Sylvania, Vertical Restraints, and Dual Distribution

• Author: Stuart Altschuler
• Published date: 01 March 1980
• Date: 01 March 1980
• DOI: http://doi.org/10.1177/0003603X8002500101

The

Antitrust

Bulletin/Spring 1980

Sylvania, vertical restraints,

and dual distribution

BY STUART ALTSCHULER·

When the Supreme Court in Continental T. V.,Inc.v.

GTE

Sylva-

nia Inc. Irevolutionized the law

of

vertical restraints in1977, lower

courtswere left withthetask

of

applying the broad pronounce-

ments to the facts

of

particular cases. By now,the courts have

produced a body

of

case law large enoughto warrant a systematic, if

still tentative, assessment

of

Sylvania's long-range impact and sig-

nificance. The following article offersa framework for that assess-

ment,firstbyreviewing ingeneralthetreatment of vertical re-

straints before and after Sylvania, and then by focusing on a distinct

group

of

cases involving

"dual

distribution"-a

widespread com-

mercial practicewhichposesspecial problems under the antitrust

laws. Thesecases often require the courts to pursue theelusive but

crucial dividing line between vertical andhorizontal restraints.

Dual distribution typically arises when amanufacturer (or

other supplier) uses both independent distributors andits own

subsidiaries, company stores, orsalesmen to disseminate its

•Cahill Gordon &Reindel,New York,N.Y.

I433 U.S. 36 (1977).

©1980byFederalLegal Publications,Inc.

2The antitrust bulletin

products.' Manufacturersin this situationoften compete with

their independent distributorsforcustomers furtherdown the

line ofdistribution-i.e., secondary distributors, retailers, or

ultimate consumers. As a result, dualdistributorsmay labor

under avariety of antitrust constraintsthathave little orno

applicationtomanufacturersthateitherrely exclusively on inde-

pendentdistributorsorhave completely integrated,"in-house"

distribution systems.

One suchconstraintis theperse rule againsthorizontal

market division. Inthe absence of dualdistribution, restrictions

imposed by a manufacturer onthe territories in which, or on

the customers to whom, its independentdistributors may resell

the manufacturer's productsareclassified asverticalrestraints;

consequently, their legalityunder section 1 of the Sherman Act

is governed by Sylvania's flexible rule ofreason.With theadded

element of dualdistribution,however, a manufacturer enters

into actualorpotentialcompetitionwith its independentdistrib-

utors. For this reason, the sameterritorial or customer restric-

tionsthatwerepreviously viewed asverticalmaybereclassified

as marketallocations among competitors,or horizontal re-

straintsoftrade,which remain subjecttorigid perse prohibi-

tion.

3

Dual

distribution

thus

introduces

problems

of

categorization that Sylvania leftunexplored.Yet theapplicabil-

ity oftherule ofreason inaparticularcase dependsentirely on

how thechallenged restraintsarecharacterized.

2

For

other, less typicalforms

of

dual distribution, see Jones,

Marketing Strategy andGovernmentRegulation inDual Distribution

Practices, 34

GEO.

WASH. L. REV. 456, 458-59 (1966).

3Apart fromthispossible perse liabilityunder §1

of

the Sherman

Act, dual distribution may precipitate other antitrust problems as well.

For example, forward integration into the distribution sector may

expose the manufacturer to a charge of attempted monopolization.

See Comment, Dual Distribution andAttempted Monopolization un-

der Section 2

of

the Sherman Act,

11

DUQUESNE

L.

REV.

68 (1972).

Furthermore, dual distribution creates significant opportunities for

price discrimination in violation of the Robinson-Patman Act. See,

e.g., Jones, supra note 2, at 469-74.

Sylvania:

3

An additional problem arises from Sylvania's failure to pro-

vide concrete guidelines for the application

of

the rule

of

rea-

son, onceits appropriate subjects have been identified. This

difficulty plagues all vertical-restraint cases, not just those in-

volving dualdistribution.

Part

I

of

the following discussion

places this issue in context by retracing the development

of

the

law

of

vertical restraints through Sylvania, with occasional em-

phasis on therole playedby the Justice Department's enforce-

ment policies.

Part

II considers the courts' recent efforts to give

structure and content to the rule

of

reason with respect to a

wide range

of

vertical restraints. Finally, part III returns to the

initial problem

of

distinguishing between vertical and horizontal

restraints in the context

of

dual distribution.

I. History: from White Motor to Sylvania

Although vertical pricefixing hasbeencondemned as illegal

per se since

1911,4

non priceverticalrestraints did not come

under serious antitrust attack until the late 1940's:

Prior

to World

War

II, vertically restrictive distribution arrange-

ments were notchallenged by theDepartment

of

Justice or the

Federal Trade Commission and their legality was uniformly upheld

in private antitrust actions. In 1948, theDepartment

of

Justice,

relying principally on the decision

of

the Supreme

Court

in United

States v. Bausch &

Lomb

Optical Co., announced its view

that

vertical territorial

and

customer restrictions, which totally foreclose

intra

brand

competition, were unlawful per se. Over the next fifteen

years, the Department obtained a

number

of

consent decrees in

cases involving such territorial

and

customer restrictions in diverse

industries.'

•Dr.Miles Medical

Co.

v,

John

D.

Park

&Sons

Co.,

220 U.S.

373 (1911).

The

per se illegality

of

both

horizontal price fixing

and

horizontal market division has also long been established. See Addys-

ten

Pipe

&Steel

Co.

v. United States, 175 U.S. 211 (1899) (horizontal

market division); United States v. Trenton Potteries

Co.,

273 U.S. 392

(1927) (horizontal price fixing).

5ABA

ANTITRUST

SECTION,

VERTICAL

RESTRICTIONS

LIMITING

INTRA-

BRAND

COMPETITION

6-7 (Monograph

No.2,

1977) (emphasis in ori-

ginal) (footnote omitted) [hereinafter cited as ABA

MONOGRAPH].

(footnotecontinued on next page)