Sylvania, Vertical Restraints, and Dual Distribution

AuthorStuart Altschuler
Published date01 March 1980
Date01 March 1980
DOIhttp://doi.org/10.1177/0003603X8002500101
Subject MatterArticle
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 in 1977, lower
courts were left with the task
of
applying the broad pronounce-
ments to the facts
of
particular cases. By now, the courts have
produced a body
of
case law large enough to warrant a systematic, if
still tentative, assessment
of
Sylvania's long-range impact and sig-
nificance. The following article offers a framework for that assess-
ment, first by reviewing in general the treatment 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 practice which poses special problems under the antitrust
laws. These cases often require the courts to pursue the elusive but
crucial dividing line between vertical and horizontal restraints.
Dual distribution typically arises when a manufacturer (or
other supplier) uses both independent distributors and its own
subsidiaries, company stores, or salesmen to disseminate its
Cahill Gordon &Reindel, New York, N.Y.
I433 U.S. 36 (1977).
© 1980by Federal Legal Publications, Inc.
2 The antitrust bulletin
products.' Manufacturers in this situation often compete with
their independent distributors for customers further down the
line of distribution-i.e., secondary distributors, retailers, or
ultimate consumers. As a result, dual distributors may labor
under a variety of antitrust constraints that have little or no
application to manufacturers that either rely exclusively on inde-
pendent distributors or have completely integrated, "in-house"
distribution systems.
One such constraint is the per se rule against horizontal
market division. In the absence of dual distribution, restrictions
imposed by a manufacturer on the territories in which, or on
the customers to whom, its independent distributors may resell
the manufacturer's products are classified as vertical restraints;
consequently, their legality under section 1 of the Sherman Act
is governed by Sylvania's flexible rule of reason. With the added
element of dual distribution, however, a manufacturer enters
into actual or potential competition with its independent distrib-
utors. For this reason, the same territorial or customer restric-
tions that were previously viewed as vertical may be reclassified
as market allocations among competitors, or horizontal re-
straints of trade, which remain subject to rigid per se prohibi-
tion.
3
Dual
distribution
thus
introduces
problems
of
categorization that Sylvania left unexplored. Yet the applicabil-
ity of the rule of reason in a particular case depends entirely on
how the challenged restraints are characterized.
2
For
other, less typical forms
of
dual distribution, see Jones,
Marketing Strategy and Government Regulation in Dual Distribution
Practices, 34
GEO.
WASH. L. REV. 456, 458-59 (1966).
3Apart from this possible per se liability under §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 and Attempted 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, once its appropriate subjects have been identified. This
difficulty plagues all vertical-restraint cases, not just those in-
volving dual distribution.
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 the role played by 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 price fixing has been condemned as illegal
per se since
1911,4
non price vertical restraints did not come
under serious antitrust attack until the late 1940's:
Prior
to World
War
II, vertically restrictive distribution arrange-
ments were not challenged by the Department
of
Justice or the
Federal Trade Commission and their legality was uniformly upheld
in private antitrust actions. In 1948, the Department
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.,
(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)

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