U.S. Supreme Court Continental T.V., Inc. v. GTE
Sylvania, Inc., 433 U.S.
36 (1977) Continental T.V., Inc. v. GTE
Sylvania, Inc. No. 76-15 Argued February 28,
1977 Decided June 23, 1977 433 U.S.
36 CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE NINTH
CIRCUIT Syllabus In an attempt to improve its market position by attracting more
aggressive and competent retailers, respondent manufacturer of
television sets limited the number of retail franchises granted for
any given area and required each franchisee to sell respondent's
products only from the location or locations at which it was
franchised. Petitioner Continental, one of respondent's franchised
retailers, claimed that respondent had violated § 1 of the Sherman
Act by entering into and enforcing franchise agreements that
prohibited the sale of respondent's products other than from
specified locations. The District Court rejected respondent's
requested jury instruction that the location restriction was
illegal only if it unreasonably restrained or suppressed
competition. Instead, relying on United States v. Arnold,
Schwinn & Co., 388 U. S. 365 , the
District Court instructed the jury that it was a per se violation of § 1 if respondent entered into a contract,
combination, or conspiracy with one or more of its retailers,
pursuant to which it attempted to restrict the locations from which
the retailers resold the merchandise they had purchased from
respondent. The jury found that the location restriction violated §
1, and treble damages were assessed against respondent. Concluding
that Schwinn was distinguishable, the Court of Appeals
reversed, holding that respondent's location restriction had less
potential for competitive harm than the restrictions invalidated in Schwinn, and thus should be judged under the "rule of
reason." Held: 1. The statement of the per se rule in Schwinn is broad enough to cover the location restriction used by
respondent. And the retail customer restriction in Schwinn is functionally indistinguishable from the location restriction
here, the restrictions in both cases limiting the retailer's
freedom to dispose of the purchased products and reducing, but not
eliminating, intrabrand competition. Pp. 433 U. S.
42 -47.

															2. The justification and standard for the creation of per
se rules was stated in Northern Pac. R. Co. v. United
States, 356 U. S. 1 , 356 U. S. 5 :

															"There are certain agreements or practices which, because of
their pernicious effect on competition and lack of any redeeming
virtue, are conclusively Page 433 U. S. 37 presumed to be unreasonable, and therefore illegal without
elaborate inquiry as to the precise harm they have caused or the
business excuse for their use."

															Under this standard, there is no justification for the
distinction drawn in Schwinn between restrictions imposed
in sale and nonsale transactions. Similarly, the facts of this case
do not present a situation justifying a per se rule.
Accordingly, the per se rule stated in Schwinn is
overruled, and the location restriction used by respondent should
be judged under the traditional rule of reason standard. Pp. 433 U. S.
47 -59.

															537 F.2d 980, affirmed.

															POWELL, J., delivered the opinion of the Court, in which BURGER,
C.J., and STEWART, BLACKMUN, and STEVENS, JJ., joined. WHITE, J.,
filed an opinion concurring in the judgment, post, p. 433 U. S. 59 .
BRENNAN, J., filed a dissenting statement, in which MARSHALL, J.,
joined, post, p. 433 U. S. 71 .
REHNQUIST, J., took no part in the consideration or decision of the
case.

															MR JUSTICE POWELL delivered the opinion of the Court.

															Franchise agreements between manufacturers and retailers
frequently include provisions barring the retailers from selling
franchised products from locations other than those specified in
the agreements. This case presents important questions concerning
the appropriate antitrust analysis of these restrictions under § 1
of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1, and
the Court's decision in United States v. Arnold, Schwinn &
Co., 388 U. S. 365 (1967). Page 433 U. S. 38 I Respondent GTE Sylvania Inc. (Sylvania) manufactures and sells
television sets through its Home Entertainment Products Division.
Prior to 1962, like most other television manufacturers, Sylvania
sold its televisions to independent or company-owned distributors
who, in turn, resold to a large and diverse group of retailers.
Prompted by a decline in its market share to a relatively
insignificant 1% to 2% of national television sales, [ Footnote 1 ] Sylvania conducted an intensive
reassessment of its marketing strategy, and in 1962 adopted the
franchise plan challenged here. Sylvania phased out its wholesale
distributors and began to sell its televisions directly to a
smaller and more select group of franchised retailers. An
acknowledged purpose of the change was to decrease the number of
competing Sylvania retailers in the hope of attracting the more
aggressive and competent retailers thought necessary to the
improvement of the company's market position. [ Footnote 2 ] To this end, Sylvania limited the
number of franchises granted for any given area and required each
franchisee to sell his Sylvania products only from the location or
locations at which he was franchised. [ Footnote 3 ] A franchise did not constitute an exclusive
territory, and Sylvania retained sole discretion to increase the
number of retailers in an area in light of the success or failure
of existing retailers in developing their market. The revised
marketing strategy appears to have been successful during the
period at issue here, for, by 1965, Sylvania's share of national
television sales had increased to approximately 5%, and the Page 433 U. S. 39 company ranked as the Nation's eighth largest manufacturer of
color television sets.

															This suit is the result of the rupture of a
franchiser-franchisee relationship that had previously prospered
under the revised Sylvania plan. Dissatisfied with its sales in the
city of San Francisco, [ Footnote
4 ] Sylvania decided in the spring of 1965 to franchise Young
Brothers, an established San Francisco retailer of televisions, as
an additional San Francisco retailer. The proposed location of the
new franchise was approximately a mile from a retail outlet
operated by petitioner Continental T.V., Inc. (Continental), one of
the most successful Sylvania franchisees. [ Footnote 5 ] Continental protested that the location of
the new franchise violated Sylvania's marketing policy, but
Sylvania persisted in its plans. Continental then canceled a large
Sylvania order and placed a large order with Phillips, one of
Sylvania's competitors.

															During this same period, Continental expressed a desire to open
a store in Sacramento, Cal., a desire Sylvania attributed at least
in part to Continental's displeasure over the Young Brothers
decision. Sylvania believed that the Sacramento market was
adequately served by the existing Sylvania retailers, and denied
the request. [ Footnote 6 ] In
the face of this denial, Continental advised Sylvania in early
September, 1965, that it was in the process of moving Sylvania
merchandise from its San Jose, Cal., warehouse to a new retail
location that it had leased in Sacramento. Two weeks later,
allegedly for unrelated reasons, Sylvania's credit department
reduced Continental's Page 433 U. S. 40 credit line from $300,000 to $50,000. [ Footnote 7 ] In response to the reduction in credit and
the generally deteriorating relations with Sylvania, Continental
withheld all payments owed to John P. Maguire & Co., Inc.
(Maguire), the finance company that handled the credit arrangements
between Sylvania and its retailers. Shortly thereafter, Sylvania
terminated Continental's franchises, and Maguire filed this
diversity action in the United States District Court for the
Northern District of California seeking recovery of money owed and
of secured merchandise held by Continental.

															The antitrust issues before us originated in cross-claims
brought by Continental against Sylvania and Maguire. Most important
for our purposes was the claim that Sylvania had violated § 1 of
the Sherman Act by entering into and enforcing franchise agreements
that prohibited the sale of Sylvania products other than from
specified locations. [ Footnote
8 ] At the close of evidence in the jury trial of Continental's
claims, Sylvania requested the District Court to instruct the jury
that its location restriction was illegal only if it unreasonably
restrained or suppressed competition. App. 5-6, 9-15. Relying on
this Court's decision in United States v. Arnold, Schwinn &
Co., supra, the District Court rejected the proffered
instruction in favor of the following one:

															"Therefore, if you find by a preponderance of the evidence that
Sylvania entered into a contract, combination or conspiracy with
one or more of its dealers pursuant to which Sylvania exercised
dominion or control over the Page 433 U. S. 41 products sold to the dealer, after having parted with title and
risk to the products, you must find any effort thereafter to
restrict outlets or store locations from which its dealers resold
the merchandise which they had purchased from Sylvania to be a
violation of Section 1 of the Sherman Act, regardless of the
reasonableness of the location restrictions."

															App. 492. In answers to special interrogatories, the jury found
that Sylvania had engaged "in a contract, combination or conspiracy
in restraint of trade in violation of the antitrust laws with
respect to location restrictions alone," and assessed Continental's
damages at $591,505, which was trebled pursuant to 15 U.S.C. § 15
to produce an award of $1,774,515. App. 498, 501. [ Footnote 9 ]

															On appeal, the Court of Appeals for the Ninth Circuit, sitting
en banc, reversed by a divided vote. 537 F.2d 980 (1976). The court
acknowledged that there is language in Schwinn that could
be read to support the District Court's instruction, but concluded
that Schwinn was distinguishable on several grounds.
Contrasting the nature of the restrictions, their competitive
impact, and the market shares of the franchisers in the two cases,
the court concluded that Sylvania's location restriction had less
potential for competitive harm than the restrictions invalidated in Schwinn, and thus should be judged under the "rule of
reason," rather than the per se rule stated in Schwinn. The court found support for its Page 433 U. S. 42 position in the policies of the Sherman Act and in the decisions
of other federal courts involving nonprice vertical restrictions.
[ Footnote 10 ]

															We granted Continental's petition for certiorari to resolve this
important question of antitrust law. 429 U.S. 893 (1976). [ Footnote 11 ] II A We turn first to Continental's contention that Sylvania's
restriction on retail locations is a per se violation of §
1 of the Sherman Act as interpreted in Schwinn. The
restrictions at issue in Schwinn were part of a three-tier
distribution system comprising, in addition to Arnold, Schwinn
& Co. (Schwinn), 22 intermediate distributors and a network of
franchised retailers. Each distributor had a defined geographic
area in which it had the exclusive right to supply franchised
retailers. Sales to the public were made only through franchised
retailers, who were authorized to sell Schwinn bicycles only from
specified locations. In support of this limitation, Schwinn
prohibited both distributors and retailers from selling Schwinn
bicycles to nonfranchised retailers. At the retail level,
therefore, Schwinn was able to control the number of retailers
of Page 433 U. S. 43 its bicycles in any given area according to its view of the
needs of that market.

															As of 1967 approximately 75% of Schwinn 's total sales
were made under the "Schwinn Plan." Acting essentially as a
manufacturer's representative or sales agent, a distributor
participating in this plan forwarded orders from retailers to the
factory. Schwinn then shipped the ordered bicycles directly to the
retailer, billed the retailer, bore the credit risk, and paid the
distributor a commission on the sale. Under the Schwinn Plan, the
distributor never had title to or possession of the bicycles. The
remainder of the bicycles moved to the retailers through the hands
of the distributors. For the most part, the distributors functioned
as traditional wholesalers with respect to these sales, stocking an
inventory of bicycles owned by them to supply retailers with
emergency and "fill-in" requirements. A smaller part of the
bicycles that were physically distributed by the distributors were
covered by consignment and agency arrangements that had been
developed to deal with particular problems of certain distributors.
Distributors acquired title only to those bicycles that they
purchased as wholesalers; retailers, of course, acquired title to
all of the bicycles ordered by them.

															In the District Court, the United States charged a continuing
conspiracy by Schwinn and other alleged coconspirators to fix
prices, allocate exclusive territories to distributors, and confine
Schwinn bicycles to franchised retailers. Relying on United
States v. Bausch & Lomb Co., 321 U.
S. 707 (1944), the Government argued that the nonprice
restrictions were per se illegal as part of a scheme for
fixing the retail prices of Schwinn bicycles. The District Court
rejected the price-fixing allegation because of a failure of proof
and held that Schwinn's limitation of retail bicycle sales to
franchised retailers was permissible under § 1. The court found a §
1 violation, however, in "a conspiracy to divide certain borderline
or overlapping counties in the territories served by four
Midwestern Page 433 U. S. 44 cycle distributors." 237 F.
Supp. 323 , 342 (ND Ill.1965). The court described the violation
as a "division of territory by agreement between the distributors .
. . horizontal in nature," and held that Schwinn's participation
did not change that basic characteristic. Ibid. The
District Court limited its injunction to apply only to the
territorial restrictions on the resale of bicycles purchased by the
distributors in their roles as wholesalers. Ibid. Schwinn came to this Court on appeal by the United
States from the District Court's decision. Abandoning its per
se theories, the Government argued that Schwinn's prohibition
against distributors' and retailers' selling Schwinn bicycles to
nonfranchised retailers was unreasonable under § 1, and that the
District Court's injunction against exclusive distributor
territories should extend to all such restrictions regardless of
the form of the transaction. The Government did not challenge the
District Court's decision on price-fixing, and Schwinn did not
challenge the decision on exclusive distributor territories.

															The Court acknowledged the Government's abandonment of its per se theories, and stated that the resolution of the
case would require an examination of

															"the specifics of the challenged practices and their impact upon
the marketplace in order to make a judgment as to whether the
restraint is or is not 'reasonable' in the special sense in which §
1 of the Sherman Act must be read for purposes of this type of
inquiry."

															388 U.S. at 388 U. S. 374 .
Despite this description of its task, the Court proceeded to
articulate the following "bright line" per se rule of
illegality for vertical restrictions:

															"Under the Sherman Act, it is unreasonable without more for a
manufacturer to seek to restrict and confine areas or persons with
whom an article may be traded after the manufacturer has parted
with dominion over it." Id. at 388 U. S. 379 .
But the Court expressly stated that the rule of reason governs
when

															"the manufacturer retains title, dominion, and risk with Page 433 U. S. 45 respect to the product and the position and function of the
dealer in question are, in fact, indistinguishable from those of an
agent or salesman of the manufacturer." Id. at 388 U. S.
380 .

															Application of these principles to the facts of Schwinn produced sharply contrasting results depending upon the role played
by the distributor in the distribution system. With respect to that
portion of Schwinn's sales for which the distributors acted as
ordinary wholesalers, buying and reselling Schwinn bicycles, the
Court held that the territorial and customer restrictions
challenged by the Government were per se illegal. But,
with respect to that larger portion of Schwinn's sales in which the
distributors functioned under the Schwinn Plan and under the less
common consignment and agency arrangements, the Court held that the
same restrictions should be judged under the rule of reason. The
only retail restriction challenged by the Government prevented
franchised retailers from supplying nonfranchised retailers. Id. at 388 U. S. 377 .
The Court apparently perceived no material distinction between the
restrictions on distributors and retailers, for it held:

															"The principle is, of course, equally applicable to sales to
retailers, and the decree should similarly enjoin the making of any
sales to retailers upon any condition, agreement or understanding
limiting the retailer's freedom as to where and to whom it will
resell the products." Id. at 388 U.S.
378 . Applying the rule of reason to the restrictions that
were not imposed in conjunction with the sale of bicycles, the
Court had little difficulty finding them all reasonable in light of
the competitive situation in "the product market as a whole." Id. at 388 U. S.
382 . B In the present case, it is undisputed that title to the
television sets passed from Sylvania to Continental. Thus, the Schwinn per se rule applies unless Sylvania's restriction
on Page 433 U. S. 46 locations falls outside Schwinn's prohibition against a
manufacturer's attempting to restrict a "retailer's freedom as to
where and to whom it will resell the products" Id. at 388 U.S. 378 . As the Court
of Appeals conceded, the language of Schwinn is clearly
broad enough to apply to the present case. Unlike the Court of
Appeals, however, we are unable to find a principled basis for
distinguishing Schwinn from the case now before us.

															Both Schwinn and Sylvania sought to reduce, but not to
eliminate, competition among their respective retailers through the
adoption of a franchise system. Although it was not one of the
issues addressed by the District Court or presented on appeal by
the Government, the Schwinn franchise plan included a location
restriction similar to the one challenged here. These restrictions
allowed Schwinn and Sylvania to regulate the amount of competition
among their retailers by preventing a franchisee from selling
franchised products from outlets other than the one covered by the
franchise agreement. To exactly the same end, the Schwinn franchise
plan included a companion restriction, apparently not found in the
Sylvania plan, that prohibited franchised retailers from selling
Schwinn products to nonfranchised retailers. In Schwinn, the Court expressly held that this restriction was impermissible
under the broad principle stated there. In intent and competitive
impact, the retail customer restriction in Schwinn is
indistinguishable from the location restriction in the present
case. In both cases, the restrictions limited the freedom of the
retailer to dispose of the purchased products as he desired. The
fact that one restriction was addressed to territory and the other
to customers is irrelevant to functional antitrust analysis and,
indeed, to the language and broad thrust of the opinion in Schwinn. [ Footnote
12 ] As Mr. Chief Justice Hughes stated in Page 433 U. S. 47 Appalachian Coals, Inc. v. United States, 288 U.
S. 344 , 288 U. S. 360 ,
377 (1933): "Realities must dominate the judgment. . . . The
Anti-Trust Act aims at substance." III Sylvania argues that, if Schwinn cannot be
distinguished, it should be reconsidered. Although Schwinn is supported by the principle of stare decisis, Illinois Brick
Co. v. Illinois, 431 U. S. 720 , 431 U. S. 736 (1977), we are convinced that the need for clarification of the law
in this area justifies reconsideration. Schwinn itself was
an abrupt and largely unexplained departure from White Motor
Co. v. United States, 372 U. S. 253 (1983), where, only four years earlier, the Court had refused to
endorse a per se rule for vertical restrictions. Since its
announcement, Schwinn has been the subject of continuing
controversy and confusion, both in the scholarly journals and in
the federal courts. The great weight of scholarly opinion Page 433 U. S. 48 has been critical o the decision, [ Footnote 13 ] and a number of the federal courts
confronted with analogous vertical restrictions have sought to
limit its reach. [ Footnote
14 ] In our view, the experience of the Page 433 U. S. 49 past 10 years should be brought to bear on this subject of
considerable commercial importance.

															The traditional framework of analysis under § 1 of the Sherman
Act is familiar, and does not require extended discussion. Section
1 prohibits "[e]very contract, combination . . or conspiracy, in
restraint of trade or commerce." Since the early years of this
century, a judicial gloss on this statutory language has
established the "rule of reason" as the prevailing standard of
analysis. Standard Oil Co. v. United States, 221 U. S.
1 (1911). Under this rule, the factfinder weighs all of
the circumstances of a case in deciding whether a restrictive
practice should be prohibited as imposing an unreasonable restraint
on competition. [ Footnote
15 ] Per se rules of illegality Page 433 U. S. 50 are appropriate only when they relate to conduct that is
manifestly anticompetitive. As the Court explained in Northern
Pac. R. Co. v. United States, 356 U. S.
1 , 356 U. S. 5 (1958),

															"there are certain agreements or practices which, because of
their pernicious effect on competition and lack of any redeeming
virtue, are conclusively presumed to be unreasonable, and therefore
illegal, without elaborate inquiry as to the precise harm they have
caused or the business excuse for their use. [ Footnote 16 ]"

															In essence, the issue before us is whether Schwinn's per
se rule can be justified under the demanding standards of Northern Pac. R. Co. The Court's refusal to endorse a per se rule in White Motor Co. was based on its
uncertainty as to whether vertical restrictions satisfied those
standards. Addressing this question for the first time, the Court
stated:

															"We need to know more than we do about the actual impact of
these arrangements on competition to decide whether they have such
a 'pernicious effect on competition and lack . . . any redeeming
virtue' ( Northern Pac. R. Co. v. United States, supra, p. 356 U. S. 5 ), and therefore
should Page 433 U. S. 51 be classified as per se violations of the Sherman
Act."

															372 U.S. at 372 U. S. 263 .
Only four years later, the Court, in Schwinn, announced
its sweeping per se rule without even a reference to Northern Pac. R. Co. and with no explanation of its sudden
change in position. [ Footnote
17 ] We turn now to consider Schwinn in light of Northern Pac. R. Co. The market impact of vertical restrictions [ Footnote 18 ] is complex because of their
potential for a simultaneous reduction of intrabrand competition
and stimulation of interbrand competition. [ Footnote 19 ] Page 433 U. S. 52 Significantly, the Court in Schwinn did not distinguish
among the challenged restrictions on the basis of their individual
potential for intrabrand harm or interbrand benefit. Restrictions
that completely eliminated intrabrand competition among Schwinn
distributors were analyzed no differently from those that merely
moderated intrabrand competition among retailers. The pivotal
factor was the passage of title: all restrictions were held to be per se illegal where title had passed, and all were
evaluated and sustained under the rule of reason where it had not.
The location restriction at issue here would be subject to the same
pattern of analysis under Schwinn. It appears that this distinction between sale and nonsale
transactions resulted from the Court's effort to accommodate the
perceived intrabrand harm and interbrand benefit of vertical
restrictions. The per se rule for sale transactions
reflected the view that vertical restrictions are "so obviously
destructive" of intrabrand competition [ Footnote 20 ] that their use would "open the door to
exclusivity of outlets and limitation of territory Page 433 U. S. 53 further than prudence permits." 388 U.S. at 388 U. S.
379 -380. [ Footnote
21 ] Conversely, the continued adherence to the traditional rule
of reason for nonsale transactions reflected the view that the
restrictions have too great potential for the promotion of
interbrand competition to justify complete prohibition. [ Footnote 22 ] Page 433 U. S. 54 The Court's opinion provides no analytical support for these
contrasting positions. Nor is there even an assertion in the
opinion that the competitive impact of vertical restrictions is
significantly affected by the form of the transaction. Nonsale
transactions appear to be excluded from the per se rule,
not because of a greater danger of intrabrand harm or a greater
promise of interbrand benefit, but rather because of the Court's
unexplained belief that a complete per se prohibition
would be too "inflexibl[e]." Id. at 388 U. S.
379 .

															Vertical restrictions reduce intrabrand competition by limiting
the number of sellers of a particular product competing for the
business of a given group of buyers. Location restrictions have
this effect because of practical constraints on the effective
marketing area of retail outlets. Although intrabrand competition
may be reduced, the ability of retailers to exploit the resulting
market may be limited both by the ability of consumers to travel to
other franchised locations and, perhaps more importantly, to
purchase the competing products of other manufacturers. None of
these key variables, however, is affected by the form of the
transaction by which a manufacturer conveys his products to the
retailers.

															Vertical restrictions promote interbrand competition by allowing
the manufacturer to achieve certain efficiencies in the
distribution of his products. These "redeeming virtues" are
implicit in every decision sustaining vertical restrictions under
the rule of reason. Economists have identified a number Page 433 U. S. 55 of ways in which manufacturers can use such restrictions to
compete more effectively against other manufacturers. See,
e.g., Preston, Restrictive Distribution Arrangements: Economic
Analysis and Public Policy Standards, 30 Law & Contemp.Prob.
506, 511 (1965). [ Footnote
23 ] For example, new manufacturers and manufacturers entering
new markets can use the restrictions in order to induce competent
and aggressive retailers to make the kind of investment of capital
and labor that is often require in the distribution of products
unknown to the consumer. Established manufacturers can use them to
induce retailers to engage in promotional activities or to provide
service and repair facilities necessary to the efficient marketing
of their products. Service and repair are vital for many products,
such as automobiles and major household appliances. The
availability and quality of such services affect a manufacturer's
goodwill and the competitiveness of his product. Because of market
imperfections such as the so-called "free rider" effect, these
services might not be provided by retailers in a purely competitive
situation, despite the fact that each retailer's benefit would be
greater if all provided the services than if none did. Posner, supra, n 13, at
285; cf. P. Samuelson, Economics 506-507 (10th
ed.1976). Page 433 U. S. 56 Economists also have argued that manufacturers have an economic
interest in maintaining as much intrabrand competition as is
consistent with the efficient distribution of their products. Bork,
The Rule of Reason and the Per Se Concept: Price-Fixing
and Market Division [II], 75 Yale L.J. 373, 403 (1966); Posner, supra, n 13, at
283, 287-288. [ Footnote 24 ]
Although the view that the manufacturer's interest necessarily
corresponds with that of the public is not universally shared, even
the leading critic of vertical restrictions concedes that Schwinn's distinction between sale and nonsale
transactions is essentially unrelated to any relevant economic
impact. Comanor, Vertical Territorial and Customer Restrictions: White Motor and Its Aftermath, 81 Harv.L.Rev. 1419, 1422
(168). [ Footnote 25 ] Indeed,
to the extent that the form of the transaction is related to
interbrand benefits, the Court's distinction is inconsistent with
its articulated concern for the ability of smaller firms to compete
effectively with larger ones. Capital requirements and
administrative expenses may prevent smaller firms from using the
exception for nonsale transactions. See, e.g., Baker, supra, n 13, at
538; Phillips, Schwinn Rules and the "New Economics" of
Vertical Page 433 U. S. 57 Relation, 4 Antitrust L.J. 573, 576 (1975); Pollock, supra, n 13, at
610. [ Footnote 26 ]

															We conclude that the distinction drawn in Schwinn between sale and nonsale transactions is not sufficient to justify
the application of a per se rule in one situation and a
rule of reason in the other. The question remains whether the per se rule stated in Schwinn should be expanded
to include nonsale transactions or abandoned in favor of a return
to the rule of reason. We have found no persuasive support for
expanding the per se rule. As noted above, the Schwinn Court recognized the undesirability of
"prohibit[ing] all vertical restrictions of territory and all
franchising. . . ." 388 U.S. at 388 U. S.
379 -380. [ Footnote
27 ] And even Continental does not urge us to hold that all such
restrictions are per se illegal.

															We revert to the standard articulated in Northern Pac. R.
Co. and reiterated in White Motor for determining
whether vertical restrictions must be

															"conclusively presumed to be unreasonable, and therefore
illegal, without elaborate inquiry as to the precise harm they have
caused or the business excuse for their use."

															356 U.S. at 356 U. S. 5 . Such
restrictions, in varying forms, are widely used in our free market
economy. As indicated above, there is substantial scholarly and
judicial authority Page 433 U. S. 58 supporting their economic utility. There is relatively little
authority to the contrary. [ Footnote 28 ] Certainly there has been no showing in this
case, either generally or with respect to Sylvania's agreements,
that vertical restrictions have or are likely to have a "pernicious
effect on competition," or that they "lack . . . any redeeming
virtue." Ibid. [ Footnote 29 ] Accordingly, we conclude that the per
se rule stated in Schwinn must be overruled.
[ Footnote 30 ] In so holding,
we do not foreclose the possibility that particular applications of
vertical restrictions might justify per se prohibition
under Northern Pac. R. Co. But we do make clear that
departure from the rule of reason standard Page 433 U. S. 59 must be based upon demonstrable economic effect, rather than --
as in Schwinn -- upon formalistic line drawing.

															In sum, we conclude that the appropriate decision is to return
to the rule of reason that governed vertical restrictions prior to Schwinn. When anticompetitive effects are shown to result
from particular vertical restrictions, they can be adequately
policed under the rule of reason, the standard traditionally
applied for the majority of anticompetitive practices challenged
under § 1 of the Act. Accordingly, the decision of the Court of
Appeals is Affirmed. MR. JUSTICE REHNQUIST took no part in the consideration or
decision of this case.

															[ Footnote 1 ]

															RCA at that time was the dominant firm, with as much as 60% to
70% of national television sales in an industry with more than 100
manufacturers.

															[ Footnote 2 ]

															The number of retailers selling Sylvania products declined
significantly as a result of the change, but, in 1965, there were
at least two franchised Sylvania retailers in each metropolitan
center of more than 100,000 population.

															[ Footnote 3 ]

															Sylvania imposed no restrictions on the right of the franchisee
to sell the products of competing manufacturers.

															[ Footnote 4 ]

															Sylvania's market share in San Francisco was approximately 2.5%
-- half its national and northern California average.

															[ Footnote 5 ]

															There are, in fact, four corporate petitioners: Continental
T.V., Inc., A & G Sales, Sylpac, Inc., and S. A. M. Industries,
Inc. All are owned in large part by the same individual, and all
conducted business under the trade style of "Continental T.V." We
adopt the convention used by the court below of referring to
petitioners collectively as "Continental."

															[ Footnote 6 ]

															Sylvania had achieved exceptional results in Sacramento, where
its market share exceeded 15% in 1965.

															[ Footnote 7 ]

															In its findings of fact made in conjunction with Continental's
plea for injunctive relief, the District Court rejected Sylvania's
claim that its actions were prompted by independent concerns over
Continental's credit. The jury's verdict is ambiguous on this
point. In any event, we do not consider it relevant to the issue
before us.

															[ Footnote 8 ]

															Although Sylvania contended in the District Court that its
policy was unilaterally enforced, it now concedes that its location
restriction involved understandings or agreements with the
retailers.

															[ Footnote 9 ]

															The jury also found that Maguire had not conspired with Sylvania
with respect to this violation. Other claims made by Continental
were either rejected by the jury or withdrawn by Continental. Most
important was the jury's rejection of the allegation that the
location restriction was part of a larger scheme to fix prices. A
pendent claim that Sylvania and Maguire had willfully and
maliciously caused injury to Continental's business in violation of
California law also was rejected by the jury, and a pendent breach
of contract claim was withdrawn by Continental during the course of
the proceedings. The parties eventually stipulated to a judgment
for Maguire on its claim against Continental.

															[ Footnote 10 ]

															There were two major dissenting opinions. Judge Kilkenny argued
that the present case is indistinguishable from Schwinn, and that the jury had been correctly instructed. Agreeing with
Judge Kilkenny's interpretation of Schwinn, Judge Browning
stated that he found the interpretation responsive to and justified
by the need to protect " individual traders from unnecessary
restrictions upon their freedom of action.'" 537 F.2d at 1021. See n 21, infra. [ Footnote 11 ]

															This Court has never given plenary consideration to the question
of the proper antitrust analysis of location restrictions. Before Schwinn, such restrictions had been sustained in Boro
Hall Corp. v. General Motors Corp., 124 F.2d 822 (CA2 1942).
Since the decision in Schwinn, location restrictions have
been sustained by three Courts of Appeals, including the decision
below. Salco Corp. v. General Motors Corp., 517 F.2d 567
(CA10 1975); Kaiser v. General Motors
Corp., 396 F. Supp.
33 (ED Pa.1975), affirmance order, 530 F.2d 964 (CA3
1976).

															[ Footnote 12 ]

															The distinctions drawn by the Court of Appeals and endorsed in
MF. JUSTICE WHITE's separate opinion have no basis in Schwinn. The intrabrand competitive impact of the
restrictions at issue in Schwinn ranged from complete
elimination to mere reduction; yet, the Court did not even hint at
any distinction on this ground. Similarly, there is no suggestion
that the per se rule was applied because of Schwinn's
prominent position in its industry. That position was the same
whether the bicycles were sold or consigned, but the Court's
analysis was quite different. In light of MR. JUSTICE WHITE's
emphasis on the "superior consumer acceptance" enjoyed by the
Schwinn brand name, post at 433 U. S. 63 , we
note that the Court rejected precisely that premise in Schwinn. Applying the rule of reason to the restrictions
imposed in nonsale transactions, the Court stressed that there
was

															"no showing that [competitive bicycles were] not in all respects
reasonably interchangeable as articles of competitive commerce with
the Schwinn product,"

															and that it did "not regard Schwinn's claim of product
excellence as establishing the contrary." 388 U.S. at 388 U. S. 381 ,
and n. 7. Although Schwinn did hint at preferential
treatment for new entrants and failing firms, the District Court
below did not even submit Sylvania's claim that it was failing to
the jury. Accordingly, MR. JUSTICE WHITE's position appears to
reflect an extension of Schwinn in this regard. Having
crossed the "failing firm" line, MR. JUSTICE WHITE attempts neither
to draw a new one nor to explain why one should be drawn at
all.

															[ Footnote 13 ]

															A former Assistant Attorney General in charge of the Antitrust
Division has described Schwinn as "an exercise in barren
formalism" that is "artificial and unresponsive to the competitive
needs of the real world." Baker, Vertical Restraints in Times of
Change: From White to Schwinn to Where?, 44
Antitrust L.J. 537 (1975). See, e.g., Handler, The
Twentieth Annual Antitrust Review -- 1967, 53 Va.L.Rev. 1667
(1967); McLaren, Territorial and Customer Restrictions,
Consignments, Suggested Retail Prices and Refusals to Deal, 37
Antitrust L.J. 137 (1968); Pollock, Alternative Distribution
Methods After Schwinn, 63 Nw.U.L.Rev. 595 (1968); Posner,
Antitrust Policy and the Supreme Court: An Analysis of the
Restricted Distribution, Horizontal Merger and Potential
Competition Decisions, 75 Colum.L.Rev. 282 (1975); Robinson, Recent
Antitrust Developments: 1974, 75 Colum.L.Rev. 243 (1975); Note,
Vertical Territorial and Customer Restrictions in the Franchising
Industry, 10 Colum.J.L. & Soc.Prob. 497 (1974); Note,
Territorial and Customer Restrictions: A Trend Toward a Broader
Rule of Reason?, 40 Geo.Wash.L.Rev. 123 (1971); Note, Territorial
Restrictions and Per Se Rules -- A Re-evaluation of the Schwinn and Sealy Doctrines, 70 Mich.L.Rev. 616
(1972). But see Louis, Vertical Distributional Restraints
Under Schwinn and Sylvania: An Argument for the
Continuing Use of a Partial Per Se Approach, 75
Mich.L.Rev. 275 (1976); Zimmerman, Distribution Restrictions After Sealy and Schwinn, 12 Antitrust Bull. 1181
(1967). For a more inclusive list of articles and comments, see 537 F.2d at 988 n. 13.

															[ Footnote 14 ]

															Indeed, as one commentator has observed, many courts "have
struggled to distinguish or limit Schwinn in ways that are
a tribute to judicial ingenuity." Robinson, supra, n 13, at 272. Thus, the
statement in Schwinn that post-sale vertical restrictions
as to customers or territories are "unreasonable without more," 388
U.S. at 388 U. S. 379 ,
has been interpreted to allow an exception to the per se rule where the manufacturer proves "more" by showing that the
restraints will protect consumers against injury and the
manufacturer against product liability claims. See, e.g.,
Tripoli Co. v. Wella Corp., 425 F.2d 932, 936-938 (CA3 1970)
(en banc). Similarly, the statement that Schwinn's enforcement of
its restrictions had been " firm and resolute,'" 388 U.S. at 388 U. S. 372 ,
has been relied upon to distinguish cases lacking that element. See, e.g., Janel Sales Corp. v. Lanvin Parfums, Inc., 396
F.2d 398, 406 (CA2 1968). Other factual distinctions have been
drawn to justify upholding territorial restrictions that would seem
to fall within the scope of the Schwinn per se rule. See, e.g., Carter-Wallace, Inc. v. United States, 196
Ct.Cl. 35, 44-46, 449 F.2d 1374, 1379-1380 (1971) ( per se rule inapplicable when purchaser can avoid restraints by electing
to buy product at higher price); Colorado Pump & Supply Co.
v. Febco, Inc., 472 F.2d 637 (CA10 1973) (apparent territorial
restriction characterized as primary responsibility clause). One
Court of Appeals has expressly urged us to consider the need in
this area for greater flexibility. Adolph Coors Co. v.
FTC, 497 F.2d 1178, 1187 (CA10 1974). The decision in Schwinn and the developments in the lower courts have been
exhaustively surveyed in ABA Antitrust Section, Monograph No. 2,
Vertical Restrictions Limiting Intrabrand Competition (1977) (ABA
Monograph No. 2). [ Footnote 15 ]

															One of the most frequently cited statements of the rule of
reason is that of Mr. Justice Brandeis in Chicago Bd. of Trade
v. United States, 246 U. S. 231 , 246 U. S. 238 (1918):

															"The true test of legality is whether the restraint imposed is
such as merely regulates, and perhaps thereby promotes,
competition, or whether it is such as may suppress or even destroy
competition. To determine that question, the court must ordinarily
consider the facts peculiar to the business to which the restraint
is applied; its condition before and after the restraint was
imposed; the nature of the restraint and its effect, actual or
probable. The history of the restraint, the evil believed to exist,
the reason for adopting the particular remedy, the purpose or end
sought to be attained, are all relevant facts. This is not because
a good intention will save an otherwise objectionable regulation or
the reverse, but because knowledge of intent may help the court to
interpret facts and to predict consequences."

															[ Footnote 16 ] Per se rules thus require the Court to make broad
generalizations about the social utility of particular commercial
practices. The probability that anticompetitive consequences will
result from a practice and the severity of those consequences must
be balanced against its procompetitive consequences. Cases that do
not fit the generalization may arise, but a per se rule
reflects the judgment that such cases are not sufficiently common
or important to justify the time and expense necessary to identify
them. Once established, per se rules tend to provide
guidance to the business community and to minimize the burdens on
litigants and the judicial system of the more complex rule of
reason trials, see Northern Pac. R. Co. v. United States, 356 U.S. at 356 U. S. 5 ; United States v. Topco Associates, Inc., 405 U.
S. 596 , 405 U. S.
609 -610 (197), but those advantages are not sufficient,
in themselves, to justify the creation of per se rules. If
it were otherwise, all of antitrust law would be reduced to per
se rules, thus introducing an unintended and undesirable
rigidity in the law.

															[ Footnote 17 ]

															After White Motor Co., the Courts of Appeals continued
to evaluate territorial restrictions according to the rule of
reason. Sandura Co. v. FTC, 339 F.2d 847 (CA6 1964); Snap-On Tools Corp. v. FTC, 321 F.2d 825 (CA7 1963). For
an exposition of the history of the antitrust analysis of vertical
restrictions before Schwinn, see ABA Monograph No. 2, pp.
6-8.

															[ Footnote 18 ]

															As in Schwinn, we are concerned here only with nonprice
vertical restrictions. The per se illegality of price
restrictions has been established firmly for many years, and
involves significantly different questions of analysis and policy.
As MR. JUSTICE WHITE notes, post at 433 U. S. 69 -70,
some commentators have argued that the manufacturer's motivation
for imposing vertical price restrictions may be the same as for
nonprice restrictions. There are, however, significant differences
that could easily justify different treatment. In his concurring
opinion in White Motor Co. v. United States, MR. JUSTICE
BRENNAN noted that, unlike nonprice restrictions,

															"[r]esale price maintenance is not only designed to, but almost
invariably does in fact, reduce price competition not only among
sellers of the affected product, but quite as much between that
product and competing brands."

															372 U.S. at 372 U. S. 268 .
Professor Posner also recognized that "industry-wide resale price
maintenance might facilitate cartelizing." Posner, supra, n 13, at 294 (footnote
omitted); see R. Posner, Antitrust: Cases, Economic Notes
and Other Materials 134 (1974); E. Gellhorn, Antitrust Law and
Economics 252 (1976); Note, 10 Colum.J.L. & Soc.Prob., supra, n 13, at 498
n. 12. Furthermore, Congress recently has expressed its approval of
a per se analysis of vertical price restrictions by
repealing those provisions of the Miller-Tydings and McGuire Acts
allowing fair trade pricing at the option of the individual States.
Consumer Goods Pricing Act of 1975, 89 Stat. 801, amending 15
U.S.C. §§ 1, 45(a). No similar expression of congressional intent
exists for nonprice restrictions.

															[ Footnote 19 ]

															Interbrand competition is the competition among the
manufacturers of the same generic product -- television sets in
this case -- and is the primary concern of antitrust law. The
extreme example of a deficiency of interbrand competition is
monopoly, where there is only one manufacturer. In contrast,
intrabrand competition is the competition between the distributors
-- wholesale or retail -- of the product of a particular
manufacturer.

															The degree of intrabrand competition is wholly independent of
the level of interbrand competition confronting the manufacturer.
Thus, there may be fierce intrabrand competition among the
distributors of a product produced by a monopolist and no
intrabrand competition among the distributors of a product produced
by a firm in a highly competitive industry. But when interbrand
competition exists, as it does among television manufacturers, it
provides a significant check on the exploitation of intrabrand
market power because of the ability of consumers to substitute a
different brand of the same product.

															[ Footnote 20 ]

															The Court did not specifically refer to intrabrand competition,
but this meaning is clear from the context.

															[ Footnote 21 ]

															The Court also stated that to impose vertical restrictions in
sale transactions would "violate the ancient rule against
restraints on alienation." 388 U.S. at 388 U. S. 380 .
This isolated reference has provoked sharp criticism from virtually
all of the commentators on the decision, most of whom have regarded
the Court's apparent reliance on the "ancient rule" as both a
misreading of legal history and a perversion of antitrust analysis. See, e.g., Handler, supra, n 13, at 1684-1686; Posner, supra, n 13, at 295-296; Robinson, supra, n 13, at
270-271; but see Louis, supra, n 13, at 276 n. 6. We quite agree with MR.
JUSTICE STEWART's dissenting comment in Schwinn that

															"the state of the common law 400 or even 100 years ago is
irrelevant to the issue before us: the effect of the antitrust laws
upon vertical distributional restraints in the American economy
today."

															388 U.S. at 388 U. S.
392 .

															We are similarly unable to accept Judge Browning's
interpretation of Schwinn. In his dissent below, he argued
that the decision reflects the view that the Sherman Act was
intended to prohibit restrictions on the autonomy of independent
businessmen even though they have no impact on "price, quality, and
quantity of goods and services," 537 F.2d at 1019. This view is
certainly not explicit in Schwinn, which purports to be
based on an examination of the "impact [of the restrictions] upon
the marketplace." 388 U.S. at 388 U. S. 374 .
Competitive economies have social and political, as well as
economic ,advantages, see e.g., Northern Pac. R. Co. v. United
States, 356 U.S. at 356 U. S. 4 , but
an antitrust policy divorced from market considerations would lack
any objective benchmarks. As Mr. Justice Brandeis reminded us:
"Every agreement concerning trade, every regulation of trade,
restrains. To bind, to restrain, is of their very essence." Chicago Bd. of Trade v. United States, 246 U.S. at 246 U. S. 238 .
Although MR. JUSTICE WHITE's opinion endorses Judge Browning's
interpretation, post at 433 U. S. 66 -68,
it purports to distinguish Schwinn on grounds inconsistent
with that interpretation, post at 433 U. S.
71 .

															[ Footnote 22 ]

															In that regard, the Court specifically stated that a more
complete prohibition

															"might severely hamper smaller enterprises resorting to
reasonable methods of meeting the competition of giants and of
merchandising through independent dealers."

															388 U.S. at 388 U. S. 380 .
The Court also broadly hinted that it would recognize additional
exceptions to the per se rule for new entrants in an
industry and for failing firms, both of which were mentioned in White Motor as candidates for such exceptions. 388 U.S. at 388 U. S. 374 .
The Court might have limited the exceptions to the per se rule to these situations, which present the strongest arguments for
the sacrifice of intrabrand competition for interbrand competition.
Significantly, it chose instead to create the more extensive
exception for nonsale transactions which is available to all
businesses, regardless of their size, financial health, or market
share. This broader exception demonstrates even more clearly the
Court's awareness of the "redeeming virtues" of vertical
restrictions.

															[ Footnote 23 ]

															Marketing efficiency is not the only legitimate reason for a
manufacturer's desire to exert control over the manner in which his
products are sold and serviced. As a result of statutory and common
law developments, society increasingly demands that manufacturers
assume direct responsibility for the safety and quality of their
products. For example, at the federal level, apart from more
specialized requirements, manufacturers of consumer products have
safety responsibilities under the Consumer Product Safety Act, 15
U.S.C. § 2051 et seq. (1970 ed., Supp. V), and obligations
for warranties under the Consumer Product Warranties Act, 15 U.S.C.
§ 2301 et seq. (1970 ed., Supp. V). Similar obligations
are imposed by state law. See, e.g., Cal.Civ.Code Ann.
1790 et seq. (West 1973). The legitimacy of these concerns
has been recognized in cases involving vertical restrictions. See, e.g., Tripoli Co. v. Wella Corp., 425 F.2d 932 (CA3
1970).

															[ Footnote 24 ]

															"Generally, a manufacturer would prefer the lowest retail price
possible, once its price to dealers has been set, because a lower
retail price means increased sales and higher manufacturer
revenues."

															Note, 88 Harv.L.Rev. 636, 641 (1975). In this context, a
manufacturer is likely to view the difference between the price at
which it sells to its retailers and their price to the consumer as
its "cost of distribution," which it would prefer to minimize.
Posner, supra, n 13, at 283.

															[ Footnote 25 ]

															Professor Comanor argues that the promotional activities
encouraged by vertical restrictions result in product
differentiation, and therefore a decrease in interbrand
competition. This argument is flawed by its necessary assumption
that a large part of the promotional efforts resulting from
vertical restrictions will not convey socially desirable
information about product availability, price, quality, and
services. Nor is it clear that a per se rule would result
in anything more than a shift to less efficient methods of
obtaining the same promotional effects.

															[ Footnote 26 ]

															We also note that per se rules in this area may work to
the ultimate detriment of the small businessmen who operate as
franchisees. To the extent that a per se rule prevents a
firm from using the franchise system to achieve efficiencies that
it perceives as important to its successful operation, the rule
creates an incentive for vertical integration into the distribution
system, thereby eliminating to that extent the role of independent
businessmen. See, e.g., Keck, The Schwinn Case,
23 Bus.Law. 669 (1968); Pollock, supra, n 13, at 608-610.

															[ Footnote 27 ]

															Continental's contention that balancing intrabrand and
interbrand competitive effects of vertical restrictions is not a
"proper part of the judicial function," Brief for Petitioners 52,
is refuted by Schwinn itself. United States v. Topco
Associates, Inc., 405 U.S. at 405 U. S. 608 ,
is not to the contrary, for it involved a horizontal restriction
among ostensible competitors.

															[ Footnote 28 ]

															There may be occasional problems in differentiating vertical
restrictions from horizontal restrictions originating in agreements
among the retailers. There is no doubt that restrictions in the
latter category would be illegal per se, see, e.g., United
States v. General Motors Corp., 384 U.
S. 127 (1966); United States v. Topco Associates,
Inc., supra, but we do not regard the problems of proof as
sufficiently great to justify a per se rule.

															[ Footnote 29 ]

															The location restriction used by Sylvania was neither the least
nor the most restrictive provision that it could have used. See ABA Monograph No. 2, pp. 20-25. But we agree with the
implicit judgment in Schwinn that a per se rule
based on the nature of the restriction is, in general, undesirable.
Although distinctions can be drawn among the frequently used
restrictions, we are inclined to view them as differences of degree
and form. See Robinson, supra, n 13, at 279-280; Averill, Sealy, Schwinn and Sherman One: An Analysis and Prognosis, 15
N.Y.L.F. 39, 65 (1969). We are unable to perceive significant
social gain from channeling transactions into one form or another.
Finally, we agree with the Court in Schwinn that the
advantages of vertical restrictions should not be limited to the
categories of new entrants and failing firms. Sylvania was
faltering, if not failing, and we think it would be unduly
artificial to deny it the use of valuable competitive tools.

															[ Footnote 30 ]

															The importance of stare decisis is, of course,
unquestioned, but, as Mr. Justice Frankfurter stated in Helvering v. Hallock, 309 U.S.
106 , 309 U. S. 119 (1940),

															" stare decisis is a principle of policy, and not a
mechanical formula of adherence to the latest decision, however
recent and questionable, when such adherence involves collision
with a prior doctrine more embracing in its scope, intrinsically
sounder, and verified by experience."

															MR. JUSTICE WHITE, concurring in the judgment.

															Although I agree with the majority that the location clause at
issue in this case is not a per se violation of the
Sherman Act, and should be judged under the rule of reason, I
cannot agree that this result requires the overruling of United
States v. Arnold, Schwinn & Co., 388 U.
S. 365 (1967). In my view, this case is distinguishable
from Schwinn because there is less potential for restraint
of intrabrand competition, and more potential for stimulating
interbrand competition. As to intrabrand competition, Sylvania,
unlike Schwinn, did not restrict the customers to whom or the
territories where its purchasers could sell. As to interbrand
competition, Sylvania, unlike Schwinn, had an insignificant market
share at the time it adopted its challenged distribution practice,
and enjoyed no consumer preference that would allow its retailers
to charge a premium over other brands. In two short paragraphs, the
majority disposes of the view, adopted after careful analysis by
the Ninth Circuit en banc below, that these differences provide a
"principled basis for distinguishing Schwinn, " ante at 433 U. S. 46 ,
despite holdings by three Courts of Appeals and the District Court
on remand in Schwinn that Page 433 U. S. 60 the per se rule established in that case does not apply
to location clauses such as Sylvania's. To reach out to overrule
one of this Court's recent interpretations of the Sherman Act,
after such a cursory examination of the necessity for doing so, is
surely an affront to the principle that considerations of stare
decisis are to be given particularly strong weight in the area
of statutory construction. Illinois Brick Co. v. Illinois, 431 U. S. 720 , 431 U. S.
736 -737 (1977); Runyon v. McCrary, 427 U.
S. 160 , 427 U. S. 175 (1976); Edelman v. Jordan, 415 U.
S. 651 , 415 U. S. 671 (1974).

															One element of the system of interrelated vertical restraints
invalidated in Schwinn was a retail customer restriction
prohibiting franchised retailers from selling Schwinn products to
nonfranchised retailers. The Court rests its inability to
distinguish Schwinn entirely on this retail customer
restriction, finding it, "[i]n intent and competitive impact . . .
, indistinguishable from the location restriction in the present
case," because, "[i]n both cases, the restrictions limited the
freedom of the retailer to dispose of the purchased products as he
desired." Ante at 433 U. S. 46 . The customer restriction may well have,
however, a very different "intent and competitive impact" than the
location restriction: it prevents discount stores from getting the
manufacturer's product, and thus prevents intrabrand price
competition. Suppose, for example, that interbrand competition is
sufficiently weak that the franchised retailers are able to charge
a price substantially above wholesale. Under a location
restriction, these franchisers are free to sell to discount stores
seeking to exploit the potential for sales at prices below the
prevailing retail level. One of the franchised retailers may be
tempted to lower its price and act, in effect, as a wholesaler for
the discount house in order to share in the profits to be had from
lowering prices and expanding volume. [ Footnote 2/1 ] Page 433 U. S. 61 Under a retail customer restriction, on the other hand, the
franchised dealers cannot sell to discounters, who are cut off
altogether from the manufacturer's product an the opportunity for
intrabrand price competition. This was precisely the theory on
which the Government successfully challenged Schwinn's customer
restrictions in this Court. The District Court in that case found
that

															"[e]ach one of [Schwinn's franchised retailers] knows also that
he is not a wholesaler, and that he cannot sell as a wholesaler or
act as an agent for some other unfranchised dealer, such as a
discount house retailer who has not been franchised as a dealer by
Schwinn."

															237 F Supp. 323, 333 (ND Ill.1965). The Government argued on
appeal, with extensive citations to the record, that the effect of
this restriction was "to keep Schwinn products out of the hands of
discount houses and other price-cutters, so as to discourage price
competition in retailing. . . ." Brief for United States, O.T.
1966, No. 25, p. 26. See id. at 29-37. [ Footnote 2/2 ]

															It is true that, as the majority states, Sylvania's location
restriction inhibited to some degree "the freedom of the retailer
to dispose of the purchased products" by requiring the retailer to
sell from one particular place of business. But the retailer is
still free to sell to any type of customer -- including discounters
and other unfranchised dealers -- from any area. I think this
freedom implies a significant difference for the effect of a
location clause on intrabrand competition. The Page 433 U. S. 62 District Court, on remand in Schwinn, evidently thought
so as well, for, after enjoining Schwinn's customer restrictions as
directed by this Court, it expressly sanctioned location clauses,
permitting Schwinn to "designat[e] in its retailer franchise
agreements the location of the place or places of business for
which the franchise is issued." 291 F.
Supp. 564 , 565-566 (ND Ill.1968).

															An additional basis for finding less restraint of intrabrand
competition in this case, emphasized by the Ninth Circuit en banc,
is that Schwinn involved restrictions on competition among
distributors at the wholesale level. As Judge Ely wrote for the
six-member majority below:

															"[Schwinn] had created exclusive geographical sales territories
for each of its 22 wholesaler bicycle distributors, and had made
each distributor the sole Schwinn outlet for the distributor's
designated area. Each distributor was prohibited from selling to
any retailers located outside its territory. . . ."

															". . . Schwinn's territorial restrictions requiring dealers to
confine their sales to exclusive territories prescribed by Schwinn
prevented a dealer from competing for customers outside his
territory. . . . Schwinn's restrictions guaranteed each wholesale
distributor that it would be absolutely isolated from all
competition from other Schwinn wholesalers."

															537 F.2d 980, 989-990 (1976). Moreover, like its franchised
retailers, Schwinn's distributors were absolutely barred from
selling to nonfranchised retailers, further limiting the
possibilities of intrabrand price competition.

															The majority apparently gives no weight to the Court of Appeals'
reliance on the difference between the competitive effects of
Sylvania's location clause and Schwinn's interlocking "system of
vertical restraints affecting both wholesale and retail
distribution." Id. at 989. It also ignores
post- Schwinn Page 433 U. S. 63 decisions of the Third and Tenth Circuits upholding the validity
of location clauses similar to Sylvania's here. Salco Corp. v.
General Motors Corp., 517 F.2d 567 (CA10 1975); Kaiser v.
General Motors Corp., 530 F.2d 964 (CA3 1976), aff'g 396 F. Supp.
33 (ED Pa.1975). Finally, many of the scholarly authorities the
majority cites in support of its overruling of Schwinn have not had to strain to distinguish location clauses from the
restrictions invalidated there. E.g., Robinson, Recent
Antitrust Developments: 1974, 75 Colum.L.Rev. 243, 278 (1975)
(outcome in Sylvania not preordained by Schwinn, because of marked differences in the vertical restraints in the two
cases); McLaren, Territorial and Customer Restrictions,
Consignments, Suggested Retail Prices and Refusals to Deal, 37
Antitrust L.J. 137, 144-145 (1968) (by implication, Schwinn exempts location clauses from its per se rule); Pollock, Alternative Distribution Methods After Schwinn, 63 Nw.U.L.Rev. 595, 603 (1968) ("Nor does the Schwinn doctrine outlaw the use of a so-called 'location
clause' . . .").

															Just as there are significant differences between Schwinn and this case with respect to intrabrand
competition, there are also significant differences with respect to
interbrand competition. Unlike Schwinn, Sylvania clearly had no
economic power in the generic product market. At the time they
instituted their respective distribution policies, Schwinn was "the
leading bicycle producer in the Nation," with a national market
share of 22.5%, 388 U.S. at 388 U. S. 368 , 388 U. S. 374 ,
whereas Sylvania was a "faltering, if not failing," producer of
television sets, with "a relatively insignificant 1% to 2%" share
of the national market in which the dominant manufacturer had a 60%
to 70% share. Ante at 433 U. S. 38 , 433 U. S. 58 n.
29. Moreover, the Schwinn brand name enjoyed superior consumer
acceptance and commanded a premium price as, in the District
Court's words, "the Cadillac of the bicycle industry." 237 F. Supp.
at 335. This premium gave Schwinn dealers a margin of Page 433 U. S. 64 protection from interbrand competition and created the
possibilities for price-cutting by discounters that the Government
argued were forestalled by Schwinn's customer restrictions.
[ Footnote 2/3 ] Thus, judged by the
criteria economists use to measure market power -- product
differentiation and market share [ Footnote 2/4 ] -- Schwinn enjoyed a
substantially stronger position in the bicycle market than did
Sylvania in the television market. This Court relied on Schwinn's market position as one reason not to apply the
rule of reason to the vertical restraints challenged there.

															"Schwinn was not a newcomer, seeking to break into or stay in
the bicycle business. It was not a 'failing company.' On the
contrary, at the initiation of these practices, it was the leading
bicycle producer in the Nation."

															388 U.S. at 388 U. S. 374 .
And the Court of Appeals below found "another significant
distinction between our case and Schwinn " in Sylvania's
"precarious market share," which "was so small when it adopted its
locations practice that it was threatened with expulsion from the
television market." 537 F.2d at 991. [ Footnote 2/5 ] Page 433 U. S. 65 In my view, there are at least two considerations, both relied
upon by the majority to justify overruling Schwinn, that
would provide a "principled basis" for instead refusing to extend Schwinn to a vertical restraint that is imposed by a
"faltering" manufacturer with a "precarious" position in a generic
product market dominated by another firm. The first is that, as the
majority puts it,

															"when interbrand competition exists, as it does among television
manufacturers, it provides a significant check on the exploitation
of intrabrand market power because of the ability of consumers to
substitute a different brand of the same product." Ante at 433 U. S. 52 n.19. See also ante at 433 U. S. 54 .
[ Footnote 2/6 ] Second is the view,
argued forcefully in the economic literature cited by the majority,
that the potential benefits of vertical restraints in promoting
interbrand competition are particularly strong where the
manufacturer imposing the restraints is seeking to enter a new
market or to expand a small market share. Ibid. [ Footnote 2/7 ] The majority even recognizes
that Schwinn "hinted" at an exception for new entrants and
failing firms from its per se rule. Ante at 433 U. S. 53 -54,
n. 22.

															In other areas of antitrust law, this Court has not hesitated to
base its rules of per se illegality in part on the
defendant's market power. Indeed, in the very case from which the
majority draws its standard for per se rules, Northern
Pac. R. Co. v. United States, 356 U. S.
1 , 356 U. S. 5 (1958), the Page 433 U. S. 66 Court stated the reach of the per se rule against
tie-ins under § 1 of the Sherman Act as extending to all defendants
with "sufficient economic power with respect to the tying product
to appreciably restrain free competition in the market for the tied
product. . . ." 356 U.S. at 356 U. S. 6 . And
the Court subsequently approved an exception to this per
se rule for "infant industries" marketing a new product. United States v. Jerrold Electronics Corp., 187 F.
Supp. 545 (ED Pa.1960), aff'd per curiam, 365 U.
S. 567 (1961). See also United States v.
Philadelphia Nat. Bank, 374 U. S. 321 , 374 U. S. 363 (1963), where the Court held presumptively illegal a merger "which
produces a firm controlling an undue percentage share of the
relevant market. . . ." I see no doctrinal obstacle to excluding
firms with such minimal market power as Sylvania's from the reach
of the Schwinn rule. [ Footnote
2/8 ]

															I have, moreover, substantial misgivings about the approach the
majority takes to overruling Schwinn. The reason for the
distinction in Schwinn between sale and nonsale
transactions was not, as the majority would have it, "the Court's
effort to accommodate the perceived intrabrand harm and interbrand
benefit of vertical restrictions," ante at 433 U. S. 52 ;
the reason was, rather, as Judge Browning argued in dissent below,
the notion in many of our cases involving vertical restraints that
independent Page 433 U. S. 67 businessmen should have the freedom to dispose of the goods they
own as they see fit. Thus, the first case cited by the Court in Schwinn for the proposition that

															"restraints upon alienation . . . are beyond the power of the
manufacturer to impose upon its vendees, and . . . are violations
of § 1 of the Sherman Act,"

															388 U.S. at 388 U. S. 377 ,
was this Court's seminal decision holding a series of resale price
maintenance agreements per se illegal, Dr. Miles
Medical Co. v. John D. Park & Sons Co., 220 U.
S. 373 (1911). In Dr. Miles, the Court stated
that "a general restraint upon alienation is ordinarily invalid,"
citing Coke on Littleton, and emphasized that the case involved
"agreements restricting the freedom of trade on the part of dealers
who own what they sell." Id. at 404, 407-408. Mr. Justice
Holmes stated in dissent:

															"If [the manufacturer] should make the retail dealers also
agents in law, as well as in name, and retain the title until the
goods left their hands, I cannot conceive that even the present
enthusiasm for regulating the prices to be charged by other people
would deny that the owner was acting within his rights." Id. at 220 U. S.
411 .

															This concern for the freedom of the businessman to dispose of
his own goods as he sees fit is most probably the explanation for
two subsequent cases in which the Court allowed manufacturers to
achieve economic results similar to that in Dr. Miles where they did not impose restrictions on dealers who had purchased
their products. In United States v. Colgate & Co., 250 U. S. 300 (1919), the Court found no antitrust violation in a manufacturer's
policy of refusing to sell to dealers who failed to charge the
manufacturer's suggested retail price and of terminating dealers
who did not adhere to that price. It stated that the Sherman Act
did not

															"restrict the long recognized right of trader or manufacturer
engaged in an entirely private business, freely to exercise his own
independent discretion as to parties with whom he will deal." Id. at 250 U. S. 307 .
In United States v. General Electric Co., 272 U.
S. 476 (1926), the Court upheld resale price
maintenance Page 433 U. S. 68 agreements made by a patentee with its dealers who obtained its
goods on a consignment basis. The Court distinguished Dr.
Miles on the ground that the agreements there were "contracts
of sale, rather than of agency," and involved

															"an attempt by the Miles Medical Company . . . to hold its
purchasers, after the purchase at full price, to an obligation to
maintain prices on a resale by them."

															272 U.S. at 272 U. S. 487 .
By contrast, a manufacturer was free to contract with his agents
to

															"[fix] the price by which his agents transfer the title from him
directly to [the] consumer . . . however comprehensive as a mass or
whole in [the] effect [of these contracts]." Id. at 272 U. S. 488 .
Although these two cases have been called into question by
subsequent decisions, see United States v. Parke, Davis &
Co., 362 U. S. 29 (1960), and Simpson v. Union Oil Co., 377 U. S.
13 (1964), their rationale runs through our case law in
the area of distributional restraints. In Kiefer-Stewart Co. v.
Joseph E. Seagram & Sons, 340 U.
S. 211 , 340 U. S. 213 (1951), the Court held that an agreement to fix resale prices was per se illegal under § 1 because

															"such agreements, no less than those to fix minimum prices,
cripple the freedom of traders, and thereby restrain their ability
to sell in accordance with their own judgment." Accord, Albrecht v. Herald Co., 390 U.
S. 145 , 390 U. S. 152 (1968). See generally Judge Browning's dissent below, 537
F.2d at 1018-1022; ABA Antitrust Section, Monograph No. 2, Vertical
Restrictions Limiting Intrabrand Competition 29-31, 82-83, 87-91,
96-97 (1977); Blake & Jones, Toward a Three-Dimensional
Antitrust Policy, 65 Colum.L.Rev. 422, 427-436 (1965).

															After summarily rejecting this concern, reflected in our
interpretations of the Sherman Act, for "the autonomy of
independent businessmen," ante at 433 U. S. 53 n.
21, the majority not surprisingly finds "no justification" for Schwinn's distinction between sale and nonsale
transactions, because the distinction is "essentially unrelated to
any relevant economic impact." Ante at 433 U. S. 56 .
But while according some weight to the businessman's Page 433 U. S. 69 interest in controlling the terms on which he trades in his own
goods may be anathema to those who view the Sherman Act as directed
solely to economic efficiency, [ Footnote 2/9 ] this principle is without question more
deeply embedded in our cases than the notions of "free rider"
effects and distributional efficiencies borrowed by the majority
from the "new economics of vertical relationships." Ante at 433 U. S. 557 .
Perhaps the Court is right in partially abandoning this principle
and in judging the instant nonprice vertical restraints solely by
their "relevant economic impact"; but the precedents which reflect
this principle should not be so lightly rejected by the Court. The
rationale of Schwinn is no doubt difficult to discern from
the opinion, and it may be wrong; it is not, however, the
aberration the majority makes it out to be here.

															I have a further reservation about the majority's reliance on
"relevant economic impact" as the test for retaining per
se rules regarding vertical restraints. It is common ground
among the leading advocates of a purely economic approach to the
question of distribution restraints that the economic arguments in
favor of allowing vertical nonprice restraints generally apply to
vertical price restraints as well. [ Footnote 2/10 ] Although Page 433 U. S. 70 the majority asserts that "the per se illegality of
price restrictions . . . involves significantly different questions
of analysis and policy," ante at 433 U. S. 51 n.
18, I suspect this purported distinction may be as difficult to
justify as that of Schwinn under the terms of the
majority's analysis. Thus, Professor Posner, in an article cited
five times by the majority, concludes:

															"I believe that the law should treat price and nonprice
restrictions the same, and that it should make no distinction
between the imposition of restrictions in a sale contract and their
imposition in an agency contract."

															Posner, supra, 433 U.S.
36 fn2/7|>n. 7, at 298. Indeed, the Court has already
recognized that resale price maintenance may increase output by
inducing "demand-creating activity" by dealers (such as additional
retail outlets, advertising and promotion, and product servicing)
that outweighs the additional sales that would result from lower
prices brought about by dealer price competition. Albrecht v.
Herald Co., supra at 390 U. S. 151 n. 7. These same output-enhancing possibilities of nonprice
vertical restraints are relied upon by the majority as evidence of
their social utility and economic soundness, ante at 433 U. S. 55 ,
and as a justification for judging them under the rule of reason.
The effect, if not the intention, of the Court's opinion is
necessarily to call into question the firmly established per
se rule against price restraints.

															Although the case law in the area of distributional restraints
has perhaps been less than satisfactory, the Court would do well to
proceed more deliberately in attempting to improve it. In view of
the ample reasons for distinguishing Schwinn from this
case, and in the absence of contrary congressional action, I would
adhere to the principle that

															"each case arising under the Sherman Act must be determined upon
the particular facts disclosed by the record, and . . . the
opinions in those cases must be read in the light of their facts
and of a clear recognition of the essential differences in the
facts of those cases, and in the facts of any new case to which the
rule of earlier decisions Page 433 U. S. 71 is to be applied." Maple Flooring Mfrs. Assn. v. United States, 268 U. S. 563 , 268 U. S. 579 (1925).

															In order to decide this case, the Court need only hold that a
location clause imposed by a manufacturer with negligible economic
power in the product market has a competitive impact sufficiently
less restrictive than the Schwinn restraints to justify a
rule of reason standard, even if the same weight is given here as
in Schwinn to dealer autonomy. I therefore concur in the
judgment.

															[ Footnote 2/1 ]

															The franchised retailers would be prevented from engaging in
discounting themselves if, under the Colgate doctrine, see infra at 433 U. S. 67 ,
the manufacturer could lawfully terminate dealers who did not
adhere to his suggested retail price.

															[ Footnote 2/2 ]

															Given the Government's emphasis on the inhibiting effect of the
Schwinn restrictions on discounting activities, the Court may well
have been referring to this effect when it condemned the
restrictions as "obviously destructive of competition." 388 U.S. at 388 U. S. 379 .
But the Court was also heavily influenced by its concern for the
freedom of dealers to control the disposition of products they
purchased from Schwinn. See infra at 433 U. S. 66 -69.
In any event, the record in Schwinn illustrates the
potentially greater threat to intrabrand competition posed by
customer, as opposed to location, restrictions.

															[ Footnote 2/3 ]

															Relying on the finding of the District Court, the Government
argued:

															"[T]he declared purpose of the Schwinn franchising system [was]
to establish and exploit a distinctive identity and superior
consumer acceptance for the Schwinn brand name as the Cadillac of
bicycles, thereby enabling the charging of a premium price. . . .
This scheme could not possibly succeed, and doubtless would long
ago have been abandoned, if in the consumer's mind other bicycles
were just as good as Schwinn's."

															Brief for United States, O.T. 1966, No. 25, p. 36.

															[ Footnote 2/4 ] See, e.g., F. Scherer, Industrial Market Structure and
Economics Performance 10-11 (1970); P. Samuelson, Economics 485-491
(10th ed.1976).

															[ Footnote 2/5 ]

															Schwinn's national market share declined to 12.8% in the 10
years following the institution of its distribution program, at
which time it ranked second behind a firm with a 22.8% share. 388
U.S. at 388 U. S.
368 -369. In the three years following the adoption of
its locations practice, Sylvania's national market share increased
to 5%, placing it eighth among manufacturers of color television
sets. Ante at 433 U. S. 38 -39.
At this time, Sylvania's shares of the San Francisco, Sacramento,
and northern California markets were respectively 2.5%, 15%, and
5%. Ante at 433 U. S. 39 nn.
4, 6. The District Court made no findings as to Schwinn's share of
local bicycle markets.

															[ Footnote 2/6 ]

															For an extensive discussion of this effect of interbrand
competition, see ABA Antitrust Section, Monograph No. 2,
Vertical Restrictions Limiting Intrabrand Competition 60-67
(1977).

															[ Footnote 2/7 ]

															Preston, Restrictive Distribution Arrangements: Economic
Analysis and Public Policy Standards, 30 Law & Contemp.Prob.
506, 511 (1965); Posner, Antitrust Policy and the Supreme Court: An
Analysis of the Restricted Distribution, Horizontal Merger and
Potential Competition Decisions, 75 Colum.L.Rev. 282, 293 (1975);
Scherer, supra, 433 U.S.
36 fn2/4|>n. 4, at 510.

															[ Footnote 2/8 ] Cf. Sandura Co. v. FTC, 339 F.2d 847, 850 (CA6 1964)
(territorial restrictions on distributors imposed by small
manufacturer "competing with and losing ground to the giants'
of the floor-covering industry" is not per se illegal);
Baker, Vertical Restraints in Times of Change: From White to Schwinn to Where?, 44 Antitrust L.J. 537, 545-547
(1975) (presumptive illegality of territorial restrictions imposed
by manufacturer with "any degree of market power"). The majority's
failure to use the market share of Schwinn and Sylvania as a basis
for distinguishing these cases is the more anomalous for its
reliance, see infra at 433 U. S. 68 -70,
on the economic analysis of those who distinguish the
anticompetitive effects of distribution restraints on the basis of
the market shares of the distributors. See Posner, supra at 299; Bork, The Rule of Reason and the Per
Se Concept: Price Fixing and Market Division [II], 75 Yale
L.J. 373, 391-429 (1966). [ Footnote 2/9 ] E.g., Bork, Legislative Intent and the Policy of the
Sherman Act, 9 J. Law & Econ. 7 (1966); Bork, The Rule of
Reason and the Per Se Concept: Price Fixing and Market
Division [I] 74 Yale L.J. 775 (1965).

															[ Footnote 2/10 ]

															Professor Posner writes, for example:

															"There is no basis for choosing between [price-fixing and market
division] on social grounds. If resale price maintenance is like
dealer price-fixing, and therefore bad, a manufacturer's assignment
of exclusive sales territories is like market division, and
therefore bad too. . . ."

															" * * * *" "[If helping new entrants break into a market] is a good
justification for exclusive territories, it is an equally good
justification for resale price maintenance, which, as we have seen,
is simply another method of dealing with the free-rider problem. .
. . In fact, any argument that can be made on behalf of
exclusive territories can also be made on behalf of resale price
maintenance."

															Posner, supra, 433 U.S.
36 fn2/7|>n. 7, at 292-293. (Footnote omitted.) See Bork, supra, 433 U.S.
36 fn2/8|>n. 8, at 391-464.

															MR. JUSTICE BRENNAN, with whom MR. JUSTICE MARSHALL joins,
dissenting.

															I would not overrule the per se rule stated in United States v. Arnold, Schwinn & Co., 388 U.
S. 365 (1967), and would therefore reverse the decision
of the Court of Appeals for the Ninth Circuit.