485 U.S. 717 (1988), 85-1910, Business Electronics Corp. v. Sharp Electronics Corp.

Docket Nº:No. 85-1910
Citation:485 U.S. 717, 108 S.Ct. 1515, 99 L.Ed.2d 808, 56 U.S.L.W. 4387
Party Name:Business Electronics Corp. v. Sharp Electronics Corp.
Case Date:May 02, 1988
Court:United States Supreme Court
 
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Page 717

485 U.S. 717 (1988)

108 S.Ct. 1515, 99 L.Ed.2d 808, 56 U.S.L.W. 4387

Business Electronics Corp.

v.

Sharp Electronics Corp.

No. 85-1910

United States Supreme Court

May 2, 1988

Argued January 19, 1988

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FIFTH CIRCUIT

Syllabus

Petitioner and another retailer (Hartwell) were authorized by respondent manufacturer to sell its electronic calculators in the Houston area. In response to Hartwell's complaints about petitioner's prices, respondent terminated petitioner's dealership. Petitioner brought suit in Federal District Court, alleging that respondent and Hartwell had conspired to terminate petitioner, and that such conspiracy was illegal per se under § 1 of the Sherman Act. The court submitted a liability interrogatory to the jury asking whether there was an agreement or understanding between respondent and Hartwell to terminate petitioner's dealership because of its price cutting, and instructed the jury that the Sherman Act is violated when a seller enters into such an agreement or understanding with one of its dealers. The jury answered the interrogatory affirmatively, awarding damages, and the court entered judgment for petitioner for treble damages. The Court of Appeals reversed and remanded for a new trial, holding that, to render illegal per se a vertical agreement between a manufacturer and a dealer to terminate a second dealer, the first dealer must expressly or impliedly agree to set its prices at some level.

Held: A vertical restraint of trade is not per se illegal under § 1 of the Sherman Act unless it includes some agreement on price or price levels. Pp. 723-736.

(a) Ordinarily, whether particular concerted action violates § 1 is determined through case-by-case application of the rule of reason. Per se rules are appropriate only for conduct that is manifestly anticompetitive. Although vertical agreements on resale prices are illegal per se, extension of that treatment to other vertical restraints must be based on demonstrable economic effect, rather than upon formalistic line drawing. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, which held that vertical nonprice restraints are not per se illegal, recognized that such restraints have real potential to stimulate interbrand competition; that a rule of per se illegality for such restraints is not needed or effective to protect intrabrand competition; and that such restraints do not significantly facilitate [108 S.Ct. 1517] cartelizing. There has been no showing here that different characteristics attend an agreement between a manufacturer and a dealer to terminate a "price cutter," without a further agreement on the

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price or price levels to be charged by the remaining dealer. A quite plausible purpose of the vertical restriction here was to enable Hartwell to provide better services under its sales franchise agreement with respondent. There is also no merit to petitioner's contention that an agreement on the remaining dealer's price or price levels will so often follow from terminating another dealer because of its price cutting that prophylaxis against resale price maintenance warrants the District Court's per se rule. Pp. 723-731.

(b) The term "restraint of trade" in the Sherman Act, like the term at common law before the statute was adopted, refers not to a particular list of agreements, but to a particular economic consequence, which may be produced by quite different sorts of agreements in varying times and circumstances. Moreover, this Court's precedents do not indicate that the pre-Sherman Act common law prohibited as illegal per se an agreement of the sort made here. Nor is the District Court's rule of per se illegality compelled by precedents under the Sherman Act holding certain horizontal agreements to constitute price fixing, and thus to be per se illegal even though they did not set prices or price levels. The notion of equivalence between the scope of horizontal per se illegality and that of vertical per se illegality was explicitly rejected in GTE Sylvania. Finally, earlier vertical price-fixing cases are consistent with the proposition that vertical per se illegality requires an agreement setting a price or a price level. Pp. 731-735.

780 F.2d 1212, affirmed.

SCALIA, J., delivered the opinion of the Court, in which REHNQUIST, C.J., and BRENNAN, MARSHALL, BLACKMUN, and O'CONNOR, JJ., joined. STEVENS, J., filed a dissenting opinion, in which WHITE, J., joined, post, p. 736. KENNEDY, J., took no part in the consideration or decision of the case.

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SCALIA, J., lead opinion

JUSTICE SCALIA delivered the opinion of the Court.

Petitioner Business Electronics Corporation seeks review of a decision of the United States Court of Appeals for the

Page 720

Fifth Circuit holding that a vertical restraint is per se illegal under § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1, only if there is an express or implied agreement to set resale prices at some level. 780 F.2d 1212, 1215-1218 (1986). We granted certiorari, 482 U.S. 912 (1987), to resolve a conflict in the Courts of Appeals regarding the proper dividing line between the rule that vertical price restraints are illegal per se and the rule that vertical nonprice restraints are to be judged under the rule of reason.1

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I

In 1968, petitioner became the exclusive retailer in the Houston, Texas, area of electronic calculators manufactured by respondent Sharp Electronics Corporation. In 1972, respondent appointed Gilbert Hartwell as a second retailer in the Houston [108 S.Ct. 1518] area. During the relevant period, electronic calculators were primarily sold to business customers for prices up to $1,000. While much of the evidence in this case was conflicting -- in particular, concerning whether petitioner was "free riding" on Hartwell's provision of presale educational and promotional services by providing inadequate services itself -- a few facts are undisputed. Respondent published a list of suggested minimum retail prices, but its written dealership agreements with petitioner and Hartwell did not obligate either to observe them, or to charge any other specific price. Petitioner's retail prices were often below respondent's suggested retail prices, and generally below Hartwell's retail prices, even though Hartwell too sometimes priced below respondent's suggested retail prices. Hartwell complained to respondent on a number of occasions about petitioner's prices. In June, 1973, Hartwell gave respondent the ultimatum that Hartwell would terminate his dealership unless respondent ended its relationship with petitioner within 30 days. Respondent terminated petitioner's dealership in July, 1973.

Petitioner brought suit in the United States District Court for the Southern District of Texas, alleging that respondent and Hartwell had conspired to terminate petitioner and that such conspiracy was illegal per se under § 1 of the Sherman Act. The case was tried to a jury. The District Court submitted a liability interrogatory to the jury that asked whether

there was an agreement or understanding between Sharp Electronics Corporation and Hartwell to terminate Business Electronics as a Sharp dealer because of Business Electronics' price cutting.

Record, Doc. No. 241. The District Court instructed the jury at length about this question:

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The Sherman Act is violated when a seller enters into an agreement or understanding with one of its dealers to terminate another dealer because of the other dealer's price cutting. Plaintiff contends that Sharp terminated Business Electronics in furtherance of Hartwell's desire to eliminate Business Electronics as a price-cutting rival.

If you find that there was an agreement between Sharp and Hartwell to terminate Business Electronics because of Business Electronics' price cutting, you should answer yes to Question Number 1.

* * * *

A combination, agreement or understanding to terminate a dealer because of his price cutting unreasonably restrains trade and cannot be justified for any reason. Therefore, even though the combination, agreement or understanding may have been formed or engaged in . . . to eliminate any alleged evils of price cutting, it is still unlawful. . . .

If a dealer demands that a manufacturer terminate a price cutting dealer, and the manufacturer agrees to do so, the agreement is illegal if the manufacturer's purpose is to eliminate the price cutting.

App. 18-19.

The jury answered Question 1 affirmatively and awarded $600,000 in damages. The District Court rejected respondent's motion for judgment notwithstanding the verdict or a new trial, holding that the jury interrogatory and instructions had properly stated the law. It entered judgment for petitioner for treble damages plus attorney's fees.

The Fifth Circuit reversed, holding that the jury interrogatory and instructions were erroneous, and remanded for a new trial. It held that, to render illegal per se a vertical agreement between a manufacturer and a dealer to terminate a second dealer, the first dealer

must expressly or impliedly agree to set its prices at some level, though not a specific one.

Page 723

The distributor cannot retain complete freedom to set whatever price it chooses.

780 F.2d at 1218.

II

A

Section 1 of the Sherman Act provides that

[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

15 U.S.C. § 1. Since the earliest decisions of this Court interpreting this provision, we have recognized that it was intended to prohibit only unreasonable restraints...

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