GTE Sylvania Inc. v. Continental T. V., Inc.

• Decision Date: 09 April 1976
• Citation: 537 F.2d 980
• Parties: 1976-1 Trade Cases 60,848 GTE SYLVANIA INCORPORATED, Appellant, v. CONTINENTAL T.V., INC., a corporation, et al., Appellees. No 71--1705.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 980

537 F.2d 980

1976-1 Trade Cases 60,848

GTE SYLVANIA INCORPORATED, Appellant, v. CONTINENTAL T.V., INC., a corporation, et al., Appellees.

No 71--1705.

United States Court of Appeals, Ninth Circuit.

April 9, 1976.

M. Laurence Popofsky (argued), of Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for appellant.

Lawrence A. Sullivan (argued), Berkeley, Cal., for appellees.

OPINION

Before CHAMBERS, BROWNING, DUNIWAY, ELY, HUFSTEDLER, WRIGHT, KILKENNY, CHOY, GOODWIN, WALLACE, and SNEED, Circuit Judges. ^*

ELY, Circuit Judge:

Pursuant to a jury verdict in a private antitrust action, a judgment and an equitable decree were entered in favor of the appellees (hereinafter, collectively, 'Continental') and against the appellant (hereinafter 'Sylvania'). On this appeal by Sylvania, the critical issue is whether the district judge erred in concluding, and instructing the jury accordingly, that, under the supposed rationale of United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967), Sylvania's practice of fixing by agreement the locations from which Continental was authorized to sell Sylvania's products was illegal per se under Section 1 of the Sherman Act. For the many reasons set forth below, we reverse. ¹

I. Factual Background

Sylvania, a corporate subsidiary of Geneal Telephone and Electric, manufactures and sells radios and television sets through its Home Entertainment Products Division. Though Sylvania emerged from World War II as one of the major manufacturers in the television industry, its share of the market never became large. In the post-war era, when only black and white television was the industry's major product line, a single competitor, RCA, enjoyed sixty to seventy percent of the market, and the remainder was divided among Sylvania and 130 other manufacturers. During the so-called black and white era, most television manufacturers engaged in a relatively unselective 'saturation' method of distribution. Essentially, this system involved the sale of television sets both to independent and manufacturer-owned distributorships, without any limit on the number of dealers in a given locale. The goal of such a system was to generate as much volume as possible; therefore, manufacturers sought to sell to as many dealers as possible.

By 1962 Sylvania's sales volume had decreased to a relatively tiny portion of the television market, between one and two percent, approximately. Prior to 1962 Sylvania's practice was to sell its products primarily to distributors, some of which it owned. These distributors sold, in turn, to retailers. At about this time Sylvania determined that its attempt to utilize the saturation type of distribution in competition, especially with RCA and Zenith, could not be successful. Hoping to revive itself as an effective interbrand competitor, and to avoid the virtually certain possibility that it would be compelled to surrender the business of manufacturing and selling television sets, ² Sylvania decided to abandon its former method of saturation distribution and begin a program of selective distribution. ³ Sylvania's management apparently believed that it could become a more effective competitor in the then rapidly expanding market for color television if it could develop a prestige image and a network of dealers with sufficient loyalty to Sylvania to market Sylvania products aggressively.

In 1962, as part of a reorganization of its Home Entertainment Products Division, Sylvania implemented its new selective distribution system by phasing out both its wholesale distributors and its own factory distributorships. These were replaced by a 'straight line distribution' system (SLD), under which sales were made from the factory directly to franchised dealers, who in turn sold to consumers. This program, which Sylvania called its 'elbow room policy,' involved the use of franchises to limit the number of Sylvania retail dealers. Sylvania hoped to attract dealers willing to identify themselves as authorized Sylvania outlets in exchange for the opportunity to earn fair profits.

An essential element of Sylvania's 'elbow room policy' was the practice of franchising by location. Under this policy Sylvania sold its products only to selected retailers, who were identified as authorized Sylvania dealers, and who were authorized to sell Sylvania products only at designated locations. There were agreements ⁴ between Sylvania and its dealers that the dealer would not move Sylvania brand merchandise to a new unapproved location for resale without the prior approval of Sylvania.

Sylvania made specific efforts to avoid anticompetitive practices. No dealer was given an exclusive dealership for a particular area. In Northern California, for example, Sylvania had at least two or more autorized dealers serving every major metropolitan market larger than the City of Salinas. No dealer had the power to veto Sylvania's decision to approve an additional franchise location in a given market area. There were no agreements that in any way restricted the freedom of authorized Sylvania dealers to sell to anyone who came to their franchise location, regardless of the customer's place of residence.

The record contains evidence suggesting that this 'elbow room policy' was moderately successful in improving Sylvania's competitive position. Sylvania asserts that due to its selective distribution policy and its practice of franchising by location, it became able to attract effective, aggressive dealers. With the growth of the color television market, Sylvania increased its market share from about one or two percent in 1962 to about five percent by 1965. By the mid-1960's Sylvania had emerged as a vigorous competitor, ranking as the nation's eighth largest manufacturer and seller of color television sets.

The appellees, Continental, are a group of affiliated corporations with common ownership. The principal operating officer of Continental, together with his wife, owned substantially all of the stock of the corporations. Continental began business in 1960 as a retail dealer of radios and television sets in San Jose, California. Its primary sales territory included most of Santa Clara County, and its inventory consisted principally of television sets manufactured by Muntz T.V., Inc. Continental prospered, and in 1964 it replaced its downtown San Jose store with a larger suburban facility in a region known as the Stevens Creek area. In the 1960--64 period Continental had no credit arrangements for floor financing of its inventory with either Muntz, or any bank or credit institution. It handled its customer credits largely through a local bank in San Jose.

In May, 1964, Sylvania attracted Continental to become an authorized Sylvania dealer and granted franchises to Continental for several locations. In July, 1964, Continental began financing its purchases of Sylvania merchandise with the 'Maguire plan,' under which Continental executed a promissory note for the price of inventory purchased from Sylvania, with payment secured by a trust receipt in favor of John P. Maguire & Co., Inc., a national finance company. Continental was obligated to repay Maguire Continental's cost for each television set immediately after the set was sold (or six months after Continental's receipt of unsold merchandise). Sylvania maintained some control over the amount of credit to be extended to Continental, because in the event of Continental's default, Maguire had full recourse against Sylvania.

Continental expanded rapidly. By May, 1965, it had become one of the largest Sylvania dealers in the country, ⁵ operating Sylvania franchises at eight locations in the California counties of San Francisco, Santa Clara, San Mateo, and Alameda. In the spring of 1965 Continental learned that Sylvania was planning to franchise another dealer, Young Brothers, at a location on Geary Street in San Francisco, about one mile form one of Continental's outlets. Continental allegedly believed that the franchising of this location would violate the spacing concept underlying the 'elbow room policy'. It therfore strenuously objected and threatened to reappraise its need for Sylvania merchandise in its San Francisco store. In June, 1965, Sylvania franchised the Young Brothers store. Continental thereupon canceled a very large Sylvania order, placed a half-million dollar order with a Sylvania competitor called Philco, and advised Sylvania that Continental would reduce its further purchases from Sylvania.

In March, 1965, Continental had notified Sylvania that it wished to enter the Sacramento, California, market. In compliance with Sylvania's policy, Continental had initially agreed not to sell Sylvania merchandise from a Sacramento location without Sylvania's prior approval. As he had previously done when Continental opened a store at a new location, Continental's principal operating officer organized a new corporate affiliate (S.A.M. Industries, Inc.) and, through that affiliate, leased a Sacramento location about one mile form another Sylvania dealer, Handy Andy. In early September, 1965, Continental advised Sylvania of the location of the new Continental store in Sacramento and requested approval for a franchise to sell Sylvania products there. Sylvania replied that approval would be denied. Thereafter, Continental moved Sylvania merchandise into the Sacramento store. According to some of the testimony, Sylvania refused Continental's request for a Sacramento franchise because Sylvania's management believed that Sylvania's distribution in the area was already sufficient and that additional Sylvania retail outlets would be undesirable. On September 7, 1965, Continental decided that it would violate the locations agreement that it had made with Sylvania and proceed to sell Sylvania merchandise in Sacramento without Sylvania's approval. One of Sylvania's contentions is that Continental's move into the...