United States v. Arnold, Schwinn Co

• Decision Date: 12 June 1967
• Docket Number: No. 25,25
• Parties: UNITED STATES, Appellant, v. ARNOLD, SCHWINN & CO. et al
• Court: U.S. Supreme Court

388 U.S. 365

87 S.Ct. 1856

18 L.Ed.2d 1249

UNITED STATES, Appellant,

v ARNOLD, SCHWINN & CO. et al.

No. 25.

Argued April 20, 1967.

Decided June 12, 1967.

[Syllabus from pages 365-366 intentionally omitted] Richard A. Posner, Washington, D.C., for appellant.

Robert C. Keck, Chicago, Ill., and Earl E. Pollock, Washington, D.C., for appellees.

Mr. Justice FORTAS delivered the opinion of the Court.

The United States brought this appeal to review the judgment of the District Court in a civil antitrust case alleging violations of § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1. Direct appeal is authorized by § 2 of the Expediting Act, 32 Stat. 823, as amended, 15 U.S.C. § 29. The complaint charged a continuing conspiracy since 1952 between defendants and other alleged co-conspirators involving price fixing, allocation of exclusive territories to wholesalers and jobbers, and confinement of merchandise to franchised dealers. Named as defendants were Arnold, Schwinn & Company ('Schwinn'), the Schwinn Cycle Distributors Association ('SCDA'), and B. F. Goodrich Company ('B. F. Goodrich').¹

At trial, the United States asserted that not only the price fixing but also Schwinn's methods of distribution were illegal per se under § 1 of the Sherman Act. The trial lasted 70 days. The evidence, largely offered by appellees, elaborately sets forth information as to the total market interaction and interbrand competition, as well as the distribution program and practices.

The District Court rejected the charge of price fixing. With respect to the charges of illegal distribution practices, the court held that the territorial limitation was unlawful per se as respects products sold by Schwinn to its distributors; but that the limitation was not unlawful insofar as it was incident to sales by Schwinn itself to franchised retailers where the wholesaler or jobber (hereinafter referred to as the distributor) functioned as agent or consignee, including distribution pursuant to the 'Schwinn Plan' described below.

The United States did not appeal from the District Court's rejection of its pricefixing charge. The appellees did not appeal from the findings and order invalidating restraints on resale by distributors who purchase products from Schwinn.

In this Court, the United States has abandoned its contention that the distribution limitations are illegal per se. Instead we are asked to consider these limitations in light of the 'rule of reason,' and, on the basis of the voluminous record below, to conclude that the limitations are the product of 'agreement' between Schwinn and its wholesale and retail distributors and that they constitute an unreasonable restraint of trade.

Appellee Schwinn is a family-owned business which for many years has been engaged in the manufacture and sale of bicycles and some limited bicycle parts and accessories.² Appellee SCDA is an association of distributors handling Schwinn bicycles and other products. The challenged marketing program was instituted in 1952. In 1951 Schwinn had the largest single share of the United States bicycle market—22.5%. In 1961 Schwinn's share of market had fallen to 12.8% although its dollar and unit sales had risen substantially. In the same period, a competitor, Murray Ohio Manufacturing Company, which is now the leading United States bicycle producer, increased its market share from 11.6% in 1951 to 22.8% in 1961. Murray sells primarily to Sears, Roebuck & Company and other mass merchandisers. By 1962 there were nine bicycle producers in the Nation, operating 11 plants. Imor ts of bicycles amounted to 29.7% of sales in 1961.

Forty percent of all bicycles are distributed by national concerns which operate their own stores and franchise others. Another 20% are sold by giant chains and mass merchandisers like Sears and Montgomery Ward & Company. Sears and Ward together account for 20% of all bicycle sales. Most of these bicycles are sold under private label. About 30% of all bicycles are distributed by cycle jobbers which specialize in the trade, and the remaining 10% by hardware and general stores.

Schwinn sells its products primarily to or through 22 wholesale distributors, with sales to the public being made by a large number of retailers. In addition, it sells about 11% of its total to B. F. Goodrich for resale in B. F. Goodrich retail or franchised stores. There are about 5,000 to 6,000 retail dealers in the United States which are bicycle specialty shops, generally also providing servicing. About 84% of Schwinn's sales are Through such specialized dealers. Schwinn sells only under the Schwinn label, never under private label, while about 64% of all bicycles are sold under private label. Distributors and retailers handling Schwinn bicycles are not restricted to the handling of that brand. They may and ordinarily do sell a variety of brands.

The United States does not contend that there is in this case any restraint on interbrand competition, nor does it attempt to sustain its charge by reference to the market for bicycles as a whole. Instead, it invites us to confine our attention to the intrabrand effect of the contested restrictions. It urges us to declare that the method of distribution of a single brand of bicycles, amounting to less than one-seventh of the market, constitutes an unreasonable restraint of trade or commerce among the several States.

Schwinn's principal methods of selling its bicycles are as follows: (1) sales to distributors, primarily cycle distributors, B. F. Goodrich and hardware jobbers; (2) sales to retailers by means of consignment or agency arrangements with distributors; and (3) sales to retailers under the so-called Schwinn Plan which involves direct shipment by Schwinn to the retailer with Schwinn invoicing the dealers, extending credit, and paying a commission to the distributor taking the order. Schwinn fair-traded certain of its models at retail in States permitting this, and suggested retail prices for all of its bicycles in all States. During the 1952—1962 period, as the District Court found, 'well over half of the bicycles sold by Schwinn have been sold direct to the retail dealer (not to a cycle distributor) by means of Schwinn Plan sales and consignment and agency sales.' Less than half were sold to distributors. ³

After World War II, Schwinn had begun studying and revamping its distribution pattern. As of 1951—1952, it had reduced its mailing list from about 15,000 retail outlets to about 5,500. It instituted the practice of franchising approved retail outlets. The franchise did not prevent the retailer from handling other brands, but it did require the retailer to promote Schwinn bicycles and to give them at least equal prominence with competing brands. The number of franchised dealers in any area was limited, and a retailer was franchised only as to a designated location or locations. Each franchised dealer was to purchase only from or through the distributor authorized to serve that particular area. He was authorized to sell only to consumers, and not to unfranchised retailers. The District Court found that while each Schwin f ranchised retailer 'knows that he is an unrestricted retail dealer, free to sell at his own price to any person who wants to buy on a retail basis. * * * (He) 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 * * *. When he acts as such an agent he subjects his franchise to cancellation at will by Schwinn.'

Schwinn assigned specific territories to each of its 22 wholesale cycle distributors. These distributors were instructed to sell only to franchised Schwinn accounts and only in their respective territories which were specifically described and allocated on an exclusive basis. The District Court found 'that certain cycle distributors have in fact not competed with each other * * * and that in so doing they have conspired with Schwinn to unreasonably restrain competition contrary to the provisions of Section 1 of the Sherman Act.' The court, however, restricted this finding and its consequent order to transactions in which the distributor purchased the bicycles from Schwinn for resale, as distinguished from sales by the distributor as agent or consignee of Schwinn or on the Schwinn Plan. The United States urges that this Court should require revision of the decree in this respect to forbid territorial exclusivity regardless of the technical form by which the products are transferred from Schwinn to the retailer or consumer. ⁴ The District Court rejected the Government's contention that Schwinn had in fact canceled the franchises of some retailers because of sales to discount houses or other unfranchised dealers, nor did it find that distributors have been cut off because of sales to unfranchised retailers or violation of territorial limitations. The United States urges that this is 'clearly erroneous.' In any event, it is clear and entirely consistent with the District Court's findings that Schwinn has been 'firm and resolute' in insisting upon observance of territorial and customer limitations by its bicycle distributors and upon confining sales by franchised retailers to consumers, and that Schwinn's 'firmness' in these respects was grounded upon the communicated danger of termination. Our analysis will embrace this conclusion, rather than the finding which is urged by the Government and which was refused by the trial court that Schwinn actually terminated retail franchises or cut off distributors for the suggested reasons.

We come, then, to the legal issues in this case. We are here confronted with challenged vertical restrictions as to territory and dealers. The source of the restrictions is the manufacturer. These are not horizontal restraints, in which the actors are distributors with or without the manufacturer's participation. We have held in such ...