Gte Sylvania Incorporated v. Continental T v. Inc., a Corporation

537 F.2d 980

Opinions

OPINION

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

Footnotes

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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 General 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 authorized 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 mar ket 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 Continéntal’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 from 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 therefore 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 Phil-co, 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 from 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 Sacramento area was made in retaliation for Sylvania’s decision to franchise Young Brothers in San Francisco and represented an attempt by Continental to pressure Sylvania into revoking the Young Brothers franchise.

While all these events were occurring in Sacramento, credit personnel at Sylvania’s headquarters had become deeply concerned over Continental’s ability to meet its obligations under its financing arrangements. Sylvania had received information sometime prior to June, 1965, that Continental’s principal shareholder and chief operating officer had a criminal record. Sylvania ordered and received a Dun and Bradstreet report which confirmed that the chief officer had a military conviction while in the Marine Corps for misappropriation of government funds and issuing worthless checks. A second alleged cause for the concern of Sylvania’s credit personnel was the fact that Continental had substantially increased its obligations to Philco by a capital loan and a $500,000 order for Philco products. This was in addition to Continental’s existing high credit limit, $300,000, with Sylvania. Additionally, Continental had failed to pay past due obligations for its purchase of Sylvania products. These obligations were held by Maguire for Sylvania and were passing into maturity and then delinquency stages. Finally, on September 24, 1965, Continental informed Sylvania that pending resolution of the dispute over Continental’s new Sacramento store, all of its future obligations would be paid as they matured by the deposit of checks with its, Continental’s, own attorneys.

Because of its concern, Sylvania’s credit department placed a credit hold on Continental’s orders and on September 16, 1965, reduced Continental's credit line from $300,000 to $50,000. In reaction to the credit reduction, Continental withheld all payments due to Maguire. This refusal to make payment continued for over three weeks until Continental owed $62,000 to Sylvania, unsecured by any merchandise. At that time Maguire instituted suit against Continental for the amount due, repossessed the Sylvania merchandise in Continental’s possession, levied attachments on Continental’s places of business and bank account, and caused Continental’s San Jose stores and central warehouse to be closed. A bank with which Continental had done business terminated Continental’s consumer financing program and called for the payment of a commercial loan. Finally, Sylvania notified Continental that Continental’s franchise as a Sylvania dealer was terminated.

Continental sought damages from both Sylvania and Maguire, alleging violations of the antitrust laws and tortious injury to its business and property, a pendent claim under California law. Continental alleged that Sylvania’s credit actions were not based upon a genuine concern about Continental’s solvency, but rather were undertaken to enforce the location restriction and to prevent Continental from selling Sylvania merchandise from the unauthorized Sacramento location. Continental further asserted that Sylvania’s “elbow room policy” was a policy in restraint of trade, constituting a per se violation of Section 1 of the Sherman Act. Damages were alleged to have resulted from Sylvania’s termination of its relationship with Continental and Continental’s resulting inability to procure substitute products during a period of product shortage. Continental also sought an injunction prohibiting Sylvania from enforcing its locations restrictions. Continental’s antitrust and tort claims were submitted to the jury. The jury returned a verdict in favor of Continental⁶ and found that Continental had been damaged in the amount of $591,505. The jury decided that John P. Maguire & Co., the only other defendant, had not engaged in a combination, contract, or conspiracy in restraint of trade in violation of the antitrust laws. Finally, the jury exonerated both Sylvania and Maguire on Continental’s pendent tort claim under California law. Trebling the damages pursuant to 15 U.S.C. § 15, the district judge entered judgment against Sylvania in the amount of $1,774,515. In addition, the court awarded Continental attorney’s fees in the sum of $275,000.

On Continental’s prayer for equitable relief, the district judge entered findings of fact and conclusions of law. The non-jury court found that Sylvania had requested Maguire to sue Continental on its outstanding notes as a part of Sylvania’s attempt to prevent Continental from selling Sylvania products in Sacramento.⁷ Further, the court found that Sylvania’s credit concerns were not the true reason for Sylvania’s actions. The court entered a limited injunction,⁸ prohibiting Sylvania from enforcing its location clause.⁹

Sylvania’s principal contention here is that the district judge erred in basing both the jury instructions and the grant of equitable relief on the theory that by seeking to restrict the locations from which Continental could sell Sylvania products, Sylvania had committed a per se violation of Section 1 of the Sherman Act. Over Sylvania’s objection, the trial judge instructed the jury as follows:

“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 and control over the 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.”¹⁰

In deciding that the per se rule of United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967), was applicable to Sylvania’s location restrictions, the court rejected instructions requested by Sylvania under which the jury would have been told that Sylvania’s locations practice was illegal only if it unreasonably restrained competition in the market for television sales.¹¹

Once the instruction incorporating the theory of per se illegality was submitted, a verdict against Sylvania was virtually assured. Sylvania never denied the existence of its locations practice, which by definition admittedly “restrict[ed] outlets or store locations from which its dealers resold the merchandise which they had purchased from Sylvania . . . .” It is not entirely clear from the jury instructions and the findings of fact and conclusions of law entered on the equitable claim whether Sylvania was found to have committed an illegal per se violation merely because it entered the agreement restricting Continental to specific locations, or because of the subsequent enforcement of that agreement. We think it irrelevant as to whether both, or only one, of these considerations were applied, since we hold that under either, the court’s application of the law was clearly erroneous.

II. Analysis

We confront an important and intriguing question, i. e., whether the rule of per se illegality established by the Supreme Court in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967), should be extended to embrace the “locations practice” utilized by Sylvania and others as a method of modern product distribution systems. The trial judge, applying a bit of the literal language of Schwinn without reference to its context or the specific facts of that case, determined to extend that language to encompass locations clauses. Accordingly, Sylvania’s proffered “rule of reason” jury instruction was rejected. Our study has convinced us, beyond doubt, that the challenged conclusion reflects a misinterpretation of Schwinn, is inconsistent with the existing law permitting exclusive dealerships, and, most importantly, would seriously undermine, rather than implement, the major purpose of the Sherman Act. That purpose is to insure the “unrestrained interaction of competitive forces” that “will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.” Northern Pacific Ry. v. United States, 356 U.S. 1, 4, 78 S.Ct. 514, 517, 2 L.Ed.2d 545, 549 (1958). We therefore hold that the legality of the locations clauses here involved should be judged under what is commonly referred to as the “rule of reason,” rather than a rule of per se illegality. We are convinced that a contrary holding would constitute an unwarranted “body blow” to legitimate business enterprise and would place our free capitalistic system under stifling restraints, never contemplated or intended by the Congress. The “rule of reason” should have been applied, permitting inquiry into the competitive effect and reasonableness of the locations agreement in question.¹²

A. The Schwinn Precedent in Context

In ruling that Sylvania’s locations practice was illegal per se, the trial judge chose to apply, literally, the following sweeping language from the opinion of Mr. Justice Fortas for the Court in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967):¹³

“Once the manufacturer has parted with title and risk, he has parted with dominion over the product, and his effort thereafter to restrict territory or persons to whom the product may be transferred— whether by explicit agreement or by silent combination or understanding with his vendee — is a per se violation of § 1 of the Sherman Act.¹⁴

388 U.S. at 382, 87 S.Ct. at 1867, 18 L.Ed.2d at 1262.

We reiterate our view that this language, in isolation, was applied too literally, without sufficient reference to the textual context in which it appears or the facts from which Schwinn arose. Furthermore, a fundamental antitrust principle which our own court stressed in Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71 (9th Cir. 1969), cert. denied, 396 U.S. 1062, 90 S.Ct. 752, 24 L.Ed.2d 755 (1970), was apparently overlooked. Quoting from Maple Flooring Manufacturers Association v. United States, 268 U.S. 563, 579, 45 S.Ct. 578, 583, 69 L.Ed. 1093, 1100 (1925), we emphasized in Hawaiian Oke the Supreme Court’s admonition 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 is to be applied.”

416 F.2d at 79.

In Schwinn the Supreme Court held illegal per se a system of vertical restraints affecting both wholesale and retail distribution. Arnold, Schwinn & Company 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. Moreover, the restrictions in Schwinn limited the classes of customers to whom Schwinn’s wholesale distributors and franchised retailers could sell, by prohibiting them from selling Schwinn products to unfranchised retailers. Consequently, Schwinn’s system completely barred sales to some potential purchasers of Schwinn products, regardless of where these customers were located. The Schwinn restrictions on classes of persons or particular persons to whom a distributor may not sell have been termed “customer” restrictions, while the restrictions against selling to customers outside a certain area are classified as “territorial” restrictions.¹⁵

In our present case Sylvania imposed neither of the restrictions that Schwinn appropriately condemned. 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. In contrast, Sylvania’s dealers could sell to customers from any area, could advertise in any area, and- were limited only as to the location of the franchisee’s place of business. Schwinn’s restrictions guaranteed each wholesale distributor that it would be absolutely isolated from all competition from other Schwinn wholesalers. Sylvania, on the other hand, franchised competing dealerships at will, and in the major metropolitan markets in Northern California such competing dealers were located within the 25 to 30 mile radius of volume selling. Schwinn’s territorial restrictions were tied to customer restrictions, but a Sylvania dealer could sell to anyone, just so long as the dealer’s store remained in the approved location.

Thus a critical and very obvious distinction between the restrictions in Schwinn and those of Sylvania is that Schwinn involved a restriction on the locations and types of permissible vendees, while Sylvania only imposed restrictions on the permissible locations of vendors. When Schwinn’s proscription of restrictions on “territory or persons to whom the product may be transferred”, 388 U.S. at 382, 87 S.Ct. at 1867, 18 L.Ed.2d at 1262, and on “areas or persons with whom an article may be traded”, 388 U.S. at 379, 87 S.Ct. at 1865, 18 L.Ed.2d at 1260, are interpreted in Schwinn’s factual context, it is clear to us that “territory” and “areas” refer to the location of vendees, rather than vendors. Moreover, there are very clear and substantial differences between the effect of the restrictions in Schwinn and the effect of those of Sylvania. In Schwinn a wholesale distributor was foreclosed from selling Schwinn products to any purchaser located outside his exclusive territory; thus, intrabrand competition (i. e., competition between sellers of the same brand) was wholly destroyed. A potential purchaser of Schwinn products at the wholesale level could look to only one source of the product — the authorized dealer for his territory. No other wholesaler could compete by offering a lower price or better service to the same purchaser. In marked contrast, Sylvania franchised at least two dealers in the major markets and each Sylvania dealer was free to sell to any buyer he chose — preserving intrabrand competition and allowing to every potential purchaser of Sylvania products a reasonable choice between several competing dealers.

Concurring in White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963),¹⁶ Mr. Justice Brennan noted that while there are no possible procompetitive benefits to be derived from vendee, or customer, restrictions, some territorial restrictions on vendors may have procompetitive effects. The Justice wrote:

“There are other situations, not presented directly by this case, in which the possibility of justification cautions against a too hasty conclusion that territorial limitations are invariably unlawful. Arguments have been suggested against that conclusion, for example, in the case of a manufacturer starting out in business or marketing a new and risky product; the suggestion is that such a manufacturer may find it essential, simply in order to acquire and retain outlets, to guarantee his distributors some degree of territorial insulation as well as exclusive franchises. It has also been suggested that it may reasonably appear necessary for a manufacturer to subdivide his sales territory in order to ensure that his product will be adequately advertised, promoted, and serviced.”

372 U.S. at 269, 83 S.Ct. at 705, 9 L.Ed.2d at 750.

“I turn next to the customer restrictions. These present a problem quite distinct from that of the territorial limitations. The customer restraints would seem inherently the more dangerous of the two, for they serve to suppress all competition between manufacturer and distributors for the custom of the most desirable accounts. At the same time they seem to lack any of the countervailing tendencies to foster competition between brands which may accompany the territorial limitations. In short, there is far more difficulty in supposing that such customer restrictions can be justified.”

372 U.S. at 272, 83 S.Ct. at 707, 9 L.Ed.2d at 752.

The observations of Mr. Justice Brennan also spotlight another significant distinction between our case and Schwinn. Schwinn had an extremely large share of the bicycle market. Sylvania’s market share, however, was so small when it adopted its locations practice that it was threatened with expulsion from the television market. In Schwinn a manufacturer with a dominant market share imposed restraints which destroyed any possibility of intrabrand competition in the same territory. Here, a manufacturer with a precarious market share entered agreements which enabled it to achieve a viable 5% market share while preserving significant intrabrand competition in each metropolitan area. When viewed in their respective factual contexts, we cannot possibly perceive the situation presented in the two cases as being analogous or similar, even remotely.

The facts in Schwinn make it clear that the territorial restraint which the Court condemned was a restraint that absolutely prohibited a dealer from selling to purchasers outside a certain area. That, of course, is not our case. The Schwinn holding that restrictions forbidding dealers from selling to persons located outside specifically designated exclusive territories and to certain classes of customers are per se violations of the Sherman Act should not, we think, be stretched to encompass Sylvania’s practice which can produce pro-competitive effects, desirable effects wholly different from those produced by the restrictions that the Court, in Schwinn, sought to prohibit.

Our interpretation of Schwinn is reinforced by the fact that the decree on remand in Schwinn expressly sanctions locations clauses. After paraphrasing the general language of the Supreme Court’s Schwinn decision dealing with restrictions on “areas or persons,” the District Court’s decree on remand adds: “Notwithstanding the foregoing provisions, nothing in this Final Judgment shall prevent Schwinn . from designating in its retailer franchise agreements the location of the place or places of business for which the franchise is issued.” United States v. Arnold, Schwinn & Co., 291 F.Supp. 564, 565-66 (N.D.Ill.1968) (Emphasis added). Surely, if a manufacturer has the right to choose a particular dealer to franchise, as the Supreme Court recognized in Schwinn, 388 U.S. at 376, 87 S.Ct. at 1864, 18 L.Ed.2d at 1258,¹⁷ and the right to designate the location where the franchise is valid, as recognized in the Schwinn decree on remand, then the manufacturer must have the pow er to enforce these rights if a franchisee violates his location clause agreement.

When we move beyond Schwinn to a consideration of other relevant precedent,¹⁸ our conclusion is further strengthened. We have discovered no reported cases wherein a location clause has been struck down for illegality. In fact, and to the contrary, it has been widely assumed that location restrictions were reasonable restraints of trade, and therefore lawful,¹⁹ ever since Boro Hall Corp. v. General Motors Corp., 124 F.2d 822 (2d Cir. 1942), cert. denied, 317 U.S. 695, 63 S.Ct. 436, 87 L.Ed. 556 (1943). In Boro Hall, Judge Augustus Hand, writing for the Court of Appeals for the Second Circuit, specifically held that a dealer contract clause that would “fix a location for the sale of used cars at a place that did not unduly affect other dealers” did not constitute an unreasonable restraint of trade. 124 F.2d at 823. In United States v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966), the Supreme Court was presented with a location clause which prohibited Chevrolet dealers from moving to, or establishing, a new location for the sale of Chevrolet vehicles without the prior approval of Chevrolet. The Government urged the Supreme Court to declare the clause illegal, but only insofar as it was employed to prohibit dealers from selling to discounters for resale. The Supreme Court expressly declined to do this,²⁰ although it held the conduct of General Motors and its dealers unlawful solely on the basis of a horizontal conspiracy among dealers to prevent sales to discounters. In concurring Mr. Justice Harlan wrote, “In my opinion, . General Motors is not precluded from enforcing the location clause by unilateral action, and I find nothing in the Court’s opinion to the contrary.” Id. at 149, 86 S.Ct. at 1332, 16 L.Ed.2d at 428. In our own Circuit, the District Court on remand expressly provided that “[njeither the injunctive provisions of this Final Judgment nor any provision thereof shall be construed to enjoin General Motors from acting unilaterally under any Chevrolet dealer franchise agreement or from unilaterally enforcing any such agreement [including the location clause],” except as provided in a six months prohibition relating to sales to discounters.²¹ United States v. General Mo tors Corporation, Civil No. 62-1208-CC (S.D.Cal. Aug. 17, 1966).²²

Two other Courts of Appeals have considered the legality of location clauses in the post -Schwinn era, and both have concluded that such clauses are valid. In Salco Corporation v. General Motors Corporation, Buick Motor Division, 517 F.2d 567 (10th Cir. 1975), a franchisee, relying upon Schwinn contended that the location clause within the standard Buick Automobile dealer franchise agreement²³ was illegal per se, as a restraint of trade. The Tenth Circuit rejected this argument, noting with approval the Second Circuit’s conclusion in Boro Hall, supra, that the right to franchise necessarily validated the type of location clause typically included in automobile franchise agreements. The court therefore concluded that a location clause is valid as a matter of law.

“There is nothing in the complaint, nor for that matter in the facts subsequently developed by Denver Buick in opposition to the General Motors’ summary judgment motion on the First Claim for Relief, indicating that General Motors did anything other than simply assert its rights under the terms of the clause by insisting on the right to approve a new location for Denver Buick. There is no allegation that General Motors assigned territories outside of which dealers could not sell, and in fact the appellant admits otherwise (Br. 57). Accordingly, the Section 1 allegations were properly dismissed, since the location clause is valid as a matter of law, and there are no allegations that would amount to an unlawful use of the clause.”

517 F.2d at 576.

In the present case, like Saleo and unlike Schwinn, Sylvania did not assign discrete selling territories outside of which the dealers were not permitted to sell. The dealer could sell to anyone who came to his approved location. Indeed, in terms of the wording of the location clause involved and its potential competitive effect, we find Saleo to be virtually indistinguishable from the case before us.

In Kaiser v. General Motors Corp., 530 F.2d 964 (3d Cir. 1976), aff’g 396 F.Supp. 33 (E.D.Pa.1975), the Third Circuit affirmed a District Court’s order granting summary judgment in favor of a manufacturer against a challenge that a location clause in its franchise agreement was illegal under the Sherman Act. The District Court expressly found nothing in Schwinn that makes location clauses illegal.

Looking beyond the cases dealing with location clauses, we find numerous decisions that, while applying Schwinn, have not interpreted Schwinn as establishing a per se rule against all vertical territorial restraints.²⁴ A variety of vertical territorial and customer restraints have been upheld under the rule of reason test,²⁵ and some of these restraints were far more burdensome than the location clause which is here at issue. See Anderson v. American Automobile Association, 454 F.2d 1240, 1246 (9th Cir. 1972); Tripoli Company, Inc. v. Wella Corp., 425 F.2d 932, 936 (3d Cir.), cert. denied, 400 U.S. 831, 91 S.Ct. 62, 27 L.Ed.2d 62 (1970);²⁶ Janel Sales Corp. v. Lanvin Parfums, Inc., 396 F.2d 398, 406 (2d Cir.), cert. denied, 393 U.S. 938, 89 S.Ct. 303, 21 L.Ed.2d 275 (1968); Carter-Wallace, Inc. v. United States, 449 F.2d 1374, 1380, 196 Ct.Cl. 35 (1971); National Dairy Products Corp. v. Milk Drivers & Dairy Employees Union Local 680, 308 F.Supp. 982 (S.D.N.Y. 1970); La Fortune v. Ebie, 1972 Trade Cas. ¶ 74,090 (Calif.Ct.App.). See also Good Investment Promotions, Inc. v. Corning Glass Works, 493 F.2d 891 (6th Cir. 1974).

In the light of the cases upholding the legality of location clauses and the fact that the decree on remand in Schwinn expressly permitted manufacturers to designate the location for which a franchise is issued, it is hardly surprising that Schwinn has been interpreted by learned commentators as leaving undisturbed the basic legality of location clauses.²⁷ Moreover, years after Schwinn, the Department of Justice refused to characterize location clauses as illegal per se, treating them instead as restrictions to be governed by the rule of reason.²⁸ And only last year, a spokesman for the Antitrust Division stated that locations clauses “are not illegal standing by themselves” since “[tjhey reflect the manufacturer’s legitimate interest in having his goods distributed efficiently throughout a particular area.” Address by K. Clearwaters before the International Franchising Association, Franchising and the Antitrust Laws, May 16, 1974. The Federal Trade Commission has also recognized that Schwinn did not establish a per se rule against vertical territorial restrictions. In its Report of the Ad Hoc Committee on Franchising, the Commission reached the conclusion that: FTC, Report of the Ad Hoe Committee on Franchising 30 (June 2, 1969). See, Coca Cola Co., 3 CCH Trade Reg.Rep. H 21,010 (Oct. 8, 1975) (Sustaining a soft drink manufacturer’s imposition of exclusive territories upon licensed bottlers).

“. . . in Schwinn, the Court left enough leeway in its initial threshold test of the overall reasonableness of vertical arrangements to enable a manufacturer to justify such an arrangement by establishing that it could not have entered the market or expanded its market share

In summary, when Schwinn is analyzed in its factual context it is readily distinguishable from the case before us, in terms of both the kind of restrictions involved and their operative competitive effect. This conclusion is reinforced by reference to the Schwinn decree on remand, Boro Hall, Saleo, and Kaiser, all of which uphold location clauses like the one before us now. Finally, in both the cases decided after Schwinn involving other types of vertically imposed customer and territorial restraints, and the post-Schwinn pronouncements of the Federal Trade Commission and Antitrust Division of the Department of Justice, we see a clear trend against interpreting Schwinn as establishing a per se rule of illegality, indiscriminately invalidating all vertical territorial restraints without any consideration of their reasonableness in terms of their overall competitive effect.

B. The Exclusive Dealership Precedents

The validity of the trial judge’s decision to apply a rule of per se illegality to Sylvania’s locations practice is further undermined by the many authorities upholding a manufacturer’s right to grant “exclusive dealerships,” a practice much more restrictive of competition than Sylvania’s location clauses. In an exclusive dealership arrangement a manufacturer agrees with a dealer not to authorize any competing dealers to sell the manufacturer’s products anywhere within the exclusive territory of the first dealer. There is a veritable avalanche of precedent to the effect that, absent sufficient evidence of monopolization, a manufacturer may legally grant such an exclusive franchise, even if this effects the elimination of another distributor. See Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71 (9th Cir. 1969), cert. denied, 396 U.S. 1062, 90 S.Ct. 752, 24 L.Ed.2d 755 (1970); Elder-Beerman Stores Corp. v. Federated Department Stores, Inc., 459 F.2d 138 (6th Cir. 1972); Scanlan v. Anheuser Busch, Inc., 388 F.2d 918 (9th Cir. 1968), cert. denied, 391 U.S. 916, 88 S.Ct. 1810, 20 L.Ed.2d 654 (1968); Walker Distributing Co. v. Lucky Lager Brewing Co., 323 F.2d 1, 7 (9th Cir. 1963), cert. denied, 385 U.S. 976, 87 S.Ct. 507, 17 L.Ed.2d 438 (1966); Ace Beer Distributors, Inc. v. Kohn, Inc., 318 F.2d 283 (6th Cir.), cert. denied, 375 U.S. 922, 84 S.Ct. 267, 11 L.Ed.2d 166 (1963); Packard Motor Car Co. v. Webster Motor Car Co., 100 U.S.App.D.C. 161, 243 F.2d 418 (D.C. Cir.), cert. denied, 355 U.S. 822, 78 S.Ct. 29, 2 L.Ed.2d 38 (1957); Interborough News Co. v. Curtis Publishing Company, 225 F.2d 289 (2d Cir. 1955); Naifeh v. Ronson Art Metal Works, 218 F.2d 202 (10th Cir. 1954); Bascom Launder Corp. v. Telecoin Corp., 204 F.2d 331 (2d Cir.), cert. denied, 345 U.S. 994, 73 S.Ct. 1133, 97 L.Ed. 1401 (1953); Fargo Glass & Paint Co. v. Globe American Corp., 201 F.2d 534 (7th Cir.), cert. denied, 345 U.S. 942, 73 S.Ct. 833, 97 L.Ed. 1368 (1953); Potter’s Photographic Applications Co. v. Ealing Corp., 292 F.Supp. 92 (E.D.N.Y.1968); L. S. Good & Co. v. H. Daroff & Sons, Inc., 279 F.Supp. 925 (N.D.W.Va.1968); Peerless Dental Supply Co. v. Weber Dental Manufacturing Co., 283 F.Supp. 288 (E.D.Pa.1968); Top-All Varieties, Inc. v. Hallmark Cards, Inc., 1969 Trade Cas. ¶ 72,850 (S.D.N.Y.). See generally Note, Restricted Channels of Distribution Under the Sherman Act, 75 Harv.L.Rev. 795 (1962).

The clearly established legality of exclusive dealerships logically compels the conclusion that location clauses cannot be per se illegal. If it is legal for a manufacturer to promise one dealer that he will have the exclusive right to sell the manufacturer’s products within a designated territory, then obviously it is legal for that manufacturer to keep his promise of exclusivity by denying other dealers like Continental the power to sell from retail outlets at unauthorized locations within the first dealer’s exclusive territory. The accepted principle that a manufacturer may legally grant an exclusive dealership is rendered meaningless if he cannot legally use a location clause to prevent his other dealers from opening their own retail outlets in the same area. If a manufacturer cannot include a location restriction in a franchise agreement, he cannot do what the exclusive dealership cases hold is legal, i. e., promise that “I will not franchise another dealer in your area.” If a location restriction cannot legally be enforced, and, for example, a franchisee is established in San Francisco, California, who then opens a store in Los Angeles, California, the manufacturer cannot fulfill his promise to his original Los Angeles franchisee that he will not recognize another dealer in Los Angeles. Therefore, we conclude that the rule of per se illegality applied below is logically inconsistent and irreconcilable with our decision in Hawaiian Oke and the many other cases upholding the right of manufacturers to establish exclusive dealerships.

If the rule adopted by the trial judge in this case were the law, it would have grievous implications for the common and established practices of franchising²⁹ and the granting of exclusive dealerships. Under the district judge’s approach a manufacturer legally prevented from imposing or enforcing a location restriction could not lawfully prevent its franchisee from creating new outlets at any unauthorized locations the franchisee might choose and distributing the franchisor’s merchandise therefrom. In other words, under the rule of per se illegality, if a dealer is franchised anywhere he is franchised everywhere. Once the manufacturer has granted a franchise for any location, he would be legally obligated to enable the franchisee to sell the manufacturer’s product from all other locations into which the franchisee might wish to expand, regardless of the prejudicial effect that this would have on existing distribution in those areas.³⁰

The adoption of the rule of per se illegality in a case such as this would undoubtedly hasten the disappearance from the American market place of the small independent merchant, now often a franchisee, and already an endangered entrepreneur. The Supreme Court has recognized the concern that Congress has expressed over the disappearance of the small independent merchant due to competition with much larger, vertically integrated firms. In the words of Mr. Justice Stewart,

“. . . franchising promises to provide the independent merchant with the means to become an efficient and effective competitor of large integrated firms. Through various forms of franchising, the manufacturer is assured qualified and effective outlets for his products, and the franchisee enjoys backing in the form of know-how and financial assistance. These franchise arrangements also make significant social and economic contributions of importance to the whole society, as at least one federal court has noted:

‘The franchise method of operation has the advantage, from the standpoint of our American system of competitive economy, of enabling numerous groups of individuals with small capital to become entrepreneurs. ... If our economy had not developed that system of operation these individuals would have turned out to have been merely employees. The franchise system creates a class of independent businessmen; it provides the public with an opportunity to get a uniform product at numerous points of sale from small independent contractors, rather than from employees of a vast chain.’³¹

Indiscriminate invalidation of franchising arrangements would eliminate their creative contributions to competition and force ‘suppliers to abandon franchising and integrate forward to the detriment of small business. In other words, we may inadvertently compel concentration by misguided zealousness. As a result, ‘[t]here [would be] less and less place for the independent.’ Standard Oil Co. v. United States, 337 U.S. 293, 315, 69 S.Ct. 1051, 1062, 93 L.Ed. 1371, 1386 (separate opinion of Mr. Justice Douglas). ‘The small, independent businessman [would] be supplanted by clerks.’ Id., at 321, 69 S.Ct. at 1067 [93 L.Ed. at 1386].”

United States v. Arnold, Schwinn & Co., 388 U.S. at 386-87, 87 S.Ct. at 1869, 18 L.Ed.2d at 1264-65 (Stewart, J., concurring and dissenting) (footnotes omitted).

If we were to adopt the approach of per se illegality, the ultimate result might be to undermine franchising as a tool to enable the small, independent businessman to compete with the large vertically integrated giants of many industries. One danger would be that a single franchisee, allowed to expand into a chain of stores and sell everywhere over the manufacturer’s objection and in violation of the contract, might make it impossible for other small single-outlet franchisees of the same manufacturer to compete effectively. Thus the loyal network of small independent businessmen that the manufacturer desired for his franchisees might be supplanted by several “gi ant” franchisees, each having numerous outlets. Another risk would be that a small manufacturer who could not afford to integrate vertically, if prohibited from offering any degree of territorial protection from intrabrand competition or “elbow room”, might not be able to attract dealers and thus might be unable to establish an effective system of distribution for its product. We cannot believe that Congress intended to implement a rigid per se rule of illegality that portends such serious risk to franchising arrangements, methods that have made significantly worthy contributions to our Nation’s economy.³²

C. The Policy of the Sherman Act

A final reason for our conclusion, and perhaps the most compelling one, is our belief that location agreements like the ones adopted by Sylvania may in some instances promote, rather than impede, competition. Consequently, we think that there must be a case by case inquiry under the “rule of reason” to determine the competitive effect of such restraints if the policy of the Sherman Act is to be effectuated. The true anticompetitive evil of the restraints which Schwinn declared to be illegal per se was their total proscription of all competition between Schwinn dealers for the same customers or within the same geographical areas. Here, Sylvania’s practice involved no such total destruction of intraband competition.³³ Implicit in the application of a per se rule in antitrust analysis is the conclusion that the challenged practice necessarily and always involves an unreasonable restraint upon competition,³⁴ and thus can be conclusively presumed to be illegal without any inquiry into the nature and history of the industry involved and a determination of the precise manner in which a particular restraint has affected competition. Harsh and inflexible per se rules should be applied when, and only when, a court has made a threshold examination of the economic effects of the challenged practice and has determined that it is clear that the practice to be declared illegal per se has had a “pernicious effect on competition” and a “lack of any redeeming virtue.” See Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545, 549 (1958).

On the record before us Continental has not proved that the enforcement by Sylvania of its location clause has worked a net anticompetitive effect, or that the facts presented in this one case warrant the conclusion that further inquiry into the economic impact of Sylvania’s location clauses upon competition would be irrelevant. We recognize, of course, that in establishing a locations practice, Sylvania did check intrabrand competition to some extent. This was an inevitable incident to Sylvania’s attempt to promote and maintain interbrand competition. However, to ignore Sylvania’s ultimate purpose to remain in the market as a viable competitor, thereby fostering interbrand competition, and to consider only the fact that its practice slightly limited intrabrand competition, is to overlook the forest while watching the trees.³⁵ The free market policy of the antitrust laws would not be served by fashioning rules which foster intrabrand competition to the point of extinguishing interbrand competition. This would lead to the more insidious evil of total monopolization. In this connection, it is important to emphasize the following considerations: that in a market dominated by a single company (RCA), Sylvania possessed only a minor fraction of the total market, that many other brands were available to the consumer, that Sylvania dealers possessed no veto power against the franchising of additional dealers in any given area, that Sylvania dealers could and did carry competing brands, and that the location restriction on Sylvania dealers had no demonstrable effect on prices, volume of products available, quality, or consumer choice. Additionally, in no market did Sylvania’s practice foreclose any consumer from substantial choice among several Sylvania dealers, and any Sylvania dealer who might have been inclined to set his prices too high or to provide inadequate service would run headlong into both strong inter-brand competition from other manufacturers and intrabrand competition from one or more other Sylvania dealers.

Where, as here, it cannot be said with certainty that a challenged practice is inherently anticompetitive and unreasonable, the standard commonly referred to as the “rule of reason” is, and should be, applied. That rule, read into the Sherman Act in Standard Oil Co. v. United States, 221 U.S. 1, 62, 31 S.Ct. 502, 516, 55 L.Ed. 619, 646 (1911), was stated in its classic form by Mr. Justice Brandeis in Chicago Board of Trade v. United States, 246 U.S. 231, 38 S.Ct. 242, 62 L.Ed. 683 (1918).

“Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. 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.”

Id., at 238, 38 S.Ct. at 244, 62 L.Ed. at 687.

In holding that an instruction incorporating the “rule of reason” should have been given to the jury, we note that Sylvania presented substantial evidence from which the jury might have reasonably concluded that Sylvania’s location practice, rather than unreasonably restricting competitive market forces, actually had a procompetitive effect³⁶ in that it enabled a marginal producer to achieve the status of a viable competitor in an industry threatened by oligopolistic tendencies. It may be true, as Sylvania claimed, that the location restrictions employed by Sylvania attracted dealers to carry and promote Sylvania’s products, and ultimately fortified its market position in competition with other brands. Perhaps some limit on ruinous intrabrand competition was necessary to induce a sufficient number of otherwise reluctant dealers to sell the Sylvania product. It is undisputed that, as we have previously noted, Sylvania’s share of the market increased from less than 2% in 1962 to 5% by 1965. Any reduction of intrabrand competition that may have resulted from the locations practice apparently did not eventuate in the evils that are normally associated with an unreasonable restraint of trade, since the television industry as a whole experienced both an increase in volume and a decrease in .price during this period.36a Whether some diminution in intrabrand competition is justified when it. averts the loss of one competitor in an industry that is already oligopolistic should ultimately be a question for the finder of the facts. Our choice of a rule of reason test over a per se rule of illegality means only that the critical policy question will at least be asked and answered.³⁷ In our view, the Sherman Act demands no less.

Chief Justice Hughes once wrote, in discussing the Sherman Act: “The restrictions the Act imposes are not mechanical or artificial. Its general phrases, interpreted to attain its fundamental objects, set up the essential standard of reasonableness.” Appalachian Coals, Inc. v. United States, 288 U.S. 344, 360, 53 S.Ct. 471, 474, 77 L.Ed. 825 (1933).³⁸ In holding that the just result in the present controversy is not absolutely foreordained by Schwinn, and that a rule of reason analysis should have been applied, we believe and hope that we further the Sherman Act’s goal of protecting the consumer from the dangers that result when free competition is suppressed. Since the legislative intent underlying the Sherman Act had as its goal the promotion of consumer welfare,³⁹ we decline blindly to condemn a business practice as illegal per se because it imposes a partial, though perhaps reasonable, limitation on intrabrand competition, when there is a significant possibility that its overall effect is to promote competition between brands. If the application of the rule of per se illegality in this case were permitted to stand, Sylvania would inevitably be stripped of a tool which it claims enabled it to compete effectively with the few “giants” of the industry. Its market share might well shrink to the precarious level that existed prior to institution of its “elbow room” policy. It is altogether possible that foreclosing the competitive benefits of vertical agreements like the one here involved by means of a per se rule, without any inquiry into the possibility of an overall procompetitive effect in the relevant industry, might well signal the death of similarly situated manufacturers with small market shares in other industries.⁴⁰ If a per se rule of illegality is permitted to replace a genuine inquiry into the reasonableness and economic effect of business arrangements which, in reality, strengthen competition and promote the Nation’s economic welfare, the purpose of the Sherman Act is undermined. This would promote monopoly, hamstring free enterprise, and victimize our country’s consumers. Hopefully, our conclusion in this case bars such subversion of the national welfare.

The judgment of the District Court is reversed, and the cause is remanded for further proceedings not inconsistent with the views herein expressed.⁴¹

Reversed and Remanded.⁴²

1

. The majority and dissenting opinions of the panel first concerned with the appeal, unofficially reported in 1974-1 Trade Cas. ¶ 75,072 (9th Cir. May 9, 1974), was withdrawn by the full court’s Order of December 19, 1974. The original majority opinion has been the subject of a number of law review commentaries. See Robinson, Recent Antitrust Developments—1974, 75 Colum.L.Rev. 243 (1975), and the case notes at 88 Harv.L.Rev. 636 (1975); 26 Mercer L.Rev. 629 (1975); 53 N.C.L.Rev. 775 (1975); 49 N.Y.U.L.Rev. 957 (1975); 53 Tex.L.Rev. 127 (1975); 10 Colum.J.L. & Social Prob. 497 (1974).

2

. Certain testimony indicated that Sylvania instituted its elbow room policy in order to avoid being driven out of the television market. Ray J. Steiner, at the time of trial the Vice President of Sony Corporation of America, and prior to April, 1969, the National Sales Manager of Sylvania, testified as follows:

. basically elbow room was as a result of the fact that as a company we were in trouble. By that I mean that we needed something, a sales pitch that the sales company could use in order for us to get a foot hold in the market.

Basically we were competing with RCA, Zenith, Magnavox, Motorola, private brands, and very frankly we were not doing a good job.

So the elbow room is basically a selective or limited distribution approach that has been used by other companies in the business, for example, Magnavox, Frigidaire, and we decided that we could no longer have a me too approach to the dealers.

Because if we were in a me too approach or the same type of approach as RCA or Zenith, basically there was no reason for the dealers to handle our line because they could handle other lines.

******

We knew that if the advent of this program, if it didn’t work and we didn’t keep our plant running in Batavia, there was the alter native that we would probably go out of the television business.” (Record at 2543^44) (Emphasis added).

* * * * * *

. the result was that it [the elbow room policy] was successful. We did get a foothold in the market place and we were able to compete with the big boys in the business and it got the onus off our back that we were going out of business.” (Record at 2554) (Emphasis added).

William E. Boss, Jr., the Vice President of Marketing for Sylvania, testified that the purpose of the elbow room policy was:

“. . . really to enable us and our retailers to survive profitably, to effectively compete in a marketplace. Limited distribution merely means that there are less dealers in a given area. We have, for example, perhaps one-sixth of the dealers of our competition, but by having a limited distribution policy we feel that we can develop a more mutually profitable business with the retailer.

If we were to go out and compete with the majors we would not be successful.” (Emphasis added).

3

. Selective distribution was pioneered in the late 1950’s by another company, Magnavox, which held only a small share of the television market. By utilizing this method of distribution, as above noted, Sylvania was able to increase its share of the market to approximately five percent, thereby becoming an effective interbrand competitor.

4

. At trial Sylvania denied that its elbow room policy involved any express or implied agreement with its franchised dealers concerning the movement of television sets. Sylvania insisted that its elbow room policy was implemented unilaterally by an announcement. However, for purposes of this appeal Sylvania has deferred to the implied findings of the jury and has argued its appeal upon the assumption that an implied agreement existed between Sylvania and its dealers prohibiting the shipment of inventory to unauthorized locations.

5

. In 1965, Continental opened five new stores. Its sales volume exceeded $1,000,000, and it had a $300,000 line of credit with Sylvania.

6

. The jury’s verdict was returned in the form of answers to special interrogatories. The verdict in respect to the antitrust claim is as follows:

A. Antitrust Claim

1. Did Sylvania Electric Products, Inc. engage in a contract, combination, or conspir acy in restraint of trade in violation of the antitrust laws with respect to location restrictions and price fixing as an integral part of a single distribution policy?

__X

Yes No

2. Did Sylvania Electric Products, Inc. engage in a contract, combination, or conspiracy in restraint of trade in violation of the antitrust laws with respect to locations restrictions alone?

_X__

Yes No

3. Did John P. Maguire & Co., Inc. engage with Sylvania in a contract, combination or conspiracy:

a. As described in Question 1 above?

__X

Yes No

b. As described in Question 2 above?

__X

Yes No

4. If the answer to Question 1, 2, or 3 is “yes”, did Continental T. V., Inc., sustain damage to its business or property as a proximate result of such violation of the antitrust laws?

_X__

Yes No

5. If the answer to Question 4 is “yes”, what is the amount of such damage?

$591,505

7

. The trial judge’s finding on this point appears to be in conflict with the finding of the jury that Maguire and Sylvania were not involved in any contract, combination, or conspiracy to enforce the location restriction. When issues common to both legal and equitable claims are to be tried together, the legal issues are to be tried first, and the findings of the jury are binding on the trier of the equitable claims. Beacon Theatres v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959). We therefore rely upon the findings of the jury if they appear to be inconsistent with findings of the trial judge.

8

. Since the incidental injunctive relief granted below was predicated upon the application of an erroneous legal standard (See the District Court’s conclusion of law No. 5, quoted infra note 9), the equitable Decree, in addition to the legal Judgment, must be vacated. See United States v. Parke Davis & Co., 362 U.S. 29, 44, 80 S.Ct. 503, 511, 4 L.Ed.2d 505, 515 (1960); Beverage Distributors, Inc. v. Olympia Brewing Co., 440 F.2d 21 (9th Cir.), cert. denied, 403 U.S. 906, 91 S.Ct. 2209, 29 L.Ed.2d 682 (1971).

9

. The district judge entered findings of fact and conclusions of law pertaining to the equitable Decree. The most significant conclusions are as follows:

“3. Sylvania, during the time involved herein, and in violation of Section 1 of the Sherman Act, did engage in a contract, combination or conspiracy with its retail dealers, including Handy Andy and Continental, pursuant to which it restricted and enforced its location distribution policy and imposed a system of location restraints upon its retail dealers limiting for all practical purposes the areas in which they could display and sell Sylvania brand products which the dealers had purchased from Sylvania and which were owned by them.

4. As a proximate result of Sylvania’s conduct as above described, Continental sustained damage to its business and property as found by the jury. Moreover, equitable relief having been granted in the Judgment heretofore entered on the 11th day of December, 1970, the Court deems it necessary to enter in support thereof, Findings of Fact and Conclusions of Law contained herein.

5. The foregoing restraints are per se violations of Section 1 of the Sherman Act, inasmuch as Sylvania made sales to its retailers upon ‘condition, agreement or understanding limiting the retailers freedom as to where and to whom it will resell the products’, these sales having been made ‘subject to territorial restrictions upon resale.’ United States v. Arnold[,] Schwinn & Co., 388 U.S. 378-379 [87 S.Ct. 1865-1866, 18 L.Ed.2d 1259-1260], (1967).”

10

. The trial judge in this case was the distinguished Associate Justice Tom C. Clark (Ret.), sitting by designation in the District Court. In formulating his jury instructions, Justice Clark apparently adopted some of his own dissenting comments in White Motor Co. v. United States, 372 U.S. 253, 275, 83 S.Ct. 696, 708, 9 L.Ed.2d 738, 753 (1963). There, the majority of the Court, against the will of Mr. Justice Clark, declined to establish a broad per se rule regarding all vertical territorial restraints.

11

. The court also rejected a jury instruction proposed by Sylvania which propounded the theory that even if the Schwinn per se rule were applicable to locations restrictions, Sylvania would be exonerated if it could prove a “failing company” defense. The rejected instruction reads as follows:

“If you find such a contract, combination or conspiracy to restrain movement or sale of merchandise, such a practice would be presumptively unlawful. However, before you can find it to be a violation of the antitrust laws, you must consider whether it was justified. In this case, such a restriction would be justified if Sylvania had proved by a preponderance of the evidence that the adoption of such a restriction was reasonably necessary to enable Sylvania to remain in the television business or to enable it to increase the strength and effectiveness of its competitive efforts in the television industry. If you find that such justification has been shown, you should find that Sylvania and Maguire have not' violated the antitrust laws. If you find that Sylvania has not proved such a justification by a preponderance of the evidence, and if you find the existence of a contract, combination or conspiracy to restrict movement or sale of merchandise, as I have defined it above, then you should find that Sylvania has violated the antitrust laws.” (Emphasis added).

12

. We think it noteworthy that all of the law review commentators who have undertaken a detailed analysis of the decision of our court’s original panel have reached the conclusion that the District Court’s application of a per se rule of illegality was wholly inappropriate and that, in light of the purposes of the Sherman Act, the “rule of reason” should have been applied. Robinson, Recent Antitrust Developments—1974, 75 Colum.L.Rev. 243, at 278-79 (1975); 88 Harv.L.Rev. 636, 641-42, 648 (1975); 26 Mercer L.Rev. 629, 637 (1975); 53 N.C.L.Rev. 775, 784-85 (1975); 49 N.Y.U.L.Rev. 957, 969 (1975); 53 Texas L.Rev. 127, 134-37 (1974).

13

. If we thought the opinion of Mr. Justice Fortas in Schwinn to control our present decision, our duty would compel us to apply Schwinn. And this we would do, despite the fact that the opinion of Mr. Justice Fortas has frequently been criticized for the breadth of a small portion of its language and its primary reliance upon the “ancient rule against restraints on alienation,” 388 U.S. at 380, 87 S.Ct. at 1866, 18 L.Ed.2d at 1261, a rule described in Mr. Justice Stewart’s dissent as a “wooden and irrelevant formula.” Id. at 394, 87 S.Ct. at 1873, 18 L.Ed.2d at 1268. See generally Comegys, Moderator, Restraints in Distribution: General Motors, Sealy and Schwinn, a Symposium on Ancillary Restrictions, 36 ABA Antitrust L.J. 84 (1967); Handler, Twenty-Fifth Annual Antitrust Review, 73 Colum.L.Rev. 415, 458-59 (1973); Handler, The Twentieth Annual Antitrust Review-1967, 53 Va.L.Rev. 1667, 1680-86 (1967); Keck, The Schwinn Case, 23 Bus.Lawyer 669 (1968); McLaren, Marketing Limitations on Independent Distributors and Dealers — Prices, Territories, Customers, and Handling of Competitive Products, 13 Antitrust Bull. 161, 168 (1968); Orrick, Marketing Restrictions Imposed to Protect the Integrity of ‘Franchise’ Distribution Systems, 36 ABA Antitrust L.J. 63, 69-72 (1967); Pollack, Antitrust Problems in Franchising, 15 N.Y.L.F. 106, 110-13 (1969); Pollack, Alternative Distribution Methods After Schwinn, 63 Nw.L.Rev. 595 (1968); Sadd, Territorial and Customer Restrictions After Sealy and Schwinn, 38 U.Cin.L.Rev. 249 (1969); Williams, Distribution and the Sherman Act-The Effects of General Motors, Schwinn and Sealy, 1967 Duke L.J. 732, 740 (1967); Note, Restrictive Distribution Arrangements after the Schwinn Case, 53 Cornell L.Rev. 515 (1967); The Supreme Court, 1966 Term, 81 Harv.L.Rev. 69, 235-38 (1967); Note, Territorial Restrictions and Per Se Rules — A Re-evaluation of the Schwinn and Sealy Doctrines, 70 Mich.L.Rev. 616 (1972); Comment, Vertical Territorial Restraints and the Per Se Concept, 18 Buffalo L.Rev. 153, 161 (1969); Comment, The Impact of the Schwinn Case on Territorial Restrictions, 46 Texas L.Rev. 497, 511 (1968).

14

. The District Court may also have relied, to some extent, and with some justification, upon certain additional isolated language from Schwinn.

“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. White Motor, supra; Doctor Miles, supra. Such restraints are so obviously destructive of competition that their mere existence is enough.” 388 U.S. at 379, 87 S.Ct. at 1865, 18 L.Ed.2d at 1260. (Emphasis added).

15

. Pollack, Alternative Distribution Methods after Schwinn, 63 Nw.U.L.Rev. 595 (1968); Williams, Distribution and the Sherman Act— The Effects of General Motors, Schwinn and Sealy, 1967 Duke L.J. 732; Note, Vertical Customer and Territorial Restrictions and the Sherman Act, 63 Nw.U.L.Rev. 262 (1968); Note, Restrictive Distribution Arrangements after the Schwinn Case, 53 Cornell L.Rev. 514 (1968).

16

. White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963), involved customer restrictions that precluded distributors and dealers irom selling trucks to any federal or state government or subdivision thereof and to other large customers without the permission of the manufacturer.

17

. One exceptionally distinguished commentator, very recently the Assistant Attorney General heading the Antitrust Division of the Department of Justice and now a United States District Judge, has interpreted Schwinn as clearly exempting locations clauses from the rule of per se illegality because a locations clause is implicit in this right of a manufacturer to select his dealers:

“Justice Fortas’ opinion does clearly exempt two types of arrangements. First, it upholds the right of a manufacturer to select — or ‘franchise’ — the dealers ‘to whom, alone, he will sell his goods’ — citing United States v. Colgate & Co., 250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992 (1919) — where competitive products are readily available. A necessary element of the right to ‘franchise’ —which I suggest is really a word of art covering the Category 2 arrangement described earlier — is the right to have a ‘location clause.’ That is, a manufacturer must be free to appoint another to be his dealer at a given place and to agree not to appoint another dealer within a certain distance. If this were not so, a manufacturer would exhaust his right of dealer selection — which Justice Fortas says he has — once he appointed a single dealer. Moreover, the auto dealer location clause — allowed to stand in the General Motors Discount House case — would be outlawed sub silentio.”

McLaren, Territorial and Customer Restrictions, Consignments, Suggested Retail Prices and Refusals to Deal, 37 Antitrust L.J. 137, 144 — 45 (1968) (footnote omitted).

18

. The conclusion we reach is not inconsistent with the recent decision of the United States Court of Appeals for the Fifth Circuit in Copper Liquor, Inc. v. Adolph Coors Co., 506 F.2d 934 (5th Cir. 1975). Two fundamental distinctions between Coors and the present case make the reasoning of Coors inapplicable to our situation: (1) Coors involved overt price fixing, a clear per se violation of section one of the Sherman Act. As Judge Gee pointed out in his concurring opinion (506 F.2d at 955), any consideration of Schwinn was unnecessary to the decision in Coors. (2) The restrictions involved in Coors were, like those in Schwinn, designed to foreclose all intrabrand competition, while Sylvania’s “elbow room policy” undeniably retained and fostered substantial intrabrand competition.

In Coors, the plaintiff alleged that Coors combined or conspired with its distributors to fix the retail price of its beer and caused its distributors, servicing the plaintiff’s retail liquor store, to discontinue the supply of Coors beer to the plaintiff when he sold below the suggested retail price and declined to give assurances that he would not continue to do so in the future. 506 F.2d at 936. Vertical price fixing, of course, has long been recognized as a per se violation of the Sherman Act. United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 64 S.Ct. 805, 88 L.Ed. 1024 (1944). There being evidence that Coors had conspired to fix prices, we agree with Judge Gee that it was unnecessary for the court to rely upon Schwinn so as to hold that Coors’ practices were a per se antitrust violation. But of more significance is the fact that the Coors opinion explicitly recites that the evidence of price fixing was the foundation for the determination that Coors’ restrictions ran afoul of the Schwinn holding:

“We do not say that vertically imposed territorial restrictions may never comport with the Sherman Act; Schwinn itself conceded they might be proper in the case of new entrants in a highly competitive field or ‘failing companies’. And there may be other exceptions. We say only that this record does not, as a matter of law, provide justification for excepting Coors from the effect of Schwinn, in light of the price fixing evidence.” 506 F.2d at 945 (Emphasis in original).

Later in the Coors opinion the court abandoned an inquiry into various exceptions which the Tenth Circuit has engrafted onto the Schwinn rule, saying:

“But we need pursue the question no further here. Coors’s restraints were ancillary to an illegal price fixing scheme.” 506 F.2d at 947-48.

We therefore believe that there is no significant similarity between our situation and that presented in Coors. In Coors territorial restraints were utilized to effect vertical price fixing — a clear per se violation by whatever means it is achieved. Here, there was absolutely no evidence that Sylvania engaged in price fixing or that there was any other unlawful purpose underlying the location clause agreements.

The second major distinction between Coors and the present case inheres in the competitive effects of the challenged territorial agreements. In addition to his claim of price fixing, the plaintiff in Coors contended that “Coors conspired or combined with its distributors to create and enforce exclusive territories within which each distributor was to conduct his business, making it impossible for the plaintiff to obtain a supply of Coors beer from another distributor once his original supply had been cut off.” 506 F.2d at 936 (Emphasis added). Mr. Coors himself stated that “unless the distributor could be assured that he would not be confronted with competition from another Coors distributor within his territory — assured there would be no intrabrand competition —the distributor would be unwilling to make the necessary capital expenditure, and lending institutions would be unwilling to extend credit to him.” 506 F.2d at 938 (Emphasis added).

In contrast to the Coors restrictions which “assured that there would be no intrabrand competition” because the distributor promised to “conduct his wholesale distribution exclusively within the prescribed territory” (506 F.2d at 938), Sylvania permitted intrabrand competition. No Sylvania retailer was forbidden to sell to persons residing outside any prescribed territory, and Sylvania franchised more than one dealer in every major metropolitan area in Northern California. It was not impossible for a buyer to purchase from more than one seller, as it was for the plaintiff in Coors. Thus, the restriction in Coors, like the restriction in Schwinn and unlike Sylvania’s location clauses, “assured that there would be no intrabrand competition.”

Similar considerations apply to the Tenth Circuit’s decision in Adolph Coors Company v. FTC, 497 F.2d 1178 (10th Cir. 1974), cert. denied, 419 U.S. 1105, 95 S.Ct. 775, 42 L.Ed.2d 801 (1975). We need not speculate as to how that decision might relate to locations clauses, since the Tenth Circuit expressly considered the legality of locations clauses in the later case of Salco Corp. v. General Motors Corp., (discussed at p. 23, infra) and resolved the issue as we resolve it now.

19

. See Robinson, Recent Antitrust Developments — 1974, 75 Colum.L.Rev. 243, 276 n.207 (1975).

20

. “We need not reach these questions concerning the meaning, effect, or validity of the ‘location clause’ or of any other provision in the Dealer Selling Agreement, and we do not. We do not decide whether the ‘location clause’ may be construed to prohibit a dealer, party to it, from selling through discounters, or whether General Motors could by unilateral action enforce the clause, so construed.” United States v. General Motors Corp., 384 U.S. 127, 139-40, 86 S.Ct. 1321, 1327, 16 L.Ed.2d 415, 423 (1966).

21

. Another case, United States v. Topeo Associates, Inc., 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972), dealt similarly with locations clauses. Although Topeo involved horizontal rather than vertical limitations, the District Court, on remand, expressly allowed the defendant to fix the locations of his licensees, except where doing so would give an exclusive territory to another licensee. The District Court’s Judgment provided:

. . nothing in this Final Judgment shall prevent defendant ... (2) from designating the location of the place or places of business for which a trademark license is issued, provided that the defendant shall not refuse to grant a trademark license to any member or withdraw a license from any member, except any withdrawal incidental to the bona fide termination of any member firm’s membership in Topeo, if such action would achieve or maintain territorial exclusivity in any member firm.” United States v. Topco Associates, Inc., 1973 Trade Cas. ¶ 74,391 (N.D.Ill.1973).

An appeal was taken from the judgment entered by the District Court, after remand, and this judgment was summarily affirmed, with only Mr. Justice Douglas dissenting. 414 U.S. 801, 94 S.Ct. 116, 38 L.Ed.2d 39 (1973).

The dissenting opinions written by my brothers Browning and Kilkenny rely heavily upon language from the Supreme Court’s opinion in Topeo for the sweeping and unqualified conclusion that, in Judge Kilkenny’s words, “restricted intrabrand competition cannot be justified by alleged interbrand competitive gain.” The majority believes that such a broad interpretation of Topeo is plainly wrong. In Topeo the Court held that the District Court had erred by applying a rule of reason to a horizontal restraint, which, the Court noted, is “[ojne of the classic examples of a per se violation of § 1.” 405 U.S. at 608, 92 S.Ct. at 1133, 31 L.Ed.2d at 526.

Thus, Topeo stands only for the accepted proposition that a rule of reason may not be applied in circumstances wherein a per se violation has been clearly established. A vertical device, like the locations clause employed in the present case, is by no means a “classic example” of a per se violation. When, as here, the issue of per se liability has not been previously determined, Topeo in no way precludes consideration of whatever gains in interbrand competition have resulted from intrabrand restrictions.

22

. Continental attempts to circumvent the precedent established by the Schwinn, Topeo, and General Motors (United States v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966)) orders on remand by arguing that the manufacturer’s acknowledged right to “franchise by location” means only that a franchisor may authorize a dealer to hold himself out as the “authorized agent” of the franchisor only at certain locations. Thus, the argument continues, the right to “franchise by location” does not give the franchisor any right to prevent the franchisee from opening as many additional outlets as he wishes at unauthorized locations, and the franchisor must provide additional quantities of product and related services to the dealer at these locations. The “right to franchise by location” is construed to mean only that the franchisor may deny his franchisee the right to “hold himself out as the authorized agent” of the manufacturer at these additional locations.

We find the foregoing argument to be highly artificial and even spurious. The very fact that the television sets sold from the unauthorized location bear the Sylvania brand name implies to the public that the store is an “authorized Sylvania dealer”, even if the store cannot expressly identify itself as such. The franchised Sylvania dealer has the advantage of company arranged credit, guaranteed company shipments, Sylvania’s national advertising of the product, and his recognized name as a Sylvania dealer at his authorized locations. Any inherent advantages of being a Sylvania franchisee go with the dealer to the new location, regardless of whether he holds himself out at the new location as a franchised Sylvania dealer or not. The decree on remand in Schwinn expressly provided that nothing therein should prevent Schwinn “from designating in its franchise agreements the location of the place or places of business for which the franchise is issued” 291 F.Supp. 564, 566 (N.D.Ill.1968). Continental would define “franchise”, as applied to the facts here, to mean the right of a store at an unauthorized location to refer to itself in its advertisements or signs on the premises as an “authorized Sylvania dealer.” It is obvious to us that the word, “franchise”, should more logically be interpreted to mean the right to purchase television sets from Sylvania for resale, in conjunction with the above mentioned benefits; in essence, the right to act as a Sylvania dealer. Both the Schwinn and Sylvania franchises were agreements which authorized the dealer to sell the manufacturer’s products from a specific location. The primary purpose of the franchises in both cases was to authorize the sale and display of the manufacturer’s product, as part of an overall system of distribution.

Therefore, we read the above quoted language from the Schwinn decree on remand explicitly to authorize the practice followed by Sylvania, designating the location or locations from which a particular retailer was authorized to operate as the manufacturer’s dealer. The term “franchise” in the Schwinn order on remand has been similarly interpreted by law review commentators. See, e. g., Pollack, Alternative Distribution Methods After Schwinn, 63 Nw.U.L.Rev. 595, 603-04 (1968):

“Nor does the Schwinn doctrine outlaw the use of the so-called ‘location clause’, which designates the location of the place of business for which a franchise is issued and which requires the franchisor’s consent to operate the business at another location. . Indeed, without some such agreement, it is difficult to see how a franchise relationship could operate. . . Subsequently in his final decree in the Schwinn case on remand from the Supreme Court, Judge Perry specifically authorized Schwinn’s use of location clauses in its franchise agreements.”

23

. The location clause involved in Saleo provided:

“Once dealer is established in facilities and at a location . mutually satisfactory to Dealer and Buick, Dealer will not move to or establish a new or different location . without prior written approval of Buick.”

517 F.2d at 575 n.7.

24

. The tendency of the courts to construe the Schwinn holding narrowly has been the subject of law review discussions. See Note, Territorial and Customer Restrictions: A Trend Toward a Broader Rule of Reason?, 40 Geo.Wash.L. Rev. 123 (1971); Note, Vertical Territorial and Customer Restrictions Under the Sherman Act: Decisions Since United States v. Arnold, Schwinn & Co., 22 J.Pub.L. 483 (1973).

25

. While a locations clause is a common tool utilized by manufacturers in their distributorship or franchise arrangements, it is by no means the only vertical restraint that has been employed to subject a distributor or retailer of products bearing a recognized trade name to certain controls over his business operations. These other controls on dealer territorial expansion include such practices as exclusive dealerships, area of primary responsibility covenants, and profit pass-over requirements. Each of these vertical restraints might limit intrabrand competition, and all are susceptible, linguistically, to inclusion within the literal language of Schwinn; nevertheless, all have been upheld against claims that they fall within Schwinn’s per se rule of prohibition. See Colorado Pump & Supply Co. v. Febco Inc., 472 F.2d 637 (10th Cir.), cert. denied, 411 U.S. 987, 93 S.Ct. 2274, 36 L.Ed.2d 965 (1973) (primary responsibility clause); Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71, 76 (9th Cir. 1969), cert. denied, 396 U.S. 1062, 90 S.Ct. 752, 24 L.Ed.2d 755 (1970) (exclusive dealership); Superior Bedding Co. v. Serta Associates, Inc., 353 F.Supp. 1143 (N.D.Ill.1972) (primary responsibility and profit pass-over clauses); Plastic Packaging Materials, Inc. v. Dow Chemical Co., 327 F.Supp. 213 (E.D.Pa.1971) (primary responsibility clause); but cf. Reed Brothers, Inc. v. Monsanto Company, 525 F.2d 486 (8th Cir., 1975) (recognizing that courts have approved designation of areas of primary responsibility “without more”, but holding that there was “more” in Monsanto’s additional policies that effectively curtailed the ability of its distributors to sell Monsanto Herbicides, after purchase, to whomever they wished).

A primary responsibility clause is basically an agreement obligating a distributor to concentrate his sole efforts in a specified geographical area for which he is primarily responsible. The use of these clauses was endorsed in White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963), by Mr. Justice Brennan, who noted in his concurring opinion that the lawfulness of area of primary responsibility covenants has been recognized in many consent decrees. (372 U.S. at 271 n. 12, 83 S.Ct. at 706, 9 L.Ed.2d at 751).

A profit pass-over arrangement requires a dealer who makes sales within the territory of another dealer to turn over part of his profits from those sales to that other dealer, to compensate the other dealer for the latter’s promotional efforts in the territory wherein the sale occurred. Mr. Justice Brennan also discussed this type of restriction in White Motor Co., supra, noting “[i]f, for example, such a cross-sale incurs only an obligation to share (or ‘pass over’) the profit with the dealer whose territory has been invaded — as is most often, and appar ently here, the case — then the practical effect upon competition of a territorial limitation may be no more harmful than that of the typical exclusive franchise — the lawfulness of which the Government does not dispute here.” 372 U.S. 253, 270-71, 83 S.Ct. 696, 706, 9 L.Ed.2d 738, 751 (Brennan, J., concurring).

26

. The Third Circuit, sitting en banc, held in Tripoli that a cosmetic manufacturer’s restriction on its distributor’s resale of products, intended for professional use, to non-professionals was not a per se violation of the Sherman Act, although the challenged practice fell within the Schwinn language pertaining to restrictions on resale after title to the product passes to the distributor. The court applied the rule of reason and held the restrictions reasonable as a means of protecting the public from potential harm. The court chose to restrict Schwinn to its facts, stating:

“That case [Schwinn] does not, as plaintiff proposes, establish as a per se violation every attempt by a manufacturer to restrict the persons to whom a wholesaler may resell any product whatsoever, title to which has left the manufacturer. Rather, Schwinn must be read, as must all antitrust cases, in its factual context.” 425 F.2d at 936 (3rd Cir. 1970). More recently, the Third Circuit has suggested that the principle established in Tripoli may not be limited to health and safety justifications, but may extend to encompass the broader proposition that “. . where a manufacturer’s restriction is related to a legitimate business purpose, Schwinn may be inapplicable.” Scooper Dooper, Inc. v. Kraftco Corp., 494 F.2d 840, 847 n.13 (3rd Cir. 1974).

27

. See Jentes, Permissible Vertical Restraints in Manufacturer-Distributor Relations, 8 A.B.A. Antitrust Law Notes 97, 102 (Summer 1972), in which the author advises that a location clause is not only legal, but a preferred type of manufacturer restraint under Schwinn. See also 1968 Antitrust Law Symposium of the New York State Bar Association, 62-64; Pollack, Alternative Distribution Methods After Schwinn, 63 Nw.U.L.Rev. 595, 603-4 (1968); Hanson, American Bar Association Symposium on Marketing and Franchising: Antitrust Prognosis for the 70’s, 39 Antitrust L.J. 502, 516 (1970).

28

. See Robinson, Recent Antitrust Developments — 1974, 75 Colum.L.Rev. 243, 276 n.207 (1975).

29

. According to the Department of Commerce, there were 445,281 franchised businesses in the United States in 1972. U.S. Dept, of Commerce, Franchising in the Economy 1972-1974 (1974).

30

. It has been argued that if, under Schwinn, Sylvania could not legally prevent Continental from selling to another unfranchised retailer, who thereupon resells from an unauthorized location, then there is no reason why Continental could not sell to itself (by shipping television sets to unauthorized locations for resale there). It may be true that any attempt by Sylvania to restrict sales by its franchisees to unfranchised dealers would constitute a violation of the antitrust laws. However, Sylvania was careful to avoid this problem by allowing its dealers to sell to anyone. Allowing a franchised dealer to sell to a non-franchised retailer has a far different effect upon the franchisor than allowing a franchisee, in violation of a contract, to open a store at any location he chooses. The unfranchised retailer would ordinarily, in the first instance, pay a higher price for the Sylvania product because the unfranchised dealer would be buying through a middleman, the franchised dealer, rather than directly from Sylvania. On the other hand, as we have previously emphasized, the franchised dealer has the benefit of company arranged credit, guaranteed company shipments, and a recognized name as a Sylvania franchisee, as well as the advantage of buying directly from the manufacturer at a lower price. And all advantages of the status of a Sylvania franchisee attend the dealer’s move to the new location, regardless of whether he holds himself out at the new location as a franchised Sylvania dealer. The franchised dealer who violates the company’s elbow room policy still will retain all the benefits of his franchise, while eliminating the benefits to the company of having a reliable market, and spaced distribution. The ultimate economic result of the approach below would likely spell the doom of all Sylvania franchised dealers. No longer could Sylvania offer to its dealers the primary advantage of a promise not to franchise more dealers than a particular market could reasonably support. This promise on Sylvania’s part was not nearly as restrictive as an exclusive dealership, which our court and many others have upheld, but it did tend to prevent the kind of “cut-throat” competition between franchisees that could ultimately result in the destruction of Sylvania as an interbrand competitor. The elbow room policy was never used by Sylvania severely to restrict intrabrand competition or to divide markets. No dealer had a veto power over the entry of other dealers into his area, and locations were authorized by Sylvania solely on the basis of market expandability.

Taking another approach, Continental also argues that “Continental sold in Sacramento not ‘to itself’, but to an ‘unfranchised dealer’, namely, to S.A.M. Industries, Inc.” In fact, the record thoroughly belies this contention and conclusively demonstrates that Continental was indeed shipping to itself in Sacramento because S.A.M. Industries, Inc., was not a separate, independent dealer.

In the original Answer and Counterclaim, Continental (including S.A.M.) alleges that it, as a group of affiliates, did business in California under the firm name and style of “Continental T.V.” Throughout its Answer S.A.M. and the other affiliated corporations referred to themselves, collectively, as “Continental.” In his statements to the jury, Continental’s attorney made it clear that S.A.M. was a part of Continental and that the Sacramento store operated by S.A.M. was doomed to be a link in the Continental chain. The testimony of George Shahood, the President and General Manager of Continental T.V., also shows that the Sacramento store was part of Continental T.V.’s whole enterprise. Finally, and as the irrefutable answer to Continental’s alternate approach, the district judge found as a fact that “Cross claimants are a group of affiliated corporations in substantially common ownership which did business under the name ‘Continental T.V.’ George Shahood and his wife were the principal owners of all the corporations and Mr. Shahood was the principal operating officer.”

31

. Quoting Susser v. Carvel Corp., 206 F.Supp. 636, 640 (S.D.N.Y.1962), aff'd, 332 F.2d 505 (2d Cir. 1964), cert. granted, 379 U.S. 885, 85 S.Ct. 158, 13 L.Ed.2d 91, cert. dismissed, 381 U.S. 125, 85 S.Ct. 1364, 14 L.Ed.2d 284 (1965).

32

. See generally H. Brown, Franchising — Realities and Remedies (1973); Small Business Administration for Senate Select Committee on Small Business, 92d Cong., 1st Sess., Report on the Economic Effects of Franchising (Comm. Print 1971); E. Lewis & R. Hancock, The Franchise System of Distribution (1963); Zeidman, The Growth and Importance of Franchising— Its Impact on Small Business, 12 Antitrust Bull. 1191 (1967).

33

. See text accompanying notes 14 to 18 supra.

34

. “Specifically, the per se rule of prohibition has been applied to price-fixing agreements, group boycotts, tying arrangements, and horizontal division of markets. As to each of these practices, experience and analysis have established the utter lack of justification to excuse its inherent threat to competition. To gauge the appropriateness of a per se test for the forms of restraint involved in this case, then, we must determine whether experience warrants, at this stage, a conclusion that inquiry into effect upon competition and economic justification would be similarly irrelevant.” White Motor Co. v. United States, 372 U.S. 253, 265-66, 83 S.Ct. 696, 703, 9 L.Ed.2d 738, 748 (1963) (Brennan, J., concurring) (footnotes omitted). See generally von Kalinowski, The Per Se Doctrine — An Emerging Philosophy of Antitrust Law, 11 U.C.L.A.L.Rev. 569 (1964).

35

. As one economist has explained the principal point in the course of an analysis of the economic effects of restrictive distribution arrangements:

“Restrictive marketing arrangements of any sort thus limit competition in some respect. However . limitations on competitive activity in one direction may strengthen competitive forces in another . . The question for analysis ... is whether this departure from competitive structure within one marketing organization is counterbalanced by an increase in the number of marketing organizations and products available in particular markets or in the vigor of competitive behavior.” Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards, 30 Law. & Contemp. Prob. 506, 508 (1965).

36

. Lee Egan Preston, Jr., a professor at the School of Management at the State University of New York in Buffalo, testified as to his conclusions after a study of the television market:

“A: Now, since Sylvania occupies a relatively small position in the television market and it is therefore a competitive element in that market, I think the television market would be less competitive if Sylvania would be out of it, because the number of brands, after all, are 10 to 12.

Sylvania is in there. They are at the bottom, but in there.

Now, if we squeeze out the bottom firms from that market, then I think we would see a decline in competition among brands in all the major markets in the country. Therefore, if this distribution policy or any particular distribution policy has the effect of strengthening Sylvania or any other smaller firm as a competitive force among the other firms in that market, many of which are much larger, then I think we have to look carefully at that policy as an element in competition, indeed, as a procompetitive policy among the brands and the manufacturers as a whole.

Q: In the opinion which you have just described for us, sir, did you ascertain whether the type of distribution policy that you have assumed to be employed was in any way beneficial to competition in the sense beyond the one you have just given?

A: I think I just responded to that by saying that I think that anything that maintains a range of competition alternatives throughout the market strengthens competitive forces there.”

“Q: Assuming a distribution practice of the type that you are asked to assume, is there any anticompetitive characteristics that you can identify?

A: I don’t see any, because I feel that competition in the market has resulted from the large number of brands and dealers available throughout the system.” Compare Preston, supra note 35, at 506.

. See Note, 53 Texas L.Rev. 127, 136 (1974).

37

. A number of justifications have been offered for vertically-imposed territorial restraints, a few of which can be briefly summarized. We express no view as to the validity of these justifications, either as a matter of abstract economic theory or in the context of the specific facts of this case. As previously indicated, under the rule of reason the ultimate question must be answered by the trier of fact.

Perhaps the major justification offered for such restrictions is that they enable a manufacturer to obtain access to markets that are otherwise closed to him. It is altogether probable that distributors will be unwilling to handle a manufacturer’s product unless they are afforded some protection against ruinous intrabrand competition. Dealers could justifiably believe that in the absence of vertical restrictions, “cutthroat” intrabrand competition from other dealers would drive down prices and render their operation unprofitable, and endanger their capital investment.

A second argument in favor of vertical restrictions is the so-called “free ride” theory. Vertical restrictions are said to be necessary to prevent dealers from invading the territories of other dealers by choosing to rely on the promotional efforts of those other dealers rather than undertaking costly selling activities themselves. It is argued, with significant logic, that in the absence of vertical territorial restrictions, dealers will not provide advertising or repair facilities as extensively as they would if they could be assured that invading dealers will not pirate the benefits of these promotional activities.

A third asserted justification for vertical restrictions is that they encourage total sales effort on a dealer’s part by facilitating more concentrated and intense coverage of each geographic market, thus leading to increased sales of the manufacturer’s products. Sales to large customers located close to the dealer usually require lower distribution costs than sales to smaller, more distant customers. Accordingly, the manufacturer benefits if all customers are charged an identical price and the dealer’s savings from sales to the choice customers offset the higher costs incurred in sales to others. Vertical territorial restrictions are thus often designed to motivate dealers to increase their depth of coverage in narrowly defined areas rather than “skimming” choice customers over a wider area.

A fourth major justification for the legality of vertical restraints is that they are necessary incentives to motivate dealers to provide a high quality and character of dealer services such as consumer credit, prompt and efficient repairs, and other post-sale services. The theory is that dealers can be persuaded, and are willing, to provide these better services in exchange for some insulation from ruinous intrabrand competition.

For a more detailed discussion of these justifications and others, see Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 Yale L.J. 373, 430—453 (1966); Comanor, Vertical Territorial and Customer Restrictions: White Motor and its Aftermath, 81 Harv.L.Rev. 1419, 1426-33 (1968); Preston, Restrictive Distribution Arrangements: Economic Analysis and Public Policy Standards, 30 Law. & Contemp. Prob. 506, 511-12 (1965).

38

. In the words of the present Solicitor General of the United States, “. . . the inescapable fact is that an agreement which eliminates competition is basic to almost every productive unit consisting of more than a single person. The agreement may be spelled out or, more often, may be tacit, but, to the degree that coordination of the productive activities of persons is achieved, actual or potential competition must be eliminated.” Bork, supra n.37 at 377 (1966). For a classic discussion cautioning against an overly literal construction of the Sherman Act, see the dissenting opinion of Mr. Justice Holmes in Northern Securities Co. v. United States, 193 U.S. 197, 400-411, 24 S.Ct. 436, 486-487, 48 L.Ed. 679, 726-730 (1904).

39

. A study of the legislative history of the Sherman Act “establishfes] conclusively that the legislative intent underlying the Sherman Act was that courts should be guided exclusively by consumer welfare and the economic criteria which that value premise implies.” Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.Law & Econ. 7, 11 (1966). The current Solicitor General also noted that:

“It is difficult to resist the conclusion that the most faithful judicial reflection of Senator Sherman’s and his colleague’s policy intentions was the rule of reason enunciated by Chief Justice White in the 1911 Standard Oil and American Tobacco opinions. There was in White’s opinions as in Sherman’s speeches the idea that the statute was concerned exclusively with consumer welfare and that this meant the law must discourage restriction of output without hampering efficiency. White appears also to have incorporated into his rule of reason those major rules of law which Sherman envisaged as implied by a consumer-welfare policy. The rules implied by the policy are alterable as economic analysis progresses, however. White clearly foresaw this and incorporated that principle of change into the rule of reason.”

Id. at 47.

40

. We acknowledge that, as a matter of economic theory, there is a sharp divergence of opinion as to the alleged procompetitive effects of vertical territorial restrictions. Perhaps the classic exposition of the competing arguments appear in two discussions, one written by Solicitor General Bork, and the other by William Comanor. Compare Bork, supra n.37, with Comanor, supra n.37. We do not further summarize the major aspects of the competing views, inasmuch as our reasoning in the present case endorses neither of the views. We simply believe that the fact that a disagreement exists, and the corresponding possibility that the locations clauses involved here may have had a procompetitive effect, renders wholly inappropriate the application of a per se rule of illegality. The ultimate consideration of the procompetitive merits of Sylvania’s practice must be conducted under the rule of reason.

41

. Sylvania vigorously contends that even if its locations practice could be held to be illegal per se under Schwinn, then it should have had the benefit of an instruction on the “failing company” defense. We have hitherto quoted its proffered jury instruction in this respect. See note 11 supra. Sylvania argues that at the time its “elbow room” policy was instituted, Sylvania would have been compelled to abandon its television manufacturing business if it did not increase its share of the market in the manner that it did. The failing company defense has generally been applied to mergers or acquisitions which would otherwise violate the antitrust laws. United States v. Greater Buffalo Press, 402 U.S. 549, 91 S.Ct. 1692, 29 L.Ed.2d 170 (1971); Citizen Publishing Co. v. United States, 394 U.S. 131, 89 S.Ct. 927, 22 L.Ed.2d 148 (1969); International Shoe Co. v. FTC, 280 U.S. 291, 50 S.Ct. 89, 74 L.Ed. 431 (1930); Hale and Hale, Failing Firms and the Merger Provisions of the Antitrust Laws, 52 Ky.L.J. 597 (1964); Connor, Section 7 of the Clayton Act: The Failing Company Myth, 49 Geo.L.J. 84 (1960). However, United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967) indicates that the defense is also available in cases wherein a vertical restraint is being challenged. The Court in Schwinn clearly indicated its intent that the failing company defense, once shown, would then subject the case to the rule of reason and the per se rule would not be applicable. We requote the Court’s remarks:

“We first observe that the facts of this case do not come within the specific illustrations which the Court in White Motor articulated as possible factors relevant to a showing that the challenged vertical restraint is sheltered by the rule of reason because it is not anti-competitive. Schwinn was not a newcomer, seeking to break into or stay in the bicycle business. It was not a ‘failing company.’ ”

388 U.S. at 374, 87 S.Ct. at 1863, 18 L.Ed.2d at 1257. However, because we have determined that the trial court erred in applying the Schwinn rule of per se illegality to Sylvania’s locations clauses and that a new trial is therefore required, we find it unnecessary now to decide whether there was sufficient evidence to warrant instructing the jury on the failing company defense. For future guidance to the District Court, however, we think it presently appropriate to emphasize that even if a manufacturer is prosperous in its whole operation, the failing company defense is applicable if the company is failing in the manufacture and distribution of one of its significant products. In Schwinn Mr. Justice Fortas wrote of the “product market.” 388 U.S. at 382, 87 S.Ct. at 1867, 18 L.Ed.2d at 1262.

Similarly, our determination that the rule of per se illegality established in Schwinn is inapplicable to the Sylvania location practice challenged here also makes it unnecessary for us to consider the merits of Sylvania’s argument that it had no reasonable basis for believing its practices violated the antitrust laws because the conduct in question occurred before the Schwinn decision.

42

. While the disposition of the present case was under consideration by the full court, a panel issued its opinion in Noble v. McClatchy Newspapers, 533 F.2d 1081 (9th Cir. 1975).

The majority here has no quarrel with the result reached by the Noble court; however, any language in the Noble opinion that may be inconsistent with any of the majority’s language in the present case is hereby disapproved.