United States v. Sealy, Inc./Dissent II

Mr. Justice HARLAN, dissenting.

I cannot agree that on this record the restrictive territorial arrangements here challenged are properly to be classified as 'horizontal,' and hence illegal per se under established antitrust doctrine. I believe that they should be regarded as 'vertical' and thus, as the Court recognizes, subject to different antitrust evaluation.

Sealy, Inc., is the owner of trademarks for Sealy branded bedding. Sealy licenses manufacturers in various parts of the country to produce and sell its products. In addition, Sal y provides technical and managerial services for them, conducts advertising and other promotional programs, and engages in technical research and quality control activities. The Government's theory of this case in the District Court was essentially that the allocation of territories by Sealy to its various licensees was unlawful per se because in spite of these other legitimate activities Sealy was actually a 'front' created and used by the various manufacturers of Sealy products 'to camouflage their own collusive activities. * *  * ' Plaintiff's Brief in Opposition to Defendants' Briefs, October 12, 1961, pp. 12, 15.

If such a characterization of Sealy had been proved at trial I would agree that the division of territories is illegal per se. Horizontal agreements among manufacturers to divide territories have long been held to violate the antitrust laws without regard to any asserted justification for them. See Addyston Pipe & Steel Co. v. United States, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136; United States v. National Lead Co., 332 U.S. 319, 67 S.Ct. 1634, 91 L.Ed. 2077; Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199. The reason is that territorial divisions prevent open competition, and where they are effected horizontally by manufacturers or by sellers who in the normal course of things would be competing among themselves, such restraints are immediately suspect. As the Court noted in White Motor Co. v. United States, 372 U.S. 253, 263, 83 S.Ct. 696, 702, 9 L.Ed.2d 738, they are 'naked restraints of trade with no purpose except stifling of competition.' On the other hand, vertical restraints-that is, limitations imposed by a manufacturer on its own dealers, as in White Motor Co., supra, or by a licensor on his licensees-may have independent and valid business justifications. The person imposing the restraint cannot necessarily be said to be acting for anticompetitive purposes. Quite to the contrary, he can be expected to be acting to enhance the competitive position of his product vis-a -vis other brands.

With respect to vertical restrictions, it has long been recognized that in order to engage in effective interbrand competition, some limitations on interbrand competition may be necessary. Restraints of this type 'may be allowable protections against aggressive competitors or the only practicable means a small company has for breaking into or staying in business (cf. Brown Shoe Co. (v. United States, 370 U.S. 294), at 330, 82 S.Ct. 1502, at 1526, 1527, 8 L.Ed.2d 510; United States v. Jerrold Electronics Corp., D.C., 187 F.Supp. 545, 560-561, aff'd, 365 U.S. 567, 81 S.Ct. 755, 5 L.Ed.2d 806) and within the 'rule of reason." White Motor Co., supra, at 263, 83 S.Ct. at 702; see also id., at 267-272, 83 S.Ct. at 704-706 (Concurring opinion of Brennan, J.). For these reasons territorial limitations imposed vertically should be tested by the rule of reason, namely, whether in the context of the particular industry, '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.' Chicago Board of Trade v. United States, 246 U.S. 231, 238, 38 S.Ct. 242, 244, 62 L.Ed. 683. Indeed the Court reaffirms these principles in the opinion which it announces today in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249.

The question in this case is whether Sealy is properly to be regarded as an independent licensor which, as a prima facie matter, can be deemed to have imposed these restraints on its licensees for its own business purposes, or as equivalent to a horizontal combination of licensees, that is as simply a vehicle for effectuating horizontal arrangements between its licensees. On the basis of the findings made by the District Court, I am unable to accept the Court's classification of these restraints as horizontally contrived. The District Court made the following findings:

'4. The proceding (detailed factual) findings indicate the      type of evidence in this record that demonstrates that there      has never been a central conspiratorial purpose on the part      of Sealy and its licensees to divide the United States into      territories in which competitors would not compete. Their     main purpose has been the proper exploitation of the Sealy      name and trademarks by licensing bedding manufacturers to      manufacture and sell Sealy products in exchange for royalties      to Sealy. The fact remains that each licensee was restricted     in the territory in which he could manufacture and sell Sealy      products. However, the record shows that this restriction was     imposed by Sealy and was also secondary, or ancillary, to the      main purpose of Sealy's license contracts.

'119. Plaintiff's evidence, read as a whole, conclusively     proves that the Sealy licensing arrangements were developed      in the early 1920's for entirely legitimate business purposes, including royalty income to      Sugar Land Industries, which owned the Sealy name, trademarks      and patents, and the benefits to licensees of joint      purchasing, research, engineering, advertising and      merchandising. These objectives were carried out by successor     companies, including defendant, whose activities have been      directed not toward market division among licensees but      toward obtaining additional licensees and more intensive      sales coverage.'

The Solicitor General in presenting the appeal to this Court stated explicitly that he did not contend 'that Sealy, Inc. was no more than a facade for a conspiracy to suppress competition,' Brief, p. 12, since it admittedly did have genuine and lawful purposes. For me these District Court findings, which the Government accepts for purposes of this appeal, take this case out of the category of horizontal agreements, and thus out of the per se category as well. Sealy has wholly ligitimate interests and purposes of its own: it is engaged in vigorous interbrand competition with large integrated bedding manufacturers and with retail chains selling their own products. Sealy's goal is to maximize sales of its products nationwide, and thus to maximize its royalties. The test under such circumstances should be the same as that governing other vertical relationships, namely, whether in the context of the market structure of this industry, these territorial restraints are reasonable business practices, given the true purposes of the antitrust laws. See White Motor Co., supra; Sandura Co. v. FTC, 6 Cir., 339 F.2d 847. It is true that in this case the shareholders of Sealy are the licensees. Such a relationship no doubt requires special scrutiny. But I cannot agree that this fact by itself automatically requires striking down Sealy's policy of territorialization. The correct approach, in my view, is to consider Sealy's corporate structure and decision-making process as one (but only one) relevant factor in determining whether the restraint is an unreasonable one. Compare United States v. Penn-Olin Chem. Co., 378 U.S. 158, 170, 84 S.Ct. 1710, 1716, 12 L.Ed.2d 775.

The Court in reaching its result relies heavily on the fact that these territorial limitations were part of 'an 'aggregation of trade restraints," ante, p. 354, because the District Court has held that appellee did violate the Sherman Act by engaging in unlawful price fixing. 'The territorial restraints,' the Court says, 'were a part of the unlawful price-fixing and policing,' ante, p. 356. Nothing, however, in the findings of the District Court supports this conclusion. Indeed, the opposite conclusion is the more tenable one since the District Court that found Sealy guilty of price fixing found at the same time that it had not unlawfully conspired to allocate territories. The Government has not contended here that it is entitled to an injunction against territorial restrictions as a part of its relief in the price-fixing aspect of the case. The price-fixing issue was not appealed to this Court, and we can assume that the Government will obtain adequate and effective injunctive relief from the District Court. For these reasons the Court's 'aggregation of trade restraints' theory seems to me ill-conceived.

I find nothing in the Court's opinion that persuades me to abandon the traditional 'rule of reason' approach to this type of business practice in the context of the facts found by the trial court. The District Court, however, made no findings in respect to this theory for judging liability since the Government insisted on trying the case in per se terms, attempting to prove only a horizontal conspiracy. Although Sealy did introduce some evidence concerning the bedding industry, the territorialization issue was not tried in the terms of the reasonableness of the territorial restrictions. A motion to suppress Sealy's subpoena seeking discovery with respect to one of its leading competitors was successfully supported by the Government, and no evidence directly aimed at justifying territorial limitations as a reasonable method of competition in the bedding industry was taken. Accordingly, the District Court made no findings as to such justification.

Although in the normal course of things I would have voted to remand the case for further proceedings and findings under the correct rules of law, I believe that since the Government deliberately chose to stand on its per se approach, and dd not prevail, it should not be able to relitigate the case on an alternative theory, especially when it opposed appellee's efforts to present the case that way.

I would affirm the dismissal of this aspect of the case by the District Court.