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Cont’l T.V. v. GTE Sylvania - 433 U.S. 36, 97 S. Ct. 2549 (1977)

Rule:

When anticompetitive effects are shown to result from particular vertical restrictions they can be adequately policed under the rule of reason, the standard traditionally applied for the majority of anticompetitive practices challenged under § 1 of the Sherman Act.

Facts:

Respondent GTE Sylvania, Inc. (Sylvania) manufactured televisions. Sylvania's marketing plan required franchisees to sell Sylvania's products only from the location at which that franchisee was franchised. Dissatisfied with its sales in the city of San Francisco, Sylvania decided in the spring of 1965 to franchise Young Brothers, an established San Francisco retailer of televisions, as an additional San Francisco retailer. The proposed location of the new franchise was approximately a mile from a retail outlet operated by petitioner Continental T.V., Inc. (Continental), one of the most successful franchisees of respondents. Continental protested that the location of the new franchise violated Sylvania's marketing policy, but Sylvania persisted in its plans. Continental then canceled a large Sylvania order and placed a large order with Phillips, one of Sylvania’s competitors. In response to the generally deteriorating relations with Sylvania, Continental withheld all payments owed to John P. Maguire & Co., Inc. (Maguire), the finance company that handled the credit arrangements between Sylvania and its retailers. Shortly thereafter, Sylvania terminated Continental's franchises, and Maguire filed this diversity action in the United States District Court for the Northern District of California seeking recovery of money owed and of secured merchandise held by Continental. Continental filed its cross-claims against Sylvania claiming that Sylvania violated § 1 of the Sherman Act, 15 U.S.C.S. § 1 (the Act), by prohibiting sales other than from specified locations. The district court, applying the per se rule to the restrictions, held in favor of Continental. The Court of Appeals for the Ninth Circuit, applying the rule of reason to the vertical restrictions involved, entered a judgment in favor of Sylvania. The United States Supreme Court granted Continental's petition for certiorari review.

Issue:

  1. Was the legality of the electronic manufacturer’s location restriction be determined by the “rule of reason” standard?
  2. Did the manufacturer's franchisee location restriction violate § 1 of the Sherman Act?

Answer:

1) Yes. 2) No.

Conclusion:

The United States Supreme Court held that because such location restrictions were widely used, and because there was no showing that the restrictions had a pernicious effect on competition or that the restrictions lacked any redeeming virtue, the per se rule was the incorrect standard under which to analyze the restrictions. Instead because such could be adequately policed under the rule of reason, that standard applied, and the judgment of the appellate court was affirmed.

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