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United States v. Arnold, Schwinn & Co. - 388 U.S. 365, 87 S. Ct. 1856 (1967)

Rule:

Where a manufacturer sells products to his distributor subject to territorial restrictions upon resale, a per se violation of the Sherman Act (Act) results. The same principle applies to restrictions of outlets with which the distributors may deal and to restraints upon retailers to whom the goods are sold. Under the 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. 

Facts:

This is a civil antitrust suit under § 1 of the Sherman Act in which appellees were charged by the Government with a continuing conspiracy, with others, to fix prices, to allocate exclusive territories to wholesalers and jobbers, and to confine merchandise to franchised dealers. Appellees are Arnold, Schwinn & Co. (Schwinn), a leading bicycle manufacturer, and an association of distributors handling Schwinn products. In 1951, Schwinn had the largest share, 22.5%, of the U.S. bicycle market. By 1961 its share had fallen to 12.8%, although dollar and unit sales had risen. The market leader, with 22.8% in 1961, which had increased its share from 11.6% in 1951, sells mainly to mass merchandisers. Schwinn sells to (1) distributors, (2) retailers by means of consignment or agency arrangements with distributors, and (3) retailers under the Schwinn Plan, which involves direct shipment to retailers with Schwinn invoicing the dealers, extending credit, and paying a commission to the distributor taking the order. Schwinn assigned specific territories to each of its wholesale distributors who were instructed to sell only to franchised dealers in their respective territories. The District Court rejected the charge of price-fixing, held that the Schwinn franchising system was fair and reasonable, but that the territorial limitation was unlawful per se as respects products sold by Schwinn to its distributors. The United States did not appeal from the rejection of the price-fixing charge, and appellees did not appeal from the order invalidating restraints on resale by distributors who purchase products from Schwinn. The Government requests that the limitations on distribution where the distributor acts as agent or consignee of Schwinn or on the Schwinn Plan be considered under the "rule of reason" and that they be held to constitute an unreasonable restraint of trade.

Issue:

Did the agreement between Schwinn and its wholesale and retail distributors constitute an unreasonable restraint of trade?

Answer:

Yes

Conclusion:

The United States Supreme Court reversed the district court's judgment and held that Schwinn’s sale to a distributor, subject to a territorial restriction upon resale, was a per se violation of the Sherman Act, 15 U.S.C.S. § 1. The Court further held that if Schwinn parted with dominion over its product or transferred risk of loss to another, it could not reserve control over its destiny or the conditions of its resale.

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