United States v. Sealy, Inc./Dissent II

by John Marshall Harlan II

United States Supreme Court

388 U.S. 350

United States  v.  Sealy, Inc.

 Argued: April 20, 1967. --- Decided: June 12, 1967

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. ^[1] 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. ^[2] 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. ^[3] 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, ^[4] 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.

Notes

1. Compare United States v. General Motors Corp., 384 U.S. 127, at 140-141, 86 S.Ct. 1321, at 1327-1328, 16 L.Ed.2d 415, where the undisputed facts as found by the District Court, proved a horizontal conspiracy among Chevrolet dealers to initiate and police a boycott of sales by dealers to discount houses. It is precisely because no such horizontal impetus was shown to exist here that I view this case differently. See my opinion concurring in the result in General Motors, 384 U.S., at 148, 86 S.Ct. at 1332.
2. The District Court made no findings as to the position of Sealy in the bedding industry, but on the basis of testimony introduced and not seriously contravened it appears that Sealy products are by no means the largest selling bedding products, that Sealy manufacturers have many competitors both nationwide and local, and that advertising-particularly nationwide advertising-is an important competitive factorin the industry.
3. The Sealy trademark was originally owned by Sugar Land Industries, and its products were manufactured by a subsidiary, Sealy Mattress Co. In the 1920's independent manufacturers were licensed to produce Sealy products, and in 1925 Sugar Land sold the trademarks to a new corporation, Sealy Corp., owned by one E. E. Edwards and the various Sealy licensees. In 1933, when the economic depression eliminated a number of Sealy producers, the corporation was reorganized into the present Sealy, Inc. At present there are about 30 licensees owning approximately 90% of the stock. This joint-venture approach was created and maintained, the District Court found, 'for entirely legitimate business purposes,' such as obtaining the benefits 'of joint purchasing, research, engineering, advertising and merchandising.' Finding 119.
4. See United States v. Serta Associates, Inc., D.C., 29 F.R.D. 136, where in a companion action against another licensor of bedding products a similar subpoena was quashed after it was opposed by the Government. The District Court there noted: 'The complaint alleges price fixing and market allocations by Serta, which it has denied. Defendant alleges the agreements made were reasonable ancillary restraints, valid under the Sherman Act, and the evidence sought by this subpoena would completely corroborate the reasonableness. The plaintiff, the Government, has also filed a brief supportive of the motion to quash the subpoena. It asserts that the complaint raises per se violations of the Sherman Act which fact renders completely irrelevant the subpoenaed material, tending to confirm the reasonableness of defendant's conduct.'