Notes - United States v. Colgate Co. copy | mmckinnon | August 07, 2012


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Original Creator: Kessler, Gilmore & Kronman Current Version: mmckinnon

1. As the excerpts from the two preceding cases dealing with the validity of resale price-maintenance agreements show, a system committed to liberty of trade and competition requires close scrutiny of contract as an instrument of commercial and industrial organization. Freedom of contract cannot be used as a means to bring about unreasonable restraint of trade. Small wonder that freedom of contract has been subjected to extensive limitation through the antitrust laws, particularly the Sherman[1] and, Clayton Acts.[2] These statutes, enacted to protect the competitive framework of the market, deal with horizontal restraints of trade (e.g., cartels aimed at price fixing or market allocation), as well as vertical integration (the combination of various phases of the production and distribution process before the goods reach the ultimate consumer). To be sure, integration by contract (both backwards and forwards), restricting the freedom of the distributor by means of resale price setting, tie-ins,[3] the allocation of territories, and other exclusive arrangements, is not the only means of integration. But contract integration has one advantage over ownership integration that is of particular importance; it enhances flexibility and thereby affords protection against the movement of the business cycle.[4]


Since antitrust laws are exceedingly vague, they amount in effect to a legislative command to the judiciary to develop a common law of antitrust; as a result, in the antitrust field judicial lawmaking has become of paramount importance. Excellent illustrations are furnished by the excerpts from the Cream of Wheat and Colgate cases (whose implications are still felt today, though less broadly and more remotely than before).[5]


Both cases deal with one aspect of freedom of contract; the refusal to deal. Given unlimited scope, the refusal to deal is a means of controlling the distribution process and of enforcing resale price-maintenance agreements. The law has not gone so far as to take away the privilege of a single trader to deal with whom he pleases, but it"has expanded its control over what may be termed "joint action." Even here the protection accorded to the injured party is still imperfect under present antitrust laws.[6] A single trader, on the other hand, is free to deal with whom he pleases, absent any purpose to create or maintain a monopoly. And it would seem that he is free to announce in advance (unilaterally) the conditions under which he will refuse to deal with those who fail to abide by his wishes and thus, for example, is free to terminate a recalcitrant dealer who is unwilling to accede to a scheme in restraint of trade. So long as he acts unilaterally, he is safe, but once he enlists the help of others in the scheme of distribution, his privilege is forfeited; see, for example, United States v. Parke, Davis & Co., 362 U.S. 29 (1960).


This book is not the place to deal with the economics of vertical integration or to evaluate the relevant statute and case law. It must be sufficient to sketch a few highlights and to point out that the field is a highly controversial one. Congress and the courts have vacillated when dealing with the legitimacy of vertical integration. This is not surprising since the relevant antitrust statutes reflect different and somewhat inconsistent legislative purposes and, as a result, internal tensions exist within the antitrust structure. To make matters worse, a tension also exists between the "per se" and "rule of reason" yardsticks employed to determine the existence of an antitrust violation. A rule of reason standard requires the court to assay the economic consequences of business behavior and to ban only behavior that is "unreasonable" in purpose or effect. The application of this standard necessitates a comprehensive and costly economic analysis, a task for which courts may be most ill-suited (Standard Oil Co. v. United States, 337 U.S. 293, 310 (1949)). Therefore, a catalogue of per se offenses has emerged. Within this category the courts are relieved of the necessity of a comprehensive economic analysis, since "the practice facially appears to be one that would almost always tend to restrict competition .... " (Broadcast Music, Inc. v. CBS, 441 U.S. 1, 19-20 (1979)). Unfortunately, "there is often no bright line separating per se from rule of reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence certifies a presumption of anticompetitive effect. For example, while the Court has spoken of a per se rule against tying arrangements, it has also recognized that tying may have procompetitive justifications that make it inappropriate to condemn without considerable market analysis." See Jefferson Parish Hosp. Dist. 2 v. Hyde, - U.S. - , 104 S. Ct. 155 (1984). Inquiry into market conditions is also necessary to determine the pro- or anti-competitive effects of exclusive dealings.


As early as 1911, the Supreme Court was confronted with the problem of resale price maintenance in the celebrated case of Dr. Miles Medical Co. v. John D. Park and Sons, Co., 220 U.S. 373 (1911). The Court treated the scheme as an illegal restraint on alienation on the grounds that the seller sought to maintain prices after he had parted with the article. The scheme was declared illegal per se, and thus the public was given the benefit of price competition in the market subsequent to the first sale. Congress stepped in to overturn the decision, making resale price maintenance legal, but subsequent legislation restored the per se rule of the Dr. Miles case. Consumer Goods Pricing Act of 1975, 89 Stat. 801.


Non-price restraints are treated differently. With regard to these there is a growing tendency to advocate a hands-off policy on the grounds of efficiency. This attitude is reflected in Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1971). Although the Court explicitly said that it was not changing the per se rule in vertical price fixing, there has been an increasing tendency in the legal literature to question whether price and territory restraints can logically be treated differently under the per se rule. See, e.g., Posner, The Chicago School of Antitrust Analysis, 127 U. Pa. L. Rev. 925, 936 (1979), and the amicus brief of the Department of Justice in Monsanto Co. v. Spray-Rite Service Co., 104 S. Ct. 1464 (1984) (where the Court in that case sidestepped the issue). See further Nelson, Comments on a Paper by Posner, 127 U. Pa. L. Rev. 949 (1970); Williamson, SessingVertical Market Restrictions: Antitrust Ramifications of the Transaction Cost Approach, 127 U. Pa. L. Rev. 953 (1979); United States Department of Justice Vertical Restraints Guidelines, Jan. 23, 1985. The testimony of L. A. Sullivan before the Subcommittee on Monopolies and Commercial Law of the Committee on the Judiciary is highly critical, 16 Antitrust Law and Economics Review 11 (1984); see further L. A. Sullivan, Antitrust, Ch. 5 (1977) and Comanor, Vertical Price Fixing, Vertical Market Restraints, and the New Antitrust Policy, 98 Harv. L. Rev. 949 (1985) (critical); Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division (pt. 2), 75 Yale L.J. 373 (1966); Kramer, The Supreme Court and Tying Arrangements: Antitrust as History, 69 Minn. L. Rev. 1013 (1985). See further Chapter 4, Section 4 on dealer franchises.


2. A statutory approach to the refusal-to-deal problem has been suggested by Vernon Mund in a report prepared for the Senate Small Business Committee (Sen. Doc. No. 32, 85th Cong., 1st Sess. (1957)). The report proposed legislation "requiring producers of standard products who hold themselves out as dealing with the public, and who control a substantial percentage of the output in their area of practical shipment, to sell to all comers offering to meet the terms of sale" (pp. 92, 102). His proposal was not unlike a section of the original Clayton Bill which passed the House in 1914 but was deleted by the Senate Committee before the passage of the Act. The excised section imposed a duty upon owners and transporters of hydroelectric energy, coal, oil, gas, and other minerals to sell to all responsible persons (H. R. 15657, 63d Cong., 2d Sess. S 3 (1914)). The Senate felt such a statute "would practically compel owners of the products named to sell to anyone or else decline to do so at the peril of incurring heavy penalties, [and] would project us into a field of legislation at once untried, complicated, and dangerous" (S. Rep. No. 698, 63d Cong., 2d Sess. (1914)).


3. The economic plight of workers laid off by plant shutdowns and relocations is not a new problem, but until recently it has been regarded as an unavoidable consequence of the market system. Traditionally, a belief in the mobility of both capital and labor supported the view that employers should be free to close or relocate when an operation became unprofitable due to obsolescence, increased transportation costs, or for other reasons. Over the last decades, however, the plight of workers, along with their families and communities, has become a matter of increasing national concern, and the traditional wisdom of leaving the problem of dislocation to free market decisionmaking has become problematical. It is not surprising that we observe a tendency, in recent years, to bring the problem of dislocation to courts and legislatures.


As yet, efforts to prevent shutdowns through the application of labor law, antitrust legislation, and the common law have for the most part been unsuccessful. In particular, attempts to expand the duty imposed by labor legislation to bargain in good faith to include a duty on the part of management to bargain with the employees' representative about plant-closing decisions have come to naught: an employer, it has been held, has an almost absolute right to terminate the business for economic reasons. First National Maintenance Corporation v. NLRB, 452 U.S. 666 (1981).


Common law principles have proven equally unhelpful from the worker's point of view. For example, one federal court quite recently refused to make a contract out of assurances by local managers and public relations experts that the plant would remain open if the joint efforts of management and the union were successful in making the plant profitable. Accepting the management's accounting procedures, the court found that this "condition precedent" had not been met. Also unsuccessful was the argument, advanced in the same case, for the imposition of a duty to sell the plant to community interests, based on a "new concept of community property." Attempts to get financing apparently failed, thus foreclosing the possibility left open by the court that the workers might pursue an antitrust remedy based on the contention that management was anxious to prevent the emergence of a competitor. Local 1330, United Steel Workers of America v. United States Steel Corp., 631 F.2d 1264 (6th Cir. 1980). (See further Abbington v. Dayton Malleable, Inc., 561 F. Supp. 1290 (S.D. Ohio 1983).)


While the court in the United Steel Workers case could not have reached any other result under traditional doctrine, the decision has led the author of a recent article to advocate the extension of contract principles in recognition of the social dimension of contract law. Freedom of contract, he argues, "in the utopian vision requires a social order in which people possess the practical ability to connect with each other to find meaning in their lives through common endeavor, a freedom that denies the life and death power of distant corporate managers over workers and their town." The analysis and reform of contract law, this author asserts, should be the next step on the agenda of critical legal theory. Feinman, Critical Approaches to Contract Law, 30 U.C.L.A.L. Rev. 829, at 857 et seq. (1983). Feinman is associated with the Critical Legal Studies movement, a somewhat amorphous group of legal scholars and law reformers that is broadly concerned with the relationship between legal rules and institutions and the prerequisites for a "more humane, egalitarian and Studies, democratic society." Kennedy & Klare, A Bibliography of Critical Legal Studies, 94 Yale L.J. 460 (1984). Some members of the group have been influenced by legal realism and others by contemporary social theory (especially the work of those in the Neo-Marxist “Frankfurt School”). On the movement, see The Politics of Law: A Progressive Critique (D. Kairys ed. 1982); Symposium in 36 Stan. L. Rev. 1-674 (1984); Unger, The Critical Legal Studies Movement, 96 Harv. L. Rev. 561 (1982).


Despite these setbacks, there are continuing efforts to persuade plant owners to sell, and even to impose upon them a duty to sell to unions or to other community interests, plants regarded as obsolete. These efforts have so far succeeded only with regard to the transfer of ownership of the Wireton steel mill. See the recent article in the New York Times of Jan. 30, 1985, at 7, entitled "Pittsburgh Area Rallies to Save Blast Furnace."


Efforts to obtain help by legislation on the federal level have as yet yielded no positive results, although a substantial number of bills have been introduced. On the state level, similar efforts have also been largely unsuccessful. Only in three states, Maine, South Carolina, and Wisconsin, have legislatures acted favorably. See Barton, Common Law and Its Substitutes: The Allocation of Social Problems to Alternative Decisional Institutions, 63 N.C.L. Rev. 518, 525-526 (1985). See in general Aarons, Plant Closings: American and Comparative Perspectives, 59 Chi. Kent L. Rev. 941 (1983); MacNeil, Plant Closings and Workers' Rights, 14 Ottawa L. Rev. 122 (1982).


[1] 26 Stat. 209 (1890).


[2] 38 Stat. 731 (1914).


[3] They are made illegal under the Clayton Act. Clayton Act §3, 38 Stat. 731 (1914). 15 U .S.C. 14 (1958); Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1910). For a criticism of the treatment of tie-ins, see Bowman, Tying Arrangements and the Leverage Problem, 67 Yale L.J. 19 (1957); see pp. 61-63 infra.


[4] For the most eloquent defense see of the Sherman Act, see Black, J., in Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4-5 (1958):

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces 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. But even were that premise open to question, the policy unequivocally laid down by the Act is competition. And to this end it prohibits, "Every contract, combination. . . or conspiracy, in restraint of trade or commerce among the several States." Although this prohibition is literally all-encompassing, the courts have construed it as a precluding only those contracts or combinations which “unreasonably” restrain competition. Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 31.

[5] For an early analysis of the Cream of Wheat case, see Slichter, The Cream of Wheat Case, 31 Pol. Sci. Q. 392 (1916). On the erosion of the Colgate doctrine, see in general Levi, The Parke, Davis-Colgate Doctrine: The Ban on Resale Price Maintenance, 1960 Sup. Ct. Rev. 258; Turner, The Definition of Agreement under the Sherman Act: Conscious Parallelism and Refusals to Deal, 75 Harv. L. Rev. 655, 684-695 (1961). But see P. Areeda & D. Turner, Antitrust Law (1978); Fulda, Individual Refuasals to Deal: When Does Single-Firm Conduct Become Vertical Restraint?, 30 Law & Contemp. Prob. 590 (1965); L. Sullivan, Antitrust §139 (1977). See also the discussion of franchising in Chapter 4, Section 4.


[6] Nelson radio & Supply Co. v. Motorola, Inc., 200 F.2d 911 (5th Cir. 1952), cert. denied, 345 U.S. 925 (1953); Kessler & Stern, Competition, Contract, and Vertical Integration, 69 Yale L.J. 1, 83-91, 115-116 (1959); Stern, A Proposed Uniform State Antitrust Law: Text and Commentary on a Draft Statute, 39 Tex. L. Rev. 717, 731, 747-751 (1961).


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June 02, 2014 Notes - United States v. Colgate Co. Notes - United States v. Colgate Co. copy

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