Legal Remedies of a Distributor Terminated Pursuant to a ...

LEGAL REMEDIES OF A DISTRIBUTORTERMINATED PURSUANT TO A

CONTRACTUAL PROVISIONOF TERMINATION

UPON NOTICE

ELLIOTT HORTON*

According to many critics, our jurisprudence has never suc-cessfully dealt with the legal problems created by the summarytermination of a distributorship.1 In most instances the distributorcan summon no successful remedy against the manufacturer orsupplier even if the termination is arbitrary and without cause;because generally, the contract between the parties expressly per-mits the supplier to cancel upon short notice. Nevertheless, thecourts have been sympathetic to the distributor; however, casesgranting recovery to an injured distributor are legal "sports" andhave not grown organically out of the preceding case law.2 Thesecases prove the adage that hard facts make bad law and suggestthat a strong undercurrent exists in hard cases for giving theterminated party an opportunity to prove that he was terminatedarbitrarily.8

It is not the purpose of this article to consider whether thetraditional freedom of contract should give way to equitable con-siderations. Rather, the article will discuss the remedies availableto the terminated distributor and show how their inadequacy, ineffect, has made the Sherman Act 4 potentially the main vehicleof relief for the aggrieved distributor.

Before doing so, the equities of the hard case should be con-

* B.A. Yale University, 1946, J.D., Harvard, 1950. Member of theNew York State Bar.

1. See, e.g., Gellhorn, Limitations on Contract Termination Rights-Franchise Cancellations, 1967 DUKE L.J. 465 (1967).

2. Compare Philadelphia Storage Battery Co. v. Mutual Tire Stores,161 S.C. 487, 159 S.E. 825 (1931) and J.R. Watkins Co. v. Rich, 254 Mich.82, 235 N.W. 845 (1931) with Union Tank Car Co. v. Lindsay Soft WaterCorp., 257 F. Supp. 510 (D. Neb. 1966).

3. In addition to judicial sympathy, it cannot be denied that in thisera of large organizations a judicial concern exists for the small, inde-pendent businessman, in short, a concern for the texture and quality oflife. One well-known commentator has commented on the need for the de-velopment of an ethic to govern the relationship of the organization to theindividual in such a society. DRUcKER, THE AGE OF DISCONnNUITY PartIII (1966).

4. 15 U.S.C. §§ 1, 2 (1964).

LEGAL REMEDIES OF A DISTRIBUTOR

sidered. In doing so, I do not suggest that the equities are alwayson the side of the distributor. For instance, the distributor maybe a chain with enormous purchasing power whose business isvery attractive to the supplier. Quite obviously, the courts neednot be concerned with the equities of the agreement between twosuch parties. In such case, arbitrary termination is a consequenceof the distributor's bargain.

Primary consideration will be given herein to the case of thedistributor who has no bargaining power whatsoever. If he wantsto deal at all, he must deal on the terms of the supplier andthose terms invariably include a provision for termination uponvery short notice. He may have primary responsibility for develop-ing a territory and must make a substantial investment in ware-house or showroom space, advertising, trucks, and service facilities.After making this investment and before he reaps the fruit of hisexpenditure and energy, the supplier may arbitrarily exercise thetermination clause. The product supplied is in such a concentratedmarket that the distributor cannot find an alternative source ofsupply. As a result, the newly appointed distributor gains the bene-fit of the careful cultivation of the territory by the terminated dis-tributor. Legal remedies available for such a distributor are lim-ited.

I. AUTOMOBILE FRANCHISE LEGISLATION

Automobile dealers do not suffer from this problem as do theirfellow distributors. The National Association of Automobile Deal-ers has successfully lobbied laws through many state legislatures5

and Congress6 limiting the right of the manufacturer to arbitrarilyterminate a dealer's franchise. This class legislation has enabledthe terminated dealer to have his day in court to prove that he wasdischarged arbitrarily.7

5. See 9 WILLISTON, CONTRACTS § 1017 AA at 171-2 (3rd ed. 1967).6. Automobile Dealer Franchise Act, 15 U.S.C. §§ 1221-25 (1964).

For a discussion of this act, see 6 CoRBIN, CONTRACTS § 1266, n. 73.5 at 59-64(1962).

7. Lawsuits by dealers claiming to have been treated not in goodfaith have generally been unsuccessful on the ground that the manufacturerdid not use coercion or intimidation but was motivated by legitimatebusiness reasons. Kotula v. Ford Motor Co., 338 F.2d 732 (8th Cir. 1964),cert. denied, 380 U.S. 979 (1965); Woodard v. General Motors Corp., 298F.2d 121 (5th Cir. 1962), cert. denied, 369 U.S. 887 (1964); Abbott-StansellMotor Co. v. Chrysler Motor Corp., 333 F.2d 322 (5th Cir. 1964); GlobeMotors, Inc. v. Studebaker-Packard Corp., 328 F.2d 645 (3d Cir. 1964); Milosv. Ford Motor Co., 317 F.2d 712 (3d Cir.), cert. denied, 375 U.S. 896 (1963);Garvin v. American Motor Sales Corp., 318 F.2d 518 (3d Cir. 1963); Pierce

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CREIGHTON LAW REVIEW

The state statutes in general provide that termination mayonly be for cause. The federal statute requires that terminationmust be exercised in good faith. This type of legislation may be-come model legislation for all classes of distributors; but to date,only Puerto Rico has enacted such legislation. Puerto Rico's stat-ute applies to all types of distributorships and requires that theybe terminated only for cause.8

The source of legislative reluctance to adopt such a drasticremedy is the fear that it will upset the delicate balance and ten-sion that must exist between the supplier and distributor for theeconomic distribution of goods. Certainly, in many commercialmarkets, the bargaining power enjoyed by the supplier is equal tothat of the distributor and alternative sources of supply are avail-able to the distributor. A statute allowing termination only upona showing of good faith may inequitably wed the supplier to thedistributor because of the supplier's fear of litigation. Such a re-sult could encourage inefficient distributors or produce forward-integration, substituting a whole army of clerks of the supplier forthe performance of the function of the individual distributor. In-terference in every distributorship situation with the supplier'sfreedom to contract is strong medicine. The cure might be worsethan the disease.

II. THE UNIFORM COMMERCIAL CODE

The Code's provisions with respect to the enforcement of un-conscionable clauses are so general that their meaning must beleft to development by the courts.9 To date that development hasnot aided terminated distributors.

Ford Sales, Inc. v. Ford Motor Co., 299 F.2d 425 (2d Cir.), cert. denied,371 U.S. 829 (1962); Berry Bros. Buick, Inc. v. General Motors, Corp.,257 F. Supp. 542 (E.D. Pa. 1966), aff'd, 377 F.2d 552 (1967).

The above cases suggest that distributorships usually are terminatedonly for good cause, although this result may be an effect of the legislation.See legislation cited note 5 and 6 supra.

8. P.R. LAWS ANN. Tit. 10, Ch. 13, § 278-278d (Supp. 1966). Section278 reads as follows:

Notwithstanding the existence in a dealer's contract of a clausereserving to the parties the independent right to terminate theexisting relationship, no principal or grantor may directly or in-directly perform any act detrimental to the established relationshipor refuse to renew said contract on its normal expiration exceptfor just cause.

9. UNIFORM COMMERCIAL CODE § 2-302 (1):If the Court as a matter of law finds the contract or any clauseof the contract to have been unconscionable at the time it wasmade the court may refuse to enforce the contract, or it mayenforce the remainder of the contract without the unconscionableclause, or it may so limit the application of any unconscionable

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In Sinkoff Beverage Co. v. Jos. Schlitz Brewing Co.10 the NewYork Supreme Court, special term, refused to find unconscionablea clause in a distributorship agreement providing that the agree-ment could be terminated at any time by either party withoutnotice or cause. The court focused its attention on the statementof the Official Comment to section 2-30211 to the effect that thetest of unconscionability must be applied at the time of the makingof the contract:

For all that appears the mere creation of any relationshipbetween Sinkoff and Schlitz was, at that first point in time,of great benefit to both and perhaps even particularlyfavorable (and thus especially inoppressive) to Sinkoff.' 2

Although not mentioned by the court in Sinkoff, section 1-102(3) affirmatively engrafts the principle of "freedom of contract"into all Code sections (unless otherwise provided). Also, section1-102 (2) (b) establishes that one of the underlying purposes andpolicies of the Code is "to permit the continued expansion of com-mercial practices through custom, usage and agreement of theparties." Taken together these fundamental provisions of the Codesuggest that the sections on unconscionability are not meant to givethe courts an opportunity to introduce their own concepts of fair-ness but are only intended to encourage judicial interpretations con-sistent with the concepts of fairness existing in the trade. In orderfor the courts to give relief to aggrieved distributors under this sec-tion, they would have to ignore this legislative intent by disregard-ing the custom of summary termination prevailing in most trades.It might be helpful for an association of distributors to pass a reso-lution condemning arbitrary termination clauses in order to givecourts a peg on which to declare such clauses contrary to the con-cepts of fairness existing in the trade. Conceivably, more andmore distributors will be using this section in the future, however,as of yet judicial interpretations of the pertinent Code sections havebeen insufficient to determine how the case law will develop.

clause as to avoid any unconscionable result.UNIFORM COMMERCIAL CODE § 2-309 (3):Termination of a contract by one party except on the happening ofan agreed event requires that reasonable notification be receivedby the other party and an agreement dispensing with notificationis invalid if its operation would be unconscionable.10. 51 Misc. 2d 446, 273 N.Y.S.2d 364 (Sup. Ct. 1966); accord, Triple T

Service, Inc. v. Mobil Oil Corp., (N.Y. Sup. Ct., Weschester County, Septem-ber 9, 1968). See also Weilersbacher v. Pittsburgh Brewing Co., 421 Pa.118, 218 A.2d 806 (1966).

11. UNIFORM COMMERCIAL CODE § 2-302, Comment 1.12. 51 Misc. 2d at 448, 273 N.Y.S.2d at 367.

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III. THE COMMON LAW

The overwhelming majority of courts 13 have refused to coun-tenance a claim of breach of contract when a supplier arbitrarilyexercises a contract right to terminate upon notice in a writtencontract. However, a few courts, 4 obviously appalled by the un-fairness of such a result to the distributor, have created a remedyif such termination is found to have been made in bad faith withintent to injure the other contracting party.

In Philadelphia Storage Battery v. Mutual Tire Stores,' aradio manufacturer brought an action on a check given by a jobberin payment for the first goods purchased from him under a jobberagreement. The jobber had stopped payment on the check afterthe manufacturer exercised, according to the contract terms, hisright to terminate the jobber agreement. The court recognizedthat by terminating the agreement the manufacturer had relievedhimself of the obligation to fulfill the warranties in the radiospurchased under the jobber agreement and to service them. How-ever, the jobber charged in his answer and in a counterclaim thatthe manufacturer had acted in bad faith by cancelling the agree-ment after inducing the jobber, by means of the agreement, tomake substantial purchases. The Court said,

[D]efendant has, in the opinion of the court, set forth inhis answer these things which entitle him to show by theevidence, if he can do so, that it would be against equityand good conscience to permit plaintiff . . . to terminatethe jobber's agreement in the manner, and with the intentand purpose alleged against it in the answer.16

Since there was no evidence of fraudulent representation to thejobber, it is apparent that the complaint was not based on commonlaw fraud.

. Similarly, in J. R. Watkins Co. v. Rich,17 a sales agent wasindebted to a supplier under a contract. In order to obtain asurety's guarantee of the debt and also of future debts, the supplierentered into a new agreement with the sales agent. Soon thereafterthe supplier arbitrarily terminated the agreement, pursuant to thecontract, and eventually brought an action against the sureties andthe agent. The court held, however, that the manufacturer couldnot collect on the guarantee because he had caused a breach of theguaranteed agreement by terminating in bad faith. The Court said,

13. See note 1 at 476 n. 43 supra.14. See text beginning at note 15 infra.15. 161 S.C. 487, 159 S.E. 825 (1931).16. Id. at 489, 159 S.E. at 827.17. 254 Mich. 82, 235 N.W. 845 (1931).

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A provision in a contract for termination at the option ofa party is valid. But where the relationship is commercialand does not involve fancy, taste, sensibility, judgment, orother personal features, the option may be exercised onlyin good faith."'

Dicta to the same effect has appeared in other cases.19 For instance,in another case, a Texas court, in a widely quoted remark, stated:

It is a well-established rule of law that a contract mayprovide for its termination at the option of one or eitherof the parties, and such a stipulation, when fairly enteredinto, will be enforced if not contrary to equity and goodconscience.

2 0

These cases and the dicta are perversions in the fabric of thelaw and fall into no conceptual framework. Their disregard of thecontractual language, even when elements of common law fraudare lacking, are justified only upon vague notions of fairness andunjust enrichment. The conceptual weakness of these theoriesgives a terminated distributor little hope of persuading other courtsto adopt them.

More logical concepts could be presented by arguments to theeffect that arbitrary termination clauses are contrary to the publicpolicy of those states which have adopted automobile franchiselegislation, or by the development of a theory of fiduciary or con-fidential relationship between manufacturer and distributor.2'1

But, these concepts remain only theories and do not, in the presentstate of the law, give much solace to summarily terminated dis-tributors.

We have assumed that most distributorship contracts todayprovide for termination upon notice. Where the agreement con-tains no provision whatever for termination, however, the courtsusually imply that the contract is terminable at will after a reason-able time.2 2 If an exclusive distributor has spent a substantial sum

18. Id. at 84-85, 235 N.W. at 846.19. Jones v. Chester, 363 S.W.2d 150 (Tex. Civ. App. 1962); Haley v.

Nickels, 235 S.W.2d 683 (Tex. Civ. App. 1950); Maddox Motor Co. v. FordMotor Co., 23 S.W.2d 333 (Tex. Com. App. 1930).

20. 23 S.W.2d at 338 (Tex. Com. App. 1930) (emphasis added).21. See A.S. Rampbell, Inc. v. Hyster Co., 3 N.Y.2d 369, 144 N.E.2d

371, 165 N.Y.S.2d 475 (1957), where the court refused to dismiss a cause ofaction for malicious interference with a contract terminable at will be-cause of the confidential relationship between the manufacturer and thedealer.

22. 9 WILLISTON, CONTRACTS, § 1017 A at 150 (3rd ed. 1967). For anexhaustive, although jumbled collection of cases on this subject, see 19A.L.R.3d 196 (1968). A recent interesting case is Clausen and Sons, Inc. v.Theo. Hamm Brewing Co., 395 F.2d 388 (8th Cir. 1968).

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of money, his distributorship can be terminated only after he hashad a reasonable time in which to recoup his investment.2 8 Inthis day and age, few courts, if any, will find that such a contractis void for lack of mutuality.2 4

Strangely enough, the terminated distributor may have a bet-ter remedy if he has no written contract. Astute counsel canusually find many expressions of good will by the representativesof the manufacturer or supplier, particularly in the beginning ofthe relationship, to the effect that the distributor will have thefranchise as long as he does a good job. Upon these statementshe can predicate an agreement, the duration of which is for as longas the distributor performs satisfactorily. Cases along this linehave been successfully pleaded, avoiding both the statute of fraudsand lack of mutuality. 2 However, courts in some jurisdictionshave denied relief on the grounds that such an agreement lacksmutuality or is within the statute of frauds.26 In order to avoidthe defect of lack of mutuality, it is wise for the distributor,if the facts justify it, to plead that the supplier had promised anexclusive territory to the distributor and had imposed upon himthe duty of spending substantial sums of money to develop thearea.

IV. THE FEDERAL ANTI-TRUST LAWS

The lure of trebled damages and counsel fees and the inade-quacy of the remedies cited above usually leads the distributor withsophisticated counsel to claim that the refusal of the supplier to

23. See, e.g., Martin v. Meles, 179 Mass. 114, 117, 60 N.E. 397, 398 (1901),where Justice Holmes speaking for the Court in a much quoted commentsaid:

There must be some ground for saying that the acts done in relianceupon the promise were contemplated by the form of the transactioneither impliedly or in terms as the conventional inducement, motiveand equivalent for the promise. But courts have gone very greatlengths in discovering the implication of such an equivalencesometimes perhaps even having found it in matters which wouldseem to be no more than conditions or natural consequences ofthe promise.24. See, e.g., Burgermeister Brewing Corp. v. Bowman, 227 Cal. App. 2d

274, 38 Cal. Rptr. 597 (1964). But see Terre Haute Brewing Co. v. Dugan,102 F.2d 425 (8th Cir. 1939), where the oral contract alleged did not setforth any detriment on the part of the distributor or promise as considera-tion.

25. See, e.g., Northshore Bottling Co., Inc. v. C. Schmidt & Sons, Inc.,22 N.Y.2d 954, 233 N.E.2d 721, 280 N.Y.S.2d 427 (1968); Burgermeister Brew-ing Corp. v. Bowman, 227 Cal. App. 2d 274, 38 Cal. Rptr. 597 (1964).

26. Terre Haute Brewing Co. v. Dugan, 102 F.2d 425 (8th Cir. 1939);Jacob Schmidt Brewing Co. v. Minot Beverage Co., 93 F. Supp. 994 (D.N.D.1950); Goodman v. Motor Products Corp., 9 Ill. App. 2d 57, 132 N.E.2d 356(1956).

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deal with him is a violation of sections 1 and 2 of the ShermanAct or Section 3 of the Clayton Act. Counsel will search for evi-dence that the refusal of the supplier to deal was motivated bysome anti-competitive purpose-an effort to maintain the resaleprice of his products; to prevent the distributor from carrying acompetitive line; to "bootleg" his products into another geographi-cal area; to sell his products to a certain class of customers; or todemand that the distributor buy additional products.

At trial the distributor may have difficulty in showing thatthe termination was the result of the distributor's refusal to com-ply with the anti-competitive activities of the manufacturer. Thelarge manufacturer will generally have a well-documented file toshow the legitimate business reasons that led to the plaintiff'stermination. Important in judging the honesty of the manufac-turer's alleged business reasons is whether he has applied to otherdistributors the same standards applied to the plaintiff. Recentdevelopments in the case law have greatly increased the distribu-tor's chances of success in such an action, assuming that evidenceexists of the necessary anti-competitive purposes and that theycaused the termination.

A. SECTION 1 OF THE SHERMAN ACT

Fifty years ago, the Court enunciated the single trader doctrine,also known as the Colgate Doctrine:

In the absence of any purpose to create or maintain amonopoly, the act does not restrict the long recognizedright of trader or manufacturer engaged in an entirelyprivate business, freely to exercise his own independentdiscretion as to parties with whom he will deal. And, ofcourse, he may announce in advance the circumstancesunder which he will refuse to sell.2 7

In reliance upon Colgate, untold numbers of American business-men during the last fifty years have cut off distributors or dealersfor failing to follow their policies regarding resale prices, for han-dling goods of competitors, and for selling within a certain terri-tory or to certain customers.

In 1960, the scope of the Colgate Doctrine was considerablynarrowed by United States v. Parke, Davis & Co.2 8 In fact, JusticeHarlan29 and a good many members of the anti-trust bar viewedthe decision as sending Colgate to its demise. In Parke, Davis, by

27. United States v. Colgate & Co., 250 U.S. 300, 307 (1919).28. 362 U.S. 29 (1960).29. Id. at 49 (dissenting opinion).

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going beyond the bare announcement of its resale price policy,specifically, by inducing wholesalers to stop dealing with offendingretailers and by obtaining agreements from the retailers to stopprice advertising, the manufacturer was held to have created com-binations or conspiracies to enforce resale price maintenance in vio-lation of sections 1 and 3 of the Sherman Act.30

Section 1 of the Sherman Act, of course, requires for its viola-tion some sort of joint action:

Every contract, combination in the form of trust or other-wise, or conspiracy, in restraint of trade or commerceamong the several States, or with foreign nations, is de-clared to be illegal .... 31

Many lawyers, on the basis of the implied conspiracy theory enun-ciated in Interstate Circuit, Inc. v. United States, 2 speculated afterParke, Davis that the mere announcement of a policy by a manu-facturer to his several distributors followed by their compliancewould spell out the requisite joint action. As the District Court inKlein v. American Luggage Works, Inc.,33 just subsequent to theParke, Davis decision, theorized:

In the face of an advance announcement by the manu-facturer that price cutters will be denied supply, a seller'scompliance with prices suggested strongly infers a tacit orimplied resale price maintenance agreement.3 4

The Third Circuit reversed the district court in Klein, citing anabsence of enforcement activities by the manufacturer other thanabrupt termination.3 5 Also, subsequent courts have reaffirmed Col-gate. However, the district court's implied conspiracy theory inKlein is supported by dicta in recent Supreme Court opinions per-taining to marketing policies.

The implied conspiracy theory was advanced by Justice White,speaking for the majority in Albrecht v. Herald Co.30 In thatcase a newspaper distributor had raised the price of newspapersin defiance of the publisher's suggested maximum price. Afterthreats of termination, the publisher hired a circulation com-pany to solicit the distributor's customers. Upon termination of

30. Id. at 45-46.31. 15 U.S.C. § 1 (1964).32. 306 U.S. 208, 226-27 (1939). See also United States v. Container

Corp. of America, 393 U.S. 333 (1969).33. 206 F. Supp. 924 (D. Del. 1962), rev'd, 323 F.2d 787 (3d Cir. 1963).34. Id. at 937.35. Klein v. American Luggage Works, Inc., 323 F.2d 787, 790 (3d Cir.

1963).36. 390 U.S. 145 (1968).

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the distributorship, the distributor brought a treble damage ac-tion to recover the value of his lost distributorship. He contendedthat the actions of the publisher went beyond the bare announce-ment of a resale price policy permitted by Colgate and was there-fore a joint, rather than a unilateral, action. Using the terminologyof "combination" rather than the more familiar phrase, "conspir-acy," Justice White found a "combination" between the publisherand the circulation company employed by the publisher to solicitthe distributor's customers. More importantly, for the purposes ofthis discussion, he stated categorically that had the theory of im-plied conspiracy been pleaded it would have been successful:

Under Parke, Davis petitioner could have claimed a com-bination between respondent and himself, at least as ofthe day he unwillingly complied with respondent's ad-vertised price. Likewise, he might successfully haveclaimed that respondent had combined with other carriersbecause the firmly enforced price policy applied to all car-riers, most of whom acquiesced in it.3 7

Justice Harlan, dissenting in Albrecht, admitted that Parke,Davis could be justified on the theory, also advanced by ProfessorTurner, that a supplier merely by announcing a Colgate policytends to produce tacit or implied minimum price agreements amongotherwise competitive dealers and, in effect, issues an invitation toretailers to agree with each other as well as with the manufac-turer.8 8 He stated that the majority in effect was making it unlaw-ful for one person to dictate resale prices to another, even uni-laterally:

The Court's difficulties on all of its theories stem from itsunwillingness to face the ultimate conclusion at which ithas actually arrived: it is unlawful for one person to dic-tate price floors or price ceilings to another; any pressurebrought to bear in support of such dictation renders thedictator liable to any dictatee who is damaged. The rea-son for the Court's reluctance to state this conclusionbluntly is transparent: this statement of the matter takesno account of the absence of a combination or conspiracy. 89

37. Id. at 150 n. 6.38. Id. at 162. See Turner, The Definition of Agreement under

the Sherman Act: Conscious Parallelism and Refusal to Deal, 75 HARV.L. REv. 655, 685-86 (1962). Nevertheless, Justice Harlan still thinks thatthe Colgate Doctrine prohibits the making of such an implication:

[T]here is no "combination" when a manufacturer simply statesa resale price and announces that he will not deal with those whodepart from it; there is a combination when the manufacturer goesone inch further.

390 U.S. at 163.39. 390 U.S. at 162.

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Also, in United States v. Arnold, Schwinn & Co.,40 Justice For-tas seemed to agree with the implied conspiracy theory by om-inously commenting:

Once the manufacturer has parted with title and risk ...his effort thereafter to restrict territory or persons towhom the product may be transferred-whether by ex-plicit agreement or by silent combination or understand-ing with his vendee-is a per se violation of § 1 of theSherman Act.41

The dicta in these cases suggest that the recently rediscoveredword "combination" may be the magic term for construing a sup-plier's unilateral conduct as joint action in violation of the ShermanAct, at least whenever there is a pattern of coercion or of compli-ance with respect to a multiplicity of distributors.42

But what of the simple vertical arrangement where only onemanufacturer and one distributor are involved? Certainly, JusticeWhite's dictum to the effect that a warning followed by compli-ance produces a "combination" implies that he would apply theSherman Act, even in the absence of a marketing scheme andhorizontality.43 This is a radical concept and opens up avenuesof recovery formerly denied to terminated distributors. However,Justice White might permit recovery under this theory only in aprice fixing situation (which Albrecht was) because the per se il-legality of vertical price fixing agreements has been recognized foryears.

44

40. 388 U.S. 365 (1967).41. Id. at 382 (emphasis added).42. No one knows exactly what is meant by the statutory phrase

"combination in the form of trust or otherwise." See Baker, Combinationsand Conspiracies. Is there a Difference, 12 ANTI-TRUST BULL. 71 (1969).Justice Douglas, in Simpson v. Union Oil Co., 377 U.S. 13 (1964), empha-sizes a coercive pattern of price fixing through written consignment agree-ments. The Solicitor General in his amicus brief filed in Amplex ofMaryland v. Outboard Marine Corp., 380 F.2d 112 (4th Cir. 1967), cert.denied, 389 U.S. 1036 (1968), contended that whenever any substantialproportion of a supplier's distributors acquiesce in an announced policy ofthe supplier (therein an alleged refusal to deal with competitors dealing incompeting products), there is a "combination" within the scope of theSherman Act. The Supreme Court denied certiorari probably becausethere was no evidence in the record of an announced policy.

In United States v. O.M. Scott & Sons Co., 5 TRADE REG. REP. (1969Trade Cas.) 72, 884 (D.D.C. August 8, 1969), the court refused to apply theimplied conspiracy theory to a general price maintenance program withoutevidence of coercion. See the complaints tested in Clausen & Sons, Inc. v.Theo. Hamm Brewing Co., 395 F.2d 388 (8th Cir. 1968) and Stanton v.Texaco, Inc., 289 F. Supp. 884 (D.C.R.I. 1968).

43. See Albrecht v. Herald Co., 390 U.S. 145, 149 (1968).44. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373

(1911). See Broussard v. Socony Mobil Oil Co., 226 F. Supp. 195 (W.D. La.

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In the leading boycott case, Klor's, Inc. v. Broadway-HaleStores, Inc.,45 the Court disregarded the fact that the elimination

of a single victim had no effect on competition. Klor's held that ahorizontal conspiracy that excludes a single party from business,because it interferes with the natural flow of interstate commerce,is illegal even though there may be no public injury in the sensethat destruction of the plaintiff's business may make little differ-ence to the economy. However, the Court confined the legal con-cept enunciated to horizontal boycotts. Justice Black, for the ma-jority stated, "[t] his is not a case of a single trader refusing to dealwith another, nor even of a manufacturer and a dealer agreeingto an exclusive distributorship. '46 The doctrine of vertical boycotthas so far had little actual support in the lower courts, except incases of coercive price fixing.47

Another problem created by Justice White's theory is the para-dox that the distributor who refuses to comply has no remedyin contrast to one who complies. This has greatly troubled somejurists and has led them to substitute coercion and attempt for thejoint action required by section 1.4s

One problem at least which the terminated distributor will

1964) discussed in Quinn v. Mobil Oil Co., 375 F.2d 273 (1st Cir, 1967),where involvement of more than one oil dealer, even in a resale pricemaintenance situation, was deemed to be material. See also Walker Dis-tributing Co. v. Lucky Lager Brewing Co., 323 F.2d 1 (9th Cir. 1963).

45. 359 U.S. 207 (1959). It is not clear whether a victim with analternative source of supply has a remedy under the Klor's doctrine. SeeGroenke, What's New in the Antitrust Aspects of Selecting and Termi-nating Distributors, 13 THE ANTITRUST BULL. 131, 141 (1968). See alsoSilver v. New York Stock Exchange, 373 U.S. 341 (1963); Radiant Burners,Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656 (1961); Hub Auto Supply,Inc. v. Automatic Radio Mfg. Co., 173 F. Supp. 396 (D. Mass. 1959).

46. 359 U.S. at 212 (1959).47. See Potter's Photographic Application Co. v. Ealing Corp., 5 TRADE

REG. REP. (1968 Trade Cas.) 72,622 (E.D.N.Y. October 11, 1968); CarbonSteel Products Corp. v. Alan Wood Steel, 5 TRADE REG. REP. (1968 TradeCas.) 72,562 (S.D.N.Y. September 5, 1968) for refusal to extend thehorizontal doctrine to vertical cases. See also Packard Motor Car Co.v. Webster Motor Car Co., 243 F.2d 418 (4th Cir. 1957); Schwing MotorCo. v. Hudson Sales Corp., 138 F. Supp. 899 (D. Md.), aff'd, 239 F.2d 176(4th Cir. 1956); and Arthur v. Kraft-Phenix Cheese Corp., 26 F. Supp. 824(D. Md. 1937). But see, dicta in Guidry v. Continental Oil Co., 350 F.2d342 (5th Cir. 1965); Girardi v. Gates Rubber Co., 325 F.2d 196 (9th Cir.1963); U.S. v. New York Great Atlantic & Pacific Tea Co., 173 F.2d 79(7th Cir. 1949); South End Oil Co. v. Texaco Inc., 237 F. Supp. 650, 653(N.D. Ill. 1965); and cases cited in note 44, supra.

48. Sahm v. V-1 Oil Co., 402 F.2d 69 (10th Cir. 1968); Quinn v. MobilOil Co., 375 F.2d 272, 278 (1st Cir. 1967) (dissenting opinion). See Fulda,Individual Refusals to Deal: When Does Single-Firm Conduct BecomeVertical Restraint?, 30 LAW & CONTEMP. PROB. 590, 600 (1965), who justi-fies this approach by a strained analogy to patent misuse.

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not have to surmount is that created by the fact that he partici-pated in the illegal combination with his supplier. The SupremeCourt has emasculated the doctrine of "pari delicto" to permit acoerced distributor to press his claim. 49

The courts, except in price fixing situations, will probably re-fuse to apply section 1 of the Sherman Act where the only partic-ipants in the "boycott" are the supplier and the distributor. Sec-tion 3 of the Clayton Act, more properly applicable to strictly verti-cal relationships between seller and buyer, at present does notoffer much help to the terminated distributor,"0 but the Albrechtdoctrine may be used to liberalize the type of evidence needed tofind an agreement under this section as well as under section 1.The question for the courts to resolve definitively under section 1is whether Klor's is to be extended to a vertical agreement betweenone supplier and one distributor wherein the supplier refuses todeal with another distributor for reasons other than price."'

B. SECTION 2 OF THE SHERMAN ACT

A neglected part of the Colgate Doctrine and one which, be-cause of difficulty in proof, has resulted in recovery for only oneterminated distributor to date,52 is the rule that a single trader,even though acting unilaterally, cannot refuse to deal if he hasany purpose to create or maintain a monopoly. The terminateddistributor under section 2 has been required to prove that hisformer supplier had a monopoly, and, secondly, that he has a spe-cific intent to monopolize or maintain his monopoly.5 3

The requirement of a dangerous probability of success hasbeen greatly attenuated in many cases,54 but the broad "Cello-phane" definition of the relevant market as including all inter-changeable products, as announced in United States v. Dupont &

49. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S.134 (1968).

50. See text beginning at note 57 infra.51. See Joseph E. Seagrams and Sons, Inc. v. Hawaiian Oke and

Liquors, Ltd., 5 TRADE REG. REP. (1969 Trade Cas.) 72,914 (9th Cir. Sep-tember 8, 1969).

52. See United States v. Klearflax Linen Looms, 63 F. Supp. 32 (D.Minn. 1945). See also Lorain Journal Co. v. United States, 342 U.S. 143(1951).

53. National Screen Service Corp. v. Poster Exchange, Inc., 305 F.2d647 (5th Cir. 1962); Campbell Distributing Co. v. Jos. Schlitz BrewingCo., 208 F. Supp. 523 (D. Md. 1962); Banana Distributors, Inc. v. UnitedFruit Co., 162 F. Supp. 32 (S.D.N.Y. 1958).

54. See Hibner, Attempts to Monopolize: A Concept in Search of Anal-ysis, 34 A.B.A. ANTI TRUST L.J. 165 (1967).

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Co.,55 despite a Ninth Circuit deviation, 6 continues as the greatestbar to recovery. Unless the courts narrow the relevant market

to include only the distributors who carry the defendant's products

and exclude distributors who carry interchangeable products, theremedy will probably not be of much aid to the terminated dis-

tributor. The radical Ninth Circuit deviation would, if adopted byother jurisdictions, make vulnerable to a section 2 violation any

supplier who attempts to control the prices or purchasing practicesof a substantial number of his distributors.

C. SECTION 3 OF THE CLAYTON ACT

This section makes illegal vertical arrangements requiring thedistributor to deal exclusively with the seller if the effect maybe to substantially lessen competition or to tend to create a mo-nopoly in any line of commerce.5 7 Despite the language of theAct, the courts, unduly influenced by Colgate, have misconstrued

section 3 to apply only to consummated agreements. 58 A sup-plier who conditions his sales to the distributor by announcing to

55. United States v. DuPont & Co., 351 U.S. 377 (1956); accord,Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp.,382 U.S. 172 (1965); United States v. Chas. Pfizer & Co., 245 F. Supp. 737(E.D.N.Y. 1965); Becker v. Safelite Glass Corp., 244 F. Supp. 625 (D. Kan.1965); United States v. Johns-Manville Corp., 237 F. Supp. 885 (E.D. Pa.1964).

56. Lessig v. Tidewater Oil Company, 327 F.2d 459 (9th Cir. 1964).57. 15 U.S.C. § 14 (1964):[I]t shall be unlawful for any person . . . to lease or make a sale... on the condition, agreement, or understanding that the lesseeor purchaser thereof shall not use or deal in the goods . . . of acompetitor ... where the effect ... may be to substantially lessencompetition ....58. Associated Beverages Co. v. P. Ballantine & Sons, 287 F.2d 261

(5th Cir. 1961); McElhenney Co. v. Western Auto Supply Co., 269 F.2d 332(4th Cir. 1959); Allied Equip. Co. v. Weber Engineered Products, Inc., 237F.2d 879 (4th Cir. 1956); Mackey v. Sears, Roebuck & Co., 237 F.2d 869(7th Cir. 1956); Leo J. Meyberg Co. v. Eureka Williams Corp., 215 F.2d100 (9th Cir.), cert. denied, 348 U.S. 875 (1954); Hudson Sales Corp., v.Waldrip, 211 F.2d 268 (5th Cir. 1954); Nelson Radio & Supply Co. v. Motor-ola, Inc., 200 F.2d 911 (5th Cir.), cert denied, 345 U.S. 925 (1952). Butsee Osborn v. Sinclair Ref. Co., 324 F.2d 566, 574 (4th Cir. 1963); WalkerDistributing Co. v. Lucky Lager Brewing Co., 323 F.2d 1, 7 (9th Cir. 1963);American Mfrs. Mut. Ins. Co. v. American Broadcasting-ParamountTheatres, Inc., 221 F. Supp. 848 (S.D.N.Y. 1963); Albert H. Cayne Equip.Corp. v. Union Asbestos & Rubber Co., 220 F. Supp. 784 (S.D.N.Y. 1963).See Buxbaum, Boycotts and Restrictive Marketing Arrangements, 64 MICH.L. REV. 671, 688 (1966) and Turner, The Definition of Agreement under theSherman Act: Conscious Parallelism and Refusals to Deal, 75 HARv. L.REv. 655, 692-94 (1962) for criticism of the consummated agreement re-quirement. See generally Burrus & Bodner, Developments in AntitrustDuring the Past Year, 35 A.B.A. ANTITRUST L.J. 1, 104-08 (1967) on ques-tions of causation.

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him that he will refuse to deal if the distributor carries competinglines or unless he buys a full line from the supplier, does not violatesection 3. Until Colgate is finally repudiated, this entrenched mis-construction will probably continue, although the Albrecht doc-trine of a warning plus compliance creating a "combination" maybe argued as having overruled the standard construction of section3. This section will probably continue to be of little help to theterminated distributor whose former supplier has unilaterally re-fused to deal with him unless Albrecht works its way from section1 into section 3.

SUMMARY

The terminated distributor has more and more turned to sec-tion 1 of the Sherman Act, in view of the inadequacy of the otherremedies available to him. In only a few cases has he recovereddamages. The relaxation by the courts of the requirements forfinding a "combination" and a "public wrong" may make a causeof action under this section a more profitable remedy in the future.This section, intended for saving competition, may become the sec-tion for saving summarily terminated distributors as well.

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