Vertical Trade Restraints

I. Introduction and definitions

II. Resale price maintenance

III. Nonprice restraints

IV. Summary

I. Introduction

A. Def.: Devices that sellers at one level of a market use to eliminate competition at a lower (i.e., downstream) level.

B. Types: 1. Resale price maintenance

2. Nonprice restraints

IC. Not normally in the “manufacturer’s” interest, but...

1. May create a retailer cartel

2. May enforce a manufacturer cartel

3. May enhance a brand image

4. Protects franchise investment

5. May protect full service from free riding by dealers who don’t provide service.

6. May be a niche for entrants and small fry:

Sandura v. F.T.C., 1964

II. Resale price maintenanceA. Two classic principles

1. From Dr. Miles Medical Co. v. John D. Park & Sons, 1911: A seller may not control the resale price of anything it has already sold, because this

a. Creates restraint of trade at the retail level, and

b. Violates the common-law ban on “restraints upon alienation.”

II. Resale Price MaintenanceA. Two classic principles

2. From U. S. v. Colgate Co., 1920: A seller may refuse to sell to any buyer for any reason, up to failure to observe an announced price.

(It will be observed that these principles are likely to conflict in their effect on

the question of RPM!)

II. Resale price maintenance

B. The “Fair Trade” era, 1937-1975

1. From protection of product image and goodwill to protection of small business.

2. Miller-Tydings Act, 1937;

McGuire Act, 1953

3. Products and channels affected

4. Collapse due to: (a) “Discount houses”

(b) Advertising as a promotional alternative.

IIC. Current status of RPM• Monsanto Co. v. Spray-Rite Service, 1984

• Business Electronics Corp. v. Sharp Electronics Corp., 1988

• State Oil Co. v. Khan, 1997

• Ebb and flow depend more on private plaintiffs and enforcement authorities than on the courts.

III. Nonprice restraints

A. Types: Territorial and location restrictions

Customer restrictions.

B. White Motor Co. v. U. S.,1963

1. Nature of the restraints and summary judgment

2. Rule of Reason as an outcome

3. The Schwinn interlude, 1967-1977

III. Nonprice restraintsC. Back to the Rule of Reason: Continental

TV v. GTE Sylvania, 1977

1. Facts; nature of the restraints

2. Reconsideration and reinstatement

D. Protecting competition or collusion: the strange cases of

1. U. S. v. Sealy, 1966

2. General Motors v. U. S., 1966.

3. Matter of Toys ‘R’ Us, 1998

IV. Summary: vertical restraints

• Intrabrand v. interbrand competition

• Price v. nonprice restraints– Minimum v. maximum prices

• Horizontal collusion v. vertical imposition

• Severity and the Rule of Reason– Related to legitimate business purpose– Just restrictive enough to accomplish the purpose