Franchise Terminations Under the Sherman
Act: Populism and Relational Power
William B. Bohling*
Certainty generally is an illusion,
and repose is not the destiny of man.1
Franchising2 has enjoyed enormous popularity in recent years. 3 In
1968 franchising accounted for as much as thirty-five percent of the
nation's retail sales and ten percent of its gross national product.4 The
popularity of franchising is understandable. During a trend toward
* Associate Professor of Law, Texas Tech University. B.S.E.E. 1965, J.D. 1968,
University of Utah. The research for this paper was supported .in part by Texas
Organized Research funds.
1. Holmes, The Path of the Law, 10 HARv. L REv. 457, 466 (1897).
2. Franchising has been defined in a variety of ways. A congressional report
defines it as follows:
Franchising is a licensing system whereby the owner of a product, method,
or service (the franchisor), identified by a brand name or trademark, distributes the product, method, or service at the retail level through affiliated
dealers (the franchisees) while retaining certain controls over how the branded
product or service may be merchandised. The trademark or the trade name
has been called "the cornerstone of a franchise system."
SENATE SELECT COMM. ON SMALL BUSINESS, IMPACT OF FRANCHISING ON SMALL BUSINESS, S. REp. No. 1344, 91st Cong., 2d Sess. 6-7 (1970) [hereinafter cited as IMPACT ON
FRANCHISING]. The proposed Franchise Distribution Act of 1967 defines the term more
broadly:
The term "franchise" means every aspect of the relationship created between
a franchisor and franchisee by an oral or written agreement or understanding
or a series of agreements, understandings, or transactions which involve or
result in a continuing commercial relationship by which a franchisee is granted
or permitted to offer, sell or distribute the goods or commodities manufactured,
processed, or distributed by the franchisor, or the right to offer or sell services
established, organized, directed, or approved by the franchisor.
S. 2507, 90th Cong., 1st Sess. § 3(a) (1967), quoted in Hearings on S. 2507 and S. 2321
Before the Subcomm. on Antitrust and Monopoly of the Senate Comm. on the Judiciary,
90th Cong., 1st Sess. 2 (1967) [hereinafter cited as Hart Hearings II]. For a more
comprehensive definition and description of franchising, see Hearings on Distribution
Problems Affecting Small Business Before the Subcomm. on Antitrust and Monopoly of
the Senate Comm. on the Judiciary, 89th Cong., 2d Sess., pt. 2, at 669-70 (1966)
[hereinafter cited as Hart Hearings I].
3. The franchising industry has grown enormously since World War II, and in
1970 new franchises were being created at the rate of 40,000 per year. IMPACT ON
FRANCHISING, supra note 2, at 5-7. See 9 J. VON KALINOWSKI, ANTrmUST AND TRADE
REGULATIONS App. ill-A-110 (1973).
4. Comment, Franchising and the Antitrust Laws, 41 TENN. L. REv. 535 (1974).
These are liberal estimates. Other contemporaneous sources put the percentage of retail
sales at about 26%. See IMPACT ON FRANCHISING, supra note 2, at 6-7; VON KALINOWSKI,
supra note 3, at App. ill-A-l11.
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industrial concentration, 5 it enables the small businessman to compete
successfully against the large retail chains and vertically integrated firms
that dominate the retail sale of consumer goods. 6 But with the rapid
growth of franchising have come problems and abuses, 7 many of them
due to the disparity in economic power between the franchisee and the
franchisor. 8
One such problem is the arbitrary and unreasonable termination9
of a franchise by the franchisor10 with the resultant loss to the franchisee
of his investment in the business. l l Terminated franchisees have sought
judicial relief under theories in contract12 and in tort,13 but more often
5. See, e.g., F. SCHERER, INDUSTRIAL MARKET STRUCTURE AND EcONOMIC
PERFORMANCE 129-30 (1970); Jones, The Growth and Importance of Franchising and
the Role of Law, 12 ANTITRUST BULL. 717, 717-18 (1967); Mueller, The Rising
Economic Concentration in America: Reciprocity, Conglomeration, and the New American "Zaibatsu" System, 4 ANTITRUST L. & EcON. REv. 15 (Spring 1971).
6. See Susser v. Carvel Corp., 206 F. Supp. 636, 640 (S.D.N.Y. 1962), afl'd, 223
F.2d 505 (2d Cir. 1964), cert. denied, 381 U.S. 125 (1965); IMPAcr ON FRANCHISING,
supra note 2, at 5; Hart Hearings I, supra note 2, at 8; Hart Hearings II, supra note 2, at
2; Jones, supra note 5, at 720-21,725.
7. Two Senate committees have held extensive hearings on franchising and franchising problems. The Senate Select Committee on Small Business found seven major
categories of franchise problems: (1) promotion schemes involving purely worthless
franchises; (2) misleading or exaggerated promotional and advertising material; (3)
failure by the franchisor to live up to his promises to deliver certain services to the
franchisee; (4) excessive price markups of supply costs to the franchisee; (5) unreasonable and arbitrary termination of franchise agreements and leases by the franchisor; (6)
excessive buying requirements for materials, supplies, and services; and (7) unprofitable
mandatory working hours imposed on the franchisee. IMPAcr ON FRANcmSING, supra
note 2, at 13-14. The Senate Committee on the Judiciary considered legislation concerning various problems including franchise terminations. See Hart Hearings I and Hart
Hearings II, supra note 2.
8. See Gellhorn, Limitations on Contract Termination Rights-Franchise Cancellations, 1967 DUKE L.J. 465, 468. See also H. BROWN, FRANCHISING: TRAP FOR THE
TRUSTING 92 (1969); Axelrad, Franchising--Changing Legal Skirmish Lines or Armageddon?, 26 Bus. LAW. 695, 710-17 (1971).
9. "Franchise termination" as used throughout this article refers broadly to a
voluntary act of a franchisor resulting in the discontinuance of his relationship with a
franchisee, including cancellation under the terms of the franchise agreement and refusal
to renew a franchise agreement which by its terms has expired.
10. Hart Hearings I and Hart Hearings II, supra note 2; IMPAcr ON FRANCHISING,
supra note 2, at 13; Gellhorn, supra note 8, at 466.
11. 119 CONGo RIlc. 4000 (1973) (remarks of Senator Hart).
12. See, e.g., Anheuser-Busch, Inc. v. Jefferson Distrib. Co., 353 F.2d 956 (5th Cir.
1965); Shell Oil Co. v. Marinello, 120 N.J. Super. 357, 294 A.2d 253 (1972), modified,
63 N.J. 402, 307 A.2d 598 (1973), cert. denied, 415 U.S. 920 (1974); Division of Triple
T Serv., Inc. v. Mobil Oil Corp., 60 Misc. 2d 720, 304 N.Y.S.2d 191 (Sup. Ct. 1969),
afl'd, 34 App. Div. 2d 618, 311 N.Y.S.2d 961 (1970); Mobil Oil Corp. v. Rubenfeld, 77
Misc. 2d 962, 357 N.Y.S.2d 589 (Sup. Ct. 1974). See also Philadelphia Storage Battery
Co. v. Mutual Tire Stores, 161 S.C. 487, 159 S.E. 825 (1931).
13. Berry v. Chrysler Corp., 150 F.2d 1002 (6th Cir. 1945); Smoky Mountains
Beverage Co. v. Anheuser-Busch, Inc., 182 F. Supp. 326 (E.D. Tenn. 1960); Boulevard
Airport, Inc. v. Consolidated Vultee Aircraft Corp., 85 F. Supp. 876 (B.D. Pa. 1949).
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than not, the franchisee has been unsuccessful in redressing his claims
against his franchisor. 14 Legislative enactments specifically designed to
protect franchisees from unjustifiable terminations15 have not been notably successful.16 Perhaps as a consequence, terminated franchisees have
frequently turned to the antitrust laws for redress.I i
Although franchise terminations have been challenged under section l(a) of the Robinson-Patman Act,18 sections 319 and 7 2 0' of the
14. See cases cited notes 12 & 13 supra; GelIhom, supra note 8; Horton, Legal
Remedies of a Distributor Terminated Pursuant to a Contractual Provision of Termination Upon Notice, 3 CREIGHTON L. REv. 88 (1969).
15. See Automobile Dealers' Day in Court Act, 15 U.S.C. § 1222 (1970) (requires
automobile manufacturers to act in good faith toward their dealers in performing the
terms of the franchise or in terminating, cancelling, or not renewing the franchise); DEL.
CODE ANN. tit. 6, § 2552 (1974) (a termination of or failure to renew a franchise must
not be in bad faith or without good cause); NJ. STAT. ANN. § 56:10-5 (Supp. 1975) (a
franchisor cannot terminate, cancel, or fail to renew a franchise except for good cause);
VA. CODE ANN. § 13.1-564 (1973) (a franchisor cannot cancel a franchise without
reasonable cause); WASH. REv. CODE ANN. § 19.100.180 (Supp. 1974) (a franchisor can
terminate a franchise before its expiration only for good cause; if a franchisor refuses to
renew or terminates a franchise, he must compensate the franchisee for the fair market
value of the franchise, including good will). Two bills were introduced into the 93d
Congress addressed to the problems of franchise terminations. See Proposed Faimess in
Franchising Act, S. 840, 93d Cong., 2d Sess. § 4 (1973) (no franchisor can terminate,
cancel, or fail to renew a franchise except for good cause and legitimate business reasons.
Good cause includes failure of the franchisee to comply with the franchise agreement;
legitimate business reasons do not include a purpose to take over the franchisee's
business, unless reasonable compensation is paid); Proposed Fair Marketing of Petroleum Products Act, S. 323, 94th Cong., 1st Sess. § 4(b) (1975) (a refiner or distributor
of petroleum products may not cancel, fail to renew, or otherwise terminate a franchise
except for failure to comply substantially and in good faith with any reasonable requirements of the franchise) (passed by Senate on June 20, 1975).
16. Some of the state statutes protecting franchisees have been declared unconstitutional. See, e.g., Fomaris v. Ridge Tool Co., 423 F.2d 563 (1st Cir.), rev'd on other
grounds, 400 U.S. 41 (1970); Mariniello v. Shell Oil Co., 368 F. Supp. 1401 (D.N.J.
1974), rev'd, 511 F.2d 853 (3d Cir. 1975); General Motors Corp. v. Blevins, 144 F.
Supp. 381 (D. Colo. 1956); Note, Constitutional Obstacles to State "Good Cause"
Restrictions on Franchise Terminations, 74 COLOM. L. REv. 1487, 1494-1507 (1974)
(criticizing constitutional challenges based on substantive due process, on the contract
clause, and on federal preemption under the Lanham Act, 15 U.S.C. §§ 1051-1127
(1970) (federal trademark registration statute». But see Kuhl Motor Co. v. Ford Motor
Co., 270 Wis. 488, 71 N.W.2d 420 (1955). The ineffectiveness of a statutory good faith
termination standard is typified by the disappointing history of litigation under federal
and state laws designed to protect automobile dealers. See Freed, A Study of Dealers'
Suits Under the Automobile Dealers' Franchise Act, 41 U. DET. L.J. 245 (1964);
GelIhom, supra note 8, at 470-71; Horton, supra note 14, at 89 n.7.
17. See Horton, supra note 14, at 94-95 (ineffectiveness of contract remedies under
UCC and at common law make antitrust laws the best hope for relief); Comment,
Franchising and the Antitrust Laws, 41 TENN. L. REv. 535, 561-63 (1974) (antitrust
laws provide a more effective remedy than "good cause" termination statutes or common
law contract doctrines).
18. 15 U.S.C. § 13(a) (1970) (prohibits price discrimination where the effect may
be to substantially lessen competition).
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Clayton Act, and section 5 of the Federal Trade Commission Act,21 this
article will only consider two specific categories of terminations reachable under sections 122 and 223 of the Sherman Act. Franchise terminations challenged under the Robinson-Patman Act will not be considered
because there have been few such challenges and they have met with no
appreciable success. 24 Commentators have already accorded section 3 of
the Clayton Act substantial consideration,25 and statutory threshold
requirements limit any significant expansion. 26 A franchisee can invoke
section 7 of the Clayton Act only in narrow fact situations,27 and the few
19. 15 U.S.C. § 14 (1970) (prohibits sales made on condition that the buyer not
deal in the goods of a competitor of the seller where the effect may be to substantially
lessen competition).
20. 15 U.S.C. § 18 (1970) (prohibits mergers or acquisitions where the effect may
be to substantially lessen competition).
21. 15 U.S.C. § 45 (1970) (prohibits unfair methods of competition).
22. 15 U.S.C. § 1 (1970) (prohibits contracts, combinations, and conspiracies in
restraint of trade).
23. 15 U.S.C. § 2 (1970) (prohibits monopolizing, attempting to monopolize, and
conspiring to monopolize).
24. Barber, Refusals to Deal Under the Federal Antitrust Laws, 103 U. PA. L. REv.
847, 849 (1955); Comment, Refusals to Sell and Public Control of Competition,
58 YALE L.J. 1121, 1132-34 (1949). The statutory language helps to explain this result:
"Nothing herein contained shall prevent persons engaged in selling goods . . . from
selecting their own customers in bona fide transactions and not in restraint of trade." 15
U.S.C. § 13(a) (1970).
25. See, e.g., Bok, The Tampa Electric Case and the Problem of Exclusive Arrangements Under the Clayton Act, 1961 SUP. Cr. REv. 267; Day, Exclusive Dealing, Tying
and Reciprocity-A Reappraisal, 29 Omo ST. LJ. 539 (1968); Kessler & Stem,
Competition, Contract, and Vertical Integration, 69 YALE LJ. 1 (1959); Lockhart &
Sacks, Relevance of Economic Factors in Determining Whether Exclusive Arrangements
Violate Section 3 of the Clayton Act, 65 HARv. L. REv. 913 (1952); Robinson,
Restraints on Trade and the Orderly Marketing of Goods, 45 CORNELL L.Q. 254 (1960).
26. Franchise terminations challenged under section 3 are confined by the statutory
language to the narrow circumstances existing when a person "contracts for [the] sale of
. • . commodities • . . on the condition • . • that the . • . purchaser thereof shall not
. . . deal in the .•. commodities of a competitor." 15 U.S.C. § 14 (1970). The courts
have strictly construed this language, frequently denying a terminated franchisee recovery for want of the necessary contract. See, e.g., Associated Beverages Co. v. P.
Ballantine & Sons, 287 F.2d 261, 264-65 (5th Cir. 1961); McEIhenney Co. v. Western
Auto Supply Co., 269 F.2d 332, 337-39 (4th Cir. 1959); Leo J. Meyberg Co. v. Eureka
Williams Corp., 215 F.2d 100 (9th Cir.), cert. denied, 348 U.S. 875 (1954); Stokes
Equ;p. Co. v. Otis Elevator Co., 340 F. Supp. 937, 939-41 (E.D. Pa. 1972). Moreover,
even assuming this requirement is met a terminated franchisee must also demonstrate
that the practice "may tend substantially to lessen competition or tend to create a
monopoly." This ordinarily imposes the burden of proving a relevant product and
geographic market and demonstrating that the exclusive dealing practice has the required
anticompetitive effect in this market. See Tampa Elec. Co. v. Nashville Coal Co., 365
U.S. 320, 325-29 (1961); Standard Oil Co. v. United States, 337 U.S. 293, 299-301
(1949). This burden is substantial and eliminates the vast number of terminated
franchises. See text accompanying notes 238-39 infra.
27. Section 7 prohibits one corporation from acquiring the stock or "assets" of
another corporation where the effect "may be substantially to lessen competition." 15
U.S.C. § 18 (1970). The asset transfer provision has been held satisfied by, for example,
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challenges under that section have not enjoyed any appreciable success. 28 Section 5 of the Federal Trade Commission Act will not be
considered because it does not create a private cause of action. 29
This article will also exclude two categories of franchise terminations that can be reached under the Sherman Act but that need no
discussion here. The first category consists of those terminations resulting from the franchisor's dissatisfaction with the franchisee's failure to
adhere to various marketing restrictions. The courts have severely constrained such terminations, so reflecting a judicial intolerance to the
coercive use of superior bargaining power. S ! Precisely what remains of
the right to refuse to deals2 in this context remains a subject of interest,
but it is one well considered elsewhere. ss The second category consists of
the transfer of patent and trademark rights. United States v. Lever Bros., 216 F. Supp.
887, 889 (S.D.N.Y. 1963) (involving the complete assignment of rights in a trademark
and associated patents). However, the grant of even an exclusive local franchise would
probably not substantially lessen competition as required by § 7. Cf. Western Geophysical Co. of America v. BoIt Associates, 305 F. Supp. 1251, 1254-55 (D. Conn. 1969),
appeal dismissed, 440 F.2d 765 (2d Cir. 1971) (exclusive license of a patent); United
States v. Lever Bros., supra at 898-900. One article suggested that the definition of
"assets" be expanded to include requirements contracts, or even contracts in general, to
reach contract integration that now escapes § 7. Kessler & Stem, supra note 25, at 75-79.
The § 7 cases involving franchises have generally arisen when a franchisor is acquired by
a company that has its own distributional network, resulting in the termination of the
franchisees of the acquired company. See note 28 infra.
28. See, e.g., Alpha Distribution Co. v. Jack Daniel Distillery, 454 F.2d 442 (9th
Cir. 1972); Ricchetti v. Meister Brau, Inc. 431 F.2d 1211 (9th Cir. 1970), cert denied,
401 U.S. 939 (1971); Fargo Glass & Paint Co. v. Globe Am. Corp., 201 F.2d 534 (7th
Cir.), cert. denied, 345 U.S. 942 (1953); Haas Trucking Corp. v. New York Fruit
Auction Corp., 364 F. Supp. 868 (S.D.N.Y. 1973); Kirihara v. Bendix Corp., 306 F.
Supp.72 (D. Hawaii 1969).
29. The FTC Act makes no provision for private suits, see 15 U.S.C. § 45(b) (d)
(1970), and the courts have consistently refused to imply a private cause of action. See,
e.g., Holloway v. Bristol-Myers Corp., 485 F.2d 986, 987-94 (D.C. Cir. 1973) (rejecting
arguments for judicial implication of a private cause of action after extensive analysis of
legislative history and policy considerations); Carlson v. Coca-Cola Co., 483 F.2d 279,
280-81 (9th Cir. 1973). The FTC has, however, demonstrated considerable interest in
unfair franchise practices. See FTC v. Brown Shoe Co., 384 U.S. 316, 320-22 (1966)
(requiring franchisees to deal primarily in franchisor's goods was unfair trade practice);
Adolph Coors Co. v. FTC, 497 F.2d 1178, 1188-89 (10th Cir. 1974), cert. denied, 95 S.
Ct. 775 (1975) (clauses allowing termination at will were unfair trade practice); Phillips
Petroleum Co., 3 TRADE REG. REP. 11 20,716, at 20,586 (FTC Dec. 27, 1974) (unreasonably short leasehold agreements with station dealers were unfair trade practice, since
they deprived dealers of control of their business operations).
30. See text accompanying notes 103-115 infra.
31. See Simpson v. Union Oil Co., 377 U.S. 13, 24 (1964); Albrecht v. Herald Co.,
390 U.S. 145, 162 (1968) (Harlan, J., dissenting) (criticizes Court for emasculating
conspiracy requirement of § 1 in order to prevent one person from dictating
prices).
32. See text accompanying notes 75-85 infra.
33. See, e.g., authorities cited note 85 infra.
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those terminations resulting from the franchisee's failure to deal exclusively in the franchisor's products. While these terminations have been
attacked under sections 134 and 2,35 courts seldom find a violation of
either provision without a violation of section 3, since section 3 is
specifically directed at the practice.36 Accordingly, terminations of this
category are not considered here.
The two categories of franchise terminations that will be discussed
here have largely escaped effective antitrust regulation. The first category includes terminations performed pursuant to an agreement between
the franchisor and an existing or prospective franchisee to eliminate or
replace another franchisee; the second involves terminations performed
unilaterally by the franchisor for reasons other than the enforcement of
restrictive marketing or exclusive dealing requirements. 37 Part I of the
article examines the propriety of regulating these categories of franchise
terminations under the antitrust laws in light of the underlying antitrust
policy objectives. This discussion concludes that franchisees deserve
protection from arbitrary terminations, and that extending this protection is consistent with the objectives of the antitrust laws. Part IT of the
article discusses the first category of franchise terminations-those pursuant to agreements between a franchisor and an existing or prospective
franchisee-as potentially violative of section 1. Part ill considers the
second category of franchise terminations-those performed unilaterally
by the franchisor-and finds them potentially violative of the attempt to
monopolize clause of section 2.
34. E.g., Amplex v. Outboard Marine Corp., 380 F.2d 112 (4th Cir. 1967), cert.
denied, 389 U.S. 1036 (1968); Nelson Radio & Supply Co. v. Motorola, Inc., 200 F.2d
911 (5th Cir. 1952), cert. denied, 345 U.S. 925 (1953).
35. E.g., Alles Corp. v. Senco Prods., Inc., 329 F.2d 567 (6th Cir. 1964); Campbell
Distrib. Co. v. Jos. Schlitz Brewing Co., 208 F. Supp. 523 (D. Md. 1962).
36. See Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 335 (1961); Alles
Corp. v. Senco Prods., Inc., 329 F.2d 567, 571 (6th Cir. 1964); Campbell Distrib. Co. v.
Jos. Schlitz Brewing Co., 208 F. Supp. 523 (D. Md. 1962).
37. This article makes no attempt to treat the legality of exclusive distributorships
per se under either § 1 or § 2. One fundamental conclusion of this article is
that a franchisor's determination to terminate a franchisee to create an exclusive
distributorship with another franchisee has antitrust implications because of the effect of
the termination on the franchisee regardless of whether the franchisor could legally have
created an exclusive distributorship to start with. But see Buxbaum, Boycotts and
Restrictive Marketing Arrangements, 64 MICH. L. REv. 671, 683-84 (1966). A recent
Ninth Circuit decision condemned as per se illegal a clause in a franchise agreement
restricting the location from which the franchisee was permitted to sell merchandise.
GTE Sylvania, Inc. v. Continental T.V., Inc., 1974-1 Trade Cas. ,-r 75,072 (9th Cir.
1974), petition for rehearing en banc granted, Civil No. 71-1705 (Dec. 12, 1974). This
rule would indirectly undermine exclusive distributorships. See Recent Case, 88 HARv.
L. REv. 636 (1975); Note, 53 TEXAS L. REv. 127 (1975).
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I.
Vol. 53:1180, 1975
Franchise Terminations and the Objectives of
the Antitrust Laws
It is not immediately obvious that the Sherman Act regulates
franchise terminations per se. Franchise operations are unlikely to cause
monopolies (as popularly defined), and the arbitrary termination of a
franchisee was probably not what Congress had in mind when it drafted
the Sherman Act since franchising was then in an embryonic state.38
Antitrust regulation of franchise terminations cannot rest solely on
economic grounds either, since a single franchise termination is unlikely
to demonstrably affect efficiency or competitve intensity in the distribution of goods. 39 The propriety of antitrust regulation rests principally on
the general social goals of antitrust policy: the preservation of business
opportunities for the small entrepreneur, the promotion of diversity and
decentralization in private economic decisionmaking, and the deterrence of the concentration of economic power. Part I traces the origin
and progressive judicial expansion of the social goals of the antitrust
laws, and then examines the regulation of franchise terminations as a
natural expression of these policies.
A.
The Social Goals of the Antitrust Laws
No consensus exists on the proper goals of the antitrust laws. 40
While few question that the promotion of competition is the
fundamental purpose of antitrust,41 this recital scarcely clarifies the
38. The earliest recorded franchises were those of General Motors in 1898 and
Rexall in 1902. lMPAcr ON FRANCmSING; supra note 2, at 7. The Sherman Act was
adopted in 1890. Act of July 2, 1890, ch. 647, 26 Stat. 209.
39. The absence of any general economic injury has been the traditional ground on
which courts have denied antitrust liability. See, e.g., Schwing Motor Co. v. Hudson
Sales Corp., 138 F. Supp. 899, 904 (D. Md. 1956); Arthur v. Kraft-Phenix Cheese
Corp., 26 F. Supp. 824, 829 (D. Md. 1937). The absence of any general economic
significance of most franchise terminations is a basic assumption of this article, which
advocates the expansion of the antitrust laws to reach franchise terminations even though
they produce no general economic injury. Of course, if a termination should threaten
a demonstrable economic harm, the antitrust laws as they presently stand provide an
adequate remedy.
40. This diversity of opinion is reflected in the surfeit of works analyzing antitrust
policies and goals. See J. DIRLAM & A. KAHN, FAIR CoMPETITION: THE LAW AND
EcONOMICS OF .ANrrrRUST POLICY 15 (1954); H. THoRELLI, THE FEDERAL .ANrrrRUST
POLICY (1954); C. I(AYSEN & D. TuRNER, ANTITRUST POLICY (1959); G. STOCKING,
WORKABLE COMPETmON AND ANTITRUST POLICY (1961); W. LETWIN, LAW AND EcoNOMIC POLICY IN AMERICA (1965); Appenheim, Federal Antitrust Legislation: Guideposts to a Revised National Antitrust Policy, 50 MICH. L. REV. 1139 (1952); Blake &
Jones, Toward a Three-Dimensional Antitrust Policy, 65 COLUM. L. REV. 422 (1965);
Bork & Bowman, The Crisis In Antitrust, 65 COLUM. L. REv. 363 (1965).
41. Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962); Northern Pac. Ry.
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issue. Competition is not easily defined or measured,42 and consequently
the business environments that promote competition are not easily determined. Thus courts ultimately have relied on indirect indicia and social
criteria in assessing the legality of business practices.43
Some commentators would define the promotion of competition in
purely economic terms. 44 Accordingly, they have suggested "allocative
efficiency"45 or "workable competition"46 as the proper goals of antiv. United States, 356 U.S. 1,4 (1958); REpORT OF THE ATTORNEY GENERAL'S NATIONAL
COMMITTEE TO STUDY TIlE .ANTITRuST LAws 1 (1955) [hereinafter cited as ATT'y GEN.
REP'T]. One of the few challenges to this proposition is Justice Holmes' famous
dissenting opinion in Northern Sec. Co. v. United States, 193 U.S. 197, 404-05, 410
(1904), which maintained that the Sherman Act was directed at the excesses of competition during the trust era, when powerful combinations excluded rivals from their business
and ruined those who were already competing:
The law, I repeat, says nothing about competition, and only prevents its suppression by contracts or combinations in restraint of trade, and such contracts
or combinations derive their character as restraining trade from other features
than the suppression of competition alone.
193 U.S. at 410.
42. Bernhard, Competition in Law and in Economics, 12 .ANTITRUST BULL. 1099
(1967). See ATT'y GEN. REp'T, supra note 41, at 339; C. l{AYSEN & D. TuRNER, supra
note 40, at 1-82.
43. See Philadelphia Nat'l Bank v. United States, 374 U.S. 321, 362-63 (1963);
Northern Pac. Ry. v. United States, 356 U.S. 1, 5 (1958); Standard Oil Co. v. United
States, 337 U.S. 293, 311-14 (1949); Kauper, The "Warren Court" and the Antitrust
Laws: Of Economics, Populism, and Cynicism, 67 MICH. L. REV. 325, 332 (1968).
44. See, e.g., Adelman, Effective Competition and the Antitrust Laws, 61 HARv. L.
REv. 1289, 1304-05 (1948); Bork & Bowman, supra note 40, at 365-66; Oppenheim, supra
note 40.
45. Professors Kaysen and Turner define allocative efficiency as follows:
[Allocative efficiency] is ideally a distributive or relational concept, which
embraces the whole economy. Essentially, it is a state in which no rearrangement of outputs among products and no redistribution of inputs among firms
could increase consumer satisfaction. . •• Its elements are the efficient relations between prices and costs, capacities and outputs, demands and capacities;
and production at efficient scale in efficient locations.
C. l{AYSEN & D. TuRNER, supra note 40, at 12-13; see J. BArN, INDUSTRIAL ORGANIZATIONS
374-75 (2d ed. 1968). Some commentators hold that this should be the only goal of
antitrust policy and that only practices which militate against economic efficiency
should properly be prohibited. See Bork & Bowman, supra note 40, at 365-66. This approach has been criticized, however, because in order to reach the degree of precision in
economic analysis necessary to determine the relative impact of various practices on efficiency, see Bernhard, supra note 42, at 1115-19, and authorities cited therein; Oppenheim,
supra note 40, at 1182-84, the unrealistic assumption must be made of the existence of
perfect competition. Courts should not "be expected to be able to utilize pure and
perfect competition concepts in adjudging any given market situation." ATT'Y GEN.
REP'T, supra note 41, at 338.
46. Recognition of the oversimplified and static nature of economic analysis based
largely on models of pure competition led to the formulation of the theory of ''workable
competition." G. STOCKING, supra note 40, at 26-27, 243-45 (1961); ATT'Y GEN. REp'T,
supra note 41, at 337-39; Bernhard, supra note 42, at 1120. This concept judges the
efficacy of competition indirectly by examining market conduct, market structure, and
market performance, see G. STOCKING, supra note 40, at 276, although economists disa-
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trust policy. But no generally accepted economic theory exists that is
adapted for the formulation of antitrust policy,47 and consequently
economics alone cannot furnish the hard guidance that policymakers
require. 48 Nevertheless, antitrust policy does encompass at least in part
the achievement of economic goalS. 49 The Supreme Court has recognized this fact and from time to time has applied economic standards in
appraising conduct challenged under the antitrust laws.50 On the other
hand, the Court has often eschewed rigorous economic analysis because
of its difficulty and complexity,51 and has sustained criticism for its
decisions departing from economic principles.52
gree over which of these three indicia are in fact relevant to workable competition, Oppenheim, Divestiture as a Remedy under the Federal Antitrust Laws: Economic Background, 19 GEO. WASH. L. REV. 120, 123-24 (1950); see H. LIEBHAFSKY, AMERICAN
GOVERNMENT AND BUSINESS 239-60 (1971). The concept does not purport to provide
precise answers, but attempts to make "practical realistic judgments of actual market
situations." Arr'y GEN. REP'T, supra note 41, at 338. Some of the specific factors
recognized as significant in analysis under this theory are the number and size of competitors, the opportunity for entry, the independence of rivals, the existence of predatory
practices, the growth rate of the industry or market, market incentives, product differentiation, the practice of meeting competitors' prices, excess capacity, and the existence of
price discrimination. A"rr'y GEN. REP'T, id. at 324-36. Some critics charge that in
leaving a precise model the concept loses its analytical certainty and thus its utility.
Arr'y GEN. REP'T, id. at 339; G. STOCKING, supra note 40, at 30, 261;
Bernhard, supra note 42, at 1120-23. Others see it as a rationalization for reducing the
scope of the antitrust laws. See H. LIEBHAFSKY, supra at 329; G. STOCKING, supra note
40, at 260.
47. Bernhard, supra note 42, at 1122-25; Kauper, supra note 43, at 330; Oppenheim,
supra note 40, at 1184-86.
48. R. HEILBRONER, BETWEEN CAPITALISM AND SoCIALISM 165-92 (1970); Bernhard,
supra note 42, at 1114-19, 1122-25; Wright, Some Pitfalls of Economic Theory as a
Guide to the Law of Competition, 37 VA. L. REv. 1083 (1951); See also Leff, Economic
Analysis of Law: Some Realism About Nominalism, 60 VA. L. REV. 451 (1974).
49. See, e.g., C. KAYSEN & D. TURNER, supra note 40, at 11-14; Blake & Jones, supra
note 40, at 424, 436-40; Bark & Bowman, supra note 40, at 365; Oppenheim, supra note
40, at 1139-48, 1186-87.
50. The Court's references to "dread enhancement of prices," e.g., Apex Hosiery Co.
v. Leader, 310 U.S. 469, 500-01 (1940); Standard Oil Co. v. United States, 221 U.S. 1,
58 (1911), market structure, see, e.g., Philadelphia Nat'! Bank v. United States, 374 U.S.
321,362 (1963), barriers to entry, Fortner Enterprises, Inc. v. United States Steel Corp.,
394 U.S. 495, 509 (1969); Associated Press v. United States, 326 U.S. 1, 13-14 (1945),
and cross-elasticity of demand, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 325
(1962); United States v. E.!. du Pont de Nemours & Co., 351 U.S. 377, 394, 400 (1956),
all reflect the Court's awareness of relevant economic considerations.
51. United States v. Topco Associates, Inc., 405 U.S. 596, 610 (1972); Standard Oil
Co. v. United States, 335 U.S. 293, 308-14 (1949). See also FTC v. Cement Institute,
333 U.S. 683, 715 (1948); United States v. United States Steel Corp., 251 U.S. 417, 44849 (1920), in which the Court expresses skepticism about the utility of expert testimony
by economists.
52. See, e.g., Bork & Bowman, supra note 40, at 366-68; Bowman, Tying Arrangements and the Leverage Problem, 67 YALE L.J. 19 (1957); Burstein, A Theory of Full
Line Forcing, 55 Nw. U.L. REv. 62 (1960); Director & Levi, Law and the Future: Trade
Regulation, 51 Nw. U.L. REv. 281 (1956); Markovitz, Tie-illS, Reciprocity and the
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Most commentators now concede that the promotion of competition embraces not only economic goals, but social ones as wel1. 53 Expressions of these social concerns appear in both the legislative history54
of the Sherman Act and in subsequent judicial interpretations. In the
congressional debates, the Sherman Act was urged as a means of dealing
with great trusts that had accumulated tremendous power threatening
small businessmen, the consuming public, and the social order/ill Its
purpose was variously conceived to be to preserve "free and full competition,"56 to protect the public against high prices,57 and to protect small
Leverage Theory Part II: Tie-ins, Leverage, and the American Antitrust Laws, 80 YALE
L.J. 195 (1970).
53. See A. NEALE, THE ANTITRUST LAWS OF THE UNITED STATES OF AMERICA 42123 (1968):
Antitrust has a broader base than the findings of economists as to the conditions required for optimum economic performance. It is indeed highly doubtful whether economists offer an agreed body of doctrine on which policy could
be based. • .. In short, the "competition" which antitrust seeks to promote
(or at least to prevent from being unduly obstructed) is "competition" in some
rough-and-ready popular sense which leaves plenty of room for changes in
the currents of economic opinion as to the technical requirements of a competitive system. . .. An economy made up of independent, competing business
units fulfills the condition that economic decision-making should be dispersed
and renders the holders of economic power liable to mutual encroachment.
It is important to this conception that the individual's right to engage in business activities of his own choice shall be preserved and that no single economic
unit, whether in the form of monopoly or combination, shall be able to exclude
rivals at its own behest and so render its own power immune from invasion.
The pursuit of these objectives is the true function of antitrust policy and constitutes its broadest appeal.
See J. DIRLAM & A. KAHN, supra note 40, at 15-25; C. l{AYSEN & D. TuRNER, supra note
40, at 11-22; Bernhard, supra note 42, at 1129-52; Blake & Jones, supra note 40. But see
Bork & Bowman, supra note 40, at 363-66. The Court's failure to adhere to the
imperatives of economic theory itself implies the existence of noneconomic values, which
have skewed the anticipated direction of the Court's decisions. See Kauper, supra note
43, at 331.
54. Seminal works have been completed on this subject. H. THORELLI, supra note 40;
W. LETWIN, supra note 40; Bork, Legislative Intent and the Policy of the Sherman Act, 9
J. LAW & BeON. 7 (1966).
55. See 21 CONGo REc. 2457, 2460, 2569 (1890) (remarks of Senator Sherman); id.
at 3147 (remarks of Senator George). In later opinions the Supreme Court recognized
the combating of trusts as the principal object of the Act. Standard Oil Co. v. United
States, 221 U.S. 1, 50 (1911); see United States V. South-Eastern Underwriters Ass'n,
322 U.S. 533, 554-55 (1944).
56. 21 CONGo REc. 2457 (1890). A resolution offered by Senator Sherman and
passed by the Senate that led to the drafting of the Sherman Act directed the Committee
on Finance to report
such measures as it may deem expedient to set aside, control, restrain or prohibit all arrangements, contracts, agreements, trusts, or combinations between
persons or corporations, made with a view, or which tend to prevent free and
full competition • . • with such penalties and provisions • • • as will tend to
preserve freedom of trade and production, the natural competition of increasing production, the lowering of prices by such competition.
Unnumbered S. Res., 50th Cong., 1st Sess., 19 CONGo Roc. 6041 (1888) (emphasis
added).
57. See Unnumbered S. Res., supra note 56; 21 CONGo Roc. 2457, 2460, 2461
(remarks of Senator Sherman).
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business58 and individual freedom against corporate wealth and power. 59 In the broad, general terms of the debates, the Senators appeared to
regard these social, political, and economic purposes as consistent,
collateral thrusts of the Act. 60 Supreme Court decisions have also expounded the social objectives of the antitrust laws, although not in an
entirely predictable fashion. While the Court has expressed concern for
the viability of small business, this concern has not been transformed
into judicial rules protecting small business as a class. 61 The Court has
repeatedly decided against the interests of "small business" when the
result might otherwise be reduced competition or elevated prices.62
The most important of the social policy objectives found in the
Court's antitrust decisions are the concepts of business independence
and freedom of business oppOrtunity.6S The antitrust objective of inde58. During the Senate debates Senator George stated: "By the use of this organized
force of wealth and money, the small men engaged in competition with them are crushed
out, and that is the great evil at which all this legislation ought to be directed." 21 CONGo
REc. 3147 (189G).
59. Senator Sherman declared in the course of the debates: "Although this body [the
Senate] is always conservative, yet, whatever may be said of it, it has always been ready
to preserve, not only popular rights in their broad sense, but the rights of individuals as
against associated and corporate wealth and power." 21 CONGo REc. 2460 (1890).
60. See Blake & Jones, supra note 40, at 422; H. THORELLI, supra note 40, at 227.
But see Bork, supra note 54, at 7.
61. Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 HARv. L.
REv. 1313, 1325 (1965). See A. NEALE, supra note 53, at 420; Handler, Twenty-Five
Years of Antitrust, 73 COLUM. L. REv. 415, 422, 460-61 (1973). But see United States v.
Von's Grocery Co., 384 U.S. 270 (1966); Brown Shoe Co. v. United States, 370 U.S.
294 (1962). In these cases involving mergers attacked under § 7 of the Clayton Act,
some scholars have argued that the Court protected small businesses from stronger rivals
despite the absence of any identifiable economic harm to competition. Much of the
criticism of the Court concerning present antitrust policy has focused on its handling of
mergers. See Bork & Bowman, supra note 40, at 370-76; Kauper, supra note 43, at 330,
333, 338.
62. Decisions arguably against the interests of small business include the decisions
forbidding resale price maintenance, e.g., Dr. Miles Medical Co. v. John D. Park & Sons,
220 U.S. 373 (1911); see Note, Mr. Justice Brandeis, Competition, and Smallness, 66
YALE L.J. 69, 88 (1956) (the only justification for resale price maintenance is the
protection of small businessmen who require such a device to maximize their profits),
dissemination of price information by trade associations, e.g., American Column &
Lumber Co. v. United States, 257 U.S. 377, 413 (1921) (Brandeis, J., dissenting); see
Note, supra at 90, and territorially restricted trademark licensing, United States v. Topco
Associates, 405 U.S. 596 (1972); see Handler, supra note 61, at 460-61.
63. See Blake & Jones, supra note 40, at 427-36; Kauper, supra note 43, at 331-34.
These two goals, though customarily reviewed as social or political in character, see
Blake & Jones, supra note 40, at 427-36, are consistent with the principles of workable
competition, Kauper, supra note 43, at 332-34. "Opportunity for entry" and "independence of rivals" are two of the factors significant in determining effective competition.
Arr'y GEN. REP'T, supra note 41, at 326-27.
Other social or political antitrust policy goals have been suggested including the
protection of self-policing markets, Blake & Jones, supra note 40, at 425-27, and the
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pendence vaguely postulates that a firm should ordinarily be free from
limitations on its best business judgment concerning how, where, or
against whom it will compete, whether or not those limitations are by
voluntary agreement or are imposed through another's superior bargaining power. 64 This goal lies behind the Court's decisions prohibiting
minimum and maximum resale price maintenance and vertical territorial
restrictions, among others. 65 The goal of freedom of business opportunity is similar to the goal of business independence although distinguishable from it. 66 In general terms, a firm should have free access to
establishment of standards of fair business conduct, C. KAYSEN & D. TuRNER, supra note
40, at 16-17; Hawk, Attempts to Monopolize-Specific Intent as Antitrust's Ghost in the
Machine, 58 CORNELL L REv. 1121, 1124 (1973). The self-policing market notion is not
involved here since it relates to the social and political evils of monopolization. The
author questions whether the Supreme COurt has ever recognized an antitrust policy goal
relating to business ethics other than as an adjunct to economic efficiency, business
independence, and business opportunity. It is in effect another way of characterizing the
protection given by the Court against certain practices that threaten or harm the
competitive activities of an individual business.
64. This goal should be distinguished from the proposition that one has the right to
deal or not deal with whomever he chooses. The latter proposition, enshrined in the socalled Colgate doctrine, represents a qualified right that does not owe its existence to the
antitrust laws. See text accompanying notes 75-88 infra.
65. As early as Dr. Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373
(1911), the COurt recognized that agreements which constituted restraints upon alienation
interfered with "individual liberty of action in trading" and restricted "the freedom of
trade on the part of dealers who own what they sell." ld. at 406-08. In United States v.
A. Schrader's Son, Inc., 252 U.S. 85, 99-100 (1920), the Court reaffirmed Dr. Miles,
''where the effort was to destroy the dealers' independent discretion through restrictive
agreements." ld. at 99. The Court observed that resale price maintenance agreements are
"designed to take away dealers' control of their own affairs." ld. at 100. One writer concluded that in United States v. Arnold, Schwinn & CO., 388 U.S. 365 (1967), a case condemning vertical territorial restrictions partly on the rationale that such restrictions constituted restraints on alienation, the Court "would appear to be evolving a doctrine which
embraces the freedom of an individual businessman to conduct his business as he sees
fit, and which sees as illegal, attempts on the part of other businessmen to curtail that
freedom unduly." Jones, supra note 5, at 741. The restraints on alienation rationale was
also invoked in Kiefer-8tewart Co. v. Joseph E. Seagram & Sons, 340 U.S. 211 (1951),
in which a distiller had imposed maximum prices on its wholesalers, above which they
could not sell. ThOUgh a practice of this kind has substantially different economic implications than fixing minimum prices, the Court nevertheless condemned the practice because "such agreements, no less than those to fix minimum prices, cripple the freedom
of traders and thereby restrain their ability to sell in accordance with their own judgment." ld. at 213. In United Mine Workers v. Pennington, 381 U.S. 657 (1965), the
Court condemned under the Sherman Act an agreement between a group of employers
and a union in which the union undertook to impose certain labor standards, e.g., wage
scales, on competing employers, on the ground that in so doing "the union surrenders its
its freedom of action with respect to its bargaining poliey.••. It is just such restraints
upon the freedom of economic units to act according to their own choice and discretion
that run counter to antitrust policy." ld. at 668; accord, Ramsey v. United Mine Workers, 401 U.S. 302, 311 (1971).
66. Though some commentators have treated business independence and business
opportunity as if they were a single goal, see Blake & Jones, supra note 40, at 427-36;
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customers and markets, with success determined competitively on the
basis of price, quality, and service. The Court has identified this goal as
underlying its decisions relating to a variety of exclusionary practicestie-ins,67 group boycotts,68 exclusive dealing,69 and vertical mergers70which restrict business opportunity by foreclosing competitors from
particular markets or customers.
B.
The Populist Shift
The antitrust objectives of economic efficiency, business independence, and business opportunity exist in a tenuous equilibrium. The
Supreme Court has suggested in general terms that these goals are
compatible, i.e., that what promotes one promotes the othersY Such a
notion is, however, unduly optimistic. Many scholars view conflict as
inevitable. 72 In the past twenty years the equilibrium which these antitrust policy goals have maintained in relation to one another has experienced a gradual but profound dislocation, characterized here as the
Populist Shift,73 which has broadly expanded the antitrust policy goals
Kauper, supra note 43, at 331-34, the Court has frequently distinguished them, see
Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 213 (1959); Northern Pac. Ry.
v. United States, 356 U.S. 1, 6 (1958); United States v. First Nat'l Pictures, Inc., 282
U.S. 44, 54 (1930).
67. See Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 498-99
(1969); Northern Pac. Ry. v. United States, 356 U.S. 1, 6 (1958); International Salt Co.
v. United States, 332 U.S. 392, 396 (1947) ("[1]t is unreasonable, per se, to foreclose
competitors from any substantial market,."); Note, The Logic of Foreclosure: Tie-in
Doctrine After Fortner v. U.S. Steel, 79 YALE LJ. 86,93 (1969).
68. See Silver v. New York Stock Exchange, 373 U.S. 341, 359-60 (1963) ("[T]he
antitrust laws serve . . . to protect. . • freedom of individual business units to compete
unhindered by the group action of others."); Associated Press v. United States, 326 U.S.
1, 13-14, 15 (1945) (attacking defendant's practices for reducing "their competitor's
opportunity to buy or sell the things in which the group compete").
69. See FTC v. Motion Picture Advertising Servo Co., 344 U.S. 392, 395 (1953);
Standard Oil Co. v. United States, 337 U.S. 293, 314 (1949).
70. See Brown Shoe Co. v. United States, 370 U.S. 294, 323-24 (1962) ("The
primary vice of a vertical merger • . • is that, by foreclosing the competitors of either
party from a segment of the market otherwise open to them, the arrangement may act as
a 'clog on competition' • • • which 'deprive[s] • • • rivals of a fair opportunity to
compete.''' (brackets in original)).
71. See Northern Pac. Ry. v. United States, 356 U.S. 1,4 (1958):
The Sherman Act • • • 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.
72. See Bork & Bowman, supra note 40, at 363-64; Kessler & Stem, supra note 25, at
21-22.
73. The term is derived from an article by Professor Kauper in which he characterizes the antitrust opinions of the Warren Court as reflecting "a peculiar blend of modem
economic theory and Populism." Kauper, supra note 43, at 329.
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of protecting business independence and opportunity and correspondingly shrunk the role of economic efficiency.74 Five closely related
developments have contributed to the expansion: the limitation of the
right to refuse to deal, the demise of the public injury doctrine, the
broadening of the requisite concerted activity under section 1, the
expanded prohibition of exclusionary practices, and the acquired respectability of private antitrust actions.
1. The Right to Refuse to Deal.-The concept of a right to refuse
to deal antedates the antitrust laws. 75 The right finds its origin in the
common law doctrine of freedom of contract, and has been declared to
be "one of the most sacred rights of liberty . . . protected by the
constitution."76 Its scope includes the right to refuse to buy,77 the right
to refuse to sell,78 and the right to sell one line of products but refuse to
sell other lines. 79 It was firmly established as a defense under the
antitrust laws by the Supreme Court in United States v. Colgate & CO.,80
and acts such as franchise terminations done under its protective aegis
have enjoyed a favored status with respect to other forms of business
conduct, which were judged under a reasonableness standard.
74. In the view of some, this relative subordination of the role of efficiency has been
unfortunate. See Bark & Bowman, supra note 40, at 363-66; Kauper, supra note 43, at
334.
75. See Standard Oil Co. v. United States, 221 U.S. 1, 49-62 (1911) (tracing origin
of the rule to English common law); Adair v. United States, 208 U.S. 161, 173 (1908)
(quoting from an 1880 treatise on torts); Great Atl. & Pac. Tea Co. v. Cream of Wheat
Co., 227 F. 46, 48-49 (2d Cir. 1915). But see also Munn v. Illinois, 94 U.S. 113, 130
(1877) ("[W]hen private property is devoted to a public use, it is subject to public
regulation.")
76. lIZ re Grice, 79 F. 627, 641 (C.C.N.D. Tex. 1897) (action under state antitrust
law). See Brown, The Right to Refuse to Sell, 25 YALE LJ. 194 (1916).
77. FTC v. Raymond Bros.-Clark Co., 263 U.S. 565, 573 (1924).
78. See, e.g., Weather Wise Co. v. Aeroquip Corp., 468 F.2d 716 (5th Cir. 1972),
cert. denied, 410 U.S. 990 (1973); Greenberg, Unilateral Refusals to Deal, 42
ANTITRUST L.J. 305, 306 (1973).
79. See Interstate Camera Stores, Inc. v. E.!. du Pont de Nemours & Co., 1970
Trade Cas. 11" 73,077 (E.D.N.Y. 1970); L.S. Good & Co. v. H. Daroff & Sons, 263 F.
Supp. 635, 646 (N.D.W. Va. 1967); Greenberg, supra note 78, at 306.
80. 250 U.S. 300, 307 (1919).
The right to refuse to deal has been recognized as a controlling principle under
§ 1, see, e.g., United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 721-22
(1944) (dictum); United States v. Colgate & Co., 250 U.S. 300, 307 (1919), § 2,
see, e.g., Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 626-27 (1953);
Lorain Journal Co. v. United States, 342 U.S. 143, 155 (1951) (dictum), § l(a) of
the Robinson-Patman Act, see Naifeh v. Ronsom Art Metal Works, 218 F.2d 202 (10th
Cir. 1954), § 3 of the Clayton Act, see, e.g., McElhenney Co. v. Western Auto
Supply Co., 269 F.2d 332, 337-39 (4th Cir. 1959); Nelson Radio & Supply Co. v.
Motorola, Inc., 200 F.2d 911, 915-16 (5th Cir. 1952), cert. denied, 345 U.S. 925 (1953),
§ 7 of the Clayton Act, see Ricchetti v. Meister Brau, Inc., 431 F.2d 1211, 1215
(9th Cir. 1970), and § 5 of the FTC Act, see FTC v. Raymond Bros.-Clark Co.,
263 U,S. 565, 573 (1924).
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As the antitrust laws have broadened their scope, however, the
right to refuse to deal has eroded. A long recognized qualification to the
right has been "the absence of any purpose to create or maintain a
monopoly"81 or to otherwise violate the antitrust laws,82 and courts may
properly impose a duty to deal as a remedy for antitrust violations. 83
Thus, the right to refuse to deal is best conceptualized not as an absolute right, but as a qualified right, representing the residue of a firm's
freedom to deal not forbidden by the antitrust laws or other prohibitions. 84 Every limitation on a firm's freedom under the antitrust laws
represents a judgment ·that more valuable interests are at stake; a firm's
refusal to deal may cause sufficient harm to another's independence
or opportunity in some situations to justify limiting that firm's discretion. 85 This new, evolving characterization of the right to refuse to
81. United States v. Colgate & Co., 250 U.S. 300, 307 (1919).
82. The Supreme Court has held in a number of contexts that the right to refuse to
deal does not sanction a conspiracy in restraint of trade, see, e.g., United States v. Parke,
Davis & Co., 362 U.S. 29 (1960); Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, 340
U.S. 211 (1951); Buxbaum, supra note 37, at 683-85; Fulda, Individual Refusals to
Deal: When Does Single Firm Conduct Become Vertical Restraint?, 30 LAw & CoNTEMP.
PROB. 590, 603-04 (1965); Turner, The Definition of Agreement Under the Sherman
Act: Conscious Parallelism and Refusals to Deal, 75 HARv. L. REv. 655, 681-84 (1962).
83. Monopolists have been required to deal on fair and nondiscriminating terms with
suppliers and customers, e.g., Otter Tail Power Co. v. United States, 410 U.S. 366
(1973); LaPeyre v. FTC, 366 F.2d 117 (5th Cir. 1966); Packaged Programs, Inc. v.
Westinghouse Broadcasting Co., 255 F.2d 708 (3d Cir. 1958), and a variety of duties to
deal may be inlposed to restore effective competition following antitrust violations. These
remedies may include an obligation to purchase, see Ford Motor Co. v. United States,
405 U.S. 562 (1972), an obligation to sell, see United States v. Glaxo Group Ltd., 410
U.S. 52, 60-64 (1973); Besser Mfg. Co. v. United States, 343 U.S. 444, 447 (1952);
International Salt Co. v. United States, 332 U.S. 392 (1947), an obligation to lease, see
id.; United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 352-54 (D. Mass.
1953), afi'd per curiam, 347 U.S. 521 (1954), and compulsory patent licensing, see
United States v. Glaxo Group Ltd., supra; United States v. United States Gypsum Co.,
340 U.S. 76, 93-94 (1950); United States v. National Lead Co., 332 U.S. 319, 353-58
(1947); ATI'Y GEN. REp'T, -supra note 41, at 225.
84. See Poller v. Columbia Broadcasting Sys., Inc., 368 U.S. 464, 473 (1962);
TimeS-Picayune Publishing Co. v. United States, 345 U.S. 594, 625 (1953). Developments in the field of labor law further curtail the freedom of a firm to refuse to deal. See
Textile Workers Union v. Darlington Mfg. Co., 380 U.S. 263 (1965) (limiting right of
employer to refuse to deal with a union); NLRB v. Rapid Bindery, Inc., 293 F.2d 170
(2d Cir. 1961); Perrit & Wilkinson, Economic Pressure and Antitrust, 23 AM. U.L. REv.
627, 654-57 (1974); Note, Economic Pressure and Antitrust: A Response, 23 AM. U.L.
REv. 667, 677-80 (1974). In addition, Congress has enacted legislation directed at
perceived abuses in specific industries, curtailing the right still further. Automobile
Dealers' Day in Court Act, 15 U.S.C. §§ 1221-25 (1970) (discussed at note 15 supra);
Agricultural Fair Practices Act of 1967, 7 U.S.C. §§ 2301-06 (1970) (handlers of agricultural products may not discriminate in dealing with an agricultural producer because
of his relationship with a producer's association).
85. Barber, supra note 24, at 859; Fulda, supra note 82, at 603; Turner, supra note
82, at 684-95; Pitofsky & Dam, Is the Colgate Doctrine Dead?, 37 ANTITRUST L.J. 772,
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deal, which rejects any notion of an exalted status for this special facet
of business discretion, permits a much larger role for the policy goals
of business independence and opportunity in judging business conduct.
2. The Public Injury Doctrine.-The notion that injury to the
public underlies the antitrust laws has existed from the earliest years of
antitrust enforcement. 86 From it evolved the doctrine that an antitrust
action necessarily required the showing of a public injury.87 The Supreme Court confronted this doctrine on five different occasions from
1957 to 1964,88 and on each occasion it rejected the application of the
doctrine to the facts before it. 89 The cumulative effect of these rulings,
787-88 (1967); Note, "Combinations" in Restraint of Trade: A New Approach to
Section 1 of the Sherman Act, 1966 UTAH L. REV. 75.
86. See Northern Sec. Co. v. United States, 193 U.S. 197, 332 (1904); D.R. Wilder
Mfg. Co. v. Com Prods. Ref. Co., 236 U.S. 165, 174 (1915). But see Eastern States
Retail Lumber Dealers' Ass'n v. United States, 234 U.S. 600, 614 (1914).
87. See, e.g., Wm. Filene's Sons Co. v. Fashion Originators' Guild of America, 90
F.2d 556 (lst Cir. 1937); Glenn Coal Co. v. Dickinson Fuel Co., 72 F.2d 885, 889 (4th
Cir. 1934); Arthur v. Kraft-Phenix Cheese Corp., 26 F. Supp. 824 (D. Md. 1937). The
Supreme Court gave substantial impetus to this doctrine in Apex Hosiery Co. v. Leader,
310 U.S. 469 (1940), in which the Court held that a strike to enforce union demands for
a closed shop was outside the scope of the antitrust laws. In reaching its decision the
Court noted that the alleged conduct had not been shown to have any actual or intended
effect on price or price competition. ld. at 501. Lower courts widely interpreted Apex
as holding that the pleading and establishment of a public injury were prerequisite to
liability in a private antitrust action. See, e.g., Kinnear-Weed Corp. v. Humble Oil & Ref.
Co., 214 F.2d 891, 893-94 (5th Cir. 1954), cert. denied, 348 U.S. 912 (1955);
Feddersen Motors, Inc. v. Ward, 180 F.2d 519, 522 (lOth Cir. 1950); Schwing Motor
Co. v. Hudson Sales Corp., 138 F. Supp. 889, 903 (D. Md. 1956), affd, 239 F.2d 176
(4th Cir. 1956); Kessler & Stem, supra note 25, at 91.
88. Radovich v. National Football League, 352 U.S. 445 (1957); KIor's, Inc. v.
Broadway-Hale Stores, Inc., 359 U.S. 207 (1959); Radiant Burners, Inc. v. Peoples Gas,
Light & Coke Co., 364 U.S. 656 (1961); Poller v. Columbia Broadcasting Sys., Inc., 368
U.S. 464 (l962); Simpson v. Union Oil Co., 377 U.S. 13 (1964).
89. In Radovich v. National Football League, 352 U.S. 445 (1957), an action
alleging a group boycott, the Court stated:
Congress has, by legislative fiat, determined that such prohibited activities are
injurious to the public and has provided sanctions allowing private enforcement
of the antitrust laws by an aggrieved party. These laws protect the victims of
forbidden practices as well as the public. . . . In the face of such a policy this
Court should not add requirements to burden the private litigant beyond what
is specifically set forth by Congress in those laws.
ld. at 453-54. In Radiant Burners, Inc. v. Peoples Gas, Light & Coke Co., 364 U.S. 686
(l961), again involving a concerted refusal to deal, the Court reversed the lower court's
dismissal for failure to allege a public injury, holding that the challenged conduct "falls
within one of the classes of restraint which from their 'nature or character' [are] unduly
restrictive and, hence, forbidden." ld. at 659 (brackets in original). This language might
indicate that the Court was eliminating the public injury requirement only in cases
alleging a per se violation, see E. TIMBERLAKE, FEDERAL TREBLE DAMAGE ANTITRUST
AcrroNS 200-02 (1965); however, in Poller v. Columbia Broadcasting Sys., Inc., 368
U.S. 464, 473 (1962), the Court summarily dismissed the defendant's public injury
argument even though no per se violation was evident. Cf. In re McConnell, 370 U.S.
230 (l962), in which the Court reversed a criminal contempt citation against a lawyer
who ignored the order of a district court judge not to introduce evidence of a conspiracy
into an antitrust trial without first proving a public injury. The Court declared without
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in view of the broad grounds on which the Court rested these opinions, leaves little doubt that a public injury need no longer be established as a prerequisite to maintaining a private antitrust action. oo
As a corollary to this result, it appears clear that conduct which injures
only a single competitor can incur' antitrust liability in appropriate
cases. 01 While in existence, the public injury doctrine imposed an
onerous burden on the private antitrust plaintiff in redressing all but
the most blatant per se violations. Its demise has contributed significantly to the Court's expanded antitrust protection of individual businesses. 02
3. Concerted Activity.-A violation of section 1 requires a showing of both an unreasonable restraint of trade and the necessary concerted activity.03 This latter requirement consists of two elements: a plurality element and a collaboration element. Plurality refers to that quality of
separateness or distinctness sufficient to constitute the actors more than
one entity; collaboration refers to the degree of interdependence or
cooperation necessary for the actors to have combined or conspired.
These two elements have experienced separate but somewhat parallel
expansion. The principal expansion of the plurality element occurred
qualification that "the right of recovery of a plaintiff in a treble damage. antitrust case
does not depend at all on proving an economic injury to the public." ld. at 231.
90. See, e.g., Switzer Bros. v. Locklin, 297 F.2d 39 (7th Cir. 1961); Syracuse
Broadcasting Corp. v. Newhouse, 295 F.2d 269, 276-77 (2d Cir. 1961); Note, Standing
to Sue for Treble Damages Under Section 4 of the Clayton Act, 64 COLUM. L. REV. 571,
574-75 (1964). But see Cherokee Laboratories, Inc. v. Rotary Drilling Serv., Inc., 383
F.2d 97, 104 (5th Cir. 1967); Ford Motor Co. v. Webster's Auto Sales, Inc., 361 F.2d
874, 878 (lst Cir. 1966); E. TIMBERLAKE, supra note 89, at 200-02.
91. See KIor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 213 (l959);
United States v. Griffith, 334 U.S. 100, 107 (1948) (dicta). See also, e.g., George R.
Whitten, Jr., Inc. v. Paddock Pool Builders, Inc., 508 F.2d 547 (1st Cir. 1974); Tower
Tire & Auto Center, Inc. v. Atlantic Richfield Co., 5 TRADE REG. REP. (l975 Trade
Cas.) 1T 60,316 (S.D. Tex. Apr. 10, 1975); Boone, Single-Corporation Competitive Torts
and the Sherman Act: A Projection Based Upon a Review of the Albert Pick, Atlantic
Heel, and Perryton Cases, 2 GA. L. REV. 372 (1968). These cases involve "dirty tricks"
played by one competitor on another, in which the injury is clearly limited to the victim
of the challenged conduct.
92. The decline of the public injury doctrine has followed the same pattern in
franchise termination cases as in other areas of antitrust law. Several early franchise
termination cases were dismissed for failure to plead public injury. E.g., Feddersen
Motors, Inc. v. Ward, 180 F.2d 519, 522-23 (10th Cir. 1950); Shotkin v. General Elec.
Co., 171 F.2d 236, 238-39 (lOth Cir. 1948). Following the Supreme Court's decisions in
the area, the public injury defense has enjoyed little success in actions concerning
franchise terminations. See, e.g., Allied Elec. Supply Co. v. Motorola, Inc., 1974-1 Trade
Cas.1T 74,878 (W.D. Pa. 1973); McCormack v. Theo. Hamm Brewing Co., 284 F. Supp.
158 (D. Minn. 1968).
93. See, e.g., United States v. Trenton Potteries Co., 273 U.S. 392, 394-97 (1927);
Day, New Theories of Agreement and Combinations, 42 ANTITRUST L.J. 287, 288-89
(1973); Turner, supra note 82, at 655-56; Note, supra note 85.
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from 1947 to 1951,94 shortly prior to the Populist Shift, when the
Supreme Court established that affiliated corporations, even whollyowned subsidiaries of the same parent, could constitute separate entities
under section 1.95 Despite criticism of these decisions as illogical,96 the
Court recently affirmed the doctrine97 and thereby revealed its determination to escape the strictures of the concerted activity requirement. In
two of the decisions that involved restrictions imposed on franchisees by
their franchisors, the Court pointedly embraced the intra-corporate conspiracy doctrine as a means of protecting the business independence of
franchisees. 98
The expansion of the collaboration element evolved more directly
from the Populist Shift. Early Supreme Court decisions viewed section 1
94. Questions focusing on the plurality requirement appeared earlier in the lower
courts. White Bear Theatre Corp. v. State Theatre Corp., 129 F.2d 600 (8th Cir. 1942);
Patterson v. United States, 222 F. 599, 618 (6th Cir. 1915), cert. denied, 238 U.S. 635
(1915); Arr'y GEN. REp'T, supra note 41, at 31.
95. The issue did not squarely reach the Court in United States v. Yellow Cab Co.,
332 U.S. 218 (1947). The activities of one individual defendant and six corporate
defendants, which he controlled, were held sufficient to satisfy the concerted activity
requirement of section 1. The Court noted that the Sherman Act was aimed at substance
rather than form and said that an unreasonable restraint of trade "may result as readily
from a conspiracy among those who are affiliated or integrated under common ownership as from a conspiracy among those who are otherwise independent. . .. The corporate interrelationships of the conspirators . . . are not determinative of the applicability
of the Sherman Act" ld. at 227.
In the next four years the Court faced the issue three times. In Schine Chain
Theatres, Inc. v. United States, 334 U.S. 110, 116 (1948), a parent company and six
wholly owned subsidiaries were held to have unlawfully conspired. Three years later in
Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, 340 U.S. 211 (1951), the Court found
that two subsidiaries of the same parent had conspired and declared that "common
ownership and control does not liberate corporations from the impact of the antitrust
laws." ld. at 215. In the same year, in Timken Roller Bearing Co. v. United States, 341
U.S. 593, 598 (1951), an American company and its English and French subsidiaries
were held to have conspired.
96. See, e.g., Handler, Some Misadventures in Antitrust Policy Making, 76 YALE L.J.
92, 119-22 (1966); Handler, supra note 61, at 452-53; Handler, Through the Antitrust
Looking Glass, 57 CALIF. L. REv. 182, 182-93 (1969); McQuade, Conspiracy, Multicorporate Enterprises, and Section 1 of the Sherman Act, 41 VA. L. REv. 183, 214-16
(1955); Willis & Pitofsky, Antitrust Consequences of Using Corporate Subsidiaries, 43
N.Y.U.L. REv. 20, 25-30 (1968).
97. See Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134 (1968).
The Seventh Circuit had dismissed a Sherman Act conspiracy charge against a corporation, its parent corporation, and six individual defendants who were agents or officers of
the corporations "because respondents were all part of a single business entity and were
entitled to cooperate without creating an illegal conspiracy." ld. at 141. The Supreme
Court reversed and found a conspiracy; since the defendants had "availed theInselves
of the privilege of doing business through separate corporations, the fact of common
ownership could not save them from any of the obligations that the law imposes on
separate entities." 392 U.S. at 141-42.
98. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 141-42
(1968); Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, 340 U.S. 211, 215 (1951).
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as requiring a formal agreement or understanding. 99 Since 1960, the
Court has all but abandoned these traditional conceptions of concerted
activity and has found certain essentially unilateral conduct to be within
the reach of section 1.100 Significantly, these recent decisions departing
from the traditional view of concerted activity101 all involved terminated
franchisees and were the Court's expressed response to threats to the
99. See American Tobacco Co. v. United States, 328 U.S. 781, 81n (1946); United
States v. Colgate & Co., 250 U.S. 300, 305-08 (1919); Eastern States Retail Lumber
Ass'n v. United States, 234 U.S. 600, 612 (1914); Handler, Some Comments on Selected
Current Rulings and the Burning Issues of the Day, 38 ANTIIRUST L.J. 574, 596 (1969);
Ward, Contract, Combination and Conspiracy, 38 ANTIIRUST L.J. 627, 630 (1969).
100. In United States v. Parke, Davis & Co., 362 U.S. 29, 32-36 (1960), a manufacturer imposed minimum price levels on its retailers by refusing to deal with any
wholesaler who sold to a noncomplying retailer. The Supreme Court reversed the lower
court's finding that the manufacturer's actions were unilateral and found a combination
in the coerced acquiescence of the wholesalers and retailers in the manufacturer's
demands. In Albrecht v. Herald Co., 390 U.S. 145 (1968), a newspaper publisher hired
Milne, an individual, to solicit customers away from Albrecht, a route deliveryman,
because Albrecht had been selling above the newspaper's maximum recommended price.
The publisher then gave the customers Milne had obtained to a new deliveryman,
Kroner. The Supreme Court found a combination among the publisher, Milne, and
Kroner to force Albrecht to reduce his price. The Court also stated in a now well known
footnote that Albrecht "could have claimed a combination between [the newspaper] and
himself, at least as of the day he unwillingly complied with {its] advertised price," or
between the newspaper and the other carriers "because the firmly enforced price policy
applied to all carriers, most of whom acquiesced in it." In addition, the Court stated that
Albrecht's abandoned contention that the newspaper had combined with Albrecht's
customers "was not •.. a frivolous contention." Id. at 150 n.6. The first two of these
three suggestions were adopted in Perma Life Mufflers, Inc. v. International Parts Corp.,
392 U.S. 134, 142 (1968), as alternative grounds for satisfying the concerted activity
requirement. The Court said that "each petitioner can clearly charge a combination
between Midas and himself, as of the day he unwillingly complied with the restrictive
franchise agreements, or between Midas and other franchise dealers, whose acquiescence in Midas' firmly enforced restraints was induced by 'the communicated danger of
termination.''' (citations omitted)
The practical effect of these decisions is to expand dramatically the class of conduct
that satisfies the collaboration requirement. See Albrecht v. Herald Co., 390 U.S. 145,
162 (1968) (Harlan, J., dissenting); Bartlit, Practical Problems in Terminating Distributors and Dealers, 42 ANTIIRuST L.J. 317, 319 (1973); Day, supra note 93; Turner, supra
note 82, at 663-81; Note, supra note 85, at 89-100. But see Fulda, supra note 82, at 60406. The Court has not confined the expansion of the collaboration concept under section
l.to price-related offenses, as evidenced by its per secondemnation of tying arrangements under section 1, which are essentially unilateral in character, see cases cited in
notes 109-15 infra, and its condemnation of vertical territorial restrictions, see United
States v. Arnold, Schwinn & Co., 388 U.S. 365, 379-80 (1967), irrespective of whether
they are unilateral or not, see White Motor Co. v. United States, 372 U.S. 253, 264-72
(1963) (Brennan, J., concurring).
101. Earlier decisions had liberalized the concerted activity requirement with respect
to the problem of proving conspiracy in horizontal contexts involving conscious parallelism and oligopOly behavior. See United States v. Masonite Corp., 316 U.S. 265, 276
(1942); Interstate Circuit, Inc. v. United States, 306 U.S. 208, 221-27 (1939); Rahl,
ConspiracY and the Anti-Trust Laws, 44 ILL. L. REv. 743, 759 (1950); Turner, supra
note 82, at 695-703.
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business independence of the victims. 102
4. Exclusionary Practices.-Antitrust concern with exclusionary
practices103 is not of recent origin. The Supreme Court, for example,
condemned a group boycott as early as 1904,104 a tying arrangement in
1917/05 and an exclusive dealing arrangement in 1922.106 Some significant developments, however, have occurred during the last quarter
century. Beginning in 1956, a series of scholarly articles have challenged
the economic rationale behind the Court's hostility toward exclusionary
practices. 107 Yet during this same period, the Court has broadly expanded antitrust prohibitions of exclusionary practices. lOS The most notable
example is the Court's expansion of the prohibition against tying arrangements. In the Court's early condemnations of tying arrangements,
the defendant had substantial monopoly power over the tying product. 109 In 1947, however, the Court condemned a tying arrangement
under both sections 1 and 3 based on the defendant's patent of the tying
product, but without any explicit consideration of the patented product's
dominance in its relevant market. 110 The Court declared that it was
"unreasonable, per se, to foreclose competitors from any substantial
102. See cases cited in note 100 supra.
103. Exclusionary practices are business practices that exclude or foreclose competitors from customers or markets by means other than superior price, quality, or service.
These practices include tying arrangements, vertical mergers, exclusive dealing, requirement contracts, price discrimination, and group boycotts. lSee, e.g., Bork & Bowman,
supra note 40, at 366; Posner, Exclusionary Practices and the Antitrust Laws, 41 U. CHI.
L. REv. 506, 507 (1974).
104. Montague & Co. v. Lowry, 193 U.S. 38 (1904).
105. Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917)
(based on patent-misuse doctrine, an equitable concept ancillary to the patent laws). The
Court condemned a tying arrangement under § 3 of the Clayton Act in United Shoe
Mach. Co. v. United States, 258 U.S. 451 (1922).
106. Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346 (1922).
107. See note 52 supra.
108. For example, in KIor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959),
the Court declared group boycotts per se illegal. Though the exact parameters of the per
se violation remain very much in question, see, e.g., Woolley, Is a Boycott a Per Se
Violation of the Antitrust Laws?, 27 RUTGERS L. REv. 773 (1974), Klor's undeniably
expanded the scope of the prohibition since the alleged boycott was directed against a
single store and lacked any general economic implications. In Brown Shoe Co. v. United
States, 370 U.S. 294 (1962), the Court condemned the vertical (as well as certain
horizontal) aspects of a merger. Under the less than concentrated structure of the
market, this decision has been criticized as economically unjustifiable. See, e.g., Bork &
Bowman, supra note 40, at 370-73.
109. See International Business Machs. Corp. v. United States, 298 U.S. 131, 134
(1936); United Shoe Mach. Corp. v. United States, 258 U.S. 451, 456 (1922); Arr'Y
GEN. REP'T, supra note 41, at 139-40.
110. See International Salt Co. v. United States, 332 U.S. 392, 394-96 (1947); An'y
GEN. REp'T, supra note 41, at 140.
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market."111 Cases decided in 1958 112 and 1962113 further reduced the
degree of dominance in the tying product necessary to sustain a violation
of sections 1 and 3. Finally, the Court in 1969 rejected the need for
proof of truly dominant power over the tying product and condemned
any tie resulting in an appreciable restraint on competition. An appreciable restraint resulted whenever the seller could "exert some power over
some of the buyers in the market, even if his power is not complete over
them and over all other buyers in the market."114
In its prohibition of exclusionary practices the Court has conspicuously stressed the importance of protecting business opportunity.115 The
Court's willingness to adhere consistently to its per se condemnation of
these practices in the face of its critics suggests that the Court has
rejected a one-dimensional approach to antitrust policy emphasizing
economic efficiency to the exclusion of all other objectives, and has
accepted the protection of business opportunity-as defined in relation
to these exclusionary practices-as an important antitrust goal.
5. Private Antitrust Actions.-Many of the cases resulting in the
development of these foregoing areas were private antitrust actions.
They reflect a judicial hospitality to private antitrust actions that once
111. 332 U.S. at 396.
112. Northern Pac. Ry. v. United States, 356 U.S. 1, 6-7 (1958) ("strategically
located" land "prized by those who purchased" it gave rise to "sufficient economic power
with respect to the tying product to appreciably restrain free competition in the market
for the tied product. . ..").
113. United States v. Loew's, Inc., 371 U.S. 38, 45 (1962) (power derived from
copyrighted feature films was sufficient). The Court distinguished between the indicia of
market power relevant to tying arrangements under section 1 and those relevant to
monopoly power under section 2:
Since the requisite economic power may be found on the basis of either uniqueness or consumer appeal, and since market dominance in the present context
does not necessitate a demonstration of market power in the sense of § 2 of
the Sherman Act, it should seldom be necessary in a tie-in sale case to embark
upon a full-scale factual inquiry into the scope of the relevant market for the
tying product and into the corollary problem of the seller's percentage share
in that market This is even more obviously true when the tying product is
patented or copyrighted, in which case . . . sufficiency of economic power is
presumed. Appellants' reliance on United States v. E.l. du Pont de Nemour~
& Co., 351 U.S. 377 [1956], is therefore misplaced.
ld. at 45 n.4.
114. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503-04
(1969) (tying product was real estate financing at "uniquely and unusually advantageous
terms"). Both in Northern Pac. Ry. v. United States, 356 U.S. 1, 7-8 (1958), and in
Fortner, supra at 504, the principal evidence before the Court of the defendant's power
in the tying product was the "very existence" of the tying arrangement and the buyer's
acceptance of terms that were against his self-interests.
115. See Brown Shoe Co. v. United States, 370 U.S. 294, 323-24 (1962); Klor's, Inc.
v. Broadway-Hale Stores, Inc., 359 U.S. 207,213 (1959); Northern Pac. Ry. v. United
States, 356 U.S. 1, 5-6 (1958).
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did not exist. 116 A number of factors may account for the increased
success of the private antitrust plaintiff,117 several of which are directly
attributable to decisions of the Court in this past quarter century. They
include the narrowing of the in pari delicto doctrine,118 the limitation of
the "passing-on" defense,119 the broadening of circumstances suspending the running of the statute of limitations,120 the disfavoring of
summary judgments in antitrust proceedings,121 the expansion of access
for private antitrust plaintiffs to grand jury transcripts of related government criminal antitrust investigations,122 the allowance of damages under certain circumstances for conduct occurring prior to the statute of
limitation period,123 and the liberalized admissibility of evidence to
demonstrate injury in an antitrust action. 124
It is not easy to mark precisely the cause-and-effect relationship
existing between this general development and the other four, but it
seems plausible that the Court's apparent support of the private antitrust
action is related to the Populist Shift and to its concern for business
independence and opportunity. The interest of the private plaintiff,
116. See e.g., Alioto, The Role of the Private Antitrust Action in Antitrust Enforcement, 43 .ANTITRUST L.J. 67, 68-71 (1973); Collen, Procedural Directions in Antitrust
Treble Damage Litigation: An Overview of Changing Judicial Attitudes, 17 .ANTITRUST
BULL. 997, 998-1000 (1972). The Supreme Court's hospitality to private antitrust actions
is observable in the Court's decisions during the past twenty years. Private antitrust
plaintiffs before the Supreme Court have compiled a record of 26 wins to 9 losses from
1955 through 1969. Posner, A Statistical Study of Antitrust Enforcement, 13 J. LAw &
BeoN. 365, 384 (1970). fu apparent response to the increased judicial hospitality to
private antitrust actions, the annual number of private suits filed has increased at an
astonishing rate since 1955. ld. at 371.
117. See, e.g., Collen, supra note 116, at 1001-56; Panel Discussion: Private Actions
-The Purposes Sought and the Results Achieved, 43 ANTITRUST LJ. 73, 77 (1973) (remarks of Mr. Millstein).
118. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 135-40
(1968); Simpson v. Union Oil Co., 377 U.S. 13, 16-17 (1964); Kiefer-Stewart Co. v.
Joseph E. Seagram & Sons, 340 U.S. 211, 214 (1951). The in pari delicto doctrine
precluded a private antitrust plaintiff from recovering for antitrust violations if he was
involved in the unlawful conduct.
119. Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 487-88 (1968).
The "passing on" defense barred recovery from a plaintiff who had shifted to third
parties the injury caused by the defendant's conduct, e.g., by passing on increased prices
to later purchasers.
120. Leh v. General Petroleum Corp., 382 U.S. 54, 59-66 (1965); Minnesota Mining
& Mfg. Co. v. New Jersey Wood Finishing Co., 381 U.S. 311,317-24 (1965).
121. Poller v. Columbia Broadcasting Sys., Inc., 368 U.S. 464, 473 (1962).
122. Pittsburgh Plate Glass Co. v. United States, 360 U.S. 395, 398-401 (1959);
United States v. Procter & Gamble Co., 356 U.S. 677, 681-83 (1958); cf. Dennis v.
United States, 384 U.S. 855, 873-75 (1966).
123. Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.s. 321, 339-42 (1971).
124. Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699-701
(1962).
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unlike that of the antitrust division, is the redress of private, not public,
injuries,125 and in most of the decisions discussed above benefiting the
private plaintiff, the Court identified either the plaintiff's independence
or his opportunity as the focus of antitrust concern.
6. Summary.-The developments in these four areas suggest that
the Court's populism has been applied broadly. It has not sought to
protect any class of business identified as small business, but has sought
to protect what it has defined as business independence and opportunity
against coercive, collusive, or exclusionary practices, perhaps even at the
risk of some loss of efficiency. A remaining question is whether the
transition from the Warren to the Burger Court will likely see this trend
continue. In some areas a retrenchment may well be under way.126 But
the Burger Court's view of the relationship between the social and economic objectives of the antitrust laws seems in harmony with the
Warren Court's view. The only opportunity the Court has had to consider this broad question came in United States v. Topeo Associates,127 in
which independent grocers had associated to enhance their purchasing
power. Private trademarks were developed for goods purchased through
the association, and territorial and customer restrictions were established
incident to the trademarks. The Court condemned the restrictions.
Justice Marshall, speaking for the majority, with Blackmun concurring,
Powell and Rehnquist abstaining, and Burger dissenting, said:
[C]ourts are of limited ability in examining difficult economic
problems. Our inability to weigh, in any meaningful sense,
destruction of competition in one sector of the economy
against promotion of competition in another sector is one important reason we have formulated per se rules.
In applying these rigid rules, the Court has copsistently
rejected the notion that naked restraints of trade are to be
tolerated because they are well intended or because they are
allegedly developed to increase competition.
125. See, e.g., United States v. Borden Co., 347 U.S. 514, 519 (1954); Locker v.
American Tobacco Co., 218 F. 447, 448 (2d Cir. 1914); Ronson Patents Corp. v.
SparkIets Devices, 112 F. Supp. 676, 686-87 (R.D. Mo. 1953).
.
126. See United States v. Connecticut Nat'l Bank, 418 U.S. 656 (1974); United
States v. Marine Bancorporation, 418 U.S. 602 (1974); United States v. General
Dynamics Corp., 415 U.S. 486 (1974); Alcorn, Merger Analysis for Banks and OthersMarine Bancorporation and Connecticut National Bank, 12 HOUsrON L. REv. 539, 59091 (1975); Wall St. J., July 1, 1975, at 11, col. 3.
127. 405 U.S. 596 (1972) ..
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Antitrust laws in general, and the Sherman Act in particu1ar, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our freeenterprise system as the Bill of Rights is to the protection of
our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the
freedom to compete-to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster.
Implicit in such freedom is the notion that it cannot be foreclosed with respect to one sector of the economy because
certain private citizens or groups believe that such foreclosure
might promote greater competition in a more important section of the economy.128
Thus the Burger Court seems to assign, as did the Warren Court, high
priorities to the protection of business independence and opportunity.
C.
The Application of the Antitrust Policy Goals to Franchise Terminations.
The identification of the antitrust goals of business iIidependence
and business opportunity as companions to the goal of economic efficiency does not resolve the question of the proper role of the antitrust
laws in regu1ating franchise terminations. The interests of three separate
groups-the franchisors, existing franchisees, and aspiring franchisees
-must be reconciled with the public interests that are manifested by the antitrust policy objectives. l29 All three groups can claim
protection under one or more policy objective, and the claims are
conflicting. This section will examine these conflicting interests and the
proper boundaries for antitrust involvement.
The franchisor's control over the trademarks and goods involved
in the franchise inherently threatens the franchisee's business opportunity,
because the power to terminate is frequently the power to destroy the
franchisee's business.13o This disparity in bargaining power also inherently threatens the business independence of the franchisee, since it may
result in the franchisee's acquiescence in restrictive distribution schemes,
128. Id. at 609-10 (citations omitted).
129. See text accompanying notes 40-70 supra. Interests of direct concern to the
public are the economic goals of efficient allocation of resources and low price levels.
Social goals such as decentralization of power and business opportunity for small
entrepreneurs affect the public more indirectly.
130. H. BROWN, FRANCHISING-REALITIES & REMEDIES 13-15 (1973); Hart Hearings
I, supra note 2, at 672-73 (statement of Mr. Timberg). But see Hart Hearings II, supra
note 2, at 276-77 (remarks of Prof. Gellhom) (a disparity in bargaining power does not
exist in all cases).
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tying arrangements, or other prohibited practices. 13l The power to
terminate can be abused in other ways, as well. The franchisee bears a
substantial portion of the risk in establishing a new; business in a
locality, and he may also invest heavily in building a clientele and in
developing the good will of the franchisor's trademark. 132 The franchisor may attempt to appropriate the value of these investments by terminating the franchisee and then either vertically integrating or selling the
franchise to a different franchisee at an appreciated price.133
The dangers of abuse stemming from the disparity of bargaining
power between franchisor and franchisee do not ineluctably require
legal intervention on behalf of the franchisee, however. Overzealous
protection of the franchisee may impair the antitrust goal of efficiency
by constraining a franchisor from obtaining business efficiencies that
may be available through the termination of poorly performing or even
adequately performing franchisees. 134 Moreover, the goal of independence cuts both ways to some extent, since any limitation on the exercise
of the franchisor's business discretion necessarily limits his independence. 135 Further, the freedom of the franchisor to terminate arguably
promotes the business opportunity of aspiring franchisees by making
franchises more available. Competition between existing and aspiring
131. Thus, curbing franchisor power can have a prophylactic effect on conduct
forbidden by the antitrust laws. Beyond preventing antitrust violations, correcting the
current imbalance in bargaining power would serve the worthy social goal of granting the
franchisee greater power to run his business in accord with his own business judgment,
see Simpson v. Union Oil Co., 377 U.S. 13, 20-21 (1964), and free him of his bondage
of "economic serfdom" to the franchisor, see 119 CONGo REc. 4000 (1973) (remarks of
Senator Hart introducing the proposed "Fairness in Franchising Act," S. 840, 93d Cong.,
2d Sess. (1973)).
132. H. BROWN, supra note 130, at 20-23.
133. H. BROWN, supra note 130, at 183; IMPACT ON FRANCHISING, supra note 2, at 1819; cf. Poller v. Columbia Broadcasting Sys., Inc., 368 U.S. 464, 466-67 (1962) (plaintiff
charged inter alia that defendant terminated him so he couId buy his facilities "at distress
prices").
134. A surplus of outlets may exist for the franchisor's products, prompting him to
reduce the number of franchisees to a more efficient level. See Hearings on the Fair
Marketing of Petroleum Products Act Before the Consumer Subcomm. of the Senate
Comm. on Commerce, 93d Cong., 1st Sess. 36 (1973) (surplus of retail gasoline
stations). Economies may also be available through the total vertical integration of the
franchisor's business. See, e.g., J. BAIN, INDUSTRIAL ORGANIZATION 177-80 (2d ed. 1968);
R. POSNER, .ANTITRUST: CASES, EcONOMIC NOTES AND OTHER MATERIALS 704-08 (1974);
Note, Refusals to Deal by Vertically Integrated Monopolists, 87 lIARv. L. REv. 1720,
1725-32 (1974).
.
135. See United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 728-29 (1944),
in which the Court struck down a resale price maintenance scheme, but nevertheless
upheld the manufacturer's right to select its customers, as a right thought essential to the
effective conduct of its specialty business. See text accompanying notes 75-85 supra.
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franchisees may even promote efficiency of operation by existing franchisees.
In resolving the conflicting interests of ·existing and aspiring franchisees, the existing franchisee deserves a favored status. An existing
franchisee has invested time, effort, and capital in lrls business that
generally cannot be recouped in the event of ·a termination. 136 An
existing franchisee develops ·certain skills and expertise in his business
that may not be transferable to other enterprises. The aspiring franchisee
sustains no comparable losses if franchisor discretion to terminate is
curbed. Moreover, the aspiring franchisee gains a Pyrrhic victory if he
can acquire a franchise only at the cost of destroying the security and
independence of that franchise. As to possible efficiency gains through
competition between existing and aspiring franchisees, it seems doubtful
that this competition would increase the incentives for efficiency beyond
that generated by interbrand competition. Further, allowing the franchisor to sell the franchise of an existing franchisee competitively encourages the franchisor to appropriate the value of the existing franchisee's
investment in the franchise.
Resolving the competing interests of the franchisor and the existing
franchisee poses greater difficulties. Extreme protectiveness of the franchisee might encourage franchisors to turn to other means of distribution; on the other hand, insufficient protection might discourage potential franchisees from making the investment in time, effort, and capital
necessary to operate a successful franchise. Certainly a demonstrable
failure by the franchisee to perform properly should justify termination.
A franchisor should also escape antitrust liability if the terminated
franchisee has ready access to other products or other means of continuing his business following the termination. On the other hand, a termination solely or substantially motivated by a ,desire to destroy a franchisee's business and acquire his .customers should be condemned. Between
these extremes is a multitude of more difficult situations.
Early franchise termination caseS reflected greater concern with the
effect on the franchisor of forbidding a contemplated termination than
with the effect on the franchisee of allowing it. An argument frequently
made was that denying complete discretion to the franchisor to terminate in effect created a public utility out of a private concern.137 In
136. 'See Wilson, An Emerging Enforcement Policy for Franchising, 15 N.Y.L.
1, 15-16 (1969); Comment, Franchise Regulation: Ohio Considers Legislation to
Protect the Franchisee, 33 Omo ST. L.J. 641,643 (1972); note 130 supra.
137. See, e.g., Associated Press v. United States, 326 U.S. 1, 47 (1945) (Roberts, J.,
dissenting) •
FORUM
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denying antitrust liability for franchise terminations, several lower courts
analogized to the well-established rule that the courts lack the authority
to determine which businesses are "affected with the public interest" so
as to incur the obligation of dealing with all customers on equal
terms. 13S The transportation of this rule into an antitrust setting sprang
from the pragmatic concern that denying unlimited discretion to terminate "would require [franchisors] to indefinitely entrust the marketing
of their product . . . to a distributor with whom a relationship of
confidence and cooperation [had] become impossible."139 Commentators expressed similar views. 14o But despite its frequent appearance, the
argument is specious. In ~e absence of a public injury such as diminished competitive vigor or monopoly prices, an injunction against infringing behavior need not issue. Relief can usually be afforded by
awarding monetary damages,141 so that an obligation to deal indefinitely
with the franchisee need not be imposed. Moreover, unlike a public
utility, a franchisor need never initiate dealings with a particular franchisee, and the careful exercise of discretion in the selection of franchisees can reduce the incidence of future terminations.
Even though the argument for unfettered discretion fails, few
would question that a franchisor should be free under some circumstances to terminate a franchisee. As several decisions have noted, "a
franchisor is under no obligation to cut his own throat."142 Implicit in
this maxim is the principle that a franchisor is entitled under the
antitrust laws to terminate a franchisee if doing so will demonstrably
benefit his business. The antitrust goal of efficiency and the legitimate
underlying bases of the right to refuse to deal and the public utility
objection all compel this result. Certainly a franchisor should not be
. 138. Nebbia v. New York, 291 U.S. 502, 532-33, 537 (1934). See Bushie v. Stenocord
Corp., 460 F.2d 116, 120 (9th Cir. 1972); Cartrade, Inc. v. Ford Dealer Advertising
Ass'n, 445 F.2d 289, 294 (9th Cir. 1971).
139. DeItown Food, Inc. v. Tropicana Prods" Inc., 219 F. Supp. 887, 890-92
(S.D.N.Y. 1963). See also Albrecht v. Herald Co., 452 F.2d 124, 131 (8th Cir. 1971);
Osborn v. Sinclair Ref. Co., 324 F.2d 566, 579 (4th Cir. 1963) (dissenting opinion).
140. Greenberg, supra note 78, at 305; Handler, Some Unresolved Problems of
Antitrust, 62 COLUM. L. REv. 930, 935 (1962); Turner, supra note 82, at 704.
141. Awarding damages for improper franchise temlinations resembles awarding
damages for breach of an implied obligation to remain in business. See, e.g., 407 E. 61st
Garage v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 244 N.E.2d 37, 296 N.Y.S.2d 338
(1968); Wigand v. Bachmann-Bechtel Brewing Co., 222 N.Y. 272, 277-80, 118 N.E.
618, 620 (1918); Horton v. Hall & Clark Mfg. Co., 94 App. Div. 404, 406-07,88 N.Y.S.
73,74 (1904).
.
142. Brown v. Western Mass. Theatres, Inc., 288 F.2d 3U2, 305 (1st Cir. 1961); see
Joseph E. Seagram & Sons v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71, 78 (9th Cir.
1969), cert. denied, 396 U.S. 1062 (1970).
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required to maintain a relationship with a franchisee whose inadequate
performance jeopardizes the franchisor's profits or good will. 143 Thus if
a franchisor is rendering poor service to his customers, is dishonest, or is
in poor financial condition, to mention but a few possibilities, a termination should be allowed. 144 But even if a franchisee has performed
acceptably, a termination should be allowed if it actually improves the
franchisor's business or combats competitive pressures. For example,
terminations may be justified when performed to make the franchisor's
operation more efficient or to expand the scope of its operations. HIS
Similarly, terminations may be justified if attributable to external market
conditions, as for example when a supply shortage exists. 146 This analysis conforms with exemptions from antitrust liability granted in other
contexts, such as the "failing company" exception to mergers prohibited
under section 7 147 and the "newcomer" exception to tie-ins under section 1.148
Other possible motivations, however, do not adequately justify
terminating a satisfactorily performing franchisee. One obvious example
is a termination designed to effectuate a prohibited business practice,
such as price fixing. 149 Beyond this easy case, however, the difficulty of
categorizing possible motivations as legal or illegal increases. In light of
the disparity in bargaining power between franchisors and franchisees
and the importance of preserving the business opportunity and indepen143. For example, a party to a contract normally enjoys the implied right of rescission if the other party fails to substantially perform in good faith and gives no indication
that he will so perform. A. CoRBIN, CONTRACTS § 700 (1952); REsTATEMENT OF CONTRACTS § 397 (1932); cf. UNIFORM COMMERCIAL CoDE § 2-703(f). However, if the
terms of the franchise agreement are unreasonable, termination for breach of those terms
may be subject to attack. See note 12 supra; UNIFORM CoMMERCIAL CoDE § 2-302 (unconscionable contract or clause); Caine, Terminations of Franchise Agreement: Some
Remedies Under the Uniform Commercial Code, 3 CuMBER.-SAM. L REV. 347 (1972).
But see Horton, supra note 14 (franchisees have generally not succeeded under the unconscionability doctrine). The FTC has found some clauses in franchise agreements
to be unfair trade practices. See note 29 supra.
144. See notes 206-11 & 323-24 infra.
145. See notes 212-13 & 327-28 infra.
146. See notes 215 & 325 infra.
147. See Brown Shoe Co. v. United States, 370 U.S. 294, 346 (1962); International
Shoe Co. v. FTC, 280 U.S. 291, 302-03 (1930).
148. See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 374 (1967); United
States v. Jerrold Electronics Corp., 187 F. SUpp. 545, 557 (E.D. Pa. 1960), afl'd per
curiam, 365 U.S. 567 (1961).
149. Business conduct that is "contaminated by price fixing" may incur prohibition
even though the defendant advances business justifications for nonprice aspects of his
conduct. See United States v. Sealy, Inc., 388 U.S. 350, 356 (1967). The Court left open
the possibility of applying the "contamination" doctrine to prohibited practices other than
price fixing in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 373 (1967).
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dence of franchisees, the proposal here is that to avoid antitrust liability,
a franchisor must demonstrate convincing benefits flowing to the franchisor's business or to the public as a direct result of any termination
that destroys a franchisee's business.150 Thus, terminations prompted by
mere caprice or malice should be prohibited.
The effect of a termination on the franchisee is also significant in
determining the antitrust consequences of a termination, although a
finding of injury to the franchisee's business should not sustain an
antitrust violation in the face of legitimate business justifications for the
termination. In franchises involving the sale of products manufactured
or supplied by the franchisor, the effect on the franchisee rests in large
part on the availability to the franchisee of alternative products. 151 If
several similar brands are readily available to the franchisee, then the
franchisor should probably be free to terminate. Other similar considerations include the length of the franchisee relationship, the cost of
independent entry into the business, restrictions in the franchise agreement on dealing in competing lines, and the significance of the trade~
mark in the successful marketing of the product.
An important procedural question concerns the allocation of the
burden of proof for the factual considerations mentioned above. One
approach that accommodates the competing interests would be to require initially that the franchisee establish the unavailability of substitute
products or other reasonable means of remaining in the same or similar
business, and then require that the franchisor demonstrate as an affirma150. The legality of restraints of trade under § 1 of the Sherman Act often requires the unavailability of less restrictive alternatives to the restraint in question. See
White Motor Co. v. United States, 372 U.S. 253, 260-64 (1963) (Brennan, J., concurring); International Salt Co. v. United States, 332 U.S. 392, 400 (1947); International
Business Machs. Corp. v. United States, 298 U.S. 131, 138-40 (1936); United States v.
Addyston Pipe & Steel Co., 85 F. 271, 282 (6th Cir. 1898), afrd, 175 U.S. 211 (1899).
In the context of franchise terminations, this doctrine would require the consideration of
alternatives to termination that would serve the franchisor's needs while preserving the
franchisee's business. The precise manner in which this issue should be raised, however,
is a difficult question. To require the franchisor to demonstrate a business justification
for terminating, and in addition to require him to prove the absence of any less drastic
alternative, may raise an unduly difficult burden for him to bear. Apart from the
procedural allocation of the burden of proof, the substantive issue might be framed thus:
Was it unreasonable for the franchisor not to use a less drastic alternative? So stated, the
question seems evidentiary of intent or motivation. Another relevant factor might be the
character of the alternatives to termination that are available; the imposition of additional restrictions on the franchisee's freedom of operation, cf. International Salt Co. v.
United States, supra, might improve the performance of a poorly performing franchisee,
but it would also militate against the policy of business independence.
151. See text accompanying notes 221-26 infra.
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tive defense the existence of a legitimate business reason justifying his
action. The underlying policies of the Populist Shift support this result;
the right to impair the franchisee's business opportunity through discretionary termination is qualifed by the duty to justify the act. Moreover,
the franchisor enjoys superior access to the evidence relating to the
espoused justification. To require the franchisee to prove the absence of
a business justification would require him to prove a negative, which is a
much more difficult undertaking. 152 Evidence of predatory motivation
should be admissible to contradict the franchisor's case, but it should not
be prerequisite to the franchisee's success. Admittedly, this allocation of
the burden of proof creates a presumption of illegality, but perhaps this
presumption serves a useful role as a deterrent to the adoption and
enforcement of restrictive marketing schemes,153 which although clearly
illegal, are often difficult to discover and prove.
To summarize, a resolution of the conflicting interests should
revolve around a broad factual inquiry into the purposes, effects, and
business justifications of a challenged termination, evaluated with an eye
toward the antitrust policy objectives of business independence, economic efficiency, and business opportunity. Parts IT and ill of this article
will contrast this proposed approach with the treatment given by the
courts to franchise terminations challenged under sections 1 and 2 of the
Sherman Act, and will suggest mechanisms for incorporating this new
standard within the traditional Sherman Act framework.
IT.
Franchise Terminations as Unreasonable
Restraints of Trade Under Section 1
,This section examines terminations pursuant to an agreement between the franchisor and an existing or prospective franchisee to eliminate or replace another franchisee as potentially violative of section 1 of
the Sherman Act. 154 It is assumed that the concerted activity require152. Imposing this burden on the franchisor has been criticized as unduly burdensome, oSee Cooper, Attempts and Monopolization: A Mildly Expansionary Answer to the
Prophylactic Riddle of Section Two, 72 MICH. L. REv. 373, 450-52 (1974), but it is not
without precedent, see Gamco v. Providence Fruit & Produce Bldg., Inc., 194 F.2d 484
(1st Cir. 1952), cert. denied, 344 U.S. 817 (1952).
153. !See text accompanying notes 130-31 supra.
154. Section 1, 15 U.S.C. § 1 (1970), reads in pertinent part: "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce among the several States . . • is hereby declared to be illegal." The Supreme
Court initially interpreted the language of § 1 literally to condemn "every" restraint of
trade, United States v. Trans-Missouri Freight Ass'n, 166 U.S. 290 (1897), but the Court
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ment155 is satisfied by the collaboration of the franchisor and the prospective or existing franchisee. 156 Most frequently, these terminations are
designed to substitute one franchisee for another, or to reduce intrabrand competition among the remaining franchisees.
This section begins with a discussion of the traditional approach
to franchise terminations under section 1, which denied protection to the
franchisee in the absence of some general economic effect from the
termination. Although the Populist Shift throws considerable doubt on
this view, it largely remains the law today. The section then discusses a
few recent decisions that foreshadow the abandonment of the traditional
view in favor of a standard more consistent with modern policy. A
correlative development involving vertical boycotts that is facilitating
this judicial movement is also discussed here. Part IT concludes by
examining the emerging section 1 standard for the legality of franchise
terminations and develops an approach for incorporating the relevant
factors identified in part I into existing doctrines and decisions.
A.
The Pre-Populist Shift Termination Decisions
Before the Populist Shift the established view was that absent a
purpose to monopolize, a franchisor had an unqualified right to terminate a franchisee. Though the Supreme Court had never confronted the
precise issue, lower court opinions reaching back at least to the 1930's
provided formidable authority for this proposition. In reaching this
result, the lower courts relied heavily on the right to refuse to deal and
later adopted the "Rule of Reason" test in Standard Oil Co. v. United States, 221 U.S. 1,
60-65 (1911), which condemned only ''unreasonable'' restraints of trade. Though the
Court has held that certain restraints are unreasonable as a matter of law and hence per
se unlawful, see e.g., Northern Pac. Ry. v. United States, 356 U.S. 1, 507 (1958);
United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940); United States v.
Trenton Potteries Co., 273 U.S. 392, 396 (1927), the rule of reason test remains the
general standard today, see Oppenheim, supra note 40.
155. See text accompanying note 93 supra. See generally United States v. Parke,
Davis & Co., 362 U.S. 29, 36-38 (1960); Turner, supra note 82, at 684-705. Section 1
requires a "contract, combination, or conspiracy." The focus in this article is on the
latter two criteria. While it is possible for the franchise agreement to be a "contract"
within § 1, this situation will seldom arise, since the restraint of trade would have to be
written into the agreement itself. Compare Dr. Miles Medical Co. v. John D. Park &
Sons, 220 U.S. 373 (1911), with United States v. Colgate & Co., 250 U.S. 300 (1919).
More typically, the restraint stems from a contemporaneous agreement or other conduct,
and thus is not contained in the franchise agreement.
156. Under the expansive interpretation of concerted activity adopted under the
Populist Shift, see text accompanying notes 163-94 supra, an agreement between a
franchisor and a franchisee to eliminate another franchisee would certainly satisfy § 1.
See Buxbaum, supra note 37, at 683-85; Greenberg, supra note 107, at 308.
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on the public injury doctrine. 157 The protection of a franchisee's business opportunity was not considered to be a proper objective of the
antitrust laws.
illustrative of the reasoning of these early cases is Schwing Motor
Company v. Hudson Sales Corp.158 Defendant Hudson refused to renew
its dealership agreements with Schwing, a Hudson dealer since 1944,
and Belair, a dealer since 1947. Schwing and Belair alleged that Hudson
had conspired with a third dealer, Bankert, to eliminate them from
competition with Bankert, and that Bankert had also solicited their
employees to join Bankert in furtherance of the conspiracy. Schwing and
Belair also alleged that Hudson and Bankert held a virtual monopoly
over the sale of new Hudson automobiles and Hudson parts and accessories in the Baltimore area, resulting in higher prices to the public.
The court rejected plaintiff's arguments on three grounds-a business enjoys a natural and complete monopoly over its own products;159
its discretion concerning with whom it will deal is a common law right
recognized by the antitrust laws; and a business has the right to grant
exclusive distributorships in particular territories. 160 In establishing an
exclusive distributorship, the court reasoned, a manufacturer necessarily
created a limited monopoly in the sale of its products; this was permissible so long as the manufacturer did not attempt to extend a monopoly
into other fields, to establish market dominance, or to drive out competitors' products. Although an exclusive dealership necessarily permitted a
dealer to dictate prices subject to interbrand competition, to condemn
the challenged agreement would be to make all exclusive agency agreements illegal per se. 161
This brought the court to its major point-the antitrust laws
protect the public and only public injury justifies a private antitrust
action. 162 This protection, in the court's view, focuses on availability of
supply, existence of competitive prices, and other general effects upon
the market. 163 The mere existence of a conspiracy ~etween a franchisor
157. See Fedderson Motors v. Ward, 180 F.2d 519, 522 (lOth Cir. 1950); Riedly v.
Hudson Motor Car Co., 82 F. Supp. 8, 10 (W.D. Ky. 1949); Arthur v. Kraft-Phenix
Cheese Corp., 26 F. Supp. 824, 828-29 (D. Md. 1937).
158. 138 F. Supp. (D. Md.), afl'd per curiam, 239 F.2d 176 (4th Cir. 1956), cert.
denied, 355 U.S. 823 (1957).
159. The court is referring to the "rule against trademark monopolization." See text
accompanying notes 295-99 infra.
160. 138 F. Supp. at 902-03.
161. [d. at 903.
162. [d.
163. [d. at 904.
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and a franchisee to terminate other franchisees in order to eliminate
intrabrand competition, resulting in the destruction of the terminated
franchisees' businesses, does not violate section 1. The court failed to
recognize any distinction between initially granting an exclusive dealership and terminating an existing dealer to attain the same goal, thus
denying antitrust protection to individual businesses in the absence of a
public injury.164
B.
The Impact of the Populist Shift
Schwing and similar decisions long enjoyed a virtually unquestioned suzerainty over challenges to franchise terminations. 165 During
the latter years of the Populist Shift, however, the number of contrary
decisions166 increased to the point that franchise terminations are currently one of the most actively litigated, unresolved antitrust problems.
Though the Supreme Court has not yet confronted the precise question
discussed here, the Court's enunciation of the goals of business independence and opportunity has undoubtedly contributed to the erosion of the
traditional view that a franchisor has almost absolute discretion to
terminate its franchisees. Also contributing to the erosion of the traditional view has been the expanded antitrust cognizance of vertical
boycotts, which were once thought exempt from antitrust liability.
1. Vertical Boycotts.-Horizontal group boycotts designed to
eliminate competitors have long been condemned as per se violations of
the antitrust laws. 167 Purely vertical boycotts designed for the same
purpose,16S however, have generally been viewed as outside the concern
of the antitrust laws. 169 These decisions carry profound significance for
164. Only the reasoning of the Schwing court is being criticized here, not the result.
Hudson was a failing company, and may well have had legitimate business reasons for
reducing the number of its retail outlets. See text accompanying notes 145-48 supra; ct.
White Motor Co. v. United States, 372 U.S. 253,256-59 (1963). But the Schwing court
failed to rest its holding on this basis.
165. A rare contrary decision or dissenting opinion may be found, but they have
failed to have any lasting influence. See Webster Motor Car Co. v. Paokard Motor Car
Co., 135 F. Supp. 4 (D.D.C. 1955), rev'd, 243 F.2d 418 (D.C. Cir.), cert. denied, 355
U.S. 822 (1957), and Judge Bazelon's dissenting opinion, 243 F.2d at 422.
166. See text accompanying notes 194-200 & cases cited note 200 infra.
167. See, e.g., United States v. Topco Associates, 405 U.S. 596, 608-09 (1972);
Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207,212-13 (1959).
168. Vertical boycotts designed to effectuate price-fixing arrangements are the notable exception. See, e.g., United States v. Parke, Davis & Co., 362 U.S. 29 (1960). See
generally United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 218, 220-24 &" n.59
(1940).
169. See, e.g., White Motor Co. v. United States, 372 U.S. 253, 263 (1963)
(distinguishing horizontal from vertical restraints and treating the latter with ambiva-
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the category of franchise terminations under consideration here, since
they typically involve an agreement between a single franchisor and a
single franchisee to eliminate a competing franchisee, and thus are
purely vertical in character.
The Supreme Court decisions involving vertical boycotts do not
clearly condemn them, but can be read broadly to do so. Two cases,
KlOl-'S, Inc. v. Broadway-Hale Stores, Inc.,17o and United States v.
General Motors Corp./71 condemned boycotts which involved both
horizontal and vertical elements. In Klor's, a retail appliance dealer
charged Broadway-Hale, a neighboring 'competitor, with inducing several appliance manufacturers to agree among themselves not to sell to
Klor's. Thus the conspiracy involved both a vertical and a horizontal
element, with the horizontal element at the level above that in which the
plaintiff competed. In General Motors, several Chevrolet dealers in the
Los Angeles area were supplying cars to discount operators who were
disrupting the market by reselling the cars at low prices. Competing
Chevrolet dealers convinced General Motors to pressure the offending
dealers to stop selling to the discounters, thereby excluding them from
the market. This conspiracy was inverted in structure from Klor's, with
the horizontal element at the same level as that in which the victims
competed. In both cases, the Court stressed "exclusion of traders" by
concerted action as the gravamen of the offense,172 without laying
special emphasis on the vertical or horizontal nature of the conspiracy.173
The Court's decision in Poller v. Columbia Broadcasting System,
lence); Richardson v. Chrysler Motors Corp., 257 F. Supp. 547, 554 (S.D. Tex. 1966)
("Only a horizontal conspiracy between competitors of the same level is proln"bited by
the Shennan Antitrust Act-not a vertical conspiracy between manufacturer-distributor
and its retail dealers."); Barber, supra note 24, at 860; Buxbaum, supra note 37, at 67478.
170. 359 U.S. 207 (1959).
171. 384 U.S. 127 (1966).
172. In Klor's, the Court condemned the boycott because it "takes from KIor's its
freedom to buy appliances in an open competitive market" and "deprives the manufacturers and distributers of their freedom to sell to KIor's." 359 U.S. at 213. Thus, the Court
took into account the loss of business independence as well as the loss of business opportunity. In General Motors the Court similarly focused on "the free market principles
embodied in the Shennan Act." 384 U.S. at 146. General Motors did involve allegations
of price fixing, however. [d. at 147.
173. But see Klor's, 359 U.S. at 212 ("This is not a case . . . of a manufacturer and a
dealer agreeing to an exclusive distributorship."); United States v. Arnold, Schwinn &
Co., 388 U.S. 365, 372-73 (1967), citing General Motors as typical of cases involving
"horizontal restraints, in which the actors are distributors with or without the manufacturer's participation."
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Inc.,174 cast further doubt on the importance of the horizontal element
in Klor's and General Motors. CBS had terminated its affiliation with
WCAN, an ultrahigh frequency broadcasting station owned by Poller in
Milwaukee, Wisconsin, and had affiliated instead with a station that
CBS had purchased. WCAN was unable to affiliate with another national network, and as a result was forced to liquidate. Poller alleged that
CBS had conspired to purchase a competing UHF broadcaster175 and to
cancel its affiliation with WCAN, forcing Poller to sell WCAN's equipment to CBS at distress prices. He further alleged that CBS had conspired to destroy the entire UHF industry by destroying WCAN. In a
five-to-four decision, the Court held that these allegations were sufficient to deny a motion for summary judgment against the plaintiff.176
The facts of the case approach a vertical boycott in which the franchisor
conspired with an aspiring franchisee to eliminate an existing franchisee.
This observation must be qualified, however, because of the special
attention placed by the Court on Poller's allegations of a broader
conspiracy to destroy the UHF industry, or to at least monopolize the
UHF band in the Milwaukee area. 177 Nevertheless, a fair reading of the
case could interpret each of the allegations as sufficient collaterally to
support a section 1 violation. 178
A few lower court decisions have extended liability to situations
substantially more vertical in character, though having at least a nominal
horizontal element as well. A district court has held that an agreement
between a manufacturer and just two competing distributors to eliminate
a third'distributor is within the Klor's doctrine. 179 The Ninth Circuit has
condemned an understanding among a brewer and its distributors that
the distributors discontinue selling competing brands of beer, again
174. 368 U.S. 464 (1962).
175. CBS allegedly conspired with an individual to acquire an option to purchase the
competing station in the individual's name, on condition that the option would be
assigned to CBS at CBS' request. This arrangement was necessary under the then-existing
multiple ownership rules of the FCC, which forbade CBS from owning UHF stations in
addition to VHF stations. 368 U.S. at 466. The arrangement was entered into in
anticipation of a change of these rules which would allow CBS to own UHF stations. [d.
176. [d. at 467.
177. [d. at 465-67.
178. See id. at 472-73.
179. Hub Auto Supply, Inc. v. Automatic Radio Mfg. Co., 173 F. Supp. 396 (D.
Mass. 1959). A distributor of automobile radios alleged that it had been terminated as a
result of an agreement between the manufacturer and two competing distributors. In
denying the manufacturer's motion to dismiss, the Court compared the situation to Klors
and found in plaintiff's allegations a similarly objectionable deprivation of access to a
competitive market. [d. at 397.
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relying principally on Klor's.180 While the court emphasized that the
agreement was horizontal as well as vertical,181 the horizontal component seemed of a particularly harmless variety, since the conspiring
distributors apparently did not compete against each other. 182 Finally,
the First Circuit in Ford Motor Co. v. Webster's Auto Sales, [nc./ 83
condemned on the strength of General Motors a purely vertical conspiracy between Ford and one o~ its dealers designed to stop certain
practices of competing Ford dealers. 184 The court rejected an asserted
distinction that General Motors was a horizontal, not a vertical arrangement, declaring:
[W]e find no controlling significance in the fact that such a
boycott takes its shape and strength from a series of vertical
arrangements rather than from a single vertical-horizontal
agreement. In both cases there is an "agreement" within the
terms of section 1. In both cases the purpose of the agreement-"to deprive others of access to merchandise which
[they] wish to sell to the public"-falls within the category
of agreements "which because of their pernicious effect on
competition and lack of any redeeming virtue are conclusively
presumed to be unreasonable."185
180. Walker Distn"b. Co. v. Lucky Lager Brewing Co., 323 F.2d 1, 7 (9th Cir. 1963),
cert. denied, 385 U.S. 976 (1966).
181. The Ninth Circuit refused to distinguish KloTs merely because the alleged
boycott was vertical, not horizontal as in KloTs. But the court knew of no cases
proscribing a vertical agreement that a distributor sell only one manufacturer's products.
The court finally relied on a horizontal understanding among the distributors combined
with vertical conspiracies between the manufacturer and each distributor. [d. at 7-8.
Thus, the rationale advanced by the court does not go much beyond the horizontalvertical merger condemned in United States v. General Motors Corp., 384 U.S. 127
(1966).
182. See 323 F.2d at 8. Each distributor was given an agreed-upon nonexclusive
territory in which to operate. The co-conspiring distributors were not named nor were
their locations or number named. The Ninth Circuit said such allegations were not
required. [d. Thus, though it pointed to the horizontal as well as the vertical aspect of the
conspiracy, it is not apparent why similar collaboration between a brewer and one
distributor would not be equally restrictive.
183. 361 F.2d 874 (1st Cir. 1966).
184. Webster, a used car dealer, had purchased certain Ford automobiles for resale
from a Ford dealer that had been used only by Ford employees and were sold by Ford to
its authorized new car dealers for resale as used cars. A second Ford dealer located near
Webster complained about it to Ford. In response, Ford mentioned in its next announcement of the sale of these automobiles that they should not be purchased for the "purpose
of reselling them to a wholesaler," and a Ford officer personally informed the offending
Ford dealer the purpose of the letter. The offending Ford dealer, nevertheless, asserted
his intention to continue to do as he pleased. [d. at 877-88. The sale of the disputed cars
to Webster declined sharply after the announcement, and Webster sued under § 1.
185. [d. at 882-83. The court's principal concern was the harmful effect of a vertical
boycott in excluding traders from the opportunity to obtain a product. This effect, the
court said, was as repugnant to the Sherman Act as a horizontal boycott having the same
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To the extent that these decisions lessen the significance of the horizontal element in vertical-horizontal conspiracies, the Schwing doctrine is
correspondingly weakened. Logically, once collaborations between a
seller and buyer to exclude another buyer are prohibited, little remains
on which to rest the doctrine.
2. The Post-Populist Shift Termination Decisions.-Neither the
Populist Shift nor the movement toward a vertical boycott doctrine
directly vitiates the traditional view reflected in Schwing, but they do
necessarily weaken its underpinnings. Even so, absent specific Supreme
Court guidance186 a substantial number of lower courts have adhered to
the traditional view,187 and these decisions represent strong authority that
a franchisor may safely collaborate with one franchisee to terminate
another. The more recent decisions, though, contain subtle changes in
emphasis that manifest the influence of the Populist Shift.
The Sixth Circuit's decision in Ace Beer Distributors, Inc. v. Kohn,
Inc.,188 decided in 1963, is an example of an early post-Populist Shift
termination decision that reflects a virtual obliviousness to the changes
in antitrust policy. Ace, an exclusive distributor of Stroh's Beer, alleged
that defendants maliciously conspired to destroy, Ace's business by
cancelling Ace's franchise without prior notice while simultaneously
giving a new franchise to Kohn. The court affirmed judgment on the
pleadings for defendants, relying on Colgate for the proposition that a
manufacturer has a right to select its customers and to refuse to sell its
goods to anyone for reasons sufficient to itself,189 unless such an act
effect. The force of the decision is limited, however, because the purpose of the boycott
was obviously to eliminate price competition between Webster and the complaining
dealer. Thus, condemning the dealer's conduct is compatible with the traditional objective
of the antitrust laws of safeguarding the public from artificially high prices.
186. There has been some indirect guidance from the Court that limits the Schwing
doctrine. In Poller v. Columbia Broadcasting Sys., Inc., 368 U.S. 464 (1962), both the
district court and appellate court relied on Packard Motor Car Co. v. Webster Motor Car
Co., 243 F.2d 418 (D.C. Cir.), cert. denied, 355 U.S. 822 (1957), which had cited
Schwing approvingly. See Poller v. Columbia Broadcasting Sys., Inc., 174 F. Supp. 802,
805 (D.D.C. 1959) (declaring ~chwing "precisely similar" to Packard), affd, 284 F.2d
599, 606 (D.C. Cir. 1960) (finding Packard "certainly relevant"), rev'd, 368 U.S. 464
(1962). The majority opinion of the Supreme Court cited neither Schwing nor Packard;
but Justice Harlan's dissenting opinion, in which three others concurred, did cite
Packard. 368 U.S. at 484.
187. See, e.g., Scanlan v. Anheuser-Busch, Inc., 388 F.2d 918 (9th Cir. 1968); Ace
Beer Distribs., Inc. v. Kohn, Inc., 318 F.2d 283 (6th Cir. 1963); Oak Distrib. Co. v.
Miller Brewing Co., 370 F. Supp. 889, 897-98 (B.D. Mich. 1973); Metropolitan Liquor
Co. v. Heublein, Inc., 305 F. Supp. 946, 949 (B.D. Wis. 1969).
188. 318 F.2d 283 (6th Cir.), cert. denied, 375 U.S. 922 (1963).
189. ld. at 286.
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creates an unreasonable restraint of trade. Citing Schwing, the court concluded that since plaintiff had not alleged any harmful impact on prices
or competition, he could not prove an unreasonable restraint of
trade. 1110 To reach this conclusion, the court summarily distinguished
Klor's as involving a horizontal group boycott. 1111
The Ninth Circuit, on the other hand, has experienced a gradual
shift of emphasis from the traditional view of Ace to a more moderate
view suggestive of Poller. In Scanlan v. Anheuser-Busch, Inc.,192 involving facts reminiscent of Ace, the Ninth Circuit expressly followed Ace
and Colgate, asserting that "a mere unilateral change of distributors by a
brewer, having no effect on the availability of competing products, does
not violate the Sherman Act."193 A year later, however, the court was
utilizing a far different analysis. In Joseph E. Seagram & Sons v.
Hawaiian Oke & Liquors, Ltd.,194 McKesson & Robbins, a liquor distributor, negotiated with Seagram and another distiller, Barton, for the
exclusive right to distribute their liquors in Hawaii. Seagram and Barton
agreed, plaintiff alleged, knowing that the arrangement was conditioned
on the participation of each, and that the switch to McKesson would
deprive Hawaiian Oke, a competitor of McKesson, of the major portion
of its business.195 The Ninth Circuit reversed a jury verdict for Hawaiian
Oke. In a carefully reasoned opinion, the court did not rely as in Scanlan
on the broad discretion of a franchisor to terminate as it pleased.
Instead, it took the more limited view that "it is not a per se violation of
the antitrust laws for a manufacturer or supplier to agree with a distributor to give him an exclusive franchise, even if it means cutting off
another distributor."196 Although a manufacturer may do many things
independently which he may not combine with others to accomplish, the
court observed, not all concerted actions are per se illegal. 197 The
touchstone of illegality, the court concluded, was the purpose or motive
for which the challenged activity was undertaken. 19s No evidence existed
in the instant case that any party was "primarily motivated by a desire to
190. ld. at 287.
191. ld.
192. 388 F.2d 918 (9th Cir.), cert. denied, 391 U.S. 916 (1968).
193. ld. at 921.
194. 416 F.2d 71 (9th Cir. 1969), cert. denied, 396 U.S. 1062 (1970).
195. ld. at 74.
196. ld. at 76. The Court cited several cases for this proposition including Schwing
and Ace.
197. ld.
198. ld. at 78.
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damage plaintiff or put it out of business."199 Thus, in contrast to the
traditional approach, the Ninth Circuit confined the franchisor's discretion to terminate to "a legitimate interest in the quality, competence, and
stability of his distributors."2oo
c.
The Emerging Standard
The general expansion under the Populist Shift of antitrust protection of business opportunity is striking a new balance between the
interests of the franchisee and the franchisor. As the foregoing cases
suggest, the lower courts may finally be questioning the traditional
approach to franchise terminations, which largely ignore the motivation
of the franchisor and the effect on the franchisee, and may be moving
toward the new standard outlined in part T. This new standard would
condemn predatory franchise terminations if substitute products were
unavailable to the franchisee and if the franchisor failed to demonstrate
legitimate business justifications for his actions. To be sure, the courts
have not yet adopted this standard in toto, but considerable precedent
exists to facilitate the courts' movement in this direction.
The essential implements for incorporating the new standard into
the framework of section 1 already exist. Justice Brandeis' formula for
199. [d.
200. [d. at 80. Two other cases also merit discussion here. In Alpba Distrib. Co. v.
Jack Daniel Distillery, 454 F.2d 442 (9th Cir. 1972), plaintiff Alpba bad been a
distributor of defendant Jack Daniel's liquors for several years and bad performed in an
excellent manner. Sbortly after Jaok Daniel was acquired by Brown-Forman, Alpba was
terminated and replaced by Rathjen Bros., a Brown-Forman distributor. The trial court
conceded that Jack Daniel's liquors were unique and irreplaceable products, but found for
defendant under § 1. The Ninth Circuit remanded for supplemental findings of fact,
laying empbasis on the motive or intent for the cballenged termination. Alpba cbarged
that be was terminated because he carried the products of a competitor, Scbenley, and
that the termination was designed to hamper competition by Scbenley. Jack Daniel
claimed the termination was a matter of sound business judgment, based on Alpba's
financial position vis-a.-vis Scbenley. The court viewed the resolution of this issue as
critical to determining liability, 454 F.2d at 453 n.14, since an anticompetitive effect or
purpose could result in a § 1 violation, id. at 452. The court made no mention of any
actual anticompetitive effect of defendant's conduct.
In Peerless Dental Supply Co. v. Weber Dental Mfg. Co., 283 F. Supp. 238 (E.n.
Pa. 1968), defendant Weber bad terminated plaintiff Peerless' distributorship and
replaced him with Heinsheimer. Peerless charged that Weber and Heinsbeimer bad
conspired to acquire Peerless' customers. The court denied a motion to dismiss, stating
that while the mere substitution of one dealer for another did not violate the antitrust
laws, a different question is presented when a conspiracy to capture the plaintiffs
customers is alleged.
Ct. Cartrade, Inc. v. Ford Dealer Advertising Ass'n, 445 F.2d 298, 294 (9th Cir.
1971), cert. denied, 405 U.S. 997 (1972), in wbicb the court recognized tbe possibility
of an antitrust violation arising from the destruction of a single noncompeting business if
done for an anticompetitive purpose.
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the Rule of Reason set forth in Chicago Board of Trade v. United
States201 suggested weighing various factual criteria relating to the purpose and the effect of the challenged practice. In Alpha Distributing Co.
v. Jack Daniel Distillery,202 the Ninth Circuit employed a similar approach addressed specifically to refusal-to-deal problems:
The critical inquiry in such "refusal to deal" cases is not
whether there was a refusal to deal, or whether a refusal to
deal was carried out by agreement with others, but rather
whether the refusal to deal, manifested by a combination or
conspiracy, is so anticompetitive, in purpose or effect, or
both, as to be an unreasonable restraint of trade. This inquiry is primarily a factual one, and its resolution often requires determination of motive or intent. 203
A significant distinction exists, however, between the factual inquiry
contemplated here and that traditionally undertaken in a Rule of Reason
analysis. The social policy of protecting the franchisee's business opportunity that has evolved under the Populist Shift warrants limiting the
inquiry to the consequences of the termination on the franchisee and the
franchisor. It is irrelevant, for example, that equivalent goods or services
remain freely available to the public following a challenged termination,
if those substitutes are unavailable to the terminated franchisee to enable
him to continue his business. 204
In the early development of a standard, viewing the issues as
essentially questions of fact is a logical first step. The next step in the
refinement of this standard should be the identification of the legitimate
interests of the parties and the recognition of the priorities among these
interests that should govern liability. Happily, judicial decisions that
discuss many of these relevant facators already exist to guide future
courts in applying the new standard. Concerning the most difficult factual determination-the legitimacy of proposed business justifications
-a number of courts have stressed that unsatisfactory performance by
the franchisee justifies termination. As the Ninth Circuit said in
201. 246 U.S. 231, 238 (1918). ~ee note 154 supra.
202. 454 F.2d 442 (9th Cir. 1972).
203. [d. at 452 (citations omitted).
204. Of course, the existence of a public injury stemming from challenged conduct is
still highly relevant, since a public injury may warrant prohibition even of conduct with
strong business justifications. See United States v. Arnold, Schwinn & Co., 388 U.S. 365,
375 (1967). But any liability on the basis of a public injury would attach wholly
independently of the factors under discussion here, and thus will not be considered
further. The point is only that a public injury should not be required for plaintiff's
success.
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Joseph E. Seagram & Sons v. Hawaiian Oke & Liquors, Ltd.,205 a franchisor has an unquestionable interest in the "quality, competence, and
stability" of his franchisees. 206 Grounds that courts have sustained under section 1 as appropriate bases for terminations for inadequate
performance include a lack of diligence,2°7 inadequate service,208 lack
of stability,209 dishonesty,21o and poor financial condition. 211
Business considerations other than poor performance have also
received judicial imprimatur. Terminations performed to make the franchisor's operation more efficient212 or to expand distribution213 have
been held justified. In addition, where a weak company was struggling
to survive, terminations have received approval even though they were
part of an agreement to give an exclusive franchise to a competing franchisee. 214 A shortage of supply may also justify a termination.215
205. 416 F.2d 71 (9th Cir. 1969), cert. denied, 396 U.S. 1062 (1970).
206. ld. at 80.
207. Gateway Bottling, Inc. v. Dad's Rootbeer Co., 53 F.R.D. 585 (W.D. Pa. 1971).
Several terminations in actions brought under § 3 have been similarly justified. See
Hudson Sales Corp. v. Waldrip, 211 F.2d 268, 273 (5th Cir.), cert. denied, 348 U.S. 821
(1954); United States v. l.I. Case Co., 101 F. Supp. 856, 863 (D. Minn. 1951).
208. Ricchetti v. Meister Brau, Inc., 431 F.2d 1211 (9th Cir. 1970), cert. denied, 401
U.S. 939 (1971); Interborough News Co. v. Curtis Publishing Co., 127 F. Supp. 286
(S.D.N.Y. 1954), afl'd, 225 F.2d 289 (1955).
209. Ricchetti v. Meister Brau, Inc., 431 F.2d 1211 (9th Cir. 1970), cert denied, 401
U.S. 939 (1971).
210. Bougeois v. A.B. Dick Co., 386 F. Supp. 1094 (W.D. La. 1974); Beltronics, Inc.
v. Eberline Instrument Corp., 369 F. Supp. 295 (D. Colo. 1973).
211. Champion Oil Servo Co. v. Sinclair Ref. Co., 502 F.2d 709 (6th Cir. 1974), cert.
denied, 95 S. Ct. 1131 (1975); Bougeois v. A.B. Dick Co., 386 F. Supp. 1094 (W.D. La.
1974).
212. I. Haas Trucking Corp. v. New York Fruit Auction Corp., 364 F. Supp. 868
(S.D.N.Y. 1973); Clark Marine Corp. v. Cargill, Inc., 226 F. Supp. 103 (E.D. La.
1964), afl'd, 345 F.2d 79 (5th Cir. 1965), cert. denied, 382 U.S. 1011 (1966); Beacon
Fruit & Produce Co. v. H. Harris & Co., 160 F. Supp. 95 (D. Mass), afl'd, 260 F.2d 958
(1st Cir. 1958), cert. denied sub nom. Goldman V. H. Harris & Co., 359 U.S. 984
(1959).
213. Western Wholesale Liquor Co. v. Gibson Wine Co., 372 F. Supp. 802 (D.S.D.
1974).
214. Justice Brennan, in his concurring opinion in White Motor Co. V. United States,
372 U.S. 253, 269-70 n.8 (1963), explained Schwing on this basis. He stated:
The doctrine of the Packard and Schwing cases is, however, of necessarily limited scope; not only were the manufacturers involved much smaller than the
"big three" of the automobile industry against whom they competed, but both
had experienced declines in their respective market shares. And the exclusive
franchises involved in those cases apparently were not accompanied by territorial limitations.
Thus, a franchisor facing a serious threat to its business appears beyond the reach of the
antitrust laws whether he terminates a franchisee as a result of his own conclusion that
the termination will best serve his business, or whether he acts in response to a threat
from a strong franchisee to discontinue with him unless he terminates a weaker
franchisee.
215. See Independent Iron Works, Inc. v. United States Steel Corp., 322 F.2d 656
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The mere existence of justifications for a termination should not
suffice, however, if other circumstances surrounding the termination
indicate that the franchisor acted in fact from improper motivations.
Post factum rationalizations should not avoid franchisor liability. Courts
have frequently emphasized the importance of illicit motivation in assessing the legal consequences of conduct surrounded by factual controversy.216 In Poller v. Columbia Broadcasting System, Inc.,217 the Supreme Court found allegations of an illicit purpose by CBS to destroy
Poller and monopolize UHF broadcasting in Milwaukee sufficient to
reverse summary judgment for CBS and remand for a full trial on the
contested facts. Decisions by the Ninth Circuit establish the relevance of
illicit motivations such as a purpose to put a franchisee out of business 218 or to hamper competition by competing products. 219 A district
court has suggested that a purpose to appropriate the customers of a
franchisee may condemn a termination. 220 As more courts recognize the
implications of the Populist Shift for protecting franchisee business
opportunity, the illicit motivation test may well provide the means for
circumscribing franchisor discretion to those terminations for which a
demonstrable business justification exists.
Courts have also noted the importance of the availability of substitute products in assessing antitrust liability for franchise terminations. 221
Care must be taken, however, to distinguish between those cases referring to availability of substitutes to the public and those referring to
availability to the franchisee. Only availability to the franchisee is rele(9th Cir.), cert. denied, 375 U.S. 922 (1963). A real question arises, however, whether a
vertically integrated supplier may fail to allocate short supplies if the result is to destroy
his rivals at the retail level. If such a purpose could be imputed to the supplier from its
failure to allocate, then the illicit motive should override the otherwise clear business
justification and raise possible antitrust consequences. This became a serious problem
during the gasoline shortage when the major gasoline producers frequently terminated
their supply arrangements with the independents in favor of fueir company-owned
stations. See Note, 53 TExAs L REv. 551 (1975).
216. See White Motor Co. v. United States, 372 U.S. 253, 259 (1965); Poller v.
Columbia Broadcasting Sys., Inc., 368 U.S. 464, 473 (1962).
217. 368 U.S. 464 (1962).
218. See Joseph E. Seagram & Sons v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71
(9th Cir. 1969), cert. denied, 396 U.S. 1062 (1970).
219. Alpha Distrib. Co. v. Jack Daniel Distillery, 454 F.2d 442 (9th Cir. 1972).
220. Peerless Dental Supply Co. v. Weber Dental Mfg. Co., 299 F. Supp. 331, 334
(B.D. Pa. 1969).
221. See Poller v. Columbia Broadcasting Sys., Inc., 284 F.2d 599, 607 (D.C. Cir.
1960) (dissenting opinion), rev'd, 368 U.S. 464 (1962); Fargo Glass & Paint Co. v.
Globe Am. Corp., 201 F.2d 534, 540 (7th Cir.), cert. denied, 345 U.S. 942 (1953);
Arthur v. Kraft-Phenix Cheese Corp., 26 F. Supp. 824, 829 (D. Md. 1937).
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vant here; availability to the public refers back to the old public injury
doctrine. 222 The Supreme Court discussed the role of substitute products
in United States v. Arnold, Schwinn & CO.,223 in which the Court
condemned restrictions imposed by Schwinn on its distributors concerning the territories in and customers to which they could sell Schwinn
bicycles:
[A] manufacturer of a product other and equivalent brands
of which are readily available in the market may select his
customers, and for this purpose he may "franchise" certain
dealers to whom, alone, he will sell his goods. If the restraint stops at -that point-if nothing more is involved than
vertical "confinement" of the manufacturer's own sales of the
merchandise to selected dealers, and if competitive products
are readily available to others, the restriction, on these facts
alone, would not violate the Sherman Act. 224
It must be noted that the Court was considering only the initial selection
of franchisees, not their subsequent termination, and was addressing the
possible effects of exclusive dealerships on competition, not on the
business opportunity of franchisees. Thus, the phrase "readily available
in the market" probably refers to availability to the public generally and
not availability to the terminated franchisee. The manner in which some
lower courts have applied the Schwinn criterion, however, suggests a
de facto extension of Schwinn to require availability of substitutes specifically to the franchisee. 225 The extension is logical and should be
approved. Schwinn may also be fairly read to require the establishment
of a relevant market as a predicate to showing the unavailability of substitute products. This approach would raise the complex problem of
market analysis with its attendant difficulties of proof226 and would
create an onerous burden on the plaintiff franchisee. Since the relevant
issue here is not the effect of a termination on the market but its effect
on the franchisee, the courts should require only that the terminated
222. 'See text accompanying notes 86-92 supra.
223. 388 U.S. 365 (1967).
224. ld. at 376 (citations omitted).
225. See Cherokee Laboratories, Inc. v. Rotary Drilling Servs., Inc., 383 F.2d 97,
104-05 (5th Cir. 1967), cert. denied, 390 U.S. 904 (1968); Unobco-United Oil & Belting
Co. v. Montrose Oil & Belting Co., 1974-1 Trade Cas. 1f 75,110, at 96,942 (E.D.N.Y.
1974); Top-AIl Varieties, Inc., v. Hallmark Cards, Inc., 301 F. Supp. 703 (S.D.N.Y.
1973); E.A. Weinel Constr. Co. v. Mueller Co., 289 F. Supp. 293 (E.D.llI. 1968). In all
of the above cases, while the opinions speak only in general terms about the ready
availability of substitution, the courts seemed to focus on availability to the terminated
distributor, not to the public generally.
226. See text accompanying notes 236-39 infra.
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franchisee demonstrate a reasonable but unsuccessful effort to acquire
substitute products.
ID. Franchise Terminations as Attempts To
Monopolize Under Section 2
This section examines terminations performed unilaterally, absent
the concerted activity that characterizes violations of section 1. Motives
underlying these terminations-some legitimate, others not-include
facilitating a franchisor's program of vertical integration, replacing a
poorly performing franchisee with one whose performance promises to
be better, responding to a shortage of supplies or absence of demand, or
reflecting a management preference. Terminations in this class have
generally avoided antitrust regulation because they fall without the
threshold criteria of the various antitrust statutes. 22 7' Section 2 provides
an effective expedient for correcting this deficiency. Though section 2
creates three offenses-monopolization, attempt to monopolize, and
conspiracy to monopolize-only the attempt offense will be considered
here. The monopolization offense is unsuitable because of its high
market share requirement228 and the irrelevancy of specific intent.229
The conspiracy offense is unsuitable because of its requirement of
concerted activity.230
This section first examines the various judicial formulations of the
attempt offense and explains the insufficiency of these tests in dealing
with the problems of franchise terminations. The section then develops a
promising new approach to attempts-the relational power test-and
chronicles the initial movement of the courts in this direction.
A.
The Traditional Attempt Offense
The attempt offense lay relatively dormant until the early 1960's,231
but in recent years the attempt offense has experienced greatly in227. See text accompanying notes 18-27 supra.
228. See Hiland Dairy, Inc. v. Kroger Co., 402 F.2d 968, 974 n.6 (8th Cir. 1968),
cert. denied, 395 U.S. 961 (1969) (collection of Supreme Court monopolization cases);
United States v. Aluminum Co. of America, 148 F.2d 416, 424 (2d Cir. 1945).
229. United States v. Aluminum Co. of America, 148 F.2d 416, 431-32 (2d Cir.
1945).
230. See text accompanying note 93 supra. If there should be sufficient concerted
activity, then the conduct can be reached under § 1, so there is no need to explore the
conspiracy offense further.
231. See, e.g., Hawk, supra note 63; Hibner, Attempts to Monopolize: A Concept in
Search of Analysis, 34 ANTrrRUST L.J. 165 (1967).
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creased activity. This growth in the number of attempt claims resulted
in part from the expansion of section 1 under the Populist Shift without
a correlative expansion of section 2. This evolution overlooked certain
anticompetitive, single-firm conduct, resulting in an apparent interstice
in the Sherman Act. 232 The attempt offense was advanced as the appropriate vehicle to close the breach. 233 This controversial proposal for the
attempt offense, coupled with the movement under the Populist Shift
toward more liberal protection of business opportunity and independence, has spawned considerable discord and confusion among the
lower courts in their handling of attempt claims.
The landmark Supreme Court decision establishing the elements
for a traditional attempt violation is Swift & Co. v. United States. 234 The
standard enunciated by Justice Holmes seemingly contained two elements: a specific intent to monopolize (a purpose requirement) and a
dangerous probability of success (a power requirement).235 In the
seventy years since Swift was decided, both of these requirements have
received considerable scrutiny, and the continuing vitality of the Swift
standard is shrouded in controversy.
The power requirement has evoked the more vigorous debate. The
establishment of a dangerous probability' of success of monopolization
requires the plaintiff to demonstrate a likelihood that the defendant will
achieve monopoly power in a relevant market. 236 In 1956 the Supreme
232. See Cooper, supra note 152, at 375-78; Hawk, supra note 63, at 1152; Note,
Attempt to Monopolize: The Offense Redefined, 1969 UTAH L. REv. 704, 709.
233. See, e.g., Brief for Solicitor Gen'l as Amicus Curiae at 10-11, Hiland Dairy, Inc.,
v. Kroger Co., 394 U.S. 903 (1969), denying cert. to 402 F.2d 968 (8th Cir. 1968);
Blecher, Attempt to Monopolize Under Section 2 of the Sherman Act: "Dangerous
Probability" of Monopolization Within the Relevant Market, 38 Goo. WASH. L. REv. 215
(1969); Note, supra note 232. This view is predicated in part on the assumption that
§§ 1 and 2 are intended to be a complete mosaic without gaps or inconsistencies.
See Standard Oil Co. v. United States, 221 U.S. 1, 60-61 (1911).
234. 196 U.S. 375 (1905).
235. Justice Holmes wrote:
Intent is . . . essential to such an attempt [to monopolize]. Where acts are
not sufficient in themselves to produce a result which the law seeks to prevent
-for instance, the monopoly-but require further acts in addition to the mere
forces of nature to bring that result to pass, an intent to bring it to pass is
necessary in order to produce a dangerous probability that it will happen. . . .
But when that intent and the consequent dangerous probability exist, [section
2] . . . directs itself against that dangerous probability as well as against the
completed result.
196 U.S. at 396.
236. See, e.g., Cliff Food Stores, Inc. v. Kroger, Inc., 417 F.2d 203, 207 (5th Cir.
1969); Kansas City Star Co. v. United States, 240 F.2d 643, 663 (8th Cir.), cert. denied,
354 U.S. 923 (1957).
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Court in United States v. E. 1. du Pont de Nemours & CO.,237
[Cellophane] formulated an essentially economic definition of the relevant market in terms of cross-elasticity of demand and reasonable
interchangeability to consumers. 238 The standard is vague and technical,
and proving the standard frequently boils down to a swearing contest
between experts. 239 When the difficulties of proving that the defendant's
course of conduct will probably result in a monopoly are combined with
the imprecision of the relevant market, the plaintiffs burden of proof
becomes onerous. Translated into litigation expense, the burden of proof
is prohibitive in most cases. Rigid adherence to this standard has significantly inhibited the successful prosecution of attempt claims. Thus, the
controversy over the propriety of expanding the attempt offense translates naturally into a debate over whether the dangerous probability test
remains an essential element of the offense. An examination of more
recent Supreme Court attempt cases fails to resolve the controversy over
the dangerous probability standard. Some authority exists contending
that the Court has retained this requirement, but it is not convincing;240
237. 351 U.S. 377 (1956).
238. ld. at 395-404.
239. See M. MASSEL, COMPETITION AND MONOPOLY 239-53 (1962) and authorities
cited therein.
240. The argument for retention of the dangerous probability test focuses on American Tobacco Co. v. United States, 328 U.S. 781 (1946), and Walker Process Equip., Inc.
v. Food Mach. & Chern. Corp. 382 U.S. 173 (1965). In American Tobacco the Court
affirmed convictions of defendants under all three § 2 offenses and quoted the trial
court's jury instructions, which defined the attempt offense as the "employment of
methods, means, and practices, which would, if successful, accomplish monopolization,
and which, though falling short, nevertheless approach so close as to create a dangerous
probability of it." 328 U.S. at 785. The Court made clear, however, that the instruction
was not under review. ld. at 784. In Walker Proce8S Walker had raised an antitrust
counterclaim to a patent infringement suit aIleging that plaintiff had monopolized in
violation of § 2 by committing fraud on the patent office in acquiring the patent. On
appeal to the Supreme Court Walker argued that in addition to monopolization the
challenged conduct constituted an attempt to monopolize, though the attempt claim was
not pleaded in the complaint. The Court defined the appropriate § 2 standard as foIlows:
To establish monopolization or attempt to monopolize . . . it would then
be necessary to appraise the exclusionary power of the illegal patent claim in
terms of the relevant market for the product involved. Without a definition of
that market there is no way to measure Food Machinery's ability to lessen or
destroy competition.
382 U.S. at 177. The only evidence before the Court of a § 2 violation was the manner
in which the chaIlenged patent was obtained. To impose liability on this basis without
further inquiry concerning the scope and nature of the patent would have been in effect
to hold fraudulent conduct before the patent office a per se violation of section 2. This
consideration, and Walker's failure to aIlege an attempt offense in its counterclaim,
compromise the applicability to nonpatent matters of the Court's reference to power in a
relevant market as an element of the attempt offense. The Department of Justice has
taken a similar view of the case. See Brief for Solicitor Gen'l as Amicus Curiae, supra
note 233, at 11-12.
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nor is the authority convincing for the view that the Court has eliminated the dangerous probability standard. 241 The outcome of this dispute
may determine as well whether a franchise termination can ever constitute an attempt to monopolize, since few franchisors even remotely
approach the market share necessary to threaten a dangerous probability
of monopolization. 242
In a 1956 article discussing the Cellophane case, Professor Turner
argued that the Supreme Court decisions in United States v. Yellow
Cab CO.248 and United States v. Columbia Steel CO.244 had eliminated
any necessity of proving the relevant market in conspiracy and attempt
actions. 245 Eight years later, the Ninth Circuit in Lessig v. Tidewater Oil
CO.246 adopted this view and discarded the dangerous probability requirement,247 holding that proof of a dangerous probability was relevant
only as circumstantial evidence of specific intent. 248 Lessig was applauded by those who favored tIre expansion of the attempt offense. 249
241. One commentator has argued that the Court's suggestion in Standard Oil Co. v.
United States, 221 U.S. 1, 60-61 (1911), that § 2 was meant to supplement § 1 and
reach prohibited conduct not within the reach of § 1 contradicted the existence of a
dangerous probability requirement. See Note, Attempt to Monopolize Under the Sherman
Act: Defendanfs Market Power as a Requisite to a Prima Facie Case, 73 COLUM. L.
REv. 1451, 1458-59 (1973). In United States v. Columbia Steel Co., 334 U.S. 495
(1948), the Court resolved an attempt to monopolize question under the specific intent
requirement without referring to the dangerous probability requirement; however, the
defendant enjoyed substantial market power. ld. at 533. Similarly, in United States v.
Times-Picayune Publishing Co., 345 U.S. 594 (1953), the Court rejected an attempt
charge for want of the necessary specific intent, again without mentioning the dangerous
probability test. ld. at 626-27. Lastly, in United States v. E.!. du Pont de Nemours & Co.,
351 U.S. 377 (1956), Justice Reed suggested in footnote 23 that the attempt and
conspiracy offenses, in contrast to the monopolization offense, did not require a
demonstration of market power. ld. at 395 n.23. The meaning and significance of this
footnote has been vigorously debated. See Hibner, supra note 231, at 170; Smith,
Attempt to Monopolize: Its Elements and Their Definition, 27 GEO. WASH. L. REv. 227,
242-43 (1958); Note, supra at 1455-56.
242. See, e.g., Allied Elec. Supply Co. v. Motorola, Inc., 1974-1 Trade Cas. ~ 74,878
(W.O. Pa. 1973); Northwest Controls, Inc. v. Outboard Marine Corp., 333 F. Supp. 493
(D. Del. 1971).
243. 332 U.S. 218 (1947).
244. 334 U.S. 495 (1948).
245. Turner, Antitrust Policy and the Cellophane Case, 70 IIARv. L. REv. 281, 304
(1956).
246. 327 F.2d 459 (9th Cir.), cert. denied, 377 U.S. 993 (1964).
247. See id. at 474,476.
248. ld. at 474.
249. See, e.g., Blecher, supra note 233, at 222. Likely the most influential proponent
of this view is the Department of Justice. Recently, the Director of Policy Planning for
the Antitrust Division told the American Bar Association:
Monopolization is basically a structural offense and therefore relevant market
and position in it are important considerations. Attempted monopoly is basically a conduct offense; and, where we are dealing with conduct which is
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Nevertheless, the doctrine has failed to take hold to any great degree.
Only a few courts have adopted the Ninth Circuit approach,250 and the
Ninth Circuit itself has subsequently treated Lessig in a far from consist~
ent manner. 251 Some courts have rejected the approach outright,252 and
others have sought a middle ground that was less stringent than Swift,
but more stringent than Lessig. 253 The Lessig doctrine has also drawn
considerable scholarly criticism, much of' which originates from the
amorphousness of the attempt offense when left entirely to a determination of specific intent. 254
Lessig is particularly deficient in franchise termination cases, which
involve a potential policy conflict between the protection of business
opportunity and the promotion of efficiency. A problem this complex
cannot be resolved by an examination of intent alone. The observable
conduct associated with franchise terminations varies little from case to
clearly predatory and unfair, there is no public policy reason for protecting it
from judicial sanction. To eliminate the "dangerous probability" and "market"
requirements from Section 2 attempt to monopolize cases would make it a
much more effective tool for dealing with indefensible single firm conduct.
Baker, Section 2 Enforcement-The View From the Trench, 41 ANTrrRuST L.J. 613, 620
(1972); Brief for Solicitor Gen'l as Amicus Curiae, supra note 233, at 11.
250. E.g., Bowl America, Inc. v. Fair Lanes, Inc., 299 F. Supp. 1080, 1093 (D. Md.
1969); McCormack v. Theo. Hamm Brewing Co., 284 F. Supp. 158, 165 (D. Minn.
1968). See Cooper, supra note 152, at 422.
251. Compare HaIImark Indus. v. Reynolds Metals Co., 489 F.2d 8, 12 (9th Cir.
1973), cert. denied, 390 U.S. 904 (1974) ("[E]vidence of market power may be
relevant, but it is not indispensable."), and Moore v. Jas. H. Matthews & Co., 473 F.2d
328, 332 (9th Cir. 1972) ("[A]n attempt to monopolize under section 2 does not require
proof of monopoly power."), and Industrial Bldg. Materials, Inc. v. InterchemicaI
Corp., 437 F.2d 1336, 1344 (9th Cir. 1970) ("In an attempt to monopolize situation,
only intent to monopolize is in issue, and no proof as to the relevant market is
required."), with Bushie v. Stenocord Corp., 460 F.2d 116, 121 (9th Cir. 1972)
(distinguishing Lessig and implying that dangerous probability must be shown), and
Cornwell Quality Tools Co. v. C.T.S. Co., 446 F.2d 825, 832 (9th Cir. 1971), cert.
denied, 404 U.S. 1049 (1972) ("[Plaintiff] had to prove •.. defendant had sufficient
market power to come dangerously close to success.").
.
252. See, e.g., Acme Precision Prods., Inc. v. American Alloys Corp., 484 F.2d 1237,
1240 (8th Cir. 1973); Diamond Int'l Corp. v. WaIterhoefer, 289 F. Supp. 550, 576-77
(D. Md. 1968); United States v. Chas. Pfizer & Co., 245 F. Supp. 737, 739 (E.D.N.Y.
1965).
.
253. One approach modifies the dangerous probability requirement to consist of an
evaluation of both conduct and the likelihood of success. See Kearney & Trecker Corp. v.
Giddings & Lewis, Inc., 452 F.2d 579, 598 (7th Cir. 1971), cert. denied, 405 U.S. 1066
(1972). Another approach examines the "factual ability to exclude competition and
control prices." Woods Exploration & Producing Co. v. Aluminum Co. of America, 438
F.2d 1286, 1306 (5th Cir. 1971), cert. denied, 404 U.S. 1047 (1972). See Denver
Petroleum Corp. v. Shell Oil Co., 306 F. Supp. 289 (D. Colo. 1969); Note, supra note
232, at 713-21.
254. See, e.g., Cooper, supra note 152, at 453-56; Hawk, .mpra note 63, at 1170-75;
Hibner, supra note 231, at 171; Note, supra note 241, at 1465-69.
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case; 1hus restricting the attempt inquiry to these 'Slight factual variances
and their 'associated .subjective motivations rests liability .on.an extremely
narrow spectrum ,of circumstances. Furthermore, :the effect of the termination on the franchisee is ignored. Hence., Lessig cannot accommodate
the ;attempt offense to the problem of franchise ;tenninations.
B.
The RelationalPower Test
Fortunately a doctrine more ancient in origin than Lessig may
provide a mechanism for expanding the attempt offense to reach franchise terminations. The relational power test evolved from several Supreme Court decisions condemning the exclusionary or predatory activites of single monopolists. Beyond the requirement in these cases of a
predatory purpose, these decisions suggest that once a business enjoys
monopoly power vis-a.-vis its victim, considerations such as the extent of
the defendant's market power in the broader relevant market and the
general economic effect of the .challenged conduct become secondary or
irrelevant. This relational power concept ,conforms with the antitrust
policy goal of protecting individual businesses from Willful destruction
and :represents a natural extension of the Populist Shift to the problems
of franchise terminations.
The roots of ·the relational power test extend as far back as 1927 to
Eastman Kodak Co. Y. Southern Plwto Materials CO.2~5 The defendant,
Eastman Kodak, stopped selling photographic supplies to Southern
Photo after ,defendant's ,offer to purchase .Southern's business was rejected. Because .of Eastman's dominant position in the industry,256 Southern
was Mable 'to obtain substitute supplies for an important line of its
business :and'Sustained substantial injury as a Tesult. The Supreme ·Court
held that 'Sufficient circumstantial evidence existed :to .submit to the jury
the question whether Eastman had refused to sell "in pursuance of .a
purpose to monopolize. "257
The Court left .several ,questions :unanswered. Reduced to its barest
elements, Eastman's liability rested on its monopoly over certain goods
essential ,to Southern's ,business 'and :on lits apparently predatory motiva255. 273 ms. 359 (1927~.
256. Two years:after Eastman stoppecLselling to Southern, Eastman was found guilty
of monopolizing nationwide the manufactux:e .and lsale of (cameras, films, zplates, and
photographic paper. United States v. Eastman Kodak Co., 226 F. 62, 79 (W.D.N.Y.
1:915.), appeal dismissed, 255 U.S. 578 (1921).
257. 273 U.S. at 375.
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tion in refusing to sell. But the Court discussed Eastman's monopoly
power only in relation to Southern, not in relation to any broader
market. While the Court may have condemned Eastman's actions because Eastman was in fact monopolizing the distribution of photographic supplies, this rationale does not appear in the opinion, and the
Court's failure to examine the ordinary criteria for this potential avenue
to liability leaves open the possibility that the Court did not consider
them essential to the violation charged.
Lorain Journal Co. v. United States2 58 is another case in which the
Court seemed more concerned with predatory intent to destroy a competitor than with the parameters of monopoly power. The Journal was
the only local daily newspaper in Lorain, Ohio,259 and reached ninetynine percent of the city's families. 26o When radio station WEOL was
licensed by the FCC to operate in Elyria,261 a community eight miles
south of Lorain, the Journal refused to accept advertisements from any
local business that advertised over WEOL. The Supreme Court noted
that if all the newspapers in a town had conspired to do what the
Journal had done, they would have violated sections 1 and 2. It would
be consistent, the Court reasoned, to hold that "a single newspaper,
already enjoying a substantial monopoly in its area, violates the 'attempt
to monopolize' clause of section 2 when it uses its monopoly to destroy
threatened competition."262
The conclusion of the Court that the Journal enjoyed monopoly
power in a relevant market rested on thin evidence indeed. The Journal's
monopoly, if it existed, reached only local newspaper advertising directed at the residents of Lorain. 263 The inference of monopoly power
apparently derived from the fact that the Journal reached 99% of the
families in the city, and the fact that some local merchants found the
Journal essential for advertising in Lorain County.264 But these facts do
258. 342 u.s. 143 (1951).
259. Lorain was then a city of 52,000 situated in Lorain County, which had a
population of 120,000. The Journal had a daily circulation of 20,000, of which 13,000
was sold in Lorain. Three Cleveland papers had a combined daily (excluding Sunday)
circulation in Lorain of 6000. A local Sunday-only paper had a circulation of about
3000, and the Sunday edition of a Cleveland paper had a circulation in Lorain of about
11,000.
260. 342 U.S. at 146.
261. WEOL reached 20 counties with an estimated population of 2,250,000. ld. at
147 nA.
262. ld. at 154.
263. The Cleveland papers reaching Lorain contained no local advertising. ld. at 146.
264. ld. at 148. The Court did not inquire into the interchangeability of advertising
in other newspapers that existed in other parts of the county.
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not in themselves prove that the Journal possessed monopoly power over
the advertisers who patronized it. Even the fact that the Journal was the
only daily newspaper in the city of Lorain does not justify this inference.
The Court ignored the fact that a local Sunday paper reached over 20%
of Lorain's families and failed to consider either the possible availability
of radio advertising in Lorain on stations other than WEOL,265 or the
availability of alternative forms of advertising such as circulars or billboards. Nor does the Court examine the reasonableness of limiting the
market geographically to those merchants who directed advertising at
residents of the city of Lorain. The Court did not focus on the criteria
customarily used to infer monopoly power in a relevant market; rather,
the expressed concern was the Journal's power to destroy WEOL.266
The most recent decision in this line is Otter Tail Power Co. v.
United States. 267 Otter Tail was a private electric utility which generated
and distributed electric power. Four towns in Otter Tail's service area
elected to establish mUnicipal distribution systems after their franchises
expired with Otter Tail. Otter Tail refused, however, to sell the towns
energy at wholesale or to "wheel" power268 from other suppliers. Because of Otter Tail's control over transmission facilities, this refusal to
deal foreclosed the towns from obtaining power from outside sources. 269
The Supreme Court condemned Otter Tail for using its natural monopoly in its service area "to foreclose competition or gain a competitive
advantage, or destroy a competitor."270 But the Court could not have
been overly concerned with the danger of Otter Tail's monopoly to the
public, since a monopoly would be serving the towns in any case, and
since the utility's rates and service were subject to governmental regulation. While Otter Tail met the criteria of a monopolist, the only power it
could effectively exercise was a relational power to prevent the entry of
competitors. Thus, the decision must rest on the Court's desire to protect
the opportunity of each municipality to become its own electric power
retailer.
The contours of a relational power test also appear in several lower
265. No evidence was before the Court concerning the existence or nonexistence of
other stations. [d. at 146.
266. [d. at 152-55.
267. 410 U.S. 366 (1973).
268. "Wheel" means to "transfer by direct ·transmission or displacement, electric
power from one utility to another over the facilities of an intermediate utility." [d. at
368.
269. [d. at 377.
270. [d.
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court decisions that have received strong criticism for their departure
from economic principles. In United States v. Klearflax Linen Looms,
Inc.,271 and in Poster Exchange, Inc. v. National Screen Service Corp.272
vertically integrated defendants used their position of dominance at the
supply level to drive out competitors at the distribution level. The courts
in each case eschewed rigorous examination of the defendant's power in
the relevant market and ignored the absence of any demonstrable
adverse effect on prices or competition in the industry as a whole. 273
Rather, the existence of power over the victims and the clear evidence of
predatory intent were sufficient to support an attempt violation. In
Gamco, Inc. v. Providence Fruit & Produce Building,274 the plaintiff
leased space in defendant's building, but the parties did not compete
against each other. The court, faced with a serious threat to the plaintiffs business due to an unjustifiable refusal by defendant to renew
plaintiff's lease, strained to find the defendant a monopolist and thereby
condemn his actions. While the defendant undoubtedly held dominant
power over the plaintiff, the existence of monopoly power in any economically significant relevant market seemed unlikely; the court was
271. 63 F. Supp. 32 (D. Minn. 1945). KlearfIax was the only manufacturer of linen
rug material in the United States. The federal government solicited bids once or twice a
year to supply the government's demand for these rugs, and one of KlearfIax's distributors, Floor Products, bid against KlearfIax and was awarded the contract. When
KlearfIax was unable to persuade Floor Products to extricate itself from the contract, it
ceased selling linen rugs to Floor Products and advised its other distributors to do
likewise.
272. 431 F.2d 334 (5th Cir. 1970). National had acquired a dominant position in the
production and distribution of motion picture advertising accessories in the 1940's and
over the years had battled several antitrust actions, eventually granting several sublicenses. Though Poster had sought to obtain a sublicense from National since 1943, National
declined to grant it one, and sold Poster supplies at the same prices it charged exhibitors.
In 1961, National adopted a nationwide policy of not providing accessories to any
independent distributor, causing Poster the loss of most of its business.
273. The Klearflax court made no attempt to establish the existence of an economically significant product market for linen rugs beyond the government's preference for
them for certain uses. The court recognized certain unique and distinctive characteristics
in linen rugs, but saw them in "active competition" with other carpets. No attempt was
made to establish the likelihood of any harm to the public. The Poster Exchange court
relied on Eastman Kodak v. Southern Photo Material Co., 273 U.S. 359 (1927), see text
accompanying notes 255-57 ..supra, and held that "a vertically integrated manufacturerretailer [is forbidden] from using its power at one level to drive out competition at
another." 431 F.2d at 339. The decision did not rest on any analysis of National's
strength or conduct in the retail market, but on National's relational power over Poster
arising from its dominance in the production market. Interestingly, the decision has been
criticized for its failure to determine that the challenged refusal to deal prevented the
achievement of competitive results (i.e., resulted in higher prices, etc.) in addition to
harming a competitor. See Note, supra note 134, at 1745-49.
274. 194 F.2d 484 (1st Cir.), cert. denied, 344 U.S. 817 (1952).
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clearly more concerned with the effect on the plaintiff and the absence
of any business justification for defendant's actions than with the boundaries of the relevant market. 275
Despite factual differences, one consistent principle runs throughout these decisions. 276 The actor in each case held great power over the
victim and exercised this power with the purpose and likely effect of
injuring or destroying the victim's business opportunity. Though the
actor's power was characterized as monopoly power, the conclusion that
such power existed was drawn from an undefined market, a vaguely
defined market, or an economically indefensible market. Once the courts
established that the necessary power existed vis-a.-vis the victim, they
seemed largely uninterested in a more precise economic analysis of the
relevant market. A relational power test appears to have developed,
implicitly to be sure, which when coupled with a purpose test makes out
a violation of section 2.
The development of a relational power test under section 2 might
be analogized to the strikingly similar evolution of the prohibition of
tying arrangements under section 1. 277 The early cases generally required the existence of dominant power over the tying product to sustain
275. For other cases explainable by a relational power rationale, see Six Twenty-Nine
Prods., Inc. v. Rollins Telecasting, Inc., 365 F.2d 478 (5th Cir. 1966); Packaged
Programs, Inc. v. Westinghouse Broadcasting Co., 255 F.2d 708 (3d Cir. 1958). See also
T.V. Signal Co. v. AT&T, 462 F.2d 1256 (8th Crr. 1972); DeteIjet Corp. v. United
Aircraft Corp., 211 F. Supp. 348 (D. Del. 1962); Banana Distribs., Inc. v. United Fruit
Co., 162 F. Supp. 32 (S.D.N.Y. 1959).
276. These cases have been the subject of frequent consideration. !See, e.g., Barber,
supra note 24, at 862-66; Buxbaum, supra note 37, at 678-80; Cooper, supra note 152, at
403-07; Hawk, supra note 63, at 1125-35, 1156-62. Neale developed a theory of
"bottleneck monopolies" that is somewhat reminiscent of the relational power test
advanced here. A. NEALE, supra note 53, at 131-38. Bottleneck analysis relates to the use
of monopoly power in one market to drive out competitors in a separate but dependent
market. Neale concluded, however, that the defendant must possess substantial market
power in the dominant market for any antitrust offense to arise. [d. at 137. A recent
commentator expanded on Neale's theme, but criticized the bottleneck test for its focus
"on the detrimental effect on competitors" and for its failure to consider the possible
benefits to consumers. Note, supra note 134, at 1740.
271. Tying arrangements are also prohibited under § 3 of the Clayton Act. See, e.g.,
United Shoe Mach. Corp. v. United States, 258 U.S. 451 (1922). The Supreme Court at
first imposed a more stringent test under § 1 than under § 3, see Times-Picayune
Publishing Co. v. United States, 345 U.S. 594, 608-09 (1953), but in recent years the
tests have coalesced, see Advance Business Sys. & Supply Co. v. SCM Corp., 415 F.2d
55, 67 (4th Cir. 1969), cert. denied, 397 U.S. 920 (1970); Day, supra note 25, at 545;
Turner, The Validity of Tying Arrangements Under the Antitrust Laws, 72 HARv. L.
REv. 50, 58 (1958).
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a violation. 278 Because of the absence of any legitimate business justifications for tying arrangements,279 the Supreme Court resolved any
uncertainty over the economic harms of tying arrangements in favor of
promoting business independence and opportunity280 and gradually
eased the power requirement;281 violations can now arise from "the
tying product's desirability to consumers or from uniqueness in its
attributes."282 The Supreme Court has found sufficient uniqueness in
cases involving patents283 and copyrights,284 and the Ninth Circuit
extended these holdings to trademarks in Siegel v. Chicken Delight,
Inc.,285 a result of particular relevance to franchise terminations. 286 The
market in which the defendant's power must be effective has also shrunk
over the years. The defendant need no longer have a "dominant position throughout the market for the tying product," but need only possess "some power over some of the buyers in the market. . . whether
few or many."287 Thus, a standard akin ,to a relational power test has
evolved for tying arrangements, which may prove helpful to the courts
in developing the relational power test under section 2.
Because the courts have developed the relational power test only
implicitly thus far, they have not explored the intricacies and limitations
of the test. One important question is the' pertinence of the relational
power test to the monopolization offense. 288 Limiting the test to the
278. See Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 608-09
(1953); note 109 supra.
279. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 (1969);
United States v. Loew's, Inc., 371 U.S. 38, 44 (1962); Northern Pac. Ry. v. United
States, 356 U.S. 1,5-6 (1958).
280. Kauper, supra note 43, at 332; Comment, The Logic of Foreclosure: Tie-In
Doctrine After Fortner v. U.S. Steel, 79 YALE L.J. 86, 93 (1969).
281. See text accompanying notes 109-14 supra.
282. United States v. Loew's, Inc., 371 U.S. 38, 45 (1962).
283. See International Salt Co. v. United States, 332 U.S. 392 (1947).
284. See United States v. Loew's, Inc., 371 U.S. 38 (1962).
285. 448 F.2d 43 (9th Cir. 1971), cert. denied, 405 U.S. 955 (1972); Redd v. Shell
Oil Co., 1974-2 Trade Cas. ~ 75,390, at 98,268 (D. Utah 1974).
286. Much of the relational power held by the franchisor over the franchisee derives
from control over trademarks. See text accompanying notes 295-99 infra. See generally
note 130 supra & accompanying text.
287. Fortner Enterprises, me. v. United States Steel Corp., 394 U.S. 495, 502-03
(1969). However, the opinion apparently precludes liability if the seller's power exists
over only a single buyer, since the number of buyers involved must be "appreciable." See
Advance Business Sys. & Supply Co. v. SCM Corp., 415 F.2d 55, 67-68 (4th Cir. 1969),
cert. denied, 397 U.S. 920 (1970). This multiplicity requirement probably developed by
analogy to § 3, see note 277 supra, which relates more specifically to tying arrangements than does § 1 and which requires that the tying arrangement "substantially
lessen competition." 15 U.S.C. § 14 (1970); cf. Standard Oil Co. v. United States, 337
U.S. 293, 311-14 (1949). Thus, the multiplicity requirement may not reflect a judicial
policy of general applicability.
288. In Eastman Kodll'k Co. v. Southern Photo Materials Co., 273 U.S. 359 (1927),
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attempt offense seems desirable: the more stringent standards of liability
employed under the monopolization offense289 necessitate the exacting
economic inquiry exhibited in modern monopolization cases. 290 Limiting the test to the attempt offenses also comports more comfortably with
the Court's usage of the test in the cases,291 and avoids the necessity of
reconciling the Court's methodology in these cases with its methodology
in the more traditional monopolization cases. The foregoing cases suggest a further restriction on the relational power test to nonhorizontal
relationships, since in each case the actor's power over the victim arose
from circumstances outside of the market in which they competed
directly. Most of the cases involved vertical relationships in which the
actor possessed the power to deny the victim access to some necessary
business or supply.292 In other cases, the actor's strength in a market in
which the victim did not operate created leverage over the victim in a
different market. 293 Thus, the relational power test may not apply to
injuries suffered at the hands of a stronger or more efficient rival in the
same market;294 however, it clearly does apply to franchise terminations,
which involve vertical relationships.
c.
Application 0/ the Relational Power Test to Franchise Terminations
Assuming the validity of the relational power test at least for
certain vertical relationships under the attempt offense, the question
remains whether a franchisor qua franchisor holds sufficient power over
a franchisee to satisfy this test. Franchisor power derives ordinarily
from the strength of the franchise trademark coupled with the unavailand Poster Exchange, Inc. v. National Screen Servo Corp., 431 F.2d 334 (5th Cir. 1970),
the courts found monopolization. In Lorain Journal Co. v. United States, 342 U.S. 143
(1951), and Otter Tail Power Co. v. United States, 410 U.S. 366 (1973), the Court
found an attempt. In United States v. Klearflax Linen Looms, Inc., 63 F. Supp. 32 (D.
Minn. 1945), and Gamco, Inc. v. Providence Fruit & Produce Bldg., 194 F.2d 484 (1st
Cir. 1952), cert. denied, 344 U.S. 817 (1952), the courts found both offenses.
289. See notes 22-8-29 supra and accompanying text.
290. See United States v. E.!. du Pont de Nemours & Co., 351 U.S. 377 (1956);
United States v. Aluminum Co. of America, 148 F.2d 416, 424-26 (2d Cir. 1945).
291. See Otter Tail Power Co. v. United States, 410 U.S. 366, 377-78 (1973) ("Use
of monopoly power 'to destroy threatened competition' is a violation of the 'attempt to
monopolize' clause of § 2 of the Sherman Act.").
292. See text accompanying notes 255, 267, 271 & 274 supra.
293. See text accompanying note 258 supra; United States v. Griffith, 334 U.S. 100
(1948).
294. See Telex Corp. v. International Business Machs. Corp., 510 F.2d 894 (10th Cir.
1975), petition for cert. filed, 43 U.S.L.W. 3646 (U.S. June 2, 1975) (No. 74-1518).
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ability of substitute goods or services. A large number of courts, however, have adopted the view that businesses enjoy a natural monopoly
in their trademarked products that is exempt from section 2. 295 This
rule against 'trademark monopolization was sanctioned by the Supreme
Court in the Cellophane case,296 and although the Court was arguably
speaking there only to monopolization,297 most courts have read this
language broadly to preclude trademark attempt violations as well. 298
A few courts, however, have recognized the potential for abuse of trademark power and have refused to apply the rule to attempts. 299 Recent
decisions in the Ninth Circuit and in the Western District of Pennsylvania open the possibility of an attempt offense arising from a franchise
termination and the relational strength of the franchisor's trademark. 30o
295. E.g., Arthur v. Kraft-Phenix Cheese Corp., F. Supp. 824, 828 (D. Mel. 1938).
See note 298 infra.
296. United States v. E.!. du Pont de Nemours & Co., 351 U.S. 377, 392-93 (1956).
297. The attempt offense was not considered by the Court, and it distinguished
between monopolization and attempt and conspiracy to monopolize with respect to the
scope of the relevant market. 351 U.S. at 395 n.23.
298. Several courts have uncritically adopted the Cellophane rationale in attempt to
monopolize claims against franchisors in a variety of industries. E.g., Nelligan v. Ford
Motor Co., 262 F.2d 556 (4th Cir. 1959) (automobiles); Packard Motor Car Co. v.
Webster Motor Car Co., 243 F.2d 418 (D.C. Cir. 1957) (automobiles); E.A. Weinel
Constr. Co. v. Mueller Co., 289 F. Supp. 293 (E.D. lli. 1968) (construction supplies);
United States v. Charles Pfizer & Co., 245 F. Supp. 737 (E.D.N.Y. 1965) (food
additives); A-I Business Mach. Co. v. Underwood Corp., 216 F. Supp. 36 (E.D. Pa.
1963) (business machines). But see Rea v. Ford Motor Co., 355 F. Supp. 842, 877
(W.D. Pa. 1973), rev'd, 497 F.2d 557 (3d Cir.), cert denied, 95 S. Ct. 126 (1974).
299. As long ago as 1913, a district court in O'Halloran v. American Sea Green Slate
Co., 207 F. 187, 193-94 (N.D.N.Y. 1913), held that "Sea Green Slate" was an
identifiable commodity capable of being restrained or monopolized, though it competed
with black slate from Pennsylvania and Maine and other places, and also a variety of
other roofing materials. In United States v. Guerlain, Inc., 155 F. Supp. 77 (S.D.N.Y.
1957), appeal dismissed, 358 U.S. 915 (1958), monopolization charges grew out of
exclusionary conduct associated with a trademark on French toilet goods. In finding a
monopolization, the court distinguished Cellophane on the basis that cellophane was a
raw material for which the critical considerations to buyers were its utility and price, in
contrast with toilet goods in which the primary appeal was a highly exploited trademark.
In support of its conclusion, the court pointed to the lack of evidence establishing the
existence of a high cross-elasticity of demand between perfumes. Defendants appealed
the case to the Supreme Court, and the Solicitor General confessed error, 358 U.S. 915
(1958), leaving the vitality of the case in doubt.
See also United States v. Sealy, Inc., 388 U.S. 350, 356 n.3 (1967); Timken Roller
Bearing Co. v. United States, 341 U.S. 593, 599 (1951). Both cases involved restraints of
trade under § 1 incident to a trademark licensing system. In both cases the Court struck
down the arrangements and said, "A trademark cannot be legally used as a device for
Sherman Act violation." ld.
300. See also FTC v. Texaco, Inc., 393 U.S. 223 (1968); Atlantic Ref. Co. v. FTC,
381 U.S. 357 (1965). The Court condemned under § 5 of the FTC Act the franchisor's
overt or tacit coercion of its franchisee to market tires, batteries, and accessories of a
particular manufacturer with which the franchisor had a contractual arrangement. The
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The Ninth Circuit case is Industrial Building' Materials, Inc. v.
Interchemical Corp.30l Plaintiff became the exclusive distributor of
defendant's line of industrial sealants shortly before the defendant began
selling directly to certain customers. Soon thereafter defendant terminated plaintiff, and plaintiff charged violations of sections 1 and 2. The
Ninth Circuit reversed summary judgment for defendant and remanded
for trial three theories advanced by plaintiff. Under the first theory,
which alleged that defendant had monopolized or attempted to monopolize the sealant industry, the court viewed the monopolization allegation
as raising fact issues concerning the relevant market; for the alleged
attempt offense, however, proof of the relevant market was not required
under the Lessig doctrine. 302 In reference to plaintiffs second theory,
which contended that defendant's product line was sufficiently unique to
constitute by itself a relevant market, the court was unaware of any case
in which a manufacturer's product had been held to be a distinct line of
commerce, and the court viewed success under the theory unlikely, but
the allegation raised a question of fact which required disposition at
trial. Under plaintiffs third the~ry, which alleged that a manufacturer
who competes with his distributors may not use predatory tactics to
eliminate them, the court said that if defendant's conduct demonstrated
an intent to monopolize the relevant market, then the conduct might
constitute an attempt to monopolize. In addition, if defendant were
found to hold monopoly power and if his conduct tended to solidify his
dominant market position, then defendant's actions against plaintiff
would constitute monopolization. 303
Considered separately, the three theories approved by the court do
not appear significant, but when taken together they constitute the
essential elements of a relational power test. The court concluded that in
the context of a franchisor-franchisee relationship, the exercise of predatory tactics to' eliminate a business could constitute an attempt to monopolize, absent any consideration of broader market power. The court
also recognized the possibility (remote, to be sure) of monopoly power
arising from a trademark. 304 It is but a short progression from these
basis of its decisions was the franchisor's improper exercise of its "dominant economic
power" over its franchisees.
301. 437 F.2d 1336 (9th Cir. 1971).
302. See text accompanying note 246 supra.
303. 437 F.2d at 1344-45.
304. But ct. TrixIer Brokerage Co. v. Ralston Purina Corp., 505 F.2d 1045, 1051 (9th
Cir. 1974) (a natural monopoly over a trademarked product does not violate the
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propositions to the -conclusion that a trademark itself may create sufficient power in a franchise relationship to support an attempt offense
even without invoking the Lessig doctrine.a05
Three recent decisions in the Western District of Pennsylvania have
gone beyond this implicit Ninth Circuit result and have adopted the
substantive equivalent of a relational power test for franchise terminations. In all three cases, an automobile manufacturer began competing
directly at the retail level with independently owned dealers, producing
charges of preferential treatment for the "factory stores" over the independent outlets. In Mt. Lebanon Motors, Inc. v. Chrysler Corp.,30G the
plaintiff-dealer vigorously protested the defendant-manufacturer's actions
and was finally terminated. The court sustained a charge of attempt to
monopolize against a motion for a directed verdict, holding that the
defendant's cars were "a sufficiently identifiable part of commerce to be
susceptible of restraint or monopolization"307 and emphasizing the importance of specific intent in attempt actions. The court dismissed a
charge of monopolization on the. ground that interbrand competition
insured against monopolistic price increases.30S Rea v. Ford Motor
CO.309 further developed this Dotion that a single manufacturer's product
can constitute a relevant market in attempt actions. The court noted that
the franchise agreement and the dealer's investment in facilities and
goodwill subjugated the survival of the dealer's business to the availability of the defendant's cars,310 and concluded that the defendant's cars
antitrust laws "unless the manufacturer uses his natural monopoly to gain control of the
relevant market in which his products compete").
305. The Ninth Circuit has not moved appreciably closer to this position. In Bushie v.
Stenocord Corp., 460 F.2d 116 (9th Cir. 1972), the Ninth Circuit confronted a situation
similar to Industrial. Stenocord terminated a dealer and hired in his place a person to
operate its own retail outlet. Bushie relied on Industrial in alleging an attempt to
monopolize Stenocord's products, which Bushie maintained constituted a relevant market.
The court rejected plaintiff's claim because there was no evidence to suggest that
Stenocord dominated office dictating machines generally or that Stenocord controlled a
major share of the market for particular types of machines. Id. at 121. See note 304
supra.
306. 283 F. Supp. 453 (w.n. Pa. 1968), a/fd, 417 F.2d 622 (3d Cir. 1969).
307. ld. at 460.
308. Id. at 461.
309. 355 F. Supp. 842 (w.n. Pa. 1973), rev'd, 497 F.2d 577 (3d Cir.), cert. denied,
95 S. Ct. 126 (1974).
310. ld. at 876-77. The court also distinguished Cellophane:
Some courts blindly follow the decision of the United States Supreme Court in
the Cellophane Case without examining the basis for this decision and without
ascertaining what may be dicta in the opinion. This was a case involving
actual monopolization, not an attempt to monopolize, and the court unquestionably held that for a manufacturer to obtain a monopoly of the sale of its
own product is not a violation of Sherman Act Section 2 where there are other
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constituted a "submarket" sufficient for an attempt action. 311 The submarket concept was more carefully explored in Coleman Motor Co. v.
Chrysler Corp.312 The court found the concept analogous to submarkets
under section 7 and enunciated the rule that a submarket emerges
whenever a dealer cannot profitably turn to another manufacturer for
substitute products. 313 The court recognized that identifiable submarkets
were based on brand loyalty, and noted that while brand loyalty could
not support a monopolization charge, brand loyalty could support an
attempt, since in attempts the relevant market was not in issue and
specific intent played a large role. 314
The submarket concept developed in these cases 315 is virtually
indistinguishable from a relational power test. The courts clearly recognize the absence of any general economic significance of submarkets;
instead, the courts emphasize the relational power of the manufacturer
over the dealer, who is inextricably locked into the franchisor's control
by the strength of the trademark, the nature of the industry, and the
terms of the franchise agreement. The courts apparently recognize the
limitations of the submarket concept as well and reject its application to
monopolizations. Particularly noteworthy is the analogy made in Coleman to the submarket concept developed under section 7. 316 As under
section 2, submarkets under section 7 developed in reponse to the
commodities "reasonably interchangeable by consumers with the manufacturer's own product." This may be true of a plastic packaging material such
as Cellophane but not necessarily true of a product such as an automobile
manufactured under a highly exploited and widely advertised trademark and to
which there is, as shown, a high percentage of owner loyalty.
ld. at 877 (citations omitted).
311. ld. at 877~78.
312. 376 F. Supp. 546 (W.D. Pa. 1974), appeal docketed, No. 74-1529, 3d Cir., May
29, 1974.
313. ld. at 561-62.
314. ld. at 561.
315. The future vitality of these cases appears to be in jeopardy as a result of the
Third Circuit's decision in Rea v. Ford Motor Co., 497 F.2d 577 (3d Cir.), cert. denied,
95 S. Ct. 126 (1974). The court reversed the lower court's judgment for plaintiff, see text
accompanying note 309 supra, because the plaintiff failed to demonstrate that the
defendant's conduct injured his business. 497 F.2d at 589-90. In a footnote, however, the
court went on to intimate that plaintiff failed to establish a claim under § 2 since he had
not established a dangerous probability of monopolization, and the court apparently
rejected the district court's submarket theory concerning the definition of the relevant
market. See id. at 590 n.28. The court cited Mt. Lebanon with approval, however,
confusing the picture. In apparent 'response to the court's dictum, plaintiff in Coleman
dropped his attempt claim on appeal. See Brief for Appellee, Coleman Motor Co. v.
Chrysler Corp., No. 74-1529 (3d Cir., filed May 29, 1974).
316. 15 U.S.C. § 18 (1970). See note 27 supra.
>
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insensitivity of the Cellophane reasonable interchangeability standard to
antitrust policies that necessitated a stricter prohibition of certain undesirable business conduct. 317 The submarket standard in section 7 differs
from that developed here, however, in that the section 7 submarket
focuses on general economic effects, albeit in a narrower sphere than in
Cellophane, whereas the attempt submarket focuses almost exclusively
on the victim.
Of course, further development remains to be done under the
relational power test concerning the circumstances under which the
franchise relationship satisfies the attempt offense power requirement.
Liability emerged easily in the case of automobile dealerships because of
the obvious strength of the trademark and the demonstrable impracticality of a dealer changing brands. In the usual case, though, the actual
power held by the franchisor over the franchisee and the effect of a
termination on the franchisee's business will be difficult questions of fact
requiring examination of the strength of the trademark, the terms of the
franchise contract, the nature of the goods sold or services performed,
the barriers to independent entry into the industry, the availability of
substitute products, the duration of the franchise, and similar factors. As
under section 1, the social policy for protecting the franchisee warrants
limiting this factual inquiry to the effect of the termination on the
franchisee and the franchisor; evidence of monopoly power in an economically significant market is relevant but not essential to an attempt.
D.
The Purpose Requirement
The second element of the traditional attempt offense is the
purpose requirement. Unlike the power requirement, the purpose requirement translates easily into the context of franchise terminations.
Once a destructive termination occurs, the essential questions involve the
317. In Brown Shoe Co. v. United States, 370 U.S. 294 (1962), the Court set forth
the Cellophane reasonable interchangeability standard and then discussed the criteria of
a submarket:
The outer boundaries of a product market are determined by the reasonable
interchangeability of use or the cross-elast~city of demand between the product
itself and substitutes for it. However, within this broad market, well-defined
submarkets may exist which, in themselves, constitute product markets for
antitrust purposes. The boundaries of such a submarket may be determined
by examining such practical indicia as industry or public recognition of the
submarket as a separate economic entity, the product's peculiar characteristics
and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.
ld. at 325 (citations omitted).
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motivation and any business justification for the conduct. The inquiry is
identical to that under section 1.318
The relational power decisions do provide some guidance concerning the legality of various motives and justifications.319 In these cases an
illicit purpose was inferred from the predator's willful exercise of its
monopoly power over the victim with the foreseeable result of freezing
the victim out of a market,320 preventing entrance into a market,321 or
otherwise specifically destroying or injuring the victim. 322 Other section
2 cases consider the circumstances in which a franchisor is entitled to
terminate a franchisee. Arguably sufficient reasons include inadequate
performance,323 financial unsoundness,324 compelling prevailing economic conditions,325 reducing the cost of distribution,326 utilizing existing sales forces,327 or exercising greater control over the sale of the
product.328
IV.
Conclusion
Franchising, in addition to being an efficient and popular distribution device, serves an important social purpose by providing an alternative to centralized economic power and decisionmaking and by creating
opportunities for the small entrepreneur. The social utility of franchising
would be enhanced by stricter controls over the discretion of the franchisor to terminate. The Populist Shift has made it clear, if it was not clear
before, that the antitrust laws are properly concerned with the protection
of franchisee business opportunity and independence. Unfortunately, the
318. See text accompanying notes 205-20 supra.
319. See Note, supra note 134, at 1732-40, for a careful scrutiny of the Court's
application of the purpose standard in the relational power decisions, and for the possible
economic justifications for conduct in these cases labeled predatory by the Court.
320. See Southern Photo Materials Co. v. Eastman Kodak Co., 273 U.S. 359 (1927);
United States v. Klearflax Linen Looms, Inc., 63 F. Supp. 32 (D. Minn. 1945).
321. See Otter Tail Power Co. v. United States, 410 U.S. 366 (1973).
322. See Lorain Journal Co. v. United States, 342 U.S. 143 (1951); United States v.
Griffith, 334 U.S. 100 (1948); Poster Exchange, Inc. v. National Screen Servo Corp., 431
F.2d 334 (5th Cir. 1970), cert. denied, 400 U.S. 997 (1970); Six Twenty-Nine Prods.,
Inc. v. Rollins Telecasting, Inc., 365 F.2d 478 (5th Cir. 1966).
323. See, e.g., N.W. Controls, Inc. v. Outboard Marine Corp., 333 F. Supp. 493, 518
(D. Del. 1971) (noncompliance with engineering specifications).
324. See, e.g., South End Oil Co. v. Texaco, Inc., 237 F. Supp. 650, 654 (N.D. Ill.
1965).
325. Mullis v. Arco Petroleum Corp., 502 F.2d 290, 297-98 (7th Cir. 1974) (gasoline
shortage), noted in 53 TExAs L. REv. 551 (1975).
326. See Varney v. Coleman Co., 1974-2 Trade Cas. 11 75,356, at 98,134 (D.N.H.
1974).
327. ld.
328. ld.
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lower courts have failed for the most part to discern the implications of
the Populist Shift, and they continue to withhold relief from the terminated franchisee. Should the judicial perspective change, this article
hopefully can provide some initial guidance for the extensions of sections 1 and 2 of the Sherman Act to the exigencies of franchise terminations.
The standard for liability proposed here involves an examination of
the impact of the termination on the franchisee and the business justifications or illicit motivations of the franchisor. While some guidelines
can be constructed, the necessity for a case-by-case factual inquiry cannot be avoided. It is interesting to note that the tests under sections
1 and 2 coalesce to a large degree; this identity is not evidence of
unnecessary redundancy, but rather it is evidence that the interstice in
the Sherman Act perceived by some329 is being closed.
A final concern is the impact the expansion of liability will have on
the franchise industry. There is of course the danger that limiting the
franchisor's discretion to terminate will reduce his willingness to engage
in franchising and cause him to seek alternate means of distributing his
goods or services. Any answer to this question is conjectural at best.
Though undoubtedly the changes proposed here may affect marginal
operations, there appears to be little likelihood that these changes will
significantly deter the utilization of franchises. The franchisor retains the
absolute right to choose initially the persons to, whom he grants a
franchise, and a franchisee can always be terminated if the franchisor
demonstrates an adequate business reason for doing so. The most likely
results of expanded liability are the exercise of greater circumspection by
the franchisor in the initial selection of franchisees and the maintenance
of more extensive records of franchisee performance. Neither of these
effects seems unduly burdensome. Indeed, in view of the proliferation
of franchisor-franchisee conflicts, they would probably be beneficial.
329. See text accompanying notes 232-33 supra.
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