NOTES
REFUSAL TO DEAL AS A PER SE
VIOLATION OF THE SHERMAN ACT:
RUSSELL STOVER ATTACKS THE
COLGA TE DOCTRINE
INTRODUCTION
The United States antitrust laws prohibit certain business conduct
that tends to lessen economic competition and thus retard the efficient
growth and operation of our economic system.' One of the primary antitrust provisions, section 1 of the Sherman Act, 2 facilitates economic
competition by prohibiting persons from entering into contracts, combinations, or conspiracies in restraint of trade. Because section I prohibits
only concerted action, 3 however, one person can unilaterally refuse to
deal with another without violating section 1.4 This antitrust principle
underlies the Colgate doctrine, 5 which permits a nonmonopolistic manuI. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 54-59 (1977) (discussing
economic effects of vertical nonprice restraints); Simpson v. Union Oil, 377 U.S. 13, 20-21 (1964)
(prohibition of vertical price restraints based on potential for destroying competition).
2. Section 1 of the Sherman Act, 15 U.S.C. § 1 (1982), provides: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the
several states, or with foreign nations, is declared to be illegal." A violation of § 1 consists of three
elements. There must be a contract, combination, or conspiracy; the contract, combination, or
conspiracy must affect interstate commerce; and the contract, combination, or conspiracy must
constitute a restraint of trade. Id
3. See United States v. Colgate & Co., 250 U.S. 300, 307 (1919). Concerted action is exhibited by a consensus or agreement between parties to act together. See Theatre Enters. v. Paramount
Film Distrib. Corp., 346 U.S. 537, 540-41 (1954) (conscious unanimity of action); Kiefer-Stewart
Co. v. Joseph E. Seagram & Sons, 340 U.S. 211, 213 (1951) (unity of purpose or common design
and understanding).
4. See American Tobacco Co. v. United States, 328 U.S. 781, 809-10 (1946) (unity of purpose
or common design between parties prerequisite to finding of conspiracy). See generally Barber, Refusals to Deal under the FederalAntitrust Laws, 103 U. PA. L. REV. 847, 849 (1955) (absent monopoly,
unilateral refusals to deal are lawful); Fulda, IndividualRefsals to Deal When Does Single-Firm Conduct
Become I'erticalRestramt?, 30 LAw & CONTEMP. PROBS. 590, 591-92 (1965) (unilateral refusal to sell
to dealers who do not observe resale prices is lawful). A unilateral refusal to deal may violate § 2 of
the Sherman Act, 15 U.S.C. § 2 (1982), if that refusal constitutes an attempt to monopolize or to
eliminate competition. See Otter Tail Power Co. v. United States, 410 U.S. 366, 377 (1973); Lorain
Journal Co. v. United States, 342 U.S. 143, 154 (1951).
5. See United States v. Colgate & Co., 250 U.S. 300 (1919).
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[Vol. 33:463
facturer to choose freely the parties with whom it will deal. The Colgate
doctrine in particular permits a nonmonopolistic manufacturer to refuse
to deal with retailers who do not comply with an announced resale price
maintenance (RPM) policy under which a manufacturer sets the price
6
at which retailers must sell its goods.
Since the inception of the Colgate doctrine, the United States Supreme
Court has increasingly narrowed the protection the doctrine affords
manufacturers by expanding the scope of what constitutes a contract,
combination, or conspiracy under section 1.7 In a series of cases, the
Court held that business conduct once considered unilateral and hence
protected by the Colgate doctrine constitutes concerted action, falling
within the scope of section l's prohibitions of restraints of trade. 8
This restriction of Colgate protection presents a substantial risk for
manufacturers that employ RPM.9 Because vertical price fixing, RPM,
is per se illegal, t0 any RPM policy that constitutes a combination or
agreement between a manufacturer and its dealers violates section 1. 1
A recent Federal Trade Commission (FTC) decision, Russell Stover
6. Id. at 307. Absent the requisite contract, combination, or conspiracy, a manufacturer
may enforce an RPM policy by refusing to deal with noncomplying retailers without violating § I
of the Sherman Act. Id Manufacturers may employ refusals to deal as a means of implementing
RPM policies. This Comment uses the terms "resale price maintenance" (RPM) and "vertical
price fixing" to refer to circumstances in which a manufacturer designates the price at which a
dealer can resell the manufacturer's goods. For the purposes of this Comment, these terms are
interchangeable.
Manufacturers use RPM in many different contexts. See, e.g., Simpson v. Union Oil Co., 377 U.S.
13 (1964) (gasoline supplier fixing retail prices for independent service stations); United States v.
Parke, Davis & Co., 362 U.S. 29 (1960) (drug manufacturer combining with wholesalers to fix
retailers' prices); Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) (drug
manufacturer fixing prices of wholesalers and retailers). Unless otherwise specified, this Comment
discusses only the use of RPM in two-tiered distribution systems in which manufacturers deal directly with their retailers.
7. See, e.g., Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 142 (1968)
(§ 1 agreement formed as of moment dealer unwillingly complies with restrictive franchise policy);
United States v. Parke, Davis & Co., 362 U.S. 29, 44 (1960) (affirmative action by manufacturer to
secure adherence to resale prices beyond bare unilateral refusal to deal constitutes agreement under
§ 1). For a more thorough discussion of the Supreme Court's expansion of the definition of conduct
under § 1, see in/ha notes 48-67 and accompanying text.
8. See infia notes 48-67 and accompanying text (discussing Court's expanded concept of
agreement).
9. See Kilburn, Other Vertical Problems: Pricing,Refusals to Deal,Distribution, 51 ANTITRUST L.J.
173, 175-78 (1982) (because illegal agreement is formed if dealer unwillingly complies with RPM,
even announcing RPM program creates risk that one dealer might unwillingly adopt it and create
illegal agreement). For a discussion of the business risks involved in implementing an RPM policy,
see infia notes 134-44 and accompanying text.
10. E.g., Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, 340 U.S. 211 (1951) (vertical price
fixing per se illegal under § 1); United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940)
(combination "raising, depressing, fixing, pegging, or stabilizing" price per se illegal).
11. See United States v. Parke, Davis & Co., 362 U.S. 29, 41-42 (1960). The Supreme Court
has rejected manufacturers' attempts to justify price fixing. See, e.g., Catalano, Inc. v. Target Sales,
Inc., 446 U.S. 643, 647 (1980) (whether prices are reasonable is immaterial); Dr. Miles Medical Co.
v. John D. Park & Sons Co., 220 U.S. 373, 401-04 (1911) (that product is manufactured pursuant to
secret process does not justify price fixing).
1984]
REFUSAL TO DEAL
Candies, Inc., 12 illustrates the government's desire to limit even further
the Colgate doctrine and thereby the use of RPM, and correspondingly
calls for a reexamination of the benefits of RPM and the legal standard
under which it is judged. In Stover, the FTC held that dealers' unwilling
compliance with the RPM policy of Stover, the manufacturer, constituted an agreement, and that the policy thus violated section 1.13 Stover
had established an RPM policy and, in order to enforce the policy, had
refused to deal with retailers who did not comply with the suggested
prices, forcing some dealers to comply unwillingly.' 4 Although the
United States Court of Appeals for the Eighth Circuit subsequently reversed the FTC,15 the FTC's holding that Stover's conduct had violated
section 1 demonstrates the limited nature of the protection that manufacturers enjoy under the Colgate doctrine, and the tenuousness of even
that limited protection.' 6 The possibility that other circuits might
adopt the FTC's coercion theory of agreement indicates the need for a
thorough reconsideration of the per se approach to vertical price fixing.
This Comment examines the standard courts employ in judging the
legality of RPM policies under section 1. The Comment argues that in
light of the government's continued attempts to abolish the Colgate doctrine, courts should adopt a rule of reason standard in judging RPM
policies. This standard would prevent restraints of trade while allowing
the procompetitive effects that the Colgate doctrine was originally
designed to encourage. Part I of this Comment discusses the facts of
Stover as a prologue to examining Colgate and its progeny. Part II delineates the Colgate doctrine, demonstrating the Supreme Court's restrictions on the doctrine's scope and the uncertainty of the protection the
doctrine provides manufacturers. In Parts III and IV, the Comment
analyzes the holding and effect of the Stover decision and discusses the
necessity of adopting a rule of reason standard in judging the legality of
RPM policies. The Comment concludes in Part V with an examination
12,
100 F.T.C. 16 (1982) (Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
13.
Id at 47.
14. Id at 17. The company had designated suggested dealer prices on lists, invoices, order
forms, and tickets. Id
Stover had refused to establish dealerships with known discounters and had
terminated dealerships with existing retailers who sold its products below the designated prices. Id
at 17-18.
15. Russell Stover Candies, Inc. v. FTC, 718 F.2d 256 (8th Cir. 1983).
16. The Supreme Court has substantially limited the Colgate doctrine, see znfia notes 48-67
and accompanying text, leaving protection only for a manufacturer's right to announce an RPM
policy and to refuse to deal with retailers who fail to comply with that policy. See United States v.
Parke, Davis & Co., 362 U.S. 29, 44-47 (1960) (simple refusal to deal does not violate § 1); Klein v.
American Luggage Works, Inc., 323 F.2d 787, 791 (3d Cir. 1963) (conscious parallelism in pricing
does not create illegal agreement); Garrett's Inc. v. Farah Mfg. Co., 412 F. Supp. 656 (D.S.C. 1976)
(unilateral refusal to deal does not violate Sherman Act). The coercion theory of agreement that
the FTC attempted to establish in Stozer, however, would have left protection only for a manufac-
turer's right to select its dealers initially. See infra notes 134-44 and accompanying text.
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of the advantages of the rule of reason standard. It argues that the
Court's recent treatment of vertical restraints provides a legal basis for
adopting the rule of reason standard, and that the necessity of preserving the Colgate doctrine mandates that courts adopt this standard.
I.
RUSSELL STOVER CANDIES, INC.
Russell Stover Candies, Inc. is a major domestic manufacturer of
boxed chocolates. Stover, which competes with several other manufacturers in the candy industry, 17 had a well-known policy of requiring retailers to sell its chocolates at designated prices. 18 In accordance with
this policy, Stover had refused to sell to known discounting retailers and
terminated dealerships with existing discounting retailers.19 As a consequence, many other retailers had refrained from selling Stover products
20
at discounted prices solely because of this refusal to deal policy.
In July 1980 the FTC issued a complaint alleging that Stover's RPM
policy 2' constituted an agreement between Stover and its retailers to fix
retail prices in violation of section 1 of the Sherman Act and section 5 of
the Federal Trade Commission Act. 2 2 The FTC argued that Stover's
RPM policy created agreements between Stover and its dealers in two
ways. First, the FTC argued that Stover's announced policy of terminating noncomplying dealers resulted in coercive agreements because
the scheme exacted unwilling compliance from the dealers. 23 Second,
the FTC argued that the dealers' willing participation in Stover's pricing plan created a series of vertical agreements between Stover and its
17. Russell StoverCandies, Inc., 100 F.T.C. 1,4-5 (1981) (initial decision),rev'd, 100 F.T.C. 16
(1982) (Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983). Stover distributes its products to
over 18,000 retail dealers in the U.S. Id at 4. Among the companies Stover competes with are
Whitman's, Schrafft Candy Co., Fanny Farmer Candy Shops, Inc., Barton's Candy Corp., Fanny
May Candy Shops, Inc., M&M/Mars, and EJ. Brach & Sons. Id at 4-5. The Company's sales in
1978 and 1979 were $117 million and $125.8 million respectively. Id at 4.
18. Russell Stover Candies, Inc., 100 F.T.C. 16, 17 (1982) (Commission decision), rezd, 718
F.2d 256 (8th Cir. 1983). Stover neither requested nor accepted express assurances of price maintenance from its dealers. Id
19. Id at 17-18. Stover had been employing these pricing and distribution policies for at least
five years prior to the issuance of the complaint. Id at 18.
20. Id According to a Louis Harris poll, Stover's retailers sold the vast majority (94.4%) of
Stover products at or above the designated prices. Id The Commission inferred widespread dealer
compliance with Stover's pricing policy from this poll. Id
21. Russell Stover Candies, Inc., 100 F.T.C. 1, 2 (1981) (initial decision),rv', 100 F.T.C. 16
(1982) (Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
22. Russell Stover Candies, Inc., 100 F.T.C. 16, 18 (1982) (Commission decision), rev'd, 718
F.2d 256 (8th Cir. 1983). Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (1982), is
broader than § 1 of the Sherman Act. See FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244
(1972). Thus, violations of the Sherman Act are, a fortiori, violations of the Federal Trade Commission Act. See FTC v. Brown Shoe Co., 384 U.S. 316, 321-22 (1966).
23. Russell Stover Candies, Inc., 100 F.T.C. 16, 20 (1982) (Commission decision), rd, 718
F.2d 256 (8th Cir. 1983) . The FTC reasoned that precedent allowed it to find an agreement if a
manufacturer's refusal to deal policy leads to widespread unwilling compliance. Id.
1984]
REFUSAL TO DEAL
dealers. 24
The administrative law judge dismissed the charges against Stover,
finding that the Colgate doctrine protected Stover's right to choose the
parties with whom it would deal. 25 Counsel for the FTC then appealed
26
the decision to the Commission.
The Commission addressed the question whether the evidentiary record, to which the parties had stipulated, 27 demonstrated the existence of
a contract, combination, or conspiracy. 28 Absent the requisite element
of agreement, Stover's pricing and distribution policies would not violate section 1 of the Sherman Act. 29 Stover argued that, based on precedent, its policy of announcing in advance the circumstances under
which it would refuse to sell to retailers, and its subsequent refusal to
deal with those retailers who violated the announced policy, was, as a
matter of law, unilateral behavior protected under the Colgate
doctrine.30
The Commission disagreed with this contention and held that Stover's conduct constituted an agreement, and hence that its RPM policy
violated section 1.3 1 An examination of the Colgate doctrine and the
FTC's opinion reveals why the FTC erred in its decision and demonstrates the correctness of the Eighth Circuit's reversal of that decision.
24. Id An identical course of conduct by two or more parties supports an inference of conspiracy. See Eastern States Retail Lumber Dealer's Ass'n v. United States, 234 U.S. 600, 614 (1914);
5ee also Interstate Circuit, Inc. v. United States, 306 U.S. 208, 225-27 (1939) (absent legitimate
business justification, consciously parallel pricing behavior among competitors raises inference of
vertical agreements to fix prices). The FTC argued that the Stover dealers' willing adherence to
Stover's RPM policy in return for uniformly higher prices and decreased price competition among
their competitors created an agreement. Russell Stover Candies, Inc., 100 F.T.C. 16, 36 (1982)
(Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
25. Russell Stover Candies, Inc., 100 F.T.C. 1, 16 (1981) (initial decision), rev'd, 100 F.T.C. 16,
17 (1982) (Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
26. Russell Stover Candies, Inc., 100 F.T.C. 16, 16-17 (1982) (Commission decision), rtv'd, 718
F.2d 256 (8th Cir. 1983).
27. Id at 18.
28. Id at 19. As to the first element of a § I violation, the parties had stipulated that Stover
engaged in commerce and that its activities affected commerce within the meaning of the Sherman
Act. Id
29. &e id Stover, in addition to arguing the lack of an agreement, noted that the Commission's refusal to allow business practices falling within the scope of the Colgate doctrine would raise
doubts about the constitutionality of § 1. Petitioner's Brief at 46-47, Russell Stover Candies, Inc.,
100 F.T.C. 16 (1982) (Commission decision),rev'd, 718 F.2d 256 (8th Cir. 1983). Stover argued that
a determination that it had violated § 1 would violate the due process clause of the fifth amendment because Stover had been denied fair warning and the opportunity to change its business
policies to comply with the law. Id The Supreme Court, however, has held that the Sherman Act
is not unduly vague. See Nash v. United States, 229 U.S. 373, 376-78 (1913) (rejecting contention
that criminal provisions of Sherman Act are unduly vague and hence void); see also Cline v. Frank
Dairy Co., 274 U.S. 445, 460 (1927) (discussing Nash).
30. Russell Stover Candies, Inc., 100 F.T.C. 16, 19-20 (1982) (Commission decision), revd, 718
F.2d 256 (8th Cir. 1983). Stover averred that because termination of noncomplying dealers was
permissible unilateral conduct under Colgate, evidence of widespread dealer compliance with Stover's RPM policy could not by itself make Stover's conduct bilateral behavior. Id
31. Id at 47.
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This examination also reveals the need to adopt a new standard for
judging RPM.
II.
A.
THE COLGATE DOCTRINE
Establishzg the Foundation.: Dr. Miles and Colgate
In Dr. Miles Medical Co. v. John D. Park & Sons Co., 32 the Supreme
Court held that express agreements fixing resale prices are unreasonable
restraints of trade.3 3 Dr. Miles Medical Co. had required its wholesalers
and retailers to enter into written contracts specifying the prices at
which, and the customers to whom, they would sell the company's
medicines.3 4 The Court based its decision on two grounds. First, the
Court found that the contracts imposed an invalid restraint on the
wholesalers' and retailers' right of alienation. 3 5 Second, the Court found
that because RPM had the same anticompetitive effect as horizontal
price-fixing agreements 36 among the dealers, it, like horizontal price
37
fixing, is illegal.
Nine years later, in United States v. Colgate & Co., 38 the Court carved
32. 220 U.S. 373 (1911).
33. Id at 409. Dr. Miles Medical Co., a manufacturer of proprietary medicines, sued to enjoin a retailer from violating its system of minimum retail pricing. Id at 379.
34. Id at 374-81.
35. Id at 409. The Court found that the resale price agreements unlawfully restrict a dealer's
freedom to trade its wares. Id at 407-08; see also Turner, The DefinitionofAgreement Under the Sherman
Act. Conscious Parallesm and Refuksals to Deal, 75 HARV. L. REV. 655, 687 (1962) (hostility to restraints on alienation was rationale of Dr. Miles).
36. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 408-09 (1911). Horizontal price fixing occurs when two or more competitors agree to set market prices for their products.
See 16AJ. VON KALINOWSKi, BUSINESS ORGANIZATIONS: ANTITRUST LAWS AND TRADE REGULA-
TION § 6A.02[l] (1983). A horizontal price-fixing agreement among dealers, or a dealer's cartel,
eliminates price competition among product brands. See id Such agreements are against public
policy because they tend to increase consumer prices. See Dr. Miles, 220 U.S. at 408. Horizontal
price fixing, like vertical price fixing, is per se illegal under § 1 of the Sherman Act. See United
States v. Trenton Potteries Co., 273 U.S. 392, 397 (1927) (horizontal price-fixing agreements are
inherently unlawful because they create great potential for monopoly power); cf United States v.
Topoco Assocs., Inc., 405 U.S. 596, 608 (1972) (horizontal market division eliminates competition
and is illegal per se).
37. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 408 (1911). The Court
compared the economic effects of horizontal and vertical price fixing and condemned both restrictions as "having for their sole purpose destruction of competition and the fixing of prices." Id In
Dr. Miles the Court failed to recognize, however, that vertical and horizontal price fixing have
different competitive effects on the economic market. Cf Continental T.V., Inc. v. GTE Sylvania
Inc., 433 U.S. 36, 57-59 (1977) (vertical nonprice restraints that stimulate competition among product brands do not constitute per se violation of § 1). Although horizontal restraints have no purpose other than the elimination of competition, see supra note 36, vertical restraints can enhance
competition among product brands. See Continental TV, 433 U.S. at 54-55. For a discussion of
vertical price restraints and their competitive effect on the economic market, see in/a notes 164-72
and accompanying text.
38. 250 U.S. 300 (1919). In a criminal indictment, the government alleged that Colgate had
engaged in RPM by implementing tactics such as blacklisting and refusing to deal with retailers
who failed to adhere to its suggested resale prices. Id at 303. The Supreme Court, reviewing the
district court's dismissal of the indictment, upheld the lower court's determination that the indict-
REFUSAL TO DEAL
out an exception to the Dr. Miles prohibition of vertical price fixing.39
The Court held that a manufacturer who does not intend to establish a
monopoly can "freely. .. exercise his own independent discretion as to
parties with whom he will deal . . . [a]nd . . .may announce in advance the circumstances under which he will refuse to sell."' 40 The
Court thus distinguished between unlawful bilateral conduct, such as
the price-fixing agreements in Dr. Miles,4 1 and lawful unilateral conduct, such as the manufacturer's refusal to sell to discounters in Colgate.42 Absent proof of an agreement, each party's conduct is unilateral
43
and thus beyond the reach of section 1 of the Sherman Act.
The rules the Court established in Colgate and Dr. Miles reflect its
attempt to balance two competing antitrust principles: a dealer's right
to sell its products without price restraint, and a manufacturer's right to
establish conditions of trade. 44 The Court's decisions, however, increased the tension between these two principles. Under Dr.Miles pricefixing agreements are unreasonable restraints of trade; under Colgate
only RPM policies established by express agreement are illegal. 45 Colgate allows manufacturers to secure dealer adherence to suggested retail
prices merely by announcing an RPM policy and threatening termination of the distribution agreement for noncompliance. 46 This result is
the same as that achieved by the explicit contractual agreements that
ment failed to allege a contract or the requisite agreement to fix resale prices. Id at 307. The
Court concluded that the indictment alleged only that Colgate was lawfully exercising its right to
refuse to sell to customers who did not comply with its announced prices. Id at 306.
39. See supra notes 32-37 and accompanying text.
40. United States v. Colgate, 250 U.S. 300, 307 (1919). The Court subsequently interpreted
this language as excluding RPM based on implied agreements, see infia notes 48-57 and accompanying text, and as including any affirmative conduct by a manufacturer beyond a bare unilateral
refusal to deal. See infia notes 58-67 and accompanying text.
41. See supra notes 32-37 and accompanying text.
42. See supra note 40 and accompanying text.
43. United States v. Colgate, 250 U.S. 300, 307-08 (1919). The Court distinguished Colgate
from Dr. Mi/es because in Dr. Miles "the unlawful combination was effected through contracts
which undertook to prevent dealers from freely exercising the right to sell," while in Colgate the
manufacturer unilaterally refused to sell to dealers who declined to follow the suggested prices. Id
44. See generally Barber, supra note 4, at 885 (manufacturer's freedom to trade has been unique
structural characteristic of capitalism); Levi, The Parke, Davis-Colgate Doctrine: The Ban on Resale Price
Maintenance, 1960 Sup. CT. REX. 258, 277 (although Dr. Miles favored dealers' right of alienation,
Colgate favored manufacturers' right to refuse to sell); Comment, The Colgate Doctrine: Its Past and
Present, 12 Hous. L. REV. 409, 409 (1975) (tension in capitalism is between manufacturer's freedom
to trade without governmental intervention and advantages of unrestrained competition based on
supply and demand principles).
45. See, e.g., Baker, Interconnected Problems of Doctrine and Economics in the Section One Labyrinth: Is
Sylvaniaa Hay Out', 67 VA. L. REV.1457, 1458 (1981) (Colgate permitted manufacturers to achieve
through threat of termination what Dr. Miles prohibited manufacturers from achieving through
explicit contractual restrictions); Levi, supra note 44, at 326 (Colgate doctrine emerged without
meaningful structure of theory to support it in light of Dr. Miles prohibition of vertical price fixing).
46. See Pitofsky & Dam, Is the Colgate Doctrine Dead?, 37 A.B.A. ANTITRUST LJ. 772, 773
(1968) (Colgate doctrine allowed manufacturer to exact compliance with RPM policy through
threat of termination).
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[Vol. 33:463
47
the Court had barred in Dr. Miles.
B. Limiting Colgate's Reach
To alleviate this tension, the Supreme Court has limited the protection Colgate provides manufacturers by expanding the scope of what
constitutes a contract, combination, or conspiracy under section 1. In
United States v. A. Schrader's Son, Inc., 48 for example, the Court held that
courts could imply an agreement between a manufacturer and its retailers to fix prices from a course of dealing. 49 The Court noted that, contrary to the lower court's interpretation, 50 Colgate had not overruled or
express or immodified Dr. Miles and that RPM agreements, whether
51
plied, remain unlawful under the Sherman Act.
In a later decision, FTCv. Beech-Nut Packing Co., 52 the Court expanded
the scope of prohibited agreements to include agreements designed to
enforce supposedly unilateral RPM policies.5 3 In Beech-Nut, a manufacturer had secured the cooperation of its wholesalers in an active pricemonitoring system designed to ensure identification and termination 5of4
dealers who did not comply with the manufacturer's RPM policy.
The Court found Beech-Nut's scheme to enforce price fixing to be as
effective in securing dealer compliance as an express or implied agreement between the manufacturer and its retailers would have been. 5 5 Although the Court decided only that Beech-Nut's practices violated
section 5 of the Federal Trade Commission Act as methods of unfair
competition,5 6 its analysis suggested that Beech-Nut's enforcement
57
measure also violated section 1.
47. See Turner,supra note 35, at 689 (no substantive difference between express agreements in
Dr. Miles and tacit agreements induced by Co/gate protected refusal to deal).
48. 252 U.S. 85 (1920). In Schrader's the government alleged that Schrader's Son, Inc. had
entered into RPM contracts with its wholesalers. Id at 94-95. The lower court had dismissed the
suit based on its interpretation that in Colgate the Supreme Court had overruled the Dr. Mt/ls rule
proscribing vertical price fixing. Id at 99.
49. Id After the Court's decision in Schrader's no clear rule existed regarding what course of
dealing would constitute an implied agreement under § 1. One commentator has stated that "once
Dr. Miles was applied to tacit as well as express agreements, any tenable line between 'agreements'
and compliance with the manufacturer's wishes wholly disappeared." Turner, supra note 35, at
688.
50. See supra note 48.
51. United States v. A. Schrader's Son, Inc., 252 U.S. 85, 98-99 (1920).
52. 257 U.S. 441 (1922).
53. Id at 454-55. The Court determined that the concept of agreement included any schemes
a manufacturer employed to secure adherence to an RPM policy. Id
54. Id at 455-56.
55. Id at 455.
56. Id at 454-55. Section 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. § 45(a)(1)
(1982), states: "Unfair methods of competition in or affecting commerce, and unfair or deceptive
acts or practices in or affecting commerce, are hereby declared unlawful." Id
57. FTC v. Beech-Nut Packing Co., 257 U.S. 441, 454 (1922). After Beech-Nut any methods
that a manufacturer used to secure adherence to its RPM policy beyond a "simple refusal to sell"
constituted a combination even if the conduct did not evidence an express or implied agreement.
1984]
REFUSAL TO DEAL
In United States v. Bausch & Lomb Optical Co.58 the Court confirmed the
suggestion that a manufacturer's use of its wholesalers to secure retailer
adherence to an RPM policy would violate section 1. The manufacturer in Bausch & Lomb had established a two-tier distribution RPM
scheme under which its wholesalers were not to sell to retailers who refused to charge the suggested retail prices. 5 9 In finding that the wholesalers "understood" that the manufacturer would no longer deal with
them if they deviated from its RPM policy, 60 the Court concluded that
the wholesalers' acquiescence in the manufacturer's RPM plan consti6
tuted a section 1 combination. '
In 1960, the Court synthesized these cases and established a general
standard for determining what constitutes an agreement in the context
of RPM policies. In United States v. Parke, Davis & Co. 62 the Court proclaimed the "plus factor" requirement: an agreement is formed only if
the manufacturer secures retailer adherence to a RPM policy by conduct that exceeds a "mere declination to sell."' 63 Parke, Davis had enforced its RPM policy by threatening to stop supplying noncomplying
retailers and wholesalers who sold to noncomplying retailers. 64 The
Court found that, by enlisting wholesaler support to enforce its pricing
policy, Parke, Davis had created a combination between itself and the
acquiescing wholesalers and retailers. 6 5 After Parke, Davis, the Colgate
See id; see also Comment, supra note 44, at 412-13 (Beech-Nut further curtailed conduct protected
under Colgate and provided Court with another decision hostile to Colgate doctrine).
58. 321 U.S. 707 (1944).
59. Id at 714-15. The Court characterized the wholesalers' cooperation with the manufacturer's suggested resale prices as an acceptance of a proffered plan of distribution and hence an
agreement under § 1.Id at 723.
60. Id at 714-15. After Bausch & Lomb the Colgate doctrine would not protect a manufacturer
who affirmatively induced or coerced its dealers to comply with its RPM policy. The Court explicitly adopted this reformation of the Colgate doctrine in United States v. Parke, Davis & Co., 362
U.S. 29 (1960). See mfra notes 62-67 and accompanying text.
61. United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 723 (1944). The Court reasoned that it was "immaterial" whether the combination was formed by "agreement or by securing
the acquiescence of the wholesalers coupled with assistance in effectuating its purpose." Id
62. 362 U.S. 29 (1960). Parke, Davis had announced a policy ofrefusing to deal with retailers
who failed to observe its suggested retail prices. Id at 32. It did reinstate discontinued retailers
who agreed to observe its pricing schedule. Id at 34-36.
63. Id at 43. Under the plus factor requirement, any affirmative action by a manufacturer
that causes retailers to comply with suggested trade prices creates an agreement. Id
64. Id at 33. The Court reasoned that a manufacturer's affirmative action in securing adherence to resale prices had the effect of changing voluntary dealer compliance into involuntary acquiescence in the plan. Id at 46-47. Unwilling compliance resulting from a manufacturer-enforced
restraint thus creates a § I agreement. Id at 45.
65. Id Apart from constituting an illegal combination, the concerted efforts of Parke, Davis
and its wholesalers to discontinue discounting dealers were tantamount to an illegal boycott.
Courts have held that boycotts or concerted refusals to deal constitute unlawful restraints of trade
under the Sherman Act. See Fashion Originators' Guild of Am., Inc. v. FTC, 312 U.S. 457 (1941)
(guild members' concerted refusal to sell to nonmember manufacturers or to retailers who bought
products from nonmember manufacturers held unreasonable restraint of trade); see also Levi, supra
note 44, at 325 (Parke, Davis' conduct of enlisting support of wholesalers to implement RPM policy
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doctrine sanctioned only two actions: a manufacturer's right to announce a RPM policy, and a manufacturer's right to refuse to deal with
retailers who failed to comply with that policy. 66 A manufacturer could
not lawfully use any other affirmative means to obtain dealer compli67
ance with its RPM policy.
These cases demonstrate the Supreme Court's reluctance to permit a
manufacturer to impose substantial restrictions on dealers' freedom to
sell their products. 68 In a free market economic system, however, a
nonmonopolistic manufacturer should be allowed to trade with retailers
on terms determined through a process of free bargaining. 69 The profit
motive guarantees that a manufacturer will be sensitive to economic fac70
tors that affect the efficient distribution and marketing of its product.
If a manufacturer decides not to deal with discounters in a competitive
market, competing manufacturers should be able to take over the
71
nondealing manufacturer's market share.
The FTC's decision in Stover, however, exemplifies the view that retailer market forces of supply and demand, rather than manufacturer
72
market forces of supply and demand, should determine resale prices.
The Commission's determination that a dealer's unwilling compliance
with suggested retail prices constitutes an agreement 73 substantially
strengthened this view in spite of the Eighth Circuit's subsequent reversal. 74 The need to consider an alternative approach to RPM thus behad aura of illegal boycott); Turner, supra note 35, at 686 (Parke, Davis' enlistment of wholesalers
to enforce RPM policy different from manufacturer's implementation of program by itselO.
66. United States v. Parke, Davis & Co., 362 U.S. 29, 43 (1960) (Colgate means "no more than
a simple refusal to sell to customers who will not resell at prices suggested by the seller").
67. Id at 44-47.
68. Set supra notes 48-64 and accompanying text; see also Albrecht v. Herald Co., 390 U.S. 145
(1968) (combination formed at moment dealer unwillingly complies with manufacturer's suggested
prices).
69. See Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 412 (1911) (Holmes,
J., dissenting).
70. See id at 412-13 (Holmes, J., dissenting) (manufacturers in better position than dealers to
determine reasonable retail prices; goal of sales maximization will motivate manufacturers to set
competitive prices commensurate with market demand forces); Russell Stover Candies, Inc., 100
F.T.C. 16, 52 (1982) (Commission decision) (Miller, Chmn., dissenting) (profit incentive ensures
that manufacturer will create inducements for retailer to market its product effectively), rev , 718
F.2d 256 (8th Cir. 1983); see also Posner, Antitrust Po/ioy and the Supreme Court: An 4nasis of the Restricted Distribution,Horizontal Mergerand PotentialCompetition Decisions, 75 COLUM. L. REv. 282, 288
(1975) (manufacturer presumptively more knowledgeable than price-cutting dealer about efficient
distribution of product).
71. See Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982) (Commission decision) (Miller,
Chmn., dissenting) (competitors can supply dealers who are terminated for failing to observe suggested resale prices), revid, 718 F.2d 256 (8th Cir. 1983).
72. See id at 55 (FTC cease and desist order prohibits Stover from terminating retailers who
set own prices and discount products).
73. Id at 35 (threat of termination for failure to comply is coercive element that establishes
agreement between Stover and acquiescing dealers). For a discussion of the FTC's coercion theory
of agreement, see infia notes 145-55 and accompanying text.
74. Russell Stover Candies, Inc. v. FTC, 718 F.2d 256 (8th Cir. 1983).
1984]
REFUSAL TO DEAL
comes even more important.
III.
THE COMMISSION'S FINDINGS
In Stover the FTC found that many dealers had complied with Stover's RPM policy solely to avoid termination of their distribution agreement. 75 Because the dealers would have discounted the products absent
the threat of termination, 76 the Commission concluded that Stover's
RPM policy had led dealers to act contrary to their own preferences and
that therefore the policy was coercive. 77 According to the FTC, the Colgate doctrine does not protect manufacturers who coerce dealers into
charging suggested resale prices.78 The FTC thus posited a coercion
theory of agreement in Stover: the coercion inherent in threatened termination that induces unwilling dealer compliance with an RPM policy
constitutes bilateral behavior and a section 1 agreement. 79
In Stover the Commission attempted to discard the plus factor requirement that the Supreme Court had established in Parke, Davis.8 0 Although the Commission acknowledged that courts had relied on the plus
factor requirement to infer coercion, it reasoned that business practices
that cause unwilling compliance were inherently coercive and thus
outside the scope of Colgate protection.8 1 The Commission thus believed
that it was applying Colgate properly in light of precedents that had
82
found various business practices to be outside Colgate's scope.
The Commission argued that the Colgate doctrine only protects a
manufacturer's initial right to select dealers and to announce a termina75. Russell Stover Candies, Inc., 100 F.T.C. 16, 18 (1982) (Commission decision), rev'd, 718
F.2d 256 (8th Cir. 1983).
76. Id
77. Id at 35. The Commission stated that the coercion inherent in a manufacturer's threat to
terminate a dealer for failure to adhere to a pricing policy is analogous to the coercion inherent in a
manufacturer's threat to cancel a lease or terminate a franchise, and thus equally illegal. Id For
an argument that courts should distinguish between coercion in a franchise context and coercion in
a manufacturer-retailer context, see infra notes 125-31 and accompanying text.
78. Russell Stover Candies, Inc., 100 F.T.C. 16, 34 (1982) (Commission decision), rev'd, 718
F.2d 256 (8th Cir. 1983). The Commission distinguished Colgate by holding that the right of a
manufacturer to terminate for noncompliance with a pricing policy "has been circumscribed by a
prohibition on the securing of unwilling compliance through the coercion inherent in threatened
termination." Id (emphasis added).
79. Id For an argument that sufficient economic power is an essential factor in showing
unwilling compliance, see infra notes 145-55 and accompanying text.
80. See Russell Stover Candies, Inc., 100 F.T.C. 16, 35 (1982) (Commission decision), rev'd,
718 F,2d 256 (8th Cir. 1983).
81. Id Although the plus factor requirement ensures that a manufacturer's conduct exceeds a
threat of termination for § 1 liability to arise, the FTC stated that an extra factor is insignificant.
Id For an argument that the plus factor requirement is essential for distinguishing Colgate protected conduct from coercive action, see infra notes 118-32 and accompanying text.
82. Ste Russell Stover Candies, Inc., 100 F.T.C. 16, 35 (1982) (Commission decision), rev'd,
718 F.2d 256 (8th Cir. 1983).
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tion policy.8 3 If the manufacturer's termination policy causes a dealer to
act contrary to his preferences, an agreement arises. 84 This argument,
however, makes the dealer's subjective motivation dispositive in proving
an agreement.8 5 Unwilling dealer compliance with suggested resale
prices would create an unlawful RPM agreement. 8 6 As the dissent
noted, Colgate thus would protect only the right of initial dealer selection
because section 1 liability would arise if the dealer acquiesced in the
87
announced termination policy.
The dissent also rejected the majority's view that unwilling dealer
compliance always constitutes an agreement. It stated that coercion
could not be demonstrated without evidence of market power.88 Absent
manufacturer market power, retailers are free to select among competitive suppliers and would choose an RPM plan only if it is preferable to
other options. 89 The stipulated record indicates that because Stover
lacked the requisite market power, no coercion, and therefore no agreement, could have existed. 9°
Furthermore, the parties' interests in a manufacturer-retailer relationship are rarely identical, and must be compromised through a process of
free bargaining. 91 The dissent argued that the majority ignored basic
contract principles when it found that the commercial constraints inher92
ent in a manufacturer-retailer relationship constituted an agreement.
The dissent concluded that RPM should not be treated as per se illegal,
93
but rather should be judged under the rule of reason.
83. Id at 39-40. The FTC acknowledged, however, that an RPM plan that included an
announced threat of termination probably would result in an unlawful combination. Id
84. Id
85. Sce id
86. Id
87. Id at 50-51 (Miller, Chmn., dissenting).
88. Id at 52 (Miller, Chmn., dissenting). For an argument that a coercive agreement cannot
be demonstrated without evidence of economic market power, see rn/a notes 145-55 and accompanying text.
89. Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982) (Miller, Chmn., dissenting) (Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
90. Id (Miller, Chmn., dissenting). Because Stover competes with other candy manufacturers, see supra note 17, the dissent inferred that terminated Stover dealers would probably be able to
find other suppliers. Russell Stover Candies, Inc., 100 F.T.C. at 52 (Miller, Chmn., dissenting)
(Commission decision). The majority, however, did not consider whether dealers discontented with
Stover's RPM plan could have found alternative suppliers. For a discussion of how the majority
erred in finding coercion based on the record, see in/fa notes 145-55 and accompanying text.
91. See Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982) (Miller, Chmn., dissenting)
(Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
92. See id (Miller, Chmn., dissenting).
93. Id at 53 (Miller, Chmn., dissenting). As the dissent noted, recent trends in the Supreme
Court's treatment of vertical nonprice restraints mandate reconsideration of the per se rule on
RPM. See infra notes 185-200 and accompanying text.
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REFUSAL TO DEAL
IV.
THE FLAWED RESULT IN STOVER
The Eighth Circuit, in reversing the FTC, rejected the Commission's
attempt to restrict the Colgate doctrine to protecting a manufacturer's
right to select its dealers initially. 94 The court noted that although Colgate's progeny had limited the Colgate doctrine's scope, courts continued
to preserve the doctrine's basic principle: unilateral manufacturer conduct, including announcements of suggested resale price policies and re95
fusals to deal, is lawful under section 1.
Unlike case law subsequent to Colgate, however, Stover was a test case
that the FTC had designed specifically to challenge the legality of those
RPM policies that the Colgate doctrine still protected. 96 Although the
Eighth Circuit's decision preserves the essence of the Colgate doctrine,
both the FTC and the Eighth Circuit decisions reveal the tenuousness of
this protection. 9 7 Not only is it possible that a different circuit may
adopt the FTC's coercion theory of agreement, but also, as the Eighth
Circuit noted,98 the Colgate doctrine currently provides only limited protection to manufacturers employing RPM policies. A critique of the
FTC decision reveals the scope of the protection manufacturers enjoy
under the Colgate doctrine. It also demonstrates that other courts similarly should reject the FTC's coercion theory of agreement and preserve
the Colgate doctrine's limited protection. An analysis of the decision
thus establishes the need to judge RPM policies under a rule of reason
standard, notwithstanding the courts' continued adherence to the Colgate doctrine. A manufacturer's RPM policies deserve the protection of
both the Colgate doctrine and the rule of reason standard.
A.
Stover As a Test Case
The FTC did not dispute the proposition that Stover's business practices paralleled those the Supreme Court had found legal in Colgate.99
94,
Russell Stover Candies, Inc. v. FTC, 718 F.2d 256, 259 (8th Cir. 1983).
95.
Id
at 260. See also Filco v. Amana Refrig., Inc., 709 F.2d 1257, 1261 (9th Cir. 1983)
(manufacturer legally may announce refusal to deal with anyone who does not adhere to suggested
price schedule); Spray-Rite Serv. Corp. v. Monsanto Corp., 684 F.2d 1226, 1234 (7th Cir. 1982)
(manufacturer may unilaterally fix suggested resale price for its products and may refuse to deal
with distributor that resells product at price other than suggested price),cert. granted, 103 S. Ct. 1249
(1983).
96. Russell Stover Candies, Inc. v. FTC, 718 F.2d 256, 257 (8th Cir. 1983) (sole issue on
appeal was continuing validity of Colgate doctrine).
97. For discussions of the Colgate doctrine's illusory protection, see L. SULLIVAN, HANDBOOK
OF THE LAW OF ANTITRUST 394 (1977); Pitofsky & Dam, supra note 46; Comment, UnilateralRefusal
to Deak King Colgate is Dead, 30 OHIO ST. L.J. 537 (1969).
98. See Russell Stover Candies, Inc. v. FTC, 718 F.2d 256, 259 (8th Cir. 1983).
99. See Russell Stover Candies, Inc., 100 F.T.C. 16, 20 n. 11 (1982) (Commission decision)
(facts stipulated to in order to present squarely question of Colgate doctrine's validity), rev'd, 718
F.2d 256 (8th Cir. 1983). The administrative law judge had characterized the stipulated record as
"a lawyer's construct which has been lovingly nurtured like a hothouse flower." Russell Stover
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The FTC argued, however, that cases decided under the Colgate doctrine
had circumscribed the protection that a manufacturer employing an
RPM policy enjoys under the Colgate doctrine.10 0 The Commission took
the position that Stover merely represented another decision interpreting
Colgate "in light of a history of an evolving standard." 10 1
Stover, however, differs from Colgate's progeny. Colgate protection was
not extended in those cases because either the manufacturer had taken
actions to compel dealer adherence to its prices, 10 2 or because there was
an inherently coercive relationship between the parties. 103 As the Eighth
10 4
only
Circuit correctly noted, Stover is in fact a case of Doric simplicity:
the manufacturer had participated in the announcement and enforce05
ment of the pricing plan.
Although the Supreme Court has limited the scope of the Colgate doctrine by carving out exceptions that render Colgate protection unavailable, it has neither repudiated nor disavowed the doctrine.10 6 The FTC,
however, misinterpreted case law subsequent to Colgate in an attempt to
Candies, Inc., 100 F.T.C. 1, 14 (1981) (initial decision), rev'd, 100 F.T.C. 16 (1982) (Commission
decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
718
100. Russell Stover Candies, Inc., 100 F.T.C. 16, 34 (1982) (Commission decision), re,'d,
F.2d 256 (8th Cir. 1983). The FTC admitted that its extension in Stover of the principles established
in Colgate's progeny was "not free from doubt," but argued that its interpretation was consonant
with the "real ongoing relationship between suppliers and distributors." Id But see nfra notes 14555 and accompanying text.
101. Russell Stover Candies, Inc., 100 F.T.C. 16, 35 (1982), rev'd, 718 F.2d 256 (8th Cir. 1983).
102. See supra notes 52-65 and accompanying text.
103. See infra notes 120-32 and accompanying text.
104. Russell Stover Candies, Inc. v. FTC, 718 F.2d 256, 259 (8th Cir. 1983); see George W.
Warner & Co. v. Black & Decker Mfg. Co., 277 F.2d 787, 790 (2d Cir. 1960) (facts of RPM policy
would have to be of such simplicity as to be rare in this day of complex business enterprises).
105. See supra notes 17-20 and accompanying text. Stover did not have other parties in the
chain of distribution to observe its dealers and it did not use terminations and reinstatements to
secure dealer compliance. See Kilburn, supra note 9, at 174-75.
106. See Klein v. American Luggage Works, Inc., 323 F.2d 787, 789 (3d Cir. 1962) (Colgate
doctrine permits manufacturer to announce RPM plan and terminate noncomplying dealer); see
alsoFilco v. Amana Refrig., Inc., 709 F.2d 1257, 1261 (9th Cir. 1983) (manufacturer legally may
announce refusal to deal with anyone who does not adhere to suggested price schedule); Spray-Rite
Serv. Corp. v. Monsanto Corp., 684 F.2d 1226, 1234 (7th Cir. 1982) (manufacturer may unilaterally
fix suggested resale price for its products and may refuse to deal with distributor that resells product
at price other than suggested price), cert. granted, 103 S. Ct. 1249 (1983); Garrett's, Inc. v. Farah
Mfg. Co., 412 F. Supp. 656 (D.S.C. 1976) (clothing manufacturers' refusal to deal with discounting
retailer constituted lawful unilateral refusal to deal).
A manufacturer exceeds Colgate's boundaries when it states expressly to its dealers that failure to
comply with the suggested prices will result in termination. In Yentsch v. Texaco, Inc., 630 F.2d 46
(2d Cir. 1980), for example, a service station dealer alleged that Texaco had terminated its lease for.
failure to comply with Texaco's pricing policy. Id at 50-51. The Second Circuit held that Texaco
had exceeded its Colgate protection by continually threatening Yentsch and eventually securing
Yentsch's agreement to participate in the pricing plan. Id at 52-53. The court reiterated the validity of Colgate's "safe harbor of announcement plus mere refusal to deal" but found that Texaco's
behavior created a coercive environment in which dealers "understood" the consequences of failure
to comply with the suggested prices. Id at 53; see also Official Airline Guides, Inc. v. FTC, 630 F.2d
920, 927-28 (2d Cir. 1980) (manufacturer retains Colgate right of dealer selection as long as there is
no purpose to restrain competition), cert. denied, 450 U.S. 917 (1981).
1984]
REFUSAL TO DEAL
overrule Colgate implicitly 10 7 and to find Stover's conduct per se
illegal. 108
I. Does unwilling compliance constitute a coerced agreement under Colgate
and its progeny?
In Stover, the Commission mistakenly asserted that in Albrecht v. Herald
Co. 109 the Supreme Court had recognized that unwilling compliance
may establish a Sherman Act agreement. 10 In Albrecht, the Court, in
holding that a maximum resale price plan violated section 1,1"' indicated in a footnote that the plaintiff might have pleaded several theories
of agreement. 112 For example, the plaintiff could have alleged that a
combination existed as of the moment he unwillingly complied with the
manufacturer's suggested prices," 3 or that a combination existed when
114
the other distributors acquiesced in the manufacturer's pricing policy.
Contrary to the Commission's intepretation, however, the Court in
Albrecht simply recapitulated the conditions under which it had previously held Colgate protection to be unavailable.' 15 In summarizing various theories of agreement, the Court in Albrecht cited cases that,
although reaffirming the Colgate doctrine's protection, specifically limited its holdings to the facts presented in each case. 116 The Court did not
107. .Se infia notes 109-32 and accompanying text.
108. See Russell Stover Candies, Inc., 100 F.T.C. 16, 48 (1982) (Commission decision), rev'd,
718 F.2d 256 (8th Cir. 1983).
109. 390 U.S. 145 (1968).
110. Russell Stover Candies, Inc., 100 F.T.C. 16, 27 (1982) (Commission decision), rev'd, 718
F.2d 256 (8th Cir. 1983).
111. Albrecht v. Herald Co., 390 U.S. 145, 150 (1968). The plaintiff, a newspaper distributor,
had raised the home delivery subscription rate above the advertised price of the paper. Id at 147.
The defendant combined with a new distributor and circulation company to solicit the plaintiff's
customers. Id The new distributor planned to service the plaintiff's customers until the plaintiff
agreed to adhere to the paper's advertised resale price. Id at 147-48. The Court found that the new
distributor and the circulation company had engaged in an unlawful combination with the defendant because they had cooperated and assisted in the defendant's scheme to force the plaintiff to
adopt the advertised price. Id at 149-50.
112. Id at 150 n.6; see Russell Stover Candies, Inc., 100 F.T.C. 16, 27 (1982) (Commission
decision) (Aibrecht clarified that Colgate no longer permitted manufacturer to secure unwilling compliance through threat of termination), rev'd, 718 F.2d 256 (8th Cir. 1983). The FTC relied on this
footnote although acknowledging it as merely dictum. Id
113. Albrecht v. Herald Co., 390 U.S. 145, 150 n.6 (1968).
114. Id (Colgate inapplicable if manufacturer uses threats of direct competition or retaliation
by other parties to obtain adherence).
115. See Russell Stover Candies, Inc. v. FTC, 718 F.2d 256, 258-59 (8th Cir. 1983). Colgate
immunity is inapplicable in two situations. It is unavailable when dealer compliance results from
an affirmative manufacturer action that exceeds an announcement of a termination policy, and
when dealer compliance results from inherently coercive business relationships. See supra notes 10205 and accompanying text; infra notes 118-32 and accompanying text.
116. See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 376 (1967) (Colgate allows
manufacturer in competitive market to select and sell exclusively to its dealers), overruled on other
grounds, Continental T.V. v. GTE Sylvania Inc., 433 U.S. 36 (1977); United States v. Parke, Davis
& Co., 362 U.S. 29, 44 (1960) (Colgate allows manufacturer to achieve RPM by announcing termi-
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adopt unwilling compliance as a determinant for finding an agreement;
rather it properly applied precedent to the facts before it. 17
2.
The role of the plusfactor requirement in establishing an agreement in a
manufacturer-dealerrelationship
The FTC similarly misapplied Colgate's progeny in determining that a
threat of termination was coercive and thus sufficient to establish a section 1 violation.1 1 8 In one of the cases construing the Colgate doctrine,
the Supreme Court held that a manufacturer's consignment agreement,
employed as a coercive device to achieve resale control of its product's
price, violated section 1.119 The manufacturer had threatened not to
renew a dealer's lease in an effort to secure the dealer's adherence to
retail prices stipulated in the lease.120
Stover, however, does not present a situation in which a manufacturer
used a contractual relationship in a coercive manner to establish resale
prices. 21 A manufacturer that is the lessor and sole supplier under a
consignment agreement exercises considerable economic leverage over
the dealer.' 22 A manufacturer that takes advantage of a dealer's vulnerability under a consignment agreement to compel the dealer to adopt a
set resale price 23 violates the Dr. Miles per se prohibition of express
RPM combinations. 2 4 Stover, however, was not party to a consignment relationship. Moreover, the stipulated record did not indicate that
nation policy); see also supra notes 62-67 (discussing Parke, Davis); notes 125-27 and accompanying
text (discussing Schwinn).
117. Albrecht v. Herald, 390 U.S. 145, 150 (1968).
118. See Russell Stover Candies, Inc., 100 F.T.C. 16, 26-27 (1982) (Commission decision), revd.
718 F.2d 256 (8th Cir. 1983).
119. Simpson v. Union Oil Co., 377 U.S. 13, 17 (1964). Although the Court had found that a
consignment arrangement had been lawfully used to market patent articles in United States v.
General Electric Co., 272 U.S. 476 (1926), in Stimpson it refused to extend the consignment exception
to the Dr. Miles prohibition of RPM. Simpson, 377 U.S. at 21-24. The Court reasoned that a "consignment" agreement used to regulate resale prices violates § 1. Id The Court's test for determining whether a § 1 violation existed consisted of two elements. There must be an agreement, and the
agreement must be employed coercively. Id at 24.
120. Simpson v. Union Oil Co., 377 U.S. 13, 14-15 (1964). A manufacturer that employs a
consignment system retains title to the products until the retailer sells them. 16A J. VON KALINOWSKI, supra note 36, § 6B.0213][d], at 6B-49. Because the manufacturer is the legal owner of the
goods and the dealer is its agent, the manufacturer often determines the terms of resale, including
price. Id
121. See Russell Stover Candies, Inc., 100 F.T.C. 1, 16 (1981) (initial decision),rv'd, 100 F.T.C.
16 (1982) (Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
122. See Simpson v. Union Oil Co., 377 U.S. 13, 20-21 (1964) (agreement oppressive because it
precluded service station dealer from being wholly independent entrepreneur).
123.
See R. POSNER, ANTITRUST LAW: AN EcONOMIC PERSPECTIVE 156-57 (1976) (resale price
maintenance imposed through consignment agreement unlawful because of disparity in economic
power between producer and dealer).
124. See Simpson v. Union Oil Co., 377 U.S. 13, 17 (1964). The Court employed contradictory
rationales in Dr. Miles and Simpson. See Posner, supra note 123, at 156. In Simpson the Court stated
that RPM was unlawful because it injured and coerced retailers. See Simpson, 377 U.S. at 20-21
(1964). In Dr. Miles, however, it stated that RPM was unlawful because it benefitted retailers. See
1984]
REFUSAL TO DEAL
Stover exercised sufficient economic leverage over its dealers to jeopardize the dealers' livelihood through a termination policy.
The Supreme Court has also indicated in two other cases that the
Parke, Davis plus factor requirement 12 5 for an agreement may not be
12 6
In one case the Court
essential when unwilling compliance exists.
stated that a "communicated danger of termination" for failure to adhere to the manufacturer's restrictions on territories and dealers, even
without actual termination, establishes a vertical agreement in a
franchise relationship. 1 2 7 In another case the Court held that a
franchise dealer could have pleaded an agreement between itself and the
franchisor if the dealer had complied unwillingly with the restrictive
12 8
franchise agreement.
Both Supreme Court decisions, however, have limited applicability to
1 29
The unique
Stover because both involved a franchise relationship.
applicasimple
a
precludes
relationship
symbiotic nature of a franchise
tion of the definition of coercion in that context to an arm's length manDr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 408-09 (1911). For a discussion of
Dr. Mles, see supra notes 36-37 and accompanying text.
125. Se supra notes 62-63 and accompanying text.
126. See Perma Life Mufflers v. International Parts, 392 U.S. 134, 142 (1968); United States v.
Arnold, Schwinn & Co., 388 U.S. 365, 372 (1967),overruedon othergrounds, Continental T.V. v. GTE
Sylvania Inc., 433 U.S. 36 (1977), see also Russell Stover Candies, Inc., 100 F.T.C. 16, 28-29 (1982)
(Commission decision) (Commission's discussion of two cases), rev'd, 718 F.2d 256 (8th Cir. 1983).
Without the plus factor, however, "unwilling compliance" is not sufficient to establish a § 1 agreement. See United States v. Colgate, 250 U.S. 300 (1919). In Colgate wholesalers and retailers generally had sold Colgate's products at the suggested resale prices solely because of Colgate's pricerelated refusal to deal policy. Id at 303-04. The Court found Colgate's policy legal even though
some Colgate dealers, like some Stover dealers, had complied unwillingly in order to avoid termination. Id
127. United States v. Arnold, Schwinn & Co., 388 U.S. 365, 372 (1967),ovemrledon othergrounds,
Continental T.V. v. GTE Sylvania Inc., 433 U.S. 36 (1977). In light of a decrease in market share,
Schwinn had revised its marketing and distribution plan. Id at 365. The company had reduced its
mailing list from 15,000 retail outlets to 5500 retail outlets. Id The Court stated that this conduct,
coupled with Schwinn's implementation of a location clause in its franchise agreements, had created a coercive atmosphere. Id
128. Perma Life Mufflers v. International Parts, 392 U.S. 134, 142 (1968). The FTC acknowledged that this lanugage is dictum. Russell Stover Candies, Inc., 100 F.T.C. 16, 29 (1982) (Commission decision), rev'd, 718 F.2d 256 (8th Cir. 1983).
129. See Perma Life Mufflers v. International Parts, 392 U.S. 134, 137-38 (1968); United States
v. Arnold, Schwinn & Co., 388 U.S. 365, 370-71 (1967), overruledon othergrounds, Continental T.V. v.
GTE Sylvania Inc., 433 U.S. 36 (1977). In a traditional franchise relationship, a franchisee usually
handles a small product line and features the franchisor's products almost exclusively. In nontraditional franchise relationships, such as those in Schwinn, the franchise item constitutes a small part of
the retailer's product line. See Goldberg, The Law and Economics of Vertical Restrictions: A Rational
Perspectii'e, 58 Ta-x. L. RE'. 91, 103-04, 110 (1979). Traditional franchisees, unlike other retailers,
are wholly dependent upon the franchisor for continued economic viability. Id at 103-04. Because
franchisees are extremely vulnerable, mere suggestions by the franchisor regarding business practices constitute subtle forms of coercion. See id at 109-10 (discussing control franchisors exercise
over franchisees). But see Russell Stover Candies, Inc., 100 F.T.C. 16, 29-30 (1982) (Commission
decision) (Commission rejected administrative law judge's distinction between disparity of economic power in franchise versus manufacturer-dealer relationships), rev'd, 718 F.2d 256 (8th Cir.
1983).
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ufacturer-retailer relationship in which the manufacturer's product is
one of several in the retailer's product line.1 30 A Stover-type dealer
faced with the choice of adopting an RPM plan or suffering termination
13
can select an alternative supplier and not risk insolvency. 1
The Commission correctly stated that various factors in Colgate's progeny could distinguish those cases from Stover. 132 The essence of Colgate
and its subsequent case law is that a manufacturer's announcement of
an RPM policy in a manufacturer-retailer relationship does not, without a plus factor, constitute a coerced agreement.
B.
The Coercion TheoO, of Agreement and the Colgate Doctrine
Although the Eighth Circuit rejected the FTC's coercion theory of
agreement, 133 other circuits may possibly adopt this theory. This discussion, therefore, will illustrate the desirability of adopting a rule of reason
standard for RPM. In Stover the FTC suggested that its holding would
preserve a manufacturer's right to exercise discretion in the initial selection of its dealers, 134 to "suggest" resale prices, 135 and to announce a
policy of terminating noncomplying dealers. 136 Although this character-
ization theoretically leaves the Colgate doctrine intact, the FTC would
impose section 1 liability if a manufacturer's exercise of these rights in-
fluenced dealer behavior.137 If a manufacturer "suggested" a resale
price, a violation of section 1 would occur the moment one of the manufacturer's dealers acted contrary to its preferences in order to avoid
termination. 138
130. Se FTC v. Texaco, Inc., 393 U.S. 223, 229 (1968) (vastly unequal bargaining power of
dealers in franchise relationship supports inference of coercion).
131. See Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982)(Commission decision) (Miller,
Chmn., dissenting), rev'd, 718 F.2d 256 (8th Cir. 1983). For further discussion of the absence of
coercion in the Stover record, see nfra notes 145-55 and accompanying text.
132. Russell Stover Candies, Inc., 100 F.T.C. 16, 34 (1982) (Commission decision), rev'd. 718
F.2d 256 (8th Cir. 1983).
133. See Russell Stover Candies, Inc. v. FTC, 718 F.2d 256 (8th Cir. 1983).
134. Russell Stover Candies, Inc., 100 F.T.C. 16, 47 (1982) (Commission decision), rev'd, 718
F.2d 256 (8th Cir. 1983).
135. Id
136. Id at 40.
137. Id at 40-41. Under the FTC's interpretation of Colgate, the legal inquiry shifts from the
manufacturer's conduct in effectuating an RPM policy to the dealer's reaction to the announcement of an RPM policy. See id The dealer's subjective motivation, rather than the manufacturer's
objective acts, thus becomes dispositive in determining whether an agreement exists. See id If the
dealer willingly complies with the announced RPM policy, the conduct is unilateral and there is no
agreement. Id If, however, the dealer complies unwillingly with the policy, the conduct is bilateral
and a § I agreement is formed. Id; see also Petitioner's Brief at 34-35, Russell Stover Candies, Inc.,
100 F.T.C. 16 (1982) (Commission decision) (dealer's motivation for complying with manufacturer's RPM plan should be irrelevant to legality of valid refusal to deal), rev'd, 718 F.2d 256 (8th
Cir. 1983).
138. Russell Stover Candies, Inc., 100 F.T.C. 16, 40-41 (1982) (Commission decision),rev'd 718
F.2d 256 (8th Cir. 1983). It is likely that at least one dealer will adhere to a manufacturer's RPM
policy "unwillingly," thus creating potential liability for the manufacturer. See Kilburn, supra note
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The FTC's interpretation of the Colgate doctrine thus would effectively prevent manufacturers from even suggesting resale prices. 139 Because a dealer's subjective motivation would be dispositive in
determining whether an agreement existed, an unscrupulous dealer
would be able to contest the legality of an otherwise valid good cause
termination by claiming unwilling adherence to the manufacturer's
RPM policy. 1 40 A manufacturer's announcement of an RPM policy
therefore may effectively immunize dealers from termination,' 4' thus
discouraging dealers from implementing such policies.
If the Eighth Circuit had allowed the FTC's reformulation of Colgate
to stand, manufacturers that wanted to implement RPM policies would
have had only one safe course of conduct: they could exercise only the
right to select dealers initially. 142 The FTC's decision would have left
the dealer as the only party with leverage in the determination of pricerelated terms. 143 Furthermore, it would have destroyed the arm's length
nature of the manufacturer-dealer relationship and denied manufacturers the right to establish an efficient price-related product distribution
system. 144
9, at 177-78. The FTC's analysis, moreover, substantially curtails a manufacturer's ability to terminate dealers for poor sales or bad credit because a dealer can threaten the manufacturer with a
lawsuit for violating § I. Set inra notes 140-41 and accompanying text. The Commission's unwilling compliance analysis makes even announcing an RPM policy extremely risky. See Kilburn,supra
note 9, at 177-78.
139. See Russell Stover Candies, Inc. v. FTC, 718 F.2d 256, 258 (8th Cir. 1983); see also infra
notes 140-41 and accompanying text. The Commission's adherence to the rule of not finding an
agreement where there is "willing" compliance and finding an agreement where there is "unwilling" compliance results in an anomaly. As Justice Harlan has noted, "[o]bviously it makes no sense
to deny recovery to a pressured retailer who resists temptation to the last and grant it to one who
momentarily yields but is restored to virtue by the vision of treble damages." Albrecht v. Herald
Co., 390 U.S. 145, 162 (1968) (Harlan, J., dissenting); see also Quinn v. Mobil Oil Co., 375 F.2d 273,
278 (lst Cir.) (incongruous to reward dealer who agrees to fix prices and then withdraws while
denying recovery to dealer who steadfastly refuses to fix prices), cert. denied, 389 U.S. 801 (1967).
140. See Petitioner's Brief at 34-36, Russell Stover Candies, Inc., 100 F.T.C. 16 (1982) (Commission decision), r'V'd, 718 F.2d 256 (8th Cir. 1983). Although a manufacturer may have evidence
of poor sales or bad credit, it would have difficulty meeting the threshold test for summary judgment because the primary evidence would be the dealer's subjective motivation. See Kypta v. McDonald's Corp., 671 F.2d 1282, 1287 (1 th Cir.) (summary judgments in antitrust cases disfavored
when questions of motive and intent exist), cert. dented, 103 S. Ct. 127 (1982); Solinger v. A & M
Records, Inc., 538 F. Supp. 402, 409 (N.D. Cal. 1982) (policy against granting summary judgment
in complex antitrust cases when motive and intent at issue).
141. See supra note 140.
142. See Russell Stover Candies, Inc., 100 F.T.C. 16, 46 (1982) (Commission decision), rev'd,
718 F.2d 256 (8th Cir. 1983). In his dissent, Chairman Miller contended that a manufacturer's
freedom of selection is a right that should not require its own doctrine. Id at 50-51 (Miller, Chmn.,
dissenting). Chairman Miller stated that the majority's decision reduced Colgate's applicability to
"situations where it is irrational and futile for a manufacturer to make the 'protected' threat in the
first place." Id
143. See id at 45 (§ I prohibition of vertical price fixing designed to promote dealer's ability to
set prices). The practical effect of the FTC's interpretation of Colgate is to give the dealer complete
control over setting resale prices. See supra notes 137-41 and accompanying text.
144. Under the Commission's interpretation even a valid refusal to deal due to poor sales or
bad credit would subject a manufacturer with an RPM plan to possible § 1 liability. See supra notes
482
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The Factorof Sufficient Economic Power in Showing Unwilling
Compliance in a Competitive Market
A showing of coercion was essential to the Commission's finding in
Stover that an agreement in violation of section I was present.' 45 The
Commission derived the requisite element of coercion from its finding
that dealers had unwillingly complied with Stover's RPM policy.t 46 In
showing that a coercive agreement exists in a manufacturer-dealer relationship, however, evidence of either market power or product differentiation is necessary to distinguish willing compliance from unwilling
compliance. 147
A manufacturer can exact unwilling dealer compliance with an RPM
policy only if it can exercise sufficient economic power to force its dealers to acquiesce in its pricing plan. 48 For example, a manufacturer may
139-41 and accompanying text. The FTC's decision thus attempted to undermine the basic policy
rationale of the Colgate doctrine that manufacturers have the freedom to trade their wares. Seesupra
note 69 and accompanying text; see also Russell Stover Candies, Inc., 100 F.T.C. 16, 51 (1982)
(Commission decision) (Miller, Chmn., dissenting) (Court formulated Colgate doctrine to allow
manufacturers flexibility in product marketing and distribution), rev'd, 718 F.2d 256 (8th Cir.
1983).
145. Russell Stover Candies, Inc., 100 F.T.C. 16, 35 (1982) (Commission decision), re'd, 718
F.2d 256 (8th Cir. 1983).
146. See id
147. See id at 52 (Miller, Chmn., dissenting). A manufacturer's ability to foreclose a percentage of the relevant product market to competition demonstrates market power. See 16A J. VON
KALINOWSKI, supra note 36, § 6G.04[1][b]. The relevant product market is defined as those products that are in direct competition with the manufacturer's products. Id Product differentiation
occurs when a manufacturer makes its product different from its competitor's product. Id For
example, a manufacturer can use brand names or special packaging to make its product unique
and thereby. capture a greater percentage of the relevant product market. See id. Economists use
determinants of market power and product differentiation to assess a manufacturer's ability to
restrain free competition in the market. See P. SAMUELSON, ECONOMICS 486-89 (11 th ed. 1980); F.
SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 10-11 (1970).
148. Cf United States v. Parke, Davis & Co., 362 U.S. 29, 45-47 (1960) (manufacturer's
threatened and actual terminations of supply agreements coerced retailers into adhering to RPM
policy). In antitrust law generally, a showing of market power demonstrates coercion. To prove an
illegal tie-in sale under § 1 of the Sherman Act, for example, a plaintiff must show that the seller
had sufficient economic power over the tying product to restrain free competition in the market for
the tied product. See United States Steel Corp. v. Fortner Enters., 429 U.S. 610, 620-21 (1977);
Betaseed, Inc. v. U and I Inc., 681 F.2d 1203, 1216 (9th Cir. 1982); Spartan Grain and Mills Co. v.
Ayers, 581 F.2d 419, 425 (5th Cir. 1978), cert. denied, 444 U.S. 831 (1979). This showing of market
power is required because a willing purchase of both products does not violate the antitrust laws.
Hill v. A-T-O, Inc., 535 F.2d 1349 (2d Cir. 1976); Ungar v. Dunkin' Donuts of Am., 531 F.2d 1211
(3d Cir.), cert. denied, 429 U.S. 823 (1976).
Similarly, to prove unwilling compliance with a manufacturer's RPM policy a dealer must show
that the manufacturer had sufficient market power to coerce the dealer into adoption of the policy.
Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982) (Commission decision) (Miller, Chmn., dissenting) (appropriate economic concept of coercion is "a response to true market power"), rev'd, 718
F.2d 256 (8th Cir. 1983). A showing of market power is necessary to distinguish willing compliance
from unwilling compliance. Id at 39-40. Without proof of market power, unwilling compliance is
distinguished from willing dealer compliance solely by the unreliable subjective reaction of the
dealer to the RPM plan. See supra notes 85-86 and accompanying text. Requiring evidence of
market power, on the other hand, would provide courts with objective factors by which to judge
whether sufficient coercion exists to establish an unwilling agreement.
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REFUSAL TO DEAL
be able to foreclose dealers from using alternative sources of supply, or
to differentiate its product to the point of being unique.149 If a manufacturer lacks this economic power, its dealers would remain free either
to continue their present relationship with the manufacturer or to deal
with a competitor. 50 Contrary to the FTC's proposition, 15 1 therefore, a
manufacturer's threat of termination alone is insufficient to establish coercion in a competitive market.
In Stover the stipulated record indicated that Stover is only one of
several large competitors in the candy market. 152 Dealers that are unhappy or unwilling to comply with Stover's policies, therefore, can pursue alternative sources of supply. 153 The FTC's failure to establish
either that Stover's policies foreclosed alternative sources of supply or
54
that Stover's product is unique thus precludes a finding of coercion. 1
A more plausible interpretation of the record is that Stover's dealers
willingly chose to continue their Stover dealerships in spite of Stover's
pricing policies, rather than choosing to deal with Stover's
55
competitors.1
Although the Eighth Circuit properly rejected the FTC's attempt to
limit further the protection that the Colgate doctrine affords manufacturers, the possibility that other circuits may adopt the FTC's coercion theory of agreement still exists. Moreover, even though rejection of the
FTC's flawed coercion theory of agreement will provide manufacturers
with important protection under the Colgate doctrine, this protection is
insufficient to encourage adequately the use of procompetitive manufacturer RPM policies. It is therefore necessary to examine an alternative
approach that will encourage the beneficial use of manufacturer RPM
policies.
V.
ALTERNATIVES:
REEVALUATION OF THE PER SE RULE AGAINST
VERTICAL PRICE RESTRAINTS
In Colgate the Supreme Court, recognizing the severity of a per se prohibition on vertical price restraints, allowed manufacturers some flex149.
See United States Steel Corp. v. Fortner Enters., 429 U.S. 610, 620-21 (1977).
150. See Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982) (Commission decision) (Miller,
Chmn., dissenting), rev'd, 718 F.2d 256 (8th Cir. 1983).
151. Se id at 39.
152. Sesupra note 17.
153. Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982) (Commission decision) (Miller,
Chmn., dissenting), rev'd, 718 F.2d 256 (8th Cir. 1983).
154. See supra notes 17 & 153 and accompanying text.
155. See Russell Stover Candies, Inc., 100 F.T.C. 16, 52 (1982) (Commission decision) (Miller,
Chmn., dissenting) (only inference that can be drawn from sparse record is that Stover's terms are
marginally superior and preferable to competitors' terms), rev'd, 718 F.2d 256 (8th Cir. 1983); see
also Goldberg, supra note 129, at 119 (dealers give up bargaining discretion for profit, not because
manufacturer forces them to do so).
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ibility in organizing the marketing, distribution, and pricing of their
products. 156 The FTC's decision in Stover illustrates the government's
desire to eliminate the narrow area of legal conduct that Colgate allows
by establishing that an agreement exists whenever a manufacturer's
RPM plan affects dealer behavior.1 57 Once the government establishes
an agreement, the manufacturer's RPM policy is per se illegal.1 58
An alternative approach would be to judge RPM and refusal to deal
policies under the rule of reason.' 59 Although a manufacturer's imposition of RPM and a policy of termination may constitute an agreement
under this approach, courts would analyze that agreement to determine
whether it was an unreasonable restraint of trade instead of declaring it
0
per se illegal.16
This alternative approach is both economically and legally valid. Because RPM has procompetitive effects on the market, it does not warrant application of the per se rule.16 1 Further, particularly in light of
156. See Russell Stover Candies, Inc., 100 F.T.C. 16, 51 (1982) (Commission decision) (Miller,
Chmn., dissenting), rev'd, 718 F.2d 256 (8th Cir. 1983).
157. Id at 39-40.
158. See, e.g., California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97,
102 (1980) (RPM per se unlawful); Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S.
211,213 (1951) (price fixing per se illegal); Dr. Miles Medical Co. v. John D. Park & Sons, Co., 220
U.S. 373, 399-400 (1911) (vertical price fixing constitutes unreasonable restraint of trade).
159. The rule of reason, which the Court initially established in Standard Oil Co. v. United
States, 221 U.S. 1, 60, 63-70 (1911), limits § 1 prohibition to those agreements that are unreasonable restraints of trade. Under the rule of reason, a factfinder analyzes both the defendant's market
power and the purpose and effect of the challenged practice to determine whether the restraint is
unreasonable. See National Soc'y of Professional Eng'rs v. United States, 435 U.S. 679, 691-92
(1978) (under rule of reason requisite inquiry is whether restraint suppresses competition in market).
Conversely, the per se approach, as articulated in Northern Pac. Ry. v. United States, 356 U.S. 1,
5 (1958), prohibits agreements that have a "pernicious effect on competition" and "lack any redeeming virtue." Id Once labelled per se, a practice is considered illegal without further examination of market power or justification for the conduct. The Court has consistently rejected
arguments defendants offer in support of RPM. See, e.g., Catalano, Inc. v. Target Sales, Inc., 446
U.S. 643 (1980) (rejecting contention that fixed prices are reasonable and fair); United States v.
Bausch & Lomb Optical Co., 321 U.S. 707 (1944) (rejecting argument that product directly and
openly competes with other brands); United States v. Univis Lens Co., 316 U.S. 241 (1942) (rejecting argument that patented articles deserve different rule); Dr. Miles Medical Co. v. John D.
Park & Sons Co., 220 U.S. 373 (1911) (rejecting argument that product manufactured under secret
process deserves different rule).
Both the Antitrust Division of the Department of Justice and the FTC's chief antitrust enforcer,
Thomas J. Campbell, argue that the Supreme Court should judge RPM under the rule of reason as
another permissible form of vertical restraints. See Letter from William F. Baxter to Representative
Robert McClory, [1969-1983 Transfer Binder] TRADE REG. REP. (CCH) 50,442 (June 18, 1982)
(if Supreme Court declines to change per se approach, Antitrust Division might seek legislative
reversal) [hereinafter cited as Baxter Letter]; Interview with Thomas J. Campbell, Director of Bureau of Competition, 43 ANTITRUST & TRADE REG. REP. (BNA) 238 (July 22, 1982) (time is ripe to
judge RPM under rule of reason instead of per se illegality) [hereinafter cited as Campbell
Interview].
160. See Campbell Interview, supra note 159 (Court could have avoided legal fiction it established in Colgate by finding agreement but holding that agreement was not unreasonable restraint
of trade).
161. See infia notes 164-72 and accompanying text.
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REFUSAL TO DEAL
the Supreme Court's recent treatment of vertical nonprice restraints,
judging vertical price restraints under the rule of reason would be consonant with the objectives of the antitrust laws.1 62 Courts employing the
rule of reason would examine the competitive effects of a manufacturer's
RPM policy and would prohibit only those policies that constitute unreasonable restraints of trade. Thus, unlike the per se approach, the rule
of reason approach would consider business concerns that might justify
1 63
the use of RPM.
A.
Manufacturers' Objectives in Employing RPM
Manufacturers use RPM both to eliminate intrabrand price competition 164 and to stimulate interbrand nonprice competition among dealers.1 65 By setting a uniform resale price that exceeds the normal profit
margin, a manufacturer not only encourages dealers to provide presale
services, but also eliminates the free-rider effect. 16 6 Manufacturers of
162. See nJfa note 189 and accompanying text.
163. Se supra note 159.
164. See Simpson v. Union Oil Co., 377 U.S. 13, 21 (1964). Intrabrand competition exists between retailers of the same product. 16A J. VON KALINOWSKI, supra note 36, § 6B.01[1], at 6B-3
n.5. Vertical price fixing eliminates intrabrand price competition because the dealers of an affected
product would sell that product at the same price. Id § 6B.01[I], at 6B-4.
165. See Posner,supra note 70, at 284. Interbrand competition is competition between different
brands of a product. 16AJ. VON KALINOWSKI,supra note 36, § 6B.01[1], at 6B-3 n.5. By setting a
uniform resale price, a manufacturer both eliminates price competition among its own dealers and
encourages nonprice competition among sellers of different product brands. Id § 6B.01[l], at 6B-3
to 6B-4. For a detailed presentation of the types of nonprice competition that RPM encourages, see
ifta note 166.
166. Posner, supra note 70, at 284. Manufacturers can use RPM to encourage their dealers to
provide retail showrooms, convenient hours, specialized displays, service facilities, trained personnel, and product advertising. In an RPM system, these services represent a manufacturer's cost of
marketing and distribution. The cost is the difference between the price at which a manufacturer
sells a product to his dealer and the retail price that consumers pay. Id at 283. Retailers employ
these services and other nonprice forms of competition to increase consumer preference for their
product. See Note, The Future of the Per Se Rule Against VerticalPrice Restraints, 12 GA. L. REv. 612,
621 (1978). The increase in consumer demand because of these services theoretically will be greater
than the decrease in consumer demand because of the rise in price. See Bork, The Rule ofReason and
the Per S Concept: Price-fixingand Market Division, 75 YALE L.J. 373, 453 (1966); Bowman, The Prerequisites and Effects of Resale Price Maintenance, 22 UNIv. CHI. L. REV. 825, 840-43 (1955); Posner, The
Chicago &hool ofAntitrust Analysis, 127 U. PA. L. REV. 925, 926-27 (1979) [hereinafter cited as Posner, The Chicago School]; Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & EcON. 86, 89-96
(1960),
Regardless of consumers' willingness to pay for such services, the costs of the services become
built into the product's retail price. Manufacturers and consumers both benefit from RPM. Manufacturers realize greater profits from increased consumer demand and sales, and consumers obtain
valuable information about product availability, price, quality, and services. See Continental T.V.,
Inc. v. GTE Sylvania Inc., 433 U.S. 36, 56 n.25 (1977).
Manufacturers also employ RPM to eliminate the free-rider problem. See Bork, supra, at 453-54;
Posner, supra note 70, at 285; Telser, supra, at 91-92. A "free rider" is a dealer who undercuts
competing dealers by selling at discount prices while relying on those dealers to provide costly
presale services. Posner, The Chicago School, supra, at 927 n.3. If a manufacturer is unable to employ
RPM, price competition from discounters probably will preclude its dealers from offering any marketing services or from capturing sales awards. See Andersen, The Antitrust Consequences of Manufacturer-SuggestedRetail Prices-The Casefor Presumptive Illegality, 54 WASH. L. REV. 763, 779-80 (1979).
486
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technologically complex products often employ RPM to induce dealers
to provide point-of-sale services that show consumers how their products
work. 167 Manufacturers of other types of products, like boxed chocolates, employ RPM to induce dealers to incur advertising and specialized display costs, and to maintain a uniform product image-services
that the manufacturer expects will increase product sales.' 6 8 RPM thus
allows manufacturers to employ dealer-provided services to encourage
sales, and allows dealers to provide those services without being under69
sold by discounting retailers.
70
Many businesses employ RPM as an important marketing device.
Dealer product promotion increases businesses' competitive posture and
therefore stimulates overall competition by expanding the number of
successful manufacturers in a product market.' 7 ' Vertical price fixing
also permits a manufacturer to combat retail price cartels, and thereby
172
protects consumers from being overcharged.
B.
RPMs Economic Efects
173
Critics of RPM policies argue that RPM increases dealer profits
167. See Baxter Letter, supra note 159, at 56,008. Manufacturers have legitimate business interests in controlling the pricing, marketing, and distribution of their products because success in the
market often depends on the provision of presale services. Id
168. Id at 56,007. Another justification for the use of RPM with fungible products such as
boxed chocolate is simply that consumers often associate quality with price. If a manufacturer
permits retailers to discount its products, consumers might believe that the product's quality is
deteriorating. See Telser, supra note 166, at 86 n. 1. Consumers then may purchase a higher-priced
competing product. Id A manufacturer such as Stover thus may have to impose an RPM plan in
order to maintain a uniform product image. RPM also protects product image by reducing the
probability of loss-leader pricing whereby retailers sell an item at cost or less than cost as a promotional device. P. AREEDA, ANTITRUST ANALYSIS
502-503 (3d ed. 1981).
169. See Bork, supra note 166, at 453; Bowman, supra note 166, at 840-43; Posner, supra note 70,
at 283-85; Telser, supra note 166, at 89-96.
170. Faltering businesses may employ RPM in an attempt to remain in the market. See Comment, .4 Re-examination of the Per Se Zllegality of Resale Price Maintenance, 83 DICK. L. REV. 95, 106
(1978). Courts should permit these businesses to employ RPM agreements because such restraints
will not harm competition. Id at 106-07. In fact, this use of RPM may stimulate competition by
adding another successful supplier to the market. Id
RPM agreements also may benefit new businesses and businesses entering new product lines. See
Comment, supra, at 106-07 (RPM aids manufacturer in recouping investment in new product line
by inducing dealers to promote product); see also Posner, supra note 70, at 293 (RPM arguably
compensates manufacturer for risks incurred in initial promotional investment); Preston, Restrictive
DistributionArrangements: Economic Analysis and Public Policy Standards, 30 LAW & CONTEMP. PROBS.
506, 511 (1965) (marketing uniformity encourages dealers to invest in promotional devices); f
United States v. Jerrold Elec. Corp., 187 F. Supp. 545, 558, 561 (E.D. Pa. 1960) (tying restraint
reasonable in introduction of new product until stabilization of its commercial status), afdper
curiam, 365 U.S. 567 (1961); Comanor, Vertical Territorialand CustomerRestrictions: White Motor and its
Aftenmath, 81 HARV. L. REV. 1419, 1437 (1968) (social value of new entrants and new products lines
may justify use of vertical nonprice restraints intended to encourage investment).
171. See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 374 (1967) (suggesting that
justification exists for excepting new industry entrants and failing firms from per se rule), overruledon
other grounds, Continental T.V. v. GTE Sylvania Inc., 433 U.S. 36 (1977).
172. Bork, supra note 166, at 464.
173. See Andersen, supra note 166, at 781-82 (manufacturer uses increases in dealer profits to
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REFUSAL TO DEAL
and reduces competition. 74 They argue that as products become differentiated through dealer-provided services, consumers are less likely to
substitute less expensive alternatives, 75 potentially allowing dealers to
reap monopoly profits. 76 These critics, however, fail to consider the
checks and balances that a free market system imposes on vertical restraints. These checks and balances usually prevent dealers from ex77
ploiting interbrand markets.
In an RPM system, for example, a manufacturer's per unit profit remains constant regardless of the price the dealer charges his customers.' 78 Artificially high resale prices and increased dealer profits
therefore would not benefit a manufacturer. 79 The manufacturer's
profit may even decrease as higher prices cause sales to decrease and as
its RPM efforts increase its marketing and distribution costs.' 8 0 Moreover, competition from lower priced products may force the manufacturer's product out of the market.' 8 '
It is clearly in the manufacturer's best interest, therefore, to keep retail prices both low enough to guarantee profits but high enough to encourage dealer services without creating dealer monopoly profits. 82 If a
manufacturer merely wanted to raise resale prices, it could raise its own
price to the dealer and reap greater profit for itself rather than for the
dealer.' 8 3 Manufacturers thus would not use RPM policies to dominate
induce dealer to promote manufacturer's product rather than products of other manufacturers);
Comment, supra note 170, at 107 (manufacturers employ RPM and consequent guaranteed profit
to encourage dealers to treat products more favorably). Commentators also argue that presale
services merely add to the product's cost without providing any consumer benefit, and that dealers
may pressure manufacturers to impose RPM merely to secure guaranteed profits. See Posner,supra
note 70, at 283; Comment, supra note 170, at 101. Such behavior is known as a horizontal restraint
or dealer cartel. See Bork, supra note 166, at 405-10. A dealer cartel arises when competitors at the
same level in the chain of distribution agree to eliminate price competition among themselves. Id
The Supreme Court has held that such horizontal restraints are per se illegal. See, e.g., United
States v. Trenton Potteries Co., 273 U.S. 392 (1927).
174. See in~fa note 176 and accompanying text.
175. Bowman, supra note 166, at 833, 835-36.
176. See L. SULLIVAN, supra note 97, at 381 (RPM produces price rigidity). Product differentiation can also reduce competition by creating or enhancing barriers to market entry. Posner, The
Chicago &hool, supra note 166, at 930. In Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36
(1977), the Court expressly rejected the view that minimum price fixing enhances product differentiation and allows manufacturers to exact monopoly profits. Id at 56 n.25; see also R. POSNER,
supra note 123, at 150-51 (RPM encourages retailers to provide valuable presale services).
177. See infra notes 178-83 and accompanying text.
178. See Baxter Letter, supra note 159, at 56,007 (dealer, not manufacturer, retains excess revenues derived from higher resale prices).
179. See id. (inconceivable that manufacturers would employ RPM if sole effect was to "fatten
their distributors' profit margins and lessen their own").
180. See Posner, supra note 70, at 286.
181. See Baxter Letter, supra note 159, at 56,007.
182. See Russell Stover Candies, Inc., 100 F.T.C. 16, 51 (1982) (Commission decision) (Miller,
Chmn., dissenting) (manufacturers have profit incentive to distribute products in cost-effective
manner), rev'd, 718 F.2d 256 (8th Cir. 1983).
183. See Baxter Letter, supra note 159, at 56,007.
488
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markets. Moreover, under the rule of reason a court could invalidate
any RPM policy that produced anticompetitive effects, such as product
differentiation. 184
C
Nonprice Restraints Under the Rule of Reason
In a recent decision, Continental T V, Inc. v. GTE Sylvania Inc., 185 the
Supreme Court changed the law applicable to vertical nonprice restraints,1 86 and provided a legal and economic basis for changing the
law applicable to vertical price restraints. 87 In Sylvania, reversing its
prior holdings, the Court held that courts should judge vertical nonprice
restraints under the rule of reason standard rather than under the per se
standard. 88 This shift in the Court's analysis of vertical nonprice restraints illustrates the Court's willingness to base antitrust policy on demonstrable market considerations rather than on "formalistic line
drawing."' 8 9 The Court stated that by fostering increased distributional
efficiency, vertical restraints promoted interbrand competition.'90 In
adopting the rule of reason, the Court selected a flexible antitrust ap184. Cf.Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 59 (1977) (rule of reason
polices adequately anticompetitive effects of nonprice vertical restraints enough to justify removing
them from per se illegality rule).
185. Id Continental T.V. had argued that Sylvania's enforcement of a contract clause limiting the locations in which retailers could sell Sylvania televisions was per se illegal. Sylvania had
imposed the location clause as a marketing strategy to attract aggressive and competent retailers
and to improve its declining market position. Id at 38.
186. See infra note 188 and accompanying text. Vertical nonprice restraints include territorial
divisions and customer limitations. 16A J. VON KALINOWSKI, supra note 36, § 6E.0111], at 6E-2.
For example, a manufacturer might restrict the territories within which a dealer may locate its
place of business. See Boro Hall Corp. v. General Motors Corp., 124 F.2d 822 (2d Cir. 1942), etrt.
enied, 317 U.S. 695 (1943). Alternatively, a manufacturer might limit the customers to whom its
dealers may sell. See Fosburgh v. California & Hawaiian Sugar Refining Co., 291 F. 29 (9th Cir.
1923).
187. Although the Court in Sylvania declined to extend the rule of reason beyond vertical nonprice restraints, stating that the per se illegality of price restrictions was firmly established, it did
recognize arguments that a manufacturer's motivation for applying vertical price restrictions might
be the same as for applying nonprice restrictions. Continental T.V., Inc. v. GTE Sylvania Inc., 433
U.S. 36, 51 n.18 (1977). In his concurrence, Justice White noted that the majority's analysis and
holding severely weakened the justification for treating vertical price fixing under the per se rule
because the economic effects of vertical price restraints are similar to the economic effects of vertical
nonprice restraints. Id at 70 (White, J., concurring).
188. Id at 58 (terminating dealer for violation of location clause reasonable restraint of trade
where manufacturer's plan designed to increase marketing efficiency and stimulate interbrand competition). During the 1960's and early 1970's, the Supreme Court decided three significant cases
dealing with vertical nonprice restraints. In White Motor Co. v. United States, 372 U.S. 253
(1963), the Court judged vertical nonprice restrictions under the rule of reason. Four years later, in
United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), the Court held that vertical market
allocations included as part of sales agreements are per se illegal. In Continental T.V., Inc. v. GTE
Sylvania Inc., 433 U.S. 36, 58 (1977), however, the Court rejected Schwinn's distinction between sale
transactions and nonsale transactiofis and held that vertical restraints generally should be judged
under the rule of reason.
189. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 59 (1977) (departure from rule
of reason standard must be based on demonstrable economic effects).
190. Id at 54-57.
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REFUSAL TO DEAL
proach that promotes the "redeeming virtues" of vertical restraints
while policing their anticompetitive effects.' 9 1
In Sylvania the Court recognized manufacturers' vital interest in con92
This recogtrolling the marketing and distribution of their products.
nition undermines one of the primary rationales supporting the per se
prohibition of vertical price restraints of Dr. Miles-the common law
policy against restraints on alienation of property. 193 Despite the Court's
assertion that vertical price restraints involve different problems of analysis from those created by vertical nonprice restraints, 94 vertical price
fixing is functionally equivalent to nonprice restraints: both restrict a
95
retailer's freedom of alienation and reduce intrabrand competition.'
191. Id at 54-59. In contrast, the per se rule is inflexible. All vertical price fixing, whether of
minimum or maximum prices, is unlawful per se. Arizona v. Maricopa County Medical Soc'y, 457
U.S. 332 (1982). In light of S.ylvama, the Court in particular should reevaluate the per se rule
against maximum resale pricing. See Note, supra note 166, at 627-33 (maximum RPM minimizes
consumer prices, promotes dealer efficiency, and stabilizes manufacturer's sales and output levels).
Maximum price fixing has no anticonsumer effects and actually may protect the public from being
overcharged. See Albrecht v. Herald Co., 390 U.S. 145, 156-68 (1968) (Harlan, J., dissenting) (price
ceilings, as opposed to minimum pricing, prevent retailers from exacting monopoly profits); R.
BORK, THE ANTITRUST PARADOX, 281-82 (1978) (business has legitimate interest in maintaining
price ceilings to increase consumer demand).
192. Set Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 55 n.23 (1977) (manufacturer's plan to increase marketing efficiency and stimulate interbrand competition by employing
location clause justified terminating dealership).
193. See supra note 36 and accompanying text; see also Comment, supra note 170, at 108 (Slvama eliminated fundamental basis of per se rule against vertical restraints by discrediting relevance
of common law policy against restraints on alienation).
194. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 51 n.18 (1977). The Court
stated that its decision applied only to nonprice restraints. The Court justified the maintenance of
different standards of review for price and nonprice restraints on three grounds: RPM reduces
interbrand as well as intrabrand competition; RPM might facilitate the formation of cartels; and
Congress' recent repeal of the Miller-Tydings Act, ch. 690, Title VIII, 50 Stat. 693 (1937) (repealed
1975), and the McGuire Act, ch. 745, 66 Stat. 631 (1952) (repealed 1975) (both statutes allowed
states to adopt fair trade as means to achieve lawful resale price control), evidences congressional
endorsement of a per se analysis of RPM. Continental TV, 433 U.S. at 51 n. 18.
Commentators have demonstrated that these reasons do not justify treating vertical price and
nonprice restraints differently. Se R. BORK, supra note 191, at 288-98; Comment, supra note 170, at
103; Note, supra note 166, at 633-39. In fact, contrary to the Court's objectives in Sylvania, the
application of differing standards to vertical price and nonprice restraints may decrease manufacturers' marketing and distributional efficiency.
In many instances, a manufacturer can best promote interbrand competition by implementing a
distribution plan that combines RPM with a nonprice restraint, such as a territorial restriction. See
Goldberg, supra note 129, at 108. If manufacturers employ RPM but distribute to dealers without
regard to location, dealers are likely to engage in forms of nonprice competition that reward only
individual dealers. See id For example, a dealer might give more shelf space to a particular product and might not engage in local advertising that would benefit competing dealers. See id Conversely, if manufacturers employ both RPM and territorial restrictions, dealers are likely to be more
aggressive and to use every method possible to increase their market share within their designated
territories. I For examples of marketing strategies that use both price restraints and nonprice
restraints, see Magnavox Co., 78 F.T.C. 1183 (1971); Lenox, Inc., 73 F.T.C. 578 (1968),moded, 417
F.2d 126 (2d Cir. 1969), enforcedasmodified, 77 F.T.C. 860 (1970). See also Goldberg, supra note 129,
at 107-09 (discussing theories of marketing efficiency).
195. See Adams, Resale Price Maintenance: Fact and Fantasy, 64 YALE L.J. 967, 972-73 (1955);
Bork, supra note 166, at 391-464; Posner, supra note 70, at 292-93; see also Baxter Letter, supra note
159, at 56,012 (distribution scheme in Sylvania is analogous in economic effect on market to RPM).
490
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[Vol. 33:463
Because per se rules are appropriate only when the prohibited conduct
is manifestly anticompetitive, and because vertical price fixing stimulates interbrand competition, there is little justification for maintaining
96
the per se prohibition on vertical price restraints.
The legality of RPM and refusal to deal policies as analyzed under
97
the rule of reason would depend on the policies' competitive effects.'
In determining these effects, courts would consider the manufacturer's
market share, alternative sources of supply available to dealers,' 98 and
whether legitimate business concerns justify the use of RPM.1 99 Courts
would examine RPM and refusal to deal policies in light of the competitive conditions in the market rather than automatically declaring all
2 °°
vertical price fixing per se illegal.
D.
New Perspective on Stover
Analysis of Stover's conduct under the rule of reason standard would
necessitate further proceedings to determine the competitive effects of
Stover's RPM policy. 20 1 The trial record should contain evidence re-
garding Stover's market share, the availability of alternative sources of
supply, and any business justification for the imposition of RPM, such
as product integrity. Neither courts nor the FTC can determine
whether Stover's RPM policy is an unreasonable restraint of trade until
they examine the policy's competitive effects.
Under the rule of reason, objective market factors rather than the subjective motivation of the dealer become the determinants of illegal behavior. Application of the rule of reason thus would provide
manufacturers with the essence of the Colgate doctrine: the freedom to
mold competitive marketing and distribution strategies. Under the rule
of reason approach, in contrast to the practical effect of the FTC's hold196. See supra note 159 and accompanying text.
197. See supra note 159 and accompanying text.
198. See, e.g., De Voto v. Pacific Fidelity Life Ins. Co., 618 F.2d 1340 (9th Cir.)(defendant's
abrogation of contract did not restrain trade when defendant's activities affected less than one
percent of relevant market), cert. denied, 449 U.S. 904 (1980); Determined Productions, Inc. v. R.
Dakin & Co., 514 F. Supp. 645 (N.D. Cal. 1979) (availability to plaintiff of alternative, worldwide
sources of supply negated inference of anticompetitive effect of defendant's refusal to deal), afd
mem., 649 F.2d 866 (9th Cir. 1981).
199. See, e.g., Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977) (procompetitive
effects of manufacturer's marketing scheme justifies termination of dealer); Donald B. Rice Tire Co.
v. Michelin Tire Corp., 483 F. Supp. 750 (D.C. Md. 1980) (dealer termination was reasonable
restraint of trade because manufacturer's marketing scheme designed to eliminate free riders), aft'd,
638 F.2d 15 (4th Cir.), cert. denied, 454 U.S. 864 (1981).
200. See supra note 159.
201. Indeed, Judge Needelman, in his initial decision, found that the stipulated record was
more fictional than real in reflecting Stover's actual business practices. Russell Stover Candies, Inc.,
100 F.T.C. 1, 14 (initial decision) (1981), rev'd, 100 F.T.C. 16 (1982) (Commission decision), rev'd,
718 F.2d 256 (8th Cir. 1983).
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ing in Stover, a manufacturer would be able to impose an RPM plan
without fear of immunizing its dealers from termination.
CONCLUSION
The Colgate doctrine emerged as an exception to the Sherman Act's
section 1 per se prohibition of vertical restraints. In recognition of the
freedom to trade, the doctrine permits a manufacturer to announce an
RPM policy and to refuse to deal with retailers who do not adhere to
that policy. Since the inception of the Colgate doctrine, the Supreme
Court has increasingly narrowed the definition of conduct that the doctrine protects. In Stover, the FTC attempted to invalidate Colgate by
holding that a section 1 violation occurred when a manufacturer's RPM
policy induced dealers to comply unwillingly with the manufacturer's
suggested prices. This decision construed a manufacturer's unilateral
refusal to deal as bilateral conduct prohibited under section 1 of the
Sherman Act. Although the Court of Appeals for the Eighth Circuit
rejected the FTC's attempt to invalidate the Colgate doctrine, the FTC's
decision in Stover reveals the need to consider an alternative approach to
RPM.
One alternative approach would be to consider RPM under the rule
of reason standard as another permissible form of vertical restrictions.
Unlike under the per se standard, under the rule of reason standard the
court would analyze the competitive effects of vertical price fixing on
the relevant market. If the court found that the RPM policy did not
have an anticompetitive effect, that policy would not violate section 1.
Although the Supreme Court has not yet adopted the rule of reason in
an RPM context, the time is ripe for reconsideration. Such an approach
would allow the Court to balance fairly the purposes of the Sherman
Act with the manufacturer's right to trade freely on the open market.
The Stover decision should provide the impetus for adopting the rule of
reason standard because it illustrates both the length to which the definition of an agreement may be extended in order to find concerted action under section 1 and the consequent danger of losing the
procompetitive benefits of RPM policies.
KATHRYN
A. KUSSKE