The Supreme Court yesterday freed manufacturers to specify the locations at which their products are sold by franchised retailers.
The court said this will strengthen competition among rival producers while providing consumers with benefits such as better servicing.
Lawyers who both sue and defend manufacturers in antitrust cases joined in applauding the ruling. It affects a vast marketplace - for items ranging from autombiles to hamburgers.
The justices decided 6 to 2 to overturn a 1967 decision making it an automatic or per se violation of the Sherman Antitrust Law for manufacturer to restrict the outlets or store locations from which its dealers resell its merchandise.
From now on, Justice Lewis F. Powell Jr. wrote in the opinion for the court, the pre-1967 "rule of reason" will again be in force: anyone claiming that a restriction on retail locations is anti-competitive can sue, but must prove that the restriction is unreasonable.
The case arose from a marketplace for television sets in which GTE Sylvania, Inc., had a declining share. By the early 1960s it was accounting for only 1 per cent to 2 per cent of national sales. RCA accounted for 60 per cent to 70 per cent and more than 100 other makers for the rest.
Sylvania devised and implemented a new marketing strategy. Phasing out wholesalers, it began to sell sets directly to franchised dealers. At the same time, it weeded the ranks of competing dealers in order to retain and attract those it deemed aggressive and competent. By 1965 its share of the market was 5 per cent - roughly triple 1962's - and it was the nation's eighth-largest supplier of color TVs.
Part of the strategy was a limit on the number of Sylvania dealers in any given area and a requirement that each of them sell sets only from the location or locations franchised by the company. Sylvania imposed no restrictions on the dealers' right to sell competing brands, to sell to any buyers, including discounters, or to set their own prices.
In San Francisco, a retailer called Continental T.V., Inc., prospered under the plan. But Sylvania was dissatisfied because its market share in the city was 2.5 per cent - half the average for Northern California and the nation.
As a result, Sylvania in the spring of 1965 franchised another established retailer, Young Brothers, to sell its sets at a store only a mile away from a Continental outlet.
The action set off a bitter dispute in which Continental began moving Sylvania merchandise to a new outlet in Sacramento, a market Sylvania believed to be already well served. Finally Sylvania terminated all of Continental's franchises.
In the litigation that followed, a federal judge instructed the jury to find that Sylvania had violated the Sherman Act if the evidence showed the firm made "any effort . . . to restrict outlets . . . regardless of the reasonableness of the location restrictions." The jury awarded Continental treble damages of $1,774,515. A divided Ninth U.S. Circuit Court of Appeals reversed and, yesterday, was affirmed.
The jury instruction was in accord with the 1967 Supreme Court decision. There, the court struck down a system with which the manufacturer of Schwinn bicycles let only franchised retailers sell the bikes to the public - and sell them only at specified locations. The company forebade both distributors and retailers from selling the bikes to nonfranchised retailers.
The Schwinn decision, which termed the system an automatic violation of the Sherman Act, overturned - without referring to it - a 1958 ruling that established a "rule of reason," putting the burden of proving that a restriction was anticompetitive on the plaintiff.