United States v. Sealy, Inc./Opinion of the Court

by Abe Fortas

United States Supreme Court

388 U.S. 350

United States  v.  Sealy, Inc.

 Argued: April 20, 1967. --- Decided: June 12, 1967

Appellee and its predecessors have, for more than 40 years, been engaged in the business of licensing manufacturers of mattresses and bedding products to make and sell such products under the Sealy name and trademarks. In this civil action the United States charged that appellee had violated § 1 of the Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. § 1, by conspiring with its licensees to fix the prices at which the retail customers of the licensees might resell bedding products bearing the Sealy name, and to allocate mutually exclusive territories among such manufacturer-licensees.

After trial, the District Court found that the appellee was engaged in a continuing conspiracy with its manufacturer-licensees to agree upon and fix minimum retail prices on Sealy products and to police the prices so fixed. It enjoined the appellee from such conduct, 'Provided, however, that nothing herein contained shall be construed to prohibit the defendant from disseminating and using suggested retail prices for the purpose of national advertising of Sealy products.' Appellee did not appeal the finding or order relating to price-fixing.

With respect to the charge that appellee conspired to allocate mutually exclusive territory among its manufacturers, the District Court held that the United States had not proved conduct 'in unreasonable restraint of trade in violation of Section 1 of the Sherman Act.' The United States appealed under § 2 of the Expediting Act, 32 Stat. 823, as amended, 15 U.S.C. § 29. We noted probable jurisdiction. 382 U.S. 806, 86 S.Ct. 58, 15 L.Ed.2d 57 (1965).

There is no dispute that exclusive territories were allotted to the manufacturer-licensees. Sealy agreed with each licensee not to license any other person to manufacture or sell in the designated area; and the licensee agreed not to manufacture or sell 'Sealy products' outside the designated area. A manufacturer could make and sell his private label products anywhere he might choose.

Because this Court has distinguished between horizontal and vertical territorial limitations for purposes of the impact of the Sherman Act, it is first necessary to determine whether the territorial arrangements here are to be treated as the creature of the licensor, Sealy, or as the product of a horizontal arrangement among the licensees. White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963).

If we look at substance rather than form, there is little room for debate. These must be classified as horizontal restraints. Cmp are United States v. General Motors Corp., 384 U.S. 127, 141-148, 86 S.Ct. 1321, 1328-1332, 16 L.Ed.2d 415 (1966); id., at 148-149, 86 S.Ct. at 1332 (Harlan, J., concurring in the result); United States v. Parke, Davis & Co., 362 U.S. 29, 80 S.Ct. 503, 4 L.Ed.2d 505 (1960).

There are about 30 Sealy 'licensees.' They own substantially all of its stock. ^[1] Selay's bylaws provide that each director must be a stockholder or a stockholder-licensee's nominee. Sealy's business is managed and controlled by its board of directors. Between board meetings, the executive committee acts. It is composed of Sealy's president and five board members, all licenseestockholders. Control does not reside in the licensees only as a matter of form. It is exercised by them in the day-to-day business of the company including the grant, assignment, reassignment, and termination of exclusive territorial licenses. Action of this sort is taken either by the board of directors or the executive committee of Sealy, both of which, as we have said, are manned, wholly or almost entirely, by licensee-stockholders.

Appellee argues that 'there is no evidence that Sealy is a mere creature or instrumentality of its stockholders.' In support of this proposition, it stoutly asserts that 'the stockholders and directors wore a 'Sealy hat' when they were acting on behalf of Sealy.' But the obvious and inescapable facts are that Sealy was a joint venture of, by, and for its stockholder-licensees; and the stockholder-licensees are themselves directly, without even the semblance of insulation, in charge of Sealy's operations.

For example, some of the crucial findings of the District Court describe actions as having been taken by 'stockholder representatives' acting as the board or a committee.

It is true that the licensees had an interest in Sealy's effectiveness and efficiency, and, as stockholders, they welcomed its profitability-at any rate within the limits set by their willingness as licensees to pay royalties to the joint venture. But that does not determine whether they as licensees are chargeable with action in the name of Sealy. We seek the central substance of the situation, not its periphery; ^[2] and in this pursuit, we are moved by the identity of the persons who act, rather than the label of their hats. The arrangements for exclusive territories are necessarily chargeable to the licensees of appellee whose interests such arrangements were supposed to promote and who, through select members, guaranteed or withheld and had the power to terminate licenses for inadequate performance. The territorial arrangements must be regarded as the creature of horizontal action by the licensees. It would violate reality to treat them as equivalent to territorial limitations imposed by a manufacturer upon independent dealers as incident to the sale of a trademarked product. Sealy, Inc., is an instrumentality of the licensees for purposes of the horizontal territorial allocation. It is not the principal.

Accordingly, this case is to be distinguished from White Motor Co. v. United States, supra, which involved a vertical territorial limitation. In that case, this Court pointed out that vertical restraints were not embraced within the condemnation of horizontal territorial limitations in Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199 (1951), and prior to trial on summary judgment proceedings, the Court declined to extend Timken 'to a venic al arrangement by one manufacturer restricting the territory of his distributors or dealers.' 372 U.S., at 261, 83 S.Ct., at 701.

Timken involved agreements between United States, British, and French companies for territorial division among themselves of world markets for antifriction bearings. The agreements included fixing prices on the products of one company sold in the territory of the others; restricting imports to and exports from the United States; and excluding outside competition. This Court held that the 'aggregation of trade restraints such as those existing in this case are illegal under the (Sherman) Act.' 341 U.S., at 598, 71 S.Ct., at 974.

In the present case, we are also faced with an 'aggregation of trade restraints.' Since the early days of the company in 1925 and continuously thereafter, the prices to be charged by retailers to whom the licensee-stockholders of Sealy sold their products have been fixed and policed by the licensee-stockholders directly, by Sealy itself, and by collaboration between them. As the District Court found:

'the stockholder-licensee representatives * * * as the board of directors, the Executive Committee, or other committees of Sealy, Inc. * * * discuss, agree upon and set

'(a) The retail prices at which Sealy products could be sold;

'(b) The retail prices at which Sealy products could be advertised;

'(c) The comparative retail prices at which the stockholder-licensees and the Sealy retailers could advertise Sealy products;

'(d) The minimum retail prices below which Sealy products could not be advertised;

'(e) The minimum retail prices below which Sealy products could not be sold; and

'(f) The means of inducing and enforcing retailers to adhere to these agreed upon and set prices.'

These activities, as the District Court held, constitute a violation of the Sherman Act. Their anticompetitive nature and effect are so apparent and so serious that the courts will not pause to assess them in light of the rule of reason. See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 210-218, 60 S.Ct. 811, 838-842, 84 L.Ed. 1129 (1940); United States v. General Motors Corp., 384 U.S. 127, 147, 86 S.Ct. 1321, 1331, 16 L.Ed.2d 415 (1966).

Appellee has not appealed the order of the District Court enjoining continuation of this price-fixing, but the existence and impact of the practice cannot be ignored in our appraisal of the territorial limitations. In the first place, this flagrant and pervasive price-fixing, in obvious violation of the law, was, as the trial court found, the activity of the 'stockholder representatives' acting through and in collaboration with Sealy mechanisms. This underlines the horizontal nature of the enterprise, and the use of Sealy, not as a separate entity, but as an instrumentality of the individual manufacturers. In the second place, this unlawful resale price-fixing activity refutes appellee's claim that the territorial restraints were mere incidents of a lawful program of trademark licensing. Cf. Timken Roller Bearing Co. v. United States, supra. ^[3] The territorial restraints were a part of the unlawful price-fixing and policing. As specific findings of the District Court show, they gave to each licensee an enclave in which it could and did zealously and effectively maintain resale prices, free from the danger of outside incursions. It may be true, as appellee vigorously argues, that territorial exclusivity served many other purposes. But its connection with the unlawful price-fixing is enough to require that it be condemned as an unlawful reatraint and that appellee be effectively prevented from its continued or further use.

It is urged upon us that we should condone this territorial limitation among manufacturers of Sealy products because of the absence of any showing that it is unreasonable. It is argued, for example, that a number of small grocers might allocate territory among themselves on an exclusive basis as incident to the use of a common name and common advertisements, and that this sort of venture should be welcomed in the interests of competition, and should not be condemned as per se unlawful. But condemnation of appellee's territorial arrangements certainly does not require us to go so far as to condemn that quite different situation, whatever might be the result if it were presented to us for decision. ^[4] For here, the arrangements for territorial limitations are part of 'an aggregation of trade restraints' including unlawful price-fixing and policing. Timken Roller Bearing Co. v. United States, supra, 341 U.S., at 598, 71 S.Ct., at 974. Compare United States v. General Motors Corp., 384 U.S. 127, 147-148, 86 S.Ct. 1321, 1331-1332, 16 L.Ed.2d 415 (1966). ^[5] Within settled doctrine, they are unlawful under § 1 of the Sherman Act without the necessity for an inquiry in each particular case as to their business or economic justification, their impact in the marketplace, or their reasonableness.

Accordingly, the judgment of the District Court is reversed and the case remanded for the entry of an appropriate decree.

Reversed and remanded.

Mr. Justice CLARK and Mr. Justice WHITE took no part in the decision of this case.

Mr. Justice HARLAN, dissenting.

Notes

1. A nonlicensee, Bergmann, who was Sealy's president in the 1950's, owns some of the remaining stock; stockholders have preemptive rights.
2. Cf., e.g., Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199 (1951); United States v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966); United States v. New Wrinkle, Inc., 342 U.S. 371, 72 S.Ct. 350, 96 L.Ed. 417 (1952); United States v. American Tobacco Co., 221 U.S. 106, 31 S.Ct. 632, 55 L.Ed. 663 (1911).
3. In Timken, as in the present case, it was argued that the restraints were reasonable steps incident to a valid trademark licensing system. But the Court summarily rejected the argument, as we do here. It pointed out that the restraints went far beyond the protection of the trademark and included nontrademarked items, and it concluded that: 'A trademark cannot be legally used as a device for Sherman Act violation.' 341 U.S., at 599, 71 S.Ct., at 975. Cf. § 33 of the Lanham Act, 60 Stat. 438, as amended, 15 U.S.C. § 1115(b) (7). In Timken, the restraints covered nonbranded merchandise as well as the 'Timken' line. In the present case the restraints were in terms of 'Sealy products' only. As to their private label products, the licensees were free to sell outside of the given territory and, so far as appears, without resale price collaboration or enforcement. But this difference in fact is not consequential in this case. A restraint such as is here involved of the resale price of a trademarked article, not otherwise permitted by law, cannot be defended as ancillary to a trademark licensing scheme. Cf. also United States v. General Motors Corp., 384 U.S. 127, 142-143, 86 S.Ct. 1321, 1329-1330, 16 L.Ed.2d 415 (1966).
4. Cf. Northern Pacific R. Co. v. United States, 356 U.S. 1, 6-7, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958): 'As a simple example, if one of a dozen food stores in a community were to refuse to sell flour unless the buyer also took sugar it would hardly tend to restrain competition in sugar if its competitors were ready and able to sell flour by itself.'
5. MR. JUSTICE HARLAN observed, concurring in the result in United States v. General Motors Corp., 384 U.S. 127, 148-149, 86 S.Ct. 1321, 1332, 16 L.Ed.2d 415, that 'Although Parke Davis related to alleged price-fixing, I have been unable to discern any tenable reason for differentiating it from a case involving, as here, alleged boycotting.' The same conclusion would seem to apply with respect to an alleged market division, which, like price-fixing, group boycotts, and tying arrangements, has been held to be a per se violation of the Sherman Act. Northern Pacific R. Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958).