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Territorial Restrictions

    A territorial restriction establishes an exclusive selling territory for an authorized wholesaler or retail distributor. For example, beer distributorships routinely come with an exclusive selling territory. Like RPM, vertical market division is designed to limit intrabrand price competition.

    Issue: Is vertical market division permitted under the antitrust statutes?

    The key decision is Continental TV v. GTE Sylvania 433 U.S. 36 (1977).

bulletDisappointed with the performance of its retail distribution system, GTE Sylvania shifted tactics in 1962. It began selling TVs directly to a limited number of franchisees--the hope was that these smaller retail establishments would, by means of a professional and personalized sales pitch, be effective in increasing GTE's share of TV sales (a mere 2 percent in 1962).
bulletThe new strategy worked. The franchisees did not get an exclusive selling territory. Nevertheless, they were permitted to sell Sylvania TV's from authorized locations only.
bulletGTE Sylvania balked when one of its most successful franchishees, Continental TV of San Francisco, opened a store in Sacramento --in violation of its franchise agreement.
bulletContinental sued on grounds that the territorial restraints amounted to a "conspiracy to restrain trade" and therefore was illegal under §1 of the Sherman Act.
bulletThe Supreme Court ruled the courts should take a rule of reason approach to §1 where territorial restraints are concerned, and went on point out that such restraints are capable of promoting interbrand competition, even as they restrict intrabrand competition. Click here to read the opinion of Justice Powell.

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