UNITED STATES v. TOPCO ASSOCIATES

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Argument of Howard E. Shapiro

Chief Justice Warren E. Burger: Number 82, United States against Topco Associates.

Mr. Shapiro, you may proceed whenever you are ready.

Mr. Howard E. Shapiro: Mr. Chief Justice and may it please the Court.

This is an appeal by the United States from a decision of the District Court for the Northern District of Illinois in a civil antitrust case.

The appellee, defendant in the District Court is Topco Associates Inc. Topco is a cooperative corporation, which procures grocery and related nonfood products for 23 supermarket chains and two wholesalers.

These chains and wholesalers are owner members of the corporation and they control it.

The restriction challenged by the government is an agreement among the member chains through Topco that they will not retail Topco branded products outside of specified territories and that they will not sell Topco supply products at wholesale.

The government contended in the District Court that the arrangement was a horizontal territorial allocation scheme, which was illegal per se under Section 1 of the Sherman Act.

After a trial on the merits, the District Court held that the Act had not been violated and entered judgment for the defendant.

In its opinion which is at page 545 of the record and its findings of fact, which are at page 553; it concluded that the division of territories among Topco supermarket chains and the accompanying wholesale restrictions were not illegal per se.

Rather the Court ruled they were reasonable restrictions ancillary to the cooperative private label program, Topco furnishes its owner members.

I would like briefly to describe the Topco organization.

Justice Potter Stewart: This was after a full trial before Judge Hubert Will, was it?

Mr. Howard E. Shapiro: That is correct Your Honor.

The Topco organization, as I said procures food and related and nonfood grocery items.

About 55% of these are furnished to the members under brand names which are owned by Topco.

These brand names are not nationally advertised.

They are such names as Food Club which is the top line for canned goods; Elna which is a second line, Gallo which I think covers carbonated beverages, Top Frost and so on.

They include the primarily strategic grocery items.

There are canned goods, frozen foods, carbonated beverages, cookies and crackers.

They are sold outright to the members so that the member grocery chains had absolute title to them.

Now, Topco’s member grocery chains are independent business entities.

They have simply joined together through Topco for the purpose of procuring these products.

Topco has managed much in the same way that the Sealy Corporation was managed in United States against Sealy.

Voting stock is held equally by each member chain and the business of the corporation is conducted by 14-man Board of Directors, made up of officials who are selected from among the chief executive officers of the member chains.

Chief Justice Warren E. Burger: Are the members of Topco in any way inhibited from acquiring other brands in the open market?

Mr. Howard E. Shapiro: No, Your Honor, they are not.

Chief Justice Warren E. Burger: Their membership does not restrict their activities?

Mr. Howard E. Shapiro: No, Your Honor, it does not.

The Topco member chains are, as I said, independent organizations and that their combined retail sales in 1967 were $2.3 billion, so that the 25 Topco organizations are fourth in retail sales after A&P, Safeway and Kroger.

Many of the chains are very substantial in our local market.

Giant Foods was a member of Topco, for example, from 1960 to 1966 and it had 23% of the District of Columbia market.

Chief Justice Warren E. Burger: What percentage of that gross is represented by Topco brand names?

Mr. Howard E. Shapiro: Out of the $2.3 billion in total sales, about 10% is Topco supplied products, 237 million and about 133 million of that would be Topco brand products, Your Honor.

I started to describe the size of these organizations, which we maintain is quite substantial.

The record at A17 through 25 describes them 9 members have total sales in excess each of 100 million and 20, according to my count, have sales in excess of 50 million.

Justice Byron R. White: Does Topco supply any goods under the private label?

Mr. Howard E. Shapiro: Yes, it does, Your Honor.

Justice Byron R. White: So, it does no purchasing of nationally labeled -- of national label?

Mr. Howard E. Shapiro: I think not of national label products, they may buy a few, but there are great many non-branded goods.

It does purchase some branded goods, which are not Topco brands.

As I have say, the division seems to break down to about 102.5 million of non Topco branded products.

Justice William J. Brennan: And, what is it, that a Topco affiliate is given an exclusive license, whatever it is, they sell the Topco brand in its areas, is that it?

Mr. Howard E. Shapiro: That is correct.

Justice William J. Brennan: That is the crux of the government's case?

Mr. Howard E. Shapiro: That is the crux of the government's case.

The Topco organization licenses each member and in terms of the licensee, you may not sell the branded goods, you are authorized to sell outside of specified territories.

Actually, there are three kinds of licenses.

One is exclusive, the other is non-exclusive and the third is called co-extensive, but in effect, as the District Court found, they add up to exclusive.

In fact --

Justice Harry A. Blackmun: And, what is the remedy of the government was?

Mr. Howard E. Shapiro: The remedy which is it to enjoin the territorialization and the wholesale restriction.

Justice Harry A. Blackmun: Which would be limited then?

It would be limited then what, to the Topco branded items, the injunction?

Mr. Howard E. Shapiro: Yes, Your Honor, the injunction would run against the restrictive term in Topco’s bylaws which require this territorialization.

Justice Harry A. Blackmun: Now, is that –- can you refer me to that term?

Mr. Howard E. Shapiro: Yes, Your Honor.

It appears in the record that at appendix 395 and 398.

The description of the restraint itself, the licensing arrangement itself is in paragraph 2 of Article XI of the Topco bylaws, and the wholesale restriction, which is a supplementary restriction to the territorial restriction, is described in paragraph 8 of Article XI on appendix (a) 398.

Very briefly it is, “no member will sell or offer for sale any products bearing any of the association’s trademarks at any point outside the territory, which has been specifically assigned to them and then the wholesale restriction, would follow, that is what we are challenging.

Chief Justice Warren E. Burger: What if the particular chain member, who has a small chain, wants to expand his territory, does he have any problem until he runs into the territory of another?

Mr. Howard E. Shapiro: In order to expand his territory, he had to get the consent of the Topco organization, which of course consists of its fellow chains.

If he runs into the territory of another, he is subject to a veto in effect.

Chief Justice Warren E. Burger: But if it is open territory, I assume Topco wants to sell all of the merchandise, it can and so if it is open, they can move into it?

Mr. Howard E. Shapiro: Yes, Your Honor.

Chief Justice Warren E. Burger: And it is open in the sense of not being franchised to another member?

Mr. Howard E. Shapiro: Yes, if the Topco organization is not licensed to territory it will be open.

Occasionally, there are clashes over a territory, but territory is quite large, they are defined by county and some of them include very substantial segments of states.

The District Court found that in practice, the consent of the incumbent in any territory is needed for a chain to enter.

Justice William J. Brennan: Is the operation nationwide?

Mr. Howard E. Shapiro: Yes, Your Honor.

There is a map at the back of appellee’s brief, which sets forth the areas, in which Topco operates.

I think it covered some 33 states which makes it comparable to organizations like A&P, which operates, I think in about 37 States or Safeway which may operate in about 30.

There is no question as to the purpose of the restrictions, the purpose of the territorialization and the wholesale restrictions, which supplement them, are to protect the members from each others competition in the sale of Topco branded products, that is why you have an exclusive arrangement like this.

And, it was the government’s position in the District Court, it is the government’s position here that this kind of arrangement affected through this of its kind of an organization is a horizontal agreement to allocate territories and to restrict wholesale operations, which is illegal per se and has been illegal per se, ever since the Addyston Pipe case, 70 years ago.

If this was a vertical restriction, arguably it might be a different case, although even there, I think the law is now clear that a vertical restriction on products which are sold to a business for resale and are owned by it cannot be imposed even vertically.

And a fortiori, when you have it horizontal as you do this case, by there is an agreement among direct and actual and potential competitors, it has to be illegal per se.

The District Court relied particularly in its decision on the Sixth Circuit’s ruling in Federal Trade Commission against Sandura Company in 339 F. 2d 847, yet that was a vertical case and in that case, the Sixth Circuit pointed out that if the arrangement before it had been a horizontal arrangement as this is, then it would have been illegal per se.

Now, I call it horizontal because this organization is almost identical in its operation to the operation in United States against Sealy.

When you put the Sealy case together with the ruling in United States against Schwinn Company, which also involved a territorial restriction, you come up with a plain rule that it is illegal per se.

We think the District Court should have stopped right there.

It did not.

It went on to say that this kind of territorialization is reasonable, even though is among actual and potential competitors because without competition from each other, each member would better be able to control the pricing and merchandising of Topco goods and thus, would better be able to compete with the vertically integrated chains, such A&P, Kroger and Safeway.

The argument was that these organizations, A&P, Safeway and Kroger are able through vertical integration to have exclusive private brand, that is private brands that they do not sell to anybody else.

So, what the Topco organization was permitted to do by the District Court was to agree among themselves not to compete, so that they could have exclusive private brands and the only way they could achieve that exclusivity, however, was by horizontal agreement among themselves.

That is the justification, which is said to take this case outside the per se rule.

Our objection is not to exclusivity as such with respect to a brand nor is it to the combination of chains into a single buying organization to achieve useful economies of scale.

What we object to is the attempt to achieve exclusivity by an agreement not to compete among their actual and potential competitors.

Now, when the District Court sought to justify this arrangement, it said that the government had conceded that the Topco arrangements enabled Topco members to compete better.

We did not make such a concession.

In our post-trial brief we said, while it may be true as the defendant contends that these unlawful agreements are intended to enable the member chains to more effectively compete with others in the marketplace, this motive does not immunize defendant’s conduct.

Instead, what we urged in the District Court was that, the law just does not allow direct agreement among competitors as a means of counterbalancing the power or advantages of somebody else in the marketplace.

The same argument was made in the Schwinn case, where it was said, let us have territorialization, so that our dealers in trademark bicycles can better compete with the mass merchandisers.

Justice William J. Brennan: But, how does this work out?

You said Giant has been a member of this.

Suppose 7-Eleven also and their competitors in a way in this area, how does this arrangement work out as between them?

Mr. Howard E. Shapiro: Well, it would depend on the type of license, which was given.

If 7-Eleven and Giant, both had -- they had to have a co-extensive or non-exclusive license to compete in the same area and it is unlikely that you would have that kind of arrangement, because the Topco members have quite insistent that they not have competition from somebody else in the sale of Topco brands.

Justice William J. Brennan: Are we concerned then only with the exclusive license?

Mr. Howard E. Shapiro: No, Your Honor.

I think we have to concerned with the non-exclusive and the co-extensive license also because all of them involve some kind of arrangement in which the members of the organization, as competitors get together and say well, we either let this guy in or we would not let him in, I should not use that kind of language, but it really amounts to that.

What they say is, is this area adequately covered to promote the sale of Topco brands and if they say it is, then they agree to give an exclusive.

If they have doubt that it is adequately covered, then they will say no.

We would not give an exclusive.

We will allow more than one chain to handle.

Usually in the situation, where the chains are not directly bumping into each other, their object is to keep competition away, that is the whole purpose of --

Justice William J. Brennan: You mean in the hypothetical I gave you they would not have --?

Mr. Howard E. Shapiro: I doubt very much that 7-Eleven and Giant would both -- have been licensed at the same time.

Justice Byron R. White: Does the government agree with the District Court that after the exclusivity, the Topco would dissolve?

Mr. Howard E. Shapiro: No, we do not, Your Honor.

Our position on that was stated quite clearly.

The Topco organization furnishes its members very valuable economies of scale in purchasing --

Justice Byron R. White: Wholly inside the private brand operations, joint buying is still an attractive mechanism?

Mr. Howard E. Shapiro: Not only it is attractive, Your Honor, it is necessary.

In fact, Dr. Barnes (ph) the expert that the defendants put on said that they would incur the -- the members would incur across many times across Topco, they did not have it.

Now, if they were freed from agreements not to compete; it is quite possible that they could still achieve some of the benefits of individual labeling.

For example, by using its joint organization to achieve brands for each of them, that way they might achieve exclusivity without having territorial barriers to each other.

Justice Byron R. White: Well, I gather Topco in any of event does not promote -- does not advertise?

Mr. Howard E. Shapiro: No --

Justice Byron R. White: It is the local chains that do all the promotions of the brand?

Mr. Howard E. Shapiro: Yes, Your Honor.

Now, you got it.

Just carrying on with Your Honor’s question for a moment, Topco itself sells to two wholesalers.

One of them, Frankford Quaker is a large Pennsylvania wholesaler and it obtains supplies from Topco under its own brand, the Unity brand.

In another instance, Topco now supplies the Twin Forks Grocery Company, this is a large wholesaler, operating up in Delft and Superior.

The members up there compete in the grocery-supermarket business and we -- the record shows that Topco members have competed with each other in the sale of Topco products, without disastrous results.

We have newspaper advertisings in the records of exhibits 115 to 132 that show that Fred Meyer up in Spokane, Washington furnishes Topco products at wholesale to groceries who compete with its own Spokane, Washington stores.

Perhaps, the most dramatic example I can give of this is the instance in Michigan.

There, there were two stores that had a coextensive license, Plumbs and Meijers.

One of them -- they both entered each other’s prime territory, as the phrase is used, because they did not have exclusive licenses.

Well, Meijers' witness testified in this case that they ended up competing all over the place and yet the Meijers' revenues rose in that area.

The witness explained this by saying, well, sometimes you get so mad and work so hard that you run pass yourself.

Well, this is what we think the Sherman Act is about and this is what the per se prohibition against market division can achieve.

Justice William J. Brennan: Tell me.

Are you guys with Mr. Justice White, that you did not think that they would have -- Topco would have to dissolve, if the government prevailed?

Mr. Howard E. Shapiro: No, we did not.

Justice William J. Brennan: Well now if the Court made a finding that it would and suppose we accept that, suppose we had to accept that fact, what then is the government’s position?

Mr. Howard E. Shapiro: Well, Your Honor, our position would remain that if Topco has -- in order to compete and engage in horizontal territorialization, you have to give up Topco --

Justice William J. Brennan: Even though it would have just (Inaudible) -- just --?

Mr. Howard E. Shapiro: Yes, Your Honor.

This goes to the reasons for having per se rules.

One of the assumptions is that in most instances horizontal territorialization is just going to be extremely harmful.

Now, once in a while a case may come along in which that is not so, but even if that is true, you still apply the per se rule, because you need the benefits of predictability.

Right now, any antitrust lawyer in the country can tell a supermarket chain.

You may not divide up territories with your competitors.

The law is absolutely clear on it.

Now, along comes this case, which says you will find out whether you can divide up territory after the trial because we will go through a full scale rule of re-examination.

Now, rule of re-examination in this kind of case is extremely difficult.

This is a case in which you have some 65 different geographic markets involved.

The District Court tried to say, well, we have to balance A&P’s interests against or A&P’s market position against the Topco member's position, and yet you find nothing in the record showing what A&P’s position is in these 65 markets.

It is almost impossible to do that kind of vast market analysis.

Instead, the District Court tried to make findings as to market shares, based on the market areas, in which these firms did business on some kind of average basis and the results are very inaccurate.

Chief Justice Warren E. Burger: Well, do I get a suggestion out of your argument that there should be a per se rule because it is inconvenient and difficult for the government to prove a case-by-case violation?

Mr. Howard E. Shapiro: Oh! No, Your Honor.

It is not simply a matter of the government's convenience of proof, but of predictability and certainty in anti trust law and on judicial -- effective judicial administration, as well.

Chief Justice Warren E. Burger: Well, of course the per se rule is always very predictable, but that is hardly a reason standing alone for having per se rule?

Mr. Howard E. Shapiro: It is one of the factors and the other major factor, of course, Your Honor --

Chief Justice Warren E. Burger: Standing alone I say?

Mr. Howard E. Shapiro: Oh! Standing alone, it would not be, of course.

The factor is that in almost every instance horizontal territorialization carries adverse effects and it does here.

We think there are at least three things we can point to that a company of this kind of territorialization.

First, the territorialization here inhibits expansion by the members into each other’s territory.

Chief Justice Warren E. Burger: What did the Court have to say, the District Court have to say about the impact on the public interest, consumer interest if Topco had to dissolve, go out of operation?

Mr. Howard E. Shapiro: The District Court felt that the public would be disadvantaged if Topco were to dissolve.

Chief Justice Warren E. Burger: I will agree with that in and off itself it is not part of it or do you think that is not relevant?

Mr. Howard E. Shapiro: Well, I think that the Topco organization does achieve very useful and beneficial economies of scale and advantages in distribution for its members.

Chief Justice Warren E. Burger: What about keeping the big chains under competitive conditions?

Mr. Howard E. Shapiro: Well, Your Honor, I think that there are means of combining group buying power without territorialization.

I think that is the answer that has to be given.

Nobody, as far as we know, at the retail level uses territorialization, except Topco.

There is nothing in this record, no testimony by either expert that suggests that any one else uses horizontal territorialization.

I would like to save the remainder of my time.

Chief Justice Warren E. Burger: Fine, Mr. Shapiro.

Mr. Grimm.

Argument of Victor E. Grimm

Mr. Victor E. Grimm: Mr. Chief Justice and may it please the Court.

This Court recognized in the White Motor’s case, that caution must be exercised when a per se concept is extended to embrace new practices.

The relevant inquiry in such a circumstance is not whether an existing concept can be read broadly enough to cover a new practice, but rather whether the rationale and the policy behind the rule really fits into practice.

Per se rules, after all are based upon judicial experience.

What experience then, have the Court’s have with the practices such as those here presented?

I would point out that in the District Court, the government conceded that it could find no case, which would justify a motion for summary judgment.

In its jurisdictional statement to this Court, the government pointed out that the Court had never been presented with a similar case.

Under such circumstances, we submit that it was proper and appropriate for the District Court to engage as it did in an inquiry into the economic and business stuff to use the words of White Motor decision, from which these competitive practices emerged.

Judge Will having done that, found, that their ultimate effect was not to detract some competition, but to enhance it.

What then is the competitive context, which the District Court found in this industry and from which these practices emerged?

There does not appear to be any dispute concerning the purpose for which Topco was formed or for which it continues to exist.

The cooperative was formed in the mid-1940s by a group of local grocery chains, who recognized that the only way to successfully compete in this industry, indeed, perhaps the only way to survive in the industry, was to duplicate in some measure the advantages of scale, which the Giant mass merchandisers had attained.

We have set forth in some detail, these advantages in our brief.

They are impressive and to some in the industry, were overwhelming, but Judge Will found that perhaps the most competitively significant advantage which the large regional and national chains had achieved was the private label.

Private label permitted these chains to reduce their costs, to lower their prices and yet to increase their profits and at the same time to instill consumer loyalty for their stores.

The national chains adopted groups of trademarks, by which to identify their private labels.

These were often the store names themselves or contractions thereof.

The trademarks and the products bearing them were exclusive in these large chain stores.

The chain, rather than the store was -- rather than a manufacturer was identified as the source of those products in the mind of the consumers.

The consumers soon recognized that if her family had a preference for Ann Page Green Beans or Eight O’Clock Coffee, she was required to patronize A&P stores in order to obtain those items.

Most of the advantages of the Giant national chains were beyond the ability of smaller operators to obtain.

One which was not, however, was the private label, which through cooperative efforts, they were able to achieve.

These cooperative efforts then gave them one competitive tool which the large chains had. Many of the other advantages of the larger chains were still beyond their economic reach.

The Topco Cooperative adopted a family of brands, which each of its members could use and identify in its own marketing area as its own private label.

Each continued, however, to operate under its own store names. Each continued to adopt his own merchandising philosophy, his own pricing.

Each continued, in short to remain independent, but for the first time in their history these independent chains, had the means of meeting the significant price competition, which only the Giant chains had theretofore offered to consumer.

The trademarks however, adopted by these cooperatives, had no immediate recognition in the marketplace as often did those of the national chains.

It was necessary for each operator to introduce those trademarks into his own marketing area.

This required an investment in time, in money, in effort, in resources.

Such an investment was designed to identify his stores with these products in the mind of a consumer, just as the large national chains had done, to build a secondary meaning for them.

If, however, the trademarks which were used as private labels were subject to use by another operator in the trading area of a member, their value as private brands would be destroyed.

Chief Justice Warren E. Burger: Now, would you develop that course a little bit?

I assume you are, but if not, I would like to have you dwell on for me at least.

Well, why would it be destroyed?

Mr. Victor E. Grimm: The national chains, as I have outlined, had developed these private brands and they had built them as competitive tools.

Through them they had instilled the consumer loyalty for their stores and --

Chief Justice Warren E. Burger: Could you put that in terms of an illustration?

What can A&P do with their vertical situation that is analogous to this?

Mr. Victor E. Grimm: A&P would develop their own line of private labels, which the consumer recognized were available only in A&P stores, Ann Page was one of their principle products, for example.M

Chief Justice Warren E. Burger: And, A&P I take it controls the competitive situation as between stores by their power to locate their supermarkets, wherever they want to?

Mr. Victor E. Grimm: That is correct, but the consumer knows that if she wants to buy Ann Page Green Beans, for example, she is required to go to an A&P Store in order to obtain them.

It engendered the uniqueness for the stores.

One of the basic means of competition in this industry is to develop a uniqueness for the store, so the consumer desires to shop in one store, as opposed to another.

There are many ways of doing this, but the most competitively significant way is by as the consumer is concerned perhaps, is through a medium which offers her a good value at a low price and one which she can only get at that store and that is what A&P and the larger chains use private label for.

Justice William J. Brennan: But why would it be impossible for an illustration I gave to Shapiro, having all of the Topco, with all the economies of scale, having both Giant and 7-Eleven, with Giant, having Green Beans under some private Giant label of green beans and 7-Eleven having some 7-Eleven green beans although they are both packed by the same patron, but the economies of scale realized in the purchasing and the packing arrangement, that Topco affects for it.

Why is something like that?

Why does not that work?

Mr. Victor E. Grimm: It does not work in the Topco context because even though they have combined into a purchasing organization with large volumes, they still have not achieved sufficient volume by which they could have a different private label for each member.

At Topco, the Topco Cooperative has about thousand principal items.

To suddenly make it a cooperative procuring 26,000 items, in effect, under each different member’s own label would require an investment in time and in efforts, which would be beyond the resources of the cooperatives to do.

Justice William J. Brennan: Was this explored exactly in the District Court at all?

Mr. Victor E. Grimm: Pardon me Mr. Justice?

Justice William J. Brennan: Was this possibility explored in the District Court?

Mr. Victor E. Grimm: There was discussion on this.

I would refer to a government exhibit wherein the possibility of one second line of labels was discussed and it was determined that it was -- that one second line alone would necessitate, at page 438 G. Ex. 102 of the joint appendix.

Chief Justice Warren E. Burger: 102?

Mr. Victor E. Grimm: Government Exhibit 102 at page 438, in which one, the second line of labels, it was determined to, page 440 is the relevant reference, and there it is indicated that just one additional line of labels would cost $350,000.00, well beyond the capacity of it.

So it was necessary, in order to achieve the advantages for them to develop a family of brands, which all could use in its own marketing area, but in order to achieve this, it became a necessary element of the Topco Cooperative to have a form of trademark licensing.

This trademark licensing made the system work, in effect.

Its purpose was not to preclude competition among Topco members, but rather to assure that the private brands, though cooperatively obtained, would be and would remain the private brand of each member individually.

We do not contend that trademark licensing or the existence of trademarks provides any influation installations from Sherman Act liability, but what we do contend is that trademark licensing in this context serves a proper and pro-competitive purpose that in effect it makes cooperative procurement of private labels possible.

Justice William J. Brennan: But of course each 7-Eleven and Giant had its own label, assuming that $350,000.00 was not that much of value, that would mean of course that neither would have an exclusive on that particular item, even though it is under a different brand name?

Mr. Victor E. Grimm: That is correct, Mr. Justice Brennan.

Justice William J. Brennan: Why is that precisely what the anti trust laws preclude?

Mr. Victor E. Grimm: The purpose is not to prevent another member from having the identical item, in terms of the content of the can or jar or container.

The purpose is to allow each member to have a private label that is a trademark which he can develop and identify as private label (Voice Overlap)

Justice William J. Brennan: The illustration I h=gave you would permit that.

Each would have a private label, but then the private 7-Eleven label will be competing with the private Giant label?

Mr. Victor E. Grimm: That is correct and this is (Voice Overlap)

Justice William J. Brennan: And under this arrangement that does not happen, because only Giant or only 7-Eleven is allowed the Topco private label, is that not right?

Mr. Victor E. Grimm: Except that through the cooperative, it would not be possible for them to obtain second lines of labels, so that each could have his own label.

The economies of combined purchasing would largely be lost by attempting to do that.

Justice Byron R. White: Well, let us assume for the moment that if it was just cheap for each person to have his own private label as to have, let us just say, one brand among all of them, then the effective exclusivity in this arrangement is simply to limit competition in private label goods.

It reduces the number of private labels in any market.

Mr. Victor E. Grimm: No, it would not do that.

What it would do is to assure that each member would have his private label, which would be indeed his, other operators in the area --

Justice Byron R. White: As compared with the situation where each chain has its own private label and is free to move into any market at once, with its own private label, as compared with that, the present system under Topco does limit the quantity of competition and private label merchandise?

Mr. Victor E. Grimm: If we are taking only the Topco Cooperative as a source of private brand that would be true.

There are other sources of cooperative private labels, which in such cases another member would obtain and what happens is a practical matter.

Justice Byron R. White: Is it not true that the locals do their own promoting of the brand, of the Topco brand anyway?

Mr. Victor E. Grimm: They do indeed and they must because --

Justice Byron R. White: And the Topco does not do that?

Mr. Victor E. Grimm: Topco does not do that.

Justice Byron R. White: So, it would not be anymore expensive for a local chain to promote its own private label and the Topco label, except for start-up cost, maybe?

Mr. Victor E. Grimm: Well, it is more than start-up cost.

It is having a staff of personnel out in the procuring areas.

It is developing a second line of labels themselves, the art work, the plates, the printing, having label inventories.

There are large group of factors required in this type of operation.

The Topco organization is not a static or rigid one.

A Topco member is constantly in a state of change, as the larger members of Topco grow and become large enough to in fact develop their own private label programs, which as the record indicate requires a sales volume of upwards of $250 million annually, they graduate from the Topco organization, they do develop their own private label programs when they are large enough to do so and often under their own store names.

Chief Justice Warren E. Burger: Which chain was it you say graduated from Topco, you mentioned one of them?

Mr. Victor E. Grimm: Well, Giant was one I believe that Mr. Shapiro mentioned.

Giant did in fact leave Topco.

It became large enough to develop its own private label programs and has its own procured brand and I believe under the Giant name.

There are as an example within 3 years preceding trial, five of Topco’s largest members left to develop their own private label program.

So, the Topco Cooperative is a way station in a cooperate chains, the economic development.

Justice William J. Brennan: Does this suggest that the private label program is so important to the whole arrangement that without it Topco would disappear?

Mr. Victor E. Grimm: That is correct and that is precisely what Judge Will found, Mr. Justice Brennan.

Justice Byron R. White: And why would it disappear if there was still great advantage against the act of cooperative purchasing, even of nationally branded goods?

Mr. Victor E. Grimm: I think that it would be a process and I think that if I can describe that process quite briefly, if exclusivity of a private brand would be lost, the members closest to graduation, closest to the ability to develop their own private label program would no longer be interested in continuing to pour their corporate resources into private label, which would be subject to use by others, and therefore, they would look for their own private label to begin, to develop their own private label program.

Even --

Justice Byron R. White: And, there are no addition advantages out of Topco such as --

Mr. Victor E. Grimm: Well, there may be but if they would no longer --

Justice Byron R. White: There would be or not?

Mr. Victor E. Grimm: Yes.

Justice Byron R. White: And, if there were actual advantages, it would wholly effect the private label --

Mr. Victor E. Grimm: That is right, there are advantages, but they are advantages of the private label program.

In other words, the Topco members testified that the purpose for which they joined the organization was to obtain private label, not to achieve the cost advantages, but they had to have a private label program, which was also cost competitive.

Justice Potter Stewart: Are you trying to emphasize the transient nature of the membership of Topco which does appear in the record and the brief?

How does it work?

Now, Giant Foods, for example was a member of Topco.

It left in 1966 and when it left, it of course, then no longer have the Topco private labels, it has had its own labels, I suppose?

Mr. Victor E. Grimm: That is correct.

Justice Potter Stewart: And therefore, lost all of the consumer goodwill and habits of buying of the previous labels and had it to develop its own or did do it in a transitory -- transitional way?

Mr. Victor E. Grimm: Well, it takes a transitional period, in order for this to occur, but normally when a chain would develop its own private label or frequently when they will, they will develop and other their own corporate name, so that it will be immediately identified in the mind of the consumer as its brand of that store.

Justice Potter Stewart: Often it is not the cooperate name, but it is some sort of acronym or something?

Mr. Victor E. Grimm: That is correct, it may --

Justice Potter Stewart: Or add page for A&P and so on?

Mr. Victor E. Grimm: Or contraction of the store name.

Justice Potter Stewart: How does the person be -- how does a company become a member of the Topco and how does it get out, any?

Mr. Victor E. Grimm: The membership -- there is a membership committee in Topco, a group of independent employees of the organization, who are seeking new members all the time and actively soliciting new members, for new membership will give the cooperative the volume which they need to achieve economy.

When a new chain comes in to the organization, they purchase 50 shares of common stock.

They purchase preferred stock on the basis of a formula depending upon their sales volume and they pay service charges at an annual basis, based upon sales.

When they want to leave Topco, they are required only to give 60 days notice, but there is provision for a tapering of service for 6 months, during this transitional period, which we referred to earlier.

Justice Potter Stewart: And the stock they owned, does Topco repurchase by something or what?

Mr. Victor E. Grimm: The common stock is repurchased at par.

In effect, they pay $5,000.00 for the common stock and it is repurchased at I believe at par, which is a dollar share.

So that part of it, they do not get back, but the preferred stock is repurchased.

The government has stated in its brief that it did not specifically attempt to prove any adverse effect on competition and yet, contends that such adverse effect ought to be inferred.

This inference is based largely upon economic theory, which we contend does not find support in the record and which Judge Will rejected.

Judge Will found that Topco licensing has no appreciable influence in Topco member expansion and does not control or affect pricing.

The Topco --

Chief Justice Warren E. Burger: Talking about that period, does the government conceive that it did not adversely affect prices or is that --?

Mr. Victor E. Grimm: No, Mr. Chief Justice.

The government conceded that it did not specifically attempt to prove an adverse effect on competition, but they alleged that certain inferences are ought to be drawn from the record, in terms of effect on expansion and prices, where these inferences that were rejected by Judge Will.

Topco members are naturally interested in expansion and growth.

Judge Will has found, as I have said, that Topco licensing has no appreciable influence on member expansion.

And, the government has been able to cite no instance to the contrary.

Expansion exists as follows: Let me try to outline it briefly.

When a member desires to expand into a new area, he gets a license.

License is granted in a matter of course because the Topco Cooperative is interested in having its members expand.

Even in license barriers, an expanding member maybe licensed to sell Topco branded products.

It is only in those cases where a primary marketing area, the heartland of another member’s operation exists that a member may not be licensed to sell Topco brands.

But, even in these cases, the record demonstrates that the operator will use alternative sources of private label in the industry, such as from another cooperative or from a wholesale organization.

But that situation would not often occur because of the geographic dispersion of Topco members in various parts of the country.

Nor with refusal to apply the concept of -- despite the District Court’s findings that the Topco licensing provision resulted in no unreasonable restrain, the government now urges that these findings ought now to be ignored because the government urges the irrebuttable presumption is an unreasonable restrain, regardless of its actual effect.

We submit that if antitrust law --

Justice Byron R. White: Well, Mr. --did not Judge Will find that this arrangement did restrain competition in private label merchandise?

Mr. Victor E. Grimm: Judge Will found that it had no appreciable influence on the two aspects of competition, which the government claims were injured.

One, prices; two, expansion, Judge Will specifically found the Topco licensing provisions had no effect on prices, did not --

Justice Byron R. White: What did he find about the effect on competition generally in the private label merchandising?

I thought he found that the advantages resulting from increasing competition with the national terms outweighed the disadvantages of the restraint on competition in private brands?

Mr. Victor E. Grimm: That reference I believe was a reference to the government’s argument.

Justice Byron R. White: Did he not find that?

Mr. Victor E. Grimm: No, not quite.

What he did say was that whatever maybe the effect, in order words, the government has argued, this to me, he had said, he said whatever may be the effect, it is far outweighed by the advantages.

Justice Byron R. White: What if he was wrong in saying that you made balance competitive impact like this, but competitors may combine as long as it furthers competition with another group of competitors?

What if he was wrong on that problem as a matter of law?

Mr. Victor E. Grimm: I think.

I do not think that is quite what he did, if (Voice Overlap)

Justice Byron R. White: Well, let us assume that he did that he was wrong, is that -- do you say that is proper -- that is the proper act of law?

Mr. Victor E. Grimm: I do not think that is the proper way to approach the problem and I do not think that Judge Will approached it that way.

What Judge Will did was to find that the ultimate effect of these practices was to benefit competition.

The ultimate effect was not adverse, then with reference to the government’s argument he said, whatever may be their adverse effect would be far outweigh.

I do not think the weighing was his influence here.

I think that was just a way of describing the government’s argument.

Chief Justice Warren E. Burger: You mean his approach was that assuming the government was correct on some possible adverse competitive impact, it was offset --

Mr. Victor E. Grimm: Yes, I think what he --

Chief Justice Warren E. Burger: -- benefits to the public?

Mr. Victor E. Grimm: What he was saying is that the ultimate effect, that is correct Mr. Chief Justice, was a benefit to the public.

Let us look at a moment at the concept of the horizontal ancillary -- horizontal restraints concept, which the government would seek to have applied here.

This per se concept concerning horizontal market division finds its origin and application in those cases, where competitors, typically those with sufficient market power to restrict output, if they chose, have combined and conspired to eliminate all competition among themselves.

Such naked restraints have no capacity to achieve any beneficial effect on competition.

However, when the Courts have been presented, with restrictions which are necessary and reasonably related to achieving a legitimate venture, the Courts have refused to apply this per se analysis and properly so we submit.

For such arrangements, have a capacity to intensify competition, and therefore, their ultimate effect on competition must be discerned and Judge Will did discern that effect here and found it was beneficial.

The refusal to apply per se rule here would not, we submit, result in interminable economic inquiries.

The doctrine of ancillary restraints provides a well defined legal concept, by which to identify those practices, which have a capacity to increase efficiency to ultimately enhance competition and to benefit the consumer.

This distinction was highlighted, we submit, in the Sealy case.

Sealy presented a combination of manufacturers, who agreed to refrain from selling trademark items outside of licensed areas.

Despite the government’s urging in that case, the Court did not find that those provisions were per se a violation of the Sherman Act.

Instead, the Court examined the context, found in aggregation of trade restraints, including unlawful price-fixing and policing, the ultimate purpose and effect of which was anti-competitive, but the Court specifically distinguished those quite different situations, such as restrictions incident to cooperative efforts among small grocers.

In Topco, grocers have entered into cooperative efforts, not for the purpose of eliminating competition among themselves, not for the purpose of restricting channels of distribution, but for the purpose of creating new grants.

More important, competitively significant private labels and in so doing, they have created new competition in industry which did not exist before and which can continue to exist only because of the licensing provision.

We do not contend because Topco members are small, medium-sized chain because their purpose is to assist their members to better compete in the industry that the Sherman Act does not apply.

What we do contend is that the ultimate effect of these practices is to enhance competition and Judge Will so found.

The government here seeks to claim competition in private labels, but that is a contradiction in turn because competition in private labels, means they would no longer be private and would deprive the consumer of the competitive benefits, which they provide.

Justice Potter Stewart: Mr. Grimm, one thing I -- it is not entirely clear to me on the factual situation is this.

One of the things that the government says is violative of the antitrust law is the restriction on wholesaling.

There are two -- two of the members of Topco are wholesalers.

How do they operate?

How do they fit in to this picture and into this argument?

Mr. Victor E. Grimm: Yes, Mr. Justice Stewart.

As Mr. Shapiro did point out, there are two Topco members who are wholesalers.

In the one that Mr. Shapiro referred to, Frankford Quaker, which operates in the Philadelphia area, there are a few brands, perhaps 200 or 300 brands, which that wholesaler obtained through the Topco Cooperative, which are a second line of labels.

In other words, they are not the same ones that the Topco member in the Philadelphia area (Voice Overlap)

Justice Potter Stewart: Your Topco retail member carries?

Mr. Victor E. Grimm: That is right and that retailer serves several hundreds, so called Mom & Pop groceries.

Justice Potter Stewart: That wholesaler, you mean?

Mr. Victor E. Grimm: That wholesaler, I am sorry, who in effect use those as their private labels.

Justice Potter Stewart: I see.

Now, that is one of them, the other -?

Mr. Victor E. Grimm: The other is a similar organization.

I believe the other is a member of IGA, as well, and therefore, its member stores would operate under an IGA name or something similar.

They would present a chain --

Justice Potter Stewart: The wholesalers therefore deal in a secondary label, in a different label from the label carried by the retail member in the same area?

Mr. Victor E. Grimm: In those areas, where there is a retail member existing, that is correct, Mr. Justice Stewart.

Justice Potter Stewart: But they might deal in the primary label in an area where there is not a retail member and in that area, the wholesalers will just sell to the independent Mom & Pop corner grocery stores?

Mr. Victor E. Grimm: That is correct.

Justice Potter Stewart: Alright.

Chief Justice Warren E. Burger: Mr. Shapiro, you have about seven minutes left.

Rebuttal of Howard E. Shapiro

Mr. Howard E. Shapiro: Thank you, Your Honor.

The government’s argument has been that the competition is not enhanced by the territorialization device for achieving exclusivity.

In very brief terms, what we are saying is that it is better to have two Topco members competing against A&P in a given market or Kroger or Safeway than one.

We do not enhance competition by erecting a barrier around the market.

Secondly, we have argued that we do have here an effect on price.

Topco’s expert Dr. Applebaum (ph) explained the whole purpose of exclusivity is to insulate the seller from competition with respect to price and try and get as much control over price and margin as you can.

So that exclusivity itself has an effect on price and when exclusivity is achieved by territorial agreements not to compete, that effect is aggravated because we have the third consequence of this agreement, namely something that inhibits entry into each others markets.

Now, it is argued that well there really is not any inhibition on entry into markets.

People can enter without Topco products.

Of course, they can enter without Topco products, as is suggested and the justification for the importance of Topco is not as great as it has been suggested, but the record is to the contrary.

Just to use the exhibit that was referred to a moment ago at page 440, there, there is the discussion of the second line of products and it is also pointed out that at page 438 and 439, one of the reasons that there is not a demand for second line, doubtless rises from the fact that it is impracticable to stock in the same warehouse, duplicating private brand inventories.

Now, this really means that once you are into the Topco system of distribution, so that it is your basic system, anywhere where you are operating out of your basic warehouses, you really cannot go to some other line, if you want to expand and that means you cannot walk into another Topco member's territory with a different line and in fact, that same paragraph illustrates the kind of conflict we run into here.

The Big Bear liberal situation where neither wanted to give up the brands that the other -- the exclusivity, but and neither one of the other member having the advantages of the same brand.

Now, this goes also to the second line.

If you look at page 440, the explanation is given why would not members want a second line of brands and the answer is that if there were a second line, the competitive edge that Topco members gives -- the Topco programs give its members would be eliminated, that is the competitive edge they have against each other.

Now, the District Court found expressly a third factor, finding at 58 in a record at A56, it expressly found that intra brand competition is eliminated.

There was nothing else it could find on this record.

There has been some mention here about the importance of brand loyalty as a competitive factor here.

Now, the record on brand loyalty is that no one can determine what it is that brings the housewife in.

It certainly is not just loyalty to a private label brand.

People do not travel across the city to get Food Club canned peas.

Dr. Barnes, I mean, Dr. Applebaum, the expert put on by the defendants testified that the brand loyalty factor really cannot be determined because there are not studies available to do so, this is in the record of 186 and 187.

A point has been made that the government did not specifically attempt to prove that this practice was anti-competitive and we did not go forward with evidence beyond enough to show that this was illegal per se.

We did, however, on the record that was made try to carry the burden to show that this practice was not unreasonable and we argued principally three things that it inhibits expansion by members into each others territory, that it affects price and that it restricts intra brand competition.

Chief Justice Warren E. Burger: Mr. Shapiro, you said earlier that two Topco stores tend to compete better with Giant than one.

Now, that has the ring of a good aphorism, but I am not clear on why it is necessarily true, could you enlarge on that?

I am not rejecting it.

I just do not understand why it follows that that is true.

Mr. Howard E. Shapiro: Well, let us suppose that we had in the same market -- let me give the example that I referred to a moment ago, the situation in Michigan.

Two Topco stores Meijers and Plumbs both entered each others territory, Grand Rapids, Muskegon and I think in Lansing and they began vigorously competing with each other.

They were necessarily vigorously competing with A&P, as well and the result is -- the result for Meijers was very, very good, because Meijers ended up the winner in that contest with a very substantial market share.

That is really what it boils down to.

With this system, you do not get two Topco members competing in one market, they get one --

Unknown Speaker: I get a feeling this is price competition?

Mr. Howard E. Shapiro: This was price competition.

Chief Justice Warren E. Burger: On the same brand?

Mr. Howard E. Shapiro: The Plumbs and Meijers were competing on Topco brands.

They handled the entire line together.

They were competing all over the place, in the witness’ words.

Chief Justice Warren E. Burger: Well, but if the District Court’s finding is correct, the breakdown of the Topco method that you attack would mean that you might not have any Topco brands there.

Both stores might to decline to be members and the function, that is all assuming that the District Judge was correct?

Mr. Howard E. Shapiro: Yes, Your Honor.

Now, we do not agree that Topco would collapse.

There are just too many other advantages as the witness has testified, particularly Dr. Barnes, who emphasized these very substantial advantages that the Topco organization had.

It is a good organization.

They offer very good buying services.

I think one witness from Hillmans to described them as a, “we use them like our own buying division” and they have very excellent quality control services and incidentally it would not have to develop 26 different brands.

They might achieve some real wonders with a smaller line in 26, for each store.

Chief Justice Warren E. Burger: On your theory Mr. Shapiro, if there cannot be an exclusivity of the brand by two competing Topco members, that is what you are trying to stop is that exclusivity, is it not?

Mr. Howard E. Shapiro: May I qualify it?

Chief Justice Warren E. Burger: Yes.

Mr. Howard E. Shapiro: We are not trying to stop exclusivity.

We are trying to stop the achievement of exclusivity by territorial agreement and wholesale restriction --

Chief Justice Warren E. Burger: Well --

Mr. Howard E. Shapiro: -- and there is a very important difference (Voice Overlap)

Unknown Speaker: By agreement between competitors

Mr. Howard E. Shapiro: By agreement between competitors, yes, Your Honor.

Chief Justice Warren E. Burger: You want to stop it for those reasons then?

Now, there is nothing to prevent these two competing chains, putting their stores, right across the street from each other, is there?

Mr. Howard E. Shapiro: No, Your Honor.

Chief Justice Warren E. Burger: But, Giant does not put or A&P does not put one of its stores across the street or hundred yards away from another Giant store, does it?

Mr. Howard E. Shapiro: No.

Chief Justice Warren E. Burger: So they achieve a distribution and in a sense of limitation of competition by their vertical control, do they not?

Mr. Howard E. Shapiro: Yes, they do Your Honor, but they achieve it because they are a single economic and legal unit.

They are -- the law has always looked differently at attempts between independent firms to make agreements, but not to compete among each and situations where a single firm managing its own affair, restricts competition with itself.

Chief Justice Warren E. Burger: At least, it was Judge Will’s view whether correctly or not that this one means by which these independents could hold their own against A&P and Giants and the other big ones.

Now, this is theory in part, was it not?

Mr. Howard E. Shapiro: Oh! Yes, Your Honor and that was --

Chief Justice Warren E. Burger: And you challenge that?

Mr. Howard E. Shapiro: There are other -- there are less restrictive means, let us put it, which is really what the ancillary restriction was about.

There are less restrictive means by which it can be done, Your Honor.

Chief Justice Warren E. Burger: Thank you Mr. Shapiro.

Thank you Mr. Grimm.

The case is submitted.