Standard Fashion Co. v. Magrane-Houston Co.
258 U.S. 346, 1922 U.S. LEXIS 2279, 42 S. Ct. 360 (1922)
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Rule of Law:
An exclusive dealing contract that prohibits a purchaser from dealing in a competitor's goods violates Section 3 of the Clayton Act where the seller commands a substantial share of the market, and the effect of the contract will probably be to substantially lessen competition or tend to create a monopoly.
Facts:
- Standard Fashion Co. (Standard) was a New York corporation engaged in manufacturing and distributing patterns for women's and children's garments.
- Magrane-Houston Co. (Magrane-Houston) conducted a retail dry goods business in Boston.
- On November 25, 1914, the parties entered into a two-year, renewable contract granting Magrane-Houston an agency to sell Standard Patterns.
- The contract stipulated that Magrane-Houston would not sell or permit to be sold on its premises any other make of patterns during the term of the contract.
- At the time, Standard, along with a holding company that controlled it and two other pattern companies, controlled approximately two-fifths (40%) of the 52,000 pattern agencies in the United States.
- On or about July 1, 1917, Magrane-Houston discontinued the sale of Standard's patterns and began selling patterns from a rival company, the McCall Company, in its store.
Procedural Posture:
- Standard Fashion Co. brought suit against Magrane-Houston Co. in the U.S. District Court for the District of Massachusetts to enjoin it from violating their contract.
- The District Court, a trial court, dismissed the bill, finding for Magrane-Houston.
- Standard Fashion Co. appealed the dismissal to the U.S. Circuit Court of Appeals.
- The Circuit Court of Appeals, an intermediate appellate court, affirmed the District Court's decree.
- The Supreme Court of the United States granted a writ of certiorari to review the judgment of the Circuit Court of Appeals.
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Issue:
Does a contract provision that prohibits a retailer from selling a competitor's goods violate Section 3 of the Clayton Act when the seller controls a substantial share of the relevant market, making it probable that the agreement will substantially lessen competition?
Opinions:
Majority - Mr. Justice Day
Yes, a contract provision that prohibits a retailer from selling a competitor's goods violates Section 3 of the Clayton Act under these circumstances. The court first determined that the agreement, despite being labeled an "agency," was in substance a contract of sale because full title and dominion over the patterns passed to Magrane-Houston. The court then analyzed Section 3 of the Clayton Act, explaining that it was intended to supplement the Sherman Act by addressing anticompetitive agreements in their incipiency. The statutory language "may be to substantially lessen competition" does not prohibit a mere possibility, but rather was intended to prevent agreements that would, under the circumstances, 'probably' lessen competition or create an actual tendency toward monopoly. Given that Standard controlled 40% of the pattern agencies in the country, the restrictive covenant had the probable effect of creating local monopolies and substantially lessening competition in the broader market, thus bringing it squarely within the prohibition of the Clayton Act.
Analysis:
This decision is a foundational interpretation of Section 3 of the Clayton Act, establishing the "probability of substantial lessening of competition" standard for exclusive dealing contracts. It clarified that the Clayton Act has a lower, preventative threshold than the Sherman Act, allowing courts to strike down anticompetitive agreements "in their incipiency" without proof of an existing monopoly or unreasonable restraint of trade. The ruling demonstrates that a seller's significant market share is a key factor in determining whether its exclusive dealing arrangements foreclose a substantial portion of the market to competitors, thereby violating the Act. This case set a precedent for analyzing the legality of vertical restraints based on their likely market impact rather than their form or stated purpose.
