United States v. General Electric Co.
272 U.S. 476, 1926 U.S. LEXIS 974, 47 S. Ct. 192 (1926)
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Rule of Law:
A patent holder does not violate antitrust laws by controlling the retail price of its products when it sells them through a genuine consignment-based agency system where the manufacturer retains title and risk of loss. Furthermore, a patent holder may lawfully impose price conditions on a licensee that manufactures and sells the patented article.
Facts:
- General Electric Company (GE) owned the foundational patents for modern tungsten filament incandescent light bulbs, granting it a monopoly over their manufacture.
- GE implemented a nationwide distribution plan involving over 21,000 distributors, whom it designated as agents.
- Under the agency agreements, GE consigned lamps to the agents but retained legal title and ownership of the entire stock.
- GE set the final retail prices at which the agents were required to sell the lamps to consumers.
- The agency contracts stipulated that GE assumed the risk of loss for lamps from fire and flood and was responsible for taxes on the inventory.
- The agents were required to remit the proceeds of sales to GE, minus their commission.
- GE also granted a license to its competitor, Westinghouse Company, to manufacture and sell lamps using GE's patents.
- The license agreement required Westinghouse to sell the patented lamps at the same prices and on the same terms that GE established for its own sales.
Procedural Posture:
- The United States brought a suit in equity against General Electric Company and Westinghouse Company in the U.S. District Court for the Northern District of Ohio.
- The government sought an injunction to stop the companies from engaging in alleged violations of the Sherman Antitrust Act.
- After a full hearing, the District Court dismissed the government's bill, finding in favor of the defendants.
- The United States, as the appellant, filed a direct appeal of the District Court's judgment to the Supreme Court of the United States.
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Issue:
Does a patent holder violate the Sherman Antitrust Act by controlling the retail price of its patented products through a widespread agency distribution system and by requiring its manufacturing licensees to adhere to the same price schedule?
Opinions:
Majority - Mr. Chief Justice Taft
No. A patent holder's system of controlling the final sale price of its products through genuine agency contracts or through price restrictions on its licensees does not constitute an illegal restraint of trade. The court determined that GE's distribution system was a true agency relationship, not a disguised system of resale price maintenance. Key factors indicating a genuine agency were that GE retained title to the lamps, bore the risk of loss, and paid for insurance and taxes on the stock. The agents did not pay for the lamps until they were sold to the end consumer, and their role was merely to transfer title from GE to the customer at a price GE dictated. This arrangement is distinct from the illegal practice of a manufacturer selling a product to a distributor and then attempting to control the price at which the distributor resells it. Regarding the Westinghouse license, the court affirmed its precedent in Bement v. National Harrow Co., holding that a patentee can lawfully impose conditions on a licensee, including setting the selling price, as such conditions are reasonably adapted to securing the pecuniary reward for the patentee's monopoly.
Analysis:
This landmark decision established the 'GE agency exception' to the general prohibition against vertical price-fixing. It created a durable legal framework allowing manufacturers to control retail prices by structuring their distribution networks as genuine consignment agencies, thereby avoiding the transfer of title to distributors. The ruling also strongly affirmed a patent holder's right to set a licensee's prices, reinforcing the power of the patent monopoly. This precedent provided a significant safe harbor for manufacturers, especially patent holders, to control their product's pricing down to the final consumer, a doctrine that remained influential for decades.
