United States v. Jerrold Electronics Corporation
187 F. Supp. 545 (1960)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A tying arrangement, which is generally per se illegal under antitrust law, may be found reasonable and lawful if it is adopted by a company in a new and fledgling industry with a highly uncertain future, where the arrangement is necessary to assure the proper functioning of a complex product and protect the company's and the industry's goodwill. However, this justification diminishes as the industry matures, and the continued imposition of the tie-in becomes an unreasonable restraint of trade.
Facts:
- In the late 1940s, Jerrold Electronics Corporation ('Jerrold'), led by Milton Shapp, began developing master television antenna equipment.
- Jerrold's initial sales through untrained distributors resulted in improper installations and malfunctioning systems, which damaged the company's reputation.
- In 1950, Jerrold was hired to install the first large-scale community television antenna systems in Lansford and Mahanoy City, Pennsylvania, communities that could not otherwise receive television signals.
- These pioneering systems were experimental, using unstable and sensitive equipment that revealed significant technical challenges requiring constant on-site engineering to function properly.
- Due to the equipment's complexity, the lack of experienced technicians, and the threat that system failures posed to the nascent industry, Jerrold instituted a policy in May 1951 of selling its community antenna equipment only as a complete, integrated system.
- As part of this policy, Jerrold required all purchasers to sign a service contract for the layout, installation, and maintenance of the system.
- This policy of mandatory full-system and service contract sales was generally in effect until March 1954, after which it was applied more selectively as the industry matured.
Procedural Posture:
- The United States filed a complaint on February 15, 1957, in the U.S. District Court for the Eastern District of Pennsylvania, a court of first instance.
- The complaint named Jerrold Electronics Corporation, its president, and its subsidiaries as defendants.
- The initial complaint alleged violations of § 1 and § 2 of the Sherman Act and § 3 of the Clayton Act related to conspiracies, attempts to monopolize, and unlawful sales conditions.
- On April 2, 1959, the complaint was amended to add charges that a series of corporate acquisitions violated § 7 of the Clayton Act.
- The case was tried before the district court without a jury from November 9 to December 18, 1959.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a company's policy of selling its equipment only as a complete system and only in conjunction with a mandatory service contract constitute an unreasonable restraint of trade in violation of § 1 of the Sherman Act when the company is a pioneer in a new and technically complex industry?
Opinions:
Majority - Van Dusen, J.
Yes, while the policy was reasonable at its inception, its continuation after the industry matured constituted an unreasonable restraint of trade in violation of § 1 of the Sherman Act. Tying arrangements are typically per se unreasonable if the seller has sufficient economic power and a 'not insubstantial' amount of commerce is affected, both of which were present here. However, the per se rule is not absolute and may not apply where special circumstances exist. At the time Jerrold launched its community antenna business, the industry was new, the technology was unstable and complex, and potential customers were inexperienced. A wave of system failures could have destroyed the new industry and Jerrold's business. Therefore, the tie-in of services and the related requirement of full-system sales were initially justified as a necessary measure to ensure product quality, protect goodwill, and foster the industry's growth. This justification, however, was temporary. As the industry developed, equipment stabilized, and technicians became more skilled, the reasons for the compulsory policy disappeared. Jerrold failed to meet its burden of proving that the tie-in remained reasonable throughout the entire period it was enforced, making its later use an illegal restraint of trade.
Analysis:
This case is significant for establishing the 'new industry' or 'fledgling business' defense for an otherwise per se illegal tying arrangement. It carves out a narrow, temporary exception to the strict antitrust rule, recognizing that certain restrictive practices may be justified by business necessity during the formative period of a new, high-risk, and technically complex market. The decision clarifies that this defense is not permanent; the burden is on the defendant to prove not only the initial necessity of the restraint but also that its justification continued over time. This creates a dynamic analysis where a business practice lawful at its inception can become unlawful as market conditions change.
Unlock the full brief for United States v. Jerrold Electronics Corporation