Sharp Electronics Corporation

Text (OCR of the scan at left; may contain errors)

IN THE MATTER OF SHARP ELECTRONICS CORPORATION SET ASIDE ORDER IN REGARD TO ALGED VIOLATION OF THE FEDERA TRADE COMMISSION ACTS Aug. 21, 1989Docket G-2574. Ganent Orde, Oct. 1974-Set Aside Orde, The Federal Trade Commission has set aside a 1974 consent order with Sharp Electronics Corpration, (84 FTC 743), because respondent satisfactorily demonstrated that changes in the law required such action, thus enabling respondent to maintain favorable relations with its full servce dealers, and thereby develop and promote an effcient distribution system to compete more consumers effectively with other electronic calculator manufacturers; as a result, ar likely to benefit.

ORDER REOPENING AND SETTING ASIDE ORDER ISSUED ON OCTOBER 9 , 1974 On April 25, 1989, Sharp Electronics Corporation ("Sharp ) fied a Request To Reopen The Proceeding And Set Aside The Order Request"), pursuant to Section 5(b) of the Federal Trade Commission Act, 15 V. C. 45(b), and Section 2.51 of the Commission s Rules of Practice and Procedure, 16 CFR 2.51. The Request asks the Commission to reopen the proceeding and set aside the order issued by the Commission on October 9, 1974, in Docket No. C-2574, 84 FTC 743. The order prohibits Sharp from restricting in any manner the terrtories in which, or the customers to whom, its dealers may sell Sharp argues Sharp electronic calculators. In support of its request, that the order should be set aside to reflect changed conditions of law and fact and "to promote considerations of fairness and the public interest." Request at 6, 9. Sharp s request was placed on the public record for thirty days, pursuant to Section 2.51( c) of the Commission Rules. No comments were received.

For the reasons discussed below, the Commission has concluded that Sharp has made a satisfactory showing of changed conditions of law that require reopening the proceeding and warrant modifying the order in the manner requested by Sharp. The Commission has therefore determined to reopen the proceeding and set aside the order in its entirety.

, 304 FEDERA TRAE COMMISSION DECISIONS Set Aside Order 112 F.

The Commission issued its complaint in this matter on October 9 1974. 84 FTC at 743-45. The complaint alleged that Sharp violated Section 5 of the Federal Trade Commission Act, by, among other things, prohibiting its dealers from sellng Sharp electronic calculators outside of their " allottd" terrtories, and imposing restrictions " as to the persons or classes of persons" to whom Sharp dealers may sell such calculators. 84 FTC at 744. Sharp s distribution practices, as alleged in the complaint actually hindered, restricted, restrained and prevented competition. . . ," and constituted "unfair acts. . . and methods of competition. . ." within the meaning of Section 5 of the FTC Act, Id.

The Commission s order, entered by consent, prohibits Sharp from imposing any terrtorial restrictions on its dealers, or defining the class of customers to whom they are permitted to sell Sharp electronic calculators. The order also prohibits Sharp from using any mandatory fixed schedules for the division of profit between any sellng dealers and a dealer in whose terrtory the product is servced that has the effect of restricting the terrtory in which electronic calculators may be sold. 84 FTC at 746. However, the order explicitly permits Sharp to designate for its dealers geographical areas within which a dealer may agree to devote its best efforts to the sale of electronic calculators, engage in activities specifically rendered lawfl legislation enacted by Congress, require a dealer to undertake obligations of installation and warranty servce, and require its dealers to comply with any voluntary profit passover program made available by Sharp. Id. at 746-47.

II.

Section 5(b) of the FTC Act, 15 V. C. 45(b), provides that the Commission shall reopen an order to consider whether it should be modified if the respondent "makes a satisfactory showing that changed conditions of law or fact" require such modification. A satisfactory showing sufficient to require reopening is made when a request to reopen identifies significant changes in circumstances and shows that the changes eliminate the need for the order, bring the 1 For a period that expire in 1979, paragph 5 of the order prohibite Shar frm establishing mandatory fied schedules for the division of profit between any sellng dealer and a dealer in whose terrtory the product is servced, regardless of effec. Id.

303 Set Aside Order order into conflct with current law, or make continued application of competition. Louisiana-Pacj'I Cor.it inequitable or harml to SeeDocket No. C-2956, Letter to John C. Hart (June 5 1986), at 4. Rep. No. 96-500, 96th Cong., 2d Sess, 9 (1979) (significant changes or changes causing unfair disadvantage); Phillips Petrolem Co. Docket No. C-I088, 78 FTC 1573, 1575 (1971) (no modification for changes reasonably foreseeable at time of consent negotiations); Pay Inc., Docket No. C-3039, Letter to H. B.Less Drg Stores Northwest, Hummelt (Jan 22, 1982) (changed conditions must be unforeseeable create severe competitive hardship, and eliminate dangers that the order sought to remedy); see also United States v. Swift Co., 286 S. 106, 119 (1932) (modification warranted by "clear showing" of changes that eliminate reasons for order or such that the order causes unanticipated hardship).

The language of Section 5(b) plainly anticipates that the burden is on the petitioner to make the requisite satisfactory showing of changed conditions to obtain reopening of the order. The legislative history also makes clear that the petitioner has the burden of showing, other than by conclusory statements, why changed circumstances require that the order should be modified. If the Commission determines that the petitioner has made the necessary showing, the Commission must reopen the order to consider whether modification is required and, if so, the nature and extent of the modification. The Commission is not required to reopen the order, however, if the petitioner fails to meet its burden of making the satisfactory showing required by the statute. The petitioner s burden is not a light one given the public interest in the finality of Commission orders, See Federated Departmet Stores, Inc. v. Moitie 425 U.S. 394 (1981) (strong public interest considerations support repose and finality). II.

Based on the information provided by Sharp and other available information, the Commission has determined that Sharp has made a satisfactory showing that changes in law require reopening the proceeding and warrant setting aside the order. Having reopened and set aside the order on the basis of change of law, the Commission does 2 The Commission may properly decline to repen an order if a reuest is "merely condusory or otherwse fails to set forth speific fac demonstrting in detail the nature of the change conditions and the reasons why theBe change conditions reuire the reueste modfication of the order." S. Rep. No. 96-500, 96th Cong., 1st Sess. 9-10 (1979).

Set Aside Order 112 F.

not reach the issue whether reopening is also warranted based upon the changes of fact or the public interest considerations assertd by Sharp.

In 1974, when this consent order was issued, all vertical restraints were considered per se unlawfl, based on U.S. v. Arnld Schwinn & Co. 388 U. S. 365 (1967). Three years aftr the order was issued, the Supreme Court overrled Schwinn in Continental T. v., Inc. v. GTE Sylvania, Inc. 433 U, S. 36 (1977), stating that terrtorial restrictions and other nonprice vertical restraints are not inherently anticompetitive, and should be analyzed under the rule of reason. ' The Court said that nonprice vertical restraints had the potential to "promote interbrand competition by allowing the manufacturer to achieve certain effciencies in the distribution of his products." 433 U. S. at 54. One such effciency that the Court expressly recognized was the use of such restraints to permit suppliers "to induce retailers to engage in promotional activities or to provide service and repair facilties necessary to the effcient marketing of their products. Id. at 55. Subsequent cases have reaffrmed that nonprice vertical restraints, in the absence of further agreement on price or price levels to be charged by distributors, are to be analyzed under the rule of reason. See Business Electronics Cor. v. Sharp Electronics Cor. 108 S. Ct. 1515 (1988); Monsanto Co. v. Spray-Rite Serice Cor. 465 U. 752, 762-63 (1984).

Sharp has identified Sylvania as a change in the law of nonprice vertical restraints from a per se to a rule of reason analysis. However this showing alone, without a further showing that the order prohibitions cannot be justified under current law, would be insufficient to require reopening. This is because the challenged vertical restrictions, although not per se unlawfl, may nonetheless be unreasonable. If so, the order s prohibitions would be consistent with existing law.

The Commission has previously relied upon Sylvania to conclude that only nonprice vertical restraints having "a probable adverse effect on interbrand competition" at either the manufacturer or dealer level are unlawful. 4 The Commission has also stated that ( w Jhen the exercise of market power in a properly defined relevant market is unlikely, the Commission considers non-price vertical Sylvania did not change the per se rule against. resale price maintenance. TEAC Cor. of Ame 104 FTC 634 , 635 (1984) (emphasis in original), citingBelto Eletranic Corortio 100 FTC 68, 208 (1982).

.:.Ifi.oJ; J.vl.n.vl''Hv'' vUn.rUl'llUl'i i)VI 303 Set Aside Order restraints to be efficiency-enhancing in purpose and effect, and therefore lawfl, without further inquiry.

In its request, Sharp has shown that, under the rule of reason analysis that the Commission applies to nonprice vertical restraints there is no basis for continuing the order s prohibitions. Competitive conditions in the electronic calculator industry today make it unlikely that nonprice vertical restraints could be used to create or enhance market power or faciltate collusion. Today, more than twenty major calculator suppliers compete in the United States, none of which appears to have a controllng share of the market.' The structure of the distribution and retailng segments appears to be even more diffse. There also appear to be no significant impediments to entry into the market for the supply of electronic calculators. Sharp has shown that, since 1974, at least ten new suppliers have entered the calculator market. Similarly, there is no evidence of impediments to entry into the distribution or retailng of electronic calculators. In general, the market today appears to be competitive, The number of available model types has increased substantially, and retail prices and supplier profit margins have decreased, since the order was issued. 8 Given existing levels of concentration, the absence of significant entry impediments, and the apparent competition in the sale of electronic calculators, it appears unlikely that Sharp s use of nonprice vertical terrtorial or customer restraints would significantly restrict interbrand competition and reduce output. Therefore, Sharp has made a sufficient showing to justify reopening the order. As to relief on the merits, the Commission is not aware of any facts or of any public interest considerations that weigh against setting aside the order in this matter. The petitioner has demonstrated that TEAC Cor. of Ame 104 FTC 634, 635-36 (1984). 6 Assuming the Unite States elecronic calculator industry to be a relevant market, Shar s estimate currnt shar is less than twelve percent; it. largst competitor is estimate to have no more than fiftn 6. Matil Afdavit at "percent7 The ofpricessuchof11Sharmarket. s calculators to $1 000 in 1972, and frm $150 to $300 in 1982 rage frm $500 when it became involved in the Bunes Eletroic litigation. Busness EletrrmU: Cor. v. Sharp EletroU: Cor. 780 F.2d 1212, 1221 n.2 (5th Cir. 1986), affd 108 S. Ct. 1515 (1988). B These changes in the market were acknowledged in Judge Jones ' concurrng opinion in Buness Eletroic as follows:

Only atavistic devotes of the abacus or slide rule could fail to reall the remarkable history of the elecronic calculator market during the last fiftn years. The range of available models, variety of functons that can be performed, and myrad optional enhancements have multiplied rapidly while the average prices have plummeted. The number of competing manufacturers has increas. To maintain their market position and profitabilty, manufacturers like Shar have obviously ben reuired to react quickly and imagnatively to changes in the marketplace. 780 F.2d at 1221.

308 FEDERA TRADE COMMISSION DECISIONS Set Aside Order 112 F.

relief is appropriate. Elimination of the order s prohibitions will enable Sharp to maintain and promote an effcient distribution system. Sharp s inabilty to ban transshipping and to require its dealers to observe terrtorial restrictions could cause Sharp significant competitive injury by, among other things, lessening the effciency of Sharp distribution system and discouraging it from making necessary investments to promote sophisticated products and provide application 9 Setting aside the ordersupport and training to potential customers. wil allow Sharp to compete more effectively with other electronic calculator manufacturers, and consumers are likely to benefit. IV.

Accordingly, it is ordeed that this matter be reopened and that the Commission s order in Docket No. C-2574, issued on October 9 1974 , and it hereby is, set aside, as of the date of servce of this order. Commissioner Strenio did not participate by reason of absence. 9 According to Sharp, its competitors are able to prevent fre-riders frm "disturbing the orderly distribution of their product" by full servce dealers through such restraints as prohibiting mail ordersales and sales to 309 Complaint