From 1992 to 1996, Generac Corp. served as a dealer of certain generators that it manufactured under license from Caterpillar, Inc. The license agreement gave Generac the right to develop and manufacture a line of generators that were marketed under Caterpillar’s Olympian trademark and that were distributed by Caterpillar dealers in specified territories. Generac was assigned North, Central, and South America, as well as 17 countries in the Far East. Caterpillar agreed not to license anyone else to sell generator sets within Generac’s territory under the Olympian trademark but could sell or license others to sell generators in the Generac territory under a different trademark. In the United States and Canada, Generac was permitted to sell Olympian products only to Caterpillar dealers who had been designated by Caterpillar as a Power Systems Distributor (PSD). Generac also promised not to appoint any new distribution outlets for its own branded sets in a Caterpillar dealer’s territory as long as the dealer was adequately covering its sales territory for Olympian sets. The agreement was for an indefinite duration and could be terminated by either party upon 24 months’ written notice or with cause upon 120 days’ notice.
Through June, 1996, Generac spent $10.5 million on sales, service, and warranties to promote and support the Olympian line and invested more than $660,000 in the engineering and development of the line. It constructed a new manufacturing facility at a cost of $5.24 million. It paid Caterpillar more than $5.6 million in fees and generated sales of Olympian products of more than $124.4 million. Ultimately, Olympian products represented about 58 percent of Generac’s total industrial sales.
In May, 1996, Caterpillar informed Generac that it was terminating the agreement effective June 30, 1998, so that it could form a new business relationship with Emerson Electric Company. Generac felt that it was the victim of a “classic free ride”—that it had invested millions to develop the market for the Olympian line, only to be deprived of the opportunity to reap the long-term benefits.
Generac sued for antitrust violations, claiming that the restrictions placed on it violated Section 1 of the Sherman Act as a per se unlawful horizontal market division. Is Generac right? Why, or why not?