Oreck Corporation v. Whirlpool Corporation and Sears, Roebuck and Co.

ROBERT P. ANDERSON, Circuit Judge:

This is an appeal from a judgment entered on July 13, 1976 in favor of Oreck Corporation (Oreck) against defendants Whirlpool Corporation (Whirlpool) and Sears, Roebuck & Co. (Sears) on two counts of a seven count complaint charging violations of § 1 of the Sherman Act, 15 U.S.C. § 1. Oreck was awarded $2,250,000 (after trebling) in monetary damages. For the reasons set forth below, we reverse.

The factual basis of this controversy is fairly straightforward. Whirlpool is a manufacturer of vacuum cleaners (as well as other household appliances not relevant here) and has been in that business since 1957, when it acquired the Birtman Electric Co. Birtman had previously manufactured vacuum cleaners for Sears, under the Kenmore label. Whirlpool continued this business, and also sought to sell vacuum cleaners under its own “RCA-Whirlpool” label. It discontinued the line of sales under this label for approximately two years after which it re-entered the field through a designated exclusive distributor, Oreck, which was appointed in 1963 for an initial term of five years, with automatic extensions for one year periods thereafter, absent six months prior notice of termination by either party. Whirlpool gave Oreck formal notice of termination of the agreement on June 27, 1968, but instead, a new agreement, dated August 1, 1968, was drawn up extending Oreck’s distributorship until December 31, 1971, with no provision for extension. At the expiration of this extension, however, Oreck’s relationship with Whirlpool, as its exclusive distributor, was not renewed or extended, and it terminated completely. The instant action followed in September of 1972.

This lawsuit and the underlying controversy, are based on the claimed reasons why Oreck was not afforded an additional term as Whirlpool’s exclusive distributor of vacuum cleaners. Oreck’s successful contention below was that its agreement was not renewed by Whirlpool at the behest and insistence of Sears, a much larger purchaser of Whirlpool vacuum cleaners than Oreck. Sears’ association with Whirlpool extended back to 1925, when Sears acquired 750 shares of Whirlpool’s forerunner corporation, the Upton Machine Co.1 By January of 1960, Sears owned approximately 4% of Whirlpool’s outstanding stock. Oreck also contended that Sears did not want Oreck to compete with its own line of Kenmore vacuum cleaners, also manufactured by Whirlpool, and that it used its influence with Whirlpool to have Oreck’s exclusive distributorship terminated.

Accordingly, Oreck’s complaint charged both Whirlpool and Sears with engaging in a contract, combination or conspiracy in unreasonable restraint of trade to exclude Oreck from the vacuum cleaner market in the United States and Canada (counts one and two of the complaint) and with forcing or persuading potential customers of Oreck from refusing to deal with Oreck (count three). Additionally, count four of the complaint charged Whirlpool with selling

*56vacuum cleaners, attachments and parts to Sears at unlawfully discriminatory prices, contrary to 15 U.S.C. § 13(a) and count five with Sears’ knowing inducement or receipt of those same discriminatory prices, prohibited by 15 U.S.C. § 13(f). Finally, count six alleged irreparable damage to Oreck as a result of Sears’ and Whirlpool’s violations of the antitrust laws and Oreck’s absence of an adequate remedy at law, and count seven pleaded damage to Oreck in the amount of $6,500,000 as a result of Sears’ alleged status as a “control person” over Whirlpool (because of Sears’ stockholdings in Whirlpool) and the close relationship between the two defendants over a period of 50 years. Counts three, four and seven were voluntarily dismissed on Oreck’s motion; and the court directed a verdict for defendants on counts three and four, the alleged Robinson-Patman Act violations.

The trial testimony therefore centered on counts one and two, the alleged Sherman Act violations. Plaintiff’s case for liability rests largely upon the testimony of Marshall Oreck, its General Manager, and upon the testimony of its President and founder, David Oreck, who told of his relationship with Whirlpool over the years and of his belief, derived primarily from communications with one John Payne, a salesman for Whirlpool, that the reason for the cancellation was Sears’ desire to end competition from Oreck. Plaintiff also presented the deposition of Payne, who did not appear at the trial. Hyman B. Ritchin, an economic consultant, and Ernest L. Sommer, a certified public accountant, gave testimony for the plaintiff on the issue of damages.

By way of defense and explanation of Oreck’s cancellation, Whirlpool presented the testimony of its officers who dealt with Oreck, showing that the reason for the cancellation was Oreck’s failure to follow an assigned marketing strategy. Jack D. Sparks, a Vice President and Director of Whirlpool, who made the decision to terminate Oreck, testified that the exclusive distributor had failed to market Whirlpool vacuum cleaners through “major accounts” (department store chains and the like) and had instead resorted to “commercial-type distribution” (janitorial supply houses and mail order sales), a strategy which did not agree with Whirlpool’s desires. Sparks explained that he accepted a subordinate’s recommendation to terminate Oreck “because Oreck corporation had failed to reach the original objective when we first conceived the program in 1963 which was to set up a one-step distribution system nationally to major accounts on vacuum cleaners with the hopes that ultimately we would have a system that other specialty-type products could go through.” Sparks denied being concerned with competing against Sears, pointing out that “the system we . talked about [distribution to “major accounts” such as department stores] would be in direct competition with Sears.”2

Significantly, however, plaintiff presented no evidence or testimony that the net economic effect of Oreck’s cancellation was unreasonably to restrain trade in the vacuum cleaner industry in the United States and/or Canada. In fact, as to this critical inquiry, David Oreck testified on direct examination that “[t]he vacuum cleaner industry is, indeed, a very large one” and that during 1971, when Oreck sold 78,203 vacuum cleaners, “the vacuum cleaner industry in 1971 was about 7.8 million purchases.” Basic arithmetic reveals, therefore, that Oreck had a 1% market share at the time of the completion of his exclusive distributorship for Whirlpool. Moreover, David Oreck admitted on cross-examination that, following this event, the plaintiff obtained an alternative source of supply and was, at the time of trial, the world’s largest supplier of “top fill upright vacuum cleaners.”

The above testimony and the other evidence adduced at the trial by the plaintiff show nothing more than the refusal by Whirlpool to renew Oreck’s exclusive distributorship of Whirlpool vacuum cleaners *57under the “Whirlpool” label and the replacement of Oreck, in effect, by Sears, the other existing distributor, who sold the same manufacturer’s vacuum cleaner but under the label, “Kenmore.” It is well-settled that

“[w]hen an exclusive dealership ‘is not part and parcel of a scheme to monopolize and effective competition exists at both the seller and buyer levels, the arrangement has invariably been upheld as a reasonable restraint of trade. In short, the rule was virtually one of per se legality’ until the District Court decided the present case [which was reversed].” (Cases cited in footnote omitted.) Packard Motor Car Co. v. Webster Motor Car Co., 100 U.S.App.D.C. 161, 163, 243 F.2d 418, 420, cert. denied, 355 U.S. 822, 78 S.Ct. 29, 2 L.Ed.2d 38 (1957).3

The Supreme Court expressed much the same rationale in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967), overruled on other grounds, Continental T.V., Inc. v. GTE Syl-vania Inc.,-U.S.-, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), where it held that a manufacturer may choose his own customers and franchise certain exclusive dealers;

“If the restraint stops at that point — if nothing more is involved than vertical ‘confinement’ of the manufacturer’s own sales of the merchandise to selected dealers, and if competitive products are readily available to others, the restriction, on these facts alone, would not violate the Sherman Act.” 388 U.S. at 376, 87 S.Ct. at 1864.

See also, Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71, 76 (9th Cir. 1969), cert. denied, 396 U.S. 1062, 90 S.Ct. 752, 24 L.Ed.2d 755 (1970) (“it is well settled that it is not a per se violation of the antitrust laws for a manufacturer or supplier to agree with a distributor to give him an exclusive franchise, even if this means cutting off another distributor [citing cases].”);4 Bay City-Abrahams Bros. Inc. v. Estee Lauder Inc., 375 F.Supp. 1206, 1214-16 (S.D.N.Y.1974); Top-All Varieties, Inc. v. Hallmark Cards, Inc., 301 F.Supp. 703, 704-5 (S.D.N.Y.1969).

Under these standards, given additional weight by the Supreme Court’s recent over*58ruling of the per se approach to vertical location restrictions of United States v. Arnold, Schwinn & Co., supra, in Continental T.V., Inc. v. GTE Sylvania Inc., supra, Oreck was required to show not only conspiratorial conduct by Sears and Whirlpool in order to recover under § 1 of the Sherman Act, but also credible proof that the net result and effect of the allegedly conspiratorial conduct of the defendants was anti-competitive in the vacuum cleaner industry as a whole or that the conspiracy was designed to drive Oreck out of the vacuum cleaner business.

In instructing the jury, the trial court quoted the language of § 1 of the Sherman Act and then further defined the meaning of the terms within that statute as follows:

“As to the meaning of the term ‘restraint of trade,’ you are instructed that this general term applies only to unreasonable restraints and not to all possible restraints of trade. Not all restraints of trade are reasonable. All business affects trade in some way.
The violations alleged by plaintiff are, if you credit them, unreasonable restraints, of trade. If you do not credit them, Whirlpool’s conduct was not an unreasonable restraint of trade.” (Emphasis supplied.)

The trial court further instructed the jury with regard to count one that “[i]f you find there was such an agreement [between Whirlpool & Sears ‘to exclude Oreck from a market in vacuum cleaners or Whirlpool vacuum cleaners anywhere’], then you should go on to consider damages, if any, flowing from it.” An almost identical charge was given as regards count two, dealing with Oreck’s alleged exclusion from the Canadian market. We hold that the above-quoted portions of the jury instructions constitute plain error which make necessary a reversal of this judgment. Under these instructions, the jury could have gone no further than to find a conspiracy followed by an assessment of damages.

Oreck’s argument that it did show an unreasonable restraint of trade because the net effect of its termination was to provide Sears with a “monopoly position” in the market for Whirlpool vacuum cleaners is plainly unpersuasive. Oreck did not demonstrate anything unique about Whirlpool vacuum cleaners sufficient to establish them as a separate market apart from all other brands, United States v. E. I. DuPont de Nemours & Co., 353 U.S. 586, 593, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1957); George R. Whitten, Jr., Inc. v. Paddock Pool Builders, Inc., 508 F.2d 547, 550-52 (1st Cir. 1974). Oreck’s further attempt to characterize its cancellation as a “group boycott” under the rule of Klor’s Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959), and United States v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321,16 L.Ed.2d 415 (1966), which treats such behavior as a per se violation of § 1 of the Sherman Act, is similarly incorrect. In Klor’s, the Supreme Court specifically noted that “[t]his is not a case of ... a manufacturer and a dealer agreeing to an exclusive distributorship,” 359 U.S. at 212, 79 S.Ct. at 709-10. The present case is, in essence, a case involving an exclusive distributorship controversy, and the “group boycott” doctrine is, therefore, not applicable. Had Sears joined with other retailers of Whirlpool vacuum cleaners to drive Oreck out of the vacuum cleaner market, this court would have been presented with a totally different situation, but Sears did not do so, and, therefore, Klor’s is not applicable. Because Sears is a large company presumably selling a large number of vacuum cleaners does not, ipso facto, convert this case into a horizontal conspiracy warranting per se treatment.5

*59Any effect on price competition for the sale of Whirlpool vacuum cleaners, brought about by the cancellation of Oreck’s exclusive distributorship, cannot have any legal or economic significance in the present case. Economically, the view that the net effect of Oreck’s cancellation will be to raise the price of Whirlpool vacuums has no significance absent a showing that consumers cannot substitute for Whirlpool another type of vacuum cleaner that is as effective and equally attractive as Oreck’s was in price. In addition, Oreck has neither charged nor proven a conspiracy to fix prices for Whirlpool vacuum cleaners. Nowhere in the complaint does Oreck allege that Whirlpool’s refusal to deal was aimed at eliminating intrabrand price competition. The inappropriateness of any claim of price-fixing is made even more clear by the fact that Sears markets its vacuum cleaners under the “Kenmore” label. Oreck’s exclusive distributorship of vacuum cleaners under the “Whirlpool” label would not, from the point of view of the public consumer, have any particular effect on competition with machines sold by Sears.

Indeed, to rule otherwise would place intolerable restraints on the ability of a manufacturer to award and cancel an exclusive distributorship where no public harm has been shown. Whirlpool would be thereby compelled to continue Oreck’s exclusive distributorship indefinitely, despite the manufacturer’s clear intent and desire not to renew it and in derogation of its express contractual right and power not to renew it. Blindly protecting Oreck without regard to the cancellation’s effects on the affected market thus disregards the well-established rule that “[t]he antitrust laws were enacted for ‘the protection of competition, not competitors . . .Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977) (emphasis in original).

The judgment of the district court, based as it is on a finding of liability on the part of the defendants, is reversed and the case is remanded for a new trial. In doing so, we express no opinion as to the correctness of those portions of the trial court’s jury instruction dealing with the formulation of damages.

. According to Sears’ answer to one of plaintiff’s interrogatories, after Sears’ purchase of 750 shares of Upton Machine Co. in 1925, “the Upton Machine Company underwent major corporate changes, including merger with the Seeger Refrigeration Company in 1955, and The Birtman Electric Company in 1957. The name of the resulting corporation was changed to Whirlpool Corporation in 1957.”

. It is thus difficult to understand the dissent’s view that there was “[n]o substantial evidence . offered to show that Oreck was terminated for some possible lawful reason. . .” (Emphasis supplied.)

. The holdings of Packard Motor Car Co. v. Webster Motor Car Co., 100 U.S.App.D.C. 161, 243 F.2d 418, cert. denied, 355 U.S. 822, 78 S.Ct. 29, 2 L.Ed.2d 38 (1957), and a similar case, Schwing Motor Co. v. Hudson Sales Corp., 138 F.Supp. 899 (D.Md.), aff’d, 239 F.2d 176 (4th Cir. 1956), cert. denied, 355 U.S. 823, 78 S.Ct. 30, 2 L.Ed.2d 38 (1957), were succinctly summarized in a case relied on by the dissent, Quality Mercury Inc. v. Ford Motor Co., 542 F.2d 466 (8th Cir. 1976), as follows: “Both courts [Packard and Schwing] held that a manufacturer has a right to select his customers and may agree with one to exclude another, if: (1) the agreement is not a horizontal one between competitors; (2) the manufacturer is not using it to establish market dominance; or (3) the manufacturer is not using it to promote a monopoly.” 542 F.2d at 470. As is made clear in the remainder of this opinion, Whirlpool, as the manufacturer of vacuum cleaners, did not engage in a horizontal agreement between competitors, while Oreck submitted no substantial proof that Whirlpool’s motive in cancelling Oreck was to establish market dominance or to promote a monopoly in the vacuum cleaner business.

The dissent also relies on Quality Mercury, supra, for the proposition that a per se rule under § 1 of the Sherman Act becomes applicable when “a horizontal, intrabrand competitor exercises a veto power over plaintiff’s access to the manufacturer’s goods or trademark . .” The result in Quality Mercury, however, involving the refusal of Ford to grant a Lincoln dealership in the Minneapolis area allegedly because a preexisting dealership had veto power over such a decision, was to remand for trial in order to allow the plaintiff “an opportunity to prove the unreasonableness of the restraint,” 542 F.2d at 472, decidedly not a per se approach to the alleged Sherman Act violation.

. United States v. Hilton Hotels Corp., 467 F.2d 1000 (9th Cir. 1972), cert. denied, 409 U.S. 1125, 93 S.Ct. 938, 35 L.Ed.2d 256 (1973), cited in the dissent as limiting the Flawaiian Oke holding, was a case where hotels, restaurants and companies supplying those businesses in Portland, Oregon, organized an association to attract conventions to their city. The association was financed by contributions from its members. “To aid collection, hotel members . agreed to give preferential treatment to suppliers who paid their assessments, and to curtail purchases from those who did not.” 467 F.2d at 1002. (Emphasis supplied.) Hilton Hotels thus involved a horizontal agreement between competitors at the same level, not the situation in Hawaiian Oke or the present case.

. The dissent attempts to get around these facts by claiming that “Sears was the equivalent of many Whirlpool vacuum cleaner distributors,” a novel theory which simply transforms Sears into something it is not. The implications of applying such a concept in future cases require the trial court to make legislative determinations. When is a single company “big” enough to be considered tantamount to a series of “little” companies? The dissent presumably leaves the determination of what is a “big” company for this purpose of one case but not *59“big” for the purpose of another case, to the wisdom of the trial judge, in the complete absence of any criteria or standards which the court can apply. ;

The dissent also charges the majority with looking not to substance but to form. Perhaps the best rejoinder to such a characterization of our opinion is contained in Judge Medina’s fine opinion in United States v. Morgan, 118 F.Supp. 621 (D.C.1953), an action under §§ 1, and 2 of the Sherman Act against seventeen investment banking firms charging a combination, conspiracy and agreement to restrain and monopolize the securities business in the United States, in which the court wrote:

“Much of the confusion, especially in the field of antitrust law, is due to the fact that the breadth and scope of the Sherman Act are so general and beneficent that lawyers and even judges often fail to heed repeated admonitions that each case must necessarily stand on its own legs, and that the conclusions reached in each depend largely upon the peculiar characteristics of the particular industry involved.” 118 F.Supp. at 688.

In short, the facts and circumstances of this controversy do not call for the application of the per se rule against price fixing and/or group boycotts, so that the per se approach must not be dogmatically followed because it was used in other cases in which those factors were present. Indeed, the dissent’s attempt to convert this case into one involving a horizontal price fixing conspiracy itself might be characterized as looking to form rather than substance.