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June 7, 1962

Bernard SUSSER et al., Plaintiffs,
CARVEL CORPORATION et al., Defendants. Lester N. MODICK et al., Plaintiffs, v. CARVEL STORES OF NEW YORK, INC., et al., Defendants. Martha M. McCOY et al., Plaintiffs, v. CARVEL CORPORATION et al., Defendants. James OSSOLA et al., Plaintiffs, v. CARVEL STORES OF NEW YORK, INC., et al., Defendants. Joseph P. PHELAN, Plaintiff, v. CARVEL STORES OF NEW YORK, INC., et al., Defendants. James P. PIERCE et al., Plaintiffs, v. CARVEL STORES OF NEW YORK, INC., et al., Defendants. Matthew SEU et al., Plaintiffs, v. CARVEL CORPORATION et al., Defendants. Paul S. GIBERMAN et al., Plaintiffs, v. CARVEL STORES OF NEW YORK, INC., et al., Defendants. Joseph PAZDRO et al., Plaintiffs, v. CARVEL STORES OF NEW YORK, INC., et al., Defendants

The opinion of the court was delivered by: DAWSON

I. General Nature of the Actions.

These are nine separate cases which were consolidated for trial. By consent of the parties the trial was held without a jury.

The plaintiffs in all cases are persons who are or were operators, under franchise agreements, of Carvel Dari-Freeze Stores at which 'soft' ice cream was sold. Defendant Carvel Corporation and its subsidiaries issued the franchises, sold the basic equipment needed for operation of the stores and performed other related functions. *fn1" The other corporate defendants in the actions are the suppliers of various products such as ice cream mix, cones and paper goods used in connection with the dispensing of soft ice cream. *fn2" Also named as defendants were certain individuals who are or were officers or employees of Carvel. *fn3"

 The complaints in each of the cases set forth two fundamental causes of action. The first cause of action, based on a claim that the plaintiffs were induced to enter into their franchise agreements on the basis of certain fraudulent misrepresentations made by Carvel, was previously tried in a separate trial. The opinion of the Court which decided the fraud and deceit causes of action adversely to the plaintiffs was handed down on February 7, 1962. The present opinion relates to the second fundamental cause of action set forth in the complaints which claims treble damages for alleged violations of the antitrust laws on the part of the Carvel and the supplier defendants.

 By the consent of all parties, as embodied in Pre-Trial Order No. 5, dated February 7, 1962, it was provided that a joint trial of the issues of liability under the antitrust laws be held, that the issue of liability be tried separately from the issue of damages, that plaintiffs were relying solely on alleged per se violations of the antitrust laws and that plaintiffs' evidence on the issue of liability would be limited to written agreements between the Carvel defendants and plaintiffs and other documents supplementary thereto or explanatory thereof, as well as written agreements between Carvel defendants and the supplier defendants and other documents supplementary thereto and explanatory thereof. At the trial, which was held in March, 1962, both sides relied primarily on documentary evidence to establish their case.

 II. Allegations of Unlawful Practices.

 In regard to the antitrust causes of action the complaints all contain certain common allegations. They allege that the defendants entered into an understanding and agreement during the period encompassed by the complaint and prior and subsequent thereto whereby:

 1. The supplier defendants refused to sell their respective products direct to the Carvel franchise operators but would sell only through Carvel.

 2. The Carvel defendants designed the franchise agreement so as to obligate and compel their franchise operators to deal solely and only with the supplier defendants.

 3. The franchise operators were forbidden to deal in 'competitive products,' and

 4. The operators were required to sell their products to the public at prices fixed by Carvel.

 Rephrased in standard antitrust terminology, the complaint apparently alleges, as to the supplier defendants, a boycott under which they declined to make direct sales to the franchise operators. As to the Carvel defendants they are seemingly charged with (1) participation in the conspiratorial boycott against direct sales, (2) requiring, as a condition of obtaining the franchise and purchasing equipment, the use of the supplier defendants' products to the exclusion of the suppliers' competitors (tie-in), (3) forbidding the franchise operators from selling other than Carvel approved products (exclusive dealing), and (4) price fixing. These allegations will be taken up in order following a general discussion of the nature of the Carvel operation.

 III. Nature of the Carvel Operation and the Franchise System.

 Thomas Carvel, an individual defendant in some of the actions and president of the Carvel Corporation, went into the ice cream business in 1934. Over the succeeding years Mr. Carvel developed a freezer for dispensing 'soft' ice cream, an ice cream mixture about the consistency of frozen custard. About 1948 the business established by Mr. Carvel had grown so substantially that two corporations, Carvel Corporation and Carvel Dari-Freeze Stores, Inc., were organized for the purpose of issuing franchises and selling freezers for the operation of soft ice cream stores under the Carvel name.

 Thereafter, while the Carvel corporations operated some stores directly, most of their business related to the franchise operation. Each of the plaintiffs entered into agreements for the operation of a franchised Carvel Dari-Freeze ice cream store. The franchise operators conducted their businesses as independent contractors but were subjected to a number of restrictions which tended to create a uniform system of operation.

 In some instances the franchisee erected his own store on premises subleased from Carvel. In other cases the franchisee leased a completed store as well as the land. All stores were constructed according to plans and specifications approved by Carvel. The ice cream sold by the stores is dispensed through certain machines designed by the defendants and bearing the Carvel name or trademark. The ice cream so dispensed is processed from an ice cream mix which the franchisee bought through Carvel from a dairy approved by Carvel. The mix is prepared from a special approved formula which was developed by Carvel and which is kept confidential by the dairies. Under the franchise agreements Carvel receives a royalty of twenty-five cents a gallon on the mix used in the machines.

 The plaintiffs' franchise agreements require the franchisees to operate their stores in accordance with Standard Operating Procedure Manual (SOP). This SOP regulates the business of the operators in a number of respects. It describes the products which the operators may sell at their store, the advertising which they may use, the color they must paint their store, the hours when they must put on their lights, the amount of insurance they must carry, the colors of their employees' uniforms, and many other details. To the public the individual franchise operator appears to be part of a national organization which manufactures and distributes a limited type of products of uniform quality. The Carvel SOP refers to each store as 'an integral part of the chain.'

 There are approximately 400 Carvel Dari-Freeze stores presently in operation, extending from Mane to Florida and as far west as Wisconsin. The stores do an estimated gross business of between six to eight million dollars annually. Carvel's sales to the stores of equipment, ingredients and supplies reached a high of $ 5,532,396 in 1957 and in 1960 totalled $ 4,460,689.

 The operation of franchise stores, of which Carvel is an example, is a comparatively recent development. Franchise stores differ from the older established chain store operations in which the managers of the stores were not independent operators.

 The franchise method of operation has the advantage, from the standpoint of our American system of competitive economy, of enabling numerous groups of individuals with small capital to become entrepreneurs. The franchise business has had a phenomenal growth in the ice cream industry. If our economy had not developed that system of operation these individuals would have turned out to have been merely employees. The franchise system creates a class of independent businessmen; it provides the public with an opportunity to get a uniform product at numerous points of sale from small independent contractors, rather than from employees of a vast chain. The franchise system of operation is therefore good for the economy.

 However, the cornerstone of a franchise system must be the trademark or trade name of a product. It is this uniformity of product and control of its quality and distribution which causes the public to turn to franchise stores for the product. This is well illustrated in the Carvel operation. The individual franchise to a dealer permits him to manufacture and sell Carvel ice cream from a store of uniform and distinctive design that has as an integral structural feature the Carvel crown and cone trade-mark erected on the roof as a prominent identifying mark. All stores are also identically unique in that they have a flat, slanting roof, the front portion of the building consists only of glass walls and the name 'Carvel' is displayed on each side in the form of neon signs over twelve feet in length and nearly three feet high. The building and the distinctive appurtenances thereto are protected by a design patent issued to Thomas Carvel. The ice cream is made and dispensed from a patented machine. Where the ice cream product which is sold to the public is such as would be placed in a paper container the name 'carvel' is written in script on the face of the container. Where it is necessary to provide a spoon with the ice cream product, as in the case of a sundae, the spoon used is distinctive and unique in design, with the Carvel crown and cone at the end or top of the handle and the name 'Carvel' written in distinctive script on the handle of the spoon.

 It is this uniformity of stores and operation, and this advertising and the knowledge of the public of the uniformity and quality of the product that draws the business of the Carvel operators. The name Carvel constitutes a trademark of great value to the defendant companies and to the franchise operators.

 It is well established that the owner of a trademark may license its use to another without abandoning his trademark. However, a naked license agreement without supervisory control over the product is invalid. E. I. du Pont de Nemours & Co. v. Celanese Corp., 167 F.2d 484, at p. 489, 35 CCPA 1061, 3 A.L.R.2d 1213 (1948). The obligations of the trademark licensor were well expressed in Morse-Starrett Products Co. v. Steccone, 86 F.Supp. 796, at p. 805 (D.C.N.D.Cal.1949):

 '* * * If the owner of a trademark wants to license the use thereof to another and still retain as his own the enjoyment of the rights stemming therefrom, he must do so in such a way that he maintains sufficient control over the nature and quality of the finished product, over the activities of the licensee, as will enable the licensor to sustain his original position of guarantor to the public that the goods now bearing the trademark are of the same nature and quality as were the goods bearing the trademark before the licensing, or, that the mark now has the same meaning as far as the public is concerned as it did before the licensing.'

 The validity of the franchise agreements and the other agreements between Carvel and the operators must be judged in the light of this fundamental rule relating to the protection of trademarks and trade names.

 As was stated in Coca-Cola Co. v. J. C. Butler & Sons, 229 F. 224, 232 (D.C.Ark.1916):

 '* * * The trade-mark laws, like the patent laws, give the owner a monopoly which neither the Sherman Act nor any other act of Congress forbids. It would be paradox to say that the exercise of a right, expressly granted by law, is unlawful.'

 IV. Liability of the Supplier Defendants.

 The plaintiffs' case against the supplier defendants rests almost entirely upon the legality of the contracts of the supplier defendants with Carvel. The contracts are not uniform, but certain provisions are common to them, and the general charges made by plaintiffs are the same as respects all the supplier defendants.

 The liability of the supplier defendants is predicated upon alleged unlawful conspiracies on the part of each of the supplier defendants with Carvel not to sell direct to the plaintiffs. The plaintiffs do not contend that the supplier defendants engaged in any common conspiracy with Carvel and with each other in furtherance of any illegal end. No evidence of any such conspiracy was offered; the plaintiffs relied on the agreements between Carvel and the supplier defendants to establish the unlawful conspiracies.

 The contracts of the two dairy companies involved in this action, H. P. Hood & Sons, Inc. ('Hood') and Rakestraw's Dairy Products, Inc. ('Rakestraw'), are substantially similar. Hood and Rakestraw each agreed to manufacture and sell to Carvel all the 'Carvel Mix' required by Carvel dealers located in the respective geographical areas to be serviced by each of them. *fn4" Carvel agreed to purchase from the dairies all of its requirements of Carvel Mix for such stores. The supply contracts provided that Hood and Rakestraw should manufacture Carvel Mix according to a secret formula furnished by Carvel and that they would not disclose the formula to any unauthorized persons. In addition, Hood and Rakestraw agreed to 'deliver only Carvel Mix to Carvel Stores, and no other ice cream mix or ice cream preparation of any kind.' Deliveries of Carvel Mix were made by the dairies direct to the franchise operators.

 It is difficult to see exactly what plaintiffs consider to be the illegality of the dairy companies' contractual arrangements with Carvel. The complaint alleges that the supplier defendants violated the antitrust laws by their refusal to deal direct with the plaintiffs. There is no allegation in the complaint that the provisions of the contracts under which the dairies agreed to furnish all of Carvel's requirements for Carvel Mix were illegal in themselves, and the plaintiffs failed to prove that such provisions were in fact illegal. See, Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 81 S. Ct. 623, 5 L. Ed. 2d 580 (1960); United States v. Columbia Steel Co., 334 U.S. 495, 68 S. Ct. 1107, 92 L. Ed. 1533 (1948).

 As to the alleged refusal to deal direct, certainly the plaintiffs had no right to purchase Carvel Mix, made pursuant to Carvel's secret formula, other than on the terms which Carvel prescribed. Carvel had the right to bind the dairy companies to manufacture this secret formula mix solely for its own use or for person whom it might designate. No outside or any of the plaintiffs, without Carvel's approval, had the ...

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