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Empire Rayon Yarn Co. v. American Viscose Corp.

decided: December 13, 1965.


Hays, Circuit Judge. Moore Circuit Judge (dissenting).

Author: Hays

HAYS, Circuit Judge:

The complaint dismissed by the judgment below attacked the validity under the Robinson-Patman Act*fn1 of defendants' distribution system for rayon yarn. The district court granted summary judgment for the defendants. 238 F. Supp. 556 (S.D.N.Y. 1965). We reverse.

The plaintiff Empire Rayon Yarn Co., Inc. (Empire) buys unprocessed rayon yarn from the manufacturers of such yarn. Part of this yarn it converts, or processes, for use in the textile trade and part it resells in the original package and condition as received from the manufacturers. In this latter capacity Empire functions as a jobber, buying the rayon yarn on its own account, warehousing it at its expense and reselling it to wholesalers, other converters and retailers.

The defendant American Viscose Corporation (American) manufactures and sells unprocessed viscose rayon yarn in interstate commerce under the trade-name "AVISCO." As of 1958 American manufactured over thirty-five per cent (35%) of the total production in this country of viscose rayon yarn.

At issue here is the legality of the method of distribution of this yarn established by American. The affidavit of the general sales manager of American stated the fundamentals of that method:

"Many years ago American established a distribution policy for the sale of viscose rayon yarn by direct sales to consumers of most of the product and sales to two jobbers, the defendants Malina and Gutner, of a small percentage of the product. These two jobbers were able to sell and service smaller units of the textile trade at lower selling costs than American and for that reason American established the jobber relation. These jobbers performed such services as the maintenance of substantial inventories of yarn in their plants as well as in warehouses, maintenance of an experienced selling organization, assumption of all risk of loss and credit, advertising American products, assumption of all risk of price fluctuation and furnishing of technical assistance to users of rayon. For acting as such jobbers American allowed a discount from list price on all viscose rayon yarn resold by the jobbers. On all sales to these jobbers for processing (not for resale) they pay the current price just the same as the plaintiff [Empire] or any other customer."

In order to implement this dual distribution system American contracted with the defendant Malina Company (Malina) on May 19, 1949, and with the defendant Gutner Brothers Corporation (Gutner Brothers) on June 2, 1949, to act as American's "appointed jobbers."*fn2 Malina combines the functions of converter and jobber, whereas Gutner Brothers is only a jobber.

The contracts which American signed with Malina and Gutner Brothers are virtually identical. The "Whereas" clauses state that American "desires to avail itself of the services of selected Jobbers in selling [viscose rayon] . . . yarn in its original form to bona fide fabric manufacturers who, either because of their inability to produce in bulk or because of their inadequate credit position, are not supplied directly" by American; and that

"the Jobber maintains a large inventory of . . . [American's] yarn in its natural form; carries all overhead costs such as rentals, insurance costs, salesmen's commissions, accounting and other general office expenses incident to maintaining its inventory and performing its other functions of creating and maintaining a market, selling and distribution; and assumes both the risks of loss resulting from price fluctuation and the credit risks entailed in the marketing of yarn in its original form . . ."

Malina and Gutner Brothers undertook to function as jobbers which is defined "to consist of the resale of said yarn in original form to bona fide fabric manufacturers, together with the maintenance at the Jobber's expense of adequate stocks, a warehouse and a sales force." The contract further stipulates that Malina and Gutner Brothers are not appointed "the agent or legal representative" of American "for any purpose whatsoever." The contract provides that Malina and Gutner Brothers shall resell the yarn at American's published list prices and that yarn shall be resold in Fair Trade states at the list price "in effect on the date of acceptance of the order from the Jobber's customer," plus taxes. Section IV of the contracts provides that "in consideration of the Jobber functions described herein . . . the Jobber shall be allowed a Functional Discount on all graded rayon yarn purchased hereunder and resold by the Jobber in its original form . . . equal to five per cent (5%) of the list price of such yarn at the date of shipment" by American to the Jobber. Section V sets forth certain conditions "in order to avoid any discrimination against other customers [of American] . . . or against customers of the Jobber through the granting or receiving of said Functional Discount." It excludes any discount on sales of yarn not resold in the original form or of yarn subsequently processed by the Jobber; sales by the Jobber to customers controlled by the Jobber, its stockholders or employees, unless such resale is bona fide and without price discrimination; sales by the Jobber to other jobbers or to persons other than bona fide fabric manufacturers without American's specific approval; sales of yarn resold and subsequently purchased by the Jobber; and sales of yarn resold by the Jobber in which he retains more than a credit interest. Section VI of the contract requires that the Jobber report monthly on its sales in detail and that he permit American to inspect the Jobber's books and records. The Functional Discount is credited by American to the Jobber's account, and adjustments are made yearly.

Defendant American sold unprocessed rayon yarn under the terms of this contract to both Malina and Gutner Brothers from 1949 through 1955 in large amounts totalling in value over $17,855,000 and $5,074,000, respectively. To the plaintiff Empire, American sold at list price without discount about $62,000 worth of unprocessed rayon yarn from 1953 through the first nine months of 1959. However, Empire during this same period bought from other manufacturers and resold in the original package unprocessed rayon yarn to a value of over $1,600,000.

Empire's president repeatedly asked American for treatment equal to that given Malina and Gutner Brothers and in 1956 American responded by submitting for Empire's approval a contract virtually identical to those accorded Malina and Gutner Brothers; but shortly thereafter American withdrew the offer. American's general sales manager stated that its "officers . . . in the exercise of their own business judgment decided that the volume of yarn sold by the jobbing trade did not, and does not [as of January 1958] . . ., justify the appointment by American of more than three jobbers.*fn3

Empire had made demands in 1953 on two other manufacturers of rayon yarn, American Enka Corporation and E.I. du Pont de Nemours, for similar discounts; American Enka Corporation agreed in May or June 1958 (after Empire's complaint was filed) to grant a five per cent (5%) discount "for all graded viscose rayon yarn," but du Pont refused. During 1958 and the first nine months of 1959 ...

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