The opinion of the court was delivered by: BRYAN
Defendants, Goodyear Tire and Rubber Company (Goodyear) and Kelly-Springfield Tire Company (Kelly), move under Rule 12(b) F.R.C.P. to dismiss the amended complaint for failure to state a claim upon which relief may be granted and for summary judgment pursuant to Rule 56 F.R.C.P. Since affidavits have been submitted by the parties going beyond the allegations of the amended complaint, the motion will be treated as one for summary judgment.
Plaintiff, VTR, Incorporated, commenced this action in the New York Supreme Court for the County of New York, alleging a single claim for breach of contract. Defendants removed the action to this court on grounds of diversity of citizenship. After removal, defendants, prior to answer, moved to dismiss the complaint for failure to state a claim for relief and for summary judgment. Thereupon, VTR served an amended complaint containing three counts. Count I alleged a somewhat modified claim for breach of contract. Counts II and III sought treble damages for violation of Sections 1 and 2 of the Sherman Act. 15 U.S.C. §§ 1 and 2. Jurisdiction under Count I is based on diversity and under Counts II and III on the Federal antitrust laws.
The defendants then withdrew their motion directed to the original complaint and made the present motion addressed to the complaint as amended.
I. The Breach of Contract Count
For a number of years prior to 1961, VTR was in the business of distributing and selling replacement tires
on a retail basis through leased automotive departments in department stores in a number of cities throughout the country. Such tires were sold mainly under the brand name "Vanderbilt" and the leased departments were known as "Vanderbilt Automotive Centers" (VAC).
In 1961, VTR sold the VAC business, its assets and property, to The B. F. Goodrich Co. (Goodrich), a large tire manufacturer, under an agreement providing for periodic payment of commissions to VTR. From 1961 until April 1965 Goodrich was the exclusive owner of the VAC business and operated it. According to VTR, by 1964 VAC had become one of the two principal operators of leased tire outlets in major department stores throughout the United States, with over-all annual net sales of approximately $20,000,000 and net annual sales of replacement tires exceeding $16,000,000.
In 1965 there were disagreements between Goodrich and VTR concerning the VAC business and defendant Goodyear came into the picture. Goodyear is alleged to be the largest tire company in the world in terms of tire units manufactured and sold and its business includes the manufacture, distribution and retail sale of Goodyear replacement tires through company-owned stores, independent retailers and other outlets.
On April 2, 1965, two contracts were entered into by VTR. One, between VTR and Goodrich, provided for the repurchase of the VAC business, assets and property, with some exceptions, by VTR from Goodrich. The other, between VTR and Goodyear, provided for the purchase by Goodyear of the VAC business, assets and property being sold by Goodrich to VTR. It is the VTR-Goodrich contract which is the subject of the first count of the amended complaint.
The Goodyear-VTR contract recites (a) that Goodyear is desirous of acquiring the VAC assets being sold by Goodrich to VTR and of obtaining the services and advice of an organization with background and experience in the operation of leased automotive departments in department stores and (b) that VTR is willing to assign the Goodrich-VTR contract to Goodyear and to furnish such advice and services.
The contract, insofar as relevant here, provided in substance that:
VTR assigns to Goodyear the Goodrich-VTR contract and all of VTR's rights and benefits thereunder. (P2).
Goodyear pays Goodrich the amounts which VTR was required to pay for the repurchase of the VAC business pursuant to the Goodrich-VTR contract. (P3). This amounted to $8,800,000 at the closing plus $160,000 annually for 5 years. Goodyear also assumes all obligations of VTR under the Goodrich-VTR contract. Goodyear pays to VTR the sum of $2,500,000 in two equal annual installments of $1,250,000 as an advance on commissions. (P3-A).
VTR agrees to furnish Goodyear with advice in the establishment and operation of leased departments in department stores for a period of 20 years. As compensation therefor, Goodyear agrees to pay VTR the commissions provided in the contract. However, Goodyear may terminate this portion of the agreement at any time "with or without cause" but, if the termination is other than by discontinuance of the operation of all contract stores, commissions as provided by the contract continue to be payable to VTR as liquidated damages. (P4). If commissions are due they are payable during the first 10 years of the contract at 3 1/2% of net sales of contract stores and during the second 10 years at 2% of net sales up to $16,000,000 and 1% of net sales in excess of that sum. In any event no commissions are payable after 20 years. Each year $420,000 will be deducted from commissions payable and retained by Goodyear until the aggregate is $3,752,000, with a carryover in case commissions in any year do not reach that sum. The retained amounts "are, among other things, in repayment of the advance on commissions of $2,500,000 paid by Goodyear to VTR." However, such advances do not otherwise have to be repaid by VTR. (P5).
Contract stores are defined in paragraph 6 as those owned by corporations listed on an exhibit to the Goodrich-VTR contract (with various exceptions) in which Goodyear shall operate outlets and "such other stores, if any, as Goodyear, in its uncontrolled discretion, may classify as contract stores." Paragraph 6 then provides:
"An outlet that has been included as a Contract Store shall remain a Contract Store for the balance of the term of this Agreement, subject to the following provisions of this paragraph 6. It is of the essence of this Agreement and it is recognized and agreed by VTR that Goodyear is purchasing outright and absolutely the Property defined and described in Section 1.01 of the Goodrich-VTR Contract; that Goodyear is under no obligation to VTR to operate or to refrain from operating any particular Contract Store or to open any particular outlet; that Goodyear, in its uncontrolled discretion, may sell Vanderbilt, Princeton or Major tires to or through any person, firm or corporation without thereby rendering the store of such person, firm or corporation a Contract Store and without thereby becoming otherwise obligated to VTR in any respect; that Goodyear, in its uncontrolled discretion, may make all decisions respecting operations and the extent and intensity thereof, as well as respecting discontinuance of operation of any of the Contract Stores or all the Contract Stores; and that, with respect to the matters referred to in this sentence, Goodyear may make decisions solely in the light of Goodyear's own interest and without liability or obligation of any kind to VTR in connection therewith, except to pay commissions as above provided with respect to such Contract Stores as are then being operated by Goodyear."
Finally it is provided (P14):
"This Agreement represents the sole and entire agreement between the parties hereto and there does not exist any other agreement, understanding or arrangement with respect to the subject matter hereof. This Agreement may be amended or modified or provisions hereof waived only by another written instrument signed by the party against whom enforcement of the amendment, modification or waiver is sought. Any attempted oral amendment, change or waiver shall be void and ineffective."
On May 7, 1965 Goodyear assigned the VTR-Goodyear contract to its subsidiary Kelly-Springfield as the contract permitted. On May 10, 1965 the closing took place. Kelly has since operated the VAC business. The initial payments to Goodrich and VTR have been made and VTR has since been receiving commissions on net sales in contract stores in excess of the $420,000 per annum withheld against advances.
The gravamen of Count I of the amended complaint is that after acquiring the VAC business, Goodyear and Kelly, pursuant to plan, failed to operate the business in good faith and wilfully caused the business to deteriorate and its tire sales to diminish thus depriving VTR of part of the consideration to be paid for such business and impairing its over-all value and the plaintiff's property interest therein, in breach of the contract.
The amended complaint alleges in substance that: Goodyear purchased the VAC business for the purpose of suppressing and diminishing Vanderbilt brand tire sales and concealed such intent from VTR at the time of purchase. After acquiring the business, Goodyear and Kelly deliberately engaged on a course of conduct designed to achieve that end, in order to reduce the competitive impact of VAC's department store outlets on the sales of the higher priced Goodyear tire by franchised dealers, and other Goodyear outlets.
Goodyear and Kelly persisted in this course of conduct in bad faith despite VTR's protests. As a result, in the two years following the purchase, Vanderbilt tire sales drastically decreased although tire sales generally significantly increased; the number of VAC department store outlets which were required, because of insufficient volume, to pay minimum lease guaranties rose from 6 to 45; the growth pattern of VAC tire sales was drastically reduced; and its department store business was substantially impaired.
The acts and conduct of Goodyear and Kelly in bad faith included the closing of desirable outlets without economic justification and the imposition of inordinate price increases through the use of fraudulent practices and devices.
All this is alleged to have injured VTR's interest in the VAC business by reducing its commissions on net sales payable over a 20-year period to VTR's substantial damage and was a breach of the VTR-Goodyear contract.
VTR does not contend that any express provisions of the VTR-Goodyear contract was breached. It proceeds on the theory that under New York law
a covenant is implied that Goodyear, as purchaser, and Kelly, as its assignee, must act in good faith in the operation of the VAC business and that their allegedly wilfull and intentional conduct in bad faith, which resulted in the diminution of the ...