The opinion of the court was delivered by: WERKER
This is an application for a preliminary injunction under section 16 of the Clayton Act, 15 U.S.C. § 26 (1970), and Rule 65 of the Federal Rules of Civil Procedure.
On September 30, 1974, plaintiff, Supermarkets Services, Inc., ("Services") filed a complaint in this Court against the defendant, Hartz Mountain Corporation ("Hartz"), for treble damages, preliminary and permanent injunctive relief. Services alleges violations of sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1 and 2) through territorial and customer limitations allegedly imposed by Hartz on Services, and by Hartz's alleged monopolization or attempting to monopolize the sale and distribution of pet accessories and bird food, particularly to mass merchandising outlets.
This Court refused to issue a temporary restraining order, but ordered the parties to appear on October 2nd for a hearing on the preliminary injunction aspects of the litigation. The facts set forth below summarize the affidavits and testimony given by both parties during nearly two days of hearings.
Services, a subsidiary of the APL Corporation, is a sales-service distributor of non-food products including health and beauty aids, pet accessories, housewares, stationery, books, notions, cosmetics, cleaning aids, and shoe products to over 1,400 supermarkets, drug stores and department stores in an area reaching from Springfield, Massachusetts west to Buffalo, New York, and Pittsburgh, Pennsylvania, and south to North Carolina.
Services is known in the service merchandising trade as a "rack jobber" since it not only purchases non-food items from suppliers and resells them to mass merchandising outlets, but also performs a variety of service functions such as order taking, inventory control, stacking of merchandise, price marking, and cleaning and maintaining of display racks. According to its president, Services is the second or third largest rack jobber in the eastern United States, with total annual sales of over $40,000,000.
For the past several years, Services has been distributing pet supplies under a contractual arrangement with Hartz. Out of $40,000,000 in annual sales, $1,200,000 is attributable to the sale of pet supplies. Services distributes Hartz products primarily in the Washington, D.C. area where it has three major customers, Peoples Drug Stores ("Peoples"), Dart Drug Stores ("Dart") and Grand Union Supermarkets. Services sells a wide variety of non-food products to Grand Union, but only pet supplies to Peoples and Dart. Services also sells Hartz to over fifty independent supermarkets in the Buffalo area which are serviced by one wholesaler, Peter J. Schmitt.
Hartz is one of the largest, if not the largest,
supplier of pet supplies in the United States, with annual worldwide sales of $151,000,000 and U.S. sales of $130,000,000. Hartz, under the brand names Hartz and Delta, sells a large variety of products for the care, feeding, grooming and general well being of pets including cages, foods, toys, collars and leashes.
Hartz distributes its products to over 50,000 stores through a distribution system of independent rack jobbers who take care of the functions of delivering the merchandise to stores, stocking the shelves, placing the merchandise, rotating the merchandise, removing shop-worn and show-moving goods, and setting up floor displays and promotions. Besides selling its products to distributors for resale, Hartz also sells directly to retail outlets and to that extent is a competitor with the distributors.
Hartz has spent over twenty-five years in developing a network of distributors with the ability to service its racks and thus help to maximize its sales. The Hartz products are placed on racks, with a typical four foot rack containing from 120-180 different products. According to Hartz, the key to its success is the servicing of these racks by the specially trained distributors.
While Services claims that Hartz is the dominant force in the industry, and that all of the Services's customers have developed a strong brand loyalty for Hartz, Hartz maintains that it competes vigorously with several large competitors such as Sargeants, R.T. French and the Metafram Corporation.
Prior Dealings of the Parties
Services' relations with Hartz started in 1967 when Services acquired the Richray Distributing Company, a large rack-jobber in the Washington, D.C. area. Richray had a "Distributor Contract" with Hartz which, inter alia, had a primary responsibility clause (although no territory was specified), and which required Richray to use its "best efforts" in the promotion, sale, and servicing of Hartz products. The contract was automatically renewable at one year intervals and Richray, and subsequently Services through Richray, distributed Hartz products under the contract until February 4, 1969, when a new contract was signed.
The new contract is essentially the same as the old, except it is now entitled "Service Distribution Contract," the words "on a service basis" have been added to the primary responsibility clause, the words "through service" have been added to the best efforts clause, and the clause permitting the distributor to exercise his independent business judgment has been expanded.
Services distributed Hartz products under both the 1963 and the 1969 Richray contracts through what is known for the purposes of this litigation as the "Old Program." The Old Program was, and still is, a conventional servicing program where merchandise and services are sold together at a charge of retail price less a discount without regard to the volume of products per delivery. Services would perform all its rack jobbing functions under the Old Program including inventory control, promotion, and, at least as to Hartz products, fully servicing and maintaining the display racks.
In mid-June of 1974, Services announced what it called a "New Program" which is basically a form of cost plus wholesaling. The cost of goods and services are no longer aggregated, and the price of each is specified. Retail outlets are now given the option of doing their own servicing or continuing to use the services provided by Services. The cost of warehousing is segregated and there is now a separate charge for deliveries which is determined by the dollar volume of the order. In addition, retail outlets are no longer provided four weeks credit but are required to make a deposit equal to two weeks average volume in non-food items. Over five hundred stores, most of them current customers, have signed up for the new program and have put down $600,000 in refundable deposits.
As Services sees it, the New Program would increase its profits and at the same time reduce prices to the retail outlets and ultimately to the consumer.These results would be accomplished through the use of economies of scale which would reduce operating costs, increase productivity, and lead to purchasing economies. From the point of view of the retailer, profits may be increased, but in order to do so, the retailer must order a number of product lines from Services since the delivery charge is keyed to the dollar volume of his order. Since the Old Program, according to Services, is still available to any customer, the retailer has the following options: (1) he can stay with the Old Program and continue to make the same gross profit,
or (2) he can elect to go on the New Program, in which event he can increase his gross profit if he orders several lines of non-food products from Services.
Of course, a customer who has only used Services for obtaining one line of product (such as Peoples Drug and Dart Drug) might prefer to continue to deal with its old distributors in the other non-food lines, and might also prefer to have Services continue to perform its service functions in the pet supply line. In such cases, the rational decision would be to remain on the Old Program, or to take the New Program but continue to buy services from Services. In point of fact, all new customers who have elected to try the New Program have taken full services, and the Schmitt account in Buffalo has gone from limited services to full services.
To Hartz, the New Program is anathema. The fact that retailers have the option to do their own servicing is particularly viewed with disfavor. Hartz contends that the New Program is not just another way of offering products to retailers, but is a complete change in the nature of Service's business with a decrease in emphasis on services, the key to Hartz's success. Hartz claims that such a drastic change constitutes a breach of its contract with Services.
The offering of the New Program triggered a series of meetings and conversations, described in detail below, which brought a period of seemingly amicable relations between the parties to a precipitous halt.
Prior to the official announcement of Service's New Program, Fern Caron, a Corporate Vice President of Hartz, had heard from Art Pym, a Hartz sales manager in the New England area, that Services was going to offer a cost plus wholesaling program. Caron reported this information to Leonard Stern, president of Hartz, who told Caron to arrange a meeting with Service's president, Ray Zager, to discuss the nature of the New Program. Caron called Zager and told him he would like to set up a meeting to discuss "a problem." Zager agreed to meet Caron at the Lobsterman cocktail lounge in New Jersey on September 6th.
At approximately 3:30 p.m. on September 6th, Zager met with Caron at the Lobsterman for approximately two hours. At the preliminary injunction hearing, Zager, Caron and Stern (Caron had reported his version of the conversation to Stern) all testified as to their version of the meeting. According to Zager, Caron wanted to know what the New Program entailed. After Zager explained the program, Caron responded that he didn't want the New Program and the new price structure offered to any new customers outside of Services's territory. As for the old customers, Services could do what they wished, they could "give it away." Caron felt that Services would be upsetting Hartz's distribution pattern. Finally, Caron threatened that if Services did not stop offering the New Program to new customers, they would lose the Hartz line. Zager responded that Services would offer its New Program wherever it wanted, and to whatever customers it could find. Zager testified that the subject of services was never discussed.
The Caron version of the meeting differed markedly from Zager's. Caron testified that he asked Zager to explain Services's New Program, especially the concept of cost plus wholesaling. Zager explained that the company would be lessening services and the stores would be performing some of the services and thus saving money. Caron said he did not understand the entire concept, but that as far as pet supplies were involved, it was imperative that the stores get full service. Zager then said if he couldn't have Hartz, he would take on Sargeants and compete with Hartz. Caron told Zager to do what he thought right, but to think about it and call Caron in a few days. Caron claims that the subject of "termination" was never discussed. Caron called Stern immediately after the meeting and told him his version of the conversation. Stern testified and gave virtually the same version as Caron.
The Decision to Terminate
Subsequent to the meeting with Zager, Caron, on September 9th, called Zager to see if he had changed his position. Zager said he had not. Caron again called Zager on September 12th, and again received the same answer. Caron then reported this information to Stern and Lovitz, a senior officer of Hartz. Zager testified that on September 19th, he received a call from Lovitz who inquired whether Zager had changed his mind. Zager said no. Zager also claims that Lovitz said the "problem" was the offering of the New Program to new customers, and that there was no discussion with Lovitz about reduced services.
On or about September 19, Stern made the decision to terminate Hartz's relationship with Services. Stern testified that his decision was based on the information received from Caron relating to the meeting between Caron and Zager. Stern felt the cost plus wholesaling program was a significant change in the nature of Service's business and that because the retailers would receive fewer services, Hartz would ultimately suffer severe declines in its sales. Stern believed Services was breaching its contractual obligations to service the retailers and was not using its best efforts to promote Hartz products. Stern admitted that at the time he made the decision to terminate ...