The opinion of the court was delivered by: GRIESA
This is an antitrust action under Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Anti-discrimination Act, 15 U.S.C. § 13(a) (hereafter referred to as Section 2(a) of the Robinson-Patman Act), and Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2.
Plaintiff FLM Collision Parts, Inc., is a small company located in Yonkers, New York, and is in the business of dealing in "crash parts" for cars made by defendant Ford Motor Company -- i.e., Ford, Mercury and Lincoln cars. Crash parts consist of fenders, grills, panels, and other parts used to repair a car which has been in an accident or needs replacement of such parts for some other reason.
These crash parts are manufactured only by Ford Motor Company or by other manufacturers who make the parts to Ford's specifications. With certain exceptions not here relevant, these crash parts are sold by Ford
only to franchised Ford and Lincoln-Mercury dealers. The franchised dealers
either use the crash parts in their own repair work for customers, or resell them to independent repair shops.
The problem in this case arises from the circumstances under which Ford grants a so-called "wholesale incentive" allowance in the sale of crash parts to Ford dealers. Ford grants, or does not grant, the wholesale incentive allowance to the dealers depending on the use they make of the particular parts. If a dealer uses a part in repair work for a customer, this involves a retail sale of the part, and the dealer does not obtain a wholesale incentive allowance on that part. But if a dealer sells the part to an independent repair shop, this involves a wholesale transaction, and the dealer may obtain the wholesale incentive allowance on that part.
FLM set itself up to supply Ford crash parts to independent repair shops. At first it sought to buy directly from Ford, but when this request was refused, FLM commenced purchasing crash parts from a Ford dealer in Brooklyn to whom FLM was referred by Ford. FLM then proceeded to sell crash parts, purchased from the Brooklyn dealer, to independent repair shops, mainly in Bronx and Westchester counties.
The wholesale incentive allowance was established by Ford in 1968. Thereafter, until 1972, Ford permitted the Brooklyn Ford dealer to receive the wholesale allowance on parts sold to FLM, which allowance was almost entirely passed on to FLM, thus substantially reducing FLM's costs. Commencing in 1972, Ford refused to grant the wholesale incentive allowance on parts sold to FLM, and restricted the allowance to those parts which were sold by franchised Ford dealers directly to independent body shops.
FLM contends in this action that Ford's current pricing policies violate Section 2(a) of the Robinson-Patman Act in two regards: First, that Ford, by charging one price to a franchised dealer when it sells to an independent repair shop, and a higher price to a franchised dealer when it sells to FLM, is engaging in unlawful price discrimination in its sales to the franchised dealers, resulting in injury to FLM for which FLM has standing to recover; second, that FLM is itself a "purchaser" from Ford -- i.e., an "indirect" purchaser -- and as such has standing to sue Ford under the Robinson-Patman Act. FLM further contends that Ford has violated Section 1 of the Sherman Act in combining and conspiring with its franchised dealers to injure FLM competitively. Finally, FLM contends that Ford has violated Section 2 of the Sherman Act in that Ford has monopolized or attempted to monopolize the wholesale market for Ford crash parts. FLM seeks injunctive relief and treble damages.
The case has been tried to the Court without a jury. This opinion constitutes the Court's findings of fact and conclusions of law on the liability phase of the case. The record on damages has not been completed. A supplemental opinion will be issued on the award of damages, including attorneys' fees.
The following is a summary of my conclusions. I hold that FLM has proved a violation of Section 2(a) of the Robinson-Patman Act based upon the first theory described above -- that Ford is engaging in unlawful price discrimination in sales of crash parts to its dealers, resulting in injury to FLM for which FLM has standing to sue. I reject the Robinson-Patman claim of FLM based on the "indirect purchaser" theory. I also reject FLM's claims under both Sections 1 and 2 of the Sherman Act.
FLM commenced its business in 1965. The two principals of the company are Stephen McKee and John Andidero, both of whom had been employed previously by Ford dealers in parts operations. FLM's first idea was to buy crash parts directly from Ford and sell them to independent repair shops. FLM discussed this with a representative of Ford, but was advised that Ford would only sell its crash parts to franchised dealers. In early 1965 an employee of Ford in New York City by the name of Joe Collura introduced McKee and Andidero to Central Lincoln Mercury Corp., located in Brooklyn, New York. This led to an arrangement for FLM to buy crash parts from Central at 2% over Central's cost.
At this time there was no wholesale incentive allowance available on crash parts to franchised Ford dealers. The dealers paid the same price -- "dealer price" -- for crash parts whether they used them in their own repair shops (i.e., made retail sales) or sold them to independent repair shops (made wholesale sales). The "dealer price" was the "suggested list" or retail price, less 42%.
It is useful to examine the effects of the crash parts price structure as it existed at the time FLM commenced business in 1965 until the advent of the wholesale incentive allowance, which was instituted in 1968. Let us assume the sale by Ford of a crash part to a dealer, carrying a suggested list price of $10. The dealer would pay the dealer price of $5.80 -- i.e., the suggested list price less 42% or $4.20. The Ford dealer could use the part in his own repair operation, and would presumably charge the customer the suggested list price of $10, thus making a gross profit of $4.20. The Ford dealer could also sell the part to an independent repair shop. In such a sale the Ford dealer would presumably make some markup over the dealer cost of $5.80. The inevitable result would be that the Ford dealer and the independent repair shop, both potentially competing for the repair business of Ford owners, would be incurring different costs for the same type of crash part -- the dealer paying $5.80, the repair shop $5.80 plus.
To return to the situation of FLM, FLM was buying parts from Central Lincoln Mercury for 2% over dealer price. Using the same $10.00 part as an example, FLM would purchase this part for the dealer cost of $5.80 plus the 2% markup, or a total of $5.92. FLM would be competing with franchised Ford dealers for the business of the independent repair shops. Although there is no explicit testimony about the price which FLM was charging to repair shops in its early years, a reasonable inference from the evidence is that this was suggested retail price less 25%. Applying this percentage to the hypothetical $10.00 part would give the figure of $7.50 as FLM's price to the repair shops, for a part costing it $5.92.
With respect to FLM's competition with Ford dealers for the business of independent repair shops, there is no explicit evidence regarding what prices the dealers were charging to the independent repair shops during this period. However, the reasonable inference is that FLM's prices were at about the same level as the prices charged by the Ford dealers. In any event, FLM was able to compete effectively.
The business of FLM grew steadily. FLM offered certain services to the independent repair shops which the franchised Ford dealers generally did not provide. FLM would visit repair shops, inspect damaged vehicles and advise respecting exactly what parts would be needed to make the proper repairs. FLM carried sufficient inventory so that it could often fill an order the same day it was placed. If FLM did not have a part in its own inventory, it would attempt to procure the part and deliver it no later than the following day. FLM delivered parts to the repair shops, something apparently not done by most of the franchised dealers.
The following figures show the results of FLM's operations commencing with the fiscal year ending September 30, 1966 (the first full year of FLM's operations) through the fiscal year ending September 30, 1968. The latter was the last full year prior to the advent of the wholesale incentive allowance.
Cost of Parts $201,376.00
Gross Profit $44,362.00 (18.1%)
Other Expenses (including
of $16,680) $44,256.00
Net Operating Profit
After Taxes $80.70
Cost of Parts $276,121.00
Gross Profit $61,136.00 (18.1%)
Other Expenses (including
of $23,520) $60,927.00
Net Operating Profit
After Taxes $109.00
Cost of Parts $323,959.00
Gross Profit $66,028.00 (16.9%)
Other Expenses (including
of $26,520) $65,858.00
Net Operating Loss
After Taxes $769.00
Ford maintained a parts depot at Teterboro, New Jersey. Central Lincoln Mercury provided FLM with an authorization so that FLM could pick up parts at Teterboro. Bills were rendered by Ford to Central, who would then segregate the bills relating to the FLM purchases from the bills relating to other purchases made by Central. In its dealings with Ford, Central was identified by a "dealer code number" -- 11283.
In order to simplify the accounting for the FLM purchases, Central requested that a separate code number be given by Ford to Central for the parts which it purchased for resale to FLM. Ford agreed to this, and commencing in late 1968, Ford assigned a second code number to Central -- 13430. This code number was in the name of Central, but the billing address was the address of FLM in Yonkers.
The wholesale incentive allowance for crash parts was instituted in November 1968. At some time prior thereto, the Federal Trade Commission advised Ford that the distribution of crash parts to independent repair shops at higher prices than those charged to franchise dealers for use in the dealers' repair shops violated Section 5 of the Federal Trade Commission Act. No formal proceedings were instituted. The matter was settled when Ford agreed to allow a discount from dealer's prices for certain classes of crash parts when the franchised dealers resold such parts for use by independent repair shops. The amount of this wholesale incentive allowance on crash parts was initially set at 20%. It applied to some, but not all, crash parts. The record shows that in 1971 there were a total of 10,000 kinds of crash parts sold by Ford, of which about 4,800 were eligible for a wholesale incentive allowance.
The agreement between Ford and the Federal Trade Commission did not expressly provide whether or not a wholesale incentive allowance should be allowed in the event of sales by a Ford dealer to a party such as FLM, acting as middleman between the Ford dealer and the independent repair shop. However, it has been stipulated that from the inception of the wholesale incentive allowance for crash parts until a Ford policy change in mid-1971, a franchised Ford dealer reselling crash parts to FLM was entitled to claim the wholesale incentive allowance on such resales.
In 1968 Ford changed the amount of the discount used to reach the basic dealer price from 42% to 40%. Thus, after 1968, the basic dealer price on a part whose suggested retail price was $10.00 was $6.00 instead of $5.80. In January 1970 Ford increased the wholesale incentive allowance from 20% to 25% for those crash parts to which the allowance applied.
The wholesale incentive allowance was obviously a great benefit to FLM. This is illustrated by returning to our example of the $10.00 crash part. The price paid by FLM's supplier, Central, was $6.00. However, when Central sold this part to FLM, Central received a wholesale incentive allowance equal to 25% (using the post-January 1970 percentage) of the $6.00 -- or $1.50. Thus Central paid only $4.50 for the part. Following the institution of the wholesale incentive allowance, Central charged FLM a markup of 3% of the basic dealer price -- here $6.00. In the example this markup would be 18 cents. Thus FLM paid Central $4.68. As already noted, it appears that the wholesale incentive allowance was granted by Ford on only about half the crash parts sold by Ford. Obviously, in the example of the $10.00 part, if the wholesale incentive allowance were not in effect, FLM would pay $6.18.
With regard to FLM's resale prices to the repair shops, and the resale prices of FLM's competitors, the Ford dealers selling directly to the repair shops, there is no explicit evidence in the record as to what such prices were during the time FLM was receiving the benefit of the wholesale incentive allowance. The Federal Trade Commission had contemplated that, following the institution of the wholesale incentive allowance, the Ford dealers would reduce their prices on the covered parts to the same level paid by the Ford dealers when these dealers sold at retail. In the example of the $10.00 part this would be $6.00. The Commission contemplated that, if the Ford dealer obtained a further wholesale incentive discount when the part was sold to independent repair shops, the dealer could afford to resell the part to the repair shops at the $6.00 price.
Apparently there was substantial unwillingness on the part of Ford dealers to reduce the prices charged to the repair shops to the levels contemplated by the Federal Trade Commission. Since the present case does not involve a complaint by an independent repair shop regarding prices charged by a Ford dealer, this issue was not pursued in any depth at the trial.
The only relevance of this matter to the present case is to explain that after the institution of the wholesale incentive allowance for crash parts in 1968, the prices charged by the Ford dealers, at least in FLM's area of competition, do not appear to have been reduced substantially. It appears likewise that FLM did not reduce its prices substantially, and that the principal effect of the wholesale incentive allowance on FLM was to increase its profitability.
The following figures show the profit pictures of FLM after the wholesale incentive discount became effective. Again, the fiscal years refer to years ending September 30.
Cost of Parts $345,112.00
Gross Profit $137,903.00 (28.6%)
Other Expenses (including
and commissions of
Net Profit After Taxes $25,418.00
Cost of Parts $444,865.00
Gross Profit $175,904.00 (28.3%)
Other Expenses (including
and commissions of
Net Profit After Taxes $22,847.00
Cost of Parts $448,264.00
Gross Profit $206,118.00 (31.5%)
Other Expenses (including
of $83,200) $179,938.00
Net Profit After Taxes $18,699.00
Cost of Parts
Gross Profit $246,620.00 (33.5%)
Other Expenses (including
of $83,200) $194,232.00
Net Profit After Taxes $21,091.00
It should be noted at this point that Ford markets a wide variety of spare parts other than crash parts. These other parts include spark plugs, filters, carburetors, etc., and are marketed under the Ford brand name and under the brand names "Autolite" and "Motorcraft". Wholesale incentive allowances on the spare parts other than crash parts had been instituted prior to 1968.
The Ford witnesses have testified that commencing in 1969 Ford found that wholesale incentive allowances were running higher than had been estimated. In 1969 the total wholesale incentive allowances granted by Ford for all types of parts amounted to $45.8 million, of which $12.7 million related to crash parts.
Ford was concerned about possible large-scale violations by dealers of Ford's rules regarding the wholesale incentive allowance. Ford's rules prohibited, among other things, payment of the allowance on parts sold by one Ford dealer to another Ford dealer either directly or through an intermediary. Ford was concerned about the possibility of one Ford dealer obtaining the allowance for purported use in wholesale sales, and then transferring the parts to another Ford dealer, who would sell them at retail. In this instance, the first Ford dealer would simply be a conduit, and the second Ford dealer would be getting the benefit of the allowance although not making the wholesale sales which the allowance was intended to cover.
Another "abuse" of the wholesale incentive allowance, in Ford's view, was the claiming of the allowance by Ford dealers for parts sold to insurance companies in connection with the repair of cars. Ford regarded these as retail sales, ineligible for the allowance. Still another abuse was claiming the wholesale incentive allowance on parts which had not been purchased from Ford.
In 1969 Ford selected 37 out of its 6700 dealers for audits to determine the validity of the wholesale incentive allowances the selected dealers had claimed. These 37 dealers were ones with unusually high claims for wholesale incentive allowances.
Central Lincoln Mercury, FLM's supplier, was one of the dealers audited. This audit covered not only the records of Central, but also the records of FLM. FLM consented to such an examination. It is conceded by the Ford witnesses that the amount of incorrect wholesale allowance claims involving FLM was "minimal" and that this was a "clean audit." The audit covered the period from November 1968 through September 1969. The finding of the audit report dated November 21, 1969 was that there were total "discrepancies" of $2,185.23, of which $1,458.34 related to sales to Ford dealers. The balance of the discrepancies related to "return sales not deducted." There were no discrepancies arising from sales to insurance companies or purchases from outside sources. For some reason, the audit report does not disclose the total amount of wholesale incentive allowances claimed with regard to FLM for the November 1968 -- September 1969 period, although the audit report states that for the period January through May 1969 the total claims were $24,446. In any event, the amount of the discrepancies was considered minimal as compared with the total claims.
Following the completion of the 37 audits, Ford made a statistical evaluation in order to estimate the overall proportion of improper wholesale allowance claims for all dealers. The estimate was that for the period of the audit there were between $1.2 million and $2.1 million in improper claims out of a total of $44.5 million claims.
In the fall of 1970 there was a second audit of Central and FLM, resulting in an audit report dated November 6, 1970. The audit report stated that the wholesale incentive claims "were tested and found to be generally accurate, properly supported, and submitted in accordance with the provisions of the wholesale parts incentive program." No discrepancies were noted.
During 1970 Ford undertook a reconsideration of the second parts code number which had been issued to Central for use in connection with its sales to FLM. The second code number was discontinued as of the end of January 1971. Central continued to sell to FLM and to obtain the wholesale incentive allowance on sales to FLM until a subsequent time, as will now be described.
In July 1971 Ford amended its rules regarding the wholesale incentive allowance, with the effect that a Ford dealer could not obtain the allowance on parts sold to a party such as FLM. It is this amendment that has given rise to the present action.
Ford asserts that this change regarding the wholesale incentive allowance was the result of three considerations. The first of these was the concern that a party such as FLM might act as an intermediary in transfers of parts between Ford dealers. The second consideration was that a Ford dealer selling to a party such as FLM was not really performing the "wholesale function," but was delegating this function to a middleman such as FLM. The third consideration was that, if Ford dealers were allowed to obtain a wholesale incentive allowance in selling to a party such as FLM, who was acting as a wholesaler, the Ford dealer would not be content with the wholesale allowance, but would demand an even greater allowance -- a distributor's allowance.
The only witness at the trial who participated in the discussions of these matters within Ford was Morris J. Rowlands. He testified that he could recall no specific discussion of FLM in connection with the amendment of the wholesale incentive allowance rules in July 1971. He testified that the discussions were in general terms, in order to arrive at a consistent overall policy applicable to all types of spare parts, including but not limited to crash parts.
Certain facts should be noted with respect to the three considerations described above. As to the first, there was not the slightest indication that FLM was either actually or potentially the kind of intermediary between Ford dealers which Ford was concerned about. It is undisputed that FLM, aside from an occasional sale to a Ford dealer in an emergency, sold its crash parts entirely to independent repair shops. The "discrepancies" found in the 1969 audit were minimal, and in the 1970 audit were nonexistent.
As to the second consideration -- Ford's alleged desire to grant the wholesale incentive allowance only where Ford dealers are performing what Ford considers to be the "wholesale function" -- this raises a question of law, to be discussed hereafter, as to whether Ford is legally entitled to use the wholesale incentive allowance in such a way as to insure that a Ford dealer sells directly to a retailer rather than selling indirectly through a party such as FLM.
As to the third consideration -- Ford's fear that Ford dealers selling to wholesalers would claim a distributor's allowance -- Ford admits that, whatever this problem may have been, it related in no way to crash parts or to FLM. Ford's evidence is that it was concerned in this regard about Autolite and Motorcraft, where one channel of distribution involved distributors. Ford allegedly believed that if Ford dealers were encouraged to compete with the distributors in marketing Autolite and Motorcraft parts to wholesalers, then the Ford dealers would claim a distributor's allowance. Thus Ford was not willing to grant any incentive at all to Ford dealers in order to encourage them to sell these parts to wholesalers.
Ford contends that, although this problem did not relate directly to FLM or to crash parts, Ford desired to have a uniform policy for the wholesale incentive allowance applicable to all types of parts, rather than to have one policy for crash parts and a different policy for Autolite and Motorcraft parts.
I must note here that, even as to the Autolite and Motorcraft parts, there is no showing that any Ford dealers were in fact demanding distributors' allowances ...