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JACOBSON & CO. v. ARMSTRONG CORK CO.

July 2, 1976

Jacobson & Co., Inc., Plaintiff,
v.
Armstrong Cork Co., Defendant


Weinfeld, District Judge.


The opinion of the court was delivered by: WEINFELD

WEINFELD, District Judge.

This motion for a preliminary injunction presents the question whether a distributor has been terminated by a manufacturer for legitimate business reasons or in furtherance of a conspiracy or combination in restraint of trade.

 The plaintiff, Jacobson & Co. ("Jacobson"), is a contractor in the business of furnishing and installing acoustical ceiling tile and systems, partitions, and other interior assemblies. Jacobson also operates a "Supply Center" in Elizabeth, New Jersey, from which it sells acoustical ceiling tile and other building materials directly to persons and institutions who do their own installation. The defendant, Armstrong Cork Co. ("Armstrong"), is the nation's largest manufacturer of ceiling systems and materials.

 In March 1968 Jacobson was designated by defendant as an authorized distributor of its products in New York City, Long Island, Westchester and Rockland Counties (all in New York State), Fairfield County in Connecticut and Northern New Jersey. Plaintiff was one of a number of Armstrong dealers in those areas. *fn1" The distributorship arrangement did not restrict plaintiff from selling Armstrong products outside the designated areas. The relationship of the parties continued until March 19, 1976, when Armstrong notified Jacobson that its distributorship was terminated. Soon thereafter, plaintiff brought this action, claiming that the termination violates Sections 1 and 2 of the Sherman Act, *fn2" Section 3 of the Clayton Act, *fn3" and the Robinson-Patman Act. *fn4"

 Plaintiff seeks a preliminary injunction restraining Armstrong from terminating plaintiff as an authorized distributor and compelling Armstrong to continue to sell its products to plaintiff during the pendency of this litigation. Accordingly, the court must decide whether plaintiff has made "a clear showing of either (1) probable success on the merits and possible irreparable injury, or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly" in its favor. *fn5"

 I. The Merits

 The gravamen of Jacobson's charge on this motion is that Armstrong terminated the distributorship because of Jacobson's resistance to Armstrong's unlawful restrictions on the resale of its products in areas outside of those designated in the distributorship agreement. Jacobson grounds its claim on United States v. Arnold Schwinn & Co.,6 which held that it is per se unlawful "for a manufacturer to seek to restrict and confine areas or persons with whom an article may be traded after the manufacturer has parted with dominion over it." *fn7" If, as Jacobson contends, Armstrong's purpose to protect its other distributors against competition in their respective designated areas from Jacobson and thereby preserve the integrity of Armstrong's system of territorial distribution contributed substantially *fn8" to the decision to terminate, then plaintiff ultimately will be entitled to judgment. *fn9" On the other hand, if the termination was solely for legitimate business purposes such as Jacobson's declining sales volume, its concentration on large jobs that were less profitable to Armstrong, and a deteriorating relationship brought about by Jacobson's many complaints, then Jacobson's claim must fail. As the parties recognize, the question is a factual one. *fn10"

 To support its claim, Jacobson relies upon three aspects of its relationship with Armstrong. First, it cites the circumstances surrounding the establishment of its distributorship and the resistance it later met when attempting to expand its operations in the Philadelphia area, where Armstrong had designated another distributor. While Jacobson concedes that Armstrong acknowledged the plaintiff's right to sell in that area, Jacobson contends that in fact Armstrong's actions belied its acknowledgments. Thus, plaintiff asserts that when it sought to penetrate the Philadelphia market Armstrong deliberately placed impediments in its way in order to favor Berger Acoustical Company ("Berger"), Armstrong's designated and principal distributor in that area; that Armstrong refused to quote prices or to provide technical assistance from its regional office in Philadelphia whenever plaintiff planned to bid on jobs or sell Armstrong products there; and that Armstrong intended by such inadequate servicing to restrain plaintiff's competitive activity in the Philadelphia area in favor of Berger. While plaintiff does not contend that there is a direct nexus between its attempts to bid jobs in Philadelphia in 1970-1972 and its termination in 1976, it does assert that its difficulties in entering the Philadelphia market because of impediments placed in its way by Armstrong illustrate Armstrong's desire to protect its territorial distribution system and provide a backdrop against which to view later events. Armstrong, on the other hand, insists that it gave Jacobson all the assistance that it requested and points out that many of its local distributors do business outside their areas of primary responsibility.

 The second item plaintiff stresses relates to sales of Armstrong products from Jacobson's Supply Center in Elizabeth, New Jersey. Whereas most Armstrong distributors install the products they sell, Jacobson sells from its Supply Center on a "materials only" basis. The institutions that purchase the material can reduce their costs by installing it themselves, and small contractors who otherwise lack access to Armstrong materials can buy them from Jacobson and bid them on small jobs. In the fall of 1975 Jacobson intensified the selling activities of its Supply Center. It sent a flyer to the trade offering Armstrong products at a substantial discount and mailed over 6,000 advertisements to hospitals, schools, acoustical contractors and other potential customers in Pennsylvania, southern New Jersey and Delaware. Jacobson now asserts, in substance, that Armstrong received complaints from local distributors concerning these sales activities; that Armstrong regarded such activities as a threat to its territorial distribution system; and that Jacobson's termination was in part a reaction to its aggressive Supply Center sales practices. Although Armstrong takes the position that it was unconcerned with Jacobson's Supply Center sales, there is evidence to the contrary. Berger complained to Armstrong about Jacobson's discount sales and its promotional literature, and an interoffice memo by Armstrong's general sales manager with respect to a Jacobson flyer not only takes note of it but expresses the view that Jacobson's method of doing business would anger other distributors and would create problems for Armstrong. Armstrong contends, however, that its concern was not with the sales per se but with the manner of their promotion. It argues that the Jacobson's advertisements were harmful to its interests in that Jacobson disclosed its confidential price list and tended to disrupt its relationship with its other distributors by giving them a false impression that Armstrong had given Jacobson a special deal on prices.

 The third item upon which Jacobson focuses concerns a bid in February 1976 for the installation of ceilings in a federal office building in Atlanta, Georgia. Before submitting its bid Jacobson asked Armstrong for the pricing information and technical data Jacobson needed to determine whether it would bid Armstrong products on the job. Armstrong initially refused to provide the information unless Jacobson committed itself to bidding Armstrong material. Further, an Armstrong sales representative indicated that Armstrong did not want Jacobson bidding on jobs in the Atlanta area since Armstrong already had adequate coverage there from local distributors. Armstrong finally provided the necessary information when Jacobson objected that Armstrong's refusal to assist it was "anticompetitive." Jacobson won the contract but did not bid Armstrong products. Jacobson was terminated as a distributor three weeks later. Armstrong responds that its reluctance to aid Jacobson in bidding on the contract in Atlanta was not to thwart Jacobson's extraterritorial sales activities; rather, it was based on Jacobson's past history of using Armstrong's price quotations to predict the bids of other Armstrong distributors and to undercut them by bidding competing products. Armstrong emphasizes that it finally did give Jacobson the requested information and that Jacobson in fact did bid competing products and did win the contract for the Atlanta job.

 Plaintiff contends that the evidence as to the three items referred to -- Armstrong's discouragement of Jacobson's attempts to do business in Philadelphia, Armstrong's reaction to the sales and promotional activities of the Supply Center, and Armstrong's recent unwillingness to assist Jacobson in bidding the Atlanta job -- justifies the inference that it was terminated for insisting on its right to resell Armstrong products wherever and to whomever it chose.

 Armstrong, over and above its denials of wrongful conduct with respect to these specific items, sets forth business justifications for the termination of Jacobson's distributorship. First, Armstrong streesses that Jacobson's purchases of Armstrong's products dropped from about $1,100,000 in 1973 to about $600,000 in 1975, with prospects of future sales at even lower levels. Moreover, Armstrong contends that Jacobson's jobs in recent years have been primarily large projects upon which Armstrong must offer a price discount, thereby yielding less profit to it. This, combined with Jacobson's cutback in personnel and its abandonment of its branch outlets, indicated poor prospects ahead for Jacobson's sale of Armstrong products. That in fact this was a matter of concern to Armstrong as early as July 1974 and thereafter appears from Armstrong's internal documents; indeed, one Armstrong official recommended Jacobson's termination for these reasons as early as the spring of 1975.

 The second business reason advanced by defendant for its termination decision was what it terms a "deteriorating relationship" with Jacobson that began in 1974, worsened as time went on, and by 1976 became "intolerable." Documents presented upon this motion suggest that much of the friction between the parties resulted from Jacobson's frequent complaints about Armstrong's products, misinterpretation of specifications and other matters. Armstrong regarded the complaints as unjustified and mere pretexts by Jacobson to obtain unwarranted allowances.

 Jacobson responds to Armstrong's asserted reasons for the termination by noting that its sales volume, though less than it once was, is still relatively large. In 1975 it ranked third among the fifteen authorized Armstrong distributors in the northeast region, with sales more than twice those of the average distributor in its region. Moreover, it notes that other distributors who had similar or even greater declines were not terminated. It stresses that Armstrong never terminated a distributor whose sales approached Jacobson's in volume and that at the time of its termination Jacobson had placed firm orders for Armstrong products in excess of $500,000. As to the alleged "deteriorating relationship" between the parties, Jacobson observes that prior to and at the time of termination no ...


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