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EIBERGER v. SONY CORP. OF AMERICA

October 5, 1978

Horst A. EIBERGER d/b/a Atlanta Dictating and Business Equipment Co., and ABP, Inc., Plaintiffs,
v.
SONY CORPORATION OF AMERICA, Defendant



The opinion of the court was delivered by: BRIEANT

FINDINGS AND CONCLUSIONS

This action was filed on August 18, 1976, and tried before the Court without a jury beginning on June 6, 1977 and concluding on June 15, 1977. Plaintiffs seek damages and equitable relief based on the contention that defendant has engaged in business practices violative of § 1 of the Sherman Act (15 U.S.C. § 1). Defendant denies liability, and counterclaims for the sum of $ 11,897.57 due and owing by plaintiffs for merchandise purchased on account, as well as for warranty fees debited to their account.

 Plaintiff, Horst A. Eiberger ("Eiberger") is domiciled in the State of Georgia where he does business under the name of Atlanta Dictating and Business Equipment Company ("Atlanta Dictating"), as a sole proprietorship. Eiberger also owns and controls ABP, Inc. ("ABP") the other plaintiff in this action, which is incorporated under the laws of the State of Georgia, with its principal place of business at Atlanta.

 Sony Corporation of America ("Sony"), the defendant herein, was incorporated in the State of New York on February 8, 1960. It is the wholly owned American sales subsidiary of Sony Kabushiki Kaisha of Japan. Sony Kabuskiki Kaisha is one of the world's leading corporations engaged in the development, manufacturer and sale of electronic equipment, instruments and devices. Sony has its principal place of business in this District.

 Subject matter jurisdiction exists under §§ 4 and 16 of the Clayton Act (15 U.S.C. §§ 15, 26), and venue in this District is proper.

 Eiberger is an experienced dealer in dictation machines and accessories, with Atlanta, Georgia serving as his primary base of operations. In early 1972, Eiberger was approached by Sony's National Sales Manager and solicited to become Sony's authorized dealer in Atlanta. In 1971, when Sony had introduced its line of electronic office dictation equipment to the United States market, it had done so by direct marketing from various regional sales offices. However, this direct marketing approach had not met with great success, and by 1972 Sony was in the process of replacing its direct sales force with a network of authorized Sony dealerships, franchised in various locations. Thus, in the spring of 1972 Eiberger's sole proprietorship, Atlanta Dictating became Sony's authorized dealer in the Atlanta metropolitan area. In 1973 Eiberger transferred his dictation equipment business to a newly organized corporation, ABP, and this new entity continued to concern itself principally with the sale and service of Sony dictating equipment.

 Early in 1974, ABP began the re-sale of Sony equipment in wholesale quantities to Mr. Siegfried Williges, a former business associate of Eiberger, and a former Sony dealer in the Tampa, Florida area. While he had been an authorized Sony dealer, Williges had organized a web of dealers throughout Florida to whom he had given both sales and service training. When Williges was terminated as a Sony dealer in 1973, Sony enfranchised and began to deal directly with the sales network that Williges had established. With the machines supplied to him by Eiberger's corporation, Williges was able to enter into competition with these authorized Sony dealers who had formerly been a part of his distribution network.

 Faced with the specter of price competition created by Williges within their "territories," at least two such authorized Sony dealers began to complain to Myron Trowbridge, Sony's Regional Sales Manager for the Southeast Region, and Leo Wyett, Sony's General Manager for the same region. They urged Sony that the source of supply for Williges be cut off, thereby ending the threat posed by his price competition in the regions they served. Mr. Keith Brookins, the authorized Sony dealer for the Tampa area, sent letters to a number of other authorized dealers asking them to aid him in putting a stop to what he termed the "unethical sale of Sony dictating equipment in our area" (Pl. Exs. 16-18). Attached to each of these letters was a copy of the advertisements in which Mr. Williges had been offering Sony dictation equipment at discount prices.

 Both Mr. Brookins and Mr. Peter Abdo, a Sony dealer in West Palm Beach, Florida, continued their chorus of complaints about their price cutting competitor to persons within Sony's sales hierarchy. They began to report serial numbers of machines which they had not sold, but which had been found in the service of users located within their territories.

 At this time Sony did not maintain records of serial numbers sufficient to associate a machine with the name of the seller, and therefore was unable to trace the source of Williges' supply of Sony dictating equipment. Brookins and Abdo reported to Myron Trowbridge their suspicions that the source of Williges' supply was his friend Eiberger. This led Mr. Trowbridge to question Belton Franks, manager of ABP, as to whether or not ABP was acting as a supplier for Williges. Franks denied the accusations posed by Trowbridge, although he knew that ABP was Williges' principal source of supply.

 Beginning in 1972 and continuing up until April of 1975, there was a rising tide of complaints by Sony retailers made to Michael P. Schulhof, Sony's Manager of Special Projects. These complaints centered upon the price competition offered by unauthorized Sony dealers within the territories delineated in Sony's authorized dealer's franchise agreements. As the complaints from dealers and Sony's Regional Sales Managers reached a crescendo in the spring of 1975, Sony prepared to act to eliminate the difficulties caused by the sale of Sony dictation equipment to unauthorized dealers. Mr. Schulhof then entered upon a new assignment as General Manager of Sony's business products division, and Mr. Irwin Gross was hired as National Marketing Manager of this division.

 On April 1, 1975, Sony presented all its dealers with a modified franchise agreement which made a significant change in the warranty fee program. Before the change, a selling dealer who was unable to service a machine sold because of geographic limitations would pay a local non-selling dealer actually rendering such warranty service, at an agreed price and on a voluntary basis. No payment was made by an extraterritorial dealer without first receiving reasonable assurance from the local dealer that the claimed services actually were rendered to the user. Following the new warranty program, all that the local non-selling dealer needed to do in order to collect warranty fees from an extraterritorial selling dealer was to send to Sony the serial number of a dictating machine found within his territory. On May 1, 1975 record keeping was begun by Sony of the serial numbers of the machines sold to each dealer, so that each could be traced readily to the selling dealer or point of origin. Once an extraterritorial machine had been traced back to its source by Sony, that dealer's account with Sony was debited in an amount commensurate with a predetermined warranty fee schedule which was made a part of each dealer's franchise agreement. As a practical matter, the amount of the warranty fee debit was sufficient to eliminate any profit which a dealer would make from selling to unauthorized dealers for resale outside his territory.

 In contrast to the warranty fee program which existed prior to its institution, the new program functioned in such a manner as to be unaffected by whether or not warranty service (repairs, adjustment or user instruction) was actually being rendered to the user of a particular unit of Sony dictation equipment. It was sufficient that the machine be "found" in his territory; on so finding a machine the local non-selling dealer became entitled to a warranty fee without more; debited against the account with Sony of the franchised extraterritorial dealer who had been shipped the machine originally from defendant.

 The record is replete with evidence that Sony knew that many of the serial numbers being reported by dealers seeking warranty fees belonged to machines to which the local dealers had actually rendered little or no warranty service. Sony made no inquiry of its dealers as to when the service was rendered, or what service was given, and there was no concern shown by defendant whether or not the given machine was still within the 90 day warranty period. In fact, there was evidence presented, and unrefuted by Sony that some of the serial numbers being reported under the new warranty program belonged to machines which had not yet even been sold to users.

 One such instance revealed in the testimony of Mr. McCloud at trial involved an authorized Sony dealer in Nashville, Tennessee, one Bruce Tennyson, described as being 6 feet, 2 inches in height, and weighing 240 pounds. On November 1, 1975 Tennyson and his brother invaded the Nashville office of JLM Office Products, a business operated by the witness McCloud, forcibly took new Sony dictating equipment belonging to JLM out of the cases, and recorded the serial numbers. None of these machines had yet been sold to any ultimate user. Tennyson's unlawful intrusion caused McCloud to summon the police. Tennyson was arrested, but ultimately charges against him were dropped by agreement. On November 11, 1975 Sony billed ABP for warranty charges in the amount of $ 120 on two machines located by Tennyson in Nashville as a result of his raid on competition. This amount was credited to Tennyson's business (Exs. 32 and 43). It was clear and known to Sony at that time that no warranty service or installation had been or would be rendered by Tennyson for these machines. In this matter Sony acted with direct knowledge. At the time, Trowbridge, Sony's Regional Sales Manager knew of the incident. He testified that Tennyson admitted that he "kind of went storming in there" (to JLM's premises) and had been arrested as a result of and while engaged in efforts to get the serial numbers for the machines to permit a warranty charge to be made against the dealer who had released them to JLM. This information must have been given Trowbridge by telephone on the day of the incident. He told Tennyson to put the claim in writing. See Ex. 25, dated November 1, 1975 received by Sony's Atlanta office on November 3, 1975.

 In mid-1975 ABP began the sale of dictating machines to European Dictating Suppliers, Ltd., Inc. operating out of Hollywood, Florida. European resold the Sony equipment which it bought from ABP to a number of dealers in dictating equipment across the country. Among these dealers was JLM Office Products, and All Makes Dictating Machine Company of Los Angeles, California. These dealers in turn engaged in the price cutting activities which moved authorized Sony dealers to complain to Sony.

 I find that the primary purpose of the new warranty plan was to prevent price cutting and eliminate competition from machines sold by authorized Sony dealers for resale to others. There were additional purposes. Sony desired to keep all its dealers operating profitably and to assure that all parts of the country would be covered by authorized dealers ready and willing to render warranty and repair services. This is less likely to occur when non-authorized dealers are skimming the cream from the market place by discount, off the shelf sales effort, followed up with little or no customer service. Also, Sony's marketing plans envisaged that the dealer would "install" the machine. While this entailed opening the carton and plugging in the electric line, it also included advice and instruction in the best use of the machine. In some cases, such installation was an essential part of customer satisfaction and led to the sale of more machines to the same customer. But there are undoubtedly some customers who do not need it, and would prefer to pay less money, taking the product in its carton and without any dealer attention. It was to this latter group that the unauthorized dealers appealed, paying more and charging less than competition, and giving less service and less sales effort.

 Once the new warranty plan had been placed in operation, it became apparent to Schulhof, Trowbridge and others of Sony involved in the warranty program that ABP was engaging in large scale wholesaling of Sony dictation equipment to dealers outside of its territory. The new warranty plan resulted in a large number of debits to the ABP account, as serial numbers from machines resold by ABP were turned in by dealers from across the country.

 ABP failed to pay Sony for the warranty fees debited to its account. Eiberger asked Sony to furnish proof that warranty service had indeed been rendered by the other dealers who had sent in the serial numbers of machines found within their territory, and which had been traced back to ABP. Sony did not provide any such information, and I find that such information did not exist.

 In February of 1976, following a demand by Sony that all warranty fees debited to ABP be paid in full, which demand was met with a refusal by ABP, ABP was informed that no further shipments of Sony equipment would be forthcoming until such fees were paid. ABP's request for additional information relating to the servicing of equipment for which it had been debited was ignored by Sony, and in a letter dated April 12, 1976, plaintiffs were told that the dealer franchise which had expired on March 31, 1976, would not be renewed. The sole reason given by Sony for non-renewal of the ABP franchise was the fact that the warranty fees debited to ABP had remained unpaid.

 In fact, as early as January 1976, according to Trowbridge, and perhaps earlier, according to Aiken, Sony was proceeding with plans to replace ABP as the Sony authorized dealer for the Atlanta area. Early in March 1976, Marvin Buchana, the authorized dealer in Birmingham, Alabama met with Trowbridge. They discussed the possible appointment of Buchanan to the ABP franchise following the anticipated termination of plaintiff. Trowbridge asked Buchanan to prepare a plan for the assumption of the Sony dealership in Atlanta. This plan was prepared by Buchanan and ...


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