Appeal from judgment entered in the United States District Court for the Southern District of New York, Griesa, J., on a jury verdict in favor of plaintiffs in an action alleging that defendant violated section 1 of the Sherman Act, 15 U.S.C. § 1. Reversed and Remanded.
Before Lumbard and Van Graafeiland, Circuit Judges, and Carter, District Judge.*fn*
This is an appeal by Yamaha International Corporation (Yamaha) from a judgment entered against it in the United States District Court for the Southern District of New York for violations of section 1 of the Sherman Act, 15 U.S.C. § 1. Plaintiffs were awarded $454,158.00 (after trebling) in monetary damages and $125,000.00 in attorneys' fees. For the reasons set forth below, we reverse and remand for a new trial.
Yamaha, a California corporation, is the United States importer of various consumer products, including sporting goods, musical instruments, and high fidelity audio equipment. This case involves a line of audio products amplifiers, pre-amplifiers, tuners, turntables, speakers, receivers, and tape decks imported and distributed by Yamaha's Audio Products Division for ultimate resale to consumers in the United States.
Yamaha distributes these audio products under the brand name "Yamaha" through franchised dealers in a limited distribution system. Under this system Yamaha selects a limited number of retail dealers in a given area and enters into franchise agreements with only those dealers.*fn1 Franchised dealers agree, among other things, to promote Yamaha products with at least as much effort as is extended for competitive lines, to maintain adequate display and demonstration facilities, including at least one separate sound room, to employ qualified sales personnel, and to promote good consumer relations. Yamaha agrees to provide national advertising, to update and improve the products, to offer training sessions for sales and service personnel, to provide sales literature, to maintain warranty service stations, and to permit franchised dealers to use the "Yamaha" trademark in their advertising and promotions. A Yamaha franchise is not exclusive; rather, the franchise agreement contains a clause permitting sales of Yamaha products only from the location or locations specified in the agreement. Yamaha's tremendous growth in audio sales volume, from approximately $1 million in 1973 to approximately $42 million in 1977, attests to the effectiveness of its marketing strategy.
Under Yamaha's distribution network, the nation is divided geographically into sales districts and regions. The metropolitan New York City area is in District 12 of the Eastern Region. In early 1976, the person responsible for activities in District 12 was Joseph Thal of Regional Sales Consultants, Inc., a corporation that acted as the local representative of several manufacturers. At the same time, Steve Rosenfeld was the Eastern Regional Manager of Yamaha's Audio Products Division and Stewart Greenberg was its National Sales Manager.
Appellees are brothers and partners, doing business as Borger's Hardware and Supply Company, also known as "Borger's Stereo", "Borger's Audio", or simply "Borger's". Borger's is essentially a family enterprise, started by appellees' parents in the early part of the century. At first, Borger's handled hardware, housewares, and building maintenance supplies, but the business subsequently expanded to include sales of refrigerators, washing machines, and televisions. After Milton Borger's son, Robert, joined the business as General Manager in 1972, Borger's moved strongly into the field of audio equipment. Throughout this time, Borger's did business from a location on the East Side of Manhattan on Second Avenue between 73d and 74th Streets.
In its early sales of audio equipment, Borger's pursued a marketing strategy that involved heavy advertising of substantial discounts off manufacturers' suggested retail prices. The lines sold in this fashion were brand names that were widely distributed, the manufacturers of these brands placing few or no restrictions on the number or quality of retail outlets selling their products. Because these lines were widely distributed, they lent themselves to heavy intrabrand competition and were generally sold on very low margins of profit. Concerned about its low profits, Borger's decided sometime in 1975 to change marketing strategy and obtain limited distribution lines, which permitted higher profit margins because of less intrabrand competition. As part of its altered approach, Borger's planned to build a new store that would have the high class display facilities, sound rooms, experienced sales personnel and service facilities generally required by the limited distribution lines.
Construction of Borger's new store, which was located on the West Side of Manhattan at 130 West 72d Street, began in 1975, and the store opened for business on October 7, 1976. During construction, Robert Borger, armed with artists' renditions of the completed store and a series of newspaper ads showing Borger's transition away from heavy discounting, set out to attract some of the limited distribution lines, including Yamaha.*fn2 He contacted Yamaha's local representative, Joe Thal, by telephone sometime in February or March of 1976. Thal informed him that Yamaha was experiencing a product shortage which precluded the appointment of new dealers at that time but stated that perhaps they could talk about Borger's later on in June at the Consumer Electronics Show in Chicago. Robert and Milton Borger did meet with various Yamaha representatives including Thal, Rosenfeld, and Greenberg at the June Show, and it appears that from this point in time Borger's was under consideration as a potential Yamaha franchisee.
After the Consumer Electronics Show, contact between Borger's and the Thal organization was maintained through Thal's employee, Rene Norell. Norell visited Borger's West Side store two or three times during the summer months to see how construction was progressing. In the fall, Thal himself visited the store, inspected it, and apparently liked what he saw. He testified that as of the time of this visit he was definitely of the opinion that he would recommend Borger's as a Yamaha dealer. Thal told the Borgers that Yamaha's new Eastern Regional Manager, Michael Dalgaard, would meet with them sometime after the store opened.
The Dalgaard meeting took place in mid-October or early November 1976, at the new store. After a brief tour of the store, Dalgaard, accompanied by Arthur Broder of Thal's organization, met with Robert Borger in the audio room of the store, where they discussed various aspects of a potential franchise arrangement, including display and stocking requirements. Robert Borger testified that as the discussion drew to a close Dalgaard shook his hand and said either "congratulations" or "welcome aboard". Later, according to Borger's testimony, Dalgaard mentioned that Broder would stop by the following day to take an order and obtain the necessary credit information.
In fact, Broder did not return the next day or any other day. Borger testified that he subsequently received a phone call from Dalgaard during which Dalgaard informed him there was a problem and refused to commit himself as to when, if ever, Borger's could expect to begin receiving Yamaha products. No further action was taken by either party until sometime in June 1977, when Robert Borger telephoned Thal's successor and inquired as to the status of Borger's request to become a Yamaha dealer. Borger followed up his phone call with a mailgram expressing his disappointment over what he characterized as "broken promises" on the part of Yamaha.
Dalgaard responded with a letter in which he denied having assured Borger's of a franchise, and stated: "Three (3) days after my visit I personally told Mr. Joe Thal and his people that based on negative results of our dealer canvas (sic) we absolutely would NOT OPEN Borger as a Yamaha account. I also asked Joe to ...