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Shop & Save Food Markets Inc. v. Pneumo Corp.

UNITED STATES COURT OF APPEALS, SECOND CIRCUIT.


January 20, 1982

SHOP & SAVE FOOD MARKETS, INC.
v.
PNEUMO CORP., ABBOTT REALTY CO., AND P & C FOOD MARKETS, INC.

Author: Palmieri

Before: FEINBERG, MESKILL, Circuit Judges, and PALMIERI, District Judge.*fn*

PALMIERI, D.J.: The plaintiff Shop & Save, a Vermont corporation, operates retail grocery stores in St. Johnsbury, Derby and Lyndonville, Vermont.The defendant Pneumo Dynamics Corporation (Pneumo), a Delaware corporation, owns or controls the other defendants: P & C Food Markets, Inc. (P & C), a New York corporation operating a chain of retail grocery stores in Vermont and elsewhere; Cross Company, a wholesale grocery distributor acquired by Pneumo in 1972; and Abbott Realty Company (Abbott), a Vermont Corporation that manages property on behalf of Pneumo, which was acquired with Cross in 1972.

Prior to the events giving rise to the instant controversy, plaintiff purchased substantially all of its groceries from Cross. It had also been a month-to-month sublessee of the property where it operates its Lyndonville grocery store from 1970 to 1977, paying a rental of $20,000 per year. The principal lessee was and is Abbott Realty, whose assets were transferred to P & C by Pneumo in 1977.

In July 1976 plaintiff sought from defendants a long-term sublease with renewal options. At the same time, it began to purchase a portion of its wholesale groceries from a competitor of Cross. Prolonged negotiations ensued until, ten months later in May 1977, a long-term sublease was agreed to at $31,500 per year plus 1.5 per cent of plaintiff's annual sales above $1,500,000.

At the initial stages of negotiations, Pneumo informed plaintiff that it would not offer a lengthy sublease at the month-to-month rate because that figure did not reflect current market value and it feared that the loss of plaintiff's wholesale purchases from Cross would diminish the total value of its relationship with plaintiff in Lyndonville. It also became clear from the correspondence between the parties that Pneumo's subsidiary P & C would be opening a competing retail grocery store in Lyndonville.

When plaintiff indicated that it did not wish to commit itself to purchases from Cross, Pneumo responded with an offer of a long-term sublease at the terms finally agreed to in May 1977. Prior to this final agreement, however, several offers and counteroffers were considered and may have been operated under for a short period of time. Among these was an offer by Pneumo that rent vary from $20,000 to $31,500 per year according to the amount of groceries purchased from Cross. Plaintiff found the rent formula acceptable ("we have no alternative but to accept") but was not satisfied with the lease terms and renewal options offered by Pneumo. Subsequently, Pneumo revoked its variable rent offer, and reiterated its flat rent offer upon which terms the parties finally agreed.

Issues Presented

Appellant claims that the district court erred in granting summary judgment for defendants on the two section 1 Sherman Act violations it alleged: (1) a group boycott or concerted refusal to deal; and (2) a tying arrangement.*fn1

Summary judgment is useful as a "procedural weapon to pierce sham claims and resolve actions where the facts are undisputed. "American Manufacturers Mutual Insurance Co. v. American Broadcasting-Paramount Theatres, Inc., 388 F.2d 272, 278 (2d Cir. 1967); aff'g district court on remand, 446 F.2d 1131 (2d Cir. 1971), cert. denied, 404 U.S. 1063 (1972). It is often, however, "too blunt a weapon with which to win the day, particularly where... complicated issues of fact must be resolved in order to deal adequately with difficult questions of law which remain in the case." Miller v. General Outdoor Advertising Co., 337 F.2d 944, 948 (2d Cir. 1964). This is particularly true in the case of antitrust litigation, see Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 473 (1962), although in the proper case summary judgment may be granted, see Capital Temporaries, Inc. v. Olsten Corp., 506 F.2d 658, 667 (2d Cir. 1974); Coniglio v. Highwood Services, Inc., 495 F.2d 1286, 1292-93 (2d Cir.), cert. denied, 419 U.S. 1022 (1974). Whether or not a material fact is in dispute, so as to preclude summary judgment, is a "matter of informed and properly reasoned judgment" as the law provides "no magical talisman or compass [to] serve as an unerring guide" in this determination. American Manufacturers Mutual Insurance Co., supra at 279. If a material issue of fact does exist, the court may not grant summary judgment unless, assuming all facts alleged by plaintiff, and the reasonable inferences to be drawn thereupon, to be true, it finds that the law does not recognize plaintiff's claim for relief.

We are satisfied that Judge Coffrin's thorough opinion properly applied the above standards to the claims before him on the issue of a group boycott or concerted refusal to deal. We must reverse and remand, however, on the issue of whether an illegal "tying arrangement" existed since we believe the grant of summary judgment by the lower court was premised on a too limited view of the types of acts which may satisfy the "tying" element of this section 1 violation.

Discussion

The Supreme Court has defined an illegal tying arrangement as "an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier." Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-6 (1958). A tying arrangement will be per se illegal, and thus prohibited without proof of unreasonable anti-competitive effect, if in addition to a "tie" of two distinct products it is demonstrated that: defendants possess sufficient economic power in the tying market to coerce the purchase of the tied product; actual coercion to purchase the tied product was employed; anticompetitive effects result in the tied market; and a noninsubstantial amount of interstate commerce is involved in the tied market. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495 (1969); United States v. Loew's Inc., 371 U.S. 38 (1962); Northern Pacific Railway Co., supra; Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953); International Salt Co., Inc. v. United States, 332 U.S. 392 (1947); Yentsch v. Texaco, Inc., 630 F.2d 46, 56-57 (2d Cir. 1980); Hill v. A-T-O, Inc., 535 F.2d 1349, 1352-55 (2d Cir. 1976); Capital Temporaries, Inc. v. Olsten Corp., 506 F.2d 658, 661-63 (2d Cir. 1974); Coniglio, supra, at 1289.

As stated in Northern Pacific Railway Co., supra, at 6:

Where [tying] conditions are successfully exacted competition on the merits with respect to the tied product is inevitably curbed. Indeed "tying agreements serve hardly any purpose beyond the suppression of competition." Standard Oil Co. of California v. United States, 337 U.S. 293, 305-306. They deny competitors free access to the market for the tied product, not because the party imposing the tying requirements has a better product or a lower price but because of his power or leverage in another market. At the same time buyers are forced to forego their free choice between competing products. (footnote omitted)

The inherently pernicious effects of tying arrangements are thus deemed to require "per se illegal" treatment.

Judge Coffrin found it unnecessary to analyze each element of successful tying claim because he thought there was a failure of any allegations of the most basic element -- a "tie":

We do not reach the issues of economic power and coercion that plaintiff has briefed at length because we fail to discern two products that are linked in this case. As the parties' arrangement stands at this time, defendant exerts no influence over the allegedly tied market, i.e. wholesale groceries....

... We cannot find a tie-in on the basis of what might have been.... Any possibility of a tying arrangement was extinguished [when a non-tying agreement was reached] regardless of what the parties earlier may have contemplated or what the motive of defendants may have been. Opinion and Order of the District Court, July 22, 1980, at 5-6.

Judge Coffrin thereupon granted summary judgment for defendants finding the absence of a successful tie, despite plaintiff's allegations that it was coerced into accepting a "penalty rent" in lieu of a "leasehold-grocery" package.

We find that plaintiff's allegations of fact, and the inferences to be drawn therefrom, would satisfy the requirement of a tie if a substantial "penalty" were indeed forced upon plaintiff in a manner prohibited by section 1 of the Sherman Act. While a prototypical tie is demonstrated by the embodiment of two distinct products in a final agreement, we find that an unsuccessful tie which results in a price penalty for the single item agreed upon satisfies the tying requirement as well.

A price penalty, if high enough, has as much anticompetitive effect as a traditional tie-in. This case potentially demonstrates how a penalty rent could be used to achieve the effects of a tie-in. If we assume that the penalty rent is high,*fn2 then Shop & Save will be forced to pass the increment on to its customers. The higher prices encountered at Shop & Save's Lyndonville store will influence customers to do their shopping elsewhere, perhaps at the store run by defendant's subsidiary, P & C. If we were to further assume that mainly Cross products were sold in P & C stores, then this would, in turn, give the Cross products a competitive edge that is due not to their intrinsic worth, but to the economic clout exerted by Pneumo, as lessor of appellant's grocery store. This arrangement would then have the deleterious effect described by the Supreme Court in Northern Pacific Railway Co. v. United States, 356 U.S. 1, 6 (1958): "[Tying arrangements] deny competitors free access to the market for the tied product, not because the party imposing the tying requirements has a better product or a lower price but because of his power or leverage in another market." The ability of certain competitors to disguise tie-ins should not be allowed to thwart the important policies embodied in the Sherman Act. Cf. Hill v. A-T-O, Inc., 535 F.2d 1349 (2d Cir. 1976) (giving free memberships in buying clubs only to vacuum cleaner purchasers may violate the anti-tying statute); Osborn v. Sinclair Refining Co., 286 F.2d 832 (4th Cir. 1960), cert. denied, 366 U.S. 963 (1961) (cancellation of lease violative of tie-in statute upon proof that lease was cancelled for lessee's refusal to purchase products from lessor).

Nothing in the Supreme Court's decisions militates against*fn3 or compels*fn4 a finding that a disguised tie-in can violate the Sherman Act. Yet the logical conclusion to draw, based on the polict prohibiting tying arrangements, is that the pernicious effects of a tie sought to be eradicated is the anticompetitive coercion of a party to take that which he does not seek because of the market power exerted by another by virtue of the latter's control over the tying product's market.

Where, on a motion for summary judgment, sufficient facts are alleged to permit reasonable inferences that a tying arrangement was sought to be "forced" upon a plaintiff and, although not finally agreed to, the resulting price for the single tying product reflected a significant penalty extracted to avoid purchase of the tied product, the plaintiff has stated a sufficient case on this issue to have it presented for trial. Since we find that the record before the trial judge permitted such inferences, thus presenting a genuine issue of fact which precludes summary judgment, we reserve and remand for proceedings consistent with this opinion.

We suggest, however, that in the interest of judicial economy the district court first consider for trial any or all of the three prongs to the test enunciated herein: (1) whether the defendants were seeking to tie the leasehold with a purchase of wholesale groceries; (2) whether the agreed upon rent embodied a significant penalty; and (3) whether such penalty was the result of anticompetitive coercion exerted by defendants.*fn5 The determination of these issues is left to the trier of fact's reasoned judgment. We set forth the following guidelines, however, for consideration of these issues.

The first decision -- whether defendants sought a tying arrangement -- should be based upon an assessment of the negotiation proposals actually made, including the inferences to be drawn from the course of negotiations, which would establish whether the defendants did seek plaintiff's agreement to a "package deal."

The second decision -- whether a significant penalty resulted -- should rest upon such considerations as the fair market value of the leasehold and the special additional value when obtained by a month-to-month lessee already in possession, e.g., avoidance of moving expenses, the cost of business suspension, and the expenses of installation at a new site. We recognize that the determination of whether, and to what extent, a penalty rent was exacted cannot be made with mathematical certainty in the immediate case. In light of the policy embraced in the Sherman Act, as well as the treble damages authorized by it, we find that a section 1 tying violation will exist only if a significant penalty price for the tying item alone has been exacted. Cf. SmithKline Corp. v. Eli Lilly & Co., 427 F. Supp. 1089, 1110-14 (E.D. Pa. 1976), aff'd on other grounds, 575 F.2d 1056, (3d Cir.), cert. denied, 439 U.S. 838 (1978) (no illegal tie was found to exist where a 30% "bonus rebate" on the tying product was conditioned on the purchase of the tied product, since the plaintiff was "free to take either product by itself").

The final decision -- whether such a penalty was the result of anticompetitive coercion -- should be resolved on the basis of this circuit's precedents on the issue. See, e.g., Hill, supra at 1355; Capital Temporaries, Inc., supra at 661-63; American Manufacturers Mutual Insurance Co., supra at 1136-37.*fn6

If, after trial, it were found that any of the above elements were not proven by plaintiffs, no violation of section 1 of the Sherman Act would have occurred.*fn7

We therefore reverse and remand the district court's grant of summary judgment on the tying claim, and affirm in all other respects the decision below.

MESKILL, Cir. J. (Concurring in part and dissenting in part):

Section 1 of the Sherman Act declares illegal "[e]very contract, combination..., or conspiracy, in restraint of trade...." 15 U.S.C. ยง 1 (1976). However, since Standard Oil Co. v. United States, 221 U.S. 1 (1911), it has been recognized that only unreasonable restraints of trade are prohibited. In evaluating conduct under section 1, the Supreme Court "has held that certain agreements or practices are so 'plainly anticompetitive,'... and so often 'lack... any redeeming virtue,'... that they are conclusively presumed illegal without further examination under the rule of reason generally applied in Sherman Act cases." Broadcast Music, Inc. v. CBS, 441 U.S. 1, 8 (1979) (citations omitted). One of the types of conduct which have been held to be illegal per se is the tying arrangement. International Salt Co. v. United States, 332 U.S. 392 (1947).

"[T]he vice of tying agreements lies in the use of economic power in [the tying] market to restrict competition on the merits in [the tied market]." Northern Pacific Railway Co. v. United States, 356 U.S. 1, 11 (1958); see Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 605 (1953). Therefore, as the Supreme Court and this Circuit have held, to prove a tying violation a plaintiff must establish, inter alia, the existence of two separate and distinct products, see Northern Pacific Railway Co. v. United States, 356 U.S. at 5-6; Coniglio v. Highwood Services, Inc., 495 F.2d 1286, 1289 (2d Cir.), cert. denied, 419 U.S. 1022 (1974), that he was actually coerced by the seller into agreeing to buy the tied product, Capital Temporaries, Inc. v. Olsten Corp., 506 F.2d 658, 662-63 (2d Cir. 1974); Hill v. A-T-O, Inc., 535 F.2d 1349, 1355 (2d Cir. 1976), or at least into agreeing not to purchase the tied product from another, Northern Pacific Railway Co. v. United States, 356 U.S. at 5-6, and that the illegal tying arrangement resulted in the actual foreclosure of competition in the tied product market, id. at 6; International Salt Co. v. United States, 332 U.S. at 396; Yentsch v. Texaco, Inc., 630 F.2d 46, 58 (2d Cir. 1980); Coniglio v. Highwood Services, Inc., 495 F.2d at 1292. An attempt to force a tie which results only in an agreement to pay a higher price for the tying product is not, by itself, a tying violation. Plaintiff has not agreed to buy the tied product from defendant or to refrain from purchasing the tied product from another.

The majority asserts, nevertheless, that the exaction of a penalty price for the tying product has an much anticompetitive effect in the tied market as a traditional tie-in and, therefore, should be treated as the functional equivalent of a tying arrangement. The sole support for this proposition is the claim that, in the present case, it is conceivable that because Shop & Save had a pay a higher price for the tying product, it will be forced to raise its retail grocery prices which will in turn lead to an increase in P & C's retail market share and to an increase in Cross' share of the wholesale grocery market.

I do not believe that per se rules should be expanded merely because one hypothetical situation can be perceived in which an anticompetitive effect could possibly result. The Supreme Court has stated that in deciding whether to classify conduct as per se illegal,

our inquiry must focus on whether the effect and, here because it tends to show effect,... the purpose of the practice are to threaten the power operation of our predominantly free-market economy -- that is, whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output, and in what portion of the market, or instead one designed to "increase economic efficiency and render markets more, rather than less, competitive".

Broadcast Music, Inc. v. CBS, 441 U.S. at 19-20. The majority has not indicated, nor can I discern, a connection between the tying and the tied markets from which to conclude that the exaction of a penalty price for the tying product "always or almost always tend[s] to restrict competition and decrease output" in the tied market.

The lack of a definite nexus between the tying and the tied markets can be illustrated by the present case. For example, rather than raise its retail prices and risk a loss in market share, Shop & Save may cut its other costs of operation or may find a new supplier who offers wholesale groceries at lower prices. Furthermore, Shop & Save may absorb the increased cost of the tying product by maintaining prices and cutting its profit margin. Even if Shop & Save is forced to raise its prices it will not necessarily lose customers. Shop & Save may be able to maintain its customer base through non-price competition. Finally, any loss in Shop & Save's market share will not necessarily result on the restriction of competition in the wholesale grocery market. Other retail stores who do not purchase wholesale from Cross may acquire Shop & Save's lost market share.

Thus, as is evident, the anticompetitive effect perceived by the majority is too attenuated and too speculative properly to serve as a basis for expanding the definition of "tying arrangement." Therefore, I would confine the tying label to cases where the buyer was the "unwilling purchaser of the tied product[,]" Capital Temporaries, Inc. v. Olsten Corp., 506 F.2d at 663, or where he actually agreed not to purchase the tied product from the seller's competitors, Northern Pacific Railway Co. v. United States, 356 U.S. at 5-6.

In deciding whether to invoke the per se rule, we must be cognizant of the teachings of the Supreme Court that "easy labels do not always supply ready answers[,]" Broadcast Music, Inc. v. CBS, 441 U.S. at 8, and that "[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations of the Sherman Act[,]" United States v. Topco Associates, Inc., 405 U.S. 596, 607-08 (1972). Accordingly, as we recently noted, the expansion of per se rules should be approached with great caution. Copy-Data Systems, Inc. v. Toshiba America, Inc., slip op. 169, 179 (2d Cir. Nov. 2, 1981). The alleged unlawful conduct may well give rise to a cause of action. However, it does not constitute an unlawful tying arrangement, a group boycott or a concerted refusal to deal. Therefore, I disagree with that portion of Judge Palmieri's opinion that holds otherwise.I would affirm Judge Coffrin's decision in its entirety.


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