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April 25, 1985

LEVI STRAUSS & CO., Defendant.

The opinion of the court was delivered by: TELESCA


I. Introduction

 This is an antitrust action brought by a Rochester based retailer (and sometimes wholesaler) of sportswear, against a clothing manufacturer which refuses to allow its products to be sold by anyone at wholesale. Defendant has moved to dismiss the action on various grounds, and has moved to strike several paragraphs in the complaint as irrelevant and prejudicial. Plaintiff has moved for a preliminary injunction compelling defendant to continue supplying it at least as many pair of blue jeans as it sold to plaintiff between November, 1983 and November, 1984.

 By this decision, I deny plaintiff's motion for a preliminary injunction, along with defendant's motion to strike certain paragraphs from the complaint and defendant's motion to dismiss for lack of standing. Pursuant to Fed. R. Civ. P. 12(b), I am converting defendant's motion to dismiss plaintiff's Sherman Act Section 1 claim into a motion for summary judgment, and ordering that the parties submit affidavits, depositions testimony, and other relevant evidence by June 1, 1985. Defendant's motion to dismiss plaintiff's Sherman Act Section 2 is granted.

 II. Facts

 Levi Strauss & Company (Levi) grew from a small family owned business at the end of World War II to the nation's largest apparel manufacturer today. It claims that the "cornerstone" of this growth has been Levi's long-standing publicly announced policy of selling only to retailer customer of suitable quality. Levi refers to this as its "customer selection" policy; plaintiff refers to this as Levi's "customer restriction" policy.

 Plaintiff, Pants 'N" Stuff Shed House, Inc. (Shed House) was founded in 1969 in Rochester, New York by Seymour and Sam Tesler. It grew from one retail store in the Rochester area to over 20 retail clothing stores in New York, Pennsylvania and Vermont. Levi products have been the mainstay of Shed House's retail business since 1970.

 Shed House is also in the business of selling clothing at wholesale. It entered the wholesale business during the 1970's, allegedly as a result of Levi's refusal to accept returns of overstocked merchandise or to cancel orders. Thereafter Shed House dealt in wholesaling on a regular basis and became heavily dependent on the income from it, to such an extent that it claims it it likely to be forced out of business if Levi is permitted to cut off Shed House's supply of goods for its wholesale business.

 Since World War II, Levi has developed its "retailer only" distribution policy by selecting retail outlets for its merchandise and eliminating any wholesalers. It claims to derive several benefits from this distribution system, including improved brand image through selection of distribution channels, improved flow of information from retailers concerning current market demands, and increased retailer good will. It has diligently attempted to avoid any wholesaling of its products by others. Recently, it has developed a "light signature" surveillance technique, encoding numbers on its jeans which enable it to trace the source of any jeans found at an unauthorized retail location.

 If the light signature program discovers a pair of jeans at an unauthorized retail location (in Levi's parlance, a light signature "hit"), the source of the jeans is then identified. Although Levi officials have indicated that one or two light signature " hits" would arouse only curiosity or suspicion, a pattern of light signature hits results in Levi's termination of shipments of jeans to the retailer identified as the source of the jeans, or else a reduction in shipments to the level identified by Levi as sufficient to satisfy the retail needs of the retailer. Levi also threatens to and does terminate its own salespeople who knowingly sell to retailers who "divert" merchandise.

 There is no indication in the record thus far that anyone other than Levi's employees and agents operates the light signature system or takes any enforcement action against a retailer suspected of diverting Levi products. Rather, the record indicates that Levi salespeople are directed to visit unauthorized retailers occasionally, purchase a pair of Levi's jeans if that retailer is selling them, and send the jeans to Levi or its agent for identification of their source.

 In June, 1983, Levi's national sales manager for the Jeanswear Division wrote to Shed House, saying that Levi had discovered goods sold to Shed House in unauthorized accounts and therefore was suspending sales to it. By August, 1983, Levi resumed sales, but imposed a ceiling on the quantity of jeans it would sell to Shed House in order to prevent Shed House from selling Levi jeans at wholesale. According to Shed House, both Levi and Shed House ignored the ceiling from August, 1983 until October, 1984 when Levi again threatened to cut off Shed House because goods sold to Shed House were being retailed elsewhere. After Shed House informed Levi that it would bring this lawsuit unless an amicable resolution were reached, Levi terminated all sales to Shed House. Levi later agreed to meet Shed House's retail needs during this litigation.


 I. Sherman Act, ...

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