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FRITO-LAY, INC. v. BACHMAN CO.

December 23, 1986

FRITO-LAY, INC., Plaintiff,
v.
THE BACHMAN COMPANY, Defendant; THE BACHMAN COMPANY, Counterclaimant, v. FRITO-LAY, INC., Counterdefendant



The opinion of the court was delivered by: CEDARBAUM

CEDARBAUM, J.

 Plaintiff Frito-Lay, Inc. ("Frito-Lay") is the manufacturer of "Ruffles" potato chips. "Ruffles" is a registered trademark. In 1983, Frito-Lay commenced this action against defendant Bachman Company ("Bachman") alleging that Bachman's use of the word "ruffled" in connection with sales of its potato chips violates Frito-Lay's trademark. In its answer, Bachman asserted a number of counterclaims alleging antitrust violations by Frito-Lay in the marketing and distributing of its entire line of snack foods. Bachman's third amended answer *fn1" contains six such counterclaims, each of which charges Frito-Lay with violation of a different statute. The target of defendant's counterclaims Third through Eighth is a marketing program instituted by plaintiff in 1983, called the "To Optimize Profits" plan ("TOP program").

 Plaintiff has moved, pursuant to Rule 12(b)(6), to dismiss counterclaims Third through Eighth for failure to state a claim on which relief can be granted. For purposes of this motion to dismiss, the allegations of the counterclaims are presumed to be true. The counterclaims may not be dismissed unless "it appears beyond doubt that the [defendant] can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Plaintiff's motion is granted in part and denied in part for the reasons discussed below.

 The TOP Program

 Although certain key details of the TOP program are in dispute, its main features on which the parties agree are as follows. The TOP program was a 17-week long marketing scheme, instituted by Frito-Lay nationwide, with the exception of certain limited areas in the Northeast. It ran from September 4, 1983 to December 17, 1983, and for a second 17-week period in the metropolitan areas of the Northeast beginning in February 1984. The TOP Program consisted of two separate incentive plans. The first granted a 10 percent increase in Frito-Lay's standard trade allowance. This plan was available to any retail customer of Frito-Lay who already had a ratio of shelf space allocated to Frito-Lay products equal to their proportional share of that retailer's volume of sales of snack foods. It was also available to any customer who agreed to allocate a certain amount of extra shelf space to Frito-Lay products for a period of up to 17 weeks.

 Defendant has made no charge that this first part of the Top program was illegal. In fact, in paragraph 158 of its Answer, defendant alleges:

 
The potential and actual benefits payable under the bonus allowance, which was automatically available to retailers who were not "underspaced," were de minimus compared to the potential and actual benefits payable under the profit guarantee.

 Defendant's counterclaims are directed at the second plan of the TOP program. The second plan of the TOP program was a partial profit guarantee. The profit guarantee was available only to those retailers who were "underspaced" on Frito-Lay products; i.e., the stores in which shelf space allotted to Frito-Lay was less than Frito-Lay's proportional share of the salted snack food market in the region where each such store was located. To be eligible for the guarantee, the retailer was required to make a specified amount of additional shelf space available for Frito-Lay products. Retailers eligible for the program entered into a TOP contract with Frito-Lay. Frito-Lay projected the sales volume on the incremental space at 60% of the sales volume of its existing space. If the incremental shelf space allocated to Frito-Lay under the program failed to produce 60% of a specified amount of gross revenues, then Frito-Lay would pay the retailer 27.5% of the shortfall. According to Frito-Lay, 27.5% is the approximate average for supermarkets of gross margin on sales of products.

 The counterclaims contain the following allegations regarding the TOP program, which must be accepted as true for purposes of this motion: (1) All smaller retailers were designated automatically as "space to sales" and, accordingly, were ineligible for the profit guarantee; (2) an eligible customer's volume of sales of Frito-Lay products was determined by reference to Frito-Lay's regional share of sales computed by Nielsen market reports, rather than by individual determinations for each customer; and (3) Frito-Lay recommended that the additional shelf space to be allocated to its products come from space previously allocated to its competitors.

 Section 1 of the Sherman Act -- Fourth Counterclaim

 Defendant's fourth counterclaim alleges that the TOP program constituted an unreasonable restraint of trade under Section 1 of the Sherman Act, 15 U.S.C. § 1 (1982). Defendant alleges that the profit guarantee of the TOP program was made available only to supermarket chains, Frito-Lay's large volume customers for whose shelf space Frito-Lay faced the greatest competition, and that the sole purpose of the TOP program was to injure competition.

 Section 1 of the Sherman Act provides, in pertinent part:

 
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal . . . .

 15 U.S.C. § 1. To sustain a claim under Section 1, a claimant must allege a contract, combination or conspiracy and a resulting restraint of trade or commerce among the several states. See Oreck Corp. v. Whirlpool Corp., 639 F.2d 75 (2d Cir. 1980) cert. denied, 454 U.S. 1083, 70 L. Ed. 2d 618, 102 S. Ct. 639 (1981). Injury to one competitor is not a "restraint of trade." To state a claim under Section 1 of the Sherman Act, a claimant must allege injury to competition in general. BusTop Shelters, Inc. v. Convenience & Safety Corp., 521 F. Supp. 989 (S.D.N.Y. 1981). In Jarmatt Truck Leasing Corp. v. Brooklyn Pie Co., Inc., 525 F. Supp. 749 (E.D.N.Y. 1981), the court granted defendant's motion to dismiss plaintiff's antitrust claims:

 
No violation of section 1 of the Sherman Act is possible absent proof of anticompetitive effect beyond the injury to plaintiffs, and facts must be pleaded from which such effect can be inferred.

 Id. at 750 (emphasis in original).

 Defendant has alleged the following facts in support of its Fourth Counterclaim. Pursuant to the TOP program, plaintiff entered into agreements with a number of its key accounts whereby those accounts became eligible for a profit guarantee of 27.5% provided that they increased the shelf space allotted to Frito-Lay products to an amount proportional to sales of Frito-Lay products. The amount of sales of Frito-Lay products for each retailer was determined by reference to the Nielsen Regional Sales Reports, *fn2" rather than by an examination of each supermarket's sales records.

 There is no question that these facts clearly allege the existence of an express contract between Frito-Lay and each of its customers who chose to participate in the TOP program. The real question, however, is whether the agreements between Frito-Lay and its retailers constitute illegal contracts in restraint of trade, that is, contracts which injure competition. In interpreting Section 1 of the Sherman Act, the Supreme Court has observed that:

 
The legality of an agreement or regulation cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.

 Board of Trade v. United States, 246 U.S. 231, 238, 62 L. Ed. 683, 38 S. Ct. 242 (1918).

 For the reasons discussed below, I find that defendant has failed to state a claim under Section 1 of the Sherman Act, and plaintiff's motion to dismiss defendant's fourth counterclaim is granted.

 As plaintiff has pointed out in both its memorandum in support of its motion to dismiss and at oral argument, a number of essential allegations are missing from defendant's counterclaims. Foremost is defendant's failure to allege that plaintiff obtained a greater share of shelf space than that equivalent to its share of the market or, conversely, that defendant's Percentage of shelf space fell below its market share as a result of plaintiff's profit guarantee. Nor does defendant allege any coercive or threatening behavior on Frito-Lay's part in convincing customers to enter into a "TOP" contract. In fact, plaintiff stated at oral argument, and defendant did not disagree, that 65% of its eligible customers chose not to participate in the program.

 In addition, the customers' agreement does not contradict their own competitive interests. Space-to-sales marketing strategies appear to be a commonplace tool for competitors. In Matter of Kellogg Co., et al., 99 F.T.C. 8 (1982), the Federal Trade Commission charged Kellogg, General Mills and General Foods with engaging in practices in violation of Section 5 of the Federal Trade Commission Act, which had the effect of maintaining a noncompetitive market structure in the production and sale of ready-to-eat cereals. One of the practices challenged by the Commission was Kellogg's shelf space marketing program. The administrative law judge made the following factual findings regarding Kellogg's competition for retail shelf space:

 
460. The principle of space according to sales ensured that the retailers would avoid out-of-stocks and over-stocks, increase their efficiency and profitability and reduce labor costs. Consequently, the retailer would achieve a better utilization of its capital and a better return on its investment.
 
461. Kellogg did not invent the principle of allocating shelf space by sales volume. Sales volume is, and has been, the basic method of space allocation throughout grocery stores. A retailer's profitability is directly related to sales turnover. The allocation of shelf space according to sales volume reduces the likelihood that a product will be out of stock, maximizes turnover and return on investment and minimizes lost sales and lost profit both to the retailer and the manufacturer.

 Id. at 144 (citations to transcript omitted). Although the administrative law judge's initial decision was ultimately overturned on other grounds and the Commission's complaint was dismissed with prejudice, the findings set forth above are relevant here. Defendant has not alleged that Frito-Lay was attempting to do anything more than increase its shelf space in those stores that did not have space-to-sales allocated shelves.

 Plaintiff cites Bayou Bottling, Inc. v. Dr. Pepper Co., 725 F.2d 300 (5th Cir.), cert. denied, 469 U.S. 833, 83 L. Ed. 2d 65, 105 S. Ct. 123 (1984), as further support for the legality of space-to-sales competitive activity. In Bayou Bottling, the plaintiff challenged defendant's practice of prohibiting all but its own products from being displayed in vending machines and coolers the defendant supplied to retailers. While not directly on point, the court's comments in refusing to find that defendant's activities violated the Sherman Act evidence the ordinariness of this type of activity:

 
The shelf space argument also lacks merit. Stores allot shelf space to the bottlers in proportion to market activity. A bottler with a popular product is given a greater portion of available shelf space than a bottler with a product which has less sales appeal . . . But Bayou implies an antitrust injury and suggests an entitlement to more shelf space than its ...

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