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Gonzalez v. St. Margaret's House Housing Development Fund Corp.

decided: July 13, 1989.

JOSEFINA GONZALEZ, ET AL., PLAINTIFFS-APPELLANTS AND CROSS-APPELLEES,
v.
ST. MARGARET'S HOUSE HOUSING DEVELOPMENT FUND CORPORATION, A NEW YORK CORPORATION, DEFENDANT-APPELLEE AND CROSS-APPELLANT



Tenants and former tenants of St. Margaret's House Housing Development Fund Corporation appeal from a judgment of the United States District Court for the Southern District of New York, Pierre N. Leval, J., dismissing their complaint. Vacated and remanded.

Feinberg and Kearse, Circuit Judges, and Bartels, District Judge.*fn*

Author: Feinberg

FEINBERG, Circuit Judge

A number of tenants, past and present, of St. Margaret's House Housing Development Fund Corporation (St. Margaret's), appeal from a judgment of the United States District Court for the Southern District of New York, Pierre N. Leval, J, dismissing their federal antitrust claim and declining to exercise jurisdiction over their state antitrust claim. Appellants allege that St. Margaret's violates Section 1 of the Sherman Act, 15 U.S.C. § 1, and the Donnelly Act, N.Y.Gen.Bus.Law § 340, by enforcing an illegal tying arrangement that requires residents of the facility to purchase a meal per day at St. Margaret's. The district court found that because St. Margaret's has no economic interest in the sale of the tied product, appellants failed to state a claim upon which relief can be granted. For reasons given below, we vacate and remand.

Background

St. Margaret's is a non-profit housing facility for low-income, elderly and handicapped people in New York City. It provides congregate care; i.e., housing "connected with which there is a central dining facility to provide wholesome and economical meals" to the residents. 42 U.S.C. § 1437e. The facility opened in 1981 and currently houses approximately 290 people in 249 housing units. Its construction was financed by a direct loan from the United States Department of Housing and Urban Development ("HUD") pursuant to § 202 of the National Housing Act of 1959, 12 U.S.C. § 1701q, and it receives an operating subsidy for rental payments from HUD under the Section 8 Housing Assistance Program.

St. Margaret's provides its low-income residents a "core service program," which includes a mandatory meal program. In an earlier Housing Act challenge to the meal program, Judge Leval found that "the specified purposes of the meal plan were to ensure proper nutrition, encourage social interaction and a sense of community, and allow management to identify residents' health problems as they arise." Gonzalez v. St. Margaret's House Housing Dev. Fund Corp., 668 F. Supp. 187, 189 (S.D.N.Y 1987), aff'd, 848 F.2d 391 (2d Cir. 1988) (per curiam). St. Margaret's is precluded by federal regulation from using income received from the meal program to subsidize other costs and from earning a profit on it. Indeed, according to the judge, St. Margaret's operates the program at a loss since it "merely conveys the meal payments to its outside contractor which charges it more than it receives from the residents." The residents of St. Margaret's are now assessed a monthly charge of $130 to pay for 30 meals. In the earlier Housing Act challenge to the program, the district court found that each resident is provided with soup or juice, an entree, two vegetables, salad, bread and butter, dessert, milk or punch or soda and coffee or tea. Id. at 190. St. Margaret's presently provides exemptions from the meal program for various reasons, e.g., vacations, hospitalization and medical problems.

For the last four or five years, a relatively small group of tenants at St. Margaret's has been objecting to the mandatory nature of the meal program. In 1984, some of the residents (including some of the present plaintiffs) challenged the meal program as violative of the Brooke Amendment to the Housing Act of 1937, 42 U.S.C. § 1437a(a)(1), which caps each eligible tenant's "rent" at 30% of the tenant's adjusted gross income, and on various other grounds. This challenge was rejected by Judge Leval in August 1987 after a three-day bench trial. Gonzalez v. St. Margaret's House Housing Dev. Fund Corp., 668 F. Supp. at 192-95 Judge Leval's findings in the Housing Act case provide pertinent background to this appeal.

The present action was commenced in 1985 by 22 plaintiffs (St. Margaret's claims that only 15 remain in the action and notes that only six are parties to a companion state-court action). Appellants allege that the mandatory meal plan constitutes an unlawful tying arrangement that violates the Sherman Act and the Donnelly Act. Appellants do not wish to purchase meals from St. Margaret's, and claim that they prefer to prepare their meals in the fully equipped kitchen in each apartment or purchase prepared meals from suppliers other than St. Margaret's. In October 1987, St. Margaret's moved to dismiss the complaint for failure to state a claim. In October 1988, the district court dismissed the federal claim, holding that "because defendant has no economic interest in the sale of the tied product, an element essential to a claim for illegal tying is lacking." In passing, the district court also noted that "it is highly doubtful that plaintiffs can satisfy the element of an antitrust violation that requires 'involvement of a not insubstantial amount of interstate commerce in the tied market.'" After the decision was handed down, appellants requested clarification of the court's order with respect to the pendent Donnelly Act claim, and in its final judgment, the district court declined to exercise jurisdiction over that claim.

Thereafter, appellants appealed from dismissal of the Sherman Act claim, and St. Margaret's cross-appealed from the district court's refusal to exercise jurisdiction over the Donnelly Act claim.

Discussion

This case demonstrates the difficulty in applying a per se illegality rule in situations that do not usually present antitrust law issues. Appellants claim that St. Margaret's is using its "competitive leverage" in the low-income housing market to coerce appellants into purchasing meals from St. Margaret's House that "they do not want." Appellants argue that this impermissible use of market power is a classic, illegal tie under the Sherman Act, and that the district court erred in dismissing their complaint for failure to allege an "economic interest" requirement that has never before been required by this circuit. Appellants also argue that even if we adopt the "economic interest" requirement, their complaint still states a claim upon which relief can be granted. Appellee St. Margaret's argues that we should adopt the district court's "economic interest" analysis because it is "an important element to a cognizable illegal tying claim." Appellee addresses the actual dangers of tying arrangements, that the Sherman Act was designed to prevent, and argues that none exist here.

A tying arrangement is "an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product." Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5, 2 L. Ed. 2d 545, 78 S. Ct. 514 (1958). A seller violates the antitrust laws through a tying arrangement when it uses its market power over one product to "force" a consumer to purchase a second product. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12, 80 L. Ed. 2d 2, 104 S. Ct. 1551 (1984). In the past, we have required allegations and proof of five specific elements before finding a tie illegal: first, a tying and a tied product; second, evidence of actual coercion by the seller that forced the buyer to accept the tied product; third, sufficient economic power in the tying product market to coerce purchaser acceptance of the tied ...


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