Respondents Brief — Vendo Co. v. Lektro-Vend Corp.

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MICHAEL RODAK, JR., CLERK

In Tue

Supreme Court of the United States

Octoner Term, 1976

No. 76-156

THE VENDO COMPANY, a Missouri corporation,

Petitioner,

vs.

LEKTRO-VEND CORP., a Delaware corporation,

HARRY B. STONER and

STONER INVESTMENTS, INC., a Delaware corporation,

Respondents.

On Writ Of Certiorari To The United States Court

Of Appeals For The Seventh Circuit

RESPONDENTS’ BRIEF

BARNABAS F. SEARS

One IBM Plaza

Chicago, Illinois 60611

JAMES E. 8. BAKER

One First National Plaza

Chicago, Illinois 60603

Thomas L. Brejcha, Jr.

Richard P. ren Attorneys for Respondents

BOODELL, SEARS, SUGRUE,

GIAMBALVO & CROWLEY

One IBM Plaza - Suite 2650

Chicago, Illinois 60611

James A. Hardgrove

Clifford E. Yuknis

SIDLEY & AUSTIN

One First National Plaza - Suite 4700

Chicago, Illinois 60603

Of Counsel

Midwest Law Printing Co., Chicago 60601, Financial 6-3988

INDEX

ADDITIONAL STATUTES INVOLVED .....0

QUESTIONS PRESENTED W000... eceeeeeeeeeeees

STATEMENT OF THE CASE oo. eeeeecceseneeeeeeees

Vendo Employed Stoner And Acquired His Com-

pany (Stoner Mfg. Co.) As Part Of An Anticom-

TO TN enieicishncttinssiniabiiinitirsicareipnniaaiceciienieniiaieasinitgiaine

A. Vendo’s Preeminence In The Industry—Its

Acquisitive Aims And Actions ............................

B. Vendo’s 1959 Acquisition Of Stoner Manu-

facturing And Its Employment Of Stoner ......

(1) The Acquisition Was Expressly Spurred

By Vendo’s Intent To Suppress Competi-

GEIL shetadscciechsastedbbataineninenndihedselihadicneniamnatnaniesns

(2) Vendo Secured FTC Approval By An

Apparent Misrepresentation Of Compet-

I seentecsciteiiadameesiniaithinaaiintibdinenipennnsaien

(3) Vendo Insisted Upon Elaborate Re-

straints Upon Competition—The Ter-

mination Provisions ....................-.---:--+--++-+-

(4) The Covenants Not To Compete Were

Admittedly A Major Goal of The 1959

SEED scnsiintanectindiitetisbiciintincesnnintinmnses

(5) Vendo’s Employment Of Stoner Was It-

self But An Anticompetitive Device ........

C. Vendo’s Refusal To Release Stoner And Its

Failure To Terminate His Employment ..........

(1) Vendo Refused Stoner’s Request To Join

The Lektro-Vend Venture ..........................

(2) Well Knowing Of Stoner’s Aid To Lek-

tro-Vend, Vendo Did Not Terminate

Him, For Anticompetitive Reasons ........

D. Vendo “Negotiates’ For The Purchase Of

The Lektro-Vend Machine .....................-...-ss0-++0++

(1) Pierson Requests Stoner To Intercede ..

(2) Vendo’s Experts Disdain The Purchase ..

(3) Stoner Warns Vendo Of “A Serious Mis-

TET” cssccmmsnnidhebseteesemenndintiaeaienaniiimiantiaaeien

(4) Chairman Pierson Personally Inspects

—And Rejects—The Lektro-Vend Ma-

oT aieniaiaiecienniiaiuniagabianianin

II.

Vendo Sued To Enforee Its Covenants, Pressed

Claims It Knew To Be False, And Secured Judg-

ments Which Were Ineradicably Tainted By The

Underlying Anticompetitive Agreements ....................

A. The Complaint—Removal And Remand—

Vendo Precludes Litigation Of All Issues In

ee ID cscecectceneeiccavntiottiminaeeannetaninnns

B. The First State Court Trial And Appeal—

The False Trade Secret Theory—Echoes Of

Pein 6, Bi Ge ee viccccceccemneninninetcnmn

(1) The Trial Judge Enters Judgments For

Theft Of Trade Secrets And Breach Of

ee COORD cemeicecccicesinnveninemns

(2) The Appellate Court Reverses Both

IE seiciccnianentinsihitiinineninititin

(3) Another False Trade Secret Claim—

A RE yn

C. The Second Trial And Appeal—Vendo Ig-

nores The Mandate And Claims That Stoner

Was Responsible For Its Failure To Have A

Fe CD sciniteninienincsnenioisiicinmstaiiimaner

(1) Vendo Prepares For The Second Trial

—The Facts It Found Out ........................

(2) The Trial Court Denies Reinstatement

Of The Illinois Antitrust Defenses And

ili

Counterclaim And Defendants Dismiss

Their Federal Antitrust Defense ............ 21

(3) Pierson Blames Stoner For Vendo’s

Failure To Have A FIFO Machine ........ 22

(4) The Trial Court Enters Judgment ........ 23

(5) The Appellate Court Reverses The $7,-

ee 23

Refusing To Consider Any Restraint-Of-

Trade Issues, The Illinois Supreme Court Re-

instates The $7,345,500 Judgments Based

Upon A New Theory Of Liability—Diver-

sion Of A Corporate Opportunity. The Very

Basis Of The Judgments Is Bound Up With

The Federal Antitrust Issues At Bar .............. a4

(1) What The Illinois Supreme Court De-

I vicicnitedceiiiatiesecacadabliaicieteilaiininteitieatainlantaiai 24

(2) The Foundation Of The State Court

Judgments Is Bound Up With The Fed-

eral Antitrust Issues At Bar .................... 26

IIT.

Proceedings In The Courts Below .......0.0.0.0000000.000000.... 27

A. Proceedings In The District Court Pending

The Outcome Of The State Case 2.000.000.0000... 27

B. The Motion For A Preliminary Injunction ...... 28

(1) The District Court Directs The Parties

To Prepare For Trial ...............00.00000000...... 28

(2) Vendo Commences Collection And Pre-

cipitates An Emergency .....................-....-. 28

(3) Vendo’s Voluntary “Standstill Agree-

EET coshchaceissesbile niiesChcesdeteneicsinnsicealabitatiiabissdsdesintiethieds 29

C. The District Court’s Decision ~.......0000000000000000..... 31

(1) The Memorandum Opinion And Order .. 31

(2) The Injunction Order—A “Standstill Or-

der” Supported By Elaborate Security

SET htttntitntintininpetttincimnnnion 32

D. The Court Of Appeals’ Decision ........................

E. Subsequent Proceedings In The District Court

SUMMARY OF ARGUMENT ...00..............ceccccccseeseceeseese

EE cetennciedsccesntitnitienesiinteatniennnnaininnmnnnais

The Scope Of Review Here, Aside From Jurisdiction,

Is Limited To Determining Whether The District

Court Violated Some Principle Of Equity Or Clearly

OTE TN II ccccenicrnectinnctpdigemceminnininitiiiinnns

A. The District Court Found That Petitioner’s

Efforts To Collect The Balance Of Its Judg-

ments Would Further A Violation Of The Fed-

ON lates

B. The District Court Found That Immediate

Collection By Petitioner Of The Balance Of

Tts State Court Judgments Would Thwart The

Prosecution Of Federal Antitrust Claims ......

The District Court Had Jurisdiction To Enjoin

Petitioner, Pendente Lite, From Collecting The Bal-

ance Of Its State Court Judgments. The First Two

Exceptions To 28 U.S.C. $2283 Applied Here ............

A. The Preliminary Injunction Was Expressly

Authorized By §16 Of The Clayton Act, With-

in The Meaning Of 28 U.S.C. $2288 -...................

1. Injunctive Relief Under §16 Of The Clay-

ton Act Is A “Uniquely Federal Remedy,”

Entrusted By Congress To The Exclusive

And Untrammeled Jurisdiction Of The

PE I cecientciserssisesisinehenieiiniaicliniltaiiiinnaates

2. Both The Clear Terms And Legislative

History Of §16 Show That Its “Intended

Scope” Would Be “Frustrated” If Fed-

eral Courts Were Powerless To Issue An

Tujunction Where Antitrust Violations Are

ee ee

Furthered By Collection Of State Court

ERIE TS e nee nee CERO

3. The “Intended Seope” Of §16 Would Be

Frustrated Were Petitioner Permitted To

Consummate Its Antitrust Violations And

Thwart Private Enforcement Of The Anti-

I a

4. Affirmance Of This Preliminary Injunction

Would Not Impair The Continuing Vital-

a Saree I sesicessniesaidatasccitalictottiataaitenintansiitansitinitiia

B. The Preliminary Injunction Was “Necessary

In Aid Of” The District Court’s Jurisdiction

Within The Meaning Of The Second Excep-

Se Te ee I ticcntiinstaibincsaidttceicnsiiitiicies

IIT.

The Preliminary Injunction Strikes A Proper Bal-

ance Between State And Federal Interests And Thus

Is Fully In Aceord With Principles Of Comity And

PTE sncisieensteinchindisniicesnitesheehetedethdihiaienithibiterdaciaitasiden

A. Enjoining Collection Of Petitioner’s Judg-

ments, Pendente Lite, Did Not Unduly In-

fringe Any Significant State Interest .............

B. Paramount Federal Interests Required The

Issuance Of The Preliminary Injunction ........

IV.

The Injunction Is Not Precluded By Respondents’

Failure To Press Their Federal Antitrust Defense

ae ee ee es cusbidiniiaameateneiiini

The District Court Did Not Reverse, Review Or Re-

vise The State Court Decision By Collateral Attack

REESE Na NAN BS IR -etboees IRONC

STINET cet sadisdisssiicetsntetoianiciccunissieaiansibiveniaisamieiaianiaiy

ADDITIONAL APPENDIX A—

Text Of Additional Statutes Involved

LIST OF AUTHORITIES CITED

Cases

Amalgamated Clothing Workers of America v. Rich-

fe Me OB | | ee 61

American Manufacturers Mutual Ins. Co. v. American

Broadeasting-Paramount Theatres, Inc., 1966 Trade

ee Et SS & en 63

Atlantic Coast Line R. Co. v. Brotherhood of Loco-

motive Engineers, 398 U.S. 281, 295 (1970) ...... 39, 65, 66

Avon Pub. Co. v. American News Co., 143 F.Supp.

een

Bascom Launder Corp. v. Telecoin Corp., 9 F.R.D. 677

CT es SO intnsstenntninetbsteanieniitnipiaiansniiatesinianteanntaiiaiaintinn 63

Bath Industries v. Blot, 427 F.2d 1027 (7th Cir. 1972) .. 42

Carter v. Ogden Corp., 524 F.2d 74 (Sth Cir. 1975) ...... 63

Celebrity v. Trina, Inc., 264 F.2d 956 (1st Cir. 1959) ... 43

Colorado River Water Conservation District v. United

States, 47 L. Ed. 2d 483 (March 26, 1976) .................... 71

Cousins v. Wigoda, 463 F.2d 603 (7th Cir.), motion for

stay of execution denied, 409 U.S. 1201 (1972) (opin-

ETD N etter Ente 72

England y. Louisiana Board of Medieal Examiners, 375

ee Se CI edcsensssibiehstsininliticitibinintepeeinsishintencniandiosusidaiinies 80

Ex Parte Simon, 209 U.S. 144 (1908) ........................-00- 56

Great Lakes Dredge & Dry Dock Co. v. Huffman, 319

Ee, GEUEE TL IUIIE cxscccceusecsiuveviinssiceiinonsnscelenitdpecehiledieiunibnisnanmiineamiiete 72

Helfenbein v. International Industries, Inc., 438 F.2d

ee Ce Gy SEED cctnicernnesncnrsnettincenidiiniaetinveniten 63

Huffman v. Pursue, Ltd., 420 U.S. 592 (1975) ........

sil tintin 69, 70, 71, 72, 74

In re Glenn W. Turner Enterprises Litigation, 521 F.

ek, F ft: xe ee ee 67

Janel Sales Corp. v. Lanvin Parfums, Inc., 396 F.2d

Be ee is CIID cincidnnsecesinwesecstonvenninitasienmenidininiadiaiiiaintin o4

Jennings v. Boenning and Co., 482 F.2d 1128 (3d Cir.

STII” lendscccouscicdnstaieiiaiana ii ialiiatladateieiapaciemaii enact 66, 67

Katz Drug Co. v. Schaeffer Pen Co., 6 F.Supp. 212, 214

(W.D. Mo. 1933) ........... sieeihbaeaaiaaadeasdumtlainennaaiaatie 63-64

vil

Leiter Minerals, Inc. v. United States, 352 U.S. 220

| a ne eT BNL EE TEI Se 60, 62

Lyons v. Westinghouse Electrie Corp., 109 F.Supp. 925

(S.D.N.Y. 1952), aff'd, 201 F.2d 510 (2d Cir.), cert.

dented, 345 U.S. 923 (1963) nnn. ncnn.nncccecccccececeoceeee 61, 66

Lyons v. Westinghouse Electric Corp., 222 F.2d 184

(2d Cir.), cert. denied, 350 U.S. 825 (1955) .0.00.......

REO ETE cn SEE Me BRE OTe oe NOM 37, 41, 53, 54, 75, 79, 83

Mach-Tronies, Ine. v. Zirpoli, 316 F.2d 820 (9th Cir.

EE Spretcrvnnnee SER ie on ee ae ke eT 54

Marshall v. Holmes, 141 U.S. 589 (1891) 0002. 56

Mercoid Corp. v. Mid-Continent Investment Co., 320

2 Sf ES eT ee ee 41, 81

Mitchum v. Foster, 407 U.S. 225 (1972) 000.

iacinieeaiiiaisiaattdiliiatutsiaeiiiiainals 31, 33, 37, 38, 50, 54, 55, 57, 59, 60

Okin v. S.E.C., 161 F.2d 978 (2d Cir. 1947) 000. 59

Perma Life Mufflers, Inc. v. International Parts Corp.,

SE I I i 61, 68

Philadelphia World Hockey Club, Inc. v. Philadephia

Hockey Club, Inc., 351 F.Supp. 462, 494, 514, 517-

BP Cy a I taal i a a 64

Porter v. Dicken, 328 U.S. 252 (1946) 00000... 54, 55, 58

Potter v. Carvel Stores of N.Y., Inc., 314 F.2d 45 (4th

RARER ee cela NS RETR adh iets ES SAA 63

Prendergast v. New York Tel. Co., 262 U.S. 43 (1923) .. 42

Red Rock Cola Co. v. Red Rock Bottlers, 195 F.2d 406

Ins. UITITITT <icsicnsihtchincenncunadihlninssiapatadatdatbbntitialantnicaeiiiiaian 61, 69

Reines Distributors, Inc. v. Admiral Corp., 182 F.Supp.

Be Cite: SITE aicininieshisltsictcenieeimnensammenctdbaiaedcaminseonns

Response of Carolina v. Leaseco Response, Inc., 498 F.

2d 314 (5th Cir.), cert. dented, 419 U.S. 1050 (1974) .. 69

Rizzo v. Goode, 423 U.S. 362 (1976) .....0...2.....e eee 72

Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923) ........ 82

Scherr v. Volpe, 466 F.2d 1027 (7th Cir. 1972) —.......... 49

Schine Chain Theatres v. United States, 334 U.S. 110,

I I isbceicievessneiihdiceraienint De tla 83

Sola Electric Co. v. Jefferson Electrie Co., 317 U.S.

ARERR ener en ey maa ENTERS Rae RD 41, 54, 76, 82

Sovereign Camp v. O’Neill, 266 U.S. 292 (1924) _......... 56

vill

Studebaker Corp. v. Gittlin, 360 F.2d 692 (2d Cir.

IIE scceessetecencngaisentiunpsbingiatessninmsinitneeinivendasiii 38, 59, 60, 61, 62, 67

Toucey v. New York Life Insurance Co., 314 U.S. 118

ETI D . ccccssicsesssicnnnsiseriinisisaisinaiecngetiatuiiiaeniaenidiinansansinseianipase 56

United States v. Bayer, 135 F.Supp. 65 (S.D.N.Y.

STEED cnsinsstenssaihcigntbininitiatesicsithniniahasameiiiatididimainiedanabianes 64

United States v. Corrick, 298 U.S. 435 (1936) —............. 42

Vernitron Corp. v. Benjamin, 440 F.2d 105 (2d Cir.),

cert. denied, 402 U.S. 987 (1971) .........-....-...--c--eceeeeees 66, 67

Walling v. Black Diamond Coal Mining Co., 59 F.Supp.

ED COE A. es HD eerie 59

Wells Fargo & Co. v. Taylor, 254 U.S. 175 (1920) -....... 56

Younger v. Harris, 401 U.S. 37 (1971)... -... 69, 70, 71, 72, 74

Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S.

Ee CI sctienitnsseiinteneteetnecanieniectsdaunnnenieninnes 38, 57, 58, 61, 68

Statutes

United States Constitution, Article ITT -................... 32, 38, 65

Anti-Injunction Statute, 28 U.S.C. § 2283 .......................

a So 2, 31-33, 37-39, 44, 50-52, 54-56, 58-60, 62-64, 72-73

Clayton Act, $§ 4, 16, 15 U.S.C. $§ 15, 26 ........................

RR SI Aa Ee a 1-2, 37-39, 50-52, 55-57, 61, 63-64, 69

Sherman Antitrust Act, $§ 1, 2, 15 U.S.C. §$§ 1, 2 -......

PORN Ee 1, 3-4, 31, 35-36, 40-41, 45-47, 52, 55, 64, 72, 82-84

Emergency Price Control Act of 1942, § 205(a), 56 Stat.

— EEL EA ELLER SL LT MTR TON 54, 58, 59

Illinois Antitrust Act, Ill. Rev. Stats., ch. 38, $$ 60-1

| Ree reer 16, 17, 19, 21, 25, 72, 77-78

Other Authorities

51 Cong. Ree. 9261-62, 9270, 15944, 16275, 16319 (1914) .. 57

“Historical and Practice Notes—1970,” Smith-Hurd IIl.

Annot. Stats., Ch. 38, § 60-7.9, p. 882 .......2......--.----0000 21

H.R. Rep. No. 627, p. 17, 63rd Cong., 2d Sess. (1914) .. 57

Moore, Federal Practice (2d ed. 1974) ~........0..........-.- 16, 76

Note, The Federal Antitrust Laws and the Anti-Injunc-

tion Statute: Conflict and Coexistence, 42 Geo. Wash.

FS SS eer ee 57

S.Rep. No. 698, 63rd Cong., 2d Sess. (1914) ..................-..- 57

ALE POLO ILE OE DGS COTE I, OIE, SOO LL IT Is Pe 0

ABBREVIATIONS AND RECORD REFERENCES

**Stoner’’ refers to respondent Harry B. Stoner.

‘Stoner Inv.’’ refers to respondent Stoner Investments, Inc.

**Lektro-Vend’’ refers to respondent Lektro-Vend Corp.

““Vendo’”’ refers to petitioner The Vendo Company.

‘‘App.”’ refers to the appendix.

‘*Pet. Br.’’ refers to petitioner’s brief on the merits.

“Tr. ....’’ refers to the five volume transcript of the hearing upon

respondents’ motion for preliminary injunction, held

before the District Court from February 10, 1975,

through February 14, 1975.

“‘Tr.,’’ followed by a specific date and page reference, refers

to other transcripts of proceedings before the District

Court which are included in the record.

“PX” and ‘‘DX’”’ refer, respectfully, to respondents’ and peti-

tioner’s exhibits admitted during the five day hearing

upon respondent’s motion for preliminary injunction

in February, 1975. Respondents’ exhibits included

‘““PX 301”’’ through ‘‘PX 367,’’ and petitioner’s ex-

hibits included ‘‘DX 401’’ through ‘““DX 423.”’

Exhibits admitted in either of the two state court trials

are referred to by their exhibit number (‘‘PX ....’’ or

“DX _...”’). They are to be found in the two books

of exhibits which were admitted during the prelim-

inary injunction hearing in District Court as PX 301

(Vol. 1, comprising PX 1A - PX 78 and DX 1 - DX 33)

and PX 302 (Vol. II, comprising PX 101 - PX 135 and

DX 201 - DX 304).

Other material from the state court proceedings, which

is not reproduced in the District Court hearing tran-

script, is cited to the two volumes of the state court

abstract, which were admitted in the trial Court as

PX 303 (first state court trial, pp. 1-625) and PX 304

(second state court trial, pp. 627-1225).

**Item ....’’ refers to court papers in the record of the District

Court proceedings which are not reproduced in the

Appendix. The item numbers are indicated by the Dis-

trict Court Clerk in the list of docket entries and are

recorded on the documents themselves.

es .

ns ne =

PAO ECT GOT OL PE LT I I oN Oe orm

—T

In THE

Supreme Court of the Anited States

Ocroser TERM, 1976

No. 76-156

THE VENDO COMPANY, a Missouri corporation,

Petitioner,

vs.

LEKTRO-VEND CORP., a Delaware corporation,

HARRY B. STONER and

STONER INVESTMENTS, INC., a Delaware corporation,

Respondents.

On Writ Of Certiorari To The United States Court

Of Appeals For The Seventh Circuit

RESPONDENTS’ BRIEF

May It Please The Court:

Additional Statutes Involved

Petitioner omits (Pet. Br. 2-3) Sections 1 and 2 of the

Sherman Antitrust Act (15 U.S.C. $§1, 2) and Section 4

of the Clayton Act (15 U.S.C. §15) which are set out in

pertinent part in respondents’ Additional Appendix A,

infra.

Nore: For key to record references and abbreviations, see p. ix,

supra. Emphasis supplied throughout unless otherwise noted.

wilin

Questions Presented

1—Whether upon an interlocutory appeal from the award

of a preliminary injunction the findings of fact and con-

clusions of law of the District Court may not be set aside

unless contrary to settled principles of jurisdiction or

rules of equity, absent a clear abuse of discretion.

2—Whether Section 16 of the Clayton Act “expressly

authorizes” a preliminary injunction against the collection

of state court judgments, within the meaning of the Anti-

Injunction Statute, 28 U.S.C. §2283, where the District

Court found that those judgments depended on agreements

violative of the Sherman Act, that their procurement was

part of an anticompetitive scheme, and that the immediate

collection of the balance of those judgments would thwart

the trial of federal antitrust treble damage claims.

3—Whether the award of a preliminary injunction

against the collection of state court judgments is “neces-

sary in the aid of [the] jurisdiction” of a United States

District Court, within the meaning of the Anti-Injunction

Statute, 28 U.S.C. §2283, where the District Court found

that those judgments depended on agreements violative of

the Sherman Act and were part of an anticompetitive

scheme, and where the immediate collection of said judg-

ments would eliminate two federal antitrust plaintiffs and

cripple the third plaintiff’s prosecution of the sole re-

maining federal antitrust claim.

4—Whether the preliminary injunction at bar offends

principles of comity and federalism where, absent equi-

table relief, the trial of federal antitrust claims would be

thwarted, and where the conduct enjoined—immediate en-

forcement of state court judgments—would further a vio-

lation of the federal antitrust laws.

5— Whether respondents Stoner and Stoner Inv. waived

their right to obtain the preliminary injunction at bar by

dismissing, without prejudice and without objection, a fed-

eral antitrust defense previously asserted in the state court

proceedings, considering the peculiar facts of this case and

respondents’ role as private attorneys general enforcing

the federa] antitrust laws in the public interest.

6—Whether the District Court asserted jurisdiction ‘o

reverse, review or revise the decision of the Illinois Su-

preme Court by collateral attack or otherwise.

STATEMENT OF THE CASE

Petitioner’s statement of this case sidesteps the very

heart of the matter. The Courts below found petitioner

prima facie guilty of sweeping violations of Sections 1

and 2 of the Sherman Act; that the state proceeding—both

from its inception and upon its culmination—was founded

on illegal agreements; and that the proceeding itself was

not “a genuine attempt to use the adjudicative process

legitimately,” but rather was part and parcel of a monop-

olistic scheme. Absent the preliminary injunction at bar,

petitioner would have fully reaped the fruits of its anti-

competitive devices. It would also have thwarted, not mere-

ly respondents’ private interests, but more importantly, the

visltinn

overriding national policy of the antitrust law, whose en-

forcement in this case is entrusted to private attorneys

general in a federal court possessed of an exclusive juris-

diction. Distilled, petitioner’s brief amounts to no more than

this: 1—that it is entitled to obtain the fruits of an il-

legal objective, in violation of ancient law that if the ob-

jective is illegal, it cannot be accomplished by any means,

and 2—that no court of the United States has any power to

prevent the successful consummation of its illegal enter-

prise, the federal antitrust laws notwithstanding.

Petitioner’s brief contains assumptions contrary to the

record, and cursory and inaccurate statements about the

“marathon state court proceeding” (Pet. Br. 5) which re-

sulted from two entirely false claims being asserted by it

in two separate court trials, as part and parcel of an at-

tempt to enforce agreements and covenants violative of

Sections 1 and 2 of the Sherman Act. This “classic ex-

ample,” as the Court of Appeals described the case (App.

286), cannot be understood within the frame of petitioner’s

Statement (Pet. Br. 3-16), with its carefully selected com-

partments which emphasize the Opinion of the Illinois

Supreme Court, while ignoring the evidence below includ-

ing, inter alia, the character, size and monopolistic prac-

tices of Vendo, including the contracts in question, not

to mention the two findings of the Illinois Appellate Court

that Vendo’s claims were utterly bereft of evidence to sup-

port them. This “classic example” derives meaning and

understanding only in the totality of its facts, and these

we feel compelled to state.

VENDO EMPLOYED STONER AND ACQUIRED CcOM-

PANY (STONER MFG. CO.) AS PART OF AN ANTICOM-

PETITIVE SCHEME.

A. Vendo’s Preeminence In The Industry—Its Acquisitive

Aims And Actions.

Vendo® is the world’s largest manufacturer of automated

merchandising equipment (Tr. 797). By June, 1959, it manu-

factured and sold more vending machines than any other

company. It touted the “universality” of its markets, which

encompassed the “whole world over” (PX 303, pp. 20-28;

36-37; Tr. 153-54; see PX 354). Its corps of 112 salesmen

sold in every state and it exported machines to fifty-eight

countries throughout five continents (Jd.; PX 8, p. 2).

Vendo intended to expand throughout the world wher-

ever coins were in use (PX 303, p. 472). Prior to 1959, it had

an “aggressive acquisition program” to buttress its product

line and market share (D. Ct., App. 236;** Tr. 795-96, 848).

Among other firms, it acquired Coin Acceptors, Inc., Con-

tinental Vending Machine Corp. and Continental APCO,

Inc., closing down the latter’s plants and ceasing produc-

tion of its machines (App. 133-34; Item 104, J] 11, 19).

Vendo’s acquisition of the Vendorlator Company, a manu-

facturer of bottle vending machines, provoked a Federal

Trade Commission (“FTC”) proceeding. This culminated

in a consent decree which required FTC clearance for cer-

tain future acquisitions (Tr. 799, 833).

* In setting forth the pertinent evidence below, this Statement

refers to petitioner, The Vendo Company, as ‘‘ Vendo.’’

** Pertinent findings of the District Court are indicated as fol-

lows: ‘‘D.Ct.,. App. ..... ’’ For the key to other record references

and abbreviations, see p. ix, supra.

B. Vendo’s 1959 Acquisition Of Stoner Manufacturing And

Its Employment Of Stoner.

Vendo’s acquisition of Stoner Manufacturing Co. (“Ston-

er Mfg.) was the genesis of this dispute (D.Ct., App.

228). As early as 1955, Vendo’s executive vice-president

Wagstaff told Stoner that “they were going to acquire

[Stoner Mfg.] or else they were going to manufacture a

copy of [the Stoner Mfg.] machine and put it on the market

so cheap they would put us out of business” (Tr. 528).

After the death of a close associate and his own illness,

Stoner decided to sell (Tr. 529; PX 303, p. 175; PX 2).

Negotiations commenced in earnest in October, 1958 (Tr.

203; PX 303, p. 453).

(1) The Acquisition Was Expressly Spurred By Vendo’s

Intent To Suppress Competition—Vendo wanted to acquire

Stoner Mfg. not only to expand its product line but also to

eliminate Stoner as a potential compeiitor in the vending

machine market (D. Ct., App. 228). During the negotiations

a “confidential” memorandum was circulated within Vendo.

It cited a “consensus of opinion” within the Marketing Di-

vision that Vendo’s expansion would be “definitely re-

tard[ed] with a competitor such as Stoner already in the

field” (PX 319, § 5). Moreover, Vendo had already made

a “definite decision” to develop its own new product line

similar to Stoner’s (/d., 7] 1, 3). It feared this would prove

“very unprofitable” if Stoner Mfg. were acquired by some

other “more aggressive competitor with an easement of

[Stoner Mfg.’s] eredit policies” (/d., { 6).

Wagstaff, Vendo’s chief negotiator, reported to Vendo’s

chairman Pierson that at least two other competitors were

“actively negotiating” with Stoner and that, unless Vendo

acquired Stoner Mfg., it would be more difficult for Vendo

ole

to become a “full line” manufacturer, which it was “trying

hard to do” (DX 1, p. 5; Tr. 255).

(2) Vendo Secured FTC Approval By An Apparent

Misrepresentation Of Competitive Facts—In view of the

Vendorlator consent decree (supra, p. 5), Vendo sought

FTC clearance for the Stoner Mfg. acquisition (Tr. 833).

Apparently Vendo accomplished this by misrepresenting

to the Commission that Stoner Mfg. and Vendo were not

actual or potential competitors. The record demonstrates

that at the least Vendo was a potential competitor of Stoner

Mfg. (D. Ct., App. 228 n. 3).

Thus when Vendo supplied to its counsel data for the

FTC, that data differed markedly from the content of its

internal memoranda. Vendo emphasized to its FTC coun-

sel that the Stoner Mfg. products were substantially dif-

ferent from its own products and were not used for simi-

lar purposes (PX 313). But Vendo did not disclose that

it had already made a “definite decision” to produce Stoner-

type products and was, in fact, already developing them

(PX 319, 99 1, 3; Tr. 68-69, 851-52) Vendo decided against

further development of its own new products because “it

would take a considerable sum o1 money [and] a con-

siderable amount of time” (PX 319, { 2). Instead it de-

cided to take over Stoner Mfg., which already had ac-

ceptable machines on the market (/d., {| 3, Tr. 70).

(3) Vendo Insisted Upon Elaborate Restraints Upon

Competition—The Termination Provisions—*[S]pearhead-

ed” by chairman Pierson (Tr. 260, 262), Vendo militantly

pursued a “uniform policy of extracting broad covenants

not to compete” (D. Ct., App. 236) “[w]herever it [could]

get them” and “in anything it [could] get them into” (Wag-

staff, Tr. 260; Pierson, Tr. 88). Thus its negotiators ag-

gressively demanded elaborate restraints against competi-

tion on the part of Stoner and his company. Initially,

Vendo required that Stoner Mfg. (to be renamed “Stoner

Investments”) not compete for five years following the

acquisition (DX 5). But Vendo then insisted that “(t]he

period should be ten years,” and that “Mr. Stoner indi-

vidually should enter into a similar covenant not to com-

pete” (DX 6, p. 5). Thus a ten year non-competitive cove-

nant was written into the final acquisition agreement, exe-

euted April 3, 1959, as section 15 thereof (App. 153).

By a separate employment agreement, dated June 1,

1959, Stoner was bound “to serve as an officer or in such

other executive or advisory capacity” as Vendo “may re-

quest and as Stoner’s physical condition will permit .. .

and to serve without additional compensation ... as a

director.” It was recited that the value of Stoner’s serv-

ices ($50,000 per year) was not measured by the amount

of time and effort he devoted but by the value of his ad-

vice and counsel in the operation of the plant and his

know-how, experience and reputation (App, 155, 11 1-3).

The covenant not to compete applied, not to where

Stoner Mfg. did business, but “in any of the territories in

which [Vendo] or its subsidiaries or affiliates intends to

extend and earry on business by expansion of present ac-

tivities” (App. 156, 7 5). The patent overbreadth of these

covenants was not inadvertent. Anent their design, Wag-

staff testified that any lawyer who “wouldn’t put some-

thing like that in there . . . wouldn’t represent us very

long” (Tr. 239). Thus the Vendorlator acquisition contract

likewise barred Vendorlator, the seller, from competing

anywhere the purchaser, Vendo, did business (PX 353, {]

19).

RR RT ER et RE RTI OS

—

Stoner’s employment could be terminated in several ways:

(a) Vendo “shall have the right to terminate ... in the

event of [a] substantial violation of the terms hereof by

Stoner”; (b) Stoner could only terminate “in the event he

is not physically able to perform his duties hereunder.”

If not terminated by either party, the employment would

expire at the end of the five year term or on Stoner’s death,

whichever came first (App. 156-57, J] 6-8).

If the employment were terminated before completion

of the five year term, Vendo would have to pay compensa-

tion to Stoner only to the time of the termination (/d., {| 6,

9) and the second five year period, relating to the covenant

not to compete, would immediately commence running at

the time of the termination (Id., J] 5, 6).

(4) The Covenants Not To Compete Were Admittedly

A Major Goal Of The 1959 Transaction—The District Court

found not only that the covenants were “overly broad”

(Pet. Br. 14) but also that “their object (and effect) were

primarily directed at the elimination of competition rather

than protection of good will” and that “Vendo’s president

admitted the major purpose and intent of the employment

contract was to obtain the anticompetitive benefits accruing

from the covenants” (D. Ct., App. 233-34).

Indeed, Vendo’s highest officials repeatedly testified to

the purpose and intent underlying the covenants. Wagstaff

swore that Stoner “wasn’t to compete anywhere, in the

whole world, anywhere, he wasn’t to compete ;” that Stoner

“wasn’t to compete, ever;” that “[t]here’s no question in

my mind that [Stoner] understood that he wasn’t to com-

pete with us” (Tr. 245-46); and that tying up Stoner so

that he couldn’t compete “certainly would have been [chair-

man Pierson’s| understanding” (Tr. 260).

onlin

Pierson wrote to Stoner in January, 1963, that “one of

the major advantages of the Stoner acquisition contract,

from our standpoint, was the fact that it guaranteed that

your design genius and experience would never be coupled

with our money to put a new and most formidable competi-

tor into the business against Vendo” (PX 28). Vendo’s

vice-president (Childers) testified: “We certainly wanted

to be sure in making this acquisition that [Stoner] would

be on our side of the fence and not a competitor” (Tr.

774).

(5) Vendo’s Employment Of Stoner Was Itself But An

Anticompetitive Device—Mr. Stoner had been led to be-

lieve he would be able to take an active role in research and

development and would be treated as Chairman of the

Board with respect to the purchased assets of Stoner Mfg.

(D. Ct., App. 229; Tr. 72, 85, 299; PX 370; see Tr. 870).

But “in actuality, Mr. Stoner was virtually ignored or by-

passed by the Vendo management” (D. Ct., App. 229), was

apparently “never called upon to perform significant serv-

ices for Vendo” (/d. 234) and “was given no duties” (/d.

237).

Having relegated Stoner to the role of “senior citizen,”

“father confessor” and “advisor” (Tr. 293-95; PX 5; Tr.

535-36, 777, Tr. 772, 776, 875; PX 308, 172), Vendo’s

officials then never sought his advice and, when it was of-

fered, spurned it. While acknowledging Stoner’s “design

genius” in creating innovative vending machine products

(D. Ct., App. 228; see PX 28), Vendo never assigned him to

its products planning committee (Tr. 778) nor called upon

him for any exercise of his “genius” (Tr. 861; PX 30).

Pierson conceded that neither he nor anyone else at Vendo

ever asked Stoner to assist in the design of any device

(Tr. 117).

Vendo management admittedly was thus only paying Mr.

Stoner not to compete rather than employing him for per-

formance of actual services (D. Ct., App. 229). Since “Ston-

er was never called upon to perform significant services

for Vendo the covenant amounted to a naked agreement not

to compete, solely anticompetitive in purpose and effect”

(Id. 234).

Indeed, Vendo equated Stoner’s employment with non-

competition. Chairman Pierson testified that the employ-

ment contract was “necessary for us to have if we were

going to spend as many millions of dollars for the prop-

erty as we were” (Tr. 86); that “we certainly ought to

have au [em]ployment that he would agree to stay out of

competition for five years” (/d.); and that Vendo was

“paying [Stoner] $50,000 a year” in return for his ob-

ligation not to compete (Tr. 99). Wagstaff also acknowl-

edged that Stoner’s employment contract and his non-

competition covenant “go hand in hand;” that he didn’t

propose that Stoner would perform “any specific duties ;”

and that getting a covenant from Stoner was “[o]ne of the

main justifications for” Stoner’s employment contract (Tr.

253-54).

C. Vendo’s Refusal To Release Stoner And Its Failure To

Terminate His Employment.

(1) Vendo Refused Stoner’s Request To Join The Lek-

tro-Vend Venture—In 1960 Stoner (“virtually ignored or

bypassed by the Vendo management” (D. Ct., App. 229))

began making loans for vending machine research and de-

velopment by Rod and Bill Phillips, former employees of

Stoner Mfg. The Phillipses’ work culminated in the develop-

ment of a revolutionary design (first in/first out or

“FIFO”) which was called “the Lektro-Vend machine”

(D. Ct. App. 229; App. 53-55, 57).

= Ss

After the favorable reception of their machine at a

trade show in October, 1962, the Phillipses determined not

to sell the design, as initially planned, but to produce and

sell machines. When they invited Stoner to join in this new

project, he sought a release from his contract before a

Vendo board meeting in December, 1962. Vendo refused

the request because the 1959 acquisition agreement “guar-

anteed” that it would “never” have to compete with Stoner

(D.Ct., App. 229; PX 28, supra, p. 10).

(2) Well Knowing Of Stoner’s Aid To Lektro-Vend,

Vendo Does Not Terminate Him, For Anticompetitive Rea-

sons—Vendo was well aware of Stoner’s involvement with

the Lektro-Vend inventors as early as the 1962 trade show

when Vendo employees were present and made initial in-

quiries about purchasing the Phillipses’ new design (D. Ct.,

App. 229, 230; Tr. 867-68; see PX 352, handwritten note).

Wagstaff testified that there was “outrage” within Vendo

officialdom “about the whole Lektro-Vend set-up” at that

time (Tr. 279) and that other executives told him “that

[Stoner] was financing Lektro-Vend to go into competi-

tion with Vendo” (Tr. 280). Pierson, who disclaimed any

“official” knowledge, admitted having heard “many rumors”

from employees and customers that Stoner “was bringing

out the superlative in fine candy vending equipment” (Tr.

143-44). But Pierson never checked or pursued these ru-

mors (/d.; see also Tr. 105; Tr. 773, 775-76).

Vendo never terminated Stoner’s employment despite its

contractual right to do so “in the event of a substantial

violation of the terms” by Stoner (supra, p. 9), and

thereby “lengthen[ed] the period for which its non-com-

petition covenants would run” (D. Ct., App. 237).

—- =

D. Vendo “Negotiates” For The Purchase Of The Lektro-

Vend Machine.

(1) Pterson Requests Stoner To Intercede—In Decem-

ber, 1962, after he was refused permission to join Lektro-

Vend, Stoner told Pierson that “maybe this [machine] is

something that the Vendo Company should have” (Pier-

son, Tr. 104; see PX 27). Pierson then told Stoner to see if

Phillips was interested in selling and, if so, that Vendo

would “assign someone with the authority to negotiate

such a deal to work with you and Mr. Phillips” (PX’s 29,

30).

(2) Vendo’s Experts Disdain The Purchase—Vendo

proceeded to “find out just how serious” it was about the

purchase (PX 33). In early 1963 within “three or four days

... two separate groups of people” travelled from Kansas

City to Aurora to reevaluate the new machine (Tr. 775,

778). The engineers reported serious technical problems

(DX’s 11, 11A, 12; Tr. 855) and that it was “too costly and

could not be sold competitively” (Tr. 856; DX 13). Vendo’s

marketing chief also “didn’t think” Vendo should buy

since Lektro-Vend “took the high-cost route ... which in

my mind is not economically a good route to go” (Tr. 785-

86).

(3) Stoner Warns Vendo Of “A Serious Mistake’—

On March 28, 1963, Stoner wrote to Vendo headquarters that

Phillips, who had heard nothing further, “could be relin-

quished of his promise to give Vendo first chance for ac-

quiring” his machine. Stoner added: “J think that the fu-

ture will show that this represents a serious mistake on

your part” (PX 32).

Childers responded that the asking price ($1.5 million)

was too high but that Vendo would offer to “pay fo: all

cain

out-of-pocket costs ... plus a fair profit to Rod and his

associates” (PX 31). Stoner then called Childers and asked

“if he had a specific figure in mind that he wanted me to

talk to Rod Phillips about” (PX 304, pp. 1149, 1152) but

Childers “said no. He said, ‘We just can’t see any market

for it. It’s too expensive a machine’ ” (/d., p. 1152). Stoner

also called Vendo’s senior vice-president, who testified that

he “told [Stoner] that I had checked with our people

who were concerned, and they had said no, they were not

interested” (Tr. 789; see also Tr. 788-91).

(4) Chairman Pierson Personally Inspects—And Re-

jects—The Lektro-Vend Machine—According to Pierson,

Childers reported “that he didn’t think it would be ad-

visable” to continue negotiations (Tr. 127). Pierson alse

paid a personal visit to Aurora in May, 1963 when “some-

one said... that Mr. Stoner, you know, has been wanting

me to see this Rod Phillips vending machine. So I went

over there” (Tr. 156-57). Pierson told the Phillipses that

their machine “looked pretty” (/d.); that “it should render

a great service to the industry;” and that “if one can be

perfected, why, at a reasonable price, I think it will do fine

business” (Tr. 161-62).

Pierson also testified that Vendo did not purchase the

Lektro-Vend because “the group decided” that its selling

price would be too high. “I was told that they came to

that conclusion” (/d.). Pierson never informed Stoner what

“the group” decided nor that he had met with the Phil-

lipses. Stoner later wrote Pierson that he “would have

liked to [have] had a chat with you while you were here

. if I had known you were coming.” He added: “Please

advise if you would like me to do anything further regard-

ing your visit with Rod Phillips” (PX 311). But Pierson

never responded (Tr. 596).

— =

II.

VENDO SUED TO ENFORCE ITS COVENANTS, PRESSED

CLAIMS IT KNEW TO BE FALSE, AND SECURED JUDG-

MENTS WHICH WERE INERADICABLY TAINTED BY THE

UNDERLYING ANTICOMPETITIVE AGREEMENTS.

On March 25, 1965, when no longer employed by Vendo,*

Stoner wrote his “Dear Operator” letter, announcing to the

trade his affiliation with Lektro-Vend Corp. and seeking to

allay rumors (reportedly circulated by Vendo salesmen)

that the new company would soon founder (D. Ct., App. 230;

PX 39). Deciding that Stoner had now gone “[t]oo far” (see

PX 38, handwritten note), Vendo filed its state court suit

against Stoner and Stoner Inv. in August, 1965. The Dis-

trict Court stated:

“The Court proposes to examine these proceedings only

insofar as they may reflect illegal anti-competitive con-

duet by Vendo” (App. 230) ; and

*“... the state proceedings must be examined by this

Court for the purpose of determining whether Vendo

prosecuted those cases as part of an anti-competitive

scheme” (App. 232).

A. The Complaint—Removal And Remand—Vendo Pre-

cludes Litigation Of All Issues In One Forum.

Vendo initially charged only a breach of the covenants

not to compete in the employment and acquisition contracts,

by reason of aid to Le’*ro-Vend Corp. “in competition with

the plaintiff” (App. 6-10). Vendo sought $500,000 in dam-

ages and an injunction against Stoner for the duration

of his covenant, barring him “from engaging in the vend-

* Stoner ceased being a Vendo director in March, 1964 (Tr.

143, 840). His employment expired on June 1, 1964.

units

ing machine ... ®wsiness ... and particularly from par-

ticipating in the operations of Lektro-Vend” until June,

1969 (App. 9).*

Stoner and Stoner Inv. promptly removed the case

to federal District Court (App. 11-14) “in an effort to

avoid needless duplication of lawsuits between the par-

ties” (App. 13). When Vendo refused to waive its objec-

tions to removal, the case was remanded to the Illinois

trial court (App. 12), thereby precluding the adjudica-

tion of all claims and defenses raised by the parties—both

state and federal—in the only tribunal capable of adjudi-

eating all those claims and defenses.**

After the case was remanded, Stoner and Stoner Inv.

filed in state court substantially the same answer, de-

fenses and state antitrust counterclaim which had been

filed in federal court upon removal, including their sixth

separate defense based upon the federal antitrust laws

(App. 31-32), a defense under the Illinois Antitrust Stat-

ute of 1891 and a defense and counterclaim under the 1965

Iilinois Antitrust Act (PX 303, pp. 12-13, 15-19, 39-41).

Since no federal antitrust counterelaim could be pleaded

in the state court, on October 21, 1965—less than a month

after remandment—Stoner and Stoner Inv., together with

Lektro-Vend, filed this treble damage action in federal Dis-

trict Court.

Before trial commenced in the state court, the trial

judge dismissed all antitrust defenses and the counter-

* By a subsequent amendment Vendo sought similar injunc-

tive relief against Stoner Investments (App. 35).

** See 1A Moore’s Federal Practice, 0.157[11], note 129 and

accompanying text.

—_—\)

claim. He reasoned that state courts lacked jurisdiction to

pass upon federal antitrust defenses (PX 303, pp. 97-100)

and that, inter alia, federal preemption barred litigation

of the state antitrust defenses and counterclaim owing to

the interstate character of the parties businesses (Jd. pp.

96-97)

B. The First State Court Trial And Appeal—The False

Trade Secret Theory—Echoes Of Vendo v. O. C. Long.

(1) The Trial Judge Enters Judgments For Theft Of

Trade Secrets And Breach Of The Covenants—In January,

1966, Vendo added a charge that its trade secrets (vending

machine designs) had been misappropriated for Lektro-

Vend’s benefit, and raised the ad damnum to $1,500,000

(App. 33, 231). Upon trial, judgments were entered against

Stoner for $250,000 for breach of the covenants and against

both defendants for $1,100,000 for theft of trade secrets

(App. 47).

Contrary to petitioner’s assertions (Pet. Br. 10, Jd. n. 7),

no issue concerning “Stoner’s violation of his fiduciary du-

ties as an officer and director” was before the court since

Stoner’s claimed breach of the covenants and theft of

trade secrets were the only theories pleaded (App. 6-10,

33-35). Although the trial judge spoke of Stoner’s “ob-

ligations as a director” (Pet. Br. 10; PX 303, p. 485; App.

42) neither Count I nor Count II of Vendo’s original or

amended complaint charged either defendant with any

violation of fiduciary duty (App. 6-10, 33-34).

Nor was Vendo’s trade secret theory an “alternative

ground” for both of these judgments. (Pet. Br. 10, n. 7).

The $250,000 represented forfeiture of salary for breach

of the covenants, and the $1,100,000 was for theft of a

trade secret, representing the stated value of the Lektro-

—j1g—

Vend machine ($1.5 million, supra, pp. 13-14), less the

costs incurred in its development (App. 71).

(2) The Appellate Court Reverses Both Judgments

—The Appellate Court reversed the $1,100,000 judgment

based upon the theft of trade secret theory, holding that

Vendo never had a trade secret, let alone that Stoner had

stolen one (App. 61-64). While petitioner’s brief acknowl-

edges that “the issue was not pursued thereafter” (Tet.

Br. 10. n. 7) it ignores the District Court’s finding below:

“Tt is clear from all the evidence that Vendo should

have known that there was no theft of a trade secret;

indeed, the first Illinois Court of Appeals decision dem-

onstrates that the effort of Vendo to prove theft of

a trade secret amounted to vexatious litigation” (App.

231).

Indeed, the Appellate Court said, inter alia, that Stoner’s

exposure to Vendo’s alleged trade secret amounted to mere

“glimpses and glances .. . [which] cannot seriously be con-

tended ... [to] be the foundation for the development of

a revolutionary design that would take several skilled peo-

ple eighteen months to develop” (App. 63).

The $250,000 judgment was also reversed, the Appellate

Court holding that Stoner’s salary should be forfeited only

for the period when he was in breach of his covenant

(App. 71-73).* The covenants not to compete were held

* In one sentence the Court said that ‘‘such a breach of Stoner’s

fiduciary undertaking as an employee .. . requires a forfeiture

of salary during the period that the breach was occurring’’ (App.

71), but this obviously refers to ‘‘breach of the covenants not to

compete,’’ as set forth in the immediately preceding sentence. The

rest of the opinion deals solely with the validity of the covenants

(App. 64-69), the time period during which they were valid (App.

(footnote continued on following page)

onlin

valid under Illinois common law and Stoner and Stoner

Inv. were held liable for breach thereof (App. 64-70).

Dismissal of the state antitrust defenses and counter-

claim was affirmed upon federal preemption grounds (App.

79-81), although dismissal of the federal antitrust defense

was reversed (App. 77-79). The case was remanded for

a second trial upon the question of what damages Vendo

had suffered by reason of defendants’ wrongful competi-

tion through the instrumentality of Lektro-Vend, in viola-

tion of the covenants not to compete (App. 74). Vendo’s

petition for leave to appeal to the Illinois Supreme Court

was denied.

(3) Another False Trade Secret Claim—Vendo v. O. C.

Long—In 1957, Vendo filed a similar action in Georgia

against a former employee, Orlando C. Long, then em-

ployed by a competitor. The Georgia trial court held that

the covenant not to compete was overbroad and local coun-

sel recommended “against taking the matter further on

appeal” (PX 344). Vendo’s general counsel (Carbaugh)

reported that “sinee ... this lawsuit O. C. Long has caimed

down a great deal of his annoying activities”; suggested

interjection of trade secret allegations, though such re-

lief would have “very little practical value” (/d.); and

reported that despite dim “prospects on appeal... our

Executive Committee has decided that it would he to the

Company's advantage for many reasons to keep this case

68-69), whether ‘‘defendants’ activities amounted to the direct or

indirect entering into or engaging in the vending machine busi-

ness’’ as proscribed by the covenants (App. 69-70), and the mea-

sure ‘‘of damages for a breach of the noncompetition covenants’’

(App. 73-75), namely, the damages caused by ‘defendants’ wrong-

ful competition’? (App. 74).

— =

pending for awhile” (PX 345). Vendo’s minutes recited that

an appeal would be taken in order “to delay the final resolu-

tion of this matter” (PX 346).

Carbaugh reported upon efforts to secure “further de-

lay” and to assure that “the matter will take «till more

time” (PX’s 347, 348, 350). Finally, he concluded: “if this

action hampered O. C. Long’s activities somewhat as a prac-

tical matter, and the Sales Department says that it has,

I assume it has been worthwhile” (PX 348).*

C. The Second Trial And Appeal—Vendo Ignores The Man-

date And Claims That Stoner Was Responsible For Its

Failure To Have A FIFO Machine.

(1) Vendo Prepares For The Second Trial—The Facts

It Found Out—Vendo’s general counsel Carbaugh ad-

dressed two inquiries to the sales and engineering staffs

before the second trial. First, in order to estimate “sales

. and profits we would have made if tie Lektro-Vend

machine had never been introduced,” Carbaugh inquired

“what is now and has been the impact of Lektro-Vend in

the market?” (DX 218, p. 2). The answer was that Lektro-

Vend’s sales were comparatively miniscule—only two or

three percent of industry sales (DX 203, p. 4). Another

—

* Vendo's militancy embraced not only the exaction but the

enforcement of its covenants not to compete (Pierson, Tr. 153;

Wagstaff, Tr. 283). Apart from the 0. C. Long and Stoner cases,

Carbaugh's testimony was vague (Tr. 836-37). But the evidence

reflected that Vendo similarly sought to enforce covenants against

other former employees (PX 310, p. 8; Tr. 125-26), and Carbaugh

did suggest that Vendo threatened a patent infringement suit

against Vendorlator even though ‘‘patent counsel . . . felt, at least

they said at that time they didn't think they were’’ infringing

(Tr. 821).

iain

FIFO manufacturer outsold it “8 or 10 to 1” through 1969

(PX 304, p. 821; see also Jd., pp. 784, 1029, 1043, Tr. 810).

Through 1969, Lektro-Vend’s gross sales were orly about

$7 million.

Carbaugh addressed a second inquiry: “What is the

present status as well as the past history of our develop-

ment work on our own FIFO unit?” (DX 218). Carbaugh

received Vendo’s “very best thinking” (/d.) on this sub-

ject in a four page, single-spaced memo (DX 227) which

detailed why Vendo rejected FIFO in 1959, 1962, 1963,

1964, 1965, 1966, 1968 and in 1969: (a) emphasis on “stop-

gap adjustments” of non-FIFO products; b) insistence

upon low cost and selling price; and (c) disagreement

within management as to “just how much the FIFO feature

was worth” (/d., p. 4). Nowhere in DX 227 was Stoner

even mentioned.

(2) The Trial Court Denies Reinstatement Of The Illi-

nois Antitrust Defense And Counterclaim And Defendants

Dismiss Their Federal Antitrust Defense—In 1969, after

the first Appellate Court decision, the Illinois General As-

sembly—referring specifically to the Vendo v. Stoner case

—amended the 1965 Illinois Antitrust Act, underscoring its

intent that the statutory proscriptions applied equally to

interstate, as well as purely intrastate, transactions (see

“Historical and Practice Notes—1970,” Smith Hurd III.

Ann. Stats., Ch. 38, §60-7.9, p. 882). Based upon this amend-

ment, Stoner and Stoner Inv. moved to reinstate their state

antitrust defense and counterclaim. The trial judge, how-

ever, denied the motion.

Before the second trial, Stoner and Stoner Inv. moved

to dismiss their federal antitrust defense without prej-

udice. There being no objection from Vendo, the motion

—22—

was allowed (App. 82). In an opinion denying summary

judgment in the instant case, dated June 1, 1971, U.S.

District Judge MeGarr (before whom the case was then

pending) said that dismissal of the federal antitrust de-

fense “was undoubtedly done in consideration of this

court’s expressed reluctance to consider the cause of action

here while the same issue was pending between the same

parties in the state court case” (App. 85).

(3) Pierson Blames Stoner For Vendo’s Failure To

Have A FIFO Machine—Contrary to its own “best think-

ing” (DX 227) and the testimony of its officers Pierson

(Tr. 102), Andrews (Tr. 855-56) and Burlington (Tr. 785-

86), Vendo attempted at the second trial to implicate

Stoner in its own decision against FIFO. Vendo’s theory

was that Stoner had deprived it of “his advice and coun-

sel” (App. 155, 7 3) and thus was legally at fault for its

failure to have a FIFO machine. This theory was entire-

ly new (D. Ct., App. 231), and departed from the applicable

measure of damages laid down by the Appellate Court,

which general counsel Carbaugh had acknowledged to be

the “business and profits [Vendo] lost due to Lektro-

Vend’s impact in the market” (DX 218, p. 2). Vendo now

“had no interest in Lektro-Vend” (PX 304, p. 780; Tr.

809-10) and offered no evidence as to sales Lektro-Vend

might have diverted from Vendo.

Vendo’s new claim against Stoner was based upon Pier-

son’s testimony at the second trial: “If we had known

in 1963 that Mr. Stoner was doing this, [Vendo] would

have moved full speed ahead to try [to] develop a FIO

unit at that time. The reason we didn’t was that Mr. Stoner

said ‘I don’t believe there is a market for such an expen-

sive unit as would be necessary to be built at that time’”

(Tr. 870-71). On cross, Pierson said that he “did not per-

= =

sonally talk to Stoner about this” but had heard “this in-

formation about [Stoner’s] advice from our people who

were [at] a products planning meeting held at Aurora”

and that this was “in the fall of 1960, I believe” (Tr. 871-

72; see PX 304, pp. 930 et seq.). But none of the Vendo

officers who attended that meeting testified that Stoner

gave any such advice therein (PX 303, pp. 318, 421). The

minutes of that meeting do not even reflect Stoner’s

attendance (PX 48, p. 1); they do reflect that Vendo’s

own staff opposed the FIFO project then under con-

sideration (/d., p. 3; see DX 11). This was, moreover, the

very same meeting at which Vendo claimed in the first

trial that Stoner was exposed to its “trade secret”—an

exposure which the Appellate Court called mere “glimpses

and glances,” saying the charge “cannot seriously be con-

tended” (App. 63).

(4) The Trial Court Enters Judgment—Judgments

were entered against Stoner for $170,835 (forfeiture of

salary during the period he breached his covenant) and

against both .coner and Stoner Inv. for $7,345,500 based

on Vendo’s new theory. The trial judge expressly stated

that he was bound by “the Mandate of [the Appellate

Court|” and “the law of this case” (App. 89), and said

nothing about any breach of fiduciary duty by Stoner

as a director or the misappropriation of any corporate

opportunity. He specifically cited pages of the Appellate

Court opinion which referred to “damages for a breach

of the non-competition covenants . . . because of defend-

ant’s wrongful competition” through the instrumentality

of Lektro-Vend (App. 89, 74).

(5) The Appellate Court Reverses The $7,345,500 Judg-

ment—Upon the second appeal, Stoner’s salary forfeiture

was affirmed but the $7,345,500 judgment was reversed

because “Vendo made no attempt to prove lost profits

caused by defendants’ ‘wrongful competition’” and thus

disobeyed the Appellate Court’s mandate (App. 96, 97). The

Court also held that “[nleither the evidence in the first

trial nor in the trial on remand establishes that Stoner was

responsible for Vendo’s failure to have FIFO,” referring in

part to its first opinion (/d.).* The case was remanded to

give Vendo a third chance to prove the damage allegations

of its original complaint (App. 99).

D. Refusing To Consider Any Restraint-Of-Trade Issues,

The Illinois Supreme Court Reinstates The $7,345,500

Judgments Based Upon A New Theory Of Liability—

Diversion Of A Corporate Opportunity. The Very Basis

Of The Judgments Is Bound Up With The Federal Anti-

trust Issues At Bar.

Both sides were granted leave to appeal to the Illinois

Supreme Court which affirmed the $170,835 salary for-

feiture and, reversing the Appellate Court, reinstated the

$7,345,500 judgments entered in the trial court.

‘1) What The Illinois Supreme Court Decided—The

Supreme Court predicated liability on a new and previ-

ously unadvanced theory of liability (D. Ct., App. 231). It

held that Stoner, while an officer and director of Vendo, di-

verted a corporate opportunity—Vendo’s opportunity to

acquire the Lektro-Vend machine. It held that Stoner

nurtured the Lektro-Vend machine, failed to disclose his

financial involvement with Lektro-Vend and misled Vendo

during its negotiations with the Phillipses. The Court

expressly refused to consider the contention of Stoner and

* Vendo also omits this finding in its Statement (Pet. Br. 11).

—— - -_s

ctiliitins

Stoner Inv. that the covenants not to compete, upon which

Vendo sued, were unreasonable restraints of trade and thus

unenforceable under Illinois common law (App. 111, 117).

The Court also affirmed the trial court’s striking of the

Illinois antitrust defenses and counterclaim upon the ground

that the 1965 Illinois Antitrust Act could not be applied

retroactively to contracts entered into in 1959 (App. 117-

18), although the counterclaim alleged acts of Vendo which

occurred after the passage of that Act, and which the Act

made criminal (Ill. Rev. Stats., Ch. 38, §§60-1 to 60-11; PX

303, pp. 15-19, 39-40, {J 7-8, 9, 10).

Nor did the Court deny the defendants’ contention that

the new theory of damages which Vendo urged at the sec-

ond trial—that Stoner was responsible for Vendo’s not hav-

ing FIFO—was contrary to the Appellate Court’s mandate

which fixed the law of the case for the parties and the trial

court. Instead, the Supreme Court held that it was not

bound by the law of the case (App. 114-15). It also rejected

the contention that Vendo tried to prove a case it did not

plead, stating that “the acts of defendants in misappropri-

ating the Lektro-Vend and their use of it to compete

against plaintiff are intertwined, the latter being, so to

speak, the means by which the former was brought to bear

against plaintiff” (App. 115).

The damage award of $7,345,500 was reinstated based

on the Supreme Court’s conclusions: (i) that it could not

say that Vendo would have declined to purchase the Lek-

tro-Vend machine or develop one of its own, had a genuine

opportunity been extended to it (App. 114); (ii) that

Vendo’s damages should be measured by what it would have

earned had it owned the Lektro-Vend machine (App. 118) ;

and (iii) that the amount of the judgment was within the

range of the testimony of Vendo’s experts (App. 121).

The Court did not mention Stoner’s letter to Vendo that

the future would show that Vendo’s failure to purchase

the Lektro-Vend was “a serious mistake on [its] part”

(supra, p. 13). Concerning Childers’ letter that Vendo

would be willing to pay the Phillipses’ costs plus “a fair

profit” (supra, pp. 13-14), the Court stated that “[t]he ree-

ord does not indicate whether this counteroffer was trans-

mitted to Phillips” (App. 107). But the record before it

showed (PX 304, pp. 1149, 1152) that Stoner called Chil-

ders to ask if he had a specific figure in mind and Childers

“said no. He said, ‘We just can’t see any market for it.

It’s too expensive a machine’” (supra, p. 14). The ree-

ord also showed that Vendo would not have bought the

Lektro-Vend machine at any price. That Vendo well knew

that its theory was false is demonstrated conclusively by

additional evidence adduced before the District Cour+

(supra, pp. 13-14, 19,23).

(2) The Foundation Of The State Court Judgments Is

Bound Up With The Federal Antitrust Issues At Bar—

Here we note petitioner’s central assertion that, in the

instant case, the District Court “neither found nor held

that enforcement of the [state court] judgments would

violate the antitrust laws” (Pet. Br. 14, 15, 7d. n. 9). This

is incorrect. The very foundation of those judgments was

directly placed in issue by respondents’ claims under both

Sections 1 and Z of the Sherman Act and necessarily de-

pends upon the merit of those claims. The pertinent find-

ings of the District Court are fully developed infra, pp.

43-47.

—H—

Il.

PROCEEDINGS IN THE COURTS BELOW.

A. Proceedings In The District Court Pending The Out-

come Of The State Case.

Contrary to petitioner’s assertions, respondents did not

“reactivat(e] this federal action” (Pet. Br. 4) nor resort

to a “new stratagem” (Pet. Br. 21) in asking the District

Court for injunctive relief. That relief was only required

to assure that there would be a trial upon respondents’

federa! antitrust treble damage claims. It was the under-

standing of the parties—including petitioner—that this case

would proceed to trial when the state proceedings were

determined. This is clearly borne out by the record of

proceedings before the District Court (App. 260-64).

That reeord shows petitioner’s acknowledgement that,

apart from discovery, this case “was stayed pending the

trial and completion of the State Court case” (Item 75,

{ 2) until cross motions for summary judgment were filed,

and denied (App. 83-88). It further shows that petitioner

expressly represented that both sides were “waiting for

our trial,” that this procedure was “right” (Tr., Nov. 23,

1971, pp. 2-3), and that its counsel “appreciat[ed]” and

“certainly fe[lt] ... fair” the District Court’s declared un-

willingness “to get into a long difficult trial in this case

when we don’t know what impact the State case might have

on the effect” (Tr., June 16, 1972, pp. 3-4, 5).

Thus when petitioner’s counsel protested for the first

time on June 19, 1975 (during oral argument concerning

the form of the injunction order) that respondents should

have sought to enjoin the state proceedings at their incep-

tion, Judge McLaren stated:

—_ =

“ .. it was my understanding from your side as well

as theirs that the cases were related in the state and

here, but that it had been more or less agreed that the

state case would go forward, and that when that was

completed, we would try the case here” (App. 261).

B. The Motion For A Preliminary Injunction.

(1) The District Court Directs The Parties To Prepare

For Trial—The opinion of the Illinois Supreme Court was

initially filed on September 27, 1974. On October 1, 1974,

after discussion of the impact of that decision upon the

issues in this case, respondents’ counsel stated before the

District Court that “we start afresh here.” Petitioner’s coun-

sel concurred: “Yes, we are fresh” (Tr., Oct. 1, 1974, p. 6).

After the Illinois Supreme Court denied rehearing on

November 27, 1974, a pretrial conference was held on

December 5, 1974, during which Judge McLaren directed

the parties to prepare for trial of this action. New plead-

ings were to be filed, memoranda of further discovery ex-

changed, and a further pretrial conference (never held)

was scheduled for March 3, 1975 (Item 91).

Accordingly, on January 2, 1975, respondents filed their

amended and supplemental complaint (App. 124-59).

(2) Vendo Commences Collection And Precipitates An

Emergency—Despite the fact that preparations were un-

derway for trial of this case and certiorari had not yet

been applied for or denied, petitioner commenced a host

of citation proceedings in an attempt to collect its state

court judgments forthwith (App. 178-207). On January

10, 1975, Stoner and Stoner Inv. were compelled to in-

tervene in Vendo’s proceeding against an escrow trustee,

which culminated in Ve ido’s unlawfully premature collec-

—29__

tion of over $582,000 (App. 186-87, 93, 149-50, 9] 13, 14;

Tr. 896-900).*

Further collection, which was imminent, threatened a

takeover of Lektro-Vend and Stoner Inv., and the con-

sequent destruction of their federal antitrust claims. Those

efforts also threatened to strip the remaining respond-

ent, Stoner, of his assets. Thus, on January 23, 1975,

respondents** presented the District Court with a motion

for preliminary injunction (App. 160-63, 177-207) seeking

to stay any further collection activities pending a hearing.

Judge McLaren declined to issue a stay. Rather, he di-

recited that Stoner and Stoner Inv. seek a stay of execu-

tion of the state court judgments from this Court, thus

“exhaust[ing] all of the possibilities that are open to you

in that other litigation” to avert the emergency. If unsuc-

cessful, respondents were to receive “an immediate hearing

on the preliminary injunction” (App. 170-72).

(3) Vendo’s Voluntary “Standstill Agreement’”—On

January 27, 1975, Stoner and Stoner Inv. filed their peti-

tion for certiorari and motion for stay of execution in this

Court.

On January 29, 1975, respondents returned to District

Court, fearful of further imminent takeover orders. But

* This escrow trust agreement barred ‘‘all proceedings’’ to

enforce the judgments until the trustee verified that there had

been a ‘‘complete and final determination’’ of the appeal (Ex. H

to am. and suppl. compl., pp. 12, 13 (Item 92)). Since certiorari

was to be applied for, the trustee formally declined to pay out.

Nevertheless, petitioner continued to proceed against the trustee

(Tr. 896-900) and to take further actions to enforce its judg-

ments forthwith.

** Petitioner’s repeated complaint that Lektro-Vend was not

formally a movant for injunctive relief (Pet. Br. 13, Id. n. 13,

14) is wholly specious. Lektro-Vend’s interest was articulated and

litigated not only during the injunction hearing (App. 227, n.

2; Tr. 27, 41, 43) but also on January 23, 1975, as counsel’s re-

marks clearly show (App. 162-63).

- *

petitioner’s counsel then announced a voluntary standstill

agreement pending the District Court’s decision:

“ .. we are assuring your Honor on the record that

we are voluntarily not planning to take any action out

there that would in any way result in a turnover order

and we intend to stay that out there until we hear

from the United States Supreme Court and certainly

we would intend to abide by any decision your Honor

makes here” (App. 214).

The parties subsequently learned that Justice Rehnquist

had denied the motion for stay of execution on January

28, 1975.

A hearing was held on the motion for injunctive relief

from February 10, 1975 through February 14, 1975. On

the final day of the hearing, petitioner’s counsel specifi-

cally reaffirmed the standstill agreement, “assur[ing] the

court here that until your Honor has had an opportunity

to make this decision, we will continue all pending motions”

in the state court collection proceedings (Tr. 876-77).*

* As part of the ‘‘standstill agreement,’’ the District Court

authorized Stoner and Stoner Inv. to pay counsel fees and ex-

penses ‘‘in the ordinary course of business, whatever you nor-

mally do’’ (Tr. 879).

On April 16, 1975, concurrently with its post-trial brief, Vendo

filed a motion to ‘‘clarify’’ the standstill agreement (Item 118),

claiming for the first time that such payments of fees and expenses

would contravene the state court citations (Tr., April 16, 1975, pp.

2-4). It also sought forthwith to institute ‘‘maybe twenty-five law-

suits’’ against third parties (Jd., pp. 5-6, 13), to levy upon cer-

tain Stoner Inv. real estate (Jd., p. 11) and to reactivate a con-

tempt proceeding against Stoner and Stoner Inv. which had ‘‘been

pending for about eight years’’ in the state court without action

thereon (Id., pp. 14-15).

The District Court directed that the parties ‘‘eontinue with

the standstill agreement . . . in good faith,’’ that Stoner and

Stoner Inv. pay taxes on their properties and that they cease any

further payment of fees or expenses until the motion was de-

cided (Id., pp. 22-23).

—3i—

C. The District Court’s Decision.

(1) The Memorandum Opinion And Order—The Dis-

trict Court issued its memorandum opinion and order on

May 29, 1975 (App. 226-42), awarding the preliminary in-

junction.

First, the Court deait with the factors generally applied

“to determine whether interlocutory relief is appropriate”

(App. 232). It held that respondents “demonstrated likeli-

hood of ultimate success on both the section 1 and section

2 Sherman Act claims” (App. 233), specifically noting the

“substantial” (App. 236) and “considerable evidence in

the record demonstrating illegal anticompetitive behavior

on the part of Vendo” (App. 242). It further found “[o]n

the record as a whole... that a preliminary injunction will

prevent irreparable harm, protect the public interest, and

will benefit plaintiffs more than it will burden Vendo”

(App. 238). It also stated:

“Few public policies are more important than protec-

tion of competition. In the instant case, as previously

mentioned, the number of competitors in the vending

machine market is declining. Thus the courts have a

duty to vigilantly protect the remaining competition”

(App. 239).

Then the Court separately addressed the “special bur-

den” imposed on respondents because state court proceed-

ings would have to be enjoined (App. 239). The Court held

that it had jurisdiction to enjoin Vendo from further

collection activities based upon the first two exceptions

set forth in the Anti-Injunction Statute, 28 U.S.C. §2283.

Applying the tests prescribed by Mitchum v. Foster, 407

U.S. 225 (1972), it held that Section 16 of the Clayton Act

“expressly authorized” injunctions against “certain state

actions, if necessary” (App. 240); that the federal anti-

trust “laws, in the instant ease, can only be given their

intended scope by staying the state court proceedings ;”

and “that $2283 authorizes an injunction here where the

state court proceedings are part of the anticompetitive

scheme” (App. 240-41).

The second (“in aid of jurisdiction”) exception provided

in 28 U.S.C. $2283 was also held to apply since petitioner,

unless restrained, would “as a matter of substance” con-

trol two of the three antitrust plaintiffs, requiring their

dismissal under Article III (App. 241).

Further, the District Court recognized that “principles

of comity and federalism militate against unnecessarily

interfering with pending state court actions even if §2283

is satisfied” (App. 240), but it held that those principles

“do not prevent the issuance of an injunction considering

the peculiar nature of ‘his case,” namely, that “(t]he fed-

eral action here is based in part on the very proceeding

sought to be enjoined. if federal law is violated by con-

tinuation of the state action the paramount national in-

terest requires court intervention” (App. 241).

(2) The Injunction Order—A “Standstill Order” Sup-

ported By Elaborate Security Arrangements—The District

Court’s injunction order issued on June 27, 1975 (App.

266-75). The Court intended “a standstill ... order...

under which the parties can go along in the normal course

of business” (App. 264) pendente lite. Asserting that the

order required “an injunction bond of only $2,500.00”

(Pet. Br. 16), petitioner omits that it already collected over

$582,000 (App. 239; supra, pp. 28-29). Petitioner likewise

omits that its right to collect the balance of its judgments,

should it ultimately prevail, is secured by bonds of $300,000

(PX 326) and $7,400,000 (PX 327), and a security agree-

—33—

ment (App. 271-75) which, together with the liens of the

judgments, were continued “in full force and effect,” not

to mention the other detailed security provisions con-

tained in the order (App. 267-70).

D. The Court Of Appeals’ Decision.

The Court of Appeals affirmed the District Court on

May 28, 1976. It did not pass upon the second (“in aid

of jurisdiction”) exception to 28 U.S.C. §2283 since it held

the first (“expressly authorized”) exception applicable. The

Court found that Congress intended to afford private

citizens “a uniquely federal remedy” when it enacted Sec-

tion 16 of the Clayton Act. It also found that:

“This jurisdiction would be frustrated if federal courts

did not have the power to enjoin a state court pro-

ceeding in an appropriate case. The present situation

is a classic example. Here Vendo seeks to thwart a

federal antitrust suit by the enforcement of state court

judgments which are alleged to be the very object of

antitrust violations” (App. 286).

Thus the Court held that the tests set forth in Mitchum v.

Foster, 407 U.S. 225 (1972) had been satisfied. The Court

of Appeals also affirmed as to comity and federalism (App.

289).

Contrary to petitioner’s assertion, the Court of Appeals

did not “expressly [approve] the District Court’s asser-

tion of jurisdiction to review a final decision of the IIli-

nois Supreme Court” (Pet. Br. 16). On the contrary, it

recognized that the District Court expressly disclaimed

any power “to directly review cases from state courts,”

and examined the state proceedings only to determine

“whether Vendo prosecuted those cases as part of an anti-

competitive scheme” (App. 289).

cilities:

The Court of Appeals also rejected petitioner's conten-

tion that respondents failed to demonstrate a likelihood

of ultimate success in proving their antitrust claims and

did not satisfy the other requisites for injunctive relief

(App. 289-91). It specifically rejected petitioner’s argu-

ment that the state court judgments did not depend on

the covenants not to compete since they were based on

Stoner’s violation of fiduciary duties. It held that this

argument was “contrary to the trial judge's findings.”

which it affirmed (App. 290).

Finally, the Court of Appeals also rejected petitioner's

contentions that the injunction was barred by laches, waiver

and collateral estoppel, since those issues were not argued

below and were “without merit” (App. 291). Despite this

finding, petitioner urges its same “waiver” point here,

under the heading of “comity and federalism” (Pet. Br.

36-39).

E. Subsequent Proceedings In The District Court.

This action is now pending trial in the District Court

before the Hon. Hubert L. Will.* In light of the death in

March, 1976 of respondent Harry B. Stoner, his adminis-

trator, Ann Stoner, has been substituted as a plaintiff.

The District Court also amended the preliminary injunc-

tion order to permit petitioner “to initiate or participate

in any proceedings in [the probate of Stoner’s estate]

* Hon. Richard W. McLaren, who entered the order appealed

from, died earlier this year.

alin

which are available to creditors of an estate .. . to in-

vestigate and ascertain the nature and value of the assets

properly belonging to the estate,” except that it “shall not

initiate citation proceedings for the recovery (as distin-

guished from discovery) of property, nor move for or

otherwise attempt to obtain allowance of said claim, or

accept any amounts in payment of said claim or any portion

thereof.”

The parties have been engaged in final preparation for

trial.

SUMMARY OF ARGUMENT

This case, as the Court of Appeals described it, presents

a “classic example” (App. 286) in which petitioner, prima

facie guilty of sweeping violations of both sections 1 and 2

of the Sherman Act, attempts by writs of execution “to

thwart a federal antitrust suit by the enforcement of state

court judgments which are alleged {and found, infra, pp.

43-47] to be the very object of antitrust violations” (/d.).

The injunction at bar, tailored precisely to the exigencies

of this case, effectively preserves the status quo so that

respondents, as private attorneys general, may invoke the

statutory remedies available exclusively in the federal

courts for the private enforcement of the federal antitrust

laws. Infringing no significant state interest, the prelim-

inary injunction awarded by the District Court, and af-

firmed by the Court of Appeals, vindicates both the para-

mount national interest embodied in the antitrust laws and

the special character of the exclusive federal antitrust juris-

diction entrusted by Congress to the federal courts.

wiles

This is an interlocutory appeal from the award of a pre-

liminary injunction, which only preserves the status quo,

pending a trial upon the merits of respondents’ federal

antitrust claims. Apart from jurisdiction, the scope of ap-

pellate review is therefore limited to determining whether

the District Court violated some principle of equity or

clearly abused its diseretion. The District Court’s findings

are closely intertwined with the issues at bar.

One finding of the District Court goes to the heart of

this case—that petitioner's collection of the balance of its

state court judgments would further its violations of both

sections 1 and 2 of the Sherman Act. Petitioner makes the

startling, and utterly baseless, assertion that no such find-

ing was made. But the District Court unequivocally found

that petitioner’s state court judgments depended on agree-

ments violative of section 1 of the Sherman Act and were

procured in pursuance of a monopolistic scheme violative

of section 2 of the Sherman Act, and the Court of Appeals

affirmed those findings.

The District Court further found that continued collec-

tion of the state court judgments would eliminate two

respondents from this ease precluding the further prosecu-

tion of their claims, and would effectively cripple the third

respondent’s ability to prosecute the sole remaining anti-

trust claim. Therefore, absent equitable relief, immediate

enforcement of petitioner’s judgments would thwart the

trial of federal antitrust claims.

—37—

II.

The District Court had jurisdiction to enjoin petitioner,

pendente lite, from collecting the balance of its state court

judgments. Both the first (“expressly authorized”) and

second (“in aid of jurisdiction”) exceptions to the Anti-

Injunction Statute, 28 U.S.C. §2283, applied.

In appropriate cases $16 of the Clayton Act “expressly

authorize(s]” injunctions against state proceedings under

the first exception to $2283, as the Courts below held, in

light of the controlling criteria set forth in Mttchum v.

Foster, 407 U.S. 225 (1972). Under Mitchum, a federal stat-

ute need not refer in terms either to $2283 or to state court

proceedings, but it must have created “a specific and

uniquely federal right or remedy, enforceable in a federal

court of equity, that could be frustrated if the federal court

were not empowered to enjoin a state court proceeding”

and “could be given its intended scope only by the stay of

a state court proceeding” (407 U.S. at 237-38).

1. Supplementing the private enforcement provisions in

the Sherman Act, $16 authorizes private plaintiffs to secure

the “uniquely federal remedy” of injunctive relief in the

federal courts. By its exclusive grant of federal jurisdiction

Congress intended that federal antitrust enforcement be

“effective and uniform” as well as “untrammeled” by the

effects of related litigation in the state courts. Lyons v.

Westinghouse Electric Corp., 222 F.2d 184, 189 (2d Cir.),

cert. denied 350 U.S. 825 (1955) (per L. Hand, J.).

—33—

2. Both the clear terms and legislative histury of §16

show that its “intended scope” would be “frustrated” (Mit-

chum, supra) if federal courts could not enjoin state pro-

ceedings where, as here, the precise conduct proscribed by

the antitrust laws is sought to be furthered therein. Fur-

thermore, “Section 16 should be_construed and applied”

with a view toward “the high purpose” served by private

antitrust enforcement. Zenith Radio Corp. v. Hazeltine Re-

search, Inc., 395 U.S. 100, 130-31 (1969).

3. Injunctions are not barred by $2283 when sought by fed-

eral agencies asserting “superior federal interests” (Mit-

chum, supra). The result should be no different when

private antitrust plaintiffs seek to restrain state proceed-

ings which “threaten loss or damage by a violation of the

antitrust laws,” since §16 was clearly intended to facilitate

the vigorous enforcement of federal antitrust policy by

private attorneys general. Cf. Studebaker Corp. v. Gittlin,

360 F.2d 692, 697-98 (2d Cir. 1966).

4. Affirmance of the injunction at bar wonld not impair

the continuing vitality of $2283 because $16 authorizes re-

lief only when state proceedings threaten “loss or damage

by a violation of the antitrust laws,” a showing made in

none of the cases petitioner cites.

The second exception to $2283 also applied since the pre-

liminary injunction was “necessary in aid of” the District

Court's jurisdiction. The District Court correctly found

that, absent relief, two respondents would be, at least in

substance, under petitioner’s control or at its disposition,

requiring their dismissal under Article III. The third re-

spondent, Stoner’s administrator, would then be unable to

—39—

prosecute the claims of Lektro-Vend and Stoner Inv., and

her own ability to prosecute the sole remaining antitrust

claim would be effectively crippled.

An injunction is permissible under the second exception

to $2288 when state proceedings threaten “to seriously im-

pair the federal court's flexibility and authority to decide”

a case. Atlantic Coast Line R. Co. v. Brotherhood of Loco-

motive Engineers, 398 U.S. 281, 295 (1970). Here petition-

er’s collection proceedings would not only further violations

of the Sherman Act; they also threaten the very extinction

of federal antitrust claims, prima facie meritorious, de-

priving the federal court of its exclusive jurisdiction to ad-

judicate those claims. And this jurisdiction should be zeal-

ously protected because Congress, by conferring it ex-

clusively upon the federal courts, intended to secure not

only private rights but the national interest in the preser-

vation of free competition.

Il.

The decision below struck a proper balance between state

and federal interests and is entirely in accordance with

principles of comity and federalism. The Court below held

those principles inapplicable not only because §16 affords

an exclusive federal remedy but also in view of the peculiar

nature of this case, namely, that it is based in part on the

very proceeding sought to be enjoined.

This Court’s recent decisions concerning comity and fed-

eralism do not require blind deference to state interests

but a fair balancing of legitimate state and federal inter-

ests. Here the balance tips decisively in favor of federal

interests, which are paramount.

— =

1. Enjoining collection of petitioner’s judgments, pen-

dente lite, does not unduly infringe any legitimate state

interest, since those judgments arose out of purely private

litigation. Moreover, “special circumstances” exist since

enforcement of those judgments would further violations

of sections 1 and 2 of the Sherman Act.

2. On the other hand, paramount federal interests re-

quire that petitioner neither reap the fruit of its federal

antitrust violations nor succeed in thwarting the prosecu-

tion of federal antitrust claims by private attorneys gen-

eral.

IV.

Dismissal by Stoner and Stoner Inv. of their federal

antitrust defense in the state court action did not preclude

the award of injunctive relief. Such a result would un-

fairly penalize respondents in view of the circumstances:

simultaneous pendency of state and federal actions was

made necessary by petitioner’s objections to removal; it

was the understanding of the parties that the federal trial

would follow the state trial, and the injunction only insures

that a federal trial can take place; the federal defense was

dismissed without prejudice and without objection, only

after the state court dismissed the state antitrust defenses

and counterclaim; the federal judge then presiding was

reluctant to consider this case while federal antitrust issues

were before the state courts; dismissal of the defense

avoided the risk of conflicting state and federal decisions

upon the same federal antitrust issues; and preliminary

relief was based in part on actionable facts not in existence

when the federal defense was dismissed. Respondents thus

did not and cowd not have waived their rights to relief

_- =

upon their federal antitrust claims, which relief is obtain-

able only in a federal court. Moreover, federal jurisdiction

to adjudicate federal treble damage claims is “untram-

meled” by state court decisions upon federal antitrust

issues. Lyons v. Westinghouse, supra.

Apart from respondents’ own interests, dismissal of the

federal defense could not have immunized petitioner’s un-

lawful conduct because the overriding national antitrust

policy is not to be left at the mercy of private parties nor

subjected to the usual rules governing private litigation

(Mercoid Corp. v. Mid-Continent Investment Co., 320 US.

661, 671 (1944); Sola Electric Co. v. Jefferson Electric Co.,

317 U.S. 173, 177 (1942)), particularly where, as here, the

injunction prevents petitioner from enforcing its unlawful

agreements and consummating its anticompetitive scheme

in violation of sections 1 and 2 of the Sherman Act.

The District Court neither reversed, reviewed nor re-

vised the final judgments of the Illinois courts. It examined

the state proceedings only to determine whether petitioner

prosecuted them as part of an anticompetitive scheme.

What the District Court reviewed was not the Illinois judg-

ments, but rather, petitioner's anticompetitive conduct in

procuring those judgments. Passing solely upon issues of

federal antitrust law, the District Court found that peti-

tioner sued and recovered on agreements violative of sec-

tion 1 of the Sherman Act, and that it procured its judg-

ments in pursuance of a monopolistic scheme violative of

section 2 of the Sherman Act.

ARGUMENT

THE SCOPE OF THE REVIEW HERE, ASIDE FROM JUR-

ISDICTION, IS LIMITED TO DETERMINING WHETHER

THE DISTRICT COURT VIOLATED SOME PRINCIPLE OF

EQUITY OR CLEARLY ABUSED ITS DISCRETION.

Provided there is no lack of jurisdiction (United States

v. Corrick, 298 U.S. 435, 437-8 (1936)),

“Tt is well settled that the granting of a temporary in-

junction, pending final hearing is within the sound dis-

cretion of the trial court; and that, upon appeal, an

order granting such an injunction will not be disturbed

unless contrary to some rule of equity, or the result

of improvident exercise of judicial discretion. . . .”

“Especially will the granting of the temporary writ

be upheld when the balance of injury as between the

parties favors its issue.” Prendergast v. New York Tel.

Co., 262 U.S. 43, 50-51 (1923).

This is a well settled principle, particularly applicable

when, as here, a preliminary injunction is issued merely

for the purpose of preserving the status quo pending a de-

termination of the action on the merits (Bath Industries v.

Blot, 427 F.2d 97, 111 (7th Cir. 1970)), because the district

judge is typically presented with an abbreviated set of

facts requiring a delicate balance of the probabilities of

ultimate success at the final hearing with the consequences

of immediate irreparable injury which could possibly flow

from the denial of preliminary relief (Scherr v. Volpe, 466

F.2d 1027, 1030 (7th Cir. 1972)).*

* The District Court recognized this doctrine (App. 241 n.5).

~~ =

Much of petitioner’s brief is written as if this were a

final appeal after trial. Authorities have established that,

assuming jurisdiction, even if the reviewing court were

to disagree with the trial court that the situation required

the issuance of a preliminary injunction, such reversal

would not be warranted (Celebrity, Inc. v. Trina, Inc., 264

F.2d 956, 958 (1st Cir. 1959)). The Court of Appeals recog-

nized this doctrine (App. 289-291).

Petitioner’s brief largely ignores the detailed findings

of facts by the District Court and in effect seeks to have

this Court retry de novo the case the District Court tried

and the Court of Appeals affirmed. Although petitioner

assails the decision of the courts below on four grounds

(Pet. Br. 2), the issues it poses are closely intertwined with

the facts of this case. Those facts are reflected in the find-

ings made by the District Court in the proper exercise of

its judicial discretion. They receive scant, inaccurate and

argumentative treatment by petitioner (Pet. Br. 14-16).

They are vitally important and hence we treat them.

A. The District Court Found That Petitioner’s Efforts To

Collect The Balance Of Its Judgments Would Further

A Violation Of The Federal] Antitrust Laws.

Petitioner nowhere challenges the District Court’s find-

ing that collection of the balance of its state court judg-

ments would further a violation of the Sherman Act—a

finding which goes to the heart of this case. On the con-

trary, petitioner’s brief makes the utterly startling asser-

tion that no such finding was made. It says:

“The District Court, however, neither found nor held

that enforcement of the judgments would violate the

antitrust laws” (Pet. Br. 14).

aliens

Then, in a footnote, petitioner adds:

“The District Court also stated that, ‘Jf the state

court litigation was itself part of the anticompetitive

scheme, a judgment arising from such litigation is not

an ordinary debt’ (App. 238, italics added), and ‘/f

federal law is violated by continuation of the state

action the paramount national interest requires court

intervention’ (App. 241, italies added), but reached

no conclusion as to whether continuation of the state

action (i.e., through collection of the state judgments)

would violate the antitrust laws” (Pet. Br. 15 n.9; em-

phasis petitioner’s).

This is desperation, to put it mildly. In the Court of

Appeals petitioner specifically challenged the pertinent

findings of the District Court, contending “that the state

court judgments are based on Stoner’s violation of fidu-

ciary duties and do not depend . . . on the noncompetition

covenants” (App. 290). The Court of Appeals rejected this

contention, expressly noting that tt was “contrary to the

trial judge’s findings” (Id.).

And consider what the District Conrt said. In passing

upon applicability of the first (“expressly authorized”’)

exception to 28 U.S.C. $2283, the Court expressed the very

- basis of its holding:

“This Court therefore holds that [the federal anti-

trust] laws, in the instant case, can only be given their

intended scope by staying the state court proceedings

and that §2283 authorizes an injunction here where the

state court proceedings are part of the anticompeti-

tive scheme” (App. 240-41).

What's “iffy” about that statement? Is it anything less than

plain unequivocal language?

Even apart from what the District Court said, what ¢?

held equally belies petitioner’s assertions. Seizing upon

—

selected “If” clauses in the Court’s opinion, such as its

statement that court intervention would be required “[ilf

federal law is violated by continuation of the state action,”

petitioner underscores the “If” and says that the Court

“reached no conclusion,” ignoring the obvious fact that

the Court did intervene. Indeed, that very “court inter-

vention” provoked petitioner’s appeal!

Moreover, the District Court held “that plaintiffs have

demonstrated likelihood of ultimate success on both the

section 1 and section 2 Sherman Act claims” (App. 233),

and the very basis of petitioner’s state court judgments

was directly bound up with both of those claims. As the

Court said:

“The section 1 claim does not rest alone on the theory

that the state litigation was an essential part of an il-

legal anticompetitive scheme but rather depends on

an analysis of the total circumstances surrounding cre-

ation of the 1959 agreements. The Court believes that

viewed in this light the corporate opportunity theory

relied on in the final state court decision cannot either

in logic or as a matter of federal antitrust law be sepa-

rated from the anticompetitive intent and effect of

the covenants” (App. 234-35) ;

whereupon the Court delineated its further findings that

Stoner’s status as a director and his fiduciary duties were

themselves but additional anticompetitive devices imposed

on Stoner pursuant to the unlawful 1959 agreements (/d.).°

* It makes no difference that diversion of a corporate opportu-

nity might be classified as a ‘‘tort,’’ as petitioner contended in the

Courts below, since the state law duties which Stoner was adjudi-

eated to have breached arose out of and by virtue of the under-

lying anticompetitive agreements, as the District Court found

(App. 234-35). Indeed, petitioner bownd Stoner to become a di-

rector by those agreements, assigning to him no duties nor in-

tending any, all in pursuance of its monopolistic scheme (supra,

pp. 8-11).

— =

Since petitioner’s “anticompetitive clauses are essential

primary elements of the bargain,” they could not be severed

from the rest of the transaction, thereby rendering “all

elements of the 1959 agreements unenforceable” (App.

235). The Court concluded:

“Vendo’s reliance on the ultimate theory of the state

court litigation thus is not well taken. The 1959 acree-

ments were cut from one piece of anticompetitive cloth

and cannot be snipped apart” (/d.).

Similarly the District Court expressly stated that re-

spondents’ claim under section 2 of the Sherman Act, if

sustained, would furnish still another basts for holding fur-

ther collection unlawful:

“If plaintiffs can prove that Vendo’s state court liti-

gation against the Stoner interests was not a genuine

attempt to use the adjudicative process legitimately,

antitrust liability in the instant case under section 2 of

the Sherman Act would follow” (App. 237).

The Court not only held that respondents did sustain their

section 2 claim (App. 233), but also delineated its findings

in support of that claim (App. 235-38). Noting that it was

“considering the record as a whole” (App. 237),* the Court

said:

“There is persuasive evidence that Vendo’s activities

in its litigation against the Stoner interests in Illinois

state court were not a genuine attempt to use the ad-

judicative process legitimately” (/d.).

It also found that there was other “evidence that Vendo

used litigation as a method of harassing and eliminating

* Thus petitioner’s italicized assertion that the District Court

hae my only events in the 1963-66 period’’ (Pet. Br. 15) is

less.

—~ =

competition” (App. 236), as we have shown (supra, pp. 19-

20, 20n.). Accordingly, since petitioner chose only to deny

the existence of these findings, eschewing any claim that the

District Court abused its discretion in making them, there

can be no question but that enforcement of the state judg-

ments would further petitioner’s violation of sections 1

and 2 of the Sherman Act.

B. The District Court Found That Immediate Collection

By Petitioner Of The Balance Of Its State Court Judg-

ments Would Thwart The Prosecution Of Federal Anti-

trust Claims.

The District Court made explicit findings that petition-

er’s collection activities, unless restrained, would extinguish

two of the three pending federal antitrust treble damage

claims at bar:

“TC]ollection of the state judgment would effectively

place Lektro-Vend in the hands of—or at least at the

disposition of—Vendo. Stoner Investments is controlled

by Mr. Stoner; 78.57% of Lektro-Vend is owned by

Stoner Investments. Needless to say, Vendo would

also control Stoner Investments . . . . Continued col-

lection would thus eliminate two of the plaintiffs here-

in” (App. 239).

Thus when petitioner says that the District Court found

only that further collection might “posstbly eliminat(e] two

of the three plaintiffs in the suit as independent parties”

(Pet. Br. 35), it misstates what the Court said. Moreover,

in contending that it was “wrong on the facts” in making

this finding (/d.), petitioner makes no effort to show that

the District Court clearly abused its discretion—the stand-

ard of review upon an interlocutory appeal.

—- =

In any ever , assuming that petitioner does claim an

abuse of discr: tion, the record fully supports the pertinent

findings. Neither of petitioner’s proffered consent decrees

would have obviated the elimination of Lektro-Vend or

Stoner Inv. as federal antitrust plaintiffs.

Only the first proposed consent decree was before the

District Court when it decided the motion for preliminary

injunction. Petitioner states that this proposal, filed Jan-

uary 29, 1975 (App. 208-10),* would have “preclude[d]

Vendo’s acquiring ... control of Lektro-Vend” (Pet. Br. 13).

It would have done nothing of the sort. It provided only

for “the absence of any voting power in Vendo” through

the device of a voting trust. It expressly contemplated that

Vendo might be “the successful purchaser” of Lektro-Vend

stock at a sheriff’s sale, thus becoming the beneficial owner

of all shares held in that voting trust (App. 210); and that

those shares would be divested “at the fair market value

{including the value of Lektro-Vend’s right of action

against petitioner?) at the earliest reasonable date” (/d.).

As the District Court further found:

“Vendo’s offer to place the Stoner Investments and

Lektro-Vend stock under control of the Court does not

meet this problem because as a matter of substance

Vendo would control both plaintiff and defendant... .”

(App. 241).

* In his counter-affidavit (App. 208) and attached letter (App.

210), which set forth the first consent decree proposal, petitioner’s

counsel implied that petitioner was previously unaware that Stoner

Inv. had become majority shareholder in Lektro-Vend. The rec-

ord shows, however, that petitioner well knew this at the latest

in February, 1971, when it sought summary judgment based in

part upon that very fact (See Item 52, pp. 2-3, Exh. ‘‘Q’’).

ee eee

—

cea lh ats ie te EN ON

—49—

In fact, petitioner’s proposal made no mention of Stoner

Inv., as petitioner tacitly concedes (Pet. Br. 13).

Petitioner’s second consent decree—proposed nearly

three weeks after the District Court’s decision—likewise

fell short of preserving the viability of the two antitrust

plaintiffs. Although purporting to prohibit petitioner from

acquiring for itself any Lektro-Vend or Stoner Inv. stock

or obligations, petitioner would have been wholly unre-

stricted from precipitating the. immediate liquidation of

the majority interest in both corporations, presumably in-

cluding the forced sale of their federal antitrust claims

at the very time when the District Court had directed the

undertaking of final preparations for the trial of this action

(App. 258-59; supra, pp. 28-29).

During the five day hearing on the motion for prelim-

inary injunction, petitioner offered no evidence with re-

spect to its proposal. On the contrary, the only pertinent

evidence showed that, upon Lektro-Vend’s forced liquida-

tion, “without a viable organization there, the building and

equipment wouldn’t have any value” (Tr. 710-11), and

that prospects for securing vitally needed financing would

have been destroyed (Tr. 621-22, 706-15, 708-09).

Thus petitioner’s latest offer, like its predecessor, did.

not upset the District Court’s findings that “collection of

the state judgment will effectively place Lektro-Vend .. .

at least at the disposition of” petitioner (App. 238-39),

or that “as a matter of substance Vendo would control

both plaintiff and defendant” (App. 241). As the Court of

Appeals concluded, petitioner “seeks to thwart a federal

antitrust suit by the enforcement of state court judgments

— =

which are alleged to be the very object of antitrust viola-

tions” and, absent equitable relief, federal antitrust juris-

diction “would be frustrated” (App. 286).*

Il.

THE DISTRICT COURT HAD JURISDICTION TO ENJOIN

PETITIONER, PENDENTE LITE, FROM COLLECTING THE

BALANCE OF ITS STATE COURT JUDGMENTS. THE FIRST

TWO EXCEPTIONS TO 28 U.S.C. §2283 APPLIED HERE.

A. The Preliminary Injunction Was Expressly Authorized

By §16 Of The Clayton Act, Within The Meaning Of

28 U.S.C. §2283.

The parties are agreed that the determination of this

question must rest squarely on the principles which this

Court, in Mitchum v. Foster, 407 U.S. 225 (1972), distilled

* A wealth of additional evidence in the record amply supported

the findings below that petitioner sought by its collection pro-

ceedings to thwart the prosecution of this antitrust snit, Thus in

April, 1975, petitioner’s counsel announced his intention forth-

with to institute ‘‘maybe twenty-five lawsuits’’ and to reactivate

a contempt proceeding against Stoner and Stoner Inv. which had

lain dormant in state court ‘‘for about eight years’’ (supra, p.

30n.).

In June, 1975, petitioner again insisted that it be permitted to

investigate ‘‘questionable conduct’’ on the part of ‘‘[p)laintiffs

and their lawyers’’ before the state courts and to pursue credi-

tor’s suits against Stoner’s wife, his son and his sister-in-law

and ‘‘about thirty-five other people,’’ all in all, ‘‘some thirty-

five or forty in name’’ (Tr., June 19, 1975, pp. 34-35; App. 247,

252-53).

The predicate for the contempt charges, the alleged ‘‘question-

able conduct,’’ and the host of lawsuits, was petitioner’s charge

of ‘‘monumental fraud’’ upon which it cross-examined (Tr. 628-

748) and recross-examined (Tr. 885-89) Stoner at the hearing. The

District Court found the charge groundless (App. 239), and peti-

tioner did not appeal its finding.

meee eee

cilitinn

from the prior cases applying the “expressly authorized”

exception of $2283:

“In the first place, it is evident that, in order to qualify

under the ‘expressly authorized’ exception of the anti-

injunction statute, a federal law need not contain an

express reference to that statute....

“Secondly, a federal law need not expressly authorize

an injunction of a state court proceeding in order to

qualify. ...

“Thirdly, it is clear that, in order to qualify as an

‘expressly authorized exception to the anti-injunction

statute, an Act of Congress must have created a specific

and uniquely federal right or remedy, enforceable in a

federal court of equity, that could be frustrated if the

federal court were not empowered to enjoin a state

court proceeding. This is not to say that in order to

come within the exception an Act of Congress must, on

its face and in every one of its provisions, be totally

incompatible with the prohibitions of the anti-injunc-

tion statute. The test, rather, is whether an Act of Con-

gress, clearly creating a federal right or remedy en-

forceable in a federal court of equity, could be given

its intended scope only by the stay of a state court

proceeding” (407 U.S. at 237-38).

Both the District Court and the Court of Appeals ana-

lyzed the injunction here in precisely these terms. They

concluded that §16 opened the federal equity courts to

private citizens, creating a uniquely federal remedy which

would be frustrated if the federal courts did not have the

power to restrain the enforcement of a state court judg-

ment in an appropriate case (App. 240-41, 285-89). But

their holding was carefully limited. Judge McLaren held

that “42283 authorizes an injunction here where the state

court proceedings are part of the anticompetitive scheme”

(App. 240-41); the Court of Appeals likewise held this

= SS

to be an appropriate case on the grounds that “Vendo seeks

to thwart a federal antitrust suit by the enforcement of

state court judgments which are alleged to be the very

object of antitrust violations” (App. 286).

Neither “judicial improvisation” nor “loose statutory con-

struction” nor “ad hoc expansion of the exceptions to

[§$2283]” (Pet. Br. 23) was necessary to support that

holding. Rather, the decision below, that $16 “expressly

authorized” the preliminary injunction at bar, was fully

justified by the language, by the legislative history, and by

the clear intent of that statute.

1. Injunctive Relief Under §16 Of The Clayton Act Is

A “Uniquely Federal Remedy,” Entrusted By Con-

gress To The Exclusive And Untrammeled Jurisdic-

tion Of The Federal Courts.

By enacting the Sherman Act of 1890, Congress supple-

mented the varying common law rules administered by the

states with a uniform federal law. Common law merely

voided unreasonable restraints, denying them enforcement.

The Sherman Act, on the other hand, established positive

prohibitions, outlawing trade restraints and monopoliza-

tion as erimes. Federal equity powers were made avail-

able, and special provision was made to supplement gov-

ernment enforcement by private suits on the part of anti-

trust victims. who were to be awarded treble damages and

reasonable attorneys’ fees and costs upon recovery. By §16

of the Clayton Act, the federal courts were empowered as

well to grant equitable relief at the behest of private plain-

tiffs.

The three positive remedies afforded private plaintiffs

under these statutes—treble damages, the statutory award

ee Ss ee

-_ =

of fees and costs, and equitable relief—could be invoked

only in the federal district courts. In Lyons v. Westing-

house Electric Corp., 222 F.2d 184, 189 (2d Cir.), cert.

denied, 350 U.S. 825 (1955) (per L. Hand, J.), the exclu-

sive character of this jurisdiction was held to manifest a

Congressional design that it not be impaired or limited by

virtue of related litigation in the state courts:

“Tn the case at bar it appears to us that the grant to the

district courts of exclusive jurisdiction over the action

for treble damages should be taken to imply an im-

munity of their decisions from any prejudgment else-

where; at least on occasions, like those at bar, where

the putative estoppel includes the whole nexus of facts

that make up the wrong. The remedy provided is not

solely civil; two thirds of the recovery is not remedial

and inevitably presupposed a punitive purpose. It is

like a qui tam action, except that the plaintiff keeps

all the penalty, instead of sharing it with the sovereign.

There are sound reasons for assuming that such re-

covery should not be subject to the determinations of

the state courts. It was part of the effort to prevent

monopoly and restraints of commerce; and it was nat-

ural to wish it to be uniformily adininistered, being

national in scope. Relief by certiorari would still ex-

ist, it is true; but that is a remedy bothersome to liti-

gants and to the Supreme Court, already charged with

enough. Obviously, an administration of the Acts, at

one effective and uniform, would best be accomplished

by an untrammeled jurisdiction of the federal courts.”

The court then held that the plaintiff’s treble damage ac-

tion was not precluded even though a state court had pre-

vious!y found that the alleged antitrust violation, which

had been raised by way of defense in the state action, was

neither sustained nor established.

onlin

The basic rationale of Lyons is that no local law or state

court determination may be permitted to defeat the juris-

diction of the federal courts to enforce the overriding fed-

eral public policy of the antitrust laws. Sola Electric Co.

v. Jefferson Electric Co., 317 U.S. 173, 177 (1942); Janel

Sales Corp. v. Lanvin Parfums, Inc., 396 F.2d 398, 401

(2d Cir. 1968); Mach-Tronics, Inc. v. Zirpoli, 316 F. 2d

820, 830 (9th Cir. 1963).

Because a defense based on federal antitrust law was

available in the state proceedings here, petitioner ar-

gues (Pet. Br. 30) that the present injunction does not

meet Mitchum’s “uniquely federal remedy” requirement.

This is an obvious non sequitur. If a remedy which af-

fords private plaintiffs in the capacity of private attor-

neys general treble damages, fees and costs and equitable

relief procurable only in a federal court is not a “uniquely

federa! remedy,” it is difficult to conceive of one. And the

fallacy of petitioner’s argument is further apparent from

an examination of the authorities.

In Mitchum, the federal issues upon which an injunction

was sought were also available as a defense to the state

action; nevertheless $1983 was held to constitute a “unique-

ly federal remedy.” Similarly in Porter v. Dicken, 328 U.S.

252, 255 (1946), the Emergency Price Control Act was held

to expressly authorize the federal court’s injunction against

a state eviction suit, even though the Act invested both the

state and federal courts with jurisdiction to enforce its

provisions (56 Stat. 33). The District Court in Porter had

concluded that $2283 forbade the injunction because of the

availability of a concurrent state court remedy. Even so,

this Court rejected that contention! (328 U.S. at 234-35).

nt oe oe. ee

ee mee

obs ots a aw

Issue An Injunction Where Antitrust Violations Are

Furthered By Coilection Of State Court Judgments.

The language of §16 is sweeping: “Any person... shall

be entitled to sue for and have injunctive relief .. . against

threatened loss or damage by a violation of the antitrust

laws ... ,” subject to the ordinary principles and rules

of equity proceedings.

Thus the preliminary injunction at bar was authorized by

the plain terms of the statute, since the District Court found

on the facts that the immediate collection of the state court

judgment would have threatened loss or damage to respond-

ents by a violation of the antitrust laws—in fact, by viola-

tions of both sections 1 and 2 of the Sherman Act.

The same reasoning guided this Court in Porter v.

Dicken, supra, cited in Mitchum, 407 U.S. at 235 n.17. The

statute construed there was §205(a) of the Emergency

Price Control Act (56 Stat. 33):

“Whenever in the judgment of the Administrator any

person has engaged or is about to engage im any acts

or practices which constitute a violation of any pro-

vision of section 4 of this Act, he may make an appli-

cation to the a ¢ court for an order enjoin-

ing such acts or practices ..

The Court held that “this attain is broad enough to

justify an injunction to restrain state court evictions”

which violated the Act (328 U.S. at 255).

Petitioner argues that the prohibitions of $2283 are in-

corporated into §16 by its language: “When and under

the same conditions and principles as injunctive relief. . .

—56—

is granted by courts of equity, under the rules governing

such proceedings” (Pet. Br. 23-24). Rather, it is obviously

more reasonable to read this language as referring to the

traditional doctrines of equity jurisprudence concerning

requirements for injunctive relief, which requirements were

fully applied by the Distriet Court before it considered

whether plaintiffs had met their “special burden” under

$2283 and “comity and federalism” (App. 239).

It is clear that at the time of the passage of the Clay-

ton Act, $2283 was regarded as a much less inflexible pro-

hibition than it later became under Toucew v. New York

Life Insurance Co., 314 U.S. 118 (1941). See e.g., Sovereign

Camp v. O'Neill, 266 U.S. 292, 298 (1924); Wells Fargo &

Co. v. Taylor, 254 U.S. 175 (1920); Ex Parte Simon, 209

U.S. 144 (1908); and Marshall v. Holmes, 141 U.S. 589

(1891). This makes it impossible to argue that “the text

of the statute” incorporated any absolute prohibition of in-

junctions against state court proceedings (Pet. Br. 23-24).

Furthermore, petitioner’s reading of §16 is precluded

by the familiar rule of statutory construction, that “in-

clusio unius est exclusio alterius.” Section 16 specifically

prohibits injunctions against common carriers subject to

the jurisdiction of the Interstate Commerce Commission.

It makes no reference whatsoever to injunctions against

state court proceedings.

The decision of the Courts below is also supported by

the clear legislative intent of $16. Prior to its enactment

in 1914, though private antitrust plaintiffs could sue for

treble damages, they were barred from seeking injunc-

tive relief, which could be granted only at the behest of

the government. Section 16 was consistently described as

a measure undertaken to remedy this situation, which was

—§7—

perceived as a significant defect in the Sherman Act.* Rep.

Carlin described the Judiciary Committee's deliberations

as follows:

“First, we found that the Sherman law did not permit

an injunction on petition of an individual. The gov-

ernment could enjoin a combination or a trust; and

though an individual was standing face-to-face with

destruction, though the monster of monopoly was

knocking at his door, he would have to wait until de-

struction came, and then pursue his remedy at law

for treble damages” (51 Cong. Rec. at 9270).

So the clear and simple intent of $16 is to allow an in-

dividual to have anticompetitive behavior enjoined by a

federal court of equity before it destroys him. Where a

party’s prosecution of state proceedings is found to be

“part of the anticompetitive scheme” (App. 241), then sure-

ly §16 can “be given its intended scope only by a stay of

the state court proceedings” (Mitchum, 407 U.S. at 715).

Where “federal law is violated by continuation of the state

action” and “the precise conduct proscribed by the antitrust

laws is sought to be furthered in [the] state court action”

(App 237, 238, 241; supra, pp. 43-47), then surely the

federal remedy of §16 would “be frustrated if the federal

court were not empowered to enjoin a state court proceed-

ing” (Mitchum, 407 U.S. at 237).

After all, this Court in Zenith Radio Corp. v. Hazeltine

Research Inc., 395 U.S. 100, 130-31 (1969), told us, in lan-

guage particularly applicable here, how $16 should be con-

strued :

® See Note, The Federal Antitrust Laws and the .nti-Injune-

tion Statute: Conflict and Coexistence, 42 Geo. Wash. L. Rev. 115,

138-144 (1973); H. R. Rep. No. , p. 17; S. Rep. No. 698,

63rd Cong. 2d Sess. (1914); 51 Cong. Ree. 9261-62, 9270, 15944,

16275, 16319 (1914).

—5g—

“[T |he purpose of giving private parties treble-damage

and injunctive remedies was not merely to provide

private relief, but was to serve as well the high pur-

pose of enforcing the antitrust laws .... Section 16

should be construed and applied with this purpose in

mind .... Its availability should be ‘conditioned by the

necessities of the public interest which Congress has

sought to protect.’ ”

Zenith’s footnote 24, setting out §16, italicizes “against

threatened loss or damage by a violation of the antitrust

laws” (395 U.S. at 130 n.24).

Despite Mitchum’s holding that “a federal law need not

expressly authorize an injunction of a state court proceed-

ing in order to qualify .. .” (407 U.S. at 237), petitioner

argues that a statute will pass muster under Mitchum only

where its legislative history expressly shows a conscious

and central Congressional intent to restrain abuses of state

court proceedings (Pet. Br. 27-29, 32). But there is noth-

ing in the language or the logie of Mitchum which requires

such a limitation of its holding. Quite the contrary, the in-

validity of any such limitation is evident when one exam-

ines the “previously recognized statutory exceptions” which

Mitchum catalogued and from which it distilled its criteria.

For instance, the Emergency Price Control] Act was held

to constitute an exception to §2283 because of the breadth

of the injunctive power authorized by the Act, despite the

absence of any indication that Congress had ever expressly

considered any need for injunctions against state court pro-

ceedings (Porter v. Dicken, supra, 328 U.S. at 255, cited in

Mitchum, 407 U.S at 235) * The same was true of the Fair

* Petitioner attempts to distinguish Porter v. Dicken on the

ground that the Emergency Price Control Act ‘‘provided an in-

(footnote continued on following page)

—5o

Labor Standards Act (Walling v. Black Diamond Coal Min-

ing Co., 59 F. Supp. 348, 351 (W.D. Ky. 1943), cited in

Mitchum, 407 U.S. at 237 n. 25); the Public Utility Holding

Company Act (Okin v. S.E.C., 161 F.2d 978, 980 (2d Cir.

1947), cited in Mitchum, 407 U.S. at 237 n. 25); and the

Securities and Exchange Act (Studebaker Corp. v. Gittlin,

360 F. 2d 692 (2d Cir. 1966), cited in Mitchum, 407 U.S. at

237 n. 25).

3. The “Intended Scope” Of §16 Would Be Frustrated

Were Petitioner Permitted To Consummate Its An-

titrust Violations And Thwart Private Enforcement

Of The Antitrust Laws.

In canvassing the exceptions to §2283 which had been

recognized in prior decisions, Mitchum noted that “other

‘implied’ exceptions to the blanket prohibition of the anti-

injunction statute” had been recognized (407 U.S. at 235).

tricate system of judicial remedies and authorized the Govern-

ment to enforce the Act in both federal and state courts’’ (Pet.

Br. 31).

But even granting the arguable assumption that the Emer-

gency Price Control Act provided a more “‘intricate system of

judicial remedies’’ than do the antitrust laws, the fact is that

Porter relied on no such ground, but rather on the breadth of

the injunctive power authorized by the Act. As this Court ex-

i in Mitchum: ;

‘(T]he Emergency Price Control Act . . . provided that the

Price Administrattor could request a federal district court to

enjoin acts that violated or threatened to violate the Act. In

Porter we held that this authority was broad enough to jus-

tify an injunction to restrain state court proceedings.’’ (407

U.S. at 235 n.17).

—_~o—

Citing, inter alia, Leiter Minerals, Inc. vy. United States,

352 U.S. 220 (1957), Mitchum stated:

“Still a third exception, more recently developed, per-

mits a federal injunction of state court proceedings

when the plaintiff in the federal court is the United

States itself, or a federal agency asserting ‘superior

federal interests’ ” (407 U.S. at 235-36).

This same exception to $2283 was also noted by the

Second Circuit in Studebaker Corp. v. Gittlin, 360 F.2d

692 (2d Cir. 1966), a decision which Mitchum cited (407

U.S. at 237 n. 25). In Studebaker, a private litigant sought

to enjoin a state court action whose prosecution furthered

a violation of the proxy rules under the Securities Ex-

change Act. In an opinion by Judge Friendly, the court

initially recognized that, under Leiter Minerals, supra, and

other cases, §2283 would not have precluded an injunc-

tion against the state action had it been sought by a fed-

eral agency. Noting that Congress had intended to enlist

the aid of private litigants to secure the “effective enforce-

ment of the Exchange Act and SEC rules,” the court then

held that the exception to §2283 available for government

prosecutors was also available to private plaintiffs:

“ ... [There is little question that if the Commission

had sought the injunction here, $2283 would not have

blocked its way. We are not persuaded that a differ-

ent decision is compelled under the circumstances of

this case. If the policy of the anti-injunction statute

is superseded by the need for immediate and effective

enforcement of federal securities regulations and stat-

utes, the fact that enforcement here is by a private

party rather than the agency should not be controlling.

The Supreme Court has recognized such a suit as be-

ing ‘a necessary supplement to Commission action’ in

providing the protection for investors contemplated

by the statute .... The situation is quite different

from that in labor relations where Congress has vested

- =

the sole right to seek injunctive relief to prevent vio-

lations of the Act in the National Labor Relations

Board® .... Section 16 of the Clayton Act... affords

a closer parallel, since there as here the private suit

plays an important role in enforcement” (360 F. 2d at

697-98).

The opinion then went on to distinguish other cases (in-

cluding Lyons I (Pet. Br. 24, 25, 34) and Red Rock (Id. at

34, 37)) on the ground that the state proceedings attacked

therein did not themselves involve any violation of the

antitrust laws (J/d.).

Judge Friendly’s assessment of the intended scope of

§16 is in full aceord not only with the legislative history

of that statute but also with this Court’s own construction.

In Zenith Radio Corp., supra, 395 U.S. at 130-31, this

Court recognized that:

“(T]he purpose of giving private parties treble-damage

and injunctive remedies was not merely to provide

private relief, but was to serve as well the high pur-

pose of enforcing the antitrust laws... . Section 16

should be construed and applied with this purpose in

mind ... /ts availability should be ‘conditioned by the

necessities of the public interest which Congress has

sought to protect.’ ”

Likewise in Perma Life Mufflers, Inc. v. International Parts

Corp., 392 U.S. 134, 138-39 (1968), the Court declared that

the “overriding public policy” embodied in the antitrust

laws would best be served “by insuring that the private ac-

tion will be an ever-present threat to deter anyone contem-

plating business behavior in violation of [those] laws.”

* This disposes of Amalgamated Clothing Workers (Pet. Br. 22,

29, Id. n.13, 33) which involved the National Labor Relations Act,

whose enforcement is wholly reserved to a federal agency.

—62—

Under Leiter Minerals and Studebaker, supra, it is clear

that, because of the national interesi involved, §2283 would

not prevent the Justice Department from obtaining an in-

junction against a state court action whose enforcement

furthered antitrust violations. The result should be no dif-

ferent here, where the enforcement of the antitrust laws

is entrusted to a “private attorney general.” The same

“overriding public policy” is at stake.

As the lower Courts recognized, the present case is no

mere private squabble. Judge McLaren granted the injune-

tion, and the Court of Appeals affirmed it, because “the

paramount national interest requires court intervention”

(App. 236, 238, 241, 288). To deny the preliminary injune-

tion here would not only deprive private parties of their

uniquely federal remedies; more importantly, it would

hamper the enforcement of the national public interest in

free competition, and thus defeat the intended scope of $16

of the Clayton Act.

4. Affirmance Of This Preliminary Injunction Would

Not Impair The Continuing Vitality Of §2283.

Petitioner sounds the toesin that affirmance here “would

reduce the highest tribunals of any state to the status of

special masters subject to de novo control by a single dis-

trict judge”! (Pet. Br. 21). Other special masters “could

be preliminarily enjoined under myriad c:her federal stat-

utes as well” (/d.), namely, under “every federal statute

authorizing injunctive relief” (Pet. Br. 18, 30-31). Hyper-

bole is not a very effective weapon.

There is no question here of exempting from $2288 “every

federal statute authorizing injunctive relief.” What is in

issue, rather, is a statute providing a uniquely federal in-

—63—

junctive remedy, whose clear intent is to enlist the aid of

private litigants in the enforeement of the overriding fed-

eral policy embodied in the antitrust laws, over which the

federal courts have exclusive and untrammeled jurisdiction.

Nor is the issue here the exemption of every antitrust

injunction from the prohibition of $2283. Section 16 only

authorizes injunctions against “threatened loss or damage

by a violation of the antitrust laws.” Here the District Court

granted the injunction only after finding that the state

court proceeding was part and parcel of a violation of the

antitrust laws, and that the intended scope of $16 would

therefore be frustrated if a federal court were powerless

to enjoin it, pendente lite.

Thus the decision below in no way conflicts with cases,

such as those cited by petitioner (Pet. Br. 24 n. 24, 25-26),

in which the alleged antitrust violation was only collateral

to the state court action. As Studebaker noted (320 F. 2d

at 698), neither Lyons I (Pet Br. 24, 25, 34) nor Red Rock

(Id. at 34, 37) involved a showing by the federal plaintiff

that the state proceeding sought to be enjoined itself of-

fended the federal statute. All these cases* involved actions

“for collection of ordinary debts for goods delivered or

services rendered” and not actions “to enforce the very

conduct ... prohibited by the Clayton or Sherman Act”

(Helfenbein v. International Industries, Inc., 438 F.2d 1068,

1071 (8th Cir. 1971)).

On the other hand, courts have enjoined state suits un-

der the antitrust laws when those suits “are in further-

ance of an illegal act” (Katz Drug Co. v. Schaeffer Pen

* The same is true of all the other cases petitioner cites: Am.

Mfrs., Avon Pub. Co., Bascom Launder, Carter, Reines and Pot-

ter (Pet. Br. 24 n.24, 25-26) (see infra, pp. 67, 69).

= =

Co., 6 F. Supp. 212, 214 (W.D. Mo. 1933)), or when nec-

essary “to prevent the defendants from acquiring any of

the fruits of the condemned project” (United States v.

Bayer, 135 F. Supp. 65, 73 (S.D.N.Y. 1955); see also Phila-

delphia World Hockey Club, Inc. v. Philadelphia Hockey

Club, Inc., 351 F. Supp. 462, 494, 514, 517-19 (E.D. Pa.

1972)). Thus we do not ask this Court to obliterate “a pre-

viously settled interpretation of §2283 and §16” (Pet. Br.

24).

Finally, as the Court of Appeals declared, the facts here

reflect a “classic example” of the impending frustration

of uniquely federal remedies. Not only do Vendo’s enforce-

ment actions violate the Sherman Act, they threaten the

extinction of the very right to redress that violation in a

courtroom (supra, pp. 47-50).

B. The Preliminary Injunction Was “Necessary In Aid Of”

The District Court’s Jurisdiction Within The

Of The Second Exception To 28 U.S.C. §2283.

The District Court held that the injunction was “neces-

sary in aid oi” its jurisdiction and thus qualified under the

second exception to 28 U.S.C. $2283. The Court of Appeals

did not pass upon this question, since it upheld the Dis-

trict Court under the “expressly authorized” exception to

§2283.

The District Court’s decision was correct. Petitioner en-

tirely misconstrues what the Court held and ignores what

it found. There is no question but that petitioner’s “further

collection efforts would eliminate two plaintiffs, Stoner

Investments and Lektro-Vend Corp.,” together with their

respective federal antitrust claims. Absent the injunction

those plaintiffs would be, at least in substance, under peti-

_ =

tioner’s control or at its disposition (App. 238-39; 241).

Petitioner does not contend that the District Court abused

its discretion in making these findings which, in any event,

are squarely based upon the evidence (supra, pp. 47-50).

Petitioner argues that “irrespective of Stoner Invest-

ments and Lektro-Vend” the remaining antitrust plaintiff

—Stoner’s administrator—“would continue to be an ad-

verse party and, therefore, the District Court would not

in any event be deprived of jurisdiction under comme

ITI” (Pet. Br. 35). But petitioner would be the first to o

ject should Stoner’s administrator try to continue the pros-

ecution of the two federal antitrust claims of Lektro-Vend

and Stoner Inv. Absent relief, the District Court would be

left with but one federal antitrust claim, and even that

claim could not be prosecuted “effectively” (App. 239). The

antitrust claims of Stoner Inv. and Lektro-Vend would be

placed upon the auction block of the sheriff. Obviously

Article III would require dismissal of those two claims,

as the District Court held (App. 241), not to mention that

this would also spell the demise of petitioner’s competitor.

In Atlantic Coast Line R. Co. v. Brotherhood of Loco-

motive Engineers, 398 U.S. 281, 295 (1970), this Court de-

scribed the “in aid of jurisdiction” exception to $2283:

“!W je conclude that it implies something similar to

the concept of injunctions to ‘protect or effectuate’

judgments. Both exceptions to the general prohibition

of §2283 imply that some federal injunctive relief may

be necessary to prevent a state court from so inter-

fering with a federal court’s consideration or dispost-

tion of a case as to seriously impair the federal court's

flexibility and authority to decide that case.”

Here petitioner seeks not merely “to seriously impair the

. .. flexibility and authority” of the District Court to de-

iii,

cide this case; indeed, it seeks to “eliminate two of the

plaintiffs herein” (App. 239).

When two meritorious antitrust claims are subject to

imminent extinction in furtherance of an anticompetitive

scheme, then the need for federal injunctive relief, under

Atlantic Coast Line, is absolutely compelling. Far more

is at stake than mere “flexibility and authority” to decide

those claims; without court intervention the claims them-

selves would disappear. As the District Court put it in

Lyons I (Pet. Br. 24, n. 10, 25, 34), an injunction “in aid

of jurisdiction” would lie when “such restraint is absolutely

necessary to preserve the integrity of the Federal court’s

jurisdiction” (109 F. Supp. at 925), precisely the case at

bar.

None of the other cases cited by petitioner involved any

threat to the very exercise of federal jurisdiction such as

petitioner's collection proceedings—in furtherance of its

antitrust violations—posed in this case. On the contrary,

the grounds upon which courts have rejected injunctions in

other cases directly support the injunction here. The Sec-

ond Cireuit’s recent decisions in Jennings (Pet. Br. 33-34)

and Vernitron (Id. at 34) are particularly instructive. In

Jenninas, petitioner’s “procedurally very similar” case (Jd.

at 33), the Court found that execution of “the state court

judgments did not constitute an impediment to the asser-

tion of the federal right or remedy” (482 F. 2d at 1131);

that it was “not enough that the requested injunction is

related to [federal jurisdiction], but it must be ‘neces-

sary in aid of’” that jurisdiction (482 F. 2d at 1134-35).

Likewise in Vernitron (Pet. Br. 34) the “only con-

ceivable interference” with federal jurisdiction was the

possibility that the state court might attempt to deter-

mine issues of federal law; this, however, hadn’t occurred

- =

and “in any event would be wholly without effec.” (440 F.

2d at 108). And in Vernitron the Second Circuit did say

that §2283 does authorize injunctions “in those situations

where the real or potential conflict threatens the very au-

thority of the federal court” (Id.). Here the threatened con-

flict is not “potential” but “real” and “the very authority

of the federal court” is indeed at stake.

That both Jennings and Vernitron support the injunc-

tion at bar is further demonstrated by the fact that both

cases distinguished the Second Circuit’s earlier decision in

Studebaker, supra, pp. 60-62, upon the identical ground:

the state proceedings sought to be enjoined “did not con-

stitute a furtherance of an ongoing violation of the Secu-

rities Exchange Act” (Jennings, 482 F. 2d at 1131; Verni-

tron, 440 F. 2d at 108). But the threat to federal jurisdic-

tion here stems directly from petitioner’s antitrust vio-

lations (supra, pp. 43-47). This also disposes of Red Rock

(Pet. Br. 34; see 195 F. 2d at 409, as well as Glenn W.

Turner (Pet. Br. 33, 34, 36).

Turner (Id.) is patently inapt. It specifically found that

the state suit did not “by its very nature [further] a vio-

lation of” federal law; on the contrary, it was prosecuted

by a state attorney general and was “consistent with the

goals of the federal securities laws” (421 F. 2d at 781).

Moreover, unlike the plaintiffs in Turner, we do not seek

to enjoin petitioner’s creditors and preserve its solvency

so as “to facilitate the collection of judgments” which we

might subsequently be awarded in this action (Jd. at 780).

Rather we seek to uphold an injunction which bars peti-

tioner from “facilitat{ing] the collection of [its] judg-

ments” and thwarting the very exercise of the District

Court’s exclusive jurisdiction over our meritorious federal

antitrust claims. The issue therefore is not petitioner’s

= =

solvency but whether there can be a trial upon antitrust

claims in the only tribunal empowered to pass upon those

claims.

Finally, the need to preserve the jurisdiction of the Dis-

trict Court over the claims at bar is particularly compelling

in light of the “overriding public policy” embodied in the

antitrust laws (Perma Life Mufflers, supra) and “the

necessities of the public interest which Congress has sought

to protect” (Zenith Radio Corp., supra).

Il.

THE PRELIMINARY INJUNCTION STRIKES A PROPER

BALANCE BETWEEN STATE AND FEDERAL INTERESTS

AND THUS IS FULLY IN ACCORD WITH PRINCIPLES OF

COMITY AND FEDERALISM.

The Court of Appeals said:

“The principle of comity has no applicability when the

exclusive remedy for an injury lies in the federal court.

We are in agreement with the trial court’s observation:

‘Principles of comity and federalism do not pre-

vent the issuance of an injunction considering the

peculiar nature of this case. The federal action

here is based in part on the very proceeding sought

to be enjoined. If federal law is violated by con-

tinuation of the state action the paramount na-

tional interest requires court intervention’ ” (App.

289, quoting App. 241).

Charging that the Court below sanctioned a “flagrant

abuse of federal equity power,” “a mockery of the concept

of federalism,” and an “insult to the processes of a state

judicial system” (Pet. Br. 38, 39), petitioner seriously

overstates what the Court actually held. Contrary to peti-

tioner’s assertion (Jd.), the Court did not hold that prin-

—~o—

ciples of comity and federalism were inapplicable in any

action under §16 of the Clayton Act simply because $16

affords an exclusive remedy in the federal courts. Quite

the contrary, the Court of Appeals specifically adopted

what the District Court said about “the peculiar nature

of this case,” namely, that it “is based in part on the very

proceeding sought to be enjoined” (supra). Indeed, as

the Court of Appeals noted (App. 290), the District Court

found that the judgments petitioner sought to enforce de-

pended on unlawful agreements and were obtained in

pursuance of an anticompetitive scheme, contrary to sec-

tions 1 and 2 of the Sherman Act (supra, pp. 43-47).

Thus we dispose of petitioner’s asserted “direct conflict

with decisions of the Fifth Cireuit” (Pet. Br. 38), which

is illusory. Response of Carolina (Id. at 37) denied in-

junctive relief under §16 precisely because “the contract

provisions sued on in the state court do not embody or

further the anti-competitive practices” (498 F. 2d at 319) ;

and Red Rock (Pet. Br. 37) likewise expressly recognized

“that cases could arise in which a State Court proceeding

could be properly considered to threaten ‘a violation of

the Anti-Trust laws’ so as to come within” the express

terms of §16 (195 F. 2d at 409). Both of petitioner’s cases

thus clearly envisaged federal court intervention, as here,

upon a showing that “federai law is violated by continua-

tion of the state action” (App. 241, 289), not to mention

that further collection here would “thwart a federal anti-

trust suit” (supra, pp. 47-50).

The issue that remains here can be stated simply: should

the doctrine of Younger v. Harris, 401 U.S. 37 (1971) and

Huffman v. Pursue, Ltd., 420 U.S. 592 (1975) be extended

to bar the preliminary injunction in the present case?

—_70—

In Younger v. Harris (Pet. Br. 36), the Court reversed

an injunction against e pending state criminal prosecution

based upon the concept of “Our Federalism.” The Court’s

opinion (per Black, J.) described this concept as follows:

“The concept does not mean blind deference to ‘State’s:

Rights’ any more than it means centralization of con-

trol over every important issue in our National Gov-

ernment and its courts ... What the concept does rep-

resent is a system in which there is sensitivity to the

legitimate interests of both State and National Gov-

ernments, and in which the National Government,

anxious though it may be to vindicate and protect

federal rights and federal interests, always endeavors

to do so in ways that will not unduly interfere with

the legitimate activities of the States” (401 U.S. at 44).

The Court then held that, absent “special circumstances”

(/d. at 41, 45-49, 53-54), “the incidental ‘chilling effect’” off

a potentially unconstitutional state statute upon the ex-

ercise of first amendment rights “does not in itself justify

prohibiting the State from carrying out the important and

necessary task of enforcing these laws against socially

harinful conduct that the State believes in good faith to

be punishable under its laws and the Constitution” (/d..

at 51-52).

Then in Huffman v. Pursue, supra (Pet. Br. 37), the

Court held that the principles of equity, comity and fed-

eralism canvassed in Younger also forbade federal re-

straint of a state civil proceeding which was quasi-crim-

inal in nature. The District Court had enjoined the em-

forcement of a state court order closing down a movie

theatre as a result of a prosecution by a county attorney

under a state nuisance abatement statute. The Supreme

Court quoted what Younger said about “not unduly inter-

fer{ing] with the legitimate activities of the States” (4210

alien

U.S. at 601); it then found that the particular state pro-

ceeding involved was “more akin to a criminal prosecution

than are most civil cases,” noting specifically that the state

was a party, and that the proceeding was “both in aid of

and closely related to criminal statutes” pertaining to

— (Id. at 604). The Court concluded that:

. an offense to the State’s interest in the nuisance

litigation | is likely to be every bit as great as it would

be were this a criminal proceeding . . . Similarly, while

in this case the District Court’s injunction has not

directly disrupted Ohio’s criminal justice system, it

has disrupted that State’s efforts to protect the very

interests which underlie its criminal laws and to ob-

tain compliance with precisely the standards which are

embodied in its criminal laws” (/d. at 604-05).

That the holdings of Younger and Huffman do not ex-

tend across the board to all civil proceedings was clearly

reflected in both the majority and dissenting opinions in

Colorado River Water Conservation District v. United

States, 47 L. Ed. 2d 483, 497-98, 500-01, 504 (March 24,

1976). What is required is not a “blind deference” to

state interests, but rather a fair balancing of the “legiti-

mate interests of both State and National Governments”

(Younger, supra; Huffman, supra). When the present case

is analyzed in these terms, it becomes clear that this pre-

liminary injunction did not offend principles of comity

and federalism.

A. Enjoining Collection Of Petitioner’s Judgments, Pen-

dente Lite, Did Not Unduly Infringe Any Significant

State Interest.

The District Court recognized that “the principles of

comity and federalism militate against unnecessarily in-

—72—

terferinmy with pending state court actions even if §2283

is satisfied” (App. 240, citing Mitchum, supra).

But the state interest involved here falls far short of

the interests at stake in the previous cases where this

Court held federal injunctive relief to be inappropriate.

This state action was not a criminal proceeding (Younger,

supra).* Nor was it “akin to a criminal prosecution,”

where a federal injunction would “[disrupt the] State’s

efforts to protect the very interests which underlie its

criminal laws .. .” (Huffman, supra). There was no inter-

ference here with state executive officers (Rizzo v. Goode,

Pet. Br. 36); or the state’s collection of its taxes (Great

Lakes Dredge & Dock Co. v. Huffman, 319 U.S. 293 (1943) ):

or the state’s certification ofits delegates to a national

political convention (Cousins v. Wigoda, Pet. Br. 36; see

Id., 463 F. 2d 603, 606-07 (7th Cir. 1972).**

Rather, the interests advanced in the state court action

here were those of a private party—a private party, indeed,

which has been found prima facie guilty of violations of

both sections 1 and 2 of the Sherman Act. Neither the

State of Illinois nor any state official was a plaintiff here.

Quite the contrary, respondents’ repeated attempts to

gain relief under Illinois antitrust law were supported, not

* As Mr. Justice Stewart stated in Younger: ‘‘The offense to

state interests is likely to be less in a civil proceeding. A State's

decision to classify conduct as criminal provides some indication

of the importance it has ascribed to prompt and unencumbered

enforcement of its law. By contrast, the State might not even be

a party to a proceeding under a civil statute.’’ (401 U.S. at 55 n.2,

concurring opinion).

** Mr. Justice Rehnquist, while warning in Cousins that fed-

eral courts should not ‘‘casually enjoin the conduct of pending

state court proceedings of either civil or criminal character, also

noted that ‘‘the test to be applied may be less stringent in civil

eases than in criminal’’ (409 U.S. at 1206).

—13—

only by the Illinois attorney general, who appeared as

amicus curiae during both state court appeals (See App.

99), but even by the Plinois legislature (supra, p. 21).

The District Court did not overturn any Illinois stat-

ute, nor did it reverse any state court interpretation of

Tilinois statutory or common law. And there was no dis-

ruption of the ongoing state adjudicatory process. While

we recognize that petitioner’s collection activities qualify

as “state proceedings” for purposes of §2283, surely tem-

porary intervention during this phase of the state pro-

ceedings presents a far less sensitive situation than would

have heen presented by federal interference in the state

court’s ongoing adjudication of the substantive issues in

the case.

And petitioner’s right to collect the balance of its judg-

ments, should it ultimately prevail, “remains well protected”

by substantial bonds, a security agreement and the con-

tinued pendency of the judgment liens (App. 242; supra,

pp. 32-33). Thus any indirect state interest in the collection

of those judgments is also protected. Certainly there was

no affront to state interests when petitioner volunteered

a “standstill agreement” while the District Court passed on

respondents’ claims at the preliminary injunction hearing

(supra, pp. 29-30) ; a “standstill order” during the trial of

those claims—which the parties had always anticipated

(supra, pp. 27-28)—should have no larger effect.°

* This injunction was carefully designed to impose the minimum

restraint necessary to assure prompt and effective adjudication of

the treble damage claims. Thus, for example, the order provided

that while petitioner should not reactivate the dormant contempt

proceelings, the state court might freely do so sua sponte (App.

269-70). Also, the recent modification of the order (supra, pp. 34-

35) permits petitioner to undertake discovery im the state court

but not to secure further turnover orders.

—%4—

Finally, as Younger and Huffman noted, federal absten-

tion is inappropriate in certain circumstances: in cases of

bad faith prosecution, harassment, or prosecution under

“flagrantly and patently” unconstitutional statutes (401

U.S. at 53-54; 420 U.S. at 601, 611).

But similar cireumstances are presented in this case. The

District Court found “persuasive evidence that Vendo’s

activities in its litigation against the Stoner interests in

Illinois state court were not a genuine attempt use the

adjudicative process legitimately” (App. 237). Moreover,

the agreements upon which the petitioner sued and recov-

ered were indeed flagrantly and patently violative of the

Sherman Act (App. 233-35). Thus, Mr. Justice Stewart’s

observation in Younger is particularly appropriate :

“In such circumstances the reasons of policy for de-

ferring to state adjudication re outweighed by the

injury flowing from the very bringing of the state

proceedings, by the perversion of the very process

that is supposed to provide vindication, and hy the

need for speedy and effective action to protect fed-

eral rights” (401 U.S. at 56 (coneurring opinion) ).

Here the Illinois judicial process, which petitioner says

should be vindicated, was found to have been employed

by petitioner as part and parcel of its scheme to monopolize

trade and enforce agreements violative of the Sherman

Act.

B. Paramount Federal Interests Required The Issuance Of

This Preliminary Injunction.

As against whatever state interests may be at stake, the

federal interests at bar are paramount. Respondents prose-

cute this case in a federal district court invested by Con-

affine

gress with an exclusive jurisdiction to pass upon the claims

at bar. Congress so acted, not to demean the state courts,

but because “an administration of the Acts, at once effee-

tive and uniform would best be accomplished by an un-

trammeled jurisdiction of the federal courts” (Lyons, 222

F. 2d at 189). They prosecute this case as private attorneys

general not merely to secure “private relief, but... to

serve as well the high purpose of enforcing the antitrust

laws” (Zenith Radio Corp., 395 U.S. at 130-131). And the

determination of that policy is not ‘at the mercy of’ the

parties .. . nor dependent on the usual rules governing

settlement of private litigation” (Mercoid Corp. v. Mid

Continent Investment Co., 320 U.S. 661, 670 (1944)).

Given the District Court’s findings, this preliminary in-

junction was necessary to prevent the immediate consum-

mation of petitioner’s anticompetitive scheme, which vio-

lated both sections 1 and 2 of the Sherman Act. Other-

wise, petitioner would succeed in thwarting altogether the

prosecution of two of che antitrust claims here, and crip-

pling the prosecution of the third. Thus the District Court

concluded :

“That the public interest in protection of competition

requires the issuance of a preliminary injunction; that

the paramount national interest requires court inter-

vention by a preliminary injunction herein; that the

failure to issue such injunction will deprive the Court

of full and effective jurisdiction of the said federal

antitrust claims . . . and will impair, obstruct, or

render fruitless the Court’s determination of said

claims; and that a preliminary injunction as provided

herein is necessary to protect the jurisdiction of this

Court... .” (App. 267).

—_76—

And Mr. Chief Justice Stone said it all when he stated,

on behalf of a unanimous Court in Sola Electric:

“Local rules of estoppel which would fasten upon the

public as well as the petitioner the burden of an agree-

ment in violation of the Sherman Act must yield to

the Act’s declaration that such agreements are un-

lawful, and to the public policy of the Act which in the

public interest precludes the enforcement of such un-

lawful agreements” (317 U.S. at 177).

Iv.

THIS INJUNCTION IS NOT PRECLUDED BY RESPOND.

ENTS’ FAILURE TO PRESS THEIR FEDERAL ANTITRUST

DEFENSE IN THE STATE COURT ACTION.

At the very outset of this litigation, respondents, “in

an effort to avoid a needless duplication of lawsuits be-

tween the parties” (App. 13), removed the entire action

to the federal District Court (the only court which could

have tried all the issues in the case). Separate lawsuits

in the state and federal courts were made necessary only

by petitioner’s refusal to waive its objections to removal.*

Once petitioner made that decision, there was no question

but that a separate federal action would be required to

try respondents’ injunctive and treble damage claims.

(This fact alone negates any suggestion that the with-

drawa!] of respondents’ federal defense from the state ac-

tion was a mere “tactical” attempt to get two bites at

the apple.)

When the case was remanded to the state court (Sep-

tember 23, 1965), the respondents filed three separate de-

* Petitioner’s objections could have been waived. See LA Moore’s

Federal Practice, §0.157[11] at n29 (1974 ed.). |

alien

fenses in that court based on the Illinois and federal anti-

trust laws (October 20, 1965). The following day, they

filed the present action in the federal District Court.

It was understood by the parties and by the District

Court that a federal trial of respondents’ antitrust claims

would take place after the conclusion of the state court

suit—regardless of who prevailed there—in order to avoid

the “physical impossibility” of trying two complex law-

suits at once (App. 260-65). In its Reply In Support of

Petition, petitioner again reflected the consistent un-

derstanding of the parties that the trial of respondents’

treble damage claims would inevitably proceed. It stated:

“The jurisdiction of the federal courts to adjudicate

treble-damage claims . . . is not disputed. The issue

here relates to the federal courts’ power to enjoin

state court proceedings (and, more specifically, en-

forcement of final state court judgments)—not what

effect the state court proceedings or judgments may

have on respondents’ treble-damage action.” (p. 8; em-

phasis petitioner’s. )

Yet the plain fact is that, absent the injunction, federal

treble damage claims will be defeated (supra, pp. 47-50).

Thus, petitioner’s argument boils down to the untenable

proposition that, although respondents’ right to proceed

with their treble damage claims is conceded, they have no

right to the equitable relief which is necessary to preserve

the trial of those claims, because of the dismissal of their

federal-antitrust defense from the state action.

The facts surrounding that dismissal are pertinent. It

was only after the state trial judge refused to reinstate

their antitrust defenses (September 11, 1970) that the re-

spondents requested the dismissal without prejudice of

their federal antitrust defense as well, hoping thus to

ain

avoid piecemeal, duplicative litigation of complex anti-

trust issues.* There being no objection by petitioner, this

motion was granted (App. 82). Obviously, under such cir-

cumstances, the dismissal without prejudice envisioned

nothing less than a full preservation of respondents’ rights

to assert their federal antitrust issues in the federal court

action.

Dismissal of the federal defense was aiso spurred by the

same considerations of comity which petitioner claims have

been ignored. District Judge MeGarr, then presiding over

this case, indicated that the simultaneous pendency of these

federal antitrust issues in both staie and federal courts

“presents a conflict in the comity between our bipartite

judicial system” (App. $2). When he was informed of the

dismissal of the federal antitrust defense in the state case,

he said,

“This was undoubtedly done in consideration of this

court’s expressed reluctance to consider the cause of

* The first Appellate Court decision held the state antitrust is-

sues inapplicable under the doctrine of federal preemption—a pal-

pably erroneous ground, as petitioner now candidly acknowledges

(Pet. Br. 29 n.13). When the trial court refused to reinstate the

state antitrust defenses and counterclaim in light of an inter-

vening legislative amendment (supra, p. 21), the state defend-

ants confronted the prospect of litigating their appeal to the Ap-

pellate Court and ultimately to the Illinois Supreme Court or to

this Court, securing a third trial at which to litigate their state

antitrust defenses and counterclaim.

Thereafter, respondents faced the inevitable prospect of having

to try their treble damage claims in federal district court, mak-

ing a total of three trials on complex antitrust issues against a

litigious, deep-pocketed adversary.

——

—_79—

action here while the same issue was pending between

the same parties in the state court case.” (App. 85.)*

Indeed, the dismissal of the antitrust defense from the

state action lessened the risk of “insult to the processes of

a state judicial system” (Pet. Br. 38). For if the state court

had proceeded to a decision on ultimate legal issues of fed-

eral antitrust liability, that decision would certainly have

been subject to redetermination in the federal court, under

the doctrine of Lyons, supra. Surely that would have been

much more offensive than the present situation, which

merely involves a temporary “standstill” order, pendente

lite (App. 264).

And how can all three respondents be denied the right

to proceed on their federal antitrust claims by virtue of

the dismissal, without prejudice, by two respondents of a

defense in the state action—a defense whose adjudication

by the state courts would have been neither res judicata

nor in any way binding on the federal court? (Lyons, supra,

222 F.2d at 189).

* Judge McGarr, after receiving briefs on the question of res

judicata, concluded that respondents’ federal antitrust case ‘‘en-

compasses issues which are broader than any presented in the

[state court] anti-trust defense.’’ Accordingly, he concluded that

‘*nlaintiff cannot be precluded from asserting its anti-trust cause

of action in the federal court’’ (App. 92).

Indeed, respondents’ Amended and Supplemental Complaint

(App. 124), on the basis of which preliminary relief was sought,

alleged numerous actionable facts which were not in existence at

the time the antitrust defense was withdrawn. It is difficult to

understand how, by withdrawing their federal defense without

prejudice and without objection, the respondents could have

waived their right to a full assertion of an antitrust claim based

in part on actionable facts which could not have been included in

that defense at the time it was dismissed.

England y. Louisiana Medical Examiners, 375 U.S. 411,

421-22 (1964), approved practically the same procedure fol-

lowed here: reservation of federal constitutional claims

for adjudication in a federal court following the state

court’s determination of state law issues. It applies a for-

tior? in the case of federal antitrust claims, whose adjudica-

tion Congress entrusted exclusively to the federal courts.

Nor should it matter that respondents were remanded to

the state court by virtue of petitioner’s refusal to waive its

objections to removal, rather than by virtue (as in Eng-

land) of the federal court’s own application of the doctrine

of abstention.

Further, the present situation, in which a preliminary

injunction is required to preserve the respondents’ right to

a federal trial, has occurred only because the federal court,

by agreement of the parties, stayed its hand in order to let

the state trial conclude first. As Judge MeLaren said,

“T understood that the parties had agreed and that

[petitioner’s counsel] was in entire agreement that

there would not be any effort, that it would be an undue

burden on both sides, to try to carry on both suits con-

currently. J certainly would not have held off for three

years on the trial of the case before me if I had known

that there was any question in his mind that somehow

the plaintiff here is waiving any rights by continuing

the matter, and the Court was in some way giving the

defendant an advantage by letting it proceed in the

state proceeding and holding the matter up here ....

I didn’t think that there was anything in anyhody’s

mind to the contrary. After all of this time and after

all of the numbers of times that we have had status re-

ports, it comes as a very severe shock to me, and T must

say that I am very disappointed and very chagrined

that I didn’t simply force this case to go ahead along

with other cases.” (App. 264-65; see also App. 260-264).

Re Mer se ahd Sm ee

Judge McLaren summed up the matter succinctly when

he told petitioner: “Well, you had a chance as plaintiff to

select your forum for the charges you made. I think that

they had an equal right to choose their forum for the

charges that they made” (App. 263). Indeed, respondents

could have litigated their antitrust claims only in a federal

forum.

Where the federal Court has stayed its hand because of

such an understanding on the part of the Court and the

litigants, it would be utterly unjust now to penalize respond-

ents, not to mention the publie interest, simply because

they withdrew their federal antitrust defense without prej-

udice under the circumstances stated,

Mercoid Corp. v. Mid-Continent Investment Co., 320 US.

661, 671 (1944), held that a defendant could pursue a fed-

eral antitrust counterciaim even though it had failed to

raise the antitrust violation as a defense in a prior related

litigation between the same parties. Citing the public in-

terest embodied in the federal antitrust laws, the Court de-

elared:

“And the determination of that policy is not ‘at the

mercy of’ the parties ... nor dependent on the usual

rules governing the settlement of private litigation.”

(/d. at 670).

The most that can be said of respondents’ failure to press

their federal antitrust defense in the state court is that

they thereby permitted the entry of a final Supreme Court

judgment. Petitioner cannot escape the fact that his is not

a private action but one in which plaintiffs act as private

attorneys general to enforce the salutary provisions of the

Sherman Act. Nor can petitioner escape the finding of the

Courts below (1) that the agreements on which those judg-

' ee

—82—

ments were based violated the Sherman Act, and (2) that

the procurement of judgments based upon those agree-

ments was part and parcel of the scheme to violate the

antitrust laws. Therefore the enforcement of those judg-

ments would enforce the unlawful agreements and consum-

mate the anticompetitive scheme in violation of Sections 1

and 2 of the Sherman Act.

Thus the pronouncement of Mr. Chief Justice Stone in

Sola Electric supra, is directly in point:

“Local rules of estoppel which would fasten upon the

public as well as the petitioner the burden of an agree-

ment in violation of the Sherman Act must yield to the

Act’s declaration that such agreements are unlawful,

and to the public policy of the Act which in the public

interest precludes the enforcement of such unlawful

agreements” (317 U.S. at 177).

THE DISTRICT COURT DID NOT REVERSE, REVIEW OR

REVISE THE STATE COURT DECISION BY COLLATERAL

ATTACK OR OTHERWISE.

Petitioner's final argument is tha

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