Petition — Noble v. McClatchy Newspapers

Ocroser Term, 1976

No. 76 24 2

Wrarp M. Nosiz and Erra M. Noszz,

Cross-Petitioners,

vs.

McCiatcHy NEWSPAPERS, a corporation; ELEANOR Mc-

CLatTcnry, an individual ; Waurer P. Jones, an indi-

vidual; C. K. McCriatcry, an individual; Byron

ConxKLin, an individtal; Carto Bua,

an individual,

Cross-Respondents.

for the Ninth Circuit

G. JosupH BERTAIN, JR.,

Trmorny H. Fre,

50 California Street, Suite 955,

San Francisco, Californie 94111,

Telephone: (415) 981-4938,

Attorneys for Cross-Petitioners.

Page

EE GE ded vnnewcddeddedtndcecedeoecccasecccenkes 2

EE etic dads ekedaddaceadnesediuadsnesetediees 2

ED ic ccocccccncnceddséuecesucsedbeesdanse 2

EE bi LU ae che kesuttenuedbddeeenecoseecess 3

Section 4 of the Clayton Act, 15 U.S.C. §15 .......... 3

Section 16 of the Clayton Act, 15 U.S.C. § 26 ......... 4

Section 1 of the Sherman Act, 15 U.S.C. §1 .......... 5

EE EO Re A OE 5

Reasons for granting the writ ............c.ceceeeeeeeees 15

PE inedidsuebisetbeevadessteadebsaredssieedeceeds 24

Table of Authorities Cited

Cases Pages

Alpha Distributing Co. v. Jack Daniel Distillery, 454 F.2d

Ge ED ebdadecdesensdecccctcnccccencéeceneste 17

Bigelow v. RKO Radio Pictures, Irv., 327 U.S. 251 ...... 19, 20

Chicago Board of Trade v. United States, 246 U.S. 231 ... 16

Federal Trade Comm’n v. Texaco, Inc., 393 U.S. 223 ...... 17,18

Perma Life Mufflers, Inc. v. Intl Parts Corp., 392 U.S. 134 22

Northern Pac. Ry. Co. v. United States, 356 U.S. 1 ...... 16

Standard Oil Co. of New Jersey v. United States, 221U.S.1 15

Story Parchment Co. v. Paterson Parchment Paper Co., 282

Te GEE cccncdeceseccecaseseneusapateensedeecsonsens 19, 20

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

i scshencustssdsdekeamadeeuadneuesenseneseusssiese 20

ii Tape or AutTHorities CITep

Codes Pages

Evidence Code, Section 452(d) ........ccccecccccecceces 23

Statutes

Clayton Act:

Section 4 (15 U.S.C. Section 15) ............ 3, 4, 13, 15, 21

Section 16 (15 U.S.C. Section 26) ................. 3, 4, 12

Sherman Act:

Section 1 (15 U.S.C. Section 1) ................ 3, 5,14, 15

ee nr ae 2

Other Authorities

FTC Staff Report of Ad Hoe Committee on Franchising,

submitted to the Federal Trade Commission, June 2, 1964,

Dr TD idcdccsnncdudeaeuiessscdsavasscdeectatevectiaes 24

Franchising in the Economy 1974-1976, United States

Department of Commerce/Domestic and International

Business Administration/Bureau of Domestic Commerce 23

In the Supreme Court

Bnited States

OcToBER TERM, 1976

No.

WIarp M. Nosie and Erra M. NosLg,

Cross-Petitioners,

vs.

McCuiatcHy NEWSPAPERS, a corporation; ELEANOR Mc-

CLATCHY, an individual ; WALTER P. JONEs, an indi-

vidual; C. K. McCuiatcHy, an individual; Byron

ConKLIN, an individual; Carto Bua,

an individual,

Cross-Respondents.

CROSS-PETITION FOR WRIT OF CERTIORARI

to the United States Court of Appeals

for the Ninth Circuit

Cross-petitioners pray that a writ of certiorari issue

to review the judgment and opinion of the United

States Court of Appeals for the Ninth Circuit entered

in this proceeding on November 14, 1975.

2

OPINION BELOW

The opinion of the Court of Appealsis officially re-

ported at 533 F.2d 1081. It appears is Appendix A

to the Petition for Writ of Certioran filed by peti-

tioners in McClatchy Newspapers, et ai v. Willard M. |

Noble, et al., No. 76-86 in the Suprene Court of the

United States (October Term, 1976). No opinion was

rendered by the District Court for the Northern Dis-

trict of California.

JURISDICTION

The judgment of the Court of Aopeals for the

Ninth Circuit was entered on Novemler 14, 1975. A

timely petition for rehearing filed by cross-petitioners

herein was denied May 20, 1976. 533 T.2d 1081. This

cross-petition for certiorari was filed within 90 days

of May 20, 1976. The jurisdiction of tiis Court is in-

voked under 28 U.S.C. Section 1254(1).

QUESTIONS PRESENTED

This cross-petition involves a distribution system

which permits the distributors to transfer and sell

their businesses to another party for valuable con-

sideration so long as the distributois are in good

standing and their distribution agreenents have not

been terminated. However, if the manufacturer ter-

minates the distribution agreement, vith or without

cause, the right to sell the business is bst and the dis-

3

tributor forfeits his equity interest and good will in

his business, The questions presented here are:

1. Does a distributor suffer damages when he is

prevented from selling his business under a sale of

business restriction which has been found by the jury

to be an unreasonable restraint of interstate trade

and commerce under Section 1 of the Sherman Act,

15 U.S.C. §1, based upon a rule of reason analysis?

2. Should the judgment of the District Court in

favor of cross-petitioners herein for $63,333.04 be re-

instated by this Court against cross-respondents based

upon the verdict of the jury, which was upheld by the

District Court, that said sale of business restriction

constituted an unreasonable restraint of interstate

trade and commerce under Section 1 of the Sherman

Act, 15 U.S.C. §1, and injured cross-petitioners as a

result thereof ?

3. Did the District Court abuse its discretion when

it denied cross-petitioners’ request to provide perma-

nent equitable relief under Section 16 of the Clayton

Act, 15 U.S.C. §26 prohibiting the cross-respondents

from continuing to maintain this unreasonable re-

straint of trade?

STATUTES INVOLVED

SECTION 4 OF THE CLAYTON ACT, 15 U.S.C. § 15

Any person who shall be injured in his business or

property by reason of anything forbidden in the anti-

trust laws may sue therefor in any district court of

the United States in the district in which the defend-

ant resides or is found or has an agent, without re-

4

spect to the amount in controversy, and shall recover

threefold the damages by him sustained, and the cost

of suit, including a reasonable attorney’s fee. Oct. 15,

1914, c. 323 §4, 38 Stat. 731; 15 U.S. Code, See. 15.

SECTION 16 OF THE CLAYTON ACT, 15 U.S.C. § 26

Any person, firm, corporation, or association shall

be entitled to sue for and have injunctive relief, in

any court of the United States having jurisdiction

over the parties, against threatened loss or damage by

a violation of the antitrust laws, including sections

2, 3, 7 and 8 of this title, when and under the same

conditions and principles as injunctive relief against

threatened conduct that will cause loss or damage is

granted by courts of equity, under the rules govern-

ing such proceedings, and upon the execution of

proper bond against damages for an injunction im-

providently granted and a showing that the danger of

irreparable loss or damage is immediate, a prelimi-

nary injunction may issue: Provided, That nothing

herein contained shall be construed to entitle any

person, firm, corporation, or association, except the

United States, to bring suit in equity for injunctive

relief against any common carrier subject to the pro-

visions of the Act to regulate commerce, approved

February fourth, eighteen hundred and eighty-seven,

in respect of any matter subject to the regulation, su-

pervision, or other jurisdiction of the Interstate Com-

merece Commission. Oct. 15, 1914, ¢. 323 §16, 38 Stat.

737; 15 U.S. Code, Sec. 26.

3

SECTION 1 OF THE SHERMAN AOT, 15 U.8.C. $1

Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or com-

merce among the several States, or with foreign na-

tions, is hereby declared to be illegal. Every person

who shall make any contract or engage in any combi-

nation or conspiracy hereby declared to be illegal shall

be deemed guilty of a felony and, on conviction

thereof, shall be punished by fine not exceeding one

million dollars if a corporation, or, if any other per-

son, one hundred thousand dollars, or by imprison-

ment not exceeding three years, or by both said pun-

ishments, in the discretion of the court. July 2, 1890,

Chap. 647, See. 1, 26 Stat. 209; August 17, 1937, Chap.

690, Title VIII, 50 Stat. 693; July 7, 1955, Chap. 281,

69 Stat. 282; December 21, 1974, Public Law 93-528,

See. 3, 88 Stat. 1708; December 12, 1975, Public Law

94-145 (Antitrust Procedures and Penalties Act), 89

Stat. 801; 15 U.S. Code, See. 1.

STATEMENT OF THE CASE!

Defendant McClatchy Newspapers is the publisher

of the dominant newspaper in the Sacramento, Cali-

fornia metropolitan area—The Sacramento Bee. ( Pits.

Ex. 46F, RT 659). Like most newspaper publishers

1Cross-petitioners were the plaintiffs in the District Court and

will hereinafter be referred to as plaintiffs. Cross-respondents

were the defendants in the District Court and will hereinafter be

referred to as defendants. RT refers to the Reporter’s Transcript

of the trial proceedings; CT refers to the Clerk’s Transcript on

appeal to the United States Court of Appeals; and Pits. Ex. refers

to plaintiffs’ exhibit admitted in evidence at the trial.

6

throughout the United States McClatchy Newspapers

distributes The Sacramento Bee through independent

contractors and not employees. The reason for this

was explained by plaintiffs’ expert on newspaper dis-

tribution, Paul Rothman, who had 55 years’ experi-

ence in the newspaper business:

“A. Well, a dealer works seven days a week,

because it’s his business. His wife usually takes

care of his books. If he has a couple of boys they

carry a paper route. If it was an employee setup,

they would be working five days a week, forty

hours a week, and you would have to have one

and a third man for each dealership plus the fact

that you would have to have a relief man for it,

plus the fact that anytime that they worked be-

yond that forty hours, and this dealership is prac-

tically a twenty-four hour affair, in ease of an

emergency, why, you would have to pay all that

overtime, plus the fact that you would have to

supply trucks, vehicles of all kinds, where the

dealership, the dealer takes care of his own trans-

portation, plus the fact that you would have to

buy or print all your various forms which the

dealer either pays for now or buys it himself.”

(RT 1562). (Emphasis Added).

Distribution of The Sacramento Bee throughout

northern California and Nevada is accomplished pur-

suant to written contracts with approximately 1,700

minor city carriers, 150 to 200 minor country carriers,

200 country adult distributors and 9 city adult news-

stand distributors. As set forth in the city carriers’

contracts, the country carriers’ contracts, the country

distributors’ contracts and the city newsstand distribu-

7

tors’ contracts, the entire distribution of The Sacra-

mento Bee is laden with virtually all the recognized

trade restraints—from resale price fixing,? customer

restrictions,* territorial restrictions,‘ exclusive deal-

ing,’ to restraints against alienation.*

Mr. Paul Rothman testified that the above restraints

were common practice in the newspaper industry all

over the United States. (RT 1596-98). Defendants’

counsel argued to the jury that the universality of

these restraints by publishers throughout the country

means “there is no great sinister brooding in Sacra-

mento McClatchy Newspapers [sic] that has a lot of

erazy and supposedly illegal contracts.” (RT 2251).

The city newsstand distributor contracts between

McClatchy Newspapers and its 9 adult city newsstand

distributors permitted them to sell and transfer their

distributorships to a third party for valuable consider-

ation provided they gave McClatchy Newspapers

sixty days’ advance notice and obtained its consent to

the transfer. McClatchy Newspapers agreed that it

would not withhold its consent unreasonably. (Pits.

Ex. 7, RT 140). Pursuant to this provision city news-

stand distributor Gallagher sold Sacramento Bee City

2Para. 2 of Pits. Exs. 21, 22, RT 129; Para. 2 of Pits. Exs. 24,

25, RT 129-30; Para. 7 of Pits. Exs. 27, 28, RT 132, 137.

8Para. 6 of Pits. Exs. 21, 24, RT 129.

4Para. 7 of Pits. Exs. 21, 24, RT 129; Para. 6 of Pits. Exs. 22,

25, RT 129-30.

5Para. 16 of Pits. Exs. 21, 24, RT 129; Para. 15 of Pits. Exs. 22,

25. RT 129-30; Para. 7 of Pits. Exs. 27, 28, RT 132, 137; Para.

6 of Pits. Exs. 1, 6, RT 137, 139; Para. 4 of Pits. Ex. 7, RT 140.

6Para. 5 of Pits. Exs. 21, 22, 24, 25, RT 129-30; Para. 5 of Pits.

Exs. 27, 28, RT 132, 137; Para. 10 of Pits. Exs. 1, 6, RT 137, 139;

Para. 11 of Pits. Ex. 7, RT 140.

8

Newsstand Distributorship No. 2 to Mr. James Clifton

for $6,000.00 with the consent of McClatchy Newspa-

pers. (RT 1153-56, 1174-76, Pits. Ex. 18). Under this

provision city newsstand distributor Scott Berry sold

Sacramento Bee City Newsstand Distributorship No. 3

to Howard R. Hoel for $8,000.00 with the consent of

McClatchy Newspapers. (RT 1178-82, 1610-19, Pits.

Exs. 14, 14A).

However, under the terms of said city newsstand

distributor contracts if McClatchy Newspapers termi-

nated the contract, with or without cause, the distribu-

tor lost his right to sell his business and forfeited his

equity interest and good will in the distributorship.

(Pits. Ex. 7, RT 140).

This contractual arrangement whereby a valuable

business may be sold as long as you are in good stand-

ing with the manufacturer but is forfeited upon ter-

mination by the manufacturer gives the manufacturer

enormous leverage over the distributor. According to

plaintiffs’ other expert on newspaper circulation prac-

tices, these are the means and tools by which the pub-

lisher obtains compliance with its wishes.

“A. Well, when you’re a dealer and you know

that. your livelihood and your investment in a

dealership depends upon what management may

or may not do, it has a great deal of effect on

what you will do when asked to do so. If you

know that you can be terminated by just being

given a thirty-day notice without any reason for

termination other than the fact that it’s in the

contract that you ean be terminated and some-

thing is asked of you, you’re reluctant not to want

9

to do it. If you protest it and if someone in man-

agement should decide to point out, well, we may

need to review your rate or we might need to

split your area or, gosh, I don’t know if we want

to keep on doing business with you, it had a very

strong effect.” (RT 1281-82).

Witness after witness, subject to this restraint, tes-

tified to its effects. City newsstand distributor Galla-

gher testified that he follows The Sacramento Bee’s

suggested retail prices, that he stays within the bound-

aries of his distributorship and that he does not

handle any other newspaper than The Sacramento

Bee. (RT 1166-67).

City newsstand distributor Hoel testified that he

sold The Sacramento Bee at all times at its suggested

prices, that he does not handle other newspapers, that

he stayed within his territorial boundaries and that at

the time he was appointed city newsstand distributor

for Newsstand No. 3 he reached an understanding

with the circulation department of The Sacramento

Bee that he would cease his work as a clerk at Stop

& Shop Market, which he did. (RT 1183-84).

City newsstand distributor Clifton testified that

since becoming city newsstand distributor in news-

stand No. 2 he has not handled other newspapers, that

he has sold The Sacramento Bee at the suggested

prices and that he has stayed within his territory.

(RT 1177).

The other daily newspaper published in Sacra-

mento, The Sacramento Union, has a similar restraint

except that in the event of a termination of a Sacra-

10

mento Union distributor the publisher pays the dis-

tributor $1.00 per subscriber. (R'T 482-84, 1280). Thus, .

like The Sacramento Bee, many Sacramento Union

distributors in good standing with the publisher have

sold their Union distributorships for substantial sums

of money with the consent of the publisher. Dewey

Jackson, Sacramento Union newsstand distributor in

District No. 4 (which was almost the same area as that

serviced by plaintiffs for The Sacramento Bee) sold

his distributorship for $30,000.00 (RT 1337-49) ; Bond

J. Ward, home delivery dealer in District 700, pur-

chased his Sacramento Union distributorship effective

May 1, 1970, from Howard Lathrop for $18,000.00

cash (RT 1404-06) ; S. William Burchiel, home deliv-

ery dealer in District 1700, purchased his Sacramento

Union distributorship effective August 1, 1970 from

Fred Gardner for $20,000.00 (RT 1414-19, Plts. Ex.

33-A); John E. Smith, home delivery dealer in Dis-

trict 1600, sold a portion of his Sacramento Union

distributorship consisting of approximately 1,262 cus-

tomers to Jack C. Harney effective March 1, 1971

for $20,000.00 (RT 1434-39, Plts. Ex. 41); and Roy

Dotson, home delivery dealer in District No. 500, orig-

inally purehased his Sacramento Union distributor-

ship effective September 1, 1968 from Wallace Kuhl-

man for $8,000.00. (RT 1451-53). Notwithstanding

the foregoing The Sacramento Union has terminated

dealers and paid the terminated dealers $1.00 per cus-

tomer pursuant to such terminations. (RT 482-83, 592,

1464-65).

The effect of this restraint was brought home by

Dick D. Chaney, circulation manager of The Sacra-

11

mento Union, who testified that none of the city home

delivery and newsstand dealers for The Sacramento

Union handled other newspapers.

The plaintiffs in this action were Willard M. Noble

and his wife, Etta, city newsstand distributors for

The Sacramento Bee in the area referred to as News-

stand No. 5 comprising a portion of the counties of

Sacramento and Placer in the State of California.

They purchased copies of the daily and Sunday edi-

tions of The Sacramento Bee newspaper from defend-

ant McClatchy Newspapers and resold from them to

retail outlets (such as drug and liquor stores, markets,

newsstands and motels) and to purchasers from news-

paper vending racks located within said territory.

Plaintiffs owned various items of equipment and sup-

plies necessary for the sale and distribution of The

Sacramento Bee in said territory, including two

trucks, approximately 150 newspaper vending racks,

office equipment and related supplies. At the time

Willard Noble commenced the distribution of The

Sacramento Bee in October 1960 the circulation of

The Sacramento Bee in Newsstand No. 5 was 18,000

dailies per month and 3,000 Sundays per month (less

returns). In the last month of plaintiffs’ distribution

of The Sacramento Bee (June 1969) the circulation of

The Sacramento Bee in Newsstand No. 5 was 72,000

dailies per month and 14,500 Sundays per month (less

returns). (Joint Pre-Trial Statement, CT 343-44)

Defendant Byron Conklin, circulation manager of

The Sacramento Bee, testified that Mr. Noble was

one of those individuals who got The Sacramento Bee

12

newspaper in just about the smallest Mama and Papa

store (RT 1061-62), that Mr. Noble was recognized

as a man with some experience, that he was very

circulation conscious (RT 1062), that Mr. Noble

worked very hard to service his dealership (RT 1086)

and that Mr. Noble “did a hell of a job” for The Saec-

ramento Bee. (RT 1116).

Notwithstanding plaintiffs’ outstanding performance

as newsstand distributors, defendant Conklin notified

plaintiffs by letter dated May 27, 1969 of the termina-

tion of their city newsstand distributor contract effee-

tive July 1, 1969. The reasons for the termination

were hotly disputed at the trial court—forming the

basis of a separate claim which is the subject of de-

fendants’ petition for certiorari to this Court (No. 76-

86).

Defendant Carlo Bua, assistant circulation manager

of The Sacramento Bee, testified that a few days after

plaintiffs received their termination notice, Mr. Conk-

lin said to him, “Well, Carlo, now is the best time to

split Newsstand 5. Let’s work on a feasible split that

we think would be profitable for those concerned and

be equitable to each individual independent contractor

for that area” (RT 876-77) ; that he suggested to Mr.

Conklin that he be given the responsibility for mak-

ing the split which was granted (RT 876); that on

June 4, 1969, when Mr. Noble visited their offices he

and Mr. Conklin informed Mr. Noble that they were

splitting his distributorship (RT 873); and that at

the close of the meeting he invited Mr. Noble into his

office and showed him the map of the city newsstand

13

distributorships and the split of his distributorship

along Walnut Avenue. (RT 873-84).

Defendant Conklin testified that during his June 4,

1969 meeting with plaintiff Willard Noble, Noble

asked him “Why can’t I sell Newsstand No. 5” and

“T said that his contract had been terminated as of

the first of the following month and he had nothing

to sell, that we had other plans.” (RT 1108) Accord-

ing to Mr. Conklin the other plans were the splitting

of the dealership. (RT 1108-09).

Effective July 1, 1969 James and Elizabeth Galla-

gher took over distribution of The Sacramento Bee in

half of plaintiffs’ former territory and Gary and

Judith Downing took over distribution of The Sacra-

mento Bee in the other half of plaintiffs’ territory,

pursuant to the same form of contract McClatchy

Newspapers used with plaintiffs. (Plts. Exs. 10, 12,

RT 1097). Approval of the Gallaghers to take over

half of plaintiffs’ distributorship was conditioned on

their selling Sacramento Bee City Newsstand No. 2.

(RT 1093-94).

As a result of the foregoing plaintiffs brought an

action in the United States District Court for the

Northern District of California on June 26, 1969 under

Sections 4 and 16 of the Clayton Act, 15 U.S.C. Sec-

tions 15, 26 seeking both damages and injunctive re-

lief. (CT 1-16). The case went to trial before a jury

on November 16, 1971 upon four separate claims. The

third claim, known as the sale of business claim, in-

volved the restraint that is the subject. matter of

this cross-petition. Plaintiffs claimed that McClatchy

14

Newspapers’ distribution system, whereby plaintiffs

had the right to sell their business for a valuable con-

sideration so long as they were in good standing with

the publisher but forfeited that right and the equity

value of their business upon termination of their dis-

tribution agreement, constituted an unreasonable re-

straint of trade in violation of Section 1 of the Sher-

man Act, 15 U.S.C. Section 1, under rule of reason

analysis.

The jury returned a verdict in favor of plaintiffs

and against all defendants on claim three, the sale of —

business claim, in the sum of $15,000.00. (CT 793)

The jury returned a verdict for defendants on all

other claims. Judgment was entered in favor of plain-

tiffs on the sale of business claim in the amount of

$63,333.04—constituting trebled damages in the sum of

$45,000.00, attorneys fees in the sum of $13,500.00 and

taxable costs in the sum of $4,833.04. (CT 858-59).

Plaintiffs’ request for equitable relief to permanently

enjoin the unreasonable restraint of trade that formed

the basis of claim three was denied.

Defendants filed motions to set aside the jury ver-

dict on claim three in favor of plaintiffs and against

all defendants, and the judgment entered thereon, and

to have a judgment entered in favor of defendants or,

in the alternative, for a new trial limited to plaintiffs’

third claim. (CT 860-65). On April 10, 1972 the Dis-

trict Court denied without opinion defendants’ mo-

tions for judgment notwithstanding the verdict. and

for a new trial. (CT 958-59). On May 5, 1972, de-

fendants filed a notice of appeal. (CT 962-64). On

15

May 15, 1972, plaintiffs filed a notice of cross-appeal.

(CT 973-74).

The $63,333.04 judgment rendered by the District

Court in plaintiffs’ favor on claim three, the sale of

business claim, was reversed by the Court of Appeals

on the sole ground that plaintiffs suffered no damages

as a result of the imposition of the unreasonable re-

straint of trade. The Court of Appeals directed the

District Court to enter judgment n.o.v. in favor of de-

fendants and against plaintiffs on the sale of business

claim.

Plaintiffs filed a timely petition for rehearing with

the Court of Appeals directed solely to that court’s

reversal of the sale of business claim. This petition

was denied on May 20, 1976.

REASONS FOR GRANTING THE WRIT

The decision of the Court of Appeals is in conflict

with applicable Supreme Court decisions, weakens

the effectiveness of the private action pursuant to

Section 4 of the Clayton Act as a vital means for

enforcing the antitrust policy of the United States

and adversely affects tens of thousands of dealers

and franchisees throughout the United States, who

are subject to this same form of restraint.

Claim three, the sale of business claim, alleges a

violation of Section 1 of the Sherman Act, 15 U.S.C.

§1. Since the case of Standard Oil Co. of New Jersey

v. United States, 221 U.S. 1, Section 1 has been con-

16

strued as precluding only those contracts or combina-

tions which “unreasonably” restrain competition.

While there are certain agreements or practices, such

as price fixing, division of markets and tying arrange-

ments, which because of their pernicious effect on

competition and lack of any redeeming virtue are

conclusively presumed to be unreasonable, and there-

fore illegal per se, Northern Pac. Ry. Co. v. United

States, 356 U.S. 1, 5, plaintiffs do not contend that

claim three alleges a per se violation. Rather, the

restraint that is the subject of claim three requires

the application of the ‘‘rule of reason” test. The

District Court’s instructions on claim three so pro-

vided. 533 F.2d, at 1084, fn. 7.

In Chicago Board of Trade v. United States, 246

U.S, 231, 238-39, this Court set forth the criteria

for determining whether a particular agreement or

regulation constituted an “unreasonable” restraint of

trade:

“But the legality of an agreement or regulation

cannot be determined by so simple a test, as

whether it restrains competition. Every agree-

ment concerning trade, every regulation of trade,

restrains. To bind, to restrain, is of their very

essence. The true test of legality is whether the

restraint imposed is such as merely regulates and

perhaps thereby promotes competition or whether

it is such as may suppress or even destroy com-

petition. To determine that question the court

must ordinarily consider the facts peculiar to the

business to which the restraint is applied; its

condition before and after the restraint. was im-

posed; the nature of the restraint and its effect,

a te —

17

actual or probable. The history of the restraint,

the evil believed to exist, the reason for adopting

the particular remedy, the purpose or end sought

to be attained, are all relevant facts, This is not

because a good intention will save an otherwise

objectionable regulation or the reverse; but be-

cause knowledge of intent may help the court to

interpret facts and to predict consequences.”

The rule of reason inquiry is “primarily a factual

one”, Alpha Distributing Co. v. Jack Daniel Distil-

lery, 454 F.2d 442, 452 (9th Cir.), and pursuant

thereto plaintiffs introduced at trial over the course

of 5 weeks extensive proof of the history of the sale

of business restraint, the implementation of the re-

straint, the use of the restraint by other newspapers

including The Sacramento Bee’s only competitor, the

effect of the restraint on interstate trade and com-

merce, other trade restraints which were ancillary to

and accompanied this restraint, the purpose of the

independent contractor system of distribution, the

market position of The Sacramento Bee and the dis-

parity in the bargaining power of the parties. The

verdict of the jury in favor of plaintiffs on this claim

and the denial by the District Court of defendants’

motion that the evidence did not support the verdict

clearly establishes that plaintiffs sustained their bur-

den of proof that the subject restraint was an un-

reasonable restraint of trade.

Indeed, the Court of Appeals did not held other-

wise. Like the sales commission system for marketing

TBA, which the Court found in Federal Trade

18

Comm’n v. Texaco, Inc., 393 U.S. 223, 229 to be “in-

hereutly coercive” and adversely affecting competition

in the marketing of TBA, the instant restraint is far

more coercive on the distributor and franchisee than

the sales commission system condemned in Texaco.

As a result the restraint herein is far more effective in

causing distributors and franchisees to adhere to

suggested resale prices, suggested products to han-

dle and not handle, and suggested territories to serve

and not serve. It is plain common sense that a small

businessman, knowing that as long as he is in good

standing with his supplier he ean sell his business for

its going concern value, but will forfeit that right if

he is terminated, with or without cause, will comply

with his supplier’s wishes on such vital matters as

price, product and territory.

The sole ground for the reversal of the judgment

of the District Court by the Court of Appeals was

that this unreasonable restraint in trade did not cause

plaintiffs any damage. The Court of Appeals viewed

the injury caused by the violation as the loss to plain-

tiffs of the right to sell the distribution rights to the

Bee for thirty-odd days, whereas the jury found (and

upheld by the District Court) that the damages were

the going concern value of plaintiffs’ distributorship.

The Court of Appeals thus measured the damages in

terms of the value of plaintiffs’ business after impo-

sition of the illegal restraint—the refusal of Me-

Clatchy Newspapers to allow plaintiffs to sell their

business as a going concern te an acceptable pur-

chaser.

19

In Bigelow v. RKO Radio Pictures, Ine., 327 US.

251, a treble-damage plaintiff claimed injury from a

conspiracy among film distributors to deny him first-

run pictures. He offered evidence comparing his prof-

its with those of a competing theatre granted first-run

showings and also measuring his current profits

against those earned when first-run films had been

available to him. This Court, reversing the Court of

Appeals, found the evidence sufficient to sustain an

award of damages, stating:

“the jury may make a just and reasonable esti-

mate of the damage based on relevant data, and

render its verdict accordingly. In such cireum-

stances, ‘juries are allowed to act on probable and

inferential as well as direct and positive proof.’

Story Parchment Co. v. Paterson Parchment

Paper Co., supra 282 U.S. 561-564; Eastman

Kodak Co. v. Southern Photo Material Co., su-

pra, 273 U.S. 377-379. Any other rule would en-

able the wrongdoer to profit by his wrongdoing

at the expense of his victim. It would be an in-

ducement to make wrongdoing so effective and

complete in every case as to preclude any recov-

ery, by rendering the measure of damages un-

certain. Failure to apply it would mean that the

more grievous the wrong done, the less likeli-

hood there would be of a recovery.” 327 U.S., at

264-265.

Here, plaintiffs followed the same method of proof

as in Bigelow—introducing evidence of the sale price

and financial operating figures of comparable Sacra-

mento Bee and Sacramento Union dealerships which

had been sold in arm’s length transactions and which

20

had not been damaged by the restraint. The trial

court’s instructions to the jury on the fact of damage

and damages followed the teachings of Bigelow, RT

2343-2345. After trial the District Court then re-

viewed the evidence and denied defendants’ motion

for judgment n.o.v.

The decision of the Court of Appeals directing the

entry of a judgment n.o.v. for defendants based upon

its own finding that plaintiffs suffered no damages

from the violation, is contrary to the reviewing fune-

tions of an appellate court as well as the teachings

of Bigelow and other cases dealing with the standard

of proof in treble-damage actions—“their function is

not to decide factual issues de novo.” Zenith Radio

Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 122-

125; Story Parchment Co. v. Paterson Parchment

Paper Co., supra at 566-67.

The policy basis of the Court of Appeals’ decision

denying plaintiffs damages on the sale of business

claim was:

“Allowing plaintiffs in the present case to re-

cover antitrust damages on the sale-of-business

claim after losing the termination claim would in

effect reverse the well settled law on the antitrust

implications of distributorship terminations. Al-

lowing plaintiffs to recover on the sale-of-business

claim after winning on the termination claim

would be to permit duplicative recovery.” 533

F.2d, at 1085, fn. 9.

There is no basis for the Court of Appeals’ con-

cern that duplicative recovery may occur. The District

Court specifically instructed the jury:

21

“In determining damages, you are not to con-

cern yourself with whether or not the damages

from each claim are cumulative or not. The Court

will insure that there will be no overlapping re-

coveries. Your function is in respect to each claim

of the plaintiffs upon which you find liability

by the defendants and injury to the plaintiffs to

determine plaintiffs’ actual damages.” RT 2345.

To deny plaintiffs the right to challenge a trade

restraint as pernicious and anticompetitive as that

contained in the sale of business claim, because there

are no damages if the termination is lawful, is to

tie the sale of business claim to the termination

claim. But the jury was specifically “instructed to

consider the sale-of-business claim separate and apart

from the termination, and ‘irrespective of whether or

not the termination of the contract was lawful,’ ” 533

F.2d, at 1085, an instruction apparently meeting with

the Court of Appeals’ approval. /d., at fn. 8.

Under the Court of Appeals’ rationale there is no

conceivable way that plaintiffs could challenge the

sale-of-business restraint. While they are dealers in

good standing they have not suffered any damages

from the restraint since they are free to sell their

businesses. If they have been terminated lawfully but

denied the right to sell their business as a going con-

cern there are no damages according to the Court of

Appeals’ decision in this case, And if they have been

terminated unlawfully and denied the right to sell

their business plaintiffs can recover under the termi-

nation claim. The effect of the Court of Appeals’ de-

cision is to eviscerate section 4 of the Clayton Act as

22

a vital and necessary means for enforcing the anti-

trust policy of the United States. Perma Life Muf-

flers, Inc. v. Int’l Parts Corp., 392 U.S. 134, 136. The

effectiveness of the section 4 treble-damage suit would

be to a great extent nullified if a seller is able to

inherently coerce buyers into a combination whereby

prices are fixed, dealing is required to be exclusive

and areas and customers are confined through the

sword of denial of the right to sell one’s business by

one who is not in good standing with the seller.

This was clearly demonstrated in this case where

plaintiffs were not permitted to sell their distributor-

ship but the Gallaghers, who could not own and oper-

ate two newsstand distributorships according to Mc-

Clatchy Newspapers’ policy, were allowed to sell

Newsstand No. 2 for $6,000 pursuant to their acquir-

ing half of plaintiffs’ distributorship.

The effect of the decision of the Court of Appeals

was not only to expose McClatchy Newspapers’ city

newsstand distributors to cancellation and denial of

the right to sell their businesses but, also, tens of

thousands of other franchisees and dealers under sim-

ilar restraints were also exposed. In fact, the effect

of the Court of Appeals’ decision was clearly evi-

denced 45 days after its decision was handed down.

On December 29, 1975 McClatchy Newspapers noti-

fied all of its city newsstand distributors except one

of the termination of their contracts effective March

1, 1976. McClatchy Newspapers refused to permit

these distributors to sell their businesses and, denied

any obligation to compensate them for their businesses

23

even though several had paid substantial sums of

money for their businesses with McClatchy News-

papers’ consent. One terminated city newsstand dis-

tributor (John and Gloria Naify) paid $37,500 for

their newsstand distributorship with the consent of

McClatchy Newspapers. These facts are all set forth

in an antitrust suit filed by 7 of the city newsstand

distributors against McClatchy Newspapers on Janu-

ary 26, 1976. Civil No. C-76-117 in United States Dis-

trict Court for the Northern District of California.’

McClatchy Newspapers’ action, 45 days after the

Court of Appeals’ decision in this case was rendered,

had the effect of wiping out 9 small businesses having

a total market value, prior to said action, in excess

of $400,000.

The Court of Appeals’ decision in this case will

have a substantial and adverse effect on the approxi-

mately 374,694 franchised establishments in the United

States. These franchisee-owned businesses will do an

estimated $163 billion worth of sales in 1976. The aver-

age franchisee will do an estimated $435,000 worth of

sales in 1976. The total investment and start up eash

required for these franchisees in 1974 varied from

$26,000 for a rental service equipment franchisee to

$850,000 for a motel franchisee. These franchised

establishments are controlled by a relatively small

number of franchisors—less than 1500. The invest-

7Judicial notice may be taken of the records of this Court.

Cal. Evid. Code §452(d).

8Franchising in the Economy 1974-1976, United States Depart-

ment of Commerce/Domestic and International Business Admin-

istration/Bureau of Domestic Commerce.

24

ments of tens of thousands of these franchisees are

jeopardized if the franchisor can wield a two edged

sword which permits the franchisee to realize his in-

vestment in his business so long as he is in good stand-

ing with the franchisor but forfeits that investment

by not being allowed to sell his business if he is termi-

nated—whatever the reason. This anticompetitive

abuse is real® and should be dealt with now before

too many more small American businessmen suffer

the fate of the Nobles and the other Sacramento Bee

city newsstand distributors, Confiscation of a man’s

estimated $163 billion worth of sales in 1976. The aver-

it is used to unreasonably restrain interstate trade

and commerce.

CONCLUSION

For these reasons, a writ of certiorari should issue

to review the judgment and opinion of the Ninth

Circuit.

Respectfully submitted,

G. JosEPH BERTAIN, JR.,

Trmoruy H. FIne,

Attorneys for Cross-Petitioners.

Dated, August 16, 1976.

°FTC Srarr Report or Ap Hoc ComMITTEE ON FRANCHISING,

submitted to the Federal Trade Commission, June 2, 1964, p. xi

(Conclusions Proposed by Mr. Rufus E. Wilson, Chief, Bureau

Restraint of Trade).