Petition — Evans v. S. S. Kresge Co.

Supreme Cou t S.

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| JAN 28 J9T7 |

|

en wvenere JR., CLERK *

Seeteeend

*

an the

Supreme Court of the Wnited States

OcTosner TERM. 1976

m= ©6896-1088

JOHN EVANS, Trustee in Bankruptey for

HEMPFIELD STORES, INC., a Bankrupt,

Petitioner,

v.

S. S. KRESGE COMPANY, a foreign corporation,

Respondent

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Howarp A. SPECTER

Davin R. Brown

LITMAN LITMAN HARRIS

& SPECTER, P.A.

1320 Grant Building

Pittsburgh, Pennsylvania 15219

Attorneys for Petitioner

Financial Press Corporation, Pittsburgh

TABLE OF CITATIONS

TABLE OF CONTENTS

PETITION FOR A WRIT OF

JURISDICTION

QUESTIONS PRESENTED

STATUTE INVOLVED

1.

CERTIORARI

Is an agreement between two independent

businesses, selling the same retail products in the

same relevant market, to sell those products at

identical prices saved from being a per se violation

of Section 1 of the Sherman Act by the intention of

the parties not to compete with each other .......

Is it a per se violation of Section 1 of the Sherman

Act for a trademark licensor to deprive its licensee

of the right to exercise its own independent

business judgment and to eliminate the licensee

from the marketplace as a competitor by fixing or

stabilizing prices in the marketplace through a

contractual requirement which compels the

licensee to set all of its retail prices based upon the

“ee ere eevee ereeeeeeeeeeeeee eee ee ee eee

prices charged by the licensee’s competitiors? .... 11

Is it a per se violation of Section | of the Sherman

Act for a trademark licensor to prohibit its

supermarket licensee from selling certain goods

customarily sold by supermarkets, particularly

when that prohibition is aggregated with price-

I clu ccceuiencéesdswecsesunss 13

Is summary judgment appropriate when the

legality of pricing and other marketing restraints is

ii Table of Contents

Page

to be measured under the Sherman Act by the rule

of reason and the party challenging the restraints

has been denied the opportunity to discover facts

concerning the nature, scope and effects of the

SE atkncyecdaweneddacdnns deed ches 66ese 15

i ii ora euciuesubisnd wdkibedakons 17

APPENDIX

1. Opinion of the Court of Appeals

dated November 2, 1976 ................0000- la

2. Opinion and Order of the District Court

ee 25a

3. Amended Order of the District Court

Se SN Gs I hs ee dv cdccvccccsecss 79a

ee

Table of Citations iii

TABLE OF CITATIONS

CASES

Page

Albrecht v. Herald Co., 309 U.S. 145 (1968) .......... 10

Evans v. S. 8. Kresge Co., 394 F. Supp. 817

SERRE RR a Ee 14

FTC v. Simplicity Pattern Co., 360 U.S. 55 (1959) .... 10

Fortner Enterprises, Inc. v. United States

Steel Corp., 394 U.S. 495 (1969) ..........., ere 15

Goldfarb v. Virginia State Bar, 421 U.S.

ep ESSER A Eee ee 12, 13

Kiefer-Stewart Co. v. Joseph E. Seagram &

eS lof © 3 . SRR 12

Klor’s, Inc. v. Broadway-Hale Stores, Inc.,

ee ee ee sake hecenesceess 14

Poller v. Columbia Broadcasting System,

eeu uw ene 0s 15

Timken Roller Bearing Co. v. United States, ,

ee 14

United States v. McKesson & Robbins, Inc.,

a ek Dew chess 8086 64 10

United States v. Sealy, Inc., 388 U.S. 350 (1967) ...... l4

United States v. Socony-Vacuum Oil Co.,

eee 10, 12

United States v. Topco Associates, Inc.,

BE EPEC PILE PT OPT TTT Te TT Te 9. 14

Umdenstock v. American Mortgage & Investment

Coe., 45 F 2a SEO (C.A. BD IB74) .. ccc ccccccccces 15

White Motor Co. v. United States, 372 U.S. 253

Tr wen 15

STATUTES

Cos aa see ee Gesaeeeuebesoecue . passim

WA

gy NE Ee

ete ee ee

gn the

Supreme Court of the United States

Octoper Terni, 1976

No. 76-

JOHN EVANS, Trustee in Bankruptcy for

HEMPFIELD STORES, INC., a Bankrupt,

Petitioner,

v.

S.S. KRESGE COMPANY, a foreign corporation,

Respondent

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Petitioner John Evans, Trustee in Bankruptcy for

Hempfield Stores, Inc., a Bankrupt, prays that a writ of

certiorari issue to review the judgment of the United States

Court of Appeals for the Third Circuit entered on

November 2, 1976, which affirmed the judgment of the

United States District Court for the Western District of

Pennsylvania entered in favor of Respondent, S. S. Kresge

Company.

OPINIONS BELOW

The following opinions are printed in the Appendix to

this Petition:

1. Opinion of the Court of Appeals dated November 2,

1976 (unreported) (la);

2. Opinion and Order of the District Court dated May

13, 1975, reported at 394 F. Supp. 817 (WD. Pa. 1975) (25a).

3. Amended Order of the District Court dated F ebruary

11, 1976 (unreported) (79a).

2 Jurisdiction & Questions Presented

JURISDICTION

The judgment of the Court of Appeals was entered on

November 2, 1976. This Petition for Certiorari is filed within

ninety days therefrom. The jurisdiction of this Court is

invoked under 28 U.S.C. §1254(1).

QUESTIONS PRESENTED

1. Is an agreement between two independent

businesses, selling the same retail products in the same

relevant market, to sell those products at identical prices

saved from being a per se violation of Section 1 of the

Sherman Act by the intention of the parties not to compete

with each other?

2. Is it a per se violation of Section | of the Sherman Act

for a trademark licensor to deprive its licensee of the right to

exercise its own independent business judgment and to

eliminate the licensee from the marketplace through a

contractual requirement which compels the licensee to set all

of its retail prices based upon the prices charged by the

licensee's competitors?

3. Is it a per se violation of Section | of the Sherman Act

for a trademark licensor to prohibit its supermarket licensee

from selling certain goods customarily sold by super-

markets, particularly when that prohibition is aggregated

with price-fixing requirements?

4. Is summary judgment appropriate when the legality

of pricing and other marketing restraints is to be measured

under the Sherman Act by the rule of reason and the party

challenging the restraints has been denied the opportunity to

discover facts concerning the nature, scope and effects of

the restraints?

Statute Involved & Statement of the Case 3

STATUTE INVOLVED

The relevant portion of Section | of the Sherman Act, 15

U.S.C. §1, provides:

Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or

commerce among the several States,...is declared to

be illegal.

STATEMENT OF THE CASE

Petitioner is the trustee in bankruptcy for Hempfield

Stores, Inc., a Pennsylvania corporation (“Hempfield”). He

brought this action against Respondent under Section | of

the Sherman Act, 15 U.S.C. §1, challenging as unlawful

certain restraints which Respondent contractually imposed

upon Hempfield. These restraints were imposed through

trademark and service mark license agreements which

included retail price controls and a prohibition against

dealing in certain competing goods. The District Court and

the Court of Appeals found all of the restraints to be

reasonable and lawful as a matter of law.

Prior to September, 1963, Respondent (“Kresge”), a

nation-wide five-and-dime store chain, embarked on its K

Mart store marketing program. The thrust of the marketing

approach was the combination of a large, Kresge-owned K

Mart discount or department store with an adjoining

licensed K Mart Food supermarket to increase customer

traffic. The greater consumer attraction provided by the

department store — supermarket combination was de-

scribed by Kresge as “one-stop shopping.” Because Kresge

had no experience in operating supermarkets, it decided to

contract with others to own and operate supermarkets in the

shopping complexes.'

'Kresge experimented with owning and operating its own K Mart

Food supermarket at one location, but abandoned the idea because the

Kresge supermarket operation was unsuccessful.

4 Statement of the Case

Kresge undertook the K Mart “one-stop shopping”

enterprise on a nationwide scale. It acquired and owns the

registered trademark and service mark “K Mart,” which it

licensed to supermarket operators. By May, 1971, there were

at least 360 K Marts throughout the United States, with

licensed K Mart Food supermarkets operated by others at

approximately 320 of these locations. In 1963 and 1964,

Kresge licensed Hempfield to use the “K Mart” name in

operating two supermarkets in Western Pennsylvania. Each

supermarket was located in a multistore shopping center

immediately adjacent to a Kresge owned and operated K’

Mart discount store. Both of these K Mart stores sold many of

the same items at retail as did Hempfield’s supermarkets.

Kresge’s standard license agreements required the

parties to sell “like items,” ie., items sold by both the

supermarket and the adjacent K Mart store, at identical retail

prices. One of the licenses stated the requirement as follows:

2....Identical selling prices, which shall be

competitive for the shopping area, shall be maintained

at all times on identical items sold by both the Licensor

[Kresge] and Licensee [Hempfield]. If the parties are

unable to mutually agree as to the selling price of any

such item, the sale price of the item for both the

Licensor and the Licensee shall be established by the

Licensor and adhered to by the Licensee.... The

Licensor and Licensee shall consult at weekly intervals,

and more frequently if necessary, to provide each other

with sufficient advance information to continuously

coordinate this pricing policy.

In 1965, pursuant to the authority set forth in the license

agreements, Kresge imposed Rules and Regulations which

were applicable to all K Mart Food licensees. They

contained the following horizontal, identical pricing §re-

quirement:

Statement of the Case 5

PRICING — On non-exclusive, non-food items

permitted in Licensee's assortment and also carried by

Licensor, Licensor and Licensee will maintain identical

competitive prices which have been mutually estab-

lished. On special sales or promotion of any of these

goods by either Licensee or Licensor the offered price is

to be met or the goods removed from sale for the

duration of the promotion. Licensor and Licensee shall

provide each other with sufficient advance information

to provide for a coordinated operation.

Kresge was the final price arbiter when the parties could not

agree.

To facilitate price communications between the K Mart

store management and Hempfield’s management, Kresge

prepared and provided Hempfield with identical merchan-

dise lists and “Identical Pricing Comparison Books.” These

identical price books were intended to be used and were

used to determine the prices to be charged by both parties on

“like items”. As Kresge’s instructions unabashedly put it —

“Communications are essential to equalizing prices!” The

“Identical Pricing Comparison Books” contained detailed

instructions to Kresge’s K Mart store managers on the day-to-

day mechanics of price-fixing.

In addition to controlling the prices of “like items”,

Kresge dictated the prices of all other goods sold by

Hempfield through a scheme compelling Hempfield to set

all of its prices at or below the prices of each of its

competitors. As stated in one of the agreements, Hempfield

was required to:

....Carry adequate assortments. . .competitive or low-

er in price with the same or similar merchandise and

products offered for sale in other discount food stores in

the trading area.

6 Statement of the Case

To Kresge, “competitive” meant that Hempfield could

charge no more for any item than the lowest price charged

for the same item by any of its supermarket competitors, and

Hempfield was so instructed.

These price control policies were national in scope and

applicable to the hundreds of K Mart stores and licensed K

Mart Food stores in the United States. Counsel for Kresge

stipulated “...that throughout the period involved in this

litigation from 1964 to 1969 it was the policy of S.S. Kresge

through its K-Mart Stores to have insofar as possible identical

prices on items carried by the K-Mart Stores and by the K-

Mart Food Stores...”

In addition to the pricing restrictions, the license

agreements also prohibited Hempfield from selling certain

merchandise sold by Kresge, even though such items were

customarily sold by supermarkets. The agreements listed

categories of food items which Hempfield could sell and

then provided:

The Licensee shall sell no other merchandise or

services without the express permission of Licensor, and

shall promptly remove from sale any merchandise that

Licensor considers not to be within the foregoing

classification.

Non-food items, a substantial part of a supermarket’s

inventory, were limited to 15% of the sales area.

Kresge policed Hemptield’s operations for compliance

with these restrictions. Its employees visited Hemptield’s

stores to secure compliance information. On periodic visits,

Kresge checked the prices at which Hempfield was selling

“like items” and insisted that Henypfield raise or lower all

non-identical prices to equal Kresge’s prices. The type of

merchandise carried by Hempfield was checked and

Hempfticld was directed from time to time to discontinue

Statement of the Case 7

sales of certain items. Hempfield was obliged to comply

with Kresge’s instructions, and did so.

On numerous occasions Hempfield’s representatives —

asked to be relieved of the obligation to comply with these

restraints. On each occasion Kresge refused and insisted that

Hempfield adhere to the license requirements.

One of the licenses gave Kresge the right to terminate it

“[s]hould the Licensee fail, in Licensor’s opinion, to adhere

to the Licensor’s standard for the conduct of business, or if

the Licensee violates any of the other provisions of this

License...”. The other contained a similar clause which

allowed Kresge to terminate for violations of its Rules and

Regulations. In 1967, Kresge attempted to terminate

Hempfield’s licenses. Kresge’s Vice President and a member

of its Board of Directors testified that Hempfield’s failure to

comply with Kresge’s pricing policies was a factor in

Kresge’s decision to terminate.

Both of Hempfield’s stores closed in early July, 1969.

Shortly thereafter, an involuntary petition in bankruptcy

was filed in the United States District Court for the Western

District of Pennsylvania. Kresge’s restraints on Hempfield’s

conduct of its own business were a contributing factor in

causing Hempfield’s bankruptcy. The Petitioner filed this

action against Kresge alleging that the contractual restraints

violated Section | of the Sherman Act and caused substantial

damages which he sought to recover for the benefit of

Hempfield’s creditors.

After the close of discovery, Kresge filed a motion for

summary judgment on the issues of (1) subject matter

jurisdiction, (2) the legality of its license agreements with

Hempfield, and (3) the Petitioner's right to maintain the

action in view of Hempfield’s execution of the license

agreements. Petitioner filed a cross-motion for partial

§ Statement of the Case

summary judgment on the same issues. By its Opinion and

Order of May 13. 1975. the District Court found in favor of

Kresge on the first two issues. holding that the court lacked

subject matter jurisdiction because interstate commerce Was

not affected. and that the restraints in Kresge’s licenses were

not per se Violations of the Sherman Act but were reasonable

and lawful as a matter of law (25a).-

Petitioner appealed trom the judgment for Kresge

entered by the District Court. On November 2. 1976, the

Court of Appeals affirmed the jndagment. In its opinion, the

Court of Appeals tound that. Contrary to the conclusion of

the District Court. there «as sche ct matter jurisdiction. The

Court went on to hold ho socver. that the restraints imposed

upon Hemptield by Kresce “ere not per se violations of the

Sherman Act because Kresge and Hemptield were not

competitors in view of the arrangement between them and

their intention not to Compete with each other. Applying the

rule of reason test. the Court then concluded that. the

Challenged restraints merely regulated and perhaps thereby

promoted competition.

“The District Court did not rule on the issue of Petitioner's right to

maintain the action

BEST COPY AVAILABLE

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Reasons for Granting the Writ )

REASONS FOR GRANTING THE WRIT

The Court of Appeals has decided federal questions

under Section 1 of the Sherman Act in a way which is in

conflict with applicable decisions of this Court.

1. Is an agreement between two independent businesses,

selling the same retail products in the same relevant

market. to sell those products at identical prices saved

from being a per se violation of Section | of the Sherman

Act by the intention of the parties not to compete with

each other?

In holding that a naked price-fixing agreement may be

reasonable and lawful because of the underlying intentions

of the participants, the Court of Appeals is at total variance

with the decisions of this Court. If this anomaly is allowed to

stand, the adjudication of price-fixing cases will be thrown

into the chaos which the per se rule seeks to avoid.’

The Court of Appeals acknowledged that Hempfield

and Kresge were in fact independent businesses selling

certain of the same non-food items to the consuming public

at their adjoining stores. The proceeds of each sale went into

the pocket of either seller Kresge or seller Hempfield and

Hempfield was required to charge prices on “like items”

identical to those charged by Kresge. The Court held,

however, that these facts did not constitute price-fixing

under the Sherman Act because the parties never intended to

compete with each other. It reasoned that in view of “the

Without the per se rules, businessmen would be left with little to aid

them in predicting in any particular case what courts will find to be legal

and illegal under the Sherman Act. Should Congress ultimately determine

that predictability is unimportant in this area of the law, it can, of course,

make per se rules inapplicable in some or all cases, and leave courts free to

ramble through the wilds of economic theory in order to maintain a

flexible approach.” United States v. Topco Associates, Inc., 405 US. 596,

609 n.10 (1972).

10 Reasons for Granting the Writ

absence of this necessary element of ‘competitors’, a

horizontal limitation cannot be made out” (18a). In reaching

this conclusion, the Court of Appeals relied upon none of the

multitude of price-fixing cases decided by this Court.

Prior decisions of this Court have expressly declared

that the per se illegality of price-fixing under the Sherman

Act is to be determined without regard to the motives or

intentions of the parties. United States v. McKesson &

Robbins, Inc., 351 U.S. 305, 309-310 (1956); United States v.

Socony-Vacuum Oil Co., 310 U.S. 150, 218 (1940). An

agreement to fix specified prices constitutes, without more,

an illegal restraint under Section 1. Albrecht v. Herald Co..

309 U.S. 145, 153 (1968). The Court has not waivered from

this firmly established precept. It is too late for the Court of

Appeals to now declare that price-fixing is perhaps not the

pernicious, anticompetitive activity it has always been found

to be.

The Court of Appeals reached this result by reasoning

that the parties were not horizontal competitors because

they never intended to compete with each other. But this

Court rejected that argument in the same factual context in

FTC tv. Simplicity Pattern Co., 360 U.S.55 (1959). There, the

Court held that the existence of competition does not

depend upon the motivation of the parties. !

othe vanety and fabric stores. operitimg mn the saaie cities

and in the same shopping area, often side by side. were competitors,

purchasing from Simplicity at the same price and then at like prices

retailing the identical product to substantially the same segment of

the public” ” [Emphasis added.| 360 U.S. 55, 62.

The Court also concluded that the parties were competitors even

though they sold many dissimilar items:

“It may be, as Simplicity argues, that the sale of patterns is miniscule

in the overall business of a variety store, but the same is truce of

thousands of other items. While the giving of discriminators

(continued )

-—-@~==-

Reasons for Granting the Writ 1]

The holdings of the Court of Appeals and the District

Court are contrary to the authorities of this Court. Under

these authorities, Hempfield and Kresge were competitors

in the sale of “like items” and Kresge’s contract requirement

that Hempfield had to sell such items at prices identical to

Kresge’s constituted a per se violation of Section 1 of the

Sherman Act.

2. Is ita per se violation of Section | of the Sherman Act for

a trademark licensor to deprive its licensee of the right

to exercise its own independent business judgment and

to eliminate the licensee from the marketplace as a

competitor by fixing or stabilizing prices in the

marketplace through 2 contractual requirement which

compels the licensee to set all of its retail prices based

upon the prices charged by the licensee's competitors?

The Court of Appeals did not specifically discuss

Kresge’s license requirement that Hempfield set all of its

retail prices for items other than “like items” at levels at or

below the prices charged by Hempfield’s competitors. After

holding that the parties were not competitors in the sale of

“like items”, the Court of Appeals went on to conclude that

all of the restraints were reasonable and lawful.

But the consequence of this requirement is that prices in

the market are raised, lowered, or stabilized in direct

interference with the free play of market forces. This Court

has held that even schemes which fix prices at competitive

market levels or at maximum levels are unlawful per se

because they destroy competition and restrain the ability of

concessions to a variety store on any one isolated item might cause no

injury to competition with a fabric store in its overall operation, that

fact does not render non-existent the actual Competition between

them in patterns. It remains, and. because of the discriminators

concessions, Causes further losses to the fabric store...” 3600S. 55,

63.

12 Reasons for Granting the Writ

traders to sell in accordance with their own judgment.

United States v. Socony-Vacuuim Oil Co., supra, Kiefer-

Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211

(1951). As stated in Goldfarb v. Virginia State Bar, 421 U.S.

773 (1975):

“...Nor was it necessary for petitioner to prove that the

fee schedule raised fees. Petitioners clearly proved that

the fee schedule fixed fees and thus ‘deprive[d]

purchasers or consumers of the advantages which they

derive from free competition.” 421 U.S. 773, 785.

Kresge’s overall price control policy interfered with

Hempfield’s freedom to exercise its own judgment.

Hempfield was not free to compete with other supermarkets

in its market area. As aresult, competition among the traders

in that market area was restrained.

The Court of Appeals’ premise that the price-fixing

agreement here would be unlawful only if Kresge and

Hempfield were horizontal competitors is also in conflict

with decisions of this Court. Goldfarb v. Virginia State Bar,

supra, highlights this error.

The defendants in Goldfarb were the V irginia State Bar.

the administrative agency through which the Virginia

Supreme Court regulated the practice of law in that state,

and the Fairfax County Bar Association, which had

published a suggested minimum fee schedule for use by

attorneys. The Virginia State Bar and the Fairfax County Bar

were not horizontal competitors for lawyers, for clients, for

sales or in any other respect. Neither supplied goods or

services to the other for resale to the public. These

organizations did force price-fixing on local lawyers who

were in competition with each other. And because they did

so, this Court found the scheme to be unlawful price-fixing.

Kresge similarly forced price-fixing on Hempfield, which

was in competition with other supermarkets. The result of

= oe —

Reasons for Granting the Writ 13

this price-fixing scheme was the same. Competition among

traders in the marketplace was lessened and trade was

restrained within the meaning of the Sherman Act.

Surely the Virginia State Bar, a statutory state agency,”

had a greater interest in protecting the public service aspects

of the legal profession than Kresge did in promoting or

protecting its commercial public image by fixing the prices

charged by others. But even this important and laudable goal

of protecting the public did not save the price-fixing

requirement which the State Bar imposed upon practicing

lawyers. This Court reemphasized in Goldfarb that “Con-

gress intended to strike as broadly as it could in $1 of the

Sherman Act. ..”.° If that stroke reaches as far as a statutory

state agency created to protect the public, then it must also

reach as far as merchants such as Kresge.

3. Is ita per se violation of Section 1 of the Sherman Act for

a trademark licensor to prohibit its supermarket

licensee from selling certain goods customarily sold by

supermarkets, particularly when that prohibition is

aggregated with price-fixing requirements?

Hempfield was a potential competitor of Kresge’s in the

sale of various non-food items customarily sold by

supermarkets. As a part of its overall anticompetitive

scheme, Kresge elected to preserve for itself exclusively the

benefits of selling such merchandise. In so doing, Kresge

accomplished a horizontal allocation of customers between

it and Hempfield. At the same time, the prohibition

amounted to a boycott by precluding Hempfield from

dealing in certain goods of others. Under the decisions of this

Court, the prohibition was, therefore, a per se violation of

the Sherman Act.

‘Goldfarb v. Virginia State Bar, supra, 421 U.S. 773, 790 n.20.

*Id. 421 U.S. 733, 787.

I4 Reasons for Granting the Writ

This Court dealt with the question of a restriction

imposed by a supermarket owners’ association on the right

of its members to wholesale goods in United States v. Topco

Associates, 405 U.S. 596 (1972). The Cow’ eld that such a

restriction amounted to the regulation 0: ‘he customers to

whom Topco members could sell and, like territorial

restrictions, constituted a limitation on competition and a

per se violation of the Sherman Act.

By prohibiting Hempfield from selling certain

merchandise customarily sold by supermarkets, Kresge was

allocating customers to itself and excluding Hempfield as a

competitor in the sale of that merchandise. It is apparent

from the nature of the restraint itself that it had no purpose or

effect except the elimination of competition. As the District

Court put it:

“Kresge had an obvious rea for not wanting

Hempfield to sell merchandise which was also sold in its

stores...” (76a) 394 F. Supp. 817, 54.

Kresge could have permitted both stores to sell these items,

just as they sold a great number of other “like items”. Instead,

Kresge chose to foreclose competition completely.

The prohibition also precluded Hempfield from

purchasing merchandise from certain manufacturers and

distributors which it otherwise would have purchased for

resale. Agreements not to deal in the goods of others are

illegal per se. Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359

U.S. 207 (1959).

Even if this prohibition, standing alone, were not per se

unlawful, its aggregation with unlawful price-fixing is

enough to require its condemnation as an unlawful restraint.

United States v. Sealy, Inc., 388 U.S. 350, 356-7 (1967); also

Timken Roller Bearing Co. v. United States, 341 U.S. 593

(1951).

ee

Reasons for Granting the Writ 15

4. Is summary judgment appropriate when the legality of

pricing and other marketing restraints is to be measured

under the Sherman Act by the rule of reason and the

party challenging the restraints has been denied the

opportunity to discover facts concerning the nature,

scope and effects of the restraints?

In Polier v. Columbia Broadcasting System, 368 U.S.

464 (1962), this Court cautioned that summary judgment

procedures should be used sparingly in complex antitrust

litigation “where motive and intent play leading roles . . .”.

This same caveat was invoked in White Motor Co. v. United

States, 372 U.S. 253 (1963), after the Court concluded that

the vertical restraint involved could not be deemed a per se

violation of the Sherman Act. Because the restraint had to be

evaluated under the rule of reason, the Court concluded that

summary judgment was improperly employed in view of

the need to examine the economic impact of the business

arrangement on competition. Fortner Enterprises, Inc. v.

United States Steel Corp., 394 U.S. 495 (1969), again

emphasized that where the restraint may not fall into the per

se category, application of the rule of reason required a more

thorough examination of the purposes and effects of the

practices involved. In all three cases, this Court reversed the

grants of summary judgment and remanded the cases for

trial.

This policy of caution in the use of summary judgment

procedures to evaluate Sherman Act restraints under the rule

of reason is especially applicable where the party challeng-

ing the restraints has been denied the opportunity to

discover relevant facts concerning the nature and scope of

the restraints and their effects in the marketplace.’

See Umdenstock vc. American Mortgage & Investenent Co., 495 F 2d

589 (CA. 10 1974).

16 Reasons for Granting the Writ

During the course of discovery in this case, the District

Court consistently denied Petitioner's attempts to discover

important facts as to the identity of other K Mart Food

licensees, the extent to which the restraints Kresge imposed

upon Hempfield were imposed upon other licensees,

Kresge’s termination or threatened termination of other

licensees, the volume of goods subject to the identical

pricing policy which were sold by Kresge’s two stores

adjoining Hempfield’s, as well as the volume of such items

sold by other K Mart Food licensees. This information was

sought by Petitioner in order to assist him in proving both

subject matter jurisdiction and Kresge’s liability under the

Sherman Act. It was all relevant to a thorough evaluation of

the restraints.

Petitioner challenged the denial of this discovery on

appeal. He argued, in the alternative. that if the Court of

Appeals should disagree with his position that Kresge’s

restraints were unlawful per se, the grant of summary

judgment for Kresge should nevertheless be reversed and

the cause remanded for the purpose of enabling Petitioner to

pursue his discovery. Petitioner argued in his brief to the

Court of Appeals that “By these rulings, the district court

severly limited the Trustee in his discovery of facts relevant

to proof of subject matter jurisdiction and liability . . .”. The

Court of Appeals erroneously concluded that Petitioner's

desire for additional discovery was limited to establishing

jurisdiction.” Because of this incorrect reading of the issue

raised, the Court of Appeals failed to rule on the question

and proceeded, instead, to evaluate the grant of summary

judgment for Kresge by the application of the rule of reason

to the truncated record.

The decisions of this Court make it clear that the

application of the rule of reason under the Sherman Act

Pdics 2) nee? OO, 3d

~ oe eee

Reasons for Granting the Writ 17

requires a thorough examination of the precise nature and

scope of the challenged restraints, of the business reasons for

their adoption, their economic impact and their competitive

impact in the marketplace. It was inappropriate here for the

courts below to allow disposition of this case in favor of

Kresge on summary judgment after Petitioner was denied

the opportunity to discover facts important to the evaluation

of the restraints involved under the rule of reason.

CONCLUSION

For the reasons stated above, Petitioner prays this

Honorable Court to grant this Petition For A Writ of

Certiorari to review the important Sherman Act issues raised

herein on the merits.

Howarp A. SPECTER

Davin R. Brown

LITMAN LITMAN HARRIS

& SPECTER, P.A.

1320 Grant Building

Pittsburgh, Pennsylvania 15219

Attorneys for Petitioner

ote

> eee

ee

Opinion of the Court of Appeals la

UNITED STATES COURT OF APPEALS

For THE THirp Circuit

Nos. 75-1782 & 76-1181

JOHN EVANS, Trustee in Bankruptcy for HEMPFIELD

STORES, INC., a Bankrupt,

Appellant,

v.

S.S. KRESGE COMPANY, a Foreign Corporation,

Appellee.

APPEAL FROM THE ORDER OF THE UNITED StTaTes District

Court FOR THE WESTERN District OF PENNSYLVANIA

(Civil Action No. 71-85)

Argued February 27, 1976

Before: ApAMs, HuNtER and Gartn, Circuit Judges.

OPINION OF THE COURT

(Filed November 2, 1976)

Garth, Circuit Judge

This appeal requires us to examine the business and

license arrangement into which the parties entered to

determine if the price and product restrictions imposed

upon the licensee constituted an antitrust violation. We

conclude that we have jurisdiction to conduct this inquiry

and that the defendants did not violate Section 1 of the

Sherman Antitrust Act by their marketing requirements.

2a Opinion of the Court of Appeals

The plaintiff, trustee in bankruptcy for Hempfield

Stores, Inc. (“Hempfield”), brought this treble-damages suit

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

S. S. Kresge Co. (“Kresge”) for its alleged violations of

Section 1 of the Sherman Act, 15 U.S.C. §1.' The district

court, 394 F. Supp. 817 (W.D. Pa. 1975), granted Kresge’s

motion for summary judgment. First, it held that subject

matter jurisdiction was lacking, as “the activities complained

of did not occur in the flow of interstate commerce, nor did

they substantially affect it.” 394 F. Supp. at 833. Second,

despite its conclusion that jurisdiction was lacking, the court

discussed and found that Kresge’s conduct did not violate

the Sherman Act: “the license agreements challenged here

had a legitimate primary purpose; [furthermore,| the

alleged restraints of trade were not unreasonable and are

justifiable under the ancillary restraints doctrine.” Id. at $49."

Hempfield appeals from the judgment in favor of Kresge.

‘Section 4 of the Clayton Act provides:

Any person who shall be injured in his business . . . by reason of

anything forbidden in the antitrust laws may sue... and shall

recover threefold the damages by him sustained, .. .

Section | of the Sherman Act provides:

Every contract, combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the several

States. is declared to be illegal

'\« “he district court declined to consider Kresge’s third line of

detense—the doctrine of in pari delicto, see Perma Lite Mufflers, Inc. v.

International Parts Corp., 392 U.S. 134 (1968). By reason of our

disposition, we similarly express no opinion on that issue. Nor need we

examine the district court's deferral to the bankruptcy court of certain

issues raised by way of counterclaim see 394 F Supp. at 824, 849, inasmuch

as these issues have not been presented to us on this appeal

>The district court's opinion ot May 13, 1975 was not accompanied or

tollowed by a separate order as required by F.R. Civ. P. 58, see Dougherty

v. Harper's Magazine Co. , 537 F.2d 758, 762 (3d Cir. 1976). Thereafter, an

amended order entering final judgment pursuant to Rule 54 (b) was filed

on February !1, 1976, at Docket No. 76-1181. The original action, at No.

75-1782, was then consolidated with No. 76-1181 for purposes of our

review.

Opinion of the Court of Appeals 3a

We conclude, contrary to the conclusion of the district

court, that Sherman Act subject-matter jurisdiction was

present. However, as we also conclude that on this record

the alleged restraints of trade were justifiable under the rule

of reason, we affirm the district court’s judgment for

Kresge.*

Briefly, the facts are as follows: Under the registered

exclusive service trade name “K-Mart”, Kresge operates a

number of discount department stores. The district court’s

opinion states:

Defendant has used the “K-Mart” trade name in an

effort to develop a reputation as a low mark-up, highly

competitive merchandiser selling quality merchandise

at discount prices. From its inception the plan was

designed and its success was dependent on high volume

sales with a low per item profit margin. Kresge felt that

the best way to achieve high volume sales was to draw

on the potential buying power of those who made

frequent food purchases. However, since Kresge had no

‘Reversal of a jurisdictional decision adverse to the plaintiff would

normally require a remand to the district court for consideration of the

merits. Here, however, the district court was careful to anticipate this

possiblity, see 394 F. Supp. at 843, and thus made its analysis of the merits

available to us. Additionally, we observe that the substantive and

jurisdictional inquiries here bear marked similarities. We are satisfied that

the district court's careful and separate consideration of the merits,

although unnecessary to its holding, does not require a remand,

particularly since there are no material facts in dispute. See id. In such

circumstances, we may affirm a district court judgment, albeit on a

different ground. Cf. PAAC v. Rizzo, 502 F.2d 306, 308 n.2 (3d Cir. 1974),

cert. denied, 419 U.S. 1108 (1975).

‘The facts are set out in greater detail in the district court opinion, 394

F. Snpp. at 824-27. That opinion informs us that “both parties agree that

there are no issues of material fact precluding summary judgment.” Id. at

$43.

4a Opinion of the Court of Appeals

prior experience in food merchandising and did not

have any source of distribution, it elected to license its

registered trade name to independent food store

operators who would conduct a K-Mart Food Store

operation as part of or adjacent to a K-Mart department

store. This arrangement, it was felt, would provide

“one-stop shopping” and enhance customer acceptance

of the K-Mart program.

394 F. Supp. at 824. In 1964, Hempfield opened two food

stores sharing the same building with K-Mart stores. By

agreement with Kresge, Hempfield was permitted to use the

name “K-Mart Foods” for a term of years at each store.

Hempfield operated both stores until July 1969, when its

leases were terminated. Hempfield’s petition in bankruptcy

followed shortly.

The Hempfield grocery stores, although “under one

roof” with the K-Mart store, under the K-Mart name and thus

presented to the public as a part of the K-Mart complex,

were in fact run independently. Once past the supermarkets’

K-Mart marquees, this independence became obvious:

None of the goods sold by Hempfield was

permitted to carry the K-Mart or any other Kresge

brand name. Nor was Hempfield permitted to use the

name “K-Mart” on its checks, its business stationery or

even its pricing labels. Neither sold any goods or

services to the other and Kresge did not dictate

Hempfield’s source of supply.°

Most of Hempfield’s groceries came from a local

Pennsylvania wholesaler, Fox Grocery Company. Still,

Hempfield “received a substantial quantity of goods via

direct shipment from out of state suppliers which amounted

‘District Court Opinion, id. at 825.

on ee ge

Opinion of the Court of Appeals 5a

to in excess of $400,000 per year at cost.” Gross annual sales

at the two stores amounted to approximately four million

dollars. Most of this amount came from the sale of groceries.

A small percentage of Hempfield’s sales (about 2-5%)’ came

from those non-food items “customarily found in grocery

stores, e.g., health and beauty aids.”*

The district court summarized the various provisions of

the license agreements giving rise to the plaintiff's com-

plaint. Under these provisions, Hempfield was required to:

(1) charge prices identical to those charged by

Kresge on “like items,” i.e., items sold by both the food

stores and the department stores which prices were

established by defendant in the event the parties were

unable to arrive at a mutually agreeable price; [(2)]

maintain merchandise “competitive” in price with the

same or similar goods offered for sale in the trading

area; (3) limit non-food merchandise offered for sale to

specific categories of goods; (4) refrain from entering

into fair trade agreements; (5) refrain from issuing

trading stamps without express permission from

Kresge; and (6) use certain equipment furnished by

defendant.’

*id. The precise amount of such purchases cannot be determined, “as

it appears that the bankrupt’s records are incomplete in many respects.”

Id. The uncontradicted affidavit of Anthony Polito does disclose that

Hempfield purchased merchandise from out-of-state suppliers during the

first half of 1969 in the amount of $215,875.13. App. at 447a. “These

records reflect interstate purchases, therefore, at an annual rate in excess

of $430,000.00." Td.

“See 394 F. Supp. at 847.

‘Id. at 825-26 (footnote omitted.)

‘id. at 826. Although the district court discussed the restrictions

concerning fair trade agreements, trading stamps and tie-in equipment,

ruling in each instance against the plaintiff, the plainfitt has not raised

these issues on this appeal. Accordingly, we limit our discussion and

analysis to the pricing and product policies imposed by Kresge under its

agreements.

6a Opinion of the Court of Appeals

Kresge responded by claiming a lack of subject matter

jurisdiction and by denying that the restrictions contained in

the agreements between the parties constituted un-

reasonable restraints of trade. In support of its motion for

summary judgment, Kresge filed an affidavit of Frank J.

Zapalla, Jr., who was the former secretary of SkatZap, Inc.

(the predecessor corporation to Hempfield) and was the

individual who negotiated the Kresge license that is the

subject of this litigation. The uncontested portions of his

affidavit reveal that (1) both parties fully intended that the

food operation be presented to the public as one with the K-

Mart department store;'® (2) neither party contemplated or

intended that it would compete with the other;'! and (3) that

the “like items” price restrictions were generally acceptable

to Hempfield’s predecessor'? and applied only to goods not

purchased from Kresge and, at the retail level, “freely

available to the public at competitive prices in other stores

throughout the [relevant] marketing area.”"®

For its part, Hempfield, in an effort to substantiate

jurisdiction, sought additional pretrial discovery, which the

district court denied. That ruling is appealed, as is the district

court’s grant of summary judgment in favor of Kresge.

II.

In holding that Hempfield’s suit was barred by a lack of

Sherman Act subject-matter jurisdiction, the district court

characterized its inquiry as: “Does the defendant's conduct

have a sufficient relationship with interstate commerce so as

"See 46. App. at 402a; 49, id. at 403a-O4a, 912, id. at 405a; (17, id. at

4a.

"See US. App. at 403a: 99. supra.

“G11. App. at 405a.

‘10, App. at 404a.

oe

Opinion of the Court of Appeals Ta

to be a proper subject of federal regulation?” 394 F. Supp. at

827.

The district court measured this relationship by the

allegations in Hempfield’s complaint. Those allegations, as

the district court noted,'* “must allege either (1) activities

that are in the flow of interstate commerce, or (2) activities

which though occurring purely on a local level substantially

affect interstate commerce.” Doctors, Inc. v. Blue Cross of

Greater Philadelphia, 490 F .2d 48, 50 (3d Cir. 1973) (citations

omitted.) In other words, the district court required the

plaintiff to meet either the test of “in commerce” or that of

“affecting commerce’:

If an alleged restraint occurs within the flow of

interstate commerce, that is “in commerce,” substantial

effect on that commerce is presumed as a matter of law

and no showing need be made that any particular

amount of commerce has been affected. On the other

hand, when dealing with restraints which are alleged

merely to have affected interstate commerce, that

effect must be substantial in order to justify federal

regulation.

394 F. Supp. at 829. As our discussion need only address the

“affecting commerce” test,'° we focus our inquiry on the

element of substantiality.

'* 394 F. Supp. at 828.

'SThe district court devoted a considerable part of its opinion to the

application of the “in commerce” test to the facts of this case. See 394 F.

Supp. at 833-37. Our disposition of the jurisdictional issue relieves us of

any need to consider the “in commerce” theory. See Doctors, supra, at 30-

51:

We have made no attempt to judge the adequacy of every one of

the plaintiff's allegations on the interstate commerce issue since

jurisdiction is established if any one of them satisfies either of the

criteria for interstate commerce.

We thus express no opinion on the “in commerce” portion of the district

court opinion.

8a Opinion of the Court of Appeals

As noted by the court in Rasmussen v. American Dairy

Association, 472 F.2d 517 (9th Cir.), cert. denied, 412 U.S.

950 (1973):'6

There is no bright line dividing cases in which the

effect upon interstate commerce is sufficient to permit

Congress to prohibit particular anticompetitive activity

under the commerce clause from those cases in which it

is not sufficient. In this area perhaps more than in most,

each case must turn on its own facts.

Id. at 526."" The absence of such a bright line troubled this

Court in Doctors, supra, and it remains to trouble us here.

Doctors involved a suit by a single hospital against the

consortium that coordinated health care services in the

Philadelphia area. Blue Cross, the defendant, sought to

terminate the plaintiff hospital's membership, an action

which plaintiff alleged had been taken in an attempt by Blue

Cross to control all hospital services in the area. This Court,

looking only to the fact that “the volume of supplies which

are allegedly purchased by [the hospital] from companies

located outside Pennsylvania each year [$233,430 in 1972]

will be affected by the activities,”'> found a substantial

effect on interstate commerce and, therefore, held that

Sherman Act jurisdiction was established.

The Doctors panel was careful to note, however, that

the “affecting commerce” test would still be a bar to

jurisdiction in some actions. 490 F.2d at 53-54, citing

Lieberthal v. North Country Lanes, 332 F.2d 269 (2d Cir.

1964) and Page v. Work, 290 F.2d 323 (9th Cir.) cert. denied,

And quoted by the court below. 394 F. Supp. at 830.

' See also Hospital Building Co...) Trustees of Rex Hospital. 511 f.2d

67S. 655 (4th Cir, 1975) (en bane). reed. — US. — . 44 US LM. 4683

(Mav 24. 1976)

‘Doctors, supra, 490 F.2d at 51.

Opinion of the Court of Appeals 9a

368 U.S. 875 (1961). At the time the instant case was argued

before us, this admonition weighed even more heavily upon

us, as other Circuits had augmented our observation in

opinions restricting Sherman Act jurisdiction. Chief among

those cases was the Fourth Circuit’s en banc decision in

Hospital Building Co. v. Trustees of Rex Hospital, 511 F.2d

678 (4th Cir. 1975).

Hospital was a suit by the operator of a 49-bed

proprietary hospital in Raleigh, North Carolina. The

plaintiff hospital planned a major expansion that would

increase its size to 140 beds. Its complaint alleged that Rex

Hospital, a private tax-exempt hospital, acted in concert

with other named defendants in an effort to block the

proposed expansion and thus monopolize hospital services

in Raleigh. The Court of Appeals found the principal

“affecting commerce” allegations to be that “[nJeither the

hospital's interstate purchases of supplies and equipment, its

billings to national insurance companies and the federal

government, nor its purchases from its parent [out-of-state |

corporation have increased as they would were the hospital

to expand.” 511 F.2d at 683-84 (footnotes omitted.) The

court found these effects insufficient, reasoning that (1) the

consequences were not the result of conduct directed at

interstate commerce, and (2) the impact was “negligible.”

Id. at 654.

Hospital did not appear to furnish an answer to the

jurisdictional question with which we were confronted. F or

example, the plaintiff hospital's out-of-state purchases found

to be insufficient in that case totaled but $112,846, whereas

Hempfield’s out-of-state purchases were in the considerably

larger amount of $400,000.'° It thus appeared that Hemp-

field’s complaint would present a case squarely astride this

indistinct jurisdictional line. Upon the Supreme Court's

See footnote 6 supra.

10a Opinion of the Court of Appeals

grant of certiorari in Hospital, 423 U.S. 820 (1975), we

elected to delay our decision in this case to await its

disposition. The Supreme Court's reversal in Hospital, —

U.S. —, 44 U.S.L.W. 4683 (May 24, 1976), convinces us that

the facts here warrant the assumption of Sherman Act

subject-matter jurisdiction.

The Supreme Court found unpersuasive both of the

factors considered by the Hospital Court of Appeals. First,

the Supreme Court found that “the fact that an effect on

interstate commerce might be termed ‘indirect’ because the

conduct producing it is not ‘purposely directed’ toward

interstate commerce does not lead to the conclusion that the

conduct at issue is outside the scope of the Sherman Act.” 44

U.S.L.W. at 4685.2° Second, and more important for present

purposes, the Court found that an adverse impact on out-of-

state businesses or on market price need not be shown: “since

in this case the allegations fairly claim that the alleged

conspiracy, to the extent it is successful, will place

‘unreasonable burdens on the free and uninterrupted flow’

of interstate commerce, they are wholly adequate to state a

claim.” Id. The Court concluded that the “combination of

factors” described above (i.e., the decrease in prospective

purchases of out-of-state goods; the decrease in prospective

revenues from out-of-state insurance companies; and the

prevention of the proposed expansion, which would require

out-of-state financing) would be “certainly sufficient” to

satisfy the “affecting commerce” test.

A fortiori, we regard the same result as mandated here.

The amount of out-of-state purchases made by Hempfield—

$400,000—far exceeds the $112,000 which the Supreme

Court held to be sufficient for jurisdictional purposes in

Hospital. Further, the record reflects that the pricing policy

In reaching this conclusion, the Supreme Court discussed Burke v.

Ford, 389 U.S. 320 (1967).

Opinion of the Court of Appeals lla

attacked by the plaintiff was a standard feature in Kresge’s

nationwide licensing agreements governing K-Mart food

stores, which by 1971 numbered in excess of 300. This

pricing policy, when considered with the amount of the

plaintiff's out-of-state purchases, in our view more than

meets the jurisdictional threshold established in Hospital?!

Our review of this record in light of Hospital therefore,

convinces us that the district court erred in granting

summary judgment for Kresge on the basis of a lack of

subject matter jurisdiction.” Having concluded that there is

jurisdiction, we turn to the merits of plaintiff's complaint.

IIL.

Hempfield contends that the pricing and product

restrictions imposed by Kresge are illegal per se within the

contemplation of the Sherman Act. Kresge, on the other

hand, disputes the illegality of its admitted restrictions,

claiming that these restrictions must be tested by the rule of

reason and, when so measured, must be found to be

reasonable and therefore, permissible.

In its recent discussion of these concepts in United

States v. Topco Associates, 405 U.S. 596, 606-08 (1971), the

Supreme Court said:

“Our disposition of the jurisdictional issue presented here moots any

need for us to discuss the disco. ery issue raised on appeal by the plaintiff

Our reading of plaintiff's brief as respects this issue reveals that plaintiff's

desire for additional discovery was limited to establishing jurisdiction by

virtue of Kresge’s nationwide operations. See Brief for Appellant at 37-42.

As stated, our conclusion that jurisdiction is present obviates any need to

treat with this discovery issue.

*We recognize that the district court did not have the benefit of the

Supreme Court's discussion in Hospital at the time it decided the

jurisdictional issue. Had that opinion been available, the district court

might well have concluded that jurisdiction existed.

Having determined that jurisdiction is present, we need not discuss the

propriety of summary judgment in the context of a jurisdictional dispute

in an antitrust case. See the district court opinion, 394 F.2d at 830-32.

12a

Opinion of the Court of Appeals

On its face, §1 of the Sherman Act appears to bar

any combination of entrepreneurs so long as it is “in

restraint of trade.” Theoretically, all manufacturers,

distributors, merchants, sellers, and buyers could be

considered as potential competitors of each other. Were

§1 to be read in the narrowest possible way, any

commercial contract could be deemed to violate it.

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

238 (1918) (Brandeis, J.). The history underlying the

formulation of the antitrust laws led this Court to

conclude, however, that Congress did not intend to

prohibit all contracts, nor even all contracts that might

in some insignificant degree or attenuated sense restrain

trade or competition. In lieu of the narrowest possible

reading of §1, the Court adopted a “rule of reason”

analysis for determining whether most business com-

binations or contracts violate the prohibitions of the

Sherman Act. Standard Oil Co. v. United States, 221

U.S. 1 (1911). An analysis of the reasonableness of

particular restraints includes consideration of the facts

peculiar to the business in which the restraint is applied,

the nature of the restraint and its effects, and the history

of the restraint and the reasons for its adoption. Chicago

Board of Trade v. United States, supra, at 238.

While the Court has utilized the “mle of reason” in

evaluating the legality of most restraints alleged to be

violative of the Sherman Act, it has also developed the

doctrine that certain business relationships are per se

violations of the Act without regard to a consideration

of their reasonableness. In Northern Pacific R. Co. v.

United States, 356 U.S. 1, 5 (1958), Mr. Justice Black

explained the appropriateness of, and the need for, per

se rules:

“({T]here are certain agreements or practices

which because of their pernicious effect on

competition and lack of any redeeming virtue are

conclusively presumed to be unreasonable and

Opinion of the Court of Appeals 13a

therefore illegal without elaborate inquiry as to the

precise harm they have caused or the business

excuse for their use. This principal of per se

unreasonableness not only makes the type of

restraints which are proscribed by the Sherman Act

more certain to the benefit of everyone concerned,

but it also avoids the necessity for an incredibly

complicated and prolonged economic investiga-

tion into the entire history of the industry involved,

as well as related industries, in an effort to

determine at large whether a particular restraint

has been unreasonable—an inquiry so often wholly

fruitless when undertaken.”

It is only after considerable experience with certain

business relationships that courts classify them as per se

violations of the Sherman Act. See generally Van Cise,

The Future of Per Se in Antitrust Law, 50 Va. L. Rev.

1165 (1964). One of the classic examples of a per se

violation of §1 is an agreement between competitors at

the same level of the market structure to allocate

territories in order to minimize competition. Such

concerted action is usually termed a “horizontal”

restraint, in contradistinction to combinations of

persons at different levels of the market structure, e.g.,

manufacturers and distributors, which are termed

“vertical” restraints. This Court has reiterated time and

time again that “[h]orizontal territorial limitations .. .

are naked restraints of trade with no purpose except

stifling of competition.”

Thus, before we can accept the per se argument urged

upon us by the plaintiff here, we must analyze the business

relationship between Hempfield and Kresge to determine:

(1) whether it is one with which the courts have had

“considerable experience”, and (2) whether the challenged

restrictions are “naked restraints of trade with no purpose

except [the] stifling of competition.” Topco, supra, at 608.

l4a Opinion of the Court of Appeals

A.

At the outset, we observe that neither plaintiff nor

defendant has brought to our attention any precedent or

authority whereby the courts have evaluated in an antitrust

context a business arrangement similar to the one established

by the parties’ agreements here. Nor has our independent

research disclosed any legal or judicial antitrust analysis

treating with this type of economic relationship.

The district court in its analysis of the parties’

relationship believed that it resembled a franchise. The

district court said:

We believe that the analogy between the present

agreements and franchise arrangements is further

strengthened by the facts surrounding the initiation of

the Hempfield-Kresge relationship as well as many

provisions in the agreements including, inter alia, (1)

Hempfield agreed that upon termination of the license

agreements it would discontinue all use of the K-Mart or

any related name; (2) Hempfield agreed to pay Kresge

license fees as a percentage of gross sales in excess of a

specified figure; (3) the parties agreed to a common

advertising arrangement to be directed by Kresge, the

cost of which was to be shared by Hempfield; and (4)

there was an ongoing commercial relationship between

the parties not only as to license fees and advertising but

also as to other areas of operation.

394 F. Supp. at 544.

On the other hand, while we do not dispute that

elements of a franchise may be found in the arrangement

made between Kresge and Hempfield, we also recognize

characteristics in that arrangement which are commonly

identified with trademark licensing (i.e. Hempfield was

permitted to use and to “trade under” the K-Mart insignia. )”°

-We appreciate that a trademark license may not be used to avoid

Sherman Net liability. See United States. Sealy Ine SSS. 350 (1967):

Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951).

Opinion of the Court of Appeals 15a

In addition, to the extent that Kresge and Hempficid offered

like products for sale and competed “as one” with other

establishments, the two acted as “partners” in establishing

and operating under joint merchandising and pricing

policies.

Finally, if it was indeed necessary (which we do not

think it is) to attribute a definitive label to the relationship

created by the Kresge-Hempfield agreements, in our

opinion that relationship would most aptly be characterized

as a “concession”. Hempfield, by operating under the K-

Mart name and appearing as “K-Mart” to third parties in

effect operated its own “concession” within the K-Mart

complex.

For our purposes here, there is no necessity to fit this

relationship into any one business category. Our only inquiry

is whether there has been sufficient judicial examination of,

and experience with, the hybrid business arrangement at

issue here. We are satisfied that this kind of business

arrangement has yet to be exposed to judicial review. Just as

the Supreme Court required more knowledge of actual

impact on competition in White Motor Co. v. United States,

372 U.S. 253 (1963), we too “need to know more than we do

about the actual impact of these arrangements on competi-

tion to decide whether they have such a ‘pernicious effect on

competition and lack ... any redeeming virtue’ and

therefore should be classified as per se violations of the

Sherman Act.”*4 Accordingly, under the circumstances

presented here, we cannot subsume the challenged restraints

to per se treatment.

We turn, then, to the second step of our analysis of these

restrictions’ susceptibility to per se treatment. This requires a

consideration of the restraints themselves to determine if

they produce the “pernicious effect on competition” and

exhibit the “lack of redeeming virtue,” Northern Pacific,

supra, that would require them to be deemed unreasonable.

Id. at 263 (citation omitted.)

16a Opinion of the Court of Appeals

B.

The restraints normally found within the per se category

are horizontal®® limitations constituting “naked restraints of

trade with no purpose except stifling of competition.”

Topco, supra, at 608. Horizontal restraints by definition

require agreements between competitors.

However, before we may say that ... agreements

[imposing such restraints] are inherently unlawful, we

must find that the agreements were made between

competitors, actual or potential, dealing in competing

products in a relevant market.

United States v. Columbia Pictures Corp., 169 F. Supp. 888,

893 (S.D. N.Y. 1961). Without such competition, the

necessary precondition to a §1 violation is missing. Even if

the license provisions challenged by the plaintiff were in the

form of and had the substance of “naked restraints ot trade,”

there would still be the need for such restraints to be

imposed upon competitors for no purpose other than that of

stifling competition.

Here, the relationship established by the parties dem-

onstrates to our satisfaction that the necessary element of

competition is lacking. The district court was similarly

satisfied, stating as follows:

We find that Hempfield and Kresge were not

competitors. In the first place, the Kresge department

stores and the Hempfield grocery supermarkets were

designed to sell entirely different kinds of merchandise.

That was the reason for the agreements. The fact that

5We recognize that while vertical restraints do not normally fall

within the per se rule, in some instances, such as resale price maintenance,

they may be conclusively presumed to be illegal. Here, however, no one

contends that the agreements or practices constitute vertical restraints or

that they would be so proscribed.

Opinion of the Court of Appeals I7a

somewhere between 2% and 5% of merchandise sold by

Hempfield was also sold by defendant's stores does not,

in our view, require a finding that Hempfield and

Kresge were competitors. On the contrary we believe it

shows they were not. Therefore, a holding that

Hempfield and Kresge competed would ignore the

intensely practical business realities which underlie the

antitrust laws.

In his affidavit, Frank Zapalla, one of the Hemp-

field incorporators, states:

“It was never our intention, or Kresge’s, that in

any sense we were to be competitors of each other,

for under the arrangement, we were both to be

selling under one roof and under the name of K-

Mart entirely different kinds of merchandise.”

394 F. Supp. at 847.

We grant that certain non-food items were offered for

sale by both Kresge and Hempfield. On the surface, this

might appear to indicate that the parties were competitors in

that the proceeds of each sale went into the pocket of either

seller Kresge or seller Hempfield. As we view the substance

of the transaction, however, both Kresge and Hempfield

presented a common front under a common name to the

customer. Therefore, whether the non-food item was

purchased from Kresge or from Hempfield, it was as if that

item had been offered for sale by Kresge alone, but at two

different locations in its K-Mart establishment.”* Here, the

fact of noncompetition is dictated by the practical business

arrangement of the parties, and indeed is disclosed as their

“The problem of customer confusion and possible ill will that would

tollow if different prices were charged for the same product offered at

different locations in “one” store was foreseen and guarded against by the

parties. See Affidavit of Frank Zapalla, App. at 401a-410a.

18a Opinion of the Court of Appeals

intent by uncontradicted affidavit.” If for no other reason

than the absence of this necessary element of “competitors”,

a horizontal limitation cannot be made out.

Moreover, the challenged restraint enabled Kresge to

add a food component to its discount operation without

causing customer confusion or threatening the low-price “K-

Mart” discounting image upon which the success of K-Mart

(including K-Mart Food) would depend. Therefore, far

from attempting to stifle competition, the restraints had as

their purpose the stimulation of business and efficiency for

both the department store and the supermarket: they (the

restraints) would assure that the overall operation would

compete effectively in both the discount and food markets

vis-a-vis other department store and food discounters. The

restraints thus serve a legitimate business purpose.”

We therefore conclude that the challenged restraints are

not illegal per se.

IV.

Our treatment of the restraints under the rule of reason

requires less discussion. Hempfield, as the plaintiff in this

action, bore the burden of proof to establish that the licenses,

restraints and business arrangements violated Section 1.

Shawyer & Son, Inc. v. Oklahoma Gas & Electric Co., 463

* See id. The need tor unified business conduct under a concession

arrangement is discussed in Jay Bee Apparel Stores, Inc. v. 563-565 Main

St. Realty Corp., 130 Misc. 23, 223 N.Y.S. 537 (S. Ct. 1927), aff'd 226 App.

Div. 721, 233 N.Y.S. 792 (4th Dep't 1929), albeit not in an antitrust context.

*As the district court noted:

A restraint may be unreasonable cither because a restraint otherwise

reasonable is accompanied with a specific intent to accomplish a

forbidden restraint or because it falls within the class of restraints that

are illegal per se. Uniied States v. Columbia Steel Co., 334 U.S. 495,

522 (1948).

304 F. Supp. at 543.

Pe

Opinion of the Court of Appeals 19a

F.2d 204, 205-06 (10th Cir. 1975); Venzie Corp. v. U.S.

Mineral Products Co., 382 F. Supp. 939, 950-51 (E.D. Pa.

1974), aff'd, 521 F.2d 1309 (3d Cir. 1975); Alders v. AFA

Corporetion of Florida, 353 F. Supp. 654, 657-58 (S.D. Fla.

i973), aff'd, 490 F.2d 990 (5th Cir. 1974). See also Sulmeyer

v. Coca Cola Co., 515 F.2d 835, 849 (5th Cir. 1975).

Hempfield has only marshalled arguments contending that

the restraints that it finds offensive are subject to the per se

rule, see Brief for Appellant at 14 et seq. It has failed to

address itself to the issue of the restraints’ legality under the

rule of reason.”

The test under the rule of reason has been set out by this

Court as follows:

Despite the years since its pronouncement,

Chicago Board of Trade v. United States remains the

crucible for assaying the legality of a restraint under

section 1. There, Justice Brandeis explained the sort of

scrutiny that is required before a trial court may

determine that a restraint of trade, not per se illegal,

exceeds the bounds permissible under the rule of

reason:

Every agreement concerning trade, every regula-

tion 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 competi-

tion or whether it is such as may suppress or even

destroy competition. To determine that question

the court must ordinarily consider the facts peculiar

to the business to which the restraint is applied; its

condition before and after the restraint was

imposed; the nature of the restraint and its effect,

“Apparently the plaintiff did not press this issue before the district

court, relying, as it does here, on the per se theory.

20a Opinion of the Court of Appeals

actual or probable. The history of the restraint, the

evil believed to exist, the reason for adopting the

particular remedy, the purpose or end sought to be

attained, are all relevant facts. This is not because a

good intention will save an otherwise objectionable

regulation or the reverse; but because knowledge

of intent may help the court to interpret facts and to

predict consequences.

[246 U.S. 231, 238 (1918)],

American Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d

1230, 1246-47 (3d Cir. 1975). As noted, plaintiff has the

burden of proving a Section | violation under the rule of

reason.

In an attempt to expedite final determination of the

case, the district court, after ruling on jurisdiction, went on to

discuss the merits of the case.*° In addressing the merits, the

district court observed that “both parties agree that there are

no issues of material fact precluding summar, judgment.”

394 F. Supp. at 843. Our examination of the record and the

absence of any contention to the contrary by the parties*!

supports the district court's conclusion. Looking to the

record, therefore, we find no evidence that could lead us to

conclude that the restraints here imposed are “such as may

suppress or even destroy competition.” To the contrary, the

only proofs in this record lead to the opposite conclusion.

The uncontradicted affidavit of Frank Zapalla, who as one

of the founders of He mpfield’s predecessor had negotiated

the Kresge license, reveals the following facts about the

parties’ relationship, the nature of the restraints, and their

impact and purpose:

"See note o supra

As noted previously, plaintiff's desire for further disocvery was

directed solely to the jurisdictional issue. See note 21 supra.

Opinion of the Court of Appeals 2la

6... . 1 became aware that Kresge was interested in

licensing food operators to use the K mart name for food

supermarkets operated in conjunction with, but by

management independent from, K mart discount

variety stores. Kresge wanted the supermarket operated

with the “discount” image of high volume and

competitive prices. This concept appealed to Mr.

Skatell and myself because such a common program

would be mutually advantageous to both Kresge’s

department store and the food supermarket. We felt this

would be particularly advantageous to the food

supermarket because it would have the benefit of

identification with the K mart name, its heavy

advertising, and the additional flow of shoppers

generated by K mart.

8. lreviewed the Kresge license agreement myself,

and with Mr. Skatell. It contained limitations as to non-

food items, both as to types of items and percentage of

total area. We were interested in selling foods, and had

no desire to compete with Kresge, or any other non-

food stores in the shopping center, on non-food items

and this limitation seemed completely reasonable to us.

In addition, Greensburg Plaza, Inc. had a percentage

lease with Kresge so any competition with the Kresge

discount department store by the supermarket would

have been self defeating.

9. It was never our intention, or Kresge’s, that in any

sense we were to be competitors of each other, for

under the arrangement, we were both to be selling

under one roof and under the same K mart name

entirely different kinds of merchandise. Each was to

complement the other. However, we both did realize

that there would have to be some overlap, since

traditionally, it was customary for food supermarkets to

sell some non-food items. Kresge had a provision that to

Opinion of the Court of Appeals

the extent some goods would be sold in both stores, (a

very smal] percentage of the food store inventory,

mostly health and beauty aids—perhaps 5% at most),

they would be sold at the same price. Once again, this

was completely agreeable to us because we did not

want to compete with another store using the K mart

name. We intend to have the same type of low-price

discount operation as to foods that Kresge had for

variety items—so there was no conflict. We also realized

that it would be to our mutual advantage to coordinate

our prices of any items sold in common between the two

stores to avoid customer confusion and to avoid damage

to the K mart discount image.

10. All of the items sold in common were traditional

national brand name or other private label products that

were freely available to the public at competitive prices

in other stores throughout the marketing area served by

our stores. We bought none of these products from S. S.

Kresge Company or any of its subsidiaries—and we

were free to purchase them from any source we wished.

11. As to the “identical items” carried by both the

discount department store and our own food super-

market, we were perfectly willing to follow the Kresge

pricing pattern on a regular basis. We bought our health

and beauty aids from a jobber also serviced by Fox

Grocery, who would pre-price them and stock on our

shelves. Our plan was for the jobber to check the K mart

discount department store pricing and follow it.

12. On promotional items and advertised sales, the

managers of each store were supposed to alert each

other and the item being promoted would be removed

from inventory during the special promotion. This was

done to maintain the constant image of single, unitized

ownership, and value.

Opinion of the Court of Appeals 23a

17. l agreed to this language™ because it essentially

accomplished one purpose of two separate operations

under one name, and the identical pricing would avoid

customer confusion and damage to the low price-

discount image that we were both trying to accomplish.

19. On entering into the two agreements referred to

above with the Kresge Company, including the clauses

on restriction of items and identical pricing on like

items, we did so without any coercion or economic

pressure from Kresge. As indicated earlier, we felt they

were to our advantage as well as Kresge’s.

App. at 402a-08a.

In view of these, the only “relevant facts”, we have no

hesitation in concluding, as did the district court, that the

challenged restraints “merely regulate and perhaps thereby

promote competition.” Certainly, these restraints—

incidental and peculiar to this distinctive business

relationship, adopted by the parties for the purposes

described above, and designed only for the operation of a

more efficient unified competitive entity vis-a-vis others—

cannot be suid to either “suppress” or “destroy” competi-

tion.** We hold, therefore, that on this record, the plaintiff

“The language in question read:

On non-exclusive, non-food items permitted in licensee's assortment

and also carried by Licensor, Licensor and Licensee will maintain

identical competitive prices which have been mutually established.

On special sales on promotion of any of these goods by either

Licensee or Licensor the offered price is to be met or the goods

removed for sale for the duration of the promotion. Licensor and

Licensee shall provide each other with sufficient and advance

information to provide for a coordinated operation.

916, App. at 407a.

“Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1915).

“See id. See also 8 Non Kalinowski, Antitrust Laws and Trade

Regulation §59.06 [3] (1972), 1 Callman, Unfair Competition, Trademarks

and Monopolies §15.5.3, at 465 (3d ed. 1976).

24a Opinion of the Court of Appeals

has not proved that the restraints offended Section | of the

Sherman Act.

V.

We have concluded that summary judgment predicated

ona lack of subject-matter jurisdiction should not have been

granted. Having thus resolved the jurisdictional issue

favorably to plaintiff, Hempfield’s discovery claim has

thereby been mooted.*®

However, our analysis of the merits comports with the

conclusions expressed by the district court in that we have

found no basis for holding that the challenged restraints are

illegal per se. Further, the record will not support a holding

of Section 1 illegality under the rule of reason.

We will therefore affirm the district court's grant of

summary judgment in favor of Kresge, not on the ground”

that jurisdiction is lacking, but on the ground that no

Sherman Act violation has been proved.

"See notes 21, 31 supra.

*See note 3 supra.

Opinion and Order of the 25a

U.S. District Court

JOHN EVANS, Trustee in Bankruptcy for

Hempfield Stores, Inc., a Bankrupt,

Plaintiff,

v.

S. S. KRESGE COMPANY, a Foreign

Corporation, Defendant.

Civ. A. No. 71-85.

United States District Court.

W. D. Pennsylvania.

May 13, 1975.

David R. Brown, Roslyn M. Litman, Pittsburgh, Pa., for

plaintiff.

Andrew L. Weil, Pittsburgh, Pa., Henry T. Reath,

Philadelphia, Pa., for defendant.

OPINION AND ORDER

McCune, District Judge.

Plaintiff, trustee in bankruptcy for Hempfield Stores,

Inc., formerly Skat-Zap, Inc. (Hempfield) initiated this

antitrust action in 1971 complaining that defendant, S. S.

Kresge Company (Kresge), violated Section | of the

Sherman Act, 15 U.S.C.A. §1 which provides, inter alia, that

“every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade. ..among the

several States,...is declared to be illegal.” Plaintiff claims

injury and seeks damages under §4 of the Clayton Act, 15

U.S.C.A. §15.

Following prolonged and extensive discovery' defen-

dant has renewed its motion for summary judgment.’ In

‘Jurisdiction has been in dispute since defendant's answer was filed.

Much of the voluminous discovery proceedings has been concerned with

the issue of subject matter jurisdiction raised by defendant's answer and

prior motion for summary judgment.

“Defendant's prior motion for summary judgment was denied by

Opinion and Order of March 14, 1972.

26a Opinion and Order of the

U.S. District Court

support of that) motion, defendant advances three

arguments: (1) that the court does not have jurisdiction over

the subject matter of this action; (2) that the conduct

complained of is neither per se violative of §1 of the Sherman

Act nor unreasonable when examined by the “rule of reason”

standard; and (3) that Hempfield’s participation in the

conduct complained of precludes any recovery by its trustee

in bankruptcy as a matter of law.

Plaintiff has filed a cross motion for partial summary

judgment in which it asks the court to determine that certain

of the practices complained of are violative of $1 as a matter

of law (per se violations). Plaintiff's brief in opposition to

defendant's motion for summary judgment addresses each

of the alternative arguments advanced by defendant in

support of its motion. First. plaintiff contends that the

jurisdiction of the court over the subject matter of this

complaint has been established. In the alternative, plaintiff

contends that the jurisdictional issue is inextricably in-

tertwined with determination of the merits thereby

precluding entry of summary judgment. Plaintiff also argues

that the issue of subject matter jurisdiction must be

determined by the trier of fact. a jury in this case. since

defendant has demanded a jury trial. Second, as we have

already mentioned, plaintiff claims that the activities

complained of are per se violative of §1 of the Sherman Act.

Finally, plaintiff denies that Hempftield’s participation in the

alleged) price-fixing scheme and various other alleged

restraints is a bar to its recovery.

Also before the court are a counterclaim by defendant

seeking monies allegedly owed to it for unpaid rent and

other itemized expenses and plaintiff's counterclaim in

which plaintiff alleges that rent already paid for two months

Opinion and Order of the 27a

U.S. District Court

constitutes a preference under §60 of the Bankruptcy Act, 11

US.C.A. §96.

The court has heard oral argument on the respective

motions for summary judgment and has considered the

briefs of both parties.

<=

We turn now to the facts which give rise to the present

controversy. .

Facts ~~

Defendant Kresge is incorporated under- the laws of

Michigan. It operates department stores in 48 states, the

District of Columbia and several foreign countries. Some of

those stores use the Kresge name while others operate under

the name “K-Mart” which is defendant's registered exclusive

service trade name.

Defendant has used the “K-Mart” trade name in an

effort to develop a reputation as a low mark-up, highly

competitive merchandiser selling quality merchandise at

discount prices. From its inception the plan was designed

and its success was dependent on high volume sales with a

low per item profit margin. Kresge felt that the best way to

achieve high volume sales was to draw on the potential

buying power of those who made frequent food purchases.

However, since Kresge had no prior experience in food

merchandising and did not have any source of distribution, it

elected to license its registered trade name to independent

food store operators who would conduct a K-Mart Food

Store operation as part of or adjacent to a K-Mart

department store. This arrangement, it was felt, would

provide “one-stop shopping” and enhance customer accep-

tance of the K-Mart program. This action is a direct result of

28a Opinion and Order of the

U.S. District Court

two such license agreements entered into between Hemp-

field (Skat-Zap) and Kresge.

Prior to August 12, 1963, two of the incorporators of

Hempfield, Frank Zapalla, Jr., and Frank Nascone were the

owners of a real estate development firm known as Maret

Corporation which solicited and obtained long term lease

commitments from Kresge for department stores in two

shopping centers, one located in Westmoreland County, the

other in Allegheny County. However, the commitments

were contingent upon Kresge’s ability to obtain a licensee

who would operate a grocery store at each location.

Hempfield was incorporated to operate the grocery stores.

Hempfield was incorporated on August 12, 1963, under

the name of Skat-Zap, Inc. The incorporators and initial

shareholders were Zapalla, Nascone, and Herman Skatell.

Shortly thereafter on September 23, 1963, Hempfield and

Kresge entered into a license agreement which authorized

Hempfield to use the name “K-Mart Foods” for a period of

twelve years at a retail supermarket located next door to the

Kresge department store in the Westmoreland County

shopping center. The store was designated K-Mart Food

Store No. 4032. Approximately eight months later, the same

parties concluded a second agreement which authorized

Hempfield’s use of the name “K-Mart” for a ten-year period

at a store located in the Allegheny County shopping center.

Kresge designated this K-Mart Food Store No. 4064.

Pursuant to these agreements, Hempfield opened Food

Stores 4032 and 4064 in 1964 and continued to operate both un-

til July, 1969, at which time the leases were terminated. Short-

ly thereafter, Hempfield filed a petition in bankruptcy.’

‘See Civil Action No. 69-271. Western District of Pennsylvania, filed

August 29, 1969. It also appears that a receiver was appointed by the Court

of Common Pleas of Allegheny County at No. 3432, July Term, 1969, in a

state dissolution proceedings.

Opinion and Order of the 29a

U.S. District Court

During the years of its operation Hempfield went

through a succession of ownerships. In 1967, a joint venture

entity of which Gerald Loevner was the partner-in-charge

assumed control of all outstanding shares until January, 1969,

when Anthony Polito, who had been associated with the

supermarkets in various capacities since 1965, purchased all

Hempfield stock.

While the grocery supermarket and the department

store at each K-Mart location were designed to appear to the

public as a single entity providing “one-stop shopping,” in

fact, the stores were independently operated. None of the

goods sold by Hempfield was permitted to carry the K-Mart

or any other Kresge brand name. Nor was Hempfield

permitted to use the name “K-Mart” on its checks, its

business stationery or even its pricing labels. Neither sold

any goods or services to the other and Kresge did not dictate

Hempfield’s source of supply.

The record reveals the major supplier of Hempfield’s

groceries was a Pennsylvania wholesaler, Fox Grocery

Company, a large locai grocery outlet, which was located in

the area of both Hempfield stores. Plaintiff alleges that it also

received a substantial quantity of goods via direct shipment

from out of state suppliers which amounted to in excess of

$400,000.00 per year at cost. However, it appears that the

bankrupt’s records are incomplete in many respects. The

parties have been unable to determine exactly what volume

of purchases Hempfield made from out of state sources,

from whom such purchases were made and whether the

goods were actually shipped in from out of state or merely

billed from out of state addresses.

BEST COPY AVAILABLE

30a Opinion and Order of the

U.S. District Court

It appears that the total retail volume of both Hempfield

stores was in the vicinity of four million dollars per year,‘

almost all of which came from the sale of groceries although

both stores sold the usual non-food items customarily found

in grocery stores, e.g., health and beauty aids.°

It is undisputed that Hempfield’s sales all occurred in

the communities where its two stores were located.

The essence of the complaint is that defendant, through

various provisions of the license agreements and the rules

and regulations which supplemented those agreements,

unlawfully sought to regulate certain aspects of Hempfield’s

business in violation of Section 1 of the Sherman Act. It is not

necessary to set forth the various provisions of the license

agreements in detail. In substance, they required, inter alia,

that Hempfield (1) charge prices identical to those charged

by Kresge on “like items,” i.e., items sold by both the food

stores and the department stores which prices were

established by defendant in the event the parties were

unable to arrive at a mutually agreeable price; maintain

merchandise “competitive” in price with the same or similar

‘The annual gross sales of both Henmiptield stores were approaimately

as tollows:

Year Gross Sales

1964 $2,967,796.00

1965 4,620,727.00

1966 4,050,416.00

1967 4,183,012.00

1965 4,369,971.00

See Supplemental Affidavit of Anthony C. Polito.

*For a complete list of the categories of merchandise sold by both the

Hempfield stores and the Kresge department stores, see Defendant's

Interrogatories to Plaintiff (First Set), question 7.

Plaintiff contends that, as interpreted by defendant, being “com-

petitive” in price meant meeting the lowest price of all its competitors on

(continued )

Opinion and Order of the 3la

U.S. District Court

goods offered for sale in the trading area; (3) limit non-food

merchandise offered for sale to specific categories of goods;

(4) refrain from entering into fair trade agreements; (5)

refrain from issuing trading stamps without express

permission from Kresge; and (6) use certain equipment

furnished by defendant at Food Store 4064 (Count II).

Plaintitf alleges that the above listed restraints “con-

tributed to Hempticld’s business failure.” In plaintiff's view,

the first of the above mentioned restraints resulted in a

horizontal price-fixing arrangement which is a per se

violation of $1: alleged restraints 2 through 5 interfered with

Hemptield’s ability to exercise its independent business

judgment: and alleged restraint 6 was an unlawful tying

agrecmnent.

Defendant denies that any or all of the practices

complained of violated the Sherman Act. Furthermore, it

denies that any of the alleged restraints contributed to

Hempfield’s business failure which it attributes to bad

management, insufficient capitalization and excessive debt

structure.

From time to time, Kresge sent employees to inspect

both stores for compliance with the terms of the license

agreements and the rules and regulations. Plaintiff refers to

these periodic check-ups as “policing” since, if violations of

each and every item which Hempfield sold. As explained by counsel tor

plaintiff at oral argument. Assume Hempfield has three competitors — A,

B, and C in the trading area in which it operates, all of whom sell item X

and item Y. Competitor A sells item X for $0.49 and item Y for $0.51,

competitor B sells both items for $0.50; and competitor C sells item X for

$0.51 and item Y for $0.49. Plaintiff states that Hempfield was required to

sell both items for $0.49, the lowest price charged by any competitor.

Hempfield alleges that this requirement was used to increase the volume

of sales at defendant's stores by making Hempfield a “loss leader.” See

United States v. Food and Grocery Bureau of Southern California, 43

F Supp. 974 (S.D. Cal. 1942), aff'd, 139 F.2d 973, 974 (9th Cir. 1945).

32a Opinion and Order of the

U.S. District Court

the license agreements were found to exist, defendant, in

effect, issued citations. It appears that as a result of such

inspections, Hempfield was directed on several occasions to

remove certain unauthorized merchandise or to discontinue

its sale when the stock on hand was exhausted.’ The record

also indicates that comparative price checks were made on

grocery items to see if they were competitive with other

supermarkets in the area.* Defendant also prepared and

issued Identical Pricing Books which were designed to

insure that “like items” were sold at identical prices.

In response to defendant's interrogatories, plaintiff has

indicated that Hempfield priced its merchandise using the

following guidelines as to like items:

Merchandise sold in common by both defendant

and the Bankrupt was sold at prices dictated by

defendant, except during the approximate periods from

March, 1965 to October, 1965 and from October, 1968 to

March, 1969. During those periods, such merchandise

was sold at prices determined in accordance with the

Fox Grocery Company gross profit pricing structure

designed to produce an overall budgeted gross profit

figure of approximately 17.9% to 18.5%.°

For merchandise not sold in common:

The Bankrupt attempted to sell merchandise not

sold in common at prices determined in accordance

with the Fox Grocery Company gross profit pricing

structure designed to produce an overall budgeted

gross profit figure of approximately 17.9% to 18.5% as

follows:

‘See Exhibits 3G and 3H, attached to plaintiff's motion for summary

judgment and response in opposition to defendant's motion for summary

judgment.

‘See Exhibits 3H. 3) and 3K attached to plaintiff's motion.

‘See Defendant s Interrogatories to Plaintiff (First Set), question y

Opinion and Order of the 33a

U.S. District Court

1965 and 1966: 17.9% at both stores

1967: 18.5% at both stores

1968, Jan. to Oct.: 18.5% at both stores

Oct. 1968 to Mar. 1969: 18.1% at Food Store 4064

and 18.5¢ at Food Store 4032.

At various times throughout the entire period, however,

the Bankrupt was required to sell merchandise at prices

lower than the prices determined as above.'®

From the inception of this law suit, Kresge has accepted

as true most of plaintiff's allegations regarding pricing

requirements, purchasing restrictions and the other re-

quirements contained in the license agreements. However,

defendant differs drastically with plaintiff on what legal

conclusions are to be drawn from the facts.

With this background, we will proceed to examine the

issues presented by the motions before us.

I

Discussion of the Jurisdictional Issue

(1, 2] Although substantive and jurisdictional issues are

sometimes contusingly described in terms of the “effect” of

particular conduct upon commerce as ia Common question

were presented, see eg. Las Vegas Merchant Plimbers

Ass'n v. United States, 210 F.2d 732, 739-740, n. 3. (9th Cir,

1954). cert. denied, 348 U.S. SIT, 75 S.Ct. 29, 99 Led. 645,

the substance of the two inquiries is not properly the same.

Ford Wholesale Co. v. Fibreboard Paper Products Co., 344

F. Supp. 1323 (N.D. Cal. 1972), aff'd, 493 F.2d 1204 (9th Cir.

1974), cert. denied, 419 U.S. 876, 95 S.Ct. 138, 42 L.ked.2d

Id., question 14.

34a Opinion and Order of the

U.S. District Court

115. Whether a defendant's conduct constitutes a substantive

violation of the Sherman Act is entirely a matter of

congressional definition: Is the defendant's conduct of the

type which Congress sought to prohibit, i.e., is that conduct a

“restraint of trade” within section 12 The jurisdictional

question on the other hand concerns the power of Congress

to reach the defendant's conduct: Does the defendant's

conduct have a_ sufficient relationship with interstate

commerce so as to be a proper subject of federal regulation?

See Rasmussen v. American Dairy Ass'n, 472 F.2d 517 (9th

Cir. 1973), cert. denied, 4) U.S. 950, 93 S.Ct. 3014, 37

L..Ed.2d 1003; Gough v. Rossmoor Corp., 487 F.2d 373, 375-

376 (9th Cir. 1973).

In the Shreveport Rate Cases, (Houston, E. & Texas Ry.

v. United States) 234 U.S. 342, 34 S.Ct. 833, 58 L.Ed. 1341

(1914), the Supreme Court decided that wholly intrastate

activities were properly subject to regulation under the

federal commerce power if, despite their local character,

they had an economic impact on interstate Commerce. In

Shreveport the Court upheld the power of the federal

government to regulate the railroad rates of an admittedly

intrastate character and fixed by the authority of the state

because of the interstate affects which such rates had.

The Shreveport holding has gradually been extended to

general application, thereby obviating the need to search for

some sharp point or line where interstate commerce ends

and intrastate commerce begins in order to determine

whether the Sherman Act applies. For the essence of the

affectation doctrine was that the exact location of the line

made no difference if the forbidden effects flowed across it

to the injury of interstate commerce or to the hindrance or

defect of Congressional policy regarding it. Mandeville

Island Farms v. American Crystal Sugar Co., 334 U.S. 219,

232, 68 S.Ct. 996, 92 L.Ed. 1328 (1948). .

Opinion and Order of the 35a

U.S. District Court

[3] It is now clear that the federal commerce power is as

broad as the need that evokes it and encompasses not only

the regulation of interstate commerce itself, but all measures

necessary and proper to that end including purely intrastate

activities, if necessary, to protect and foster interstate

commerce. Rasmussen v. American Dairy Ass'n, supra, at

522. As stated by the Supreme Court in United States v.

Women's Sportswear Manufacturing Assn, 336 U.S. 460.

164. 69 S.Ct. TA. 716.93 Liked. S05 (1949):

“The source of the restraint may be intrastate, as the

making of a contract or combination usually is; the

application of the restraint may be intrastate, as it often

is; but neither matters if the necessary effect is to stifle or

restrain commerce among the states. If it is interstate

commerce that feels the pinch, it does not matter how

local the operation which applies the squeeze.”

[4] However, realizing that every enterprise, however

localized, has some effect, however remote, on the flow of

commerce among the states, the courts have recognized that

some “localness.” “remoteness” or “de minimus” factor must

intervene or federal Commerce power under the Sherman

Act is boundless. Rasmussen v. American Dairy Assn, supra,

at 526. Thus. in order for the interstate commerce allegations

of a Sherman Act complaint to be jurisdictionally sound,

they must allege either activities that are in the flow of

interstate Commerce or activities which though occurring on

a purely local level. substantially affect interstate Commerce.

Doctors, Inc. v. Blue Cross of Greater Philadelphia, 490 F.2d

48, 50 (3rd Cir. 1973). See also Page v. Work, 290 F.2d 323

(9th Cir. 1961), cert. denied, 368 U.S. 875, 82 S.Ct. 121, 7

L.Ed.2d 76. Thus, restraints which only affect interstate

commerce in some insignificant degree or attenuated sense

are not within the federal commerce power.

36a Opinion and Order of the

U.S. District Court

[5] In similar fashion the courts in dealing with the

substantive allegations of Sherman Act complaints have

recognized that were §1 to be read in the narrowest possible

way, any commercial contract would be deemed to violate

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

238, 38 S.Ct. 242, 62 L.Ed. 683 (1918). Therefore, the courts

have adopted the so-called “rule of reason” to determine

whether most business combinations or contracts violate the

provisions of the Act. See Standard Oil Co. v. United States,

221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 619 (1911). An analysis of

the reasonableness of a particular restraint includes con-

sideration of the facts peculiar to the business in which the

restraint is applied, the nature of the restraint, its effects, its

history and the reason for its adoption. Chicago Board of

Trade v. United States, supra, 246 U.S. at 238, 38 S.Ct. 242.

[6, 7] However, there are certain agreements or

practices which, because of their pernicious effect. on

competition and lack of any redeeming virtue are con-

clusively presumed to be unreasonable, and therefore

egal, without elaborate inquiry as to the precise harm

which they have caused or the business excuse for their use.

Northern Pacific Ry. Co. v. United States, 356 U.S. 1,15, 78

S.Ct. 514, 2 L.Ed.2d 545 (1958). Cf. Klor’s v. Broadway-Hale

Stores, 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959).

These are referred to as per se violations. If a practice is held

to be a per se violation the motives of the participants, the

means of establishing the per se violation, the extent of the

participants’ market control, the effect of the agreement on

prices and the amount of commerce affected are not

relevant. United States v. McKesson & Robbins, 351 U.S.

305, 309-310, 76 S.Ct. 937, 100 L.Ed. 1209 (1956).

[8-10] It is important to distinguish between the

substantive requirements of the Sherman Act and. its

jurisdictional requirements. The per se doctrine only

Opinion and Order of the 37a

U.S. District Court

establishes the unreasonable nature of the restraint; it does

not establish that the restraint has substantial interstate

impact. See Uniform Oil Co. v. Phillips Petroleum Co., 400

F.2d 267 (9th Cir. 1968). We believe that the jurisdictional

question requires independent examination since it is only

when we find that interstate commerce is involved or

affected that we reach the question of whether a substantive

violation has occurred. The reasonableness vel non of the

restraint is not relevant for jurisdictional purposes since even

a per se violation may have no inpact on interstate

commerce or an impact so insignificant as to be beyond the

federal commerce power. Cf. Page v. Work, supra, at 331-

332. Therefore, in considering our jurisdiction we assume,

but expressly do not decide, that the conduct complained of

constitutes a substantive violation of the Sherman Act. Our

sole inquiry is whether the prohibition of that conduct falls

within the utmost extent of Congress’ Constitutional power.

Inherent in any attempt to formulate a general test of

Sherman Act jurisdiction is the danger that the test will only

further muddy the already murky waters. The formulations

are, of necessity, so broad and generalized that instead of

providing a guide to the solution of the problem they do no

more than restate the issue. Doctors. Inc. v. Blae Cross of

Greater Philadelphia, supra, at 51.

{11, 12] In laying the groundwork tor a workable

approach to the problem of Sherman Act jurisdiction one

must distinguish between the two theories of jurisdiction,

commonly referred to as the “in commerce” theory and the

“affecting commerce” theory. If an alleged restraint occurs

within the flow of interstate commerce, that is “in

commerce,” substantial effect on that commerce is presum-

ed as a matter of law and no showing need be made that any

particular amount of commerce has been affected. On the

other hand, when dealing with restraints which are alleged

38a Opinion and Order of the

U.S. District Court

merely to have affected interstate commerce, that effect

must be substantial in order to justify federal regulation.

While there is language in many cases which indicates

that a restraint must have a greater effect upon interstate

commerce if it is applied “indirectly” rather than “direct-

ly.”"' see e.g., Page v. Work, supra, at 332; Bailey’s Bakery,

Ltd. v. Continental Baking Co., 235 F. Supp. 705 (D. Hawaii

1964); Spears Free Clinic and Hospital v. Cleere, 197 F.2d

125 (10th Cir. 1952), that distinction has been abandoned. In

Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122

(1942) the Supreme Court said:

“... [e]ven if . . . [the] activity be local and though it

may not be regarded as commerce, it may’ still,

whatever its nature, be reached by Congress if it exerts a

substantial economic effect on interstate commerce and

this irrespective of whether such effect is what might at

some earlier time have been defined as ‘direct’ or

‘indirect’.” 317 U.S. at 125, 63 S.Ct. at 89.

See Doctors, Inc. v. Blue Cross of Greater Philadelphia,

supra, at 51.

[13] Nor is the traditional inquiry by many courts into

the time of the imposition of the restraint any longer

necessary since if commerce is found to have been affected,

the fact that the restraint was imposed before, after or during

the flow of interstate commerce, is immaterial. As stated by

the Court in Doctors:

'' Direct restraints are restraints imposed upon goods or services in the

flow of interstate commerce and under the in commerce theory,

substantial effect is presumed as a matter of law. Indirect restraints are

those imposed on business or goods which merely compete with goods

that flow in interstate commerce. See 1 Von Kalinowski, Antitrust Laws

and Trade Regulations, $5.01(2) and cases cited therein (hereinafter

referred to as Von Kalinowski). F

Opinion and Order of the 39a

U.S. District Court

“... the Court in each case ends its inquiry when it has

satisfied itself that the logical and therefore probable

affect of the alleged act is to reduce the flow of goods in

interstate commerce.” 490 F.2d, at 53.

[14] While Congress had determined its own criteria of

substantive violations, it has left to the courts the task of

deciding whether particular activities affect interstate

commerce. Cf. United States v. Darby, 312 U.S. 100, 120,61

S.Ct. 451, 85 L.Ed. 609 (1941). The concept of interstate

commerce is an intensely practical concept drawn from the

normal and accepted course of business. Therefore, the

courts have eschewed the use of abstract mechanistic

formulae in determining whether a particular course of

conduct substantially affects interstate commerce. See, e. g.,

Doctors, Inc. v. Blue Cross of Greater Philadelphia, supra, at

51, and Rasmussen v. American Dairy Ass'n, supra, at 526,

where the Court said:

“[16] There is no bright line dividing cases in which

the effect upon interstate commerce is sufficient to

permit Congress to prohibit particular anticompetitive

activity under the commerce clause from those cases in

which it is not sufficient. In this area perhaps more than

in most, each case must turn on its own facts... .”

Since we are dealing with matters of degree and the real

world business nature of the Sherman Act's purposes permits

of no easy solution, we are instructed to make a_par-

ticularized judicial determination. See United States v.

Yellow Cab Co., 332 U.S. 218, 231, 67 S.Ct. 1560, 91 L.Ed.

2010 (1947). Precedent in this area is unlikely to dictate the

outcome in any given case. Rather, it is more likely to

communicate a general sense as to how much of an impact

local activities must have before the court will assume

jurisdiction. Doctors, Inc. v. Blue Cross of Greater

Philadelphia, supra, at 51.

40a Opinion and Order of the

U.S. District Court

In summary, we agree completely with the directive in

Rasmussen v. American Dairy Ass'n, supra, where the Court

said:

“[9] In essence the test is whether ‘[t]he facts of the

particular situation ... determine ... [that the]

relationship to interstate commerce is too tenuous in a

practical sense to warrant federal control.’” (Citation

omitted). 472 F.2d, at 524.

‘Can the Court Decide Jurisdiction

on a Motion for Summary

Judgment?

Before turning to jurisdiction, we are confronted at the

outset by two contentions raised by plaintiff which concern

the power of the court to decide the jurisdictional issue on a

motion for summary judgment. First, plaintiff contends that

the “jurisdictional” issue and certain issues on the merits are

so closely related that the court should reserve determination

of the jurisdictional issue until trial on the merits. Secondly,

plaintiff submits that the jurisdictional issue must be left for

determination by a jury.

[15] In a memorandum opinion deciding discovery

disputes, dated February 27, 1974, in denying defendant's

motion for an evidentiary hearing on the issue of subject

matter jurisdiction, we said:

“The motion for an evidentiary hearing filed by

defendant is also denied. When discovery is complete

and the facts are available, defendant may, if he desires

to do so, file a motion for summary judgment. We agree

that the court may dispose of the question of jurisdiction

as well as other questions on a motion for summary

judgment... .”

Opinion and Order of the fla

U.S. District Court

We now reaffirm our earlier decision and hold that the court

may decide the jurisdictional issue on a motion for summary

jiddamnent,

In support of his past argument. plaintiff relies on

McBeath v. Inter-American Citizens tor Decency Com-

mittee, 374 F.2d 359 (5th Cir. 1967), cert. denied, 389 U.S.

$96, 88 S.Ct. 216, 19 L.ked. 2d 214 (1967). The district court in

McBeath dismissed a Sherman Act claim holding that

plaintiff had failed to show that the conduct complained of

had the requisite impact on interstate commerce. In

reversing. the appeals court, explicitly relying on Land v.

Dollar, 330 U.S. 731, 67 S.Ct. 1009, 91 Liked. 1209 (1947),'°

held that the issue of the effects of the conduct complained

of on interstate Commerce was so intertwined with the

merits of the case that it was error for the district court to

dismiss the suit without giving plaintiff a full chance to prove

his case on the merits.!'

“In Land v. Dollar, supra. the complaint alleged that members of the

CS. Maritime Commission were unlawfully holding shares of Dollar

stock under a claim that the stock belonged to the United States. The

district court dismissed the action on the ground that the United States was

immune from suit. In affirming a reversal of that dismissal, the Supreme

Court said:

“{ Although as a general rule the District Court would have authority

to consider questions of jurisdiction on the basis of affidavits as well

as pleadings, this is the type of case where the question of jurisdiction

is dependent on decision of Hhe merits.” WOU S . at 735, 67 S.Ct. at

1011

The court reasoned that since if the plaintiffs were to prevail on either of

their theories on the merits, ioc. that the Conmroisston wie without

authority to acquire the shares or that the contract was simply a pledge ot

the shares rather than an outright transter then they would also prevail on

the jurisdictional issue. See Gulf Oil Corp. v. Copp Paving Co., Inc. 419

U.S. 186, 196. n. 10, 95 S.Ct. 392, 42 L.Ed.2d 378 (1974) (Douglas. J..

lissenting).

"The McBeath court distinguished Page v. Work, supra, where the

use of the sunmnary judgment procedure was upheld because the court

(continued)

42a Opinion and Order of the

U.S. District Court

We do not believe that the case before us falls within the

holding of Land v. Dollar, n. 12, supra, since even if the

provisions of the license agreements complained of were

held to constitute Sherman Act violations, per se or

otherwise, plaintiff must still show that the violations either

occurred in the flow of commerce or affected it. Further-

more, we believe that unlike the McBeath situation, we have

abundant evidence before us on which to base our deter-

mination.

[16] We also hold that the jurisdictional question is best

suited to trial by the court and, therefore, need not be

submitted to the jury.

[17] While there are instances in which courts have

treated the questions of whether the alleged violation

occurred in or affected interstate commerce as jury

questions, see e. g., United States v. Pennsylvania Refuse

Removal Ass'n, 357 F.2d 806 (3rd Cir. 1966), cert. denied,

384 U.S. 961, 86 S.Ct. 1588, 16 L.Ed.2d 674 (1966); Las Vegas

Merchant Plumbers Ass’n v. United States, supra, we believe

that in this case the best approach is to treat the question of

jurisdiction as triable to the court if reasonably separable

from the substantive allegations. The difference is this: If

coverage is treated as substantive for purposes of mode of

trial, the issue of whether a cause of action is stated must be

left to the jury in cases in which the underlying facts are not

in dispute, but different inferences may be drawn from

them. Thus, on the same business arrangements, one case

may be decided one way and another in a different way as

the jury may find the arrangements did or did not affect

commerce. We believe that the better approach is to treat

there had abundant evidence before it on which to base its decision. Thus

it appears the McBeath decision was premised on the tact that the district

court lacked a sufficiently complete record on which to, base its

determination of jurisdiction.

ee

Opinion and Order of the 43a

U.S. District Court

the reach of the Sherman Act as a matter of law so that the

perimeter of the statute can be worked out in the appellate

courts. 5 Moore’s Federal Practice, 938, 36 [2.-2], at 300.

[18] The existence of an important, difficult or

complicated question of law, where there is no genuine issue

of material fact, is not a bar to summary judgment. 6 Moore's

Federal Practice, 956.-16 at 2447. We are aware of the

admonition that summary procedures should be used

sparingly in complex antitrust cases, Poller v. Columbia

Broadcasting, 368 U.S. 464, 82 S.Ct. 486, 7 L.Ed.2d 458

(1962). We find, however, that this case is not of the type

where summary judgment is inappropriate.

In such cases as United States v. Employing Plasterers’

Ass'n, 347 U.S. 186, 74 S.Ct. 452, 98 L.Ed. 618 (1954),

Mandeville Island Farms v. American Crystal Sugar Co.,

supra, and United States v. Yellow Cab Co., 332 U.S. 218, 67

S.Ct. 1560, 91 L.Ed. 2010 (1947), the Supreme Court has

reviewed interstate commerce issues in the context of

dismissals of antitrust-suits prior to crial on the merits. These

dismissals, however, were not based on motions for

summary judgment but rather on motions to dismiss for

failure to state a claim under Rule 12, F.R.Civ.P. See Gulf Oil

Corp. v. Copp Paving Co., 419 U.S. 186, 196, n. 10,95 S.Ct.

392, 42 L.Ed.2d 378 (1974). Other courts have treated

motions for summary judgment as motions to dismiss. See

e.g., A. Cherney Disposal Co. v. Chicago and Suburban

Refuse Disposal Ass’n, 484 F. 2d 751, 753 (7th Cir. 1973), cert.

denied, 414 U.S. 1131, 94 S.Ct. 870, 38 L.Ed.2d 755; Deaktor

v. Fox Grocery Co., 332 F.Supp. 536 (W.D. Pa. 1971), aff'd

475 F.2d 1112 (3rd Cir. 1973), cert. denied, 414 U.S. 867, 94S.

Ct. 65, 38 L.Ed.2d 86.

[19] Summary judgment procedures have been used to

resolve jurisidctional issues. See e. g., Page v. Work, supra,

44a Opinion and Order of the

U.S. District Court

and Lieberthal v. North Country Lanes, Inc., 332 F.2d 269

(2d Cir. 1964), and we find that the challenge to the court's

jurisdiction may be decided on defendant's motion since it is

a legal issue and the record b-fore the court is adequate to

decide it.

Ill.

Decision on the Jurisdictional Issue

“. .. [T]he inquiry whether the restraint occurs in one

phase or another, interstate or intrastate, of the total

economic process is now merely a preliminary step,

except for those situations in which no aspect of or

substantial effect upon interstate commerce can be

found in the sum of the facts presented. (Footnote

omitted). For, given a restraint of the type forbidden by

the Act, though arising in the course of intrastate or local

activities, and a showing of actual or threatened effect

upon interstate commerce, the vital question becomes

whether the effect is sufficiently substantial and adverse

to Congress’ paramount policy declared in the Act's

terms to constitute a forbidden consequence.”

Mandeville Island Farms v. American Crystal Sugar

Co., 334 U.S. 219, 234, 68 S.Ct. 996, 1005, 92 L.Ed. 1328

(1947) (Emphasis added).

Defendant's motion for summary judgment is premised

upon the argument that this case involves a situation in which

no aspect of substantial effect® on interstate commerce can

be shown in the sum of the facts presented, there having

been no showing of an actual or threatened effect upon

interstate commerce.

*The words “effect” and “affect” are frequenth used inter-

changeably .

AAO eee noe

Opinion and Order of the 45a

U.S. District Court

Plaintiff contends that the court has jurisdiction over the

subject matter of this action under both theories of federal

commerce power enunciated in Doctors, Inc. v. Blue Cross

of Greater Philadelphia, 490 F.2d 48 (3rd Cir. 1973), that is,

that defendant’s conduct occurred in the flow of interstate

commerce (in commerce) or that if found to have occurred

ona purely local level, that such conduct affected interstate

commerce so as to bring this action within the expansive

purview of §1. '

Upon careful review of the entire record, the briefs of

both parties and the authorities cited therein, we conclude

that the activities complained of did not occur in the flow of

interstate commerce nor did they substantially affect it.

A. In Commerce Theory

{20} The two theories upon which the existence of

interstate Commerce can be predicated differ in’ one

important respect: where the transaction occurs in the flow

of commerce, there is no necessity of showing that it affects

interstate commerce, Mandeville Island Farms v. American

Crystal Sugar Co., supra, but where the transaction is not in

the flow of commerce, and only affects interstate Ccom-

merce, plaintiff is required to establish a nexus between the

restraint and the flow of commerce. Despite language in

some cases indicating otherwise, it is not necessary for

jurisdictional purposes that plaintiff demonstrate an adverse

effect: all that need be shown is a substantial effect. See |

Von Kalinowski, 4 5.01[1], at 5-7, 5-8, n. S.

Plaintiff contends that the restraints herein alleged are

per se violative of the Sherman Act inasmuch as they fixed

prices and interfered with Hempfield’s ability to exercise its

independent judgment. Therefore, plaintiff argues that the

requisite showing of the necessary effect on interstate

commerce has been made. Plaintiff relies on United States v.

46a Opinion and Order of the

U.S. District Court

Colmubia Steel Co., 334 U.S. 495, 522, 68 S.Ct. 1107, 1121, 92

L.Ed. 1533 (1948), in which the Supreme Court held that

“...where a complaint charges that defendants have

engaged in price fixing...then the amount of commerce

involved is immaterial because such restraints are illegal per

se.” Cf. Yellow Cab Company of Nevada v. Cab Employers,

Automotive and Warehousemen, Local No. 881, 457 F.2d

1032, 1034 (9th Cir. 1972).

[21] Plaintiffs argument cannot withstand close

scrutiny. In attempting to invoke the per se doctrine before

any showing has been made of an effect upon interstate

commerce, plaintiff is, in effect, putting the cart before the

horse. Given an in commerce context for the alleged per se

violations, we would agree with plaintiff. See United States

v. Richter Concrete Corp., 328 F. Supp. 1061 (S.D. Ohio

1971). But that showing must precede application of the per

se doctrine. It does not follow from it. The crucial nature of

the distinction was explained in Las Vegas Merchant

Plumbers Ass'n v. United States, supra.''

“... True,.a price fixing conspiracy which operates on

or within the flow of interstate commerce affects that

commerce as a matter of law. But a price fixing

conspiracy at a purely local or intrastate level does not,

as a matter of law, affect the flow of commerce.

‘In Las Vegas Merchant Plumbers, supra, government counsel

argued that it was plainly not for the jury to decide whether a per se

violation has the necessary effect upon commerce; that price fixing at any

level necessarily affects interstate commerce as a matter of law and that

the law conclusively presumes such an effect. The Ninth Circuit answered

this argument: “Assuming an ‘in commerce’ situation, we can agree. But

when the ‘affect’ on commerce theory is presented, it is clearly a question

of fact whether wholly intrastate activities affect interstate commerce ina

manner proscribed by the Sherman Act. After this question is decided,

then the per se doctrine may well apply.” 210 F.2d at 748. See also United

States v. Richter Concrete Corp., supra.

Opinion and Order of the 47a

U.S. District Court

Whether a purely local or intrastate conspiracy

unreasonably restrains interstate Commerce is primarily

a factual question, i.e., does the local price fixing

conspiracy affect substantially the flow of interstate

commerce? If the answer & yes, then only are we

concerned with the effect of the price-fixing under the

per se doctrine. In fact, unless there is a finding that the

local and intrastate activities Complained of and as

alleged... .substantially affe di interstate Commerce,

there is no jurisdiction inadis. tt court over the alleged

Sherman Act violation... .” 210 F.2d, at 747.

[22] Plaintiff seems to argue that since the restraints are

alleged to be per se violations of $1 they are subject to a less

rigorous jurisdictional test than other restraints. That

argument is without merit. The jurisdictional test is the same.

See Mandeville Island Farms v. American Crystal Sugar Co..

supra: Savon Gas Stations No. Six. Inc. v. Shell Oil Co., 309

F.2d 306 (4th Cir. 1962), cert. denied, 372 U.S. GEL S83 S.Ct.

725. 9 L.Ed.2d 719.

In Page v. Work, supra, the publisher of a local

newspaper which printed only legal advertisements argued

that a trade association of local newspapers had monopoliz-

ed the market for legal advertisements. Among his claims the

publisher alleged that the trade association had engaged in

price fixing and horizontal market divisions, and that since

such restraints were illegal per se under §1 of the Sherman

Act, there could be no issue with respect to jurisdiction. The

court rejected the plaintiff's contention, noting that for

purposes of jurisdiction, there must be an effect upon

interstate Commerce, and that because a restraint is of an

unreasonable nature it does not follow that it must affect

interstate commerce. See United States v. Frankfort

Distilleries, Inc., 324 U.S. 293, 297, 65 S.Ct. 661,89 L.Ed. 951

(1945).

48a Opinion and Order of the

U.S. District Court

In short, plaintiff cannot avoid the burden of showing

un impact on interstate commerce merely by alleging that

the conduct complained of constitutes a per se violation of

the Sherman Act. Therefore, consideration of the nature of

the alleged violation is premature until we have determined

whether that conduct either occurred in or affected

interstate Commerce.

In support of its argument that the conduct complained

of occurred in the flow of commerce, plaintiff relies on the

following facts. Defendant's employees at its home offices in

Michigan devised and adopted the restraints and incor-

porated them into the license agreements which they

drafted. The policies applied not only to the two stores

directly in question but to all of defendant's supermarket

licensees throughout the United States as well. The

particular agreements involved in this case were finally

executed in Detroit by defendant and transmitted to

Hempfield.

Furthermore, plaintiff alleges that from 1964 through

1968, Hempfield sold a total of over $20 million in

merchandise which was subjected to the restraints, of which

approximately eighty percent was manufactured outside of

Pennsylvania and shipped into the state in interstate

commerce. Of these goods, plaintiff asserts that in each year,

more than $400,000 worth were shipped directly to

Hempfield in interstate commerce from sources outside of

Pennsylvania.

[23] Although defendant contests the volume of

plaintiff's interstate transactions'® we will deal with the

'5Plaintiff's allegation that Hempfield made $400,000 worth of annual

purchases in interstate commerce by direct shipments from out of state

suppliers is challenged by defendant on several grounds: first, Anthony C.

(continued )

Opinion and Order of the 49a

U.S. District Court

alleged facts in the light most favorable to plaintiff as we

must upon a motion for summary judgment.'®

[24] In our view, the facts concerning the place of

execution, the drafting of the agreements, and the interstate

nature of both parties’ business do not lend any support to

plaintiff's argument that commerce has been affected as a

matter of law.

The test of jurisdiction is not that the acts

complained of affect a business engaged in interstate

commerce, but that the conduct complained of affects

the interstate commerce of such business.” Page v.

Work. supra, 290 F.2d. at 330.

Thus. our jurisdictional inquiry is limited to ascertaining

whether the alleged §1 violations occurred in or affected

interstate Commerce.

Plaintiff relies on Harlem River Consumers Coop., Inc.

v. Associated Grocers of Harlem, Inc., 371 F. Supp. 701 (S.D.

N.Y. 1974) aff'd, 493 F.2d 1352 (2ne’ Cir. 1974), Northern

California Pharmaceutical Assn v. United States, 306 F.2d

379 (9th Cir. 1962). cert. denied, 371 U.S. $62, 83 8.Ct. 119.9

L..Ed.2d 99, United States v. Erie County Malt Beverage

Distributors Ass'n. 264 F.2d 731 (3rd Cir 1959) and United

Polito, the sole shareholder of Hempfield, in his deposition, admitted that

he had no data available to support that figure (See excerpts from Polito

deposition, attached as tab 3b to Kresge’s first motion for summary

judgment). While Polito in a Supplemental Affidavit, purports to

document that figure, defendant claims that an investigation of

Hempfield’s creditors with out of state addresses discloses that an

overwhelming majority shipped merchandise to plaintiff from distribu-

tion centers which they maintained in Pennsylvania. (See Richmond

Affidavit, tab 6, to defendant's earlier motion for summary izdgment).

‘©The allegations in the complaint are to be taken as true on motion for

summary judgment except as they may be contradicted by stipulated fact,

affidavit or other material properly submitted to the court. Cf. Hiern v. St.

Paul-Mercury Indemnity Co., 262 F.2d 526, 529 (5th Cir. 1959).

50a Opinion and Order of the

U.S. District Court

States v. Food and Grocery Bureau of Southern California,

supra, n. 6, in his attempt to establish that the conduct

complained of here occurred in the flow of interstate

commerce.

Defendant, citing C. S. Smith Metropolitan Market v.

Food & Grocery Bureau of Southern California, 33 F. Supp.

539 (S.D. Cal. 1939); Cliff Food Stores v. Kroger, 417 F.2d

203 (5th Cir. 1969); Brosious v. Pepsi-Cola Co., 155 F.2d 99

(3rd Cir. 1946); Knuth v. Erie-Crawford Dairy Cooperative

Ass'n, 395 F.2d 420 (3rd Cir. 1968) cert. denied, 410 U.S. 913.

93 S.Ct. 966, 35 L.Ed.2d 278, Savon Gas Stations No. Six v.

Shell Oil Co., supra, and St. Anthony-Minneapolis v. Red

Owl Stores, 316 F. Supp. 1045 (D. Minn. 1970). argues that

the in commerce theory cannot apply to the case at bar.

In short, defendant argues that even if the goods subject

to the restraints had at one time been in the flow of

commerce, they ceased to be in commerce when they

reached the shelves of plaintiff's stores. Accordingly,

defendant contends that the subsequent sale of such goods to

retail customers was a purely intrastate transaction.

Plaintiff argues that the flow of commerce did not

terminate when the goods came to rest on its shelves, but

rather that the retail sale of groceries by its very nature,

contemplates a continuity of movement from the supplier to

the ultimate consumer and that, therefore, the goods

subjected to the alleged restraints remained in commerce.

[25, 26] We have already indicated that it is not always

easy to determine where interstate commerce ends and

intrastate commerce begins. Furthermore, if the conduct

affects interstate commerce, inquiry as to whether it

occurred locally or in commerce is unnecessary. See United

States v. Women’s Sportswear Manufacturing Ass'n, supra;

U.S. v. Employing Plasterers’ Association, 347 U.S. 186, 74

» LP ALOR Ramaig PEON Ow

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Opinion and Order of the 5la

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S.Ct. 452, 9S L.Ed. 618 (1954). However, since, if the

conduct occurred in the flow of commerce, theie is a

conclusive presumption of an affect on that commerce, for

jurisdictional purposes, we must determine whether the

conduct alleged occurred in commerce as plaintiff contends.

For purposes of delimiting the respective spheres of

intrastate and interstate activities, a concept has developed

relating to the movement of commodities between the states

which says that interstate activities end when the com-

modities come to rest within the state. United States v. Food

and Grocery Bureau of Southern California, 43 F. Supp. 966,

977 (S.D. Cal. 1942). See e.g., C. S. Smith Metropolitan

Market v. Food & Grocery Bureau of Southern California,

supra; see also Cliff Food Stores v. Kroger, supra, at 210, a

case under the Robinson-Patman Act, 15 U.S.C.A. $13,

where the court said:

“The sales complained of in the instant case were

intrastate ip nature. When food pre ducts are delivered

to the retail grocer. title thereto passes to him. Even

though many of the products are derived from out of

state, the merchant’s sales to the general public are not in

the flow of commerce because the moment the

products reach his shelves ‘they come to rest and cease

to be “in the flow” of interstate Commerce. ~ (Citations

omitted.!

Plaintiff contends that the “come to rest” doctrine has

itself been laid to rest by the holding of subsequent cases and

cites United States v. Food and Grocery Bureau of Southern

California, supra; Northern California Pharmaceutical Assn

.. United States, supra; United States v. Erie County Malt

Beverage Distributors Ass'n, supra, and Harlem River

Consumers Coop, Inc. v. Associated Grocers of Harlem,

supra, in support of its argument.

“See opinion of March 14, 1972.

52a Opinion and Order of the

U.S. District Court

In United States v. Food and Grocery Bureau of

Southern California, supra, the court states that the widest

application of the come to rest doctrine has been in cases

“.. upholding the regulatory powers, especially the taxing

power, of a state over goods in transit during their stay in the

state.” 43 F. Supp. at 977.

“...But the courts have warned us not to accept the

concession which the federal government is thus willing

to make to state sovereignty in matters of this character

in a dogmatic sense. Specifically have they warned us

that these cases do not delimit the extent of federal

control over interstate commerce.” (Citations omitted)

Id.

{27, 28] While we recognize the limited use of the come

to rest doctrine, we believe it has continued viability in

Sherman Act cases to determine whether the acts complain-

ed of occurred in interstate commerce, Cf. Rasmussen v.

American Dairy Ass'n, supra, at 526. We use it here for that

limited purpose. We hold that the retail sale of groceries to

the general public are transactions consummated locally,

involving commodities of a local character having been

previously diverted from the flow of commerce. We hasten

to add, however, that this holding does not preclude

jurisdiction if the restraints affected interstate commerce.

We believe that this is consistent with the logic of United

States v. Food and Grocery Bureau of Southern California,

supra,:

“In assaving price-fixing agreements, the test is not

so much whether the effect is felt after the movement of

goods has reached the end of the interstate journey. The

inquiry seeks the effect upon prices in the market and if

this effect be shown, it matters not that the movement

has come to a halt within the state. ...” 43 F. Supp. at.

977. (Emphasis added).

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Opinion and Order of the 53a

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[29] While there are instances in which goods shipped

into a state are properly considered to remain within the

flow of commerce,'* the base at bar is not among them.

B. The Affecting Commerce Theory

[30] When the transaction complained of is not in the

flow of commerce, there may be difficulty in establishing

the nexus between the restraint and the flow of interstate

commerce. Accordingly, the plaintiff in a Sherman Act case

has a much greater burden of establishing the requisite

impact on commerce resulting from the conduct complain-

ed of if the effect theory is being relied on. 1 Von Kalinowski,

q5.01(2), at 5-23.

As we have previously indicated, the time the restraint is

imposed and the nature of the restraint, i.e., direct or

indirect, are of no consequence if there is a substantial effect

on interstate commerce. The question here then is whether

plaintiff has shown any substantial effect, either real or

threatened, on interstate commerce resulting from the

conduct complained of.

[31] Congressional power is not over persons but over

practices and it is irrelevant that a person is in some way

'"The following are instances where goods brought trom without the

state are considered to remain within the flow of interstate commerce: (1)

where the shipment is made m anticipation of needs of specific customers

rather than on prior orders or contracts and there is, therefore, a practical

continuity .in transit necessary to keep a movement of goods “in

commerce.” See United States v. Richter Concrete Corporation, supra,;

(2) where the goods are purchased by the retailer from the supplier to

meet the needs of specified customers pursuant to some understanding

with the customer, although not for immediate delivery; and (3) where the

goods are purchased by the retailer based upon the anticipated needs of

specified customers. See Walker Oil Co. v. Hudson Oil Co. of Missouri,

414 F.2d 588 (5th Cir. 1969); Walling v. Jacksonville Paper Co., 317 U.S.

564, 63 S.Ct. 332, 87 L.Ed. 460 (1945). See also Country Maid v. Haseotes,

324 F.Supp. 875 (E.D. Pa. 1971).

Sta Opinion and Order of the

U.S. District Court

engaged in interstate commerce if the practice complained

of is inno way related to that commerce. Cf. Yellow Cab Co.

of Nevada v. Cab Employers, Automotive & Warehouse-

men, Local No. 881 supra. See Page v. Work, supra, at 329;

Savon Gas Stations No. Six v. Shell Oil Co., supra. See also

United States v. Bensinger Co., 430 F.2d 584, 588 (8th Cir.

1970) and United States v. Yellow Cab Co., supra, where the

Supreme Court held that there was Sherman Act jurisdiction

over that portion of a complaint which alleged that the

defendant cab company had attempted to monopolize the

carrying of passengers between two interstate railroad

terminals in Chicago, but held that there was no jurisdiction

over the allegations that the same company had violated the

Act in its intracity carriage.

Kresge argues that the entire thrust of plaintiff's

complaint is that the defendant interfered with the retail

sales practices of Hempfield’s two supermarkets. Assuming

arguendo that this is true, defendant asserts that plaintiff has

failed to show any effect on Hempfield’s interstate

commerce, let alone a substantial effect. In support of this

argument Kresge relies on the following facts:

(1) Kresge did not sell any goods to Hempfield;

(2) Kresge did not dictate or restrict Hempfield’s

sources of supply; “4

(3) Kresge did not in any way control or attempt to

control the price Hempfield paid for its merchandise; and

(4) Kresge did not in any way affect any other retail

outlet competing with Hempfield.

[32] Therefore, defendant argues that the mere fact that

Hempfield made purchases in interstate commerce is

irrelevant because Hempfield has failed to make the

necessary showing of a substantial effect on those purchases

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Opinion and Order of the 55a

U.S. District Court

resulting from the conduct complained of. Defendant also

contends that Hempfield has such a miniscule part!’ of the

intrastate food sales market that any possible impact of the

alleged restraints was merely incidental to local activity and

insufficient to confer Sherman Act jurisdiction upon the

court.

[33] After a careful and thorough examination of the

record we conclude that the plaintiff has failed to make the

required showing of a substantial impact on interstate

commerce resulting from the conduct of defendant either

qualitatively or quantitatively.2° Therefore, we believe it

proper to grant Kresge’s motion for summary judgment.

In support of its argument that Hempfield’s share of the local retail

market was miniscule, defendant submitted an Affidavit of James F

Stang], a Research Analyst and Client Service Representative employed

by Management Science Associates, Inc. (Tab 5 to Kresge Motion for

Summary Judgment). Stang] conducted an on-site survey of retail outlets

within a 5-mile radius of the two stores to make a competitive profile of

the markets in which the two K-Mart Food Stores operated by Hempfield

were involved. The results of the survey indicate that Food Store 4032 had

17 competitors in the supermarket business, that there were 26 “Mom and

Pop” convenience grocery stores, 2 delicatessens, 3 drug stores and 4 mass

merchandise stores within a five mile radius. (See Exhibit A to Stangl

Affidavit). For Food Store 4064, there were 29 supermarket competitors, 7

“Mom and Pop” convenience grocery stores, 8 delicatessens, 5 drugs

stores and 14 mass merchandise stores (Exhibit B to Stang! Affidavit). The

Stang] Affidavit also contains various published data on retail food stores.

The Stang] findings were interpreted by Alfred A. Kuehn, President of

Management Science Associates (see Tab 4 to Defendant's Motion).

Defendant, however, has objected to the Kuehn affidavit claiming it is

inadmissible hearsay and must be ignored. Finding that the Kuehn

affidavit is in the nature of expert testimony, we have not relied upon it.

However, we take judicial notice of the highly competitive market in

which the Hempfield Stores were located, of which they had in the

vicinity of 1% of the market.

“Substantial restraints may be viewed either quantitatively or

qualitatively. The quantitative approach looks to the proportion of the

total volume of the flow of commerce in a bine of Kod» or services which

(continued )

56a Opinion and Order of the

U.S. District Court

In Page v. Work, supra, the shareholders of a

corporation (Consolidated) instituted a derivative action

against the competitors of the corporation and a competitive

bureau. Consolidated published a newspaper in the Los

Angeles area concerned primarily with legal advertising.

Plaintiffs alleged that the defendants had engaged in a

conspiracy and numerous other antitrust violations which

caused the dissolution of the corporation in which plaintiffs

held stock. While the court found that both the plaintiff

corporation and the defendants were involved in interstate

commerce by the purchase of newsprint from out of state

sources, publication of some national news and sales to out

of state subscribers, it determined that the elimination of

Consolidated as a competitor would not interfere with the

flow of national news or advertising and that the business of

legal advertising in the Los Angeles area was wholly

intrastate. Accordingly, the court adopted the conclusion of

the district court:

“The interstate trade or commerce in which

plaintiff and defendants engage did not suffer any anti-

competitive effects from the acts of defendants of

which plaintiff complains.” 290 F.2d at 329.

Even though the newspapers were subject to federal

regulation because of their interstate activities, the court

held that it lacked jurisdiction over plaintiff's claim because

interstate commerce was not substantially affected by the

conduct complained of.

Plaintiff argues that Page v. Work is distinguishable

since the court's analysis there centered on the finding that

is affected by the restraints. Qualitative in substantiality is the standard

used to determine whether the restraint is essentially local in nature

without such effect as would justify the assumption of federal jurisdiction.

See generally, 1 Von Kalinowski, $5.01(4), at 5-105.

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Opinion and Order of the 57a

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the relevant product magket for monopolization purposes

was the purely intrastate legal advertising market within Los

Angeles County. Plaintiff contends that because market

control is not relevant in price-fixing cases, Cf. United States

v. McKesson & Robbins, Inc., supra, that case does not

apply. We believe, however, the Page does serve to

illuminate the metes and bounds of Sherman Act jurisdiction

and here, as in Page, participation by either or both parties in

interstate commerce does not suffice to confer jurisdiction.

That commerce must have been affected.

Plaintiff, in attempting to establish that the amount of

commerce affected was not quantitatively insubstantial,

argues that the court must consider not only Hempfield’s

interstate purchases but also those of other Kresge food

licensees who were similarly restricted, citing Doctors, Inc.

v. Blue Cross of Greater Philadelphia, 490 F.2d 48 (3rd Cir.

1973).

[34] Doctors was an action by a single hospital against

Blue Cross, a hospitalization insurer, and Hospital Survey

Committee, Inc. (HSC), a private non-profit corporation

which served as an advisory planning agency for the

coordination of hospital and health services in the

Philadelphia area. In 1972, Blue Cross sought to terminate

plaintiff hospital’s membership status. In the complaint

plaintiff claimed that this action was taken pursuant to a

scheme to control the area’s hospital services market. Both

defendants in Doctors filed motions to dismiss, arguing like

Kresge does here, that the court lacked jurisdiction of the

subject matter of the complaint. Defendants contended that

the complaint alleged only restraints in intrastate trade or

commerce. Plaintiff on the other hand, as does plaintiff here,

claimed that the court had jurisdiction under both theories,

that is, that the activities complained of occurred in the flow

of interstate commerce, and alternatively, that the activities

58a Opinion and Order of the

U.S. District Court

substantially affected interstate commerce. The district

court granted defendant's motion to dismiss. The Third

Circuit reversed and held that the allegations with respect to

the affecting commerce theory were sufficient to confer

jurisdiction. The court reasoned that while the individual

plaintiff purchased only $233,000 worth of supplies from

out-of-state sources, the defendant's conduct was directed at

all other hospitals in the area:

“, -.. Moreover, the complaint alleges that Doctors

activities are typical of those hospitals supplying

hospital and health services throughout the United

States. As a result, we must assume that like volume of

out-of-state supplies are purchased by the approximate-

ly 100 other hospitals located in the Greater Philadelphia

area. Since the overall scheme alleged in this complaint

is directed at them also, this interstate commerce will be

affected as well.

“The key question in the case then is whether these

clear ‘effects’ on interstate commerce, caused by the

activities alleged, are ‘substantial’ enough to confer

jurisdiction. . . .” 490 F.2d at 51.

The court concluded that they were. From this, plaintiff

argues that the volume of interstate purchases made by other

licensees of Kresge must be considered and not merely that

of the Hempfield stores. We disagree.

In Doctors, the defendant purchased more than 50% of

all hospital services sold in Philadelphia. Because of this

economic power in the hospital services market Blue Cross

has sufficient market control to justify consideration of the

effects which its policies would have on not only Doctors but

on other hospitals as well. The facts before us are in stark

contrast with that situation. Kresge does not even participate

in, let alone control, the groceries market in Western

Pennsylvania. It is also clear that Kresge couldn't exert any

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Opinion and Order of the 59a

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substantial influence on the overall retail groceries market

through its licensees. Therefore, we find that only Hemp-

field's interstate commerce activities are relevant to the issue

of substantial effect on that commerce in this case.

Plaintiff argues that even if only Hempfield’s purchases

are deemed relevant to the issue of substantial effect on

interstate commerce that the purchase of $400,000 worth of

goods annually in interstate commerce satisfies the require-

ment that the effect be substantial, citing Fortner Enter-

prises v. United States Steel Corp., 394 U.S. 495, 89 S.Ct.

1252, 22 L.Ed.2d 495 (1969).

In our opinion and order of March 14, 1972, we said:

“The theory of plaintiff appears to be that the

alleged price-fixing caused the bankrupt to be unable to

continue in business and unable to continue buying

goods and thus about $400,000.00 per year of merchan-

dise ceased flowing from interstate commerce into its

stores. The plaintiff argues that consequently there was

an affect on interstate commerce which Fortner has

already held to be substantial enough to give us

jurisdiction.”

In the same opinion we stated that the Polito Affidavits

would bring the instant case within the holding in Fortner.

Since that time, the parties have disputed whether Fortner

establishes a test for jurisdiction in this case.

In Fortner, plaintiff alleged an illegal tying arrangement

between the defendant steel company and its wholly owned

credit corporation whereby, as a condition to obtaining

loans from the credit corporation for the purchase and

development of certain land, plaintiff was required to agree

to purchase at unreasonably high prices, prefabricated

houses manufactured by defendant for erection on the lots

purchased with the borrowed money. After concluding that

60a Opinion and Order of the

U.S. District Court

credit was indistinguishable from other goods and services

when used as the “tying product,” the Court held that the

tying arrangements alleged were per se illegal if defendant

had sufficient economic power with respect to the tying

product (credit) to appreciably restrain free competition in

the market for the tied product (prefabricated housing) and

a not insubstantial amount of interstate commerce was

affected. The Court remanded the case for trial finding it

impossible to conclude on the record presented to it that the

credit corporation did not have a competitive advantage in

the credit market as a matter of law.

In considering whether a substantial amount of

interstate commerce was affected, the Court in Fortner,

said:

“. .. . For purposes of determining whether the amount

of commerce foreclosed is too msubstantial to warrant

prohibition of the practice, therefore, the relevant

figure is the total volume of sales tied by the sales policy

under challenge, not the portion of this total accounted

for by the particular plaintiff who brings suit. . . .” 394

U.S. at 502, 89 S.Ct. at 1258.

The Court added that all that is required is enough

commerce in terms of dollar volume so as not to be de

minimis. Plaintiff contends that $400,000 is not de minimis,

and is sufficient as a matter of law to confer jurisdiction.

[35, 36] We believe that plaintiff's reliance on Fortner is

misplaced. In tying cases, the fact that the sale of the desired

product (the tying product) is conditioned upon purchases

of some other product (tied product) necessarily means that

commerce in the tied product is foreclosed. Therefore,

interstate commerce in the tied product is affected. On the

other hand, in the case under consideration there has been no

showing that the interstate commerce in which Hempfield

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Opinion and Order of the 6la

U.S. District Court

engaged, whatever its volume, was affected by the license

agreements. To the contrary, Hempfield was free to

purchase from whomever it wanted at the best terms

available.

Furthermore, when they talk about substantiality of

commerce in the Fortner case, it is not for the purpose of

determining subject matter jurisdiction at all; it is for the

purpose of determining the economic power of the

manufacturer and his relationship to the ties and to the tying

product. Therefore, in determining whether defendant had

sufficient economic power in the marketplace, the Court

held that the scope of inquiry was not properly limited to the

single plaintiff's volume of interstate commerce. The fact

that a tie is not unlawful unless there is sufficient economic

power over the tying product to effectively require the

purchaser to also purchase the tied product necessitated this

analysis. Here, on the other hand, we are concerned neither

with a sale of goods between the parties nor a tie. Therefore,

we believe that Fortner does not relieve plaintiff from its

burden of showing that the interstate commerce in which it

participated was substantially affected by the conduct

complained of.

Defendant contends that the elimination of Hempfield

as a competitor could not have affected interstate commerce

because it would have no substantial effect on interstate

commerce, the demand for groceries being “inelastic.”

Plaintiff argues that defendant's argument runs afoul of the

Supreme Court's reading of the Sherman Act as evidenced

by Klor’s Inc. v. Broadway-Hale Stores, 359 U.S. 207, 79

S.Ct. 705, 3 L.Ed.2d 741 (1959).

2!“Inelastic” simply means that the demand for groceries is constant.

Therefore, defendant argues that Hempfield’s going out of business could

not have affected interstate commerce. See Appendix C to defendant's

brief.

62a Opinion and Order of the

U.S. District Court

Plaintiff in Klor’s was a retail merchandiser who dealt in

household appliances. He sued a chain of national depart-

ment stores (and manufacturers and distributors of

appliances in which he dealt) alleging that it had conspired

with defendant manufacturers and distributors not to sell to

plaintiff or to sell only at discriminatory prices.

The defendants did not deny these allegations but

contended that the complaint failed to state a cause of

action. Defendants submitter] unchallenged affidavits

showing that there were hundreds of other retailers in the

area who sold many competing brands of appliances

including those which defendants refused to sell to Klor’s. In

reversing the summary judgment granted defendant by the

district court, the Supreme Court said:

“The holding, if correct, means that unless the

opportunities for customers to buy in a competitive

market are reduced, a group of powerful businessmen

may act in concert to deprive a single merchant, like

Klor, of the goods he needs to compete effectively.” 359

U.S. at 210, 79 S.Ct. at 708.

The Court held that the allegations clearly established a

group boycott which interfered with the “natural flow” of an

appreciable amount of interstate commerce.

“This combination takes from Klor’s its freedom to buy

appliances in an open competitive market and drives it

out of business as a dealer in the defendants’ products. It

deprives the manufacturers and distributors of their

freedom to sell to Klor’s at the same prices and

conditions made available to Broadway-Hale and in

some instances forbids them from selling to it on any

terms whatsoever. It interferes with the natural flow of

interstate commerce.” 359 U.S. at 213, 79 S.Ct. at 710.

[37] We do not feel that the case at bar fits within the

logic of Klor’s. Contrary to the above quoted passage, the

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restraints in the case sub judice did not deprive Hempfield of

its freedom to purchase in an open, competitive market or

drive it out of business as a retailer in its distributor's

product. Nor did it deprive the distributors or producers of

their freedom to sell to Hempfield under terms determined

in a free and competitive market. We find that the conduct

complained of did not interfere with whatever interstate

business in which Hempfield may have been engaged.

[38] The mere fact there are many other grocers and the

market is highly competitive does not preclude jurisdiction.

But the fact is, the Court in Klor’s dealt with the interstate

commerce issue in one sentence: “The business of manfac-

turing, distributing and selling household appliances is in

interstate commerce.” 359 U.S. at 209, 79 S.Ct. at 708.

Having found that the conduct occurred in interstate

commerce, the only remaining question was whether the

alleged conduct constituted a violation of the Sherman Act.

We have already decided that the sale of groceries ina

local area is not in interstate commerce. Therefore, plaintiff,

in order to establish jurisdiction, must show that the

restraints complained of affected interstate commerce.

In United States v. Starlite Drive-In, Inc., 204 F.2d 419

(7th Cir. 1953), defendants who operated drive-in theaters

were charged with conspiring to fix admission prices. The

District Court dismissed the complaint for failure to allege

that interstate commerce was affected. In affirming the

dismissal, the Court of Appeals stated:

“...[N]o agreement is asserted between exhibitors

(defendants) and either distributors or producers, no

agreement which bears any relation to the price paid by

the defendant exhibitors for the’ films—in fact, no

agreement relating in any manner or form to the films

but only to the price which exhibitors will charge their

64a Opinion and Order of the

U.S. District Court

theatre patrons ....It is evident that the interstate

nature of the dealings between the distributors and the

exhibitors . .. is terminated prior to their exhibition. A

decision, therefore, simmers down to the narrow

question as to whether the price-fixing agreement

charged has or could have any appreciable effect upon

the flow of films in interstate commerce.” 204 F.2d at

420-421.

The court concluded that no such facts were alleged and

it was not reasonably discernible how or in what manner the

condemned agreement affected commerce.

“Certainly there is no basis for a claim that the

movement of films in interstate commerce was either

enhanced or diminished or that any discrimination

resulted either to exhibitors in the procurement of films

or to their patrons in viewing the films. Distributors

were as free to deal with exhibitors, and the latter were

as unfettered in the procurement of films as they would

have been in the absence of the charged conspiracy.

The agreement had nothing to do with the price which

the distributor received for its film or the price which

exhibitor paid for it. The agreement was between local

parties and related solely to a business that was typically

intrastate in its nature.” Id.

We have already discussed the limited value of

precedent in cases dealing with the jurisdictional inquiry

under the Sherman Act. However, we feel that the reasoning

of the court in Starlite Drive-In is applicable to the case

before us. Hempfield has not alleged that the restraints

complained of involved any restrictions on its sources of

supply, either in Pennsylvania or from out of state.

Furthermore, there is no evidence of any agreement

affecting the price which Hempfield was to pay for its

supplies. The sole complaint is that the defendant regulated

the prices at which Hempfield could sell its merchadise.

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We do not believe that any evidence exists which shows

or suggests that the interstate commerce in groceries was

either enhanced or diminished by the agreement. Nor do we

believe that the conduct complained of restricted Hemp-

field’s latitude in dealing with its suppliers. In short, we find

that the alleged conduct had nothing to do with whatever

interstate commerce Hempfield might have engaged in

during the course of its operation of the stores in question.

Therefore, we have no jurisdiction.”

IV.

Was There a Restraint of Trade?

Although we have decided that the practices complain-

ed of neither occurred in nor substantially affected interstate

commerce, we believe that the interests of judicial ecomony

will be served if we proceed to consider whether the

practices under attack were restraints of trade as that term is

used in §1. Our reasons are two-fold: (1) both parties agree

that there are no issues of material fact precluding summary

judgment, and (2) in view of the lengthy delays occasioned

by appeals we believe that our consideration of the alleged

restraints will expedite final determination of this case.

[39, 40] Section 1 of the Sherman Act has consistently

been held to prohibit only those restraints of trade which are

“unreasonable.”

“A restraint may be unreasonable cither because a

restraint otherwise reasonable is accompanied with a

specific intent to accomplish a forbidden restraint or

because it falls within the class of restraints that are

iNegal per se.” United States v. Columbia Steel Co. 334

US. 495, 522. 68 S.Ct. PLOT, 1121, 92 Led. 1533 (1948).

“We have caretully examined each of the other restraints alleged and

conclude that none occurred in or substantially affected interstate

commerce.

66a Opinion and Order of the

U.S. District Court

And, of course, a restraint of trade may be unreasonable if

found to be so under the rule of reason, when that standard is

applicable.

Plaintiff argues that because the practices complained

of are per se violative of §1, examination under the rule of

reason is inappropriate. It argues, in short, that the practices

are illegal as a matter of law.

With equal vigor defendant contends that the provisions

attacked were ancillary to a valid licensing agreement, a

reasonable business practice. See Addyston Pipe and Steel

Co. v. United States, 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed 136

(1899). Kresge contends that it not only had the right, but the

duty to exercise “quality control” over the use of its

registered trade name. Defendant argues that plaintiff's per

se theory rests on an erroneous factual premise, i. e., that

Hempfield and Kresge were competitors. Kresge denies that

they were competitors in any sense; it argues that they were

de facto partners, each complimenting the other to provide

full service one-stop shopping.

Kresge also argues that if the food stores did not have a

competitive pricing policy, then consumers shopping K-

Mart food stores and finding their prices not in keeping with

the K-Mart image would not only have shifted their

allegiance from the food stores but would also cease to

associate the K-Mart name with discount prices. Therefore,

defendant seeks to justify the pricing requirements as

ancillary and reasonable to the licensing of its trade name.

We believe that it is necessary to evaluate the

agreements between Hempfield and Kresge in the broader

context which led to their execution and implementation

before proceeding to a seriatim consideration of the alleged

restraints. This is because we believe it is necessary to

establish a frame of reference by which the restraints can be

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Opinion and Order of the 67a

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judged. We will approach the problem by posing the

following questions:

(1) What was the nature of the agreement between

Hempfield and Kresge?

(2) Are the practices complained of to be examined

under the rule of reason or does the per se doctrine properly

apply?

(3) Were the alleged restraints violative of §1?

A. The Nature of the Arrangement

Kresge, in its brief, states:

“It is impossible to ‘peg’ the K-Mart license

agreements into any particular ‘hole.’ It is, of course, a

license to use a registered trade name . .. Kresge,

therefore, is required to maintain ‘quality control’ over

the use of its name. It is similar to a ‘franchise’ agreement

except that Kresge did not provide goods or services to

Hempfield, but rather operated a different type of store

adjacently under the same registered trade name.”

(Defendant's Brief, p. 38).

[41] We believe that despite the provision in both

license agreements stating that “the parties do not intend this

agreement to constitute a joint venture, partnership or

lease...” defendant's analogy between its license

agreements with Hempfield and franchise agreements is

well taken. The fact that Kresge did not sell goods or services

to Hempfield does not preclude a franchise type arrange-

ment since that concept may apply to a method of doing

business as well as to a method of distributing a particular

product or line of products.

In the typical franchise arrangement a company (the

franchisor) owns a trade mark or trade name which it

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