# Petition — Evans v. S. S. Kresge Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1977
- **Citation:** 433 U.S. 908

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1280%3A1. Public record. Not legal advice.