Petition — Volkswagenwerk, A. G. v. Heatransfer Corp.
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*’ Supreme Court, U.S.
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IN THE
Supreme Court of the United
October Term, 1977
FILED
EC 23 1977
brat
MICHAEL RODAK, JR., CLERK
No 7 -QO02 )
VOLKSWAGENWERK AKTIENGESELLSCHAFT,
VOLKS-
WAGEN OF AMERICA, iNC., VOLKSWAGEN PRODUCTS
CORPORATION and VOLKSWAGEN SOUTH CENTRAL
DISTRIBUTOR, INC.,
Vv.
Petitioners,
HEATRANSFER CORPORATION,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Of Counsel:
HerzFecp & Rus, P.C.
40 Wall Street
New York, New York 10005
Wap, Harkraper & Ross
1320 Nineteenth Street, N.W.
Washington, D.C. 20036
Vinson & ELKINS a
First City National Bank Building
Houston, Texas 77002
SESSIONS, FISHMAN, ROSENSON,
SNELLINGS & BOISFONTAINE
Bank of New Orleans Building
New Orleans, Louisiana 70112
RICHARD A. PosNER
1222 East 56th Street
Chicago, Illinois 60637
PuHItiep FLMAN
1320 Nineteenth Street, N.W.
Washington, D.C. 20036
HERBERT RUBIN
Cecetta H. Goetz
40 Wall Street
New York, New York 10005
CHARLES T. NEWTON, Jr.
First City National Bank
Building
Houston, Texas 77002
Cicero C. Sessions
Bank of New Orleans Building
New Orleans, Louisiana 70112
SS Lc ioe ts het eendeeeenaueedt
SEE cic ods nacnacnUebues eeueensebuaenbes
Se IID. dc ceccccedvecdtdtacssesevess
EE EE cect cackscdcaetkeusanecceieests
Reasons for Granting the Writ ................6..
The ‘‘Best Efforts’’ Tie-in Issues ..............
oo a ie eda k Gudwedbes Gane
PE COR odin vesesvndddededaiadsedese
RS TD | on50:660dscnsunccdecsaecce’
The Competitive Effects of the Acquisitions .....
The Delanair Acquisition ............eeeeeees
The Inter-Continental Acquisition ............
Se SED i a heccdcakankwéneadenhenctone
Antitrust Injury Under Brunswick .............
ee er err Tre re rrr ere Torre rT
Appendix A
Opinion of the United States Court of Appeals for
the Fifth Circuit (‘‘Opinion’’), filed June 13, 1977
Judgment of the United States Court of Appeals for
the Fifth Circuit, filed June 13, 1977 ............
Letter of the Clerk of the United States Court of
Appeals for the Fifth Circuit and Notice of Denial
of Petition for Rehearing and Rehearing En
Banc, entered October 19, 1977 ............0005.
Opinion of the District Court Denying Motion for a
Directed Verdict at the Close of Plaintiff’s Case
= Court Opinion I’’), dated September
ie MEE nawsadciaayeeedeodaddedubesvenesuuoute
47a
48a
ii
PAGE
Opinion of the District Court Denying Motion for a
Directed Verdict at the Close of All the Evidence
(‘*District Court Opinion II’’), filed October 23,
BOP Usd cdeeusddacenrcenennendsendeseoadecses 6la
pinion of the District Court Denying Motion for a
Judgment Notwithstanding the Verdict or for a
New Trial (‘‘District Court Opinion III’’), filed
EET SOE shan dcengienkid Sankar sxneedsiane 65a
Appendix B
Sherman Act:
Se: Gee SEA ED do deaddescveawecwacen 87a
eR SES UD hv usd dwdasassaescseeee 87a
Clayton Act:
ee Oe SR UD pccedeccdecncenannwe 87a
ee BGP ES UD nu: d be eeswecnddus sce 87a
Table of Cases Cited
Beach Rambler, Inc. v. American Motors Corp., 1969
Trade Cas. q 72, Se NE oak cada s Soca 11
Brown Shoe Co. v. United States, 370 U.S. 294
SE ci ecusseye fephav ay kinetin enekecarsenmees 20
Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429
Se EEE Shi sscees scadscedksexens 3, 21, 23, 24, 25
Calnetics Corp. v. Volkswagen of America, Inc., 532
F.2d 674 (9th Cir. 1976), cert. denied, 429 U.S. 940
| psionic cuentas om Hania 10
Capital Temporaries, Inc. v. Olsten Corp., 506 F.2d
Se Ge EE 0 60.40 4 Kee cawecdaesedesesoes 12
Citizen Publishing Co. v. United States, 394 U.S. 131
re tant chsh ea taneetieeeeiebes xs 23
Colorado Pump & Supply Co. v. Febeo, Ine., 472 F.2d
637 (10th Cir. 1973), cert. denied, 411 U.S. 987
COPED vec ccececesccdcdessandeessdeeteedvocens 12
ili ’
Continental T.V., Ine. v. GTE Sylvania Inc., 97 S.Ct.
PAGE
SF Re rr Pre om eeo 13, 14,18
International Shoe Co. v. FTC, 280 U.S. 291 (1930) 22, 23
oT) v. GTE Corp., 518 F.2d 913 (9th Cir.
McElhenney Co. v. Western Auto Supply Co., 167
F.Supp. 949 (W.D.S.C. 1958), aff’d, 269 F.2d 332
SC Me 4 sbsdheeenweecdasbedenvenswada’
Miller Motors, Inc. v. Ford Motor Co., 149 F.Supp.
988) .D.N.C. 1957), aff’d, 252 F. 2d 441 (4th Cir,
DEE 656 edEC0ens Cob wNehEd CaedenceeeeNecenNust
Milos v. Ford Motor Co., 317 F.2d 712 (3d Cir. 1963)
Northern Pac. R. Co. v. United States, 356 U.S. 1
RRR Oe ey ee er ceed eee
Pick Manufacturing Co. v. General Motors Corp., 80
F.2d 641 (7th Cir. 1935), aff’d per curiam, 299 U.S.
ED, 6:80.66 6065509550 ws0bs becnded ébeeaeeees
Reed Bros., Inc. v. Monsanto Co., 525 F.2d 486 (Sth
Cir. 1975), cert. denied, 423 U.S. 1055 (1976) ....
Refrigeration Engineering Corp. v. Frick Co., 370
es De COPE Bs BPEED vcs cncdavenncccser
South End Oil Co. v. Texaco, Inc., 237 F.Supp. 650
i Mn .Jeddaddodn ens $husdderees went es
Standard Oil Co. of California v. United eee 337
ee ES oie co cud vuedeen ee eet tes eeunase
Stokes Equipment Co. v. Otis Elevator Co., 340
PU, Ge Cie WO BOOED coceccecadcscccesese
Telex Corp. v. International Business Mach. Corp.,
510 F.2d 894 (10th Cir. 1975), cert. dismissed, 423
ee SE EE. ci.cccvasesuvdcdeavakacevendesss
Times-Picayune Publishing Co. v. United States, 345
ee Ee SE Si cesivececupcecettscechacecees
Timken Roller Bearing Co. v. FTC, 299 F.2d 839
Se Ss SED Si.g0¥0 500555 eudeertuubucuseeses
Twin City Sportservice, Inc. v. Charles O. Finley &
Co., 512 F.2d 1264 (9th Cir. 1975) ..........4...
15
12
15
iv
PAGE
United States v. American Technical Industries,
1974-1 Trade Cas, 74,873 (M.D. Pa.) ......... 23
United States v. Becton, Dickinson & Co., 1964 Trade
Can: F 71,386 (Ae) incucccestcauneneeene 12
United States v. Bendix Aviation Corp., 1953 Trade
Cas. FOU SES (TAM. Bed 0 <cavcsscutenceueeeeee 13
United States v. Black & Decker Mfg. Co., 430
y Supp. 120 (D. Me. BPG) cccactessueeueeueee 23
United States v. Bostitch, Inc., 1958 Trade Cas.
T GDSOT (EARL) 2 ccocvesseccscaeneeeenee 12
United States v. Citizens & Southern National Bank,
4338 UB. GB (3008) . co vaccvccsccessseeunenee 17, 21
United States v. Columbia Steel Co., 334 U.S. 495
(IDGB) . cccvcccccssviceouncuuunea nae 16
United States v. E. 1. du Pont de Nemours & Co., 351
US. SUT (2066) .occcsccssesucceueseeeeee 18
United States v. General Dynamics Corp., 415 U.S.
GEG (IBTE) 2c ccvccccecececensenssee eee 17, 19, 23
United States v. Greater Buffalo Press, Inc., 402 U.S.
GOD (BBTA) .ccccccccegenctyseuueenneeeeee 23
United States v. International Harvester Co., 1977-2
Trade Cas. §GL.714 (7th Can.) .ccccecusscueueue 19
United States v. J. I. Case Co., 101 F.Supp. 856 (D.
Minm., IBGE) ..ccccccscceesscesuuen ane 12
United States v. J. P. Seeburg Corp., 1957 Trade Cas.
FGOS6IS (M.D. UB) ..ccccvsesseseseenneeel 13
United States v. Marine Bancorporation, Inc., 418
UB. GOB (1074) ..cccecsccccusesnusneeeene 17
United States v. M.P.M., Inc., 397 F.Supp. 78 (D.
Gele. 1976) ....0cccecccececcunee nee aeeeeeeee 23
United States v. Phileo Corp., 1956 Trade Cas.
66,400 (2D. Pa.) ..cccecscesccessseeeee 13
United States v. Rudolf Wurlitzer Co., 1958 Trade
Cas. FT ODGll (WEAR) scoccccsececsvaeeueeen 13
v
PAGE
United States v. Volkswagen of America, Inc., 18°
F.Supp. 405 (D.N.J. 1960) ........... cece eeeee 9
United States v. Volkswagen of America, Inc., 1962
Trade Cas. 470,366 (D.Nd.) .....ccccccccccees q
United States Steel Corp. v. FTC, 426 F.2d 592
Neat ee eek ee edenvesncceccece 23
Victory Motors of Savannah, Inc. v. Chrysler Motors
Corp., 357 F.2d 429 (Sth Cir. 1966) ............. 11
Table of Statutes Cited
Clayton Act, Section 4, 15 U.S.C. $15 ............. 10, 24
Clayton Act, Section 7, 15 U.S.C. $18 ............. passim
Sherman Act, Section 1,15 U.S.C. §1............. passim
Sherman Act, Section 2,15 U.S.C. 42 ............. passim
Table of Other Authorities Cited
Annual Report, Administrative Office of the United
ccc snccsecccocesceecs 25
Annual Report, Administrative Office of the United
ED os ccc cc ccececceecccces 25
Annual Report, Administrative Office of the United
EE cnc ccccceetsevccecocccces 25
Areeda, Antitrust Violations Without Damage Re-
coveries, 89 Harv. L. Rev. 1127 (1976) .......... 22
Glickman, Franchising § 10.03(6) (1977) .......... 11
1A Rabkin & Johnson, Current Legal Forms 3.50,
Eee dae edsecsecesccoccccce 11
4 Am. Jur. Legal Forms 2d § 50:15 (1971) ........ 11
IN THE
Supreme Court of the United States
October Term, 1977
No.
ry
A
VoLKSWAGENWERK AKTIENGESELLSCHAFT, VOLKSWAGEN OF
America, Inc., VoLKswaGeN Propvucts Corporation and
VoLtkswacen Sovurn Centrat Distrisvutor, Inc.,
Petitioners,
v.
HEATRANSFER CORPORATION,
Respondent.
: la’
A
| PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
| FOR THE FIFTH CIRCUIT
Opinions Below
The opinion of the court of appeals (la-46a) is reported
at 553 F.2d 964. The relevant opinions of the district court
(50a-S6a) are not officially reported but appear at 1975-1
Trade Cas. § 60, 306, 07 and 09.
Jurisdiction
The judgment of the court of appeals (47a) was entered
on June 13, 1977. A timely petition for rehearing was
denied on October 19, 1977 (48a, 49a). The jurisdiction of
this Court is founded on 28 U.S.C. § 1254(1).
Questions Presented
1. (a) Whether a standard ‘‘best efforts’’ clause, which
promotes interbrand competition by requiring franchisees
to stock and promote their franchisor’s full product line,
but does not restrict their freedom to purchase from other
suppliers, nevertheless constitutes an illegal per se tying
arrangement because its enforcement lessens the marketing
opportunities of competing suppliers; and
(b) Whether the test of an illegal per se tying ar-
rangement is different because the plaintiff is a competing
supplier rather than a franchisee.
2. Whether the decision of certain manufacturers of
automobiie air conditioners to limit their production and
sales to the automobiles of a single company (Volkswagen)
made such air conditioners a relevant market unlawfully
monopolized by such company, despite undisputed evidence
of (a) production flexibility at the manufacturer level and
(b) vigorous interbrand competition at the consumer level.
3. (a) Whether the acquisition and rehabilitation of a
faltering captive supplier can violate Section 7 of the
Clayton Act; and
(b) Whether a supplier’s acquisition of a wholesale
distributor violated Section 7 merely because the distribu-
tor bought proportionately more from the supplier after
the acquisition than it had before.
4. In a Section 7 case where the plaintiff claims and
the jury finds that but for the acquisition the acquired firm
would have continued to decline until it disappeared as a
viable competitor—
(a) Whether the ‘‘failing company’’ defense has been
established by the plaintiff’s own proof;
(b) Whether the defense requires proof that the ac-
quired firm could not be reorganized in a bankruptcy pro-
ceeding; and
(c) Whether the plaintiff, consistently with Brunswick
Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977), is
entitled to damages based not on anticompetitive acts but
on the rehabilitation of the acquired firm through lawful
product and service improvements.
Statutes Involved
The relevant provisions of the Sherman and Clayton
Acts appear in Appendix B.
Statement of Facts
This antitrust treble damage action arises out of Volks-
wagen’s efforts to compete in the American automobile
market by offering air-conditioned automobiles comparable
in all respects to cars manufactured domestically.’
Volkswagen was the first imported automobile to pene-
trate the U. S. automobile market on a large scale.? It was
1We use “Volkswagen” interchangeably to refer to the vehicle,
to Volkswagen of America, Inc. (the wholly owned American sub-
sidiary of the German corporation that manufactures Volkswagens),
and to the manufacturer. During the period of this suit Volkswagen
of America, Inc. imported Audi and Porsche as well as Volkswagen
automobiles. Audis are manufactured by a subsidiary of Volkswagen,
Porsches by an independent company (R. 3528-29). (“R.” refer-
ences are to the numbers appearing at the top of the pages in the
printed Appendix filed below.)
2 Its share of U.S. auto sales reached 6.8 percent in 1970 but had
declined to 4.1 percent by 1973, the last year for which there is
evidence in the record (8a). That year General Motors sold 44.4
percent of all new cars in the U.S., Ford 24 percent, and Chrysler
13.1 percent (DX 862).
also the first such car with parts and service availability
provided through a nationwide franchise system (R. 754-55,
3512-13).° The Volkswagen distributor and dealer contracts
require the franchisee to use his ‘‘ best efforts to promote the
sale of’’ both Volkswagen automobiles and ‘‘VW Parts,”’
defined-as any parts or accessories supplied by Volkswagen
(20a, n. 11). The franchisee is free to buy from other
suppliers but he is required to ‘‘maintain a reasonable
inventory of the corresponding genuine and approved
items and devote reasonable promotional efforts to them’”’
(PX 22; DX 904; R. 3074-75, 3533-39, 3714-31).*
Most domestie automobiles are sold with air condition-
ing installed on the assembly line (R. 5950-54). To compete
with such factory air conditioning, Volkswagen in 1963
started selling ‘‘hang-on’’ air conditioners (i.e., for installa-
tion after the car has left the factory) which it bought from
Delanair Engineering Co., a Texas subsidiary of an English
firm, Delaney-Gallay (Sa-10a). The Delanair air conditioner
thereby became an approved ‘*VW Part’’ covered by the
best efforts clause in the Volkswagen franchise agreements.
As air conditioning became increasingly important to the
* Originally Volkswagen sold to 14 independent wholesale dis-
tributors who resold to the dealer. Because the American manufac-
turers enjoy a cost advantage over Volkswagen by bypassing the
distributor stage and selling directly to the dealer, Volkswagen has
gradually been taking over the wholesale-distribution function (R.
3093, 3609-10, 3759-65). At the time of trial all but six of its
distributors were regional offices of Volkswagen (7a-8a). One of
the two acquisitions challenged in this case is Volkswagen’s acquisi-
tion, on October 31, 1969. of Inter-Continental Motors Corp. (re-
placed by Volkswagen South Central Distributor, Inc.), a distributor
yr in San Antonio and serving five southwestern states (see pp.
-9 infra).
*“Approval” is a term of art in the automobile field (R. 5952-
53). A part or accessory is “approved” if it is sold by the automobile
importer; it is not approved if it is not sold by him (R. 565-66, 1668).
ee a ee RE EE ee ot AR AEE LB ntti aren ACE tesla ante owt ey ee, ms ° m ——
sale of vehicles, a de facto partnership developed between
Volkswagen and Delanair (R. 4004-06). Delanair person-
nel visited the Volkswagen and Audi factories and received
advance technical information so that Delanair could adapt
its air conditioners to the vehicles’ design (R. 4009-11; 15a,
n. 9). Volkswagen tested, promoted and sold the Delanair
unit as its product, backed up with the Volkswagen war-
ranty (R. 4004-09, 4698-703). By 1969 Delanair was selling
95 percent of its output to Volkswagen for resale to Volks-
wagen’s customers (27a; PX 8).
Other producers of hang-on air conditioners for Volks-
wagens sold directly to the Volkswagen distributors and
dealers. In 1968 one such firm, DPD, persuaded Volks-
wagen’s distributor for the Gulf states to carry its units
exclusively and another became the exclusive supplier to
the Los Angeles distributor (12a, 13a-1l4a).
During that year, various problems developed with the
Delanair unit. For example, a design problem—the loca-
tion of the condenser on the underside of the automobile
where it was vulnerable to road hazards—was exacerbated
by poor quality control (10a, n.8; R. 4402-03). In July 1969,
with Delanair sales plummeting, Delaney-Gallay decided to
sell Delanair. It closed down its production line, after
Volkswagen refused to buy the company (R. 4046-60, 4334-
37).
Aggravated by rumors that it was going out of business,
Delanair’s condition deteriorated rapidly. By September,
when only 26 air conditioners were sold, it was ‘‘just bust’’
(14a; R. 4065). Its losses were mounting at the rate of
$125,000 a month; it had cash on hand to cover only one
week’s wages; its plant was closed down and most of its
work force laid off ; and its new president had resigned after
two weeks on the job, viewing the situation as hopeless
(R. 4087-90, 4106). Delanair also had a debt of $2 million,
an
half of which was to matute on October 1, and there was
no way of meeting this deadline (PX 13, p. 2; R. 3561-62,
4117-19A),
Having tried but failed to find another purchaser, Dela-
ney-Gallay in September 1969 returned in desperation to
Volkswagen. Delaney-Gallay gave Volkswagen two alter-
natives: buy Delanair or see it liquidated by September 30
(R. 3570-80, 4121-23, 4126-28). To avoid liquidation, which
would have left the tens of thousands of Volkswagen owners
who had bought Delanair units as Volkswagen products
without a manufacturer of repair parts, Volkswagen reluc-
tantly agreed to buy Delanair (R. 3576-78, 4123).
Announcement of the acquisition, which became effective
on September 26, 1969, was reassuring to those Volks-
wagen distributors and dealers who had stopped buying
Delanair units because of rumors that it was going out of
business (PX 155; R. 4277). Volkswagen personnel tele-
phoned and visited its customers (the Volkwagen distrib-
utors)—two of whom had dropped the approved unit com-
pletely—to urge them to buy (23a; PXs 98, 100; R. 3076-
77, 4595-4653). Sales rose, but for several months remained
well below the level reached before Delanair’s summer
shut-down (compare PX 8, p. 52 with PX 7). Sales also
rose for Volkswagen’s competitors. Their sales increase
in 1970, post-acquisition, matched Volkswagen's almost
exactly (Table 1, infra p. 7).
Delanair was renamed Volkswagen Products Corpora-
tion (‘*VPC’’) and an experienced executive was installed
as its head. Assisted by a large interest-free loan from
Volkswagen (later repaid in full), he instituted a series
of immediate steps to reverse Delanair’s decline (R. 3586-
89, 5491). He enlarged the scope of the warranty; insti-
tuted drastic quality-control measures (involving the
reworking of thousands of units held in inventory and
ee ee ee lee ene Oe ee te
the junking of a half million dollars’ worth of parts deemed
inadequate); and altered the brackets on the condenser
so as to fasten it securely to the car (PX 11, pp. 11-12;
PX 297; DX 92; R. 5370-71, 5484-87, 5664-66).
By the beginning of the 1971 model year, VPC’s model
line had been extended to cover the full range of Volks-
wagen models and also the condenser had been removed
from its vulnerable position beneath the car—a change
that plaintiff’s vice-president described as a ‘‘terrific
improvement’? (PX 11, pp. 18-14; R. 430, 2092, 5542-45,
5550). To solve the problem of improper and time-con-
suming installation of air conditioners by inexperienced
dealer personnel, Volkswagen distributors offered ‘‘port
installation’’ of air conditioners, i.e., installation at the
port of entry by specialized mechanics employed by the
distributor (PX 11, p. 7, PX 457; R. 4488-91).
Although VPC’s sales rebounded strongly in 1971, it
never regained the relative position Delanair enjoyed
before 1969 (Table 1).
TABLE 1
SALES OF AIR-CONDITIONERS FOR VOLKSWAGEN, PORSCHE, AND AUDI VEHICLES
Manufacturer 1965 1966 1967 1968 1969* 1970 1971 1972 1973
Delanair/VPC 6,702 11,144 22,754 36,339 24,400 31,923 69,394 63,507 85,665
BN Gacrtiods 1,200 3,000 3,700 7,000 15,709 22,534 23,854 24,007 28,502
Meier-Line ... 0 0 317 988 4,134 2,116 343 421 0
Heatransfer .. 0 0 0 0 2,463 4,750 2,907 3,514 1,623
Total ..... 7,902 14,144 26,771 44,327 46,708 61,323 96,498 91,449 115,790
Delanair/VPC
% share of
total .... 84.8 78.8 85.0 82.0 52.2 §2.1 71.9 69.4 74.0
* Delanair was named VPC after its acquisition by Volkswagen on September 26, 1969.
Source: PX 618A.
During Delanair’s decline, DPD’s sales representative,
W. H. Lende, Jr., decided to enter the automobile air con-
ditionin= business on his own (R. 234, 644). Doing business
as the plaintiff, Heatransfer Corporation, he designed an
air conditioner for the Volkswagen ‘‘ Beetle’’, to be installed
behind the rear passenger seat and blow cold air forward.
In early 1969 he offered this unit both to Volkswagen and to
several Volkswagen distributors (R. 275-94; DX 911). A
number of other manufacturers, including A-R-A, Frigi-
king, Coolaire, DPD, and Meier-Line, were also pressing
Volkswagen to buy their units. But, in July 1969, when no
acquisition was in prospect, Volkswagen reconfirmed its
policy of buying Delanair products exclusively (PX 638;
R. 3550-56, 4448-53).
One of the Volkswagen distributors, Inter-Continental
Motors Corp. began to buy the Heatransfer unit in June
1969 (18a). Five months later, on October 31, 1969, this dis-
tributor was acquired by Volkswagen (see, supra p. 4, n. 3).
It continued to stock and sell the Heatransfer unit along
with the VPC and DPD products (PX 594; DX 302). But
while during June-October 1969 the distributor bought pro-
portionately more from Heatransfer than from Volks-
wagen, by the end of 1970 the percentages were reversed
(14a).
A second Volkswagen distributor took on Heatransfer in
January 1970 (DX 654). Three months later, Lende de-
cided to stop his selling efforts with the Volkswagen dis-
tributors and distribute his product instead through a mass
merchandiser, such as Sears, Roebuck (R. 407-20).
After the failure of this strategy and of its efforts to
develop protitable export sales, Heatransfer brought this
suit in 1972, charging violations of Sections 1 and 2 of the
Sherman Act and Section 7 of the Clayton Act, based on the
Delanair and Inter-Continental acquisitions and the Volks-
ne at ae tee welling. we
wagen distributor and dealer best efforts clauses.’ It sought
damages predicated on the assumption that Delanair, but
for its acquisition by Volkswagen, would have disappeared
from the market and Heatransfer would have picked up a
large part of its sales.
At the conclusion of the eight-week trial, the case was
submitted to the jury upon a special verdict with fifteen
interrogatories (2a-5a, n. 1). After one hour’s delibera-
tion, the jury found, among other things, that the ‘‘provi-
sions of the Volkswagen dealer and distributor franchise
agreements constitute tying arrangements under Section
1 of the Sherman Act’’; that each of the defendants had
conspired or attempted to monopolize, or monopolized, a
worldwide market consisting of air conditioners for Volks-
wagen, Porsche and Audi automobiles, in violation of See-
tion 2 of the Sherman Act; that Delanair was not a failing
company and that Volkswagen’s acquisitions of Delanair
and of Inter-Continental Motors violated Section 7 of the
Clayton Act in the Volkswagen-Porsche-Audi air condi-
tioner market; and that Lleatransfer had sustained injury
caused by one or more of these violations in the amount of
$5 million. This damage award was upheld on the ground
that ‘‘[t]here is sufficient evidence in the record to sustain
® The acquisitions have never been challenged by the Department
of Justice or the Federal Trade Commission. And a Volkswagen best
efforts clause substantially identical to that in suit here was approved
by the Department. In 1957 the Department brought a civil action
against Volkswagen and several of its distributors alleging, inter alia,
improper restrictions on the distribution of Volkswagen automobiles
and parts. The case was settled in 1962 by the entry of a consent
judgment. Volkswagen agreed to notify each distributor and dealer
that it was free to carry the goods of other suppliers so long as it
complied with the requirements of the franchise agreement. United
States Vv. Volkswagen of America, Inc., 1962 Trade Cas. € 70,256
(D.N.J.). The franchise agreement required the franchisee to “arrange
for the efficient promotion of” Volkswagen automobiles and parts
(including accessories). Transcript of Argument on Motions, Feb.
18, 1959, at p. 38, United States v. Volkswagen of America, Inc.,
182 F.Supp. 405 (D.N.J. 1960).
10
the jury’s assumption that Delanair would have continued
to decline until it disappeared as a viable competitor.’’
(76a).
Damages were trebled pursuant to Section 4 of the Clay-
ton Act and a stipulated attorney’s fee added. The result
was a judgment of $15,350,000 which was affirmed by the
Court of Appeals for the Fifth Circuit.
Reasons for Granting the Writ
This case presents issues of large importance generated
by the increasing use—and potential for abuse—of the anti-
trust treble-damage action. In order to sustain the $15 mil-
lion judgment against petitioners, the court below stretched
the per se rule against tie-ins to condemn a wholly legitimate
provision found in most franchise agreements; adopted
standards for establishing competitive injury which render
most vertical mergers unlawful; eviscerated the failing
company defense; inferred monopoly power solely from
the large percentage of Volkswagen air conditioners that
Volkswagen sold its distributors and dealers; and allowed
damages unrelated to any antitrust violation by deeming
the rehabilitation of an acquired firm an ‘‘antitrust injury.’’
These rulings conflict with decisions of this Court and other
circuits and with basic antitrust principles.
Review is necessary not only to clarify important and
recurrent issues in private antitrust litigation but to pre-
serve competition in a basic industry. As the Department
of Justice observed in a related case, ‘‘Since the [American
automobile] market is presently dominated by the three
major American automobile manufacturers, the preserva-
tion of effective competition from foreign challengers is ~ar-
ticularly important in maintaining a competitive eco-
nomy.’’® The ‘‘effective competition’’ offered by Volks-
® Brief for the United States as Amicus Curiae at 20, Calnetics
Corp. v. Volkswagen of America, Inc., 532 F.2d 674 (9th Cir.
1976), cert. denied, 429 U.S. 940 (1976).
nll
a ee ee ae
a ee
11
wagen is thwarted by the decision below. That decision puts
Volkswagen under the competitive constraints that the anti-
trust laws impose upon a monopolist. It also penalizes
Volkswagen’s efforts to provide air-conditioned automo-
biles comparable in all respects to the factory air-condi-
tioned products of its domestic competitors—whose earlier
and more complete vertical integration has immunized
them from this type of suit.’
The “Best Efforts” Tie-in Issues
1. A ‘‘best efforts’’ clause in a franchise agreement re-
quires the franchisee to stock and promote his franchisor’s
full product line but puts him under no restraint in purchas-
ing from other suppliers as well. The court below held that
such a clause is an illegal per se tying agreement where its
enforcement results in limiting the market available to a
competing supplier (22a-23a).
The court’s holding strikes at the heart of the American
franchise system. While precise statistics are unavailable,
it appears that almost all product franchise agreements con-
tain a best efforts clause or its equivalent.* The decision
below outlaws such clauses where—as is the usual case—
the tranchisor sells more than one product.
7 Volkswagen’s domestic competitors no longer sell to wholesale
distributors and they install on the automobile assembly line air condi-
tioners which they manufacture themselves (R. 6103-06). Hence,
they cannot be charged, as Volkswagen was, with unlawfully tying air
conditioners to automobiles by urging their automobile customers to
buy their air conditioners, with having recently acquired a manu-
facturer of air conditioners, or with acquiring or conspiring with
their distributors.
8 See R. 5400-01; 1A Rabkin & Johnson, Current Legal Forms
(1977) §§ 3.50, 3.52 (“push vigorously”), 3.57 (“vigorously pro-
mote”); 4 Am. Jur. Legal Forms 2d § 50:15 (1971); Glickman,
Franchising § 10.03 (6) (1977); Victory Motors of Savannah, Inc. v.
Chrysler Motors Corp., 357 F.2d 429, 430 (Sth Cir. 1966); Milos v.
Ford Motor Co., 317 F.2d 712 (3d Cir. 1963); Beach Rambler, Inc.
v. American Motors Corp., 1969 Trade Cas. ¢ 72,798 (S.D.N.Y.).
To be sure, the court stated that best efforts clauses
are lawful “in isolation’? (20a). But the statement is
meaningless in light of the court’s holding that they are
per se illegal tying arrangements if the franchisor urges his
franchisees to carry his full product line in accordance
with the terms of the best efforts clause and a competing
seller thereby loses anticipated sales (20a, 22a-23a).°
This Court and numerous federal circuit and district
courts have held, to the contrary, that best efforts
clauses and equivalent full-line promotional requirements
are not illegal per se tying arrangements.’® The per se
® There is no evidence, nor did the court below find, that Volks-
wagen enforced observance of the best efforts clauses through
terminations, lawsuits, or other actual or threatened sanctions for
noncompliance. In the precise language of the court below, the
Volkswagen distributors and dealers “were urged to stock the
Delanair/VPC air conditioner” by Volkswagen (23a).
10 See Pick Manufacturing Co. v. General Motors Corp., 80 F.2d
641 (7th Cir. 1935), aff'd per curiam, 299 U.S. 3 (1936), and
cited approvingly in Times-Picayune Publishing Co. v. United States,
345 U.S. 594, 607 (1953); Colorado Pump & Supply Co. v. Febco,
Inc., 472 F.24 637, 641 (10th Cir. 1973), cert. denied, 411 U.S.
987 (1973); Capital Temporaries, Inc. v. Olsten Corp., 506 F.2d
658 (2d Cir. 1974); Timken Roller Bearing Co. v. FTC, 299 F.2d
839 (6th Cir. 1962); Miller Motors, Inc. v. Ford Motor Co., 149
F. Supp. 790 (M.D.N.C. 1957), aff'd, 252 F.2d 441 (4th Cir. 1958);
Refrigeration Engineering Corp. v. Frick Co., 370 F. Supp. 702
(W.D. Tex. 1974); United States v. J. I. Case Co., 101 F. Supp.
856, 867 (D. Minn. 1951). Cf. Reed Bros., Inc. v. Monsanto Co.,
525 F.2d 486 (8th Cir. 1975), cert. denied, 423 U.S. 1055 (1976);
Stokes Equipment Co. v. Otis Elevator Co., 340 F. Supp. 937
(E.D. Pa. 1972); McElhenney Co. v. Western Auto Supply Co.,
167 F. Supp. 949 (W.D.S.C. 1958), aff'd, 269 F.2d 332 (4th Cir.
1959); South End Oil Co. v. Texaco, Inc., 237 F. Supp. 650, 654
(N.D. Ill. 1965).
Best efforts or equivalent provisions have the approval of the
Department of Justice. They have been a allowed in govern-
ment antitrust consent decrees forbidding unlawful franchise restric-
tions. See United States v. Becton, Dickinson & Co., 1964 Trade Cas.
€ 71,144 at p. 79,512 (D.N.J.); United States v. Bostich, Inc., 1958
a Ce fee ee i ee
oe ee er te eh 8 Rae Bs
category is reserved for practices ‘‘which because of their
pernicious effect on competition and lack of any redeeming
virtue are conclusively presumed to be unreasonable and
therefore illegal without elaborate inquiry as to the pre-
cise harm they have caused or the business excuse for their
use.’’ Northern Pac. R. Co. v. United States, 356 U.S. 1,
5 (1958), quoted in Continental 7.'., Inc. v. GTE Sylvania
Inc., 97 S.Ct. 2549, 2558 (1977). Whereas tie-ins ‘‘serve
hardly any purpose beyond te suppression of competition’’
(Standard Ou Co. of California v. United States, 337 U.S.
293, 305 (1949)), best effor‘s clauses serve the pro-competi-
tive business purpose of enabling the seller to get his line
promoted aggressively. By fostering aggressive competi-
tion between manufacturers at the retail (franchisee) level,
they promote interbrand competition—‘the primary con-
cern of antitrust law’’ (GTE Sylvania, supra, 97 S. Ct. at
2559 n. 19)."?
2. The court below expanded the per se tie-in rule not
only by sweeping best efforts clauses under it, with poten-
tially enormous retroactive impact, but also by changing
the standard of legality where the plaintiff is a competing
supplier rather than a customer. For a customer, the court
Trade Cas. € 69,207 at pp. 75,741-42 (D.R.I.); United States v.
Rudolf Wurlitzer Co., 1958 Trade Cas. € 69,011 at p. 74,008
(W.D.N.Y.); United States v. J. P. Seeburg Corp., 1957 Trade Cas.
€ 68,613 at p. 72,479 (N.D. Ill.); United States v. Philco Corp.,
1956 Trade Cas. € 68,409 at p. 71,753 (E.D. Pa.); United States
Vv. Bendix Aviation Corp., 1953 Trade Cas. € 67,583 at p. 68,774
(S.D.N.Y.). See also n. 5 supra p. 9.
™! Moreover, such clauses, —~ 9 superficially restrictive of
deaier freedom, in fact help preserve the independent small business-
man. “To the extent that a per se rule prevents a firm from using the
franchise system to achieve efficiencies that it perceives as important
to its successful operation, the rule creates an incentive for vertical
integration into the distribution system, thereby eliminating to that
extent the role of the independent businessman.” GTE Sylvania,
supra, at 2561 n. 26.
14
below recognized that the standard is coercion. However,
for a supplier, it declared the standard to be mere fore-
closure (22a). The far-reaching consequences of this novel
doctrine are not limited to best efforts clauses. Any fran-
chise covering more than one product is now vulnerable
to attack as an illegal tying arrangement by a competitor
for the same business. It is manifestly improper, as well
as unprecedented, to make the legality of the same conduct
differ depending on who brings the suit challenging it.
This Court should grant certiorari to keep the per se
tie-in rule within proper bounds, consistently with its recent
admonition that departures from the Rule of Reason must
be based on ‘‘demonstrable economic effect.’’??
Monopolization
To prove monopolization under Section 2 of the Sherman
Act, a plaintiff must prove a relevant market and then show
that the defendant had monopoly power in it. In the present
ease, monopoly power was inferred solely from Volks-
wagen'’s percentage share of the narrow, erroneously de-
fined *‘relevant market’’ constructed by plaintiff for pur-
poses of this lawsuit (25a-29a).
Relevant Market. Although Volkswagen sells only about
one percent of the automobile air conditioners sold in this
country (DX 926), the court below imputed to it a huge
market share by upholding a relevant market limited to air
conditioners for the three makes of automobile that it im-
ports (3a, n. 1, 27a). The court’s sole ground for doing so
12 GTE Sylvania, supra, 97 §.Ct. at 2562. Since “a per se viola-
tion is ipso facto an unreasonable restraint of trade” the court below
held that its analysis of the best efforts clause justified the jury's
finding of a conspiracy to restrain trade unreasonably in violation of
Section 1 of the Sherman Act (24a). We do not discuss this Sec-
tion 1 ruling separately, since it is derivative of the court’s per se
ruling.
te te Pe Cites &
om bia eg wate ent te Me
15
was that the principal manufacturers of air conditioners for
these makes ‘‘produced air-conditioning units almost ex-
clusively for VWoA import cars.’’ (26a). The court gave
no weight to the undisputed fact that any firm which makes
air conditioners for one make of automobile can use the
same plant, personnel, and equipment to produce air condi-
tioners for a different make of automobile and that Delanair
and all of its competitors did so (PX 390; DX 940; R. 509-10,
1418, 1661-64, 1771, 3266-68, 4003-04). All that is involved in
such a change is rearranging the same standard set of com-
ponents.'®
By ignoring production interchangeability, the court be-
low divorced market definition from economic reality and
created a conflict with the Ninth and Tenth Circuits. In
Twin City Sportservice, Inc. v. Charles O. Finley & Co.,
512 F.2d 1264 (9th Cir. 1975), and ITT Corp. v. GTE
Corp., 518 F.2d 913 (9th Cir. 1975), the Ninth Cireuit held
that where a high degree of production interchangeabilit,
exists, the relevant market must be expanded to include
all of the interchangeable products. The Tenth Circuit
reached the same conclusion in Telex Corp. v. International
Business Mach. Corp., 510 F.2d 894, 917-19 (10th Cir. 1975),
cert. dismissed, 423 U.S. 802 (1975). Telex, a producer of
peripheral equipment for computers, had chosen to limit its
production to equipment plugged into IBM computers, in
13 The “manufacture” of automobile air conditioners is a simple
process of assembling standard components obtained from manu-
facturers of refrigeration equipment (R. 634, 1114-30). As plain-
tiff acknowledges, producers of automobile air conditioners “have no
production facilities in the classic sense but rely on the production fa-
cilities of larger componert manufacturers.” Plaintiff's Response to
Defendant's Motion for Directed Verdict at 22. Producing a unit
for a new or different automobile make or model does not require
any retooling, employee retraining or additions to productive capac-
ity, but simply the purchase and packaging of a different mix of
standard shelf items sold by manufacturers of refrigeration equip-
ment (R. 1770-71, 5943-45).
16
the same way that Heatransfer limited its production to air
conditioners installed in automobiles imported by Volks-
wagen. Telex argued that the relevant product market
should accordingly be limited to peripheral equipment for
IBM computers. The Tenth Circuit rejected this view on
the ground that Telex could have designed its peripheral
equipment to be compatible with another manufacturer’s
computers if it had wanted to do so. Its business decision
to limit production to equipment for one manufacturer’s
brand did not delimit a relevant market for antitrust pur-
poses. No more did the decision of a few manufacturers
to produce air conditioners only for automobiles imported
by Volkswagen create a relevant market.
These cases, and this Court’s decision in Columbia Steel
from which they descend,'* demolish the ‘‘relevant market’’
upheld below.*®
Monopoly Power. It was also error for the court of
appeals to hold that possession of a large share of so
narrowly defined a market proved the existence of monopoly
14In United States v. Columbia Steel Co., 334 U.S. 495, 510-
11 (1948), this Court stated: “Another difficulty is that the record
furnishes little indication as to the propriety of considering plates
and shapes as a market distinct from other rolled steel products. If
rolled steel producers can make other products as easily as plates
and shapes, then the effect of the removal of Consolidated’s de-
mand for plates and shapes must be measured not against the market
for plates and shapes alone, but for comparable rolled products.
The record suggests, but does not conclusively indicate, that rolled
steel producers can make other products interchangeably with shapes
and plates, and that therefore we should not measure the potential in-
jury to competition by considering the total demand for shapes and
plates alone, but rather compare Consolidated’s demand for rolled
steel products with the demand for all comparable rolled steel prod-
ucts in the Consolidated marketing area.”
15 The court below brushed these cases aside, remarking only:
“These cases deal with the adaptability or substitutability of products,
and cont2’1 nothing that persuades us to overturn” the jury’s verdict
(27a).
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Oe ce te ae ie, le ee enc Sa lt. es lng Dh A ee 0m
RAD thee OR OA be
—
17
power (28a-29a).'® The court ignored this Court’s decisions
which hold that an inference of market power based purely
on statistics must yield to evidence that they exaggerate the
defendant’s actual power. United States v. Citizens &
Southern Nationa! Bank, 422 U.S. 86, 120 (1975); United
States v. Marine Bancorporation, Inc., 418 U.S. 602, 613
(1974) ; United States v. General Dynamics Corp., 415 U.S.
486, 497-98 (1974)."?
The critical fact here—which is not disputed by plaintiff
—is that Volkswagen, Porsche and Audi automobiles are in
vigorous competition with other brands of automobiles,
foreign and domestic, and that this interbrand competition
drastically limits Volkswagen’s theoretical monopoly power
deriving from its large share in the artificially narrow
Volkswagen-Porsche-Audi air conditioning market.’* The
most important competition is not that which occurs within
a single franchise system; it is the competition between
franchise systems—between, say, air-conditioned Volks-
16 That “market share” is not even of all Volkswagen automobiles
sold. It is of air-conditioned Volkswagen automobiles. Only a small
fraction (about 16 percent) of new Volkswagen automobiles are sold
with air conditioning, as contrasted with the 74 percent share of
domestic vehicles sold with factory air conditioning (PX 9, pp. 2, 9).
Thus, Volkswagen’s 76 percent share even of the relevant market
found by the court below (28a) should be reduced to about 12
percent.
17 Although these are merger cases, their holdings are applicable
a fortiori to monopolization cases, where the requirements of demon-
strating anticompetitive effect are more stringent.
18 Heatransfer concedes that, given the competition faced by
Volkswagen in the automobile market, it is speculative whether
VPC’s prices ever exceeded competitive levels. Its main brief in the
court of appeals states (p. 155): “There was no way of knowing the
extent to which VPC prices were higher than prices would have been
in a competitive market. While there was evidence that VPC prices
were not, as a practical matter, sensitive to requests for reduction
based on competition from other kinds of cars, there was also evidence
that concern for lost car sales would at some point have a bearing on
how high VPC prices became.” (Emphasis added.)
18
wagens and air-conditioned Toyotas. (DX 573; R. 805-07).
As this Court noted in Continental T.V., Inc. v. GTE
Sylvania Inc., supra, 97 S. Ct. 2549, 2559 n. 19, **when
interbrand competition exists ... it provides a significant
check on the exploitation of intrabrand market power be-
cause of the ability of consumers to substitute a different
brand of the same product.’’ Thus, the ‘‘power that, let
us say, automobile or soft-drink manufacturers have over
their trademarked products is not the power that makes
an illegal monopoly.’’ United States v. E. I. du Pont de
Nemours & Co., 351 U.S. 377, 393 (1956).
The court of appeals’ refusal to consider the effect of
interbrand competition on Volkswagen’s market power led
it to classify a pro-competitive foreign entrant into the U.S.
automobile market as a monopolist to be placed under tight
constraints in competing with the American manufacturers.
This Court should grant certiorari in order to ensure that
the concepts of relevant market and monopoly power under
Section 2 of the Sherman Act are harmonized with the ‘‘pri-
mary concern of antitrust law’’: the preservation of ‘‘ [i]n-
terbrand competition.’’ GTE Sylvania Inc., supra, 97 S.Ct.
at 2559 n. 19.
The Competitive Effects of the Acquisitions
In holding that Volkswagen’s acquisition of its enfeebled
captive air conditioner supplier, Delanair, and of its south-
western distributor, Inter-Continental Motors, had the
effects on competition proscribed by Section 7 of the Clay-
ton Act, the court below disregarded basic principles of
merger law and this Court’s controlling decisions.’®
19 An independent reason for reversal of the Section 7 findings
is that they are expressly predicated on the same erroneous relevant
product market determination that, as we have shown above, vitiates
the court’s monopolization finding.
tit meee nt
19
The Delanair Acquisition. The court below relied on
just two facts in holding that the Delanair acquisition was
anticompetitive (31a).
The first was that the acquired company’s sales and
market share rose after the acquisition. They rose because
at the time of the merger Delanair was in a state of collapse
(with total sales of only 26 air conditioners the month be-
fore the acquisition) and Volkswagen rehabilitated it. Had
Delanair been a healthy firm when acquired, the post-acqui-
sition growth would have been less.*° In that case, under the
court’s approach, the merger would have been invulnerable
to Section 7 challenge.
In deeming rehabilitation of an acquired firm anti-
competitive, the court below stood United States v. General
Dynamics Corp., 415 U.S. 486 (1974), on its head. That
decision holds that when an acquired firm is ‘‘unable to
eompete effectively’’ (whether or not it is technically fail-
ing) the competitive significance of the acquisition must be
discounted—not magnified. 415 U.S. at 508. See also United
States v. International Harvester Co., 1977-2 Trade Cas.
7 61,711 (7th Cir.).2*\ Delanair’s inability to compete is
undisputed. Heatransfer’s proof of damages assumed that
Delanair was ‘‘beaten”’’ and in an irreversible decline, and
Lende testified that Delanair would have been completely
20 In fact, VPC’s market share never attained the level Delanair
had enjoyed before it began to fail (see Table 1, supra p. 7).
21 International Harvester, which follows General Dynamics,
brings the Seventh Circuit squarely into conflict with the decision in
this case. In that case, the defendants, eschewing the “failing com-
pany” defense and invoking, instead, what the Seventh Circuit de-
nominated the “General Dynamics defense,” introduced evidence to
show that the acquired company’s “weak financial reserves (like
United Electric’s weak coal reserves in General Dynamics) would not
allow it to be as strong a competitor as the bald statistical projections
indicate.” §€ 61,711 at p. 72,900. The Seventh Circuit held that this
evidence of the acquired company’s “weakness as a competitor” re-
butted the Government's prima facie case based on statistics. Ibid.
20
eliminated from the market by 1973 (39a; R. 649; p. 22
infra). Merger with such an enfeebled competitive factor
could have no adverse effect on competitors of the merging
firms. Its rehabilitation and preservation in the market-
place could only strengthen competition.
The second ground for holding the Delanair acquisition
unlawful was that by acquiring Delanair, Volkswagen ‘‘had
severely limited the chance of Volkswagen approval [i.e.,
purchase] of any other unit, thus curtailing the marketabil-
ity of those other units.’’ (3la) The vice of an unlawful
vertical merger, however, is the ‘‘foreclosure of a share of
the market otherwise open to competitors."’ Brown Shoe
Co. v. United States, 370 U.S. 294, 328 (1962) (emphasis
added). Even assuming that denial of approved status
could t equated to antitrust ‘‘foreclosure,’’ *? Volkswagen
was not a market ‘‘otherwise open to competitors.’ It was
‘‘foreclosed’’ to competitors of Delanair long before the
merger took place by virtue of its de facto partnership with
Delanair (supra pp. 4-5). As a result of this relationship,
the legality of which is not questioned, Volkswagen never
purchased or approved air conditioners other than Dela-
nair’s. Even at the height of Delanair’s troubles in the
summer of 1969, Volkswagen rejected all other units (in-
cluding Heatransfer’s) and announced it would stay with
the Delanair unit (supra p. 8). The only change brought
22 We submit that it cannot be. Purchase by Volkswagen for
resale to its distributors might confer a marketing advantage on a
supplier, but a competing supplier's lack of such an advantage is
unlike the foreclosure that results when an essential link in the distri-
bution chain is acquired by one supplier to the exclusion of all others.
In Brown Shoe, supra, a major shoe manufacturer acquired the lead-
ing independent retail shoe chain and thereby foreclosed competing
manufacturers from access to the ultimate consumer unless they
opened their own retail shoe stores. Here, competitors like DPD
could and did reach the ultimate consumer through sale directly to
Volkswagen distributors and dealers. Since only about 16 percent
of Volkswagen vehicles are sold with air conditioning, the potential
for such sales is clear. Supra p. 17, n.16.
21
about by the acquisition was the conversion of Delanair
from a captive supplier to a formal subsidiary of Volks-
wagen.
Consequently, this case is controlled by United States v.
Citizens & Southern National Bank, supra, 422 U.S. 86
(1975). There this Court rejected the argument that the
acquisition by a bank of its de facto (but formally indepen-
dent) branches violated Section 7 merely because it made
; remanent an informal relationship that, but for the acqui-
sition, might have dissolved. No more did Volkswagen’s
acquisition of its de facto partner affect competitive real-
ties.
The Inter-Continental Acquisition. The court’s only
basis for ruling that Volkswagen's acquisition of Inter-
Continental Motors violated Section 7 was that this distri-
butor bought proportionately more air conditioners from
Volkswagen after the acquisition than it had done before
(31a). But in every vertical merger case it is assumed that
the merger will result in increased trading between the
formerly independent partners; heretofore that has been the
starting point, not the end, of analysis. By holding that
illegality was established simply by proof that the acquired
firm bought proportionately more from the acquiring firm
following the merger than before, the court below has con-
demned virtually all vertical mergers.
Failing Company
Review in this case is also necessary to resolve im-
portant questions regarding the failing-company defense
under Section 7 of the Clayton Act.
1. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429
U.S. 477 (1977), left open the question whether a plaintiff
who bases his damage theory on the premise, and support-
ing proof, that the acquired firm was failing has thereby
proved (against himself) the failing company defense. 429
22
U.S. at 484 n. 9. See Areeda, Antitrust Violations Without
Damage Recoveries, 89 Harv. L. Rev. 1127, 1132-33 (1976),
cited at 429 U.S. at 487 n. 11.
The premise of the damage theory on which the jury
based its $5 million damage award (plaintiff’s ‘*‘ Method
II*') was that but for its acquisition by Volkswagen, Dela-
nair would have lost sales at a rate of 31 percent a year un-
til it disappeared from the market (R. 2179-81).*° The
explicit basis on which the trial court upheld the damage
award was that ‘‘[t]here is sufficient evidence in the
record to sustain the jury’s assumption that Delanair
would have continued to decline until it disappeared as a
viable competitor.’’ (76a).24 No more is required to demon-
strate that Delanair faced ‘‘the grave probability of a busi-
ness failure.’’ International Shoe Co. v. FTC, 280 USS.
291, 308 (1930). The precise date of final demise—whether
1973 as Lende testified or earlier or later—is irrelevant.
It is no answer here that the failing company defense
also required a search for alternative purchasers (39a).
Heatransfer’s damage theory, by assuming that Delanair,
had it not been acquired by Volkswagen, would have con-
tinued to decline irreversibly to an inevitable demise, neces-
°° Heatransfer’s expert witness on damages testified as follows
(R. 2429-30):
“Q. And, further, in summary, you have assumed under
Method Two that Delanair declined at 31 percent in total unit
sales?
“A. Correct.
* * *
“Q. This decline continues until Delanair, in effect ceases to
exist, in the future?
“A. Correct.
“Q. You assume that?
“A. Correct.
“Q. And you assume that there was no reversing of the
process at any point in time under Method Two?
“A. That is correct.”
24 The jury was charged that to find the damages claimed by
Heatransfer it first had to find that “but for the acquisition by
VWoA, Delanair’s sales would have declined at a constant rate of 31
percent per year.” (R. 6509).
—— ~ _ atin
23
sarily also assumed that the search for an alternative pur-
chaser would have failed.
2. Moreover, the jury was erroneously instructed that to
establish the failing company defense Volkswagen had to
prove ‘‘that the prospects of saving the company [Dela-
nair] through reorganization in bankruptey were dim or
non-existent’’ (R. 6503). This requirement was rejected
in International Shoe Co. v. FTC, supra, 280 U.S. at 301-
02, on the ground that the purpose of the failing company
defense is to protect creditors and shareholders, who fre-
quently fare badly in bankruptcy proceedings, To deny
the failing company defense to firms reorganizable in bank-
ruptey would deny its benefits to the very groups it was
designed to aid.*> Furthermore, Heatransfer, in alleging
for damage purposes that Delanair was in an irreversible
decline, negated the possibility of salvage through reor-
ganization in bankruptcy.
Antitrust Injury Under Brunswick
In upholding damages based on the fact that Volks-
wagen’s acquisition preserved Delanair as a competitor of
plaintiff, the court below failed to follow Brunswick Corp.
v. Pueblo Bowl-O-Mat, Inc., supra, 429 U.S. 477 (1977).?°
The defendant in that case had acquired a number of bowl-
2° The instruction derives from United States Steel Corp. v.
FTC, 426 F.2d 592, 608-09 (6th Cir. 1970), adopting a dictum in
Citizen Publishing Co. v. United States, 394 U.S. 131, 138 (1969).
Decisions of this Court postdating Steel have made clear that the
Citizen dictum was unintentional. United States v. Greater Buffalo
Press, Inc., 402 U.S. 549, 555 (1971); United States v. General
Dynamics Corp., 415 U.S. 486, 507 (1974). Accordingly, United
States v. M.P.M., Inc., 397 F.Supp. 78 (D. Colo. 1975) declined
to follow Steel. Accord, United States v. Black & Decker Mfg. Co.,
430 F.Supp. 729, 778 (D. Md. 1976); United States v. American
Technicai Industries, 1974-1 Trade Cas. € 74,873 (M.D. Pa.).
2° Heatransfer made no attempt to relate its damages to the
antitrust injuries claimed. Instead, it based damages on the sales
24
ing centers. The damage theory of the plaintiffs (competing
bowling centers) was that but for the acquisitions the
acquired centers—which were in perilous financial straits—
would have gone out of business, enabling the plaintiffs to
pick up some of their customers, This Court rejected that
theory, holding that Section 4 of the Clayton Act requires
that a plaintiff’s damage theory be consistent with its
theory of liability. Having alleged that the Brunswick
acquisitions were unlawful under a ‘‘deep pocket’’ theory,
plaintiffs could not recover on the basis of Brunswick’s
rehabilitation of the acquired bowling centers which was
unrelated to any abuse of its deep pocket.
Although the Delanair acquisition was deemed anticom-
petitive because it ‘‘severely limited the chance of Volks-
wagen’s approval of any other units’’ (3la), Heatransfer
made no effort to show its damages, if any, from loss of
‘*the chance of Volkswagen’s approval.’’ It did not dem-
onstrate what its sales would have been had the Heatransfer
unit been bought and resold by Volkswagen. Instead, it pro-
ceeded on the same ‘‘but for’’ approach as the Brunswick
plaintiffs. It argued that but for the acquisition by Volks-
wagen, Delanair would have proceeded on a steady down-
ward decline, and it claimed and was awarded damages with
respect to all of the sales it allegedly lost because Delanair’s
decline was arrested and reversed by the acquisition.
Heatransfer’s damages thus included sales it lost solely
because, after the acquisition, the Delanair condenser was
removed from its vulnerable position beneath the chassis,
Delanair’s warranty was enlarged and its product line
it would have gained as Delanair declined. Heatransfer’s damage
theory assumed that the difference between the sales actually made
by VPC following the acquisition and those which a declining
Delanair would have enjoyed represented sales improperly taken
from Delanair’s competitors. Of these, Heatransfer claimed it would
have made 30 percent together with 30 percent of all sales of units
for Volkswagen, Porsche and Audi vehicles actually made by DPD,
Meier-Line and itself (PXs 621, 623, 626; R. 2175-86).
25
broadened and other product and service improvements
were made (supra pp. 6-7). Yet none of these were ‘‘anti-
competitive acts made possible by the violation.’’ In allow-
ing the recovery of damages for these lawful acts taken to
rehabilitate a failing competitor, the decision below clearly
departs from Brunswick (33a-38a).
The court of appeals attempted to distinguish Bruns-
wick on the ground that Volkswagen did more than just
rehabilitate Delanair (38a). But Heatransfer’s theory of
damages was not based on whatever more the court be-
lieved Volkswagen to have done. Even assuming that
Heatransfer might have devised such a theory, this would
not distinguish Brunswick. The same possibility existed
there. This Court explicitly held that the fact that the
plaintiffs might have but did not ‘‘attempt to prove that
they had lost [some] income as a result of [Brunswick’s
alleged] predation’’ could not save a damage theory un-
related to that predation. 429 U.S. at 490.
Conclusion
In upholding a $15 million judgment against a foreign
competitor of the American automobile manufacturers, the
court below established expansive and erroneous rules of
liability and damages applicable to all private antitrust
damage actions, These rules, which are in conflict with
holdings in this Court and in other circuits, will control
the outcome of antitrust litigation throughout the Fifth
Circuit, where nearly twenty percent of private antitrust
cases originate.*’ Unless this Court grants certiorari and re-
verses, the threat of potentially enormous treble-damage
judgments will lie heavy on the $200 billion franchise in-
27 Computed from Annual Report, Administrative Office of the
United States Courts (1974), pp. 397-99; Annual Report, Adminis-
trative Office of the United States Courts (1975), pp. 354-55; Annual
Report, Administrative Office of the United States Courts (1976),
pp. 300-01.
26
dustry, and will discourage the acquisition and rehabilita-
tion of failing or faltering firms.
The petition for a writ of certiorari should be granted.
Respectfully submitted,
Ricuarp A. Posner
1222 East 56th Street
Chicago, Illinois 60637
Puiu Etman
1320 Nineteenth Street, N.W.
Washington, D.C. 20036
Hersert Rvusin
Cecetia H. Goetz
40 Wall Street
New York, New York 10005
Cuar.es T. NewTon, Jr.
First City National Bank Building
Houston, Texas 77002
Cicero C, Sessions
Bank of New Orleans Building
New Orleans, Louisiana 70112
Of Counsel:
HerzFreLp & Rusty, P.C.
40 Wall Street
New York, New York 10005
Wap, Harkrapver & Ross
1320 Nineteenth Street, N.W.
Washington, D.C. 20036
Viyson & ELKINS
First City National Bank Building
Houston, Texas 77002
Sessions, FisumMan, Rosenson,
SneLuincs & BolsFONTAINE
Bank of New Orleans Building
New Orleans, Louisiana 70112
Dated: December 23, 1977.
Appendices
Appendix A
Opinion
United States Court of Appeals
Fifth Circuit
No. 75-2779
June 13, 1977
HEATRANSFER CORPORATION,
Plaintiff-Appellee,
v.
VoLKSWAGENWERE, A. G., et all,
Defendants-Appellants.
o>
v
@ e @
Appeal from the United States District Court for the
Southern District of Texas.
Before:
GotpBerc, Simpson and Fay, Circuit Judges.
Srupson, Circuit Judge:
—
I, PRELIMINARY STATEMENT
This appeal has generated a record of giant proportions.
We are presented with 37 volumes of transcript, nine ap-
pendix volumes of abbreviated transcript, six briefs total-
ling 409 pages (with 83 pages of appendices), over 1600
2a
Opinion
exhibits, and considerable correspondence to this Court
from the parties. We have done our best to pare down
the issues and arguments prese:ted on appeal, and the
discussion and disposition of those issues and arguments,
to the greatest extent possible consistent with reasoned
resolution of the controlling questions presented. The re-
sult is an opinion still regrettably overlong.
II. NATURE AND DISPOSITION OF THE CASE
Plaintiff-appellee Heatransfer Corporation filed a pri-
vate antitrust suit, pursuant to Section 4 of the Clayton
Act, 15 U.S. Code, Section 15, against defendants-appellants
Volkswagenwerk Aktiengesellschaft (VWAG); its wholly-
owned subsidiary, Volkswagen of America, Inc. (VWoA) ;
and two wholly-owned subsidiaries of VWoA, Volkswagen
South Central Distributor, Inc. (VWSC) and Volkswagen
Products Corporation (VPC). Heatransfer’s complaint al-
leged multiple violations of Sections 1 and 2 of the Sherman
Act, 15 U.S.Code, Sections 1-2, and Section 7 of the Clayton
Act, 15 U.S.Code, Section 18.
The case was tried before a six-person jury, and was
submitted for special verdict under Rule 49(a), Federal
Rules of Civil Procedure, with 15 written Questions to be
answered by the jury.’
1 The Questions were as follows:
Questions as to Section 1 of the Sherman Act.
Question 1. Do you find from a preponderance of the evidence
that the provisions of the Volkswagen dealer and distributor franchise
agreements constitute tying arrangements under Section 1 of the
Sherman Act? Burden of proof is on plaintiff.
Answer yes or no.
3a
Opinion
The jury’s findings, in response to the written questions
submitted may be summarized as follows:
(1) The provisions of the Volkswagen dealer and dis-
tributor franchise agreements const’ ‘ate tying agreements,
in violation of Section 1 of the Sherman Act.
If you answered the above question “No”, do not answer question
2 and do not consider defendants’ conduct with respect to the fran-
chise agreements in violated Section 1. If you have answered question
1 “Yes”, then proceed to answer question 2.
Question 2. Do you find from a preponder. ice of the evidence
that the tying arrangement contained within the dealer and distributor
franchise agreements was necessary in order to preserve the goodwill
of the defendants? Burden of proof is on detrndant.
Answer yes or no.
If you have answered question 2 “Yes”, do not consider the
defendants’ conduct with respect to the franchise agreements in deter-
mining if the defendants have otherwise violated Section 1 of the
Sherman Act. If you have answered question 2 “No”, you may con-
sider the defendants’ conduct in determining whether such a violation
has occurred. In any event, you will proceed to answer question 3.
Question 3. Do you find from a preponderance of the evidence
that Volkswagen Products Corporation (VPC) was a part of a con-
spiracy, combination or agreement to restrain trade unreasonably in
violation of Section 1 of the Sherman Act? Burden of proof is on
plaintiff.
Answer yes or no.
Question 4. Do you find from a preponderance of the evidence
that Volkswagen of America (VWOA) or Volkswagen South Central
was a part of a conspiracy, combination or agreement to restrain trade
unreasonably in violation of Section 1 of the Sherman Act? Burden
of proof is on plaintiff.
Answer yes or no.
Question 5. Do you find from a preponderance of the evidence
that Volkswagen Germany (VWAG) was a part of a conspiracy,
combination or agreement to restrain trade unreasonably in violation
of Section 1 of the Sherman Act?
Answer yes or no.
Questions as to Section 2 of the Sherman Act.
Question 6. Do you find from a preponderance of the evidence
that the relevant market in considering Section 2 of the Sherman Act
was the manufacture and sale of air conditioners for only Volkswagen,
Porsche and Audi automobiles throughout the world, rather than
4a
Opinion
(2) VWAG, VWoA (or VWSC), and VPC each (a)
engaged in a conspiracy, combination, or agreement to re-
either the manufacture and sale of air cunditioners for all automobiles
or for all compact automobiles in the United States? Burden of proof
is on plaintiff.
Answer yes Or no.
If you have answered question 6 “No”, and only in that event,
then do not answer questions 7, 8, or 9, but proceed to answer Ques-
tion 10. If you have answered question 6 “Yes”, then answer ques-
tions 7, 8 and 9.
Question 7. Do you find from a preponderance of the evidence
that the defendant VWOA or Volkswagen South Central monopolized,
attempted to monopolize, or conspired to monopolize, in violation of
Section 2 of the Sherman Act? Burden of proof is on plaintiff.
Answer yes Or no.
Question 8. Do you find from a preponderance of the evidence
that the defendant VPC monopolized, attempted to monopolize, or
conspired to monopolize, in violation of Section 2 of the Sherman
Act? Burden of proof is on plaintiff.
Answer yes or no.
Question 9. Do you find from a preponderance of the evidence
that the defendant VWAG monopolized, attempted to monopolize,
or conspired to monopolize, in violation of Section 2 of the Sherman
Act? Burder of proof is on plaintiff.
Answer yes or no.
Questions as to Section 7 of the Clayton Act.
Question 10. Do you find from a preponderance of the evidence
that the relevant market in considering Section 7 of the Clayton Act
was the manufacture and sale of air conditioners for only Volkswagen,
Porsche and Audi automobiles, rather than either the manufacture
and sale of air conditioners for all automobiles or for all compact
automobiles. Burden of proof is on plaintiff.
Answer yes or no.
If you have answered question 10 “No” and only in that event, do
not answer questions 11, 12 or 13, but proceed to answer question 14.
If you have answered question 10 “Yes”, then answer questions 11
and 12 as well as question 13, if applicable.
Question 11. Do you find from a preponderance of the evidence
that the acquisition [sic] the assets of Intercontinental Motors by
VWOA may substantially lessen competition in the sale of Volks-
wagen. Porsche and Audi air conditioners in violation of Section 7
the Clayton Act? Burden of proof is on plaintiff.
Answer yes or no.
5a
Opinion
strain trade unreasonably, in violation of Section 1 of the
Sherman Act; and (b) conspired or attempted to monopo-
lize, or monopolized, the sale of air-conditioners for Volks-
wagen, Porsche, and Audi automobiles throughout the
world, in violation of Section 2 of the Sherman Act.
(3) The acquisition by VWoA of InterContinental
Motors Corp. may substantially lessen competition in the
Question 12. Do you find from a preponderance of the evidence
that Delanair Engineering was a failing company? Burden of proof
is on the defendants.
Answer yes or no.
If you have answered question 12 “Yes”, do not answer question
13. If you have answered question 12 “No”, proceed to answer
question 13.
Question 13. Do you find from a preponderance of the evidence
that the acquisition of the stock of Delanair Engineering by VWOA,
either separately or in combination with the acquisition of Intercon-
tinental Motors, may substantially lessen competition in the sale of
Volkswagen, Porsche and Audi air conditigners in violation of Section
7 of the Clayton Act? Burden of proof is on plaintiff.
Answer yes or no.
Questions as to Proximate Cause and Damages.
If you have found as a result of your previous answers that one
or more of the defendants have violated Section 1 of the Sherman Act
and/or Section 2 of the Sherman Act and/or Section 7 of the Clayton
Act, then answer question 14. Otherwise, do not answer such ques-
tion.
Question 14. Do you find from a preponderance of the evidence
that plaintiff Heatransfer Corporation sustained injury to its business
or property which was directly and proximately caused by such viola-
tion or violations on the part of defendant or defendants? Burden
of proof is on plaintiff.
Answer yes or no.
If you have answered question 14 “No” and only in that event,
do not answer question 15. If you have answered such question
“Yes”, then proceed to answer question 15.
Question 15. What sum of money, if any, do you find would be
required, if paid now in cash, to compensate plaintiff Heatransfer
Corporation for any damages suffered by it by reason of such injury
to its business or property which you have found was proximately
caused by such violation or violations found in answer to interroga-
tory 14? Burden of proof is on plaintiff.
Answer by inserting the amount, if any.
6a
Opinion
sale of air-conditioners for Volkswagen, Porsche, and Audi
automobiles, in violation of Section 7 of the Clayton Act.
(4) Delanair Engineering Co. was not a failing company,
and VWodA’s acquisition of Delanair may substantially
lessen competition in the sale of air-conditioners for Volks-
wagen, Porsche, and Audi automobiles, in violation of Sec-
tion 7 of the Clayton Act.
(5) Heatransfer sustained injury to its business or prop-
erty that was directly and proximately caused by one or
more of the violations found, and its damages were $5
million.
The damage award was trebled pursuant to 15 U.S.C.,
Section 15,? and an attorney’s fee of $350,000 was added to
the judgment, making a total judgment of $15,350,000.
Ill. THE FACTS
The facts as we state them were largely uncontroverted
at trial, although sometimes subject to contrary inferences.
As to facts in dispute, we state them in a manner consistent
with the jury’s Special Verdict, and as supported thereby.
A. Background
The distribution system of Volkswagen products in the
United States is essentially VWoA. VWoA buys auto-
2 The Clayton Act, § 4, 15 U.S.C. § 15 reads:
Any person who shall be injured in his business or
reason of anything forbidden in the antitrust laws may sue therefor in
any district court of the United States in the district in which the
defendant resides or is found or has an agent, without respect to the
amount in controversy, and shall recover three-fold the damages by
him sustained, and the cost of suit, including a reasonable attorney’s
fee.
Ta
Opinion
mobiles and parts from VWAG for resale in this country.
During the relevant time period, VWoA sold four basic
types of Volkswagen vehicles: Type I—the ‘‘ Beetle’’; Type
II—the ‘‘VW bus’’, a large station wagon, which is also
available as a camper; Type III—a squareback, which is
also available as a small station wagon; and Type IV—a
larger, more powerful, version of the Type III. All of the
above models have air-cooled engines mounted in the rear
of the car, although in 1973, the Type ITI was replaced by
the Dasher, which has a front-mounted, water-cooled engine,
Since 1969, VWoA has also imported the Porsche 911—
an expensive sports car manufactured by Porsche; and the
Porsche 914, an economy sports car manufactured jointly
by VWAG and Porsche.’ Both Porsche models have air-
cooled engines. In 1970, VWoA began importing the Audi,
a medium-sized car with a front-mounted, liquid cooled
engine.
From its inception in 1956 until the early 1960’s VWoA
distributed the products it imported to 14 independent Volks-
wagen distributors in the continental United States. These
distributors were independently owned wholesale operations
which purchased Volkswagen, Porsche, and Audi cars,
parts, and accessories from VWodA, and purchased some
parts and accessories from other suppliers as well. The
distributors resold these products to the automobile deal-
ers.© Beginning in the 1960’s, VWoA began purchasing
* The Porsche had been imported into this country by an importer
other than VWoA for a number of years prior to 1969.
* There was also one small distributer in Hawaii.
5 At the time of trial, there were in this country approximately
1200 Volkswagen dealers, 300 Porsche-Audi dealers, with i-
mately 100 of these dealerships overlapping. Trial Record (TR).
pp. 3530-3531.
8a
Opinion
these distributorship operations, and by the time of tria!
of this case it had acquired 8 of the original 14 distributor-
ships.
By 1968, VWoA was selling more than a half million new
Volkswagens per year in the United States, which amounted
to just over 55% of all imported car sales, and 5.5% of
the total United States car market. By 1970, Volkswagen
sales mounted to 6.8% of total automobile sales in the
United States, with approximately 570,000 Volkswagen
‘sold that year. Its percentage of the foreign car market
for 1970 was 46.2%. By 1973, due to much stronger com-
petition from other importers, VWoA (Volkswagen,
Porsche and Audi) maintained 31.3% of the imported car
market, and the Volkswagen percentage of the total car
market had fallen to 4.1%. These figures were still very
impressive considering the increase of sales among domestic
and foreign manufacturers of cars in direct competition
with VWoA imports.
None of these cars imported by VWoA had factory-in-
stalled air-conditioners. Since air-conditioning was becom-
ing almost a standard item in the United States by the end
of the 1960s, there appeared to be a waiting market for an
air-conditioner that would function satisfactorily in the
VWoA imports.®
* A primary reason for the lack of factory air-conditioning in the
imported German cars may have been a belief by the importers that
German air-conditioning manufacturers lacked expertise in the air-
conditioning field. John Stuart Perkins, President of VWoA, testified
at trial:
You cannot find an engineer [in Germany] who understands
air-conditioning. And we were not interested in having any
part of air-conditioning from Germany, who are making their
first air-conditioners, we would much sooner do business here
in the States. particularly here in Texas, where it seemed to be
the center of air-conditioning, where we had the talent, where
we had the expertise, and were quite happy with that.
T.R., p. 3672.
9a
Opinion
VWAG first attempted in 1973 to install factory air-
conditioning in automobiles for export to the United States.
One thousand Audi cars were equipped with factory in-
stalled air-conditioners before being shipped to the United
States. The results were not impressive. T.R., pp. 3674-
3676.
B. Automobile Air-Conditioning
The basic components of an automobile air-conditioner
are: the compressor; a pump, powered by the automobile
engine, which circulates the coolant; the condenser, which
uses the car’s airflow, supplied principally by the car’s
movement and the radiator fan, to condense the coolant
gas into liquid form; and the evaporator, where the liquid
evaporates and is biown as cold air into the car.
In water-cooled cars, the condenser is placed in front of
the radiator, so that outside air, ‘‘ramming’’ through the
front of the car, can help to supply the condenser with its
need for a flow of air coming over it. The main airflow,
however, is supplied by the radiator fan.
In the air cooled, rear engine Bectle Volkswagen, this
technique was not practicable. Ramming of outside air
over the condenser would be impossible with the condenser
in the rear with the engine. And, of course there was no
radiator fan to provide the necessary constant airflow.
To overcome these problems, Don P. Dixon, founder of
the DPD Manufacturing Company, designed a condenser
that would fit behind the spare tire in the front compart-
ment of the Beetle, and a separate fan that would provide
independent airflow for the condenser. He also designed a
compressor to fit in the rear engine compartment next to
the engine, and an evaporator to fit partially in the front
end of the car and partially under the dashboard in the
passenger compartment. Because of the scattered place-
10a
Opinion
ment of the component parts of the air-conditioning unit,
it was necessary to run hoses and electrical wires under-
neath the floorboard to make the component parts function
as a working unit.
Delanair Engineering Company,’ which became VWoA’s
approved supplier in 1963, had also designed a compressor
to fit in the rear engine compartment next to the engine.
The condenser system designed by Delanair, however, was
markedly different from the DPD front-located condenser
system. Delanair designed two condensers which were to
be placed under the rear of the car. They were connected
by tubing with a propeller fan blowing air over one of the
condensers. The evaporator was placed entirely under the
dash in the passenger compartment. The main defect with
the Delanair un:t was that the condensers were constantly
exposed to damage because of their proximity to the road
surface.* Aside from the difficulties associated with the
DPD and the Delanair units, both offered at least some solu-
tion to the Beetle’s lack of a radiator fan by providing in-
dependent airflow within the condenser system.
In 1963, Henry Willard Lende, Jr., formed a company,
Heatransfer Corporation, for the purpose of selling the
DPD units to Volkswagen dealers. Lende testified at trial
that the main obstacle to his sales efforts were the problems
encountered installing the unit:
‘‘Those fellows [working for the dealers] didn’t
know how to install an air conditioner, because it was
7 Delanair was a subsidiary of an English company, Delaney-
Gallay Ltd., itself in turn a subsidiary of another English company,
Lindustries Ltd.
’ A parts manager for a Volkswagen dealership testified that: _
“It would take us like two days to put an air conditioner in
one and, you know, the thing would get down the road, three or
four hundred miles down the road, and everything would fall
off of it out in the middle of the road... .”
lla
Opinion
a new product, and it was an involved complicated
product. You had mechanics putting mechanical
things in a car, and then you had some chemistry in
it, and you had to know how to put freon in, and you
had to pull the air out of this, it’s called pulling a
vacuum before you put the freon, because if you have
air in with the freon the thing won’t work. You had
to use a vacuum pump to pull all the air out, and you
had to use gauges to put the freon in. You had to do
a little electrical work, and then check it and know
how to troubleshoot it.
But before I would get out the door, he would say,
‘Does my mechanic know how to fix this thing? Sure,
it runs now, but if that customer comes back in, what
are we going to do, I’m the fellow that’s in the soup.’
So, I teach the fellow how to troubleshoot and serv-
ice that air conditioner, if it came in and wasn’t
working, what to look for first, was it out of freon,
had a belt that slipped. Then, I go up and teach the
salesmen how to sell it. They didn’t know what knob
did what, whether it was high, medium low fan, or
what, and they didn’t know what the thermostat did
and all these things. It was a brand new industry.
And if you didn’t do this, didn’t get the whole deal-
ership squared away, they couldn’t do a job of selling
it.’’ T.R., pp. 141-142.
With Lende’s Heatransfer Corporation as its sales com-
pany, DPD’s sales increased from 200 VW Beetle air-con-
ditioning units in 1963 to 7000 units in 1968. During 1968,
however, Lende learned of another unit being sold to
Volkswagen dealers with the VWoA stamp of approval
12a
Opinion
(manufactured by Overseas Motors Corporation of Fort
Worth, Texas—iater Delanair Engineering Company),
which was selling far more units to Volkswagen dealers
than was DPD. Approval by VWoA meant that VWoA
would purchase large quantities of the approved Delanair
unit and sell them to Volkswagen dealers, Efforts by Lende
and Dixon to secure VWoA approval of the DPD unit were
unsuccessful.
Since a distributorship allowed the dealer the opportu-
nity of ordering all of his parts and accessories from one
central location rather than from a number of suppliers,
Lende recognized that it would be advantageous to approach
these distributors, rather than the individual dealers, con-
cerning the purchase of DPD units. Because his unit was
not approved by VWoA, he met with opposition, aggravated
by VWoA’s promotion of the Delanair unit.
In 1968, however, Lende’s efforts were rewarded when
the second largest seller of air-conditioners among the
Volkswagen distributors, International Auto Sales in New
Orleans, agreed to purchase units from DPD. Lende found
this to be a particularly significant ana encouraging devel-
opment because it was the first time in his experience that
a Volkswagen distributor had been willing to abandon an
approved VWoA part or accessory for one that had not
been approved. To Lende this indicated that other distribu-
tors might be willing to consider an alternative to the
Delanair unit.
After securing the New Orleans business for DPD,
Lende severed his relationship with that company. He had
been developing his own concept of an air-conditioner for
the Beetle, and decided that the time was ripe to produce
and market that concept.
13a
Opinion
C. The Heatransfer Unit
In the Heatransfer unit all major component parts were
located in the rear of the vehicle by placing the eondenser
and the evaporator in a box which was installed behind the
back seat of the Beetle with a small opening in the floor pan
behind the back seat which allowed the condenser to remove
heat and further allowed the condenser-evaporator module
to be connected by hoses to the engine compartment where
the compressor was located. The unit was designed to feed
cold air into the car’s passenger compartment in a constant
flow, along the roofline from the back of the car to the front
of the car. The new unit was particularly distinctive for
two reasons. It was relatively easy to install as compared
with other units, and the location of the condenser reduced
significantly the chance of damage to it.
As Lende began marketing Heatransfer units in early
1969, he approached Guenter Kittel, at the time VWoA’s
Vice President of Parts (he is presently President of a
VWAG affiliate), concerning approval of the Heatransfer
unit. Because Delanair was having severe problems at
about this time, Lende had grounds for hope that his unit
would get VWoA approval. At this same time, Lende was
also soliciting Intercontinental Motors in San Antonio,
Texas, the largest seller of air-conditioners among VWoA
distributors. Intercontinental Motors agreed to purchase
and sell the Heatransfer unit in June of 1969 even though
it had not received the VWoA stamp of approval. By the
end of the summer Heatransfer had sold 1800 units to
Intercontinental.
At this time, Delanair was losing ground on other fronts.
Delanair lost the business of the New Orleans distributor-
ship to DPD, and the business of the California distributor-
ship, Volkswagen Pacific, to Meierline, a California com-
l4a
Opinion
pany. In the summer of 1969, distributor orders for the
Delanair dropped drastically. VWoA had projected sales
of 13,000 for the months of July, August, and September,
but, in actuality, sales for those months amounted to 1280,
372 and 26 units respectively. Plaintiff’s Exhibit (PX)—7.
Delanair’s English-based parent company, Delaney-
Gallay, Ltd., decided not to expend the effort to rehabilitate
Delanair, but rather to sell it. On September 29, 1969, it
was announced that VWoA had acquired Delanair for a
new wholly-owned subsidiary which VWoA named Volks-
wagen Products Corporation (VPC). During the three
months following the purchase of Delanair, VPC sales
increased markedly in comparison with Delanair’s preced-
ing three months. In October 1, 1,399 units were sold, in
November, 1,193 units, and in December, 999 units.
In October of 1969, VWoA acquired the largest Amer-
ican Volkswagen distributorship: Intercontinental Motors
of San Antonio, and renamed it Volkswagen South Central
Distributor, Inc. (VWSC). Before the acquisition Heatrans-
fer had had a 65%-35°% advantage over Delanair in terms
of unit sales by Intercontinental to dealers. By the end of
the first year after the acquisition, the advantage had been
reversed, 635¢-37%, in favor of VPC. There were no sales
by Heatransfer to VWSC of any Heatransfer units after
June, 1971, when their relationship was terminated.
The last Volkswagen distributor in the United States
to do business with Heatransfer was Import Motors in
Grand Rapids, Michigan, but sales fell when the distribu-
tor refused to install Heatransfer units in Volkswagens at
its port facility. The relationship with Import Motors was
terminated in June, 1972. After this time, Heatransfer con-
tinued to do business with franchised dealers on a direct
basis, but the lack of access to distributors made it increas-
ingly difficult to sell to VWoA’s franchised dealers.
lia
>
Opinion
é‘
Lende next attempted to develop the ‘‘after market’’
for Volkswagen air conditioners. This term is used for the
market consisting of cars originally sold by dealers without
air-conditioners. There was little competition in this market
for air-conditioners for Volkswagens and Lende received
favorable response from both Sears Roebuck Company and
J. C. Penny Company, two large retailing chains. The
after market, however, was still not sufficient to sustain
Heatransfer.
Lende also tried to push the Heatransfer unit on the
foreign market, and met with some initial success. For
example, he went to Brazil in late 1969, and secured an
order for a shipment of Heatransfer units. After cor-
respondence from VWAG to the purchaser, however, no
additional Brazilian orders were forthcoming. We re-
produce that correspondence in the margin.°
® Translation of letter from Volkswagenwerk A.G.
December 17, 1969
Airconditioner for VW 1300
Dear Mr. Scholz:
We take reference to your letter number 223 of November 19th
to Mr. Quinn, subject airconditioners for VW 1300.
A few months ago we already informed you that we are develop-
ing airconditioners in close cooperation with Delanair in the United
States. In the interim Delanair has been acquired by Volkswagen of
America and continues under the name of Volkswagen Products
Corporation. Mr. Schlager is in charge of the company.
Because of your above letter we inform you of this and would
like to suggest that you contact Mr. Schlager before carrying out tests
with airconditioners of Heat Transfer Corporation because as far as
we knew such evaluations have already been carried out there. As
Delanair belongs now to the combine we would suggest that all your
problems are communicated to Delanair which certainly now is most
interested to also assist you in this matter either from the United States
or possibly with manfacturing in the country. °
VOLKSWAGENWERK, A.G.
H. J. Radok
l6a
Opinion
The best foreign market for Volkswagen air-conditioners
appeared to be Japan, where the Heatransfer unit could
fit Japan’s right-hand drive vehicles without any major
design change. In 1971, the Volkswagen importers in Japan
bought 400 units from Heatransfer, and this amount in-
creased to 1200 units in 1972. In 1973, however, sales
dropped by 509% when the Japanese importer began pur-
chasing VPC’s newly designed right-hand drive unit.
Because of the continuing marketing problems, Lende
and his associates decided in 1974 to liquidate Heatransfer
Corporation.
IV. UNLAWFUL TYING
A tying arrangement, generally stated, is an agree-
ment by which one party agrees to sell a product (the tying
product), but only upon condition that the buying party
also purchases another product (the tied product) which
the buyer would ordinarily not purchase, where the effect
is to substantially lessen competition. Northern Pacific
Railway Co. v. United States, 356 U.S. 1, 5-6, 78 S.Ct. 514,
518, 2 L.Ed.2d 545, 549-550 (1958). In Northern Pacific,
the Supreme Court stated:
[Tying agreements] are unreasonable in and of
themselves whenever a party has sufficient economic
power with respect to the tying product to appreci-
ably restrain free competition in the market for the
tied product and a ‘‘not insubstantial’? amount of
interstate commerce is affected. International Salt
Co. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92
L.Ed. 20: Cf. United States v. Paramount Pictures,
334 U.S. 131, 156-159, 68 S.Ct. 915, 928-929, 92 L.Ed.
1260; United States v. Griffith, 334 U.S. 100, 68 S.Ct.
17a
Opinion
941, 92 L.Ed. 1236. Of course where the seller has
no control or dominance over the tying product so
that it does not represent an effectual weapon to
pressure buyers into taking the tied item any re-
straint of trade attributable to such tying arrange-
ments would obviously be insignificant at most. As
a simple example, if one of a dozen food stores in a
community were to refuse to sell flour unless the
buyer also took sugar it would hardly tend to restrain
competition in sugar if its competitors were ready
and able to sell flour by itself.
356 U.S. at 6-7, 78 S.Ct. at 518-519, 2 L.E.2d at 550.
The Court then determined what was to be considered
sufficient economic power of the seller to make the tying
agreement an illegal one:
While there is some language in the Times-
Picayune [Publishing Co. v. U.S., 345 U.S. 594, 73
S. Ct. 872, 97 L.Ed. 1277], opinion which speaks of
‘‘monopoly power’’ or ‘‘dominance’’ over the tying
product as a necessary precondition for application
of the rule of per se unreasonableness to tying ar-
rangements, we do not construe this general language
as requiring anything more than sufficient economic
power to impose an appreciable restraint on free
competition in the tied product (assuming all the
time, of course, that a ‘‘not insubstantial’’ amount
of interstate commerce is affected).
Id. at 11, 78 S.Ct. at 521, 2 L.Ed.2d at 553. See Broussard
v. Socony Mobil Oil Co., 350 F.2d 346 (5th Cir. 1965).
18a
Opinion
Thus, for a tying arrangement to be a violation of
Section 1 of the Sherman Act *® (as well as Section 3 of the
Clayton Act, although a violation of that section of the
Clayton Act is not presented to us on appeal) it must be
shown that (1) the seller has sufficient economic power over
the tying product, e. g., monopoly, market dominance, etc.,
to induce his customer, through economic leverage, to pur-
chase the tied product along with the tying product, and
(2) a not insubstantial amount of commerce in the tied
product is restrained as a result. See Sulmeyer v. Coca
Cola Company, 515 F.2d 835, 844 (Sth Cir. 1975), cert.
denied, 424 U.S. 934, 96 S.Ct. 1148, 47 L.Ed.2d 341.
10 The Sherman Act, § 1, 15 U.S.C. § 1, reads:
Every contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade or commerce among the several States,
or with foreign nations, is declared to be illegal: Provided, That noth-
ing contained in sections 1 to 7 of this title shall render illegal, con-
tracts or agreements prescribing minimum prices for the resale of a
commodity which bears, or the label or container of which bears, the
trademark, brand, or name of the producer or distributor of such com-
modity and which is in free and open competition with commodities
of the same general class produced or distributed by others, when
contracts or agreements of that description are lawful as applied to
intrastate transactions, under any statute, law, or public policy now
or hereafter in effect in any State, Territory, or the District of Colum-
bia in which such resale is to be made, or to which the commodity is
to be transported for such resale, and the making of such contracts
or agreements shall not be an unfair method of competition under
section 45 of this title: Provided further, That the preceding proviso
shall not make lawful any contract or agreement, providing for the
establishment or maintenance of minimum resale prices on any com-
modity herein involved, between manufacturers, or between pro-
ducers, or between wholesalers, or between brokers, or between
factors, or between retailers, or between persons, firms, or corpora-
tions in competition with each other. Every person who shall make
any contract or engage in any combination or conspiracy declared by
sections 1 to 7 of this title to be illegal shall be deemed guilty of a
misdemeanor, and, on conviction thereof, shall be punished by fine
not exceeding fifty thousand dollars, or by imprisonment not exceed-
ing one year, or by both said punishments, in the discretion of the
court.
a a
19a
Opinion
In answers to written questions, the jury in the present
case found, from what it believed to be a preponderance
of the evidence, that the provisions of the Volkswagen
dealer and distribution franchise agreements constituted
tying agreements under Section 1 of the Sherman Act. It
further found that such agreements were not necessary
to preserve the goodwill of the defendants.
It is well established that tying arrangements are ille-
gal per se. See, e.g., Fortner Enterprises, Inc. v. United
States Steel Corp., 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d
495 (1969) ; Northern Pacific Railway Co. v. United States,
356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958); Miller v.
Granados, 529 F.2d 393 (Sth Cir. 1976); Kentucky Fried
Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368
(5th Ci». 1977). That is to say, there are ‘‘certain categories
of business arrangements ... [which] exhibit a high likeli-
hood of anticompetitive impact and offer virtually no pros-
pect at all of enhancing competition. With respect to sucu
arrangements, antitrust plaintiffs need not demonstrate un-
reasonableness ; the conduct constitutes a per se violation of
the Sherman Act.... The per se label indicates that a plain-
tiff need not demonstrate that the effects of the tie are un-
reasonable. Indeed, not only is the plaintiff relieved from
establishing that the effects are unreasonable, but in addi-
tion the defendant is not free to demonstrate that the effects
are reasonable or even affirmatively desirable’. Kentucky
Fried Chicken, supra, at 374-375. Of course this is not to
say that the plaintiff is relieved from establishing that a
tie-in has actually occurred. Lawful arrangements by an7
other name do not thereby become unlawful.
Appellants assert that there is nothing in the best efforts
clauses in their franchise agreements on which to base a
finding oi an illegal per se tying agreement. Those agree-
20a
Opinion
“ ments contain provisions requiring the franchisee to use his
‘‘best efforts’? to promote Volkswagen automobiles, parts,
and accessories.‘ Looking at the ‘‘best efforts’’ clauses in
isolation, as appellants would have us do, we would tend tow
agree with this view. But our duty is to look at the cireum-
stances surrounding the use of these clauses to determine
if violations of the antitrust laws occurred. ‘*The presence
of the illegal condition may be inferred from an extrinsic
course of conduct supplementing the written contract’’.
Advance Business Systems & Supply Co. v. S.C.M. Corpo-
ration, 415 F.2d 55, 64 (4th Cir. 1969), cert. denied, 397 U.S.
920, 90 S.Ct 928, 25 L.Ed.2d 101.
Initially, we reject appellant’s argument that the
court’s charge to the jury allowed a finding of tying on the
basis of the best efforts provisions standing alone. We view
the court’s tying arrangement instruction as sufficient to
direct the jury to consider the means by which the pro-
visions were enforced.*?
11 For example, Plaintiff's Exhibit (PE)—142, Volkswagen Dis-
tributor Agreement, Article 6(1) provides: “Distributor will use its
best efforts to promote the sale of VW Automobiles in the Territory
through such means as may be specified from time to time by
Directives and Suggestions.”; and Article 7(1): “Distributor will use
its best efforts to promote the sale of VW Parts in the Territory
through such means as may be specified from time to time by
Directives and Suggestions.”
12 The trial court's charge to the jury on tying was as follows:
A tying arrangement exists when a seller refuses to sell one
product except on the condition that the buyer also purchase from
the seller some other product, or service, which the buyer does not
need or want, where the effect may be to substantially lessen com-
petition. Tying arrangements are considered to be naturally anti-
competitive since they deny free access to the market for the unwanted
product, not because the party imposing the tying arrangement has
a better product or a lower price, but because it has the power to force
a product upon the purchaser. To constitute an illegal tying agree-
ment, however, it is not enough that the seller simply possess eco-
21a
Opinion
It is obvious that VWoA had sufficient economic power
in the tying product, Volkswagen automobiles, to ‘‘strong-
nomic power. That power must have been used to force the purchase
of some unwanted product. There can be no illegal tie unless unlawful
conduct by the seller influences the buyer’s choice. For an antitrust
violation, it is mot necessary that the tying arrangement force a
purchaser to buy only the product of the seller, but only that the
amount of trade foreclosed by the agreement is more than merely
insubstantial.
Moreover, a manufacturer may require its distributor to promote
to customers all its products so long as the purchase of one product
of the manufacturer is not tied to the purchase of another of the
manufacturer’s products.
Plaintiff alleges that the provisions of the distributor and dealer
agreements and their interpretation by VWOA imposed the require-
ment on the distributors and dealers to purchase reasonable inven-
tories of first Delanair and then VPC air conditioners and to promote
the sale of these air conditioners, regardless of whether the distributors
and dealers in fact wished to buy these VWOA approved air condi-
tioners on the basis of the merits of the Delanair-VPC air conditioner
when compared to the merits of the competing brands. The defend-
ants deny this allegation saying that they have never required Volks-
wagen distributors and dealers to purchase Delanair-VPC air condi-
tioners as a condition to purchasing Volkswagen automobiles. Second,
they allege that they have never enforced the provisions of the dis-
tributor and dealer agreements relating to the promotion of approved
parts and accessories and that they have never used any economic
power to force distributors or deaiers into buying Delanair-VPC air
conditioners. On the contrary, defendants contend, as a practical
matter, Volkswagen distributors and dealers have always been free to
purchase any brand of air conditioner they desire.
Therefore, you must consider if. based on the evidence you have
heard, it is more likely than not that Volkswagen distributors and
dealers have purchased Delanair-VPC air conditioners because
VWOA required them to do so as a condition to their also purchasing
Volkwagen automobiles.
Even if you find the existence of a tving agreement, no violation
of Section 1 of the Sherman Act should be found if you find such
arrangement was reasonably necessary to protect the goodwill of the
Volkswagen vehicles or trademarks. The protection of goodwill is a
reasonable basis to justify an otherwise unlawful tying agreement. To
establish this defense, the defendants have the burden to show that
these provisions were reasonably necessary to assure that the products
idetntified by the Volkswagen trademarks were available at the places
identified by such trademarks to assure adequate service and parts
to such products, or to provide quality products.
22a
Opinion
ly urge’? Volkswagen distributors and dealers to purchase
VWoaA approved parts, the tied product. It is also obvious
that more than an insubstantial amount of interstate com-
merce was affected. See Fortner Enterprises, Inc. v. United
States Steel Corp., 394 U.S. 495, 501-502, 89 S.Ct. 1252,
1258, 22 L.Ed.2d 495, 503-504 (1969).
We held in a recent case that ‘‘it is not enough to
show that the seller has sufficient economic power and that
two products were purchased together. In addition, it must
be shown that the purchaser was coerced into purchasing an
unwanted product.’’ Response of Carolina, Inc. v. Leasco
Response, Inc., 537 F.2d 1307, 1327 (5th Cir. 1976). But
Leasco involved a suit by franchisees against a franchisor
claiming antitrust violations. In that type of action, a party
to a contract is alleging that the contract is being illegally
enforced against it or is illegal on its face. Courts are un-
derstandably reluctant to find such contracts to be illegal
absent a fairly strong showing of coercion. In cases like
the one at bar, on the other hand, an independent supplier
to the franchisees asserts harm to it because of antitrust
violations by the franchisor. The fact of coercion appears
less important in this situation then the fact of foreclosure.
If franchisees are coerced or ‘‘persuaded’’ to buy goods
which they otherwise would not buy, with the result being
tremendous lessening of the market in which a competitor
sells his product, such a showing is sufficient to submit the
question of a Section 1 antitrust violation to the jury.
If you have found that a tying arrangement exists but that the
provisions of the franchise agreement were reasonably necessary to
protect the defendants’ goodwill, then you cannot find that the pro-
visions of the franchise agreement violated Section 1. On the other
hand, if you found that a tying arrangement exists and if you believe
that these provisions were not reasonably necessary to protect Volks-
wagen’s goodwill, then you must find a violation of Section 1.
23a
Opinion
We think the evidence as a whole, includirg corres-
pondence and memoranda from Guenter Kittel, Vice Presi-
dent of v WoA at the time, and VPC records, provided
ample basis for a jury to find that distributors and dealers,
as a result of the best efforts clauses as enforced,'* were
urged to stock the Delanair/VPC air-conditioner, even
though the franchise agreement, on its face, allowed the
purchase of other units. We indicate the source of this
evidence in the margin.'* It is too voluminous to reproduce
in full. That same evidence also appears to us a sufficient
basis upon which a jury could reject the appellant’s defense
that the tying arrangement was necessary to preserve the
goodwill of defendants.
It is of course not our holding that all best efforts
clauses are violations per se of the antitrust laws, but we
find that an inquiry into the circumstances surrounding
the best efforts clauses and their implementation in the
present case sufficiently raised in this respect significant
questions for jury determination. We view the record as
supporting the jury’s finding that the best efforts clauses
here, as implemented, were tying arrangements of the type
which the antitrust laws were designed to prevent, and, as
such, were per se violations of Section 1 of the Sherman Act.
13Tt is necessary to determining whether the persuasion or
coercion was a product of enforcement of the best efforts clauses since
the tying violation found by the jury, in answer to Interrogatory +1,
specifically referred to the best efforts clauses (distributor franchise
agreements). See footnote 1, supra.
14 The following sources are not all inclusive, but furnish ample
evidence for a jury to find the existence of antitrust violations.
Guenter Kittel memoranda—Plaintiff’s Exhibits 98, 100, 104, 117,
264, 638; VPC sales reports, etc.—Plaintiff’s Exhibits 9, 35-41; R.
pp. 199-208, 3074-3077, 3533-3539, 3714-3719, 3746-3749, 4615-
4618.
24a
Opinion
V. CONSPIRACY IN RESTRAINT OF TRADE
In answer to written interrogatories*® the jury
found that VWoA, VWAG and VPC were part of a con-
spiracy to restrain trade in violation of Section 1. We have
already determined that there was sufficient evidence for
the jury to find that the franchise agreement best efforts
clauses of VWoA were tying arrangements that unreason-
ably restrained trade. In our discussion of the acquisition
of Delanair, infra, we, likewise, find sufficient evidence to
uphold the jury’s finding of an antitrust violation which
tended to restrain trade. These are two clear indicia of
conspiring to restrain trade. In addition, the proof that
VPC and VWoA arranged to pre-air condition a substantial
percentage of cars at port installation centers before deliv-
ering those cars to dealers was evidence of a conspiracy to
restrain trade. Further the evidence showed that certain
dealers would not carry the Heatransfer unit because it
was not approved by VWoA for reasons, it appeared, other
than performance. Officials of VWAG and of VPC, the evi-
dence showed, met several times to coordinate the develop-
ment of the Volkswagen vehicles and the VPC air-condition-
ing unit. The competition was excluded from these meet-
ings and was denied the information disclosed there.
Additionally, several memoranda were _ submitted
in evidence, from which the jury could find attempts to
restrain trade. However in view of the fact that we have
found ample evidence in the record to show that the best
efforts clause, as implemented, was a per se violation, it is
unnecessary to further analyze the evidence to determine
whether there was shown to have been an unreasonable
restraint of trade. This is so since a per se violation is ipso
facto an unreasonable restraint of trade.
15 See Questions 3, 4 and 5, note 1, supra.
25a
Opinion
VI. RELEVANT MARKET OFFENSES
A. Relevant Market
In United States v. E. I. duPont de Nemours Co., 351
U.S. 377, 393, 76 S.Ct. 994, 1006, 100 L.Ed. 1264 (1956), the
Supreme Court stated that ‘‘[s]Jection 2'* requires the ap-
plication of a reasonable approach in determining the ex-
istence of monopoly power... ’’ Thus, before it can be de-
termined whether a monopoly exists it must be determined
what the relevant market in the present case is.
Relevant market is essentially a question of fact,
so that findings concerning this subject should be over-
turned on appeal only if clearly erroneous, or where there
is a dearth of evidence to support the finding below. See
Yoder Brothers, Inc. v. California-Florida Plant Corp.,
537 F.2d 1347, 1366 (Sth Cir. 1976) ; Sulmeyer v. Coca Cola
Co., 515 F.2d 835, 849 (Sth Cir. 1975), cert. denied, 424
U.S. 934, 96 S.Ct. 1148, 47 L.Ed.2d 341; Telex Corporation
v. International Business Machines Corp., 510 F.2d 894, 915
(10th Cir. 1975), cert. dismissed, 423 U.S. 802, 96 S.Ct. 8, 46
L.Ed.2d 244.
Relevant market may be defined on the basis of
geographical boundaries of the market, Indiana Farmer’s
Guide Co. v. Prairie Farmer Pub. Co., 293 U.S. 268, 55 S.Ct.
182, 79 L.Ed. 356 (1934), and on the basis of product
differentiation, United States v. E. I. duPont de Nemours
€ Co., supra. We are concerned with the latter on this
appeal. The Supreme Court has stated that ‘‘[t]he outer
boundaries of a product market are determined by the
reasonable interchangeability of use or the cross-elasticity
of demand between the product itself and substitutes for it.
However, within this broad market, well-defined submarkets
16 Of the Sherman Act.
26a
Opinion
may exist which, in themselves constitute product markets
for antitrust purposes. United States v. E. I. duPont de
Nemours € Co., 353 U.S. 586, 593-595, 77 S.Ct. 872, [877-
878], 1 L.Ed.2d 1057, [1066-1068]. The boundaries of such
a submarket may be determined by examining such prac-
tical indicia as industry or public recognition of the sub-
market as a separate economic entity, the product’s peculiar
characteristics and uses, unique production facilities, dis-
tinct customers, distinct prices, sensitivity to price changes,
and specialized vendors.’’ Brown Shoe Co. v. United States,
370 U.S, 294, 325, 82 S.Ct. 1502, 1523-1524, 8 L.Ed.2d 510,
535-536 (1962).
If the relevant market is, as appellants argue, air-con-
ditioners for all automobiles or, at the very least, for small
foreign automobiles, the violations found by the jury, based
on the relevant market encompassing only VWoA imported
cars, must be overturned. If, however, appellees submitted
sufficient evidence to support their view of what comprised
the relevant market, we should not disturb that finding.
We will attempt a brief review of the evidence submitted.
t seems from the record that the major competitors for
the Volkswagen air-conditioning market were DPD, Meier-
line, Heatransfer, and Delanair/VPC. Indeed, this was
found to be so when appellants conducted a study of Dela-
nair shortly before that company was acquired by appel-
lants. See Plaintiff’s Exhibit 7, Acquisition Audit of Dela-
nair Engineering Company, p. 7. With few exceptions,
these companies produced air-conditioning units almost
exclusively for VWoA import cars, concentrating on this
market because of the distinct engineering problems asso-
ciated with the Volkswagen imports. Further, up until
the time of trial in this case, these four competitors were
the sole suppliers of air-conditioners for VWoA.
27a
Opinion
While Heatransfer developed an air-conditioning unit
for the Opel, it never sold units to any company save VWoA
and VWAG, or their distributors. Meierline and DPD
did sell units to other automobile manufacturers besides
VWoaA, but these sales were insignificant compared to sales
to VWoA. During its first three years in business, Dela-
nair sold some 2,670 air-conditioning units for installation
in vehicles other than VWoA imports. This amounted to
about 10% of Delanair’s total sales during that period.
By its third year in operation, however, from the time it
first became profitable, Delanair ‘‘sold air-conditioners
almost exclusively for installation in Volkswagen vehicles’’.
Plaintiff’s Exhibit 7, p. 5. VPC, although it made proto-
types for other automobiles, has never actually sold air-
conditioners to any other manufacturers. All these things
are supportive, vis-a-vis Brown Shoe, of the jury’s finding
as to the relevant market.
Appellants argue that such cases as Teler Corp. v.
International Business Machines Corp., supra, Twin City
Sportservice, Inc. v. Charles O. Finley & Co., 512 F.2d 1264
(9th Cir. 1975), and ITT Corp. v. GTE Corp., 518 F.2d 913
(9th Cir. 1975), support their argument that the relevant
market should be broader than that determined by the
jury. Those cases deal with the adaptability or substi-
tutability of products, and contain nothing that persuades
us to overturn the finding of the reply to Question 6 that
the relevant market in considering Section 2 of the Sherman
Act was the manufacture and sale of air-conditioners for
only Volkswagen, Porsche and Audi automobiles through-
out the world. We have carefully perused the briefs in
this case and the relevant records and exhibits. As we
understand the points of contention, we cannot find, as a
28a
Opinion
matter of law, that the jury’s factual finding as to relevant
market was not supported by the evidence. See Sulmeyer
v. Coca Cola Co., supra, 515 F.2d at 849.
B. Unlawful Monopolization, Attempt to Monopolize, and
Conspiracy to Monopolize ;
Having approved the jury’s finding as to the rele-
vant market, we consider the proof as to the unlawful
monopolization, attempt to monopolize, and conspiracy to
monopolize charges. Under Section 2 of the Sherman Act **
the offense of monopoly has two elements: ‘‘(1) the pos-
session of monopoly power in the relevant market and (2)
the willful acquisition or maintenance of that power as
distinguished from growth or development as a consequence
of a superior product, business acumen, or historic acci-
dent’’. United States v. Grinnell Corporation, 384 U.S.
563, 570-571, 86 S.Ct. 1698, 1704, 16 L.Ed.2d 778, 786. Once
the relevant market has been determined, the existence
of monopoly power ‘‘ordinarily may be inferred from the
predominant share of the market’’. Id. at 571, 86 S.Ct.
at 1704, 16 L.Ed.2d at 786. The evidence in the record
appears to support appellee’s estimate that appellants’
market control was between 71%-76% during the years
1971-1973. See Plaintiff’s Exhibits 9-10; R. pp. 1907-1912,
1929-1930. Such a share of the relevant market is sufficient
17 The Sherman Act, § 2, 15 U.S.C. § 2, reads:
Every person who shall monopolize, or attempt to monopolize, or
combine or conspire with any other person or persons, to monopolize
any part of the trade or commerce among the several States, or with
foreign nations, shall be deemed guilty of a misdemeanor, and, on
conviction thereof, shall be punished by fine not exceeding fifty
thousand dollars. or by imprisonment not exceeding one year, or
by both said punishments, in the discretion of the court.
July 2, 1890, c. 647, § 2, 26 Stat. 209; July 7, 1955, c. 281, 69
Stat. 282.
29a
Opinion
to establish a monopoly power. See United States v. E. I.
duPont de Nemours & Co., 351 U.S. 377, 76 S.Ct. 994, 100
L.Ed. 1264 (1956); United States v. United Shoe [sic]
Machinery Corp., 110 F.Supp. 295 (D.Mass. 1953), aff’d
per curiam, 347 U.S. 521, 74 S.Ct. 699, 98 L.Ed. 910 (1954).
The willful acquisition or maintenance of the mono-
poly power can be demonstrated by ‘‘conduct designed
to barricade access to markets or inhibit production .. .’’
Woods Exploration & Producing Company, Inc. v. Alu-
minum Company of America, 438 F.2d 1286, 1307 (Sth Cir.
1971), cert. denied, 404 U.S. 1047, 92 S.Ct. 701, 30 L.Ed.2d
736. We have already upheld the jury’s verdict finding
the existence of a tying agreement. This in itself is sub-
stantial evidence of narrowing access and prohibiting pro-
duction. Our affirmance, infra, of the violation of Section
7 of the Clayton Act, through the acquisition of Delanair
and Intercontinental Motors, is further supportive of the
finding by the jury that the monopoly power was willfully
attained.
C. Acquisition of Delanair and Intercontinental Motors
The jury found that appellants violated Section 7 of the
Clayton Act *® by acquiring Delanair and Intercontinental
18 The Clayton Act, § 7, 15 U.S.C. § 18, reads in pertinent part:
No corporation shall acquire, directly or indirectly, the whole or
indirectly, the whole or any part of the stock or qther share capital
and no corporation subject to the jurisdiction of the Federal Trade
Commission shall acquire the whole or any part of the assets of
another corporation engaged also in commerce, where in any line of
commerce in any section of the country, the effect of such acquisition
may be substantially to lessen competition, or to tend to create a
monopoly.
No corporation shall acquire, directly or indirectly, the whole or
any part of the stock or other share capital and no corporation sub-
ject to the jurisdiction of the Federal Trade Commission shall acquire
the whole or any part of the assets of one or more corporations
engaged in commerce, where in any line of commerce in any section
30a
Opinion
Motors. <A violation of Section 7 occurs when a corporation
acquires the whole or any part of another corporation also
engaged in commerce, where ‘‘the effect of such acquisition
may be substantially to lessen competition, or tend to create
a monopoly.’’
The Supreme Court has stated that ‘‘[d]etermination
of the relevant market is a necessary predicate to a finding
of a violation of the Clayton Act because the threatened
monopoly must be one which will substantially lessen com-
petition ‘within the area of effective competition’. Sub-
stantiality can be determined only in terms of the market
affected.’’ United States v. E I. duPont de Nemours € Co.,
353 U.S. 586, 593, 77 S.Ct. 872, 877, 1 L.Ed.2d 1057, 1067
(1957). We have already upheld the jury finding that
relevant market in this case was air-conditioning units for
Volkswagen vehicles. Our present task is only to deter-
mine whether there was sufficient evidence upon which a
jury could find that the effect of the acquisition may have
been substantially to lessen competition, or to tend to
create a monopoly.
Volkswagen air-conditioning units were sold mainly
through the efforts of VWoA and the regional distribu-
of the country, the effect of such acquisition, of such stock or assets,
or of the use of such stock by the voting or granting of proxies or
otherwise, may be substantially to lessen competition, or to tend to
create a monopoly.
This section shall not apply to corporations purchasing such stock
solely for investment and not using the same by voting or otherwise
to bring about, or in attempting to bring about, the substantial
lessening of competition. Nor shall anything contained in this section
prevent a corporation engaged in commerce from causing the forma-
tion of subsidiary corporations for the actual carrying on of their im-
mediate lawful business, or the natural and legitimate branches or
extensions thereof, or frorn owning and holding all or a part of the
stock of such subsidiary corporations, when the effect of such forma-
tion is not to substantially lessen competition.
3la
Opinion
tors. By acquiring Delanair, one of the manufacturers
competing for VWoA business, it was shown that VWoA
while not formally forbidding dealers and distributors from
buying other air-conditioning units, had severely limited
the chance of VWoA approval of any other unit, thus
curtailing the marketability of those other units. It was
further shown that following the acquisition of Delanair,
that company, doing business as VPC, substantially in-
creased its sales in a short period of time. See Plaintiff’s
Exhibits, 7, 8, 618A. Also, for times relevant to this trial,
testimony and evidence was piesented, already discussed,
which supported a finding of VPC’s subsequent dominance
of the market to well over 70%. After the acquisition of
Intercontinental Motors, sales of the VPC unit increased
markedly (see discussion under The Facts, Part III of this
opinion, supra), to the detriment of other suppliers. The
composite effect of this evidence, together with other evi-
dence substantiating the Section 7 violation, persuades us
that there was sufficient evidence for the jury to conclude—
as it did—that the acquisitions substantially foreclosed
competition. See Ford Motor Company v. United States,
405 U.S. 562, 92 S.Ct. 1142, 31 L.Ed.2d 492 (1972).
VU. FAILING COMPANY DEFENSE
The jury rejected the appellants’ defense that Delanair
was a failing company and hence that the acquisition of it
by VWoA did not violate Section 7, pursuant to [nter-
national Shoe Co. v. FTC, 280 U.S. 291, 50 S.Ct. 89, 74 L.Ed.
431 (1930). In International Shoe, the corporation involved
had its ‘‘resources so depleted and the prospect of re-
habilitation so remote that it faced the grave probability
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Opinion
of a busines failure... .’’ Id. at 302, 50 S.Ct. at 93, 74
L.Ed. at 443. But in Citizen Publishing Co. v. United States,
394 U.S. 131, 89 S.Ct. 927, 22 L.Ed.2d 148 (1969), the Court
added a further requirement to use of the failing company
doctrine:
‘*The failing company doctrine plainly cannot be applied
in a merger or in any other case unless it is established
that the company that acquires the failing company or
brings it under dominion is the only available purchaser.
For if another person or group could be interested, a unit
in the competitive system would be preserved and not lost
to monopoly power.’’ Id. at 138, 89 S.Ct. at 931, 22 L.Ed.2d
at 156.
Delaney-Gallay, the parent company of Delanair, made
an attempt to sell Delanair to DPD, but that plan fell
through. Subsequently, of course, Delanair was purchased
by VWoA. There is nothing in the record that supports the
theory that Delanair would collapse but for the acquisition.
Indeed, the major reason for getting rid of Delanair ap-
peared to be the desire of Delanair-Gallay to get it off the
company books before the end of the fiscal year. This rush
factor also discounts viewing VWoA as the only possible
purchaser. The evidence disclosed no affirmative effort to
sell Delanair on the open market.
We find nothing which persuades us to reverse the
jury’s verdict for appellee in this respect. Indeed, we find
ample support in the record for the verdict’s rejection of
the failing company defense.
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Opinion
VI. CAUSATION AND DAMAGES
A. Causation
Initially, we address the question of causation, for
affirmance of the award of damages to appellee certainly
eannot stand absent a finding that appellants’ actions were
the proximate cause of the damages sustained. The record
supports the jury’s finding that Heatransfer sustained in-
jury to its business caused by appellants’ violations of the
antitrust laws, already discussed at length in this opinion.
Appellants attempted to show that any damages suffered
by appellee were suffered solely because of various short-
comings on the part of appellee, including less than ad-
equate product, lack of perseverance, and haphazard sales
efforts. But these contentions were amply rebutted in each
particular by appellee’s proof. Therefore, no basis exists
for us to determine as a matter of law that the evidence did
not support the jury’s finding of causation. See Keogh v.
Chicago € N. W. Ry. Co., 260 U.S. 156, 165, 43 S.Ct. 47,
50, 67 L.Ed. 183, 188-189 (1922); M. C. Manufacturing Co. v.
Texas Foundaries, Inc., 517 F.2d 1059 (5th Cir. 1975), cert.
denied 424 U.S. 968, 96 S.Ct. 1466, 47 L.Ed.2d 736.
B. Damages
Appellee presented two theories at trial in an attempt to
project its damages as a result of lost sales. Method I as-
sumed that, absent any antitrust violations, Heatransfer
would have had the same sales through the damage period,
relative to VPC sales, as it experienced in the pre-damage,
or base, period, relative to Delanair/VPC. The trial court
instructed the jury to disregard Method I, for VPC sales
would have included presumptively the sales lost by Hea-
transfer, Meierline, and DPD, because of appellants’ anti-
trust violations.
Method II, the theory upon which the jury based its
findings as to damages, relied on four assumptions relative
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Opinion
to the finding of lost sales: (1) that plaintiff suffered dam-
ages; (2) that the damage period extended from November
1969, through December 1973; (3) that the base period, that
is, the period when there was no impediment to competi-
tion, extended from June 1969, through October 1969; and
(4) that Heatransfer would have produced and marketed
air-conditioning units for Volkswagen Types 2, 3 and 4
and for the Audi during the damage period. Three further
assumptions upon which Method II was premised, relative
to the actual calculation of damages, were as follows: (1)
Delanair sales would have declined at a constant rate but
for the anti-competitive activity; (2) the relative market
shares of Heatransfer, DPD, and Meierline would have re-
mained constant; and (3) Heatransfer would have captured
the same market shares for units manufactured for other
types of Volkswagen vehicles.
This Court stated in Kestenbaum v. Falstaff Brew-
ing Corp., 514 F.2d 690, 695 (Sth Cir. 1975), cert. denied,
424 U.S. 943, 96 S.Ct. 1412, 47 L.Ed.2d 349: ‘*We recognize
that leniency should be permitted in showing damages in
private antitrust actions, however, a damage assessment
based wholly on speculation and guesswork is improper.”’
We do not find these assumptions so speculative as to
render the damages judgment based upon them unfounded.
All such assumptions were supported by the record as ex-
emplified by the testimony and exhibits.*® Aside from the
margin references and the evidence previously discussed,
this opinion would be extended unnecessarily if we explored
the evidence in detail and at further depth. We add simply
1° There was, for example, evidence of Delanair’s continued de-
cline; of the growing dissatisfaction with the Delanair unit, with no
sign of improvement; there was no evidence of new entrants into the
market, so as to dispel evidence that market share would remain the
same; there was evidence regarding the merits and weaknesses of the
different competing units, there was also evidence that Heatransfer
would have produced and marketed air-conditioning units for Volks-
wagen Types 2, 3, 4, and Audi during the damage period, and had,
in fact, begun to design units for Types 2 and 3.
Pe
35a
Opinion
that there was amply evidence to dispel any concern that
the jury’s determination, based on the given assumptions,
was the result of guesswork and speculation.
Having concluded that the assumptions upon which the
jury based its findings of damages were valid, it is ap-
propriate to direct our scrutiny to that finding itself. Util-
izing Method II, the already mentioned appellee’s expert
Witness testified that he projected that Heatransfer would
have sold 87,000 units over the damage period absent the
antitrust violations. These sales, he testified, would have
yielded approximately $2.1 million in net profits before taxes
for Heatransfer. Thus, $2.1 million in profits were lost be-
cause of the antitrust violations. Further, because of loss of
those net profits, the expert witness caleulated that there
would be a concomitant loss to capital value of approx-
imately $3.5 million. It was from these figures that the
jury fashioned its damage award of $5 million.
In Bigelow v. R. K. O. Radio Pictures, Inc., 327 U.S.
251, 66 S.Ct. 574, 90 L.Ed. 652 (1946), the Court ob-
served that a plaintiff in a treble damage case need not
prove damages with the exactness which would have been
possible under freely competitive conditions. ‘‘The most
elementary conceptions of justice and public policy require
that the wrongdoer shall bear the risk of the uncertainty
which his own wrong has created’’. Id. at 265, 66 S.Ct. at
580, 90 L.Ed. at 660. Once it has been shown that damages
have resulted, it is only necessary that plaintiff present
reasonable evidence as to the amount of those damages.
Such a showing was made in the present case, and we are
unwilling to substitute our concept of damages for the judg-
ment made by the jury and upheld by the trial court. See
Hobart Brothers Co. v. Malcolm T. Gilliland, Inc., 471 F.2d
894, 902 (Sth Cir. 1973), cert. denied, 412 U.S. 923, 93 S.Ct.
2736, 37 L.Ed.2d 150.
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Opinion
In a recent Supreme Court decision, Brunswick Corp. v.
Pueblo Bowl-O-Mat, Inc,. —— U.S. ——, 97 S.Ct. 690, 50
L.Ed.2d 701 (1977), the question presented to the Court was
‘‘whether antitrust damages are available where the sole
injury alleged is that competitors were continued in busi-
ness, thereby denying respondents an anticipated increase
in market shares.’’ Id. at ——, 97 S.Ct. at 695, 50 L.Ed.2d
at 709. In Brunswick, the petitioner, one of the two largest
manufacturers and distributors of bowling equipment in
the United States, “ound that it was owed more than $400
million for equipment supplied on extended credit terms.
To get necessary cash, the corporation began to repossess
some equipment and sell it to third parties. Where such
sales were not feasible, petitioner would take over the bowl-
ing centers and operate them itself. Six of the bowling
centers that petitioner began operating were in competition
with respondents’ bowling centers.
Respondents sued, alleging that the acquisitions by pe-
titioner might substantially lessen competition or tend to
create a monopoly in violation of Section 7 of the Clayton
Act. Respondents’ damage theory put forth the argument
that but for Brunswick’s acquisition of the six bowling cen-
ters, those centers would have gone out of business, leaving
their customers to respondents. Respondents argued there-
fore that their injury was measured by the profits lost due
to petitioner’s acquisition of the six bowling centers.
The trial court allowed this theory to be submitted to the
jury as a basis for finding damages. The Court of Appeals
found no basic fault with the theory of damages but re-
manded stating that respondent must prove that the bowling
centers would, in fact, have failed.
The Supreme Court saw some difficulty in ‘‘intermesh-
ing’’ Section 7, which prohibits certain acts with a potential
ee ee ee eee
37a
Opinion
to cause harm, with Section 4, which attempts to remedy
such harms.
Plainly, to recover damages respondents must
prove more than that petitioner violated 47, since
such proof establishes only that injury may result.
Respondents contend that the only additional ele-
ment they need demonstrate is that they are in a
worse position than they would have been had peti-
tioner not committed those acts. The Court of Ap-
peals agreed, holding compensable any loss ‘‘causally
linked’’ to ‘‘the mere presence of the violator in the
market.’? NBO Industries Treadway Companies v.
Brunswick Corp., 523 F.2d [262], at 272-273 [3 Cir.].
Because this holding divorces antitrust recovery
from the purposes of the antitrust laws without a
clear statutory command to do so, we cannot agree
with it.
Every merger of two existing entities into one,
whether lawful or unlawful, has the potential for
producing economic readjustments that adversely
affect some persons. But Congress has not con-
demned mergers on that account; it has condemned
them only when they may produce anticompetitive
effects. Yet under the Court of Appeals’ holding,
once a merger is found to violate § 7, all dislocations
caused by the merger are actionable, regardless of
whether those dislocations have anything to do with
the reason the merger was condemned. This hold-
ing would make § 4 recovery entirely fortuitous, and
would authorize damages for losses which are of no
concern to the antitrust laws.
Id. at ——, 97 S.Ct. at 696-697, 50 L.Ed.2d at 711.
The Supreme Court thus held that for respondents to
recover treble damages because of a Section 7 violation,
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Opinion
they must prove more than a causal link to an illegal pres-
ence in the market. They must prove antitrust injury,
‘‘which is to say injury of the type the antitrust laws were
intended to prevent and that flows from that which makes
defendants’ acts unlawful. The injury should reflect the
anticompetitive effect either of the violation or of anti-
competitive acts made possible by the violation’’. Id. at ——,
97 S.Ct. at 697, 50 L.Ed.2d at 712.
In the present case, the violations allegedly caused
by VWoA’s acquisition of Delanair go beyond the casual
link rejected by the Supreme Court in Brunswick. In Hea-
transfer, the acquisition of Delanair did more than merely
keep Heatransfer and other competitors from gaining sales
that would have resulted had Delanair continued to decline.
There was substantial evidence presented that by acquiring
Delanair, VWoA virtually precluded any of the competitors
in the Volkswagen air-conditioning unit market from openly
competing with the VWoA company. Theoretically, if
Delanair had been acquired by any other company, save
VWoA, the market would still be open to competition. By
acquiring Delanair itself, VWoA had an uncontested finan-
cial interest in the success of the newly acquired company.
It was to VWoA’s advantage to deal as much as possible
with VPC /Delanair to the exclusion of other competitors—
and competition. Such a consequence is surely an antitrust
injury that reflects ‘‘the anticompetitive effect either of
the violation or of anticompetitive acts made possible by
the violation’’. Brunswick, supra. It is ‘‘the type of loss
that the claimed violations of the antitrust laws would be
likely to cause’’. Zenith Radio Corp. v. Hazeltine Research,
Inc.. 395 U.S. 100, 125, 89 S.Ct. 1562, 1577, 23 L.Ed.2d 129,
149 (1969).
We come finally to appellants’ contention that it is
flacrantly inconsistent for appellee to argue that Delanair
was not a failing company. Heatransfer counters that it
ee
A as Os cee A ee A ee — o
39a
Opinion
‘‘merely assumed that the acquired company had been fairly
beaten and would continue to decline as a market force.
It was absolutely not assumed that Delanair would some-
how have evaporeted or gone into liquidation as of the date
of acquisition or anytime during the damage period’’. Ap-
pellee’s Supp. Br., p. 14.
It is sound principle to require that a plaintiff seeking
damages not put forth proof of damages inconsistent with
the proof utilized to establish an antitrust violation. Thus,
it would be inconsistent, and unacceptable, to allow a
plaintiff to establish that a failing company defense was
not applicable to the acquiring company, while at the same
time proving, as a necessary element of some sort of
damage claim, that the acquiring company would have
failed but for the acquisition by defendant. See Areeda,
Antitrust Violations Without Damage Recoveries, 89
Harv.L. Rev. 1127, 1132-1133, n. 4 (1976).
In this case, however, appellee did not argue, nor
did it prove, that Delanair was a failing company. As
we have discussed previously, a failing company, for the
purposes of asserting that status as a defense to an other-
wise illegal acquisition, is one where resources are so de-
pleted and chances of rehabilitation so remote that business
failure is all but a foregone conclusion. To defend the
acquisition of such a company by a company which would
otherwise be violating antitrust laws, it is further necessary
to show that the acquiring company was the sole available
purchaser. None of these elements was proved in the
present case. Appellee merely asserts that Delanair’s down-
ward trend would have continued, to the advantage of
other competitors. This is not inconsistent with a rejec-
tion of the failing company defense.
The damage computations were heatedly opposed
and attacked by defendants in the several briefs they
submitted to this Court. After careful review of their
40a
Opinion
objections we find no basis for us to overturn the jury
finding on the question of damages. The essential damage
element questions not already addressed by us were sub-
stantially reviewed by the court below in its consideration
of appellants’ motion for judgment n.o.v. or for a new trial.
We adopt those views and reproduce them in the margin.”
20 [Plaintiff's Market Share}
Defendants attack the jury’s assumption that Heatransfer’s por-
tion of the total sales relative to the other competitors would have
remained constant during the damage period but for the unlawful
activities of the defendants. They allege that such an assumption is
speculative and contrary to the evidence because it fails to consider
new entrants into the market and because it fails to take into account
the sales Heatransfer would have lost to DPD.
The assumption that Heatransfer’s market share would remain
constant is not contrary to the evidence. First, there is no evidence
of any potential new entrants into the market. Second, although there
is some evidence to the effect that the relationship between DPD and
Heatransfer changed with regard to their respective market shares,
there is also evidence that this was the result of the newer company's
inability to establish itself because of the defendants’ anti-competitive
practices. Furthermore, during the course of the trial, the jury was
presented evidence regarding methods of marketing, the merits and
weaknesses of each individual competitor’s product, the trends de-
veloping within the market, etc. It cannot be said that the inference
that plaintiff's sales would have remained constant was made by the
jury without a proper consideration of market conditions. Accord-
ingly, the jury's determination to infer that the market shares of each
competitor would remain constant cannot be said to be contrary to
the evidence or to rest on speculation and guesswork.
[New Products]
Defendants also challenge the sufficiency of evidence to support
the jurv’s assumption that plaintiff would have had the same success
in marketing units for other models as it had in marketing its Type I
unit. Although the evidence to support this assumption is not exten-
sive, it is supported by the testimony of Bill Lende who testified that
it was necessary to have a full line of air conditioners for the Volks-
wagen family in order to sell any one type of unit. Lende attributed
this necessity to the fact that dealers generally preferred to purchase
a full line of products from one manufacturer in order to assure the
availability of spare parts and service. Based upon this testimony, it
was reasonable for a jury to infer that a manufacturer’s customer for
Type 1 units would remain his customer in purchasing units for other
vehicles.
4la
Opinion
NoTE 20~—-Contiaued
The Court finds no merit in defendants’ argument that the volume
of unit sales during the damage period would be less than that actually
achieved if VPC had not been a competitor within the relevant market.
Although there is evidence demonstrating that VPC did develop new
units and did organize an active sales force, it is also readily apparent
from the record that other manufacturers were engaged in develop-
ment of new units to the same extent of [sic] VPC. Indeed. DPD
preceded VPC in some instances. Furthermore, there is no evidence
to indicate that the tenacity of the VPC sales force was any greater
than that attributable to other manufacturers. Accordingly, the infer-
ence that the size of the market would remain the same without the
acquisition of Delanair by VWAG is reasonable and supported by
sufficient evidence.
[Damages After Quitting Business]
Lastly, defendants argue that damages cannot be awarded to the
plaintiff for that period of time subsequent to Lende’s decision to
withdraw from competition with VPC. The fact that Lende volun-
tarily withdrew from the market is irrelevant in determining if plaintiff
is entitled to recover damages. “The antitrust law does not require a
plaintiff to retain possession of a business oppressed by antitrust viola-
ion until the business is bankrupt or directly shut down by the
violator.” Pollack & Riley, Inc. v. Pearl Brewing Co. [1974-2 Trade
Cases ¢ 75,191], 498 F.2d 1240, 1244 (Sth Cir. 1974): accord
Lehrman v. Gulf Oil Corp. [1972 Trade Cases €75.054], 464 F.2d
26. 45 (Sth Cir.), cert. denied, 409 U.S. 1077, [93 S.Ct. 687, 34
L.Ed.2d 665] (1972). The question of whether the plaintiff withdrew
from the market because it was forced out by the actions of the
defendant or whether it withdrew for other reasons was an issue of
fact to be determined by the jury in responding to the interrogatory
relative to causation. Upon a finding that the defendants’ conduct
caused the plaintiff's injury, an award for damages subsequent to the
plaintiff's withdrawal from the market is not erroneous.
ELEMENTS OF DAMAGES RECOVERABLE AS A MATTER OF LAW
Sales and Profits Allegedly Lost to DPD
Defendants argue that a certain percentage of plaintiff's damage
calculations premised upon Method IT is unrecoverable because it
represents sales lost to DPD rather than VPC. The Court has care-
fully reviewed the defendants’ calculations submitted in support of
their argument and finds that they are inconsistent with the damage
formula that forms the basis for Method IT. Method IT was premised
upon total industry sales: however, defendants’ calculations do not
include sales made by VPC. Accordingly, the Court finds the defend-
ants’ argument to be devoid of merit.
42a
Opinion
Note 20—Continued
Lost Capital Value
Defendants ask the Court to remit a portion of the damages
awarded by the jury that may be attributable to lost capital value.
This request is premised upon their argument that lost capital value
should be calculated as of April, 1970, the date that Lende decided
to concentrate on marketing the Heatransfer unit in the “after
market”, rather than the date of trial.
Plaintiff is correct in assessing lost capital value as of the date
of trial, rather than April, 1970. Lost capital value is to be deter-
mined at the date that a business ceases to do business. See, e.g.,
Farmington Dowel Products Co. v. Forster Manufacturing C o. [1970
Trade Cases € 73,075], 421 F.2d 61 (Ist Cir. 1969). In the instant
case, plaintiff's decision in April, 1970, is no indication that plaintiff
ceased doing business altogether. In this regard, the evidence demon-
strated that Heatransfer continued to compete in the relevant market
long after the April, 1970, date and even attempted to reenter the
market in 1973. only to find that the previous anti-competitive con-
ditions continued to exist. Because Heatransfer continued to exist
and, to some extent, compete until the time of trial, even though it
was terminating its operations at that time, lost capital value was
properly assessed as of the trial date.
[Interest]
Additionally, defendants challenge the inclusion in the claim for
damages of $326,000.00 in interest on the capital value computation,
arguing that prejudgment interest is not allowable as a matter of law.
Plaintiff supports this award by arguing that the damage figure for
interest does not represent prejudgment interest but is simply a vehicle
for establishing capital value loss at the date of trial. In this regard,
plaintiff, through its expert witness, demonstrated what its capital
value loss would be as of December 31, 1973. Then, because figures
for lost sales and profits were not available for the eight-month period
of 1974 prior to trial, plaintiff's expert calculated lost capital value
as of the date of trial by adding to the figure for December 31, 1973,
an amount equal to a reasonable return on the capital loss value as
of December 31, 1973, for the eight-month period of 1974.
In the light of this explanation, the Court does not find that the
portion of the damage award labeled “interest” can be considered
“prejudgment interest” that is prohibited as a matter of law. Further,
although the Court does entertain some reservations with regard to
the determination of capital loss value in this manner, it appears that
remittitur of the sum labeled interest would result in no change in the
judgment in view of the applicable rule in this Circuit that a court
mav not remit damages below that a jury might have awarded. See,
Jenkins v. Aquatic Contractors & Engineers, 446 F.2d 520 (Sth Cir.
43a
Opinion
Note 20—Continued
1971); Glazer v. Glazer, 278 F.Supp. 476 (E.D.La. 1968). In this
regard, the $5,000,000 verdict is less than the jury might have
awarded, even if the interest figure were not included in the damage
claim. Accordingly, remittitur premised upon the inclusion of interest
on the capital value loss in the damage claim will be denied.
Profits from the Sale of “Other Model” Units
[Preparedness and Intentions]
Defendants ask that the Court remit that portion of the damage
award attributable to profits from the lost sales of units for “other
models” because the plaintiff lacked the necessary “business or prop-
erty” interest in the sale of units for vehicles other than Type I to
permit the plaintiff to recover damages under § 4 of the Clayton Ac..
This request is based upon the argument that the plaintiff failed to
demonstrate sufficiently that it had the preparedness and intention to
engage in the manufacture of these additional units, a status that is
necessary before an injured party who is about to engage in a business
or to expand an existing business must prove before he has standing
to claim that he has been injured.
In response, plaintiff admits that it never took affirmative steps in
manufacturing these units. However, it argues that proof of prepared-
ness and intention is relevant only to the threshold question of stand-
ing and that it has adequately demonstrated its standing through
roof that Heatransfer was a going concern engaged in the manu-
acture of air conditioners for Volkswagen automobiles. In this
regard, plaintiff asserts that the question of whether it can recover
for lost sales for types of units that it never manufactured is a question
relative only to the damage portion of the trial and thus does not
subject it to the heavier burden of proof for standing of preparedness
and intention to enter a business.
It is undisputed that a plaintiff who has attempted to enter a
market but who has not succeeded must demonstrate his prepared-
ness and intention to enter that maket before he may recover damages
for an antitrust violation that foreclosed the market to him. See e.g.,
Martin v. Phillips Petroleum Co. [1966 Trade Cases € 71,845], 365
F.2d 629 (Sth Cir. 1966). Furthermore, even though an antitrust
plaintiff operates a going concern, he must demonstrate his pre-
paredness and intent to expand that business into a new market if he
claims that expansion of that business into a new market has been
foreclosed to him by the monopolistic activities of the defendant.
See Zenith Radio Corp. v. Hazeltine Research 11969 Trade Cases
€ 72,800]. 395 U.S. 100 [89 S.Ct. 1562, 23 L.Ed.2d 129] (1969):
Volasco Products Co. v. Llovd A. Fry Co. [1962 Trade Cases
€ 70,451}, 308 F.2d 383 (6th Cir. 1962). However, the Court does
not believe that a going concern, which is the victim of an anti-
competitive practice, must forego damages for sales it would have
ita
Opinion
Note 20—Continued
made as the result of the natural expansion of its business simply
because it was victimized early in its existence before its attempts to
expand could ripen into evidence of preparedness and intent to in-
crease its output. Thus, the question for the Court’s determination is
whether, under the facts of the present case, the manufacture of units
for each type of Volkswagen vehicle in the relevant market can be
considered the expansion of a present business into a new market for
purposes of standing, or simply one facet of growth in an ongoing
business for purposes of damages. The line to be drawn between
expansion into new areas and growth in established ones is not easily
defined and one that must be determined from the facts of each case.
In the present case, the Court, after much consideration, finds
that the sale of “other model” units should be considered as a damage
issue. Plaintiff has sufficiently demonstrated that it had a business or
property interest in a going concern that had the manufacturing
capacity and the market for units for the entire Volkswagen family
of automobiles. Testimony at the trial indicated that Volkswagen
dealers expected an air conditioner manufacturer to develop a com-
plete line and that these dealers preferred to deal with only one
manufacturer who manufactured an entire line to satisfy their needs.
It appears that the two major competitors in the market, DPD and
VPC. developed additional units during the damage period, even
though they manufactured during the base period just about the same
variety of units as Heatransfer. Thus, the likelihood for growth and
expansion of a business such as that of Heatransfer is evident.
Furthermore, there is evidence to indicate that the various features
and components of the units actually manufactured by Heatransfer
could be utilized. with some design changes, in additional units that
Heatransfer never produced. It does not appear that the manufac-
turing facilities would have to have been modified to any significant
deeree in order to accommodate different unit types. Nor does it
appear that the plaintiff would have had to obtain new contract
rights or additional sources of financing in order to expand.
Thus, the history of the expansion and growth patterns of other
competitors in the relevant market, the fact that production facilities
did not have to be varied significantly, and the fact that customers
for one unit would in all likelihood remain customers for other units
lead this Court to the conclusion that the addition of other product
lines must be considered as growth of a company for purposes of
damages rather than expansion into new areas for purposes of deter-
mining standing. In this regard, the proper standard for considering
if the jurv award for lost sales of these units is supported by the
evidence is whether or not such an award is based upon more than
mere sneculation and guesswork and not whether plaintiff has carried
the more difficult burden in proving standing of showing that plaintiff
had the preparedness and intent to expand in these areas.
45a
Opinion
IX. Concivusion
The issues presented in this case were complex, in-
volving several sections of the antitrust laws. We have
attempted to address ourselves to every issue raised by the
litigants without being unnecessarily prolix, bearing in
mind the role of an appellate court. We have dealt with
some arguments only briefly, and have not discussed some
others raised. This was not done through oversight, but
was rather the result of our attempt at a careful selection
of issue meriting discussion. We are confident that we
have fairly responded to the arguments presented by the
litigants.”
The judgment appealed from is AFFIRMED.
The Court does not find for the above stated reasons that the
assumption that Heatransfer would have expanded is based upon
speculation or guesswork. Furthermore, the Court does not find that
the application of the Heatransfer markup for its Type I units to the
VPC prices for these additional units in determining lost profits and
maufacturing costs makes the award speculative. There is evidence
to the effect that this markup would have been higher if the plaintiff
had based its calculation upon anything other than its Type I markup.
Although the profits for these additional units cannot be assessed with
complete accuracy, the use of the Type I profit margin in assessing
lost profits resulted in a reasonable award under the circumstances
of this case.
1975-1 Trade Cas. § 60,309, (S.D.Tex. 1975), 66,222-66,225.
_*) Three issues, which we have not addressed in the body of this
— and which both litigants relegated to footnotes, are discussed
ow:
_ We find no substance to appellants’ argument for a twelve person
jury. This was clearly a civil case, with only civil penalties attached.
Therefore, as held by the Supreme Court in Colgrove v. Battin, 413
U.S. 149, 160, 93 S.Ct. 2448, 2454, 37 L.Ed.2d 522, 531 (1973)
“a jury of six satisfies the Seventh Amendment's guarantee of trial by
jury in civil cases.”
_ Appellants further argued that the trial court erred in refusing to
disallow plaintiff's claim for damages based on Section 7 of the
Clayton Act since, appellants claim, a private plaintiff cannot base a
damage action on a violation of Section 7. There is much dispute on
46a
Opinion
this issue. see. e.g., Gottesman v. General Motors Corp., 221 F.Supp.
488 (S.D.N.Y. 1963), cert. den. 379 U.S. 882, 85 S.Ct. 144, 13
L.Ed.2d 88, but in Dailey v. Quality School Plan, Inc., 380 F.2d
484, 488 (5th Cir. 1967), this Court held: “We see no escape from
the logic that § 7 of the Clayton Act is an antitrust statute within the
scope and meaning of § 4 of the Act and so hold.” We think this
holding is dispositive of appellants’ appeal on this issue.
Finally, appellants argue that the trial court erred in refusing to
inform the jury that any damages awarded would be trebled, pursuant
to Section 4 of the Clayton Act, 15 U.S. Code, Section 15. We need
only quote a prior holding of this Court to dispose of this issue:
*. . we hold that the jury should not be advised of the manda-
tory tripling provision of 15 U.S.C.A. § 15. The primary policy
supporting our decision is that underpinning the tripling provision
itself. The purpose of treble damage is to deter violations and
encourage private enforcement of the anti-trust laws. The
justifiable fear of anti-trust plaintiffs is that the juries will adjust
the damage award downward or find no liability, therefore
thwarting Congress's _ because of some notions of a
windfall to the plaintiff. One court has even suggested that a
jury might take the revelation of the treble damage provision as
an intimation from the court to restrict the amount of damages.
In sum, we agree with the Court of Appeals for the Tenth Circuit
that informing a jury would serve no useful function and its
probable consequence would be harmful—an impermissible
lowering of the amount of damages.
“Second, it is not for the jury to determine the amount of a
judgment. Its function is to compute the amount of damages.
Congress’s authorization in 15 U.S.C.A. § 15 to triple the award
of damages is a matter of law to be applied by the district court
without interference from the jury. The fact that the awarded
amount will be tripled has no relevance in determining the
amount a plaintiff was injured by the anti-trust violation.”
(Footnotes omitted).
Pollock & Riley, Inc. v. Pearl Brewing Company, 498 F.2d 1240,
1242-1243 (5th Cir. 1974), cert. denied sub nom., 420 U.S. 992,
95 §.Ct. 1427, 43 L.Ed.2d 673. See Lehrman v. Gulf Oil Corpora-
tion, $00 F.2d 659, 667 (Sth Cir. 1974), cert. denied, 420 U.S. 929,
95 S§.Ct. 1128, 43 L.Ed.2d 400.
47a
Judgment
UNITED STATES COURT OF APPEALS
For tHe Firra Circuit
No. 75-2779
D. C. Docket No. CA-72-H-1429
June 13, 1977
HEATRANSFER CORPORATION,
Plaintiff-Appellee,
versus
VoLKswaGENWERK, A.G., et al.,
Defendants-Appellants.
APPEAL FROM THE Unitep States District Court
FOR THE SOUTHERN District or Texas
ry
Vv
Before:
Goupserc, Simpson anv Fay, Circuit Judges.
This cause came on to be heard on the transcript of the
record from the United States District Court for the South-
ern District of Texas, and was argued by counsel;
On ConsiperaTion Wuereor, It is now here ordered and
adjudged by this Court that the judgment of the said Dis-
triet Court in this cause be, and the same is hereby,
affirmed ;
It is further ordered that defendants-appellants pay to
plaintiff-appellee, the costs on appeal to be taxed by the
Clerk of this Court.
June 13, 1977
Issued as Mandate:
48a
Letter
UNITED STATES COURT OF APPEALS
FirtH Circuit
Office of the Clerk
October 19, 1977
To All Parties Listed Below:
No. 75-2779 —HEATRANSFER Corp. v. VOLKSWAGEN WERK
Dear Counsel:
This is to advise that an order has this day been en-
tered denying the petition( ) for rehearing,** and no
member of the panel nor Judge in regular active service
on the Court having requested that the Court be polled on
rehearing en bane (Rule 35, Federal Rules of Appellate
Procedure; Local Fifth Cireuit Rule 12) the petition( )
for rehearing en banc has also been denied.
See Rule 41, Federal Rules of Appellate Procedure for
issuance and stay of the mandate.
Very truly yours,
Epwarp W. Wapsworts, Clerk
By Brenpa M. Havcs
Deputy Clerk
** on behalf of appellant, Volkswagenwerk,
ec: Mr. Charles Newton
Mr. Cicero C. Sessions
Mr. Herbert Rubin
Mr. Richard A. Posner
Messrs. John L. Jeffers, Jr.
Ralph S. Carrigan
Alan Gover
49a
Notice of Denial of Rehearing en Banc
UNITED STATES COURT OF APPEALS
Firta Circuir
(Rule 35 Federal Rules of Appellate Procedure; L
Fifth Circuit Rule 12) —_—
Group 1—Denials where no member of the panel nor Judge
in regular active service on the Court requested
that the Court be polled on rehearing en banc.
nie Roi Beast Giri,
Group i
s ® @
Heatransfer Corp. v. Volks- S.D.T
SE Sa kcccnevcténdesncs 75-2779 10/19/77 ; Poa sos
50a
Opinion of the District Court Denying Motion for a
Directed Verdict at the Close of Plaintiff’s Case (“‘Dis-
trict Court Opinion I’’).
IN THE
UNITED STATES DISTRICT COURT
For THE SouTHERN District or TExas
Houston Division
C. A. No. 72-H-1429
September 30, 1974
oO
HEATRANSFER CORPORATION
vs.
VoLtKkswaGeENWERK A. G., Votxswacen or America, Inc.,
VoLKswaGEN Propucts CorPoRAaTION, AND VOLKSWAGEN
Sovtn CentraL Distrisutor, Inc.
ty
Vv
Car O. Buz, Jr., District Judge:
The Court’s ruling is as follows:
Pursuant to defendants’ motion for a directed verdict
at the close of plaintiff’s case, the Court has carefully con-
sidered arguments and memoranda submitted by both sides,
in an effort to determine if ‘here is substantial evidence to
support the plaintiff’s case being submitted to the jury.
On motions for directed verdict the Court should con-
sider all of the evidence, not just that evidence which sup-
~
|
G S
dla
District Court Opinion I
ports the non-movers’ case, but in the light and with all
reasonable inferences most favorable to the party opposed
to the motion. If the facts and inferences point so strongly
and overwhelmingly in favor of one party that the Court
believes that reasonable men could not arrive at a contrary
verdict, granting of the motion is proper.
On the other hand, if there is substantial evidence
opposed to the motion, that is, evidence of such quality and
weight that reasonable and fairminded men, in the exercise
of impartial judgment, might reach difficult conclusions,
the motion should be denied and the case submitted to the
jury.
A mere scintilla of evidence is insufficient to present a
question to the jury.
From an overall consideration of the evidence in this
case it’s apparent that the Heatransfer product was efficient
and well designed and that it overcame several deficiencies
that had plagued other units. It was easily installed, placed
in such a manner so as to avoid damage to it from road
hazards, provided good air circulation and could be installed
as easily in right-hand drive vehicles as in left-hand drive
vehicles. The unit was met with enthusiasm by Volkswagen
dealers, as well as several Volkswagen distributors and
executives.
Against this general description of plaintiff’s product
it’s necessary to consider individually each violation alleged
by the plaintiff to determine if there is substantial
evidence to support a jury finding in favor of the plaintiff.
Citing that portion of the Volkswagen franchise agree-
ment requiring Volkswagen dealers to promote equally
Volkswagen products, plaintiff alleges that Volkswagen
has promulgated a tie-in arrangement in violation of Sec-
tion 1 of the Sherman Act, and Section 3 of the Clayton Act.
52a
District Court Opinion I
This, coupled with evidence that Gunther Kittel, Vice
President of Volkswagen of America, pressured non-com-
plying distributors into handling the VPC product and
consi
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.