Petition — Cowley v. Braden Industries, Inc.

| ~ Supreme Crt 4) S.

| FILED

In The 4

TAMICHAEL RODAK JR., CLERK

Supreme Court of the United States

October Term, 1979

No. 9-153.

DIXON D. COWLEY, dba COWLEY PUMP AND SUPPLY,

GRAHAM L. COWLEY and HUGH H. COWLEY, dba

COWLEY BROS. SUPPLY, and CARDER, INC., dba

RANCHERS

SUPPLY COMPANY, Petitioners,

VS.

BRADEN INDUSTRIES, INC., a Delaware corporation doing

business in the State of Arizona, Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEAIS

FOR THE NINTH CIRCUIT

LEO R. BEUS

DAVID L. WHITE

JENNINGS, STROUSS & SALMON

111 West Monroe Street

Phoenix, Arizona 85003

(602) 262-5854

Attorneys for the Petitioners

March 31, 1980

INDEX

Page

a ascicecewneasionnes 1

Sea eprctasetissenseonsgonsessess 2

QUESTIONS PRESENTED ..........csssssssseseseeeseeen 2

STATUTORY PROVISIONS INVOLVED ........ 3

STATEMENT OF THE CASE .........ccssssssesssseeseee 4

REASONS FOR GRANTING THE WRIT.......... 7

Dg!) 22

APPENDIX:

A. Decision of the United States District

Court for the District of Arizona.. App. A, A-1

B. Opinion of the Ninth Circuit Court of

I ssicsrcitnicemimiibanantacereeticasesecees App. B, B-1

C. Order Denying Petition For

IE iciinecieccannsicisnnvlepyrnedecseeeeese App. C, C-1

il

TABLE OF AUTHORITIES CITED

CASES: Page

Adolph Coors Co., 3 CCH Trade Reg. Reptr. 1

20,403, (FTC, 1973), aff'd 497 F.2d 1178

COE Rael. SEED vcdrvintattchiineloniuiicianedioneiesd 12

American Tobacco Co. v. United States, 328

She TU CID bo vcisdedicnasessdclccabdeleiaidanasiiesenten 18

Berkey Photo, Inc. v. Eastman Kodak Ce., 603

F.2d 263 (2nd Cir. 1979), cert. denied, 1980-1

Trade Cas. { 63,182 (U.S. Sup. Ct.,

DO Is TEE, stdenixtatesepennabcatenionsnnintions 14,18,19

Cernuto, Inc. v. United Cabinet Corp., 595

ee RG Ce Cals, PTD catbicsinnshiciecincccsevstevesns 14

City of Mishawaka v. American Electric

Power Co., 465 F.Supp. 1320 (N.D. Ind.

1979), aff'd in part, 1980-1 Trade Cas.

Me PORE Cis) SUED siscescdiececcasceseapsvencsiovnces 18

Continental T.V. Inc. v. GTE Sylvania Inc.,

433 U.S. 36 (1977) aff’g 573 F.2d 980 (9th

CA STUER cucsdscicsn'easeaeouvonanesmaibiabackosiannpiouse 7,8,10,11,12,13

Copper Liquor, Inc. v. Adolph Coors Co., 506

Fn Oe UD MoM LIFTED: dasnectnsissigeccntinasessberoaoon 10

Cowley v. Braden Industries, Inc., 1980-1

Trade Cas. 11 63,134 (9th Cir. 1980) .............. 4,5

Engine Specialties, Inc. v. Bombardier Ltd.,

ee EA EOE Ce, ROTOD sisssaceccsinccccbusrbnnctsccaie 14

Greyhound Computer Corporation v. IBM, 559

iw ef. gt aR: | Cement unnars 17

Hobart Brothers Co. v. Malcolm T. Gilliland

Inc., 471 F.2d 894 (5th Cir. 1973) ........... 14

ill

TABLE OF AUTHORITIES CITED

CASES (Continued) Page

Interphoto Corporation v. Minolta Corpora-

tion, 295 F.Supp. 711 (SD. N.Y. 1969), aff'd

per curiam 417 F.2d 621 (2nd Cir. 1969) ...... 14

Nat. Society of Professional Engineers v. U.S.,

435 U.S. 679, 98 S.Ct. 1355 (1978) .......ceeeees 10

Otter Tail Power Company V. United States,

410 USE; BOG (ITA). seiicdiicctecbeieeses 10,17

Paschall v. Kansas City Star Co., 441 F.Supp.

WE CHIT EE cciciicssvacniniioscniiodshsateiataaciatncainnncias 18,21

Pitchford v. PEPI, Inc., 531 F.2d 92 (8rd Cir.

1975), reaff'd 1977-2 Trade Cas. {1 61,741

COU TE Pak, TOT EP siciscicctascecavsescoscnctlebesouqnasibibpatebs 14

Purex Corp. v. Procter & Gamble Co., 596 F.2d

GE CGR AE, TTD capasiestscssccnsastntnicncovesiacenceiaaee 17

Reed Brothers, Inc. v. Monsanto Co., 525 F.2d

ABB (BE Cit. LOTBY sississsccrsccccnecasosossocesenansssnssnes 10

Siegel v. Chicken Delight, Inc., 448 F.2d 43

(Oty Cole: BOTED ccinirincsinndantonenniened es 10

Sunkist Growers, Inc. v. Winckler & Smith

Citrus Prod. Co., 284 F.2d 1 (9th Cir. 1960) . 17

Timken Roller Bearing Co. v. United States,

341 U.S. GOS CLSOL) cecccscccccccsscsccccescctsccessscscecees 13

United States v. Aluminum Co. of America,

148 F.2d 416 (2nd Cir. 1945) ....-resccsrcrsscocccsees 18

United States v. Arnold, Schwinn & Co., 388

CF Be I CITE: vc sccankatldjacnpataenisbeassusoheevebawixonayen 8,11,12

United States v. Colgate, 250 U.S. 300 (1919) 12

United States v. General Motors Corp., 384

By ee | SOF ORION x. cicccncovddscniinicastlanceapptitenninadndie 13

United States v. Griffith, 334 U.S. 100 (1948) 14,16,18

iV

TABLE OF AUTHORITIES CITED

CASES (Continued)

United States v. Grinnell Corp., 384 U.S. 563

Page

(1966) .......ccccccsscscsccccsssecerccersesscssscsenessenseenseenees 14,17,18

United States v. Topco Associates, 405 U.S.

BOG (1972) .....ccccccercecreserecsesscesscsecesecsserecsegusscssoses

United States v. United Shoe Machinery

Corp., 110 F.Supp. 295 (D. Mass. 1953), aff'd

per curiam, 347 U.S. 521 (1954) ......esseseseseeees

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

DES (19GB) ..cercercccecscesececsscrcsscscnscosnssenessscsessesseoecs

STATUTES:

Sherman Act (15 U.S.C. §1) ..cceccecsessseeeeseeseesees

Sherman Act (15 U.S.C. §2) c.cccccccsessseneeeenseesees

2B U.S.C. $1254 (1) c.cccceceressseneneneseseesesseneeeenenenenes

15 U.S.C. §15 c.cscccsccssssssssesscecscssscsssesncesssssseseseenenens

OTHER AUTHORITIES:

Kauper, Testimony Before Senate Antitrust

And Monopoly Subcommittee On Proposed

Legislation To Exempt Trademarked Food

Franchises From Antitrust laws, 5 CCH

Trade Reg. Rptr. ......csssssssessesesessenssenesesrensenenes

ee

20

13

-e wo CO WH

13

In The

Supreme Court of the United States

October Term, 1979

DIXON D. COWLEY, dba COWLEY PUMP AND SUPPLY,

GRAHAM H. COWLEY and HUGH H. COWLEY, dba

COWLEY BROS. SUPPLY, and CARDER, INC., dba

RANCHERS SUPPLY COMPANY, Petitioners,

vs

BRADEN INDUSTIRES, INC., a Delaware corporation doing

business in the State of Arizona, Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioners pray that a writ of certiorari issue to re-

view the judgment and opinion of the United States

Court of Appeals for the Ninth Circuit entered in this

proceeding on January 8, 1980, and the denial of the

petition for rehearing on March 4, 1980.

OPINIONS BELOW

This case proceeded to trial, without a jury, on

February 11, 1976. The Honorable James M. Fitzger-

ald took the testimony under advisement, noting the

2

presence of “very complex legal issues, some of which

appear to be unique and into areas of law that are not

well charted”. Transcript on Appeal, Volume H, pp.

201-202 (“T.H. 201-202”).

A decision was rendered by Judge Fitzgerald on

January 20, 1977, in effect finding against plaintiffs

on all claims for relief despite the recognition of “sub-

stantial legal questions”. Trial Court Decision, p. 22.

The formal opinion of the United States District Court

for the District of Arizona, while not reported, is re-

produced in Appendix A to this petition.

The opinion of the Ninth Circuit Court of Appeals,

affirming the decision of the District Court, has been

reported at 11 63,134 of the 1980-1 Trade Cases. That

opinion is reproduced in Appendix B.

JURISDICTION

The judgment of the Court of Appeals was entered

on January 8, 1980. A timely petition for rehearing

was denied on March 4, 1980 (Appendix C). The juris-

diction of this Court is invoked under 28 U.S.C.

§1254(1).

QUESTIONS PRESENTED

1. Whether Braden Industries, Inc.’s admitted mar-

keting policies and practices imposed resale

restrictions on its distributors in violation of a “rule of

reason” and/or per se approach to Section 1 of the

Sherman Act.

3

2. Whether Braden Industries, Inc.’s conscious dis-

tribution practices and requirements, coupled with its

dominant share of the windmill market, violated Sec-

tion 2 of the Sherman Act even in the absence of

“‘redatory purpose or conduct”.

STATUTORY PROVISIONS INVOLVED

Section 1 of the Sherman Act (15 U.S.C. $1) pro-

vides:

Every contract, combination in the form of trust

or otherwise, or conspiracy, in restraint of trade or

commerce among the several States, or with for-

eign nations, is declared to be illegal. Every person

who shall make any contract or engage in any

combination or conspiracy hereby declared to be

illegal shall be deemed guilty of a felony, and, on

conviction thereof, shall be punished by fine not

exceeding one million dollars if a corporation, or,

if any other person, one hundred thousand dollars

or by imprisonment not exceeding three years, or

by both said punishments, in the discretion of the

court.

Section 2 of the Sherman Act (15 U.S.C. §2) pro-

vides:

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

felony, and, on conviction thereof, shall be pun-

ished by fine not exceeding one million dollars if a

corporation, or, if any other person, one hundred

thousand dollars or by imprisonment exceeding

three years, or by both said punishments, in the

discretion of the court.

4

STATEMENT OF THE CASE

On December 7, 1972, the former Arizona distribu-

tor of Aermotor windmills (Cowley), and a Colorado

retailer to whom he sold (Carder), filed a complaint

against the manufacturer of such products (Braden),

for, inter alia, alleged violations of federal and state

antitrust laws. 15 U.S.C. §15. Two related subjects

have been at the center of that dispute.

First, Braden has been an undisputed holder of

monopoly power. Specifically, that company has con-

tinued to possess a monopoly position for the

manufacturing and wholesaling of windmills in geo-

graphic markets including Arizona, Colorado and the

United States as a whole. Trial Court Decision, p. 8

(Braden’s share “has fluctuated between 70 percent

and 80 percent, averaging around 75 percent, a suffi-

cient share from which to infer monopoly power”), and

Cowley v. Braden Industries, Inc., 1980-1 Trade Cas. {I

63,134 at 77,658 and 77,660 (the “district court found,

and the evidence established, that Aermotor has a

predominant position in the windmill market. It con-

trols between 70 and 80 percent of that market both

nationally and in Colorado and in Arizona’’).

Second, Braden employed a bifurcated distribution

system described by the Ninth Circuit Court of Ap-

peals as follows:

One channel of distribution was through sales by

company-owned outlets or branches; the other was

through sales by independent distributors. Dis-

tributorships were established to serve particular

geographic areas. Aermotor agreed its branches

would not compete with distributors in any given

territory. In addition, Aermotor established a pol-

5

icy which discouraged distributors from selling

within the territory of another distributor. Under

Aermotor’s announced policy, distributors could

sell outside their territories if: (1) the goods first

came to their territories; (2) the items were placed

in stock; and (3) the distributors were not “ac-

tively soliciting business outside their assigned

territory.” {1 63,134 at 77,658.

In other words, Braden ensured that an “Aermotor

branch is restricted to the extent that it may not sell

Aermotor products either to dealers or at retail within

the territory of an authorized distributor”. Trial Court

Decision, pp. 4-5. Then, and more importantly, Braden

imposed the foregoing limitations on its distributors so

that “although the restraints imposed by Aermotor did

not prohibit outright sales outside of a distributor’s

primary area, their enforcement would make such

sales economically unfeasible or, at least, significantly

less profitable”. Cowley v. Braden Industries, Inc., 1

63,134 at 77,658.

Braden admitted that by means of these distribu-

tion restraints it was “interested in promoting

interbrand competition, to obtain a better share of the

ma:ket and to sell its products over those of a compet-

itor”. Appellee Brief, p. 34. See also, T.R. 811 (‘to

stimulate interbrand competition’); T.R. 813 (“to get

a better share of the market’) and T.R. 817.

The Ninth Circuit Court of Appeals succinctly

translated these general resale restrictions into an ef-

fect upon the plaintiffs in this case:

In violation of the distribution agreement, Cowley

began selling windmills to purchasers in Colorado,

including Carder, without first shipping the wind-

mills through Arizona. Carder was reselling the

6

windmills at substantially lower prices than the

authorized Aermotor dealer for Colorado, one

Dean Bennett. After Bennett complained and

Aermotor warned Cowley, Aermotor terminated

Cowley for persisting in making sales to Carder. 1

63,134 at 77,658.

Thus enforcement of the distribution policies (a)

blocked Cowley from making Carder competitive with

Bennett in the marketing of Aermotor windmills, and

(b) caused Carder to not be able to provide consumers

with lower prices than those inflated sums charged by

Bennett. See also, T.A. 87-88; T.B. 50-58; T.B. 180

and 202; T.C. 78-80; T.C. 50-54 and 60-63; T.E. 147-

148 and 157-159; and Plaintiffs’ Trial Exhibits 149,

155, 168 and 181 (Bennett’s favored position providing

him with 10 percent of Aermotor windmill sales na-

tionally). Judge Fitzgerald further found that the

shipping restraints acted to “preclude Cowley from

effectively competing with Bennett for sales to dealers

in eastern Colorado”. Trial Court Decision, p. 29. And

finally, implementation of Braden’s policies foreclosed

Cowley from rendering his Colorado customers com-

petitive with Aermotor branches selling in states

adjacent to Colorado. See, e.g., T.A. 95, 125-128, and

144-147; T.B. 14-17, 30-31, and 198-203; T.C. 87-89;

T.H. 169-170; and Plaintiffs’ Trial Exhibits 130 and

157. In short, Braden’s shipping dictates led to a stop-

page in intrabrand competition.' See also, T.B. 71-72

and T.H. 156-172.

' Intrabrand competition refers to competition between sellers of the

semne product produced by a single manufacturer. Interbrand competi-

tion, on the other hand, looks at competition between manufacturers of

different brands of the same commodity.

7

REASONS FOR GRANTING THE WRIT

I

TERRITORIAL RESTRAINTS UNDER SECTION 1

OF THE SHERMAN ACT

The trial judge in this case concluded that there is

“no doubt that Aermotor and Dean Bennett Supply

combined their efforts to enforce the published policy

of territorial restraint”. Trial Court Decision, p. 22.

Moreover, Judge Fitzgerald stated that he would have

found the distribution restraints to be per se unlawful

but for Continental T.V. Inc. v. GTE Sylvania Inc.,

433 U.S. 36 (1977), aff’'g 573 F.2d 980 (9th Cir. 1976).

Trial Court Decision, pp. 22-23. Both the lower and

appellate courts rejected plaintiffs’ antitrust claim

under Section 1 of the Sherman Act for the following

reasons:

Ia applying the GTE Sylvania standard, the trial

court held that the territorial restraints were rea-

sonable for three reasons. First, the requirement

that a distributor take goods into his trade area

before selling them improved the efficiency in

marketing since it ensure 1 the distributor’s main-

tenance of a proper stock of goods and its intense

promotion of sales in the assigned area. Second,

there was no showing by appellants of any effec-

tive alternate means to maintain an efficient

distributor system. Third, there was no evidence

that interbrand competition was harmed by Aer-

motor’s shipping policy. These findings of fact

were fatal to the appellants’ case. 1 63,134 at

77,659.

8

It is respectfully urged that this Court consider and

remedy five errors, with severe repercussions, con-

nected with such an approval of the territorial

restrictions imposed by Braden. Each of those errors

relates to legal and economic analysis, not a second-

guessing of factual findings.

First, the opinions in this litigation have miscon-

strued the Court’s ruling in Continental T.V. Inc.

Although this Court determined therein that the broad

per se approach of United States v. Arnold, Schwinn

& Co., 388 U.S. 365 (1967) should be rejected, it did

not remove territorial impositions from antitrust scru-

tiny. Yet that is the practical effect of Judge

Fitzgerald’s and the Ninth Circuit’s interpretations of

Continental T.V. Inc.

The impact of the opinion in Continental T.V. Inc.

is merely to cause vertical limitations to now be gener-

ally subjected to a rule of reason analysis, essentially

utilizing an economic impact test that balances reduc-

tions in intrabrand competition with increases, if any,

in interbrand competition so as to measure overall

economic consequences. 433 U.S. at 51-54 (the “mar-

ket impact of vertical restrictions is complex because

of their potential for a simultaneous reduction of in-

trabrand competition and stimulation of interbrand

competition”). In the context of this economic impact

test and the factors determined material by the Court

in Continental T.V. Inc., the case sub judice stands in

stark opposition with that opinion on every relevant

fact. In Continental T.V. Inc., (a) Sylvania held an

insignificant market share at the time the shipping

policy was adopted (Braden possessed at least a 70

percent share), (b) Sylvania’s market share increased

9

to only five percent with the utilization of the terri-

torial practices (Braden maintained its monopoly

power), (c) the market contained approximately 100

other manufacturers with a non-party holding a 60

percent share (the windmill industry having less than

four other suppliers), (d) at least two franchised Syl-

vania retailers were situated within each large

metropolitan area (Aermotor distributors and com-

pany-owned branches being geographically spaced so

as to not be effectively competitive), and (e) Sylvania

imposed no restrictions on the right of the franchisee

to sell the products of competing manufacturers

(Braden having such a limitation). To ignore these dis-

tinctions on every major point is to permit virtually all

territorial restrictions to be free from the federal anti-

trust laws. If the opinions in this case stand, what fact

pattern does suggest illegality under Section 1?

Second, the judges in this case essentially found the

territorial restrictions to be reasonable due to the

manufacturer’s interest in ensuring that its distribu-

tors intensely promote sales in the assigned geograpnic

10

areas.” In effect, these opiniors permit a defendant

to avoid antitrust responsibility by simply saying that

the resale restrictions are imposed for its own self-

interest. Are the antitrust laws to be rendered impo-

tent in light of a manufacturer’s insistence that his

conscious acts are for the reason of increasing his

competitive position? The antitrust laws are not so

easily displaced. In fact, this Court has noted that

such self-interests are insignificant. See, Otter Tail

Power Company v. United States, 410 U.S. 366, 380

(1973) (the “promotion of self-interest alone does not

invoke the rule of reason to immunize otherwise illegal

conduct”); United States v. Topco Associates, 405

U.S. 596, 610 (1972) (defendants have “no authority

under the Sherman Act to determine the respective

values of competition in various sectors of the econo-

my, [and] on the contrary, the Sherman Act gives to

each Topco member... the right to ascertain for itself

whether or not competition with other supermarket

2 Under Nat. Society of Professional Engineers v. U.S., 435 U.S.

679, 98 S.Ct. 1355 (1978), the “rule of reason” test “does not open the

field of antitrust inquiry to any argument in favor of a challenged re-

straint that may fall within the realm of reason [but instead] it focuses

directly on the challenged restraints impact on competitive conditions”.

98 S.Ct. at 1363. The analysis is “confined to a consideration of impact

on competitive conditions”. Jd. at 1364. Thus the Ninth Circuit was not

free to determine “reasonableness” from the manufacturer’s interest in

ensuring a “proper stock of goods”. Jd. at 1366.

Equally puzzling, and in opposition with other case law, is the appel-

late court’s criticism of plaintiffs’ failure to show “an effective alternate

means to maintain an efficient distributor system”, presumably other

than by giving the distributors the right to sell where they wish. 1 63,134

at 77,659. See, e.g., Reed Brothers, Inc. v. Monsanto Co., 525 F.2d 486

(8th Cir. 1975); Copper Liquor, Inc. v. Adolph Coors Co., 506 F.2d 934

(5th Cir. 1975) and Siegel v. Chicken Delight, Inc., 448 F. 2d 43 (9th Cir.

1971). In Continental T.V. Inc., Justice Powell wrote of the irrelevance

of looking to “least restrictive alternatives”. 433 U.S. at 58 n.29.

11

chains is more desirable than competition in the sale

of Topco-brand products’), and United States v. Ar-

nold, Schwinn & Co., 388 U.S. at 375.

Third, and in a related vain, these lower courts have

fundamentally misconstrued the Court’s test of bal-

ancing intrabrand restrictions with interbrand

stimulation. The trial and appellate court treated the

test of reasonableness as satisfied, because of supposed

increases in interbrand competition, if the manufac-

turer asserts the territorial restriction is for the

purpose of increasing that entity’s market share. Ob-

viously, as a matter of economic and common sense,

the relevance « ° increases in interbrand competition is

with reference to the market as a whole, not the par-

ticular defendant in question. To conclude otherwise is

to excuse any defendant, even a monopolist, in vir-

tually every setting.

Additionally, the earlier decisions held there was

“no evidence that interbrand competition was harmed

by Aermotor’s shipping policy”. But why is such a

showing required in the face of acknowledged adverse

impacts on intrabrand competition? Continental T.V.

Inc. v. GTE Sylvania Inc., 97 S.Ct. at 2560 (“vertical

restrictions reduce intrabrand competition by limiting

the number of sellers of a particular product compet-

ing for the business of a given group of buyers”) and

Trial Court Decision, p. 29 (defendant’s “shipping pol-

icy had some adverse impact on intrabrand

competition”). And is not interbrand competition for

the market as a whole necessarily retarded when a

monopolist employs a distribution system for the pur-

pose of acquiring a larger market share?

12

Fourth, the earlier opinions have given inadequate

attention to the fact that the defendant here is a mo-

nopolist. That fact should have been determinative, as

this Court has hinted on various occasions. Continen-

tal T.V. Inc. v. GTE Sylvania Inc., 433 U.S. at 52 n.19

(the “extreme example of a deficiency of interbrand

competition is monopoly, where there is only one

manufacturer”) and, Justice White concurring, 433

U.S. at 64-65 (the “Court relied on Schwinn’s market

position as one reason not to apply the rule of reason

to the vertical restraints challenged there [and] in

other areas of antitrust law, this Court has not hesi-

tated to base its rules of per se illegality in part on the

defendant’s market power’”);’ United States v. Ar-

nold, Schwinn & Co., 388 U.S. at 1864; and United

States v. Colgate, 250 U.S. 300, 307 (1919) (in “the

absence of any purpose to create or maintain a monop-

oly”, the Sherman Act does not restrict the right of a

manufacturer freely to exercise his own independent

discretion as to the parties with whom he will deal).

As explained in Continental T.V. Inc., the free en-

terprise system is best served when there is “fierce

intrabrand competition among the distributors of a

product produced by a monopolist”. 433 U.S. at 52

n.19. The opinions in this case have failed to heed that

warning, and have conflicted with other judicial deci-

sions. See, e.g., Blankenship v. Hearst Corporation,

519 F.2d 419 (9th Cir. 1975) and Adolph Coors Co., 3

CCH Trade Reg. Rptr. {1 20,403 at 20,293 (FTC, 1973),

3 The majority in Continental T.V. Inc. recited that “we do not

foreclose the possibility that particular applications of vertical restric-

tions might justify per se prohibition”. 433 U.S. at 58. Braden’s

dominance lends itself to such treatment.

13

aff'd 497 F.2d 1178 (10th Cir. 1974) (it “is where the

manufacturer of a branded item possesses substantial

market power...that vertical territorial restrictions

are especially pernicious, for they eliminate the possi-

bility of intrabrand competition which in an imperfect

market is a critical supplement to competition be-

tween and among different brands’). See generally,

Kauper, Testimony Before Senate Antitrust And

Monopoly Subcommittee On Proposed Legislation To

Exempt Trademarked Food Franchises From Anti-

trust Laws, 5 CCH Trade Reg. Rptr. at 55,235 (“in

concentrated industries which emphasize brand differ-

entiation promotion, the elimination of intrabrand

competition is particularly undesirable [since] terri-

torial restrictions on distribution tend to extend the

oligopolistic characteristics present at the manufactur-

ing level down the chain of distribution”).

Fifth, the prior opinions failed to follow the teach-

ings of this Court pertaining to the particular concern,

and indeed per se treatment, accorded those territorial

restraints within a horizontal context. Continental

T.V. Inc. v. GTE Sylvania Inc., 433 U.S. at 48 n.28

(“no doubt” that horizontal restrictions are per se ille-

gal); United States v. Topco Associates, Inc., supra;

United States v. General Motors Corp. 384 U.S. 127

(1966); White Motor Co. v. United States, 372 U.S.

253, 267 (1963) and Timken Roller Bearing Co. v.

United States, 341 U.S. 593 (1951). Judge Fitzgerald

presumably was influenced by the fact that the re-

straints were initially imposed by the manufacturer

rather than competing distributors in the guise of a

vertical restriction, but that distinction appears to be

irrelevant in terms of economic impact. The distribu-

14

tors cannot effectively compete with Aermotor

branches irrespective of whether the manufacturer or

the competing distributors initiate ‘the resale controls.

Trial Court Decision, p. 25. In any event, Judge Fitz-

gerald’s opinion is at odds with other authority on this

score. See, e.g., Engine Specialties, Inc. v. Bombardier

Ltd., 605 F.2d 1 (1st Cir. 1979); Cernuto, Inc. v.

United Cabinet Corp., 595 F.2d 164 (3rd Cir. 1979);

Pitchford v. PEPI, Inc., 531 F.2d 92 (3rd Cir. 1975),

reaff'd 1977-2 Trade Cas. {| 61,741 (W.D. Pa. 1977);

Hobart Brothers Co. v. Malcolm T. Gilliland Inc., 471

F.2d 894 (5th Cir. 1973) and Jnterphoto Corporation

v. Minolta Corporation, 295 F.Supp. 711 (S.D. N.Y.

1969), aff'd per curiam 417 F.2d 621 (2nd Cir. 1969).

II

MONOPOLIZATION UNDER SECTION 2 OF

THE SHERMAN ACT

This litigation highlights the continuing struggle of

trial and appellate courts in implementing the broad

directives of this Court in United States v. Grinnell

Corp., 384 U.S. 563 (1966) and United States v. Grif-

fith, 334 U.S. 100 (1948). As Justice Rehnquist

recently noted in his dissenting opinion to the denial

of the petitions for writs of certiorari in Berkey Photo,

Inc. v. Eastman Kodak Co., 1980-1 Trade Cas. 1

63,182 (U.S. Sup. Ct., February 19, 1980), the “Court

cannot remain wholly above the battle” of managing

complex cases under Section 2 of the Sherman Act. 1

63,182 at 77,891. While theories and concerns about

monopolization are at the heart of our free enterprise

15

system and the federal antitrust laws, doctrinal devel-

opment is but beginning and lower courts face

unwieldy litigation simply in dealing with the basic

prerequisites of Section 2.

The present case offers the Court an opportunity to

give guidance on the most fundamental, but yet still

debated, elements in reviewing conduct potentially

violative of the federal antitrust statutes. It seems sur-

prisingly late in the day for courts to question whether

“predatory conduct or intent” is required in order for

a plaintiff to possibly prevail under Section 2, yet that

appears to be the case.

The trial court rejected plaintiffs’ claim of monopol-

ization precisely for lack of “predatory conduct”. Trial

Court Decision, p. 8. See also, Trial Court Decision, p.

14 (“doubt whether there is a Sherman 2 violation

where the defendant has no monopoly purpose and has

performed nonpredatory affirmative acts that tend to

maintain a dominant market share”). Similarly the

Ninth Circuit Court of Appeals squarely focused on

this point and held:

... we believe that the district court properly con-

cluded that appellants failed to meet their burder

of proof under the Grinnell test.

The district court found, and the evidence estab-

lished, that Aermotor has a predominant position

in the windmill market. It controls between 70

and 80 percent of that market, both nationally

and in Colorado and Arizona. Thus, the first part

of the Grinnell test was met. There was no evi-

dence, however, that Aermotor acquired or

maintained its market position through the use

16

of predatory conduct as required by the second

part .... and there is no evidence that these re-

straints were used, with predatory intent.

(Emphasis added). {1 63,134 at 77,660.

It is respectfully urged that the Court accept this

petition and expressly address whether predatory pur-

pose and/or conduct plays any necessary role in

ascertaining the presence of monopolization. The un-

dersigned’s position is that to allow predation to exist

as an apparent prerequisite is to (a) fuel the disturbing

trend toward economic concentration and larger corpo-

rate size, (b) to cause plaintiffs, less sure of their

increasingly difficult burden under Section 2, to face

the practical need for offering complexity and lengthy

testimony at trial, and (c) to remove the effective

check that private rights of action must provide for a

monopolist’s conscious activities. ;

A reading of this Court’s pronouncements on Sec-

tion 2 suggests that Judge Fitzgerald and the Ninth

Circuit panel erred in focusing upon predatory motive

or acts. Precedent does not call for such a showing

and, indeed, speaks of its unimportance.

In United States v. Griffith, supra, Justice Douglas

wrote that (a) it is “not always necessary to find a spe-

cific intent to restrain trade or to build a monopoly in

order to find that the antitrust laws have been violated

[as it] is sufficient that a restraint of trade or monop-

oly results as a consequence of a defendant’s conduct

or business arrangements”, (b) since no monopolist

monopolizes unconscious of what he is doing, a re-

quirement of “a greater showing would cripple the

17

Act” and (c) “monopoly power, whether lawfully or

unlawfully acquired, may itself constitute an evil and

stand condemned under {2 even though it remains

unexercised.” 334 U.S. at 105-107.

Furthermore, the Court has routinely decided that

monopolizing acts could be found with conduct no

more “predatory” than that evidenced by the instant

case. See, e.g., Otter Tail Power Company v. United

States, 410 U.S. 366 (1973) (affirming a judgment that

an electric utility company monopolized the retail dis-

tribution of electric power by using refusals to sell

power at wholesale to proposed municipal systems that

might compete); United States v. Grinnell, supra

(improper conduct came with the negotiation for ex-

clusive contracts).

Significantly, the appellate opinion here also con-

flicts with other decisions within the same Ninth

Circuit. In Greyhound Computer Corporation v. IBM,

559 F.2d 488 (9th Cir. 1977), Judge Browning stated it

“is no answer to the charge to say that these practices

are not ‘predatory’ but ‘honestly industrial’—that is,

of a kind an ordinary enterprise might utilize with

impunity”. 559 F.2d at 498. See also, Purex Corp. v.

Procter & Gamble Co., 596 F.2d 881, 890 (9th Cir.

1979) (recognizing “that ‘otherwise lawful practices

that unnecessarily excluded competition’ could be ac-

tionable under Section 2 of the Sherman Act when

used by the dominant firm in an industry”), and

Sunkist Growers, Inc. v. Winckler & Smith Citrus

Prod. Co., 284 F.2d 1, 26 (9th Cir. 1960) (“we find it

not necessary to find a specific intent to restrain trade

or eliminate a competitor or to create a monopoly’).

18

Other circuits, similarly attempting to understand

and apply the standards of Griffith and Grinnell, have

reached results inconsistent with the decisions in this

case. See, e.g., Berkey Photo, Inc. v. Eastman Kodak

Co., 603 F.2d 263, 274 (2nd Cir. 1979) (even “if the

origin of the monopoly power was innocent ... the

Grinnell rule recognizes that maintaining or extending

market control by the exercise of that power is suffi-

cient to complete a violation of §2’’); City of

Mishawaka v. American Electric Power Co., 465

F.Supp. 1320, 1330 (N.D. Ind. 1979) (one “possessing

monopoly power need not be found to have engaged in

predatory conduct in order to have engaged in prohib-

ited monopolization [as] frequently the offense of

monopolization is based on the conclusion that the

defendant has engaged in ‘exclusionary conduct’

—conduct that does not further competition on the

merits or that tends to impair the opportunities of his

rivals to compete”); aff'd in part, 1980-1 Trade Cas. 1

63,193 (7th Cir. 1980); Paschall v. Kansas City Star

Co., 441 F.Supp. 349, 361 (“it is doubtful that, even in

1911, §2 prohibited only monopolies obtained by un-

lawful restraints and predatory practices’); and

United States v. Aluminum Co. of America, 148 F.2d

416, 431 (2nd Cir. 1945) (defendant therein insisted

that “it never excluded competitors; but we can think

of no more effective exclusion than progressively to

embrace each new opportunity as it opened, and to

face every newcomer with new capacity already geared

into a great organization’’).‘

* The Alcoa opinion was endorsed by this Court in American To-

bacco Co. v. United States, 328 U.S. 781 (1946).

19

While judicial consideration of Section 2 has led to

criticism of monopoly power and recognized the evils

associated with such dominance, courts correctly have

not declared monopolies unlawful per se. To decline to

take that ultimate step is to recognize that monopolies

may be thrust upon an entity, that a successful com-

petitor must not be automatically rewarded with legal

condemnation, and that innovation, expertise and re-

lated worths should not be discouraged. But

recognition of these caveats does not, and should not,

equate with applauding the holder of monopoly power

except for predatory acts. The dividing line is rather

as set forth in Berkey Photo, Inc. v. Eastman Kodak

Co., supra:

The key to analysis, it must be stressed, is the

concept of market power .... A firm that has law-

fully acquired a monopoly position is not barred

from taking advantage of scale economies by con-

structing, for example, a large and efficient

factory. These benefits are a consequence of size

and not an exercise of power over the market.

Nevertheless, many anticompetitive actions are

possible or effective only if taken by a firm that

dominates its smaller rivals. See Telex Corp. v.

International Business Machines Corp., 510 F.2d

894, 925-26 (10th Cir.), cert. dismissed, 423 U.S.

802, 96 S.Ct. 8, 46 L.Ed.2d 244 (1975). A classic

illustration is an insistence that those who wish to

secure a firm’s serviees cease dealing with its

competitors. See, e.g., Lorain Journal Co., supra.

Such conduct is ulegal when taken by a monopo-

list because it tends to destroy competition,

although in the hands of a smaller market partici-

pant it might be considered harmless, or even

“honestly industrial.” 603 F.2d at 274-275.

20

This accommodation was also nicely illustrated in

United States v. United Shoe Machinery Corp., 110

F.Supp. 295 (D. Mass. 1953), aff'd per curiam, 347

U.S. 521 (1954), which condemned leasing practices

specifically found to not be predatory:

[T]hey are not practices which can be properly

described as the inevitable consequences of abili-

ty, natural forces, or law. They represent

something more than the use of accessible re-

sources, the process of invention and innovation,

and the employment of those techniques of em-

ployment, financing, production and distribution,

which a competitive society must foster. They are

contracts, arrangements, and policies which, in-

stead of encouraging competition based on pure

merit, further the dominance of a particular firm.

In this sense they are unnatural barriers; they

unnecessarily exclude actual and potential compe-

tition; they restrict a free market. 110 F.Supp. at

344-345.

The present case has been tainted with an emphasis

on predation. In fact, the undisputed evidence should

have been sufficient by exhibiting a distribution

scheme used by the defendant because it is “interested

in promoting interbrand competition, to get a better

share of the market and to sell its products over those

of a competitor”. Record on Appeal, page 821; Appel-

lee Brief, p. 34; T.R. 811-817. Maintenance of Braden’s

market share was not associated with economies of

scale, accessible resources, or invention. By its own

admission, the defendant looked to its territorial impo-

sitions to influence market shares.

21

Perhaps judicial difficulties with Section 2 are un-

derstandable, and are as frustrating as recently

explained in Paschall v. Kansas City ‘Star Co., supra:

As plain and forthright as the language of this sec-

tion appears, there are but two things which may

be confidently said about it: First, mere possession

of monopoly power does not constitute the offense

of monopolization; something more is needed. ...

Second, concerted action is unnecessary to consti-

tute the offense of monopolization; unilateral

monopolization violates the Sherman Act .... It is

at this point that a Court’s confidence in applying

Section 2 of the Sherman Act to the facts before it

must end, for it is at this point that the question

which has plagued the legal, judicial, and aca-

demic communities must be faced: What conduct

must a defendant, who possesses monopoly power,

engage in before he is to be found guilty of trans-

gressing the dictates of Sherman §2? ...

While the test enunciated by the Supreme Court

in Grinnell is a good and functional test for iden-

tifying those guilty of monopolization, it does not,

by any means, end the uncertainties which per-

vade this area of law. Nor does it easily resolve the

application of the test to varying factual situa-

tions. 441 F.Supp. at 359-363.

This petition offers a vehicle for confronting such

problems. .

EIEIO

A-1

22

CONCLUSION IN THE UNITED STATES DISTRICT COURT

, Pate : FOR THE DISTRICT OF ARIZONA

This case raises issues of unusual importance for the.

administration of justice in the federal courts. The pe-

tition for a writ of certiorari should be granted. Granam L. Cow.ey and Hucu H. Cow ey.

Respectfully submitted, dba Cowley Bros. Supply, and Carper,

Inc.,dba Ranchers Supply Company, NO. CIV-

Leo R. Beus Plaintiffs, -72-695-

David L. White | va. PHX

JENNINGS, STROUSS & SALMON Bininens feerieviens tic.

shy ws ee Defendant.

Phoenix, Arizona 85003

Attorneys for Petitioners

March 1980 Before: The Honorable JAMES M. FITZGERALD

United States District Judge

CERTIFICATE OF SERVICE

I am one of the attorneys for the Petitioners and am Date: JANUARY 20, 1977

a member of the bar of this Court. I hereby certify

that I caused three copies of the foregoing Petition for Place: TUCSON, ARIZONA

Writ of Certiorari to be mailed, postage prepaid, on

March 31, 1980, to: THE COURT: I wish to place on the record my de-

Roger R. Scott, Esq. cision in Civil Case No. 72-695, Phoenix, Dixon D.

LAWRENCE, SCOTT & LAMB Cowley dba Cowley Pump and Supply, Graham L.

525 South Main Street, Suite 204 Cowley and Hugh H. Cowley dba Cowley Bros. Supply,

Tulsa, Oklahoma 74103 and Carder, Inc., dba Ranchers Supply Company,

Plaintiffs, v. Braden Industries, Inc., a Delaware Cor-

All parties required to be seryed have been served.

. poration, doing business in the State of Arizona,

4 : Defendants.

f

David L. White

A-2

This case concerns the marketing of Aermotor wind-

mill and pump products in the southwest and western

plains states, principally within the states of Arizona

and Colorado.

The first claim of plaintiff Dixon D. Cowley dba

Cowley Pump and Supply Company alleges that de-

fendant Aermotor, a division of Braden Industries,

imposed a territorial restraint upon Cowley, formerly

the Aermotor distributor in the State of Arizona, in

violation of the Sherman Act, 15 USC 1.

The second claim alleges that Aermotor discrimi-

nated in prices between Cowley and Dean Bennett

Supply Company, the Aermotor distributor in the

State of Colorado, contrary to provisions contained in

Section 2 of the Clayton Act, 15 USC 13.

The third claim alleges that Aermotor tied pumps to

the purchase of windmills in violation of Section 3 of

the Clayton Act, 15 USC 14, and Section 1 of the Sher-

man Act, 15 USC 1. Plaintiffs have abandoned this

claim.

In the fourth claim it is alleged that Aermotor re-

fused to deal with plaintiff Carder, Inc., dba Ranchers

Supply Company of Colorado, in violation of Section 1

of the Sherman Act, 15 USC 1.

In the fifth claim plaintiffs allege that Aermotor

unjustifiably interfered with plaintiffs’ contract rights.

The sixth claim alleges that Aermotor has monopo-

lized or attempted to monopolize the windmill

industry in violation.of Section 2 of the Sherman Act,

15 USC 2.

A-3

The seventh claim alleges that Aermotor’s conduct

as alleged under the Sherman and Clayton Acts consti-

tutes a violation of the antitrust laws of Arizona and

Colorado.

Plaintiffs ask for treble damages under Section 4 of

the Clayton Act, 15 USC 15, for the alleged anticom-

petitive conduct of Aermotor.

Aermotor has raised counterclaims against plaintiffs

Cowley for amounts said to be owed to Aermotor for

purchases made by Cowley prior to his termination as

distributor for Aermotor products in Arizona.

Since the marketing of Aermotor products substan-

tially affects interstate commerce, jurisdictional

requirements are met under 15 USC 15 and 28 USC

1337.

Braden Industries is organized into several divisions.

The Aermotor Division manufactures and markets

water systems. Aermotor windmills have been on the

market for many years and more recently Aermotor

has entered the market with a pump line including

jets, submersibles and centrifugals. But this case has

to do principally with Aermotor windmills.

Aermotor involvement in the windmill market dates

back to 1888. For many years the company manufac-

tured its windmills but in 1967 Aermotor entered into

a licensing agreement with Fabrico do Implemotos

Agribules S. H. of Argentina to fabricate and manufac-

ture windmills. Windmill towers, however, are

apparently fabricated or manufactured in this country.

The windmills are manufactured in Argentina, shipped

to the United States and warehoused, awaiting ship-

ment on orders. For a period of time Aermotor’s

A-4

windmill warehouse was located at Tulsa, Oklahoma,

but some years ago the Tulsa warehouse was closed

and Aermotor windmills have since been warehoused

at Dallas; Texas.

Aermotor marketed its windmills and pumps

through company outlets or branches and through

independent distributors. it may be said that an Aer-

motor branch is a company outlet where Aermotor

products are stocked for sale to Aermotor distributors

or dealers. An Aermotor branch is restricted to the

extent that it may not sell Aermotor products either to

dealers or at retail within the territory of an autho-

rized distributor.

Aermotor has entered into contracts with a number

of distributors. Under these agreements distributors

are assigned a territory in which, with certain limited

exceptions, the distributor has the sole and exclusive

right to sell Aermotor products to dealers and at retail

without competition from Aermotor. Most of this law-

suit is involved with Aermotor’s marketing policies

insofar as those policies affect distributors. Two dis-

tributors are directly involved, the distributorship of

Dean Bennett of Colorado and the distributorship of

Dixon D. Cowley in Arizona.

Prior to 1965, American Pipe and Supply of Denver -

was distributor of Aermotor products in Colorado. In

April of that year Dean Bennett left the employ of

American Pipe and established Dean Bennett Supply.

He then became Aermotor distributor for Colorado.

American Pipe became a distributor of Dempster

products, a competitor of Aermotor in the windmill

line. Dixon D. Cowley was in 1966 employed by Moses

Pump and Supply of Phoenix, then the Aermotor dis-

ee

0 eEv7_oce_

A-5

tributor for Arizona. Moses Pump and Supply was

acquired by Sta-Rite, a pump manufacturer. Cowley

then left Moses Pump and established Cowley Pump

and Supply at Phoenix. In August of 1966 he became

the Aermotor distributor for Arizona and was termi-

nated in November of 1971.

Aermotor has for some years occupied approxi-

mately 70 percent of the windmill market. Its

competitors include Heller Aller of Napoleon, Ohio,

the manufacturer of Baker windmills, and ‘Dempster

Industries, manufacturing the Dempster windmill at

Beatrice, Nebraska. Although Aermotor occupies a

dominant position in the windmill market, the same is

not true in the pump line. Aermotor has manufactured

centrifugal pumps since the early 1900’s, but its main

effort to expand its pump line occurred after World

War II. At that time Aermotor began marketing sub-

mersible and jet pumps. Competition in the pump

market is keen and Aermotor as a serious competitor

is a relative latecomer.

The importance of windmills to water systems is

limited principally to providing stock water in cattle

ranching country. Ordinarily water can be produced

more efficiently by electric pumps but where electrical

distribution lines are distant, as in range country,

windmills provide an adequate and reliable method of

providing stock water. Aermotor windmills have for

years carried a fine reputation and several ranchers

have testified to their excellent quality.

A-6

During the period of Cowley’s distributorship in

Arizona, James E. Fetters was the general manager of

Aermotor Division and he was and is a vice president

of Braden Industries as well. Fetters, for the most

part, dealt directly with Dixon D. Cowley and with

Dean Bennett of Dean Bennett Supply of Colorado.

THE ALLEGED ANTITRUST VIOLATIONS

MONOPOLY

Plaintiffs claim that Aermotor has monopolized and

attempted to monopolize the windmill market in viola-

tion of Section 2 of the Sherman Act.

According to the plaintiffs’ claim, Aermotor pos-

sesses monopoly power in the windmill industry and

has unlawfully used its dominant market position to

extract monopoly profits, dominate and exclude com-

petitors, force the sale of pumps with windmills, and

extend its monopoly into the Colorado wholesale mar-

ket by eliminating intrabrand competion, thus

protecting the Dean Bennett distributorship.

Aermotor makes two arguments in defense: At the

outset Aermotor claims plaintiffs have failed to prove

that Aermotor’s share of the Colorado and Arizona

market is sufficient to constitute monopoly power.

Second, even assuming Aermotor possessed the requi-

site market share, Aermotor did not use its market

position to stifle any competition between Aermotor

and the plaintiffs. Defendant argues that plaintiffs

have never engaged in competition with Aermotor in

the distribution of windmills, and therefore have not

been injured by reason of the alleged monopoly.

ee ee ee ee eee ee ae

A-7

It is well settled that in order to establish a violation

of Section 2 of the Sherman Act it is necessary to

prove two elements:

“(1) The possession of monopoly power in the rel-

evant market, and (2) the wilful acquisition or

maintenance of that power as distinguished from

growth or development as a consequence of a su-

perior product, business acumen or historical

accident ... United States v. Grinnell, 384 U.S.

563 (1966).”

It is not seriously disputed that the relevant product

market is windmills. Moreover, the evidence clearly

establishes that Aermotor has a predominant position

in the sale of windmills nationally and in the states of

Colorado and Arizona. Aermotor’s share of windmill

sales in these respective geographic markets has fluc-

tuated between 70 percent and 80 percent, averaging

around 75 percent, a sufficient share from which to

infer monopoly power. See Pacific Coast Agricultural

Export Ass’n. v. Sunkist Growers, Inc. 526 F.2d 1196

(9th Cir. 1975). In that case defendant’s percentage of

the Hong Kong export market for oranges ranged from

45 percent to 70 percent.

However, the evidence fails as to the second ele-

ment, conduct by which the defendant purposefully

acquires, maintains or exercises monopoly power.

There is no evidence whatsoever that Braden acquired

its dominant market position through the use of pred-

atory conduct. To the contrary, there is some evidence

A-8

that Aermotor attained its position in the windmill

market by virtue of having a superior product and the

fact that many windmill manufacturers dropped out of

the business during World War II.

Likewise, plaintiffs have failed to prove that Aermo-

tor extracted monopoly profits as a consequence of

their dominant position in the industry. The evidence

shows that Aermotor made about 180 percent profit on

most windmills but it fails to show that prices of Aer-

motor windmills were greater than the prices of

competing brands. It appears that Aermotor mills were

in fact competitively priced and that the profit factor

resulted from lower production costs rather than any

design to control prices.

There is also a failure of proof on plaintiffs’ claim

that Aermotor used its dominant position in the wind-

mill market to improve its pump sales by tying pump

sales to windmill sales. All the evidence shows is that

Aermotor emphasized the promotion of pump sales to

its distributors because the company believed that the

future of the ground water systems market lies in

pumps, not windmills. The evidence establishes that

James Feters knew that Dean Bennett was using wind-

mills as leverage in selling pumps in 1967 but falls

short of establishing that Aermotor condoned tie-in

arrangements or conspired with Dean Bennett or any

other distributor in an effort to tie pump purchases to

windmills. It is clear that Aermotor never refused to

ship Cowley a truckload of windmills because he had

failed to purchase pumps. Furthermore, the 1969 writ-

ten statement of policy published by Aermotor

regarding shipment to distributors, Exhibit 133, also

made it clear that Aermotor did not condone in its

A-9

published policy tie-ins. Nor is there evidence that

Aermotor’s position in the pump market was improved

as a result of the alleged use of windmills as leverage.

Finally, and most significantly, plaintiffs have failed

to establish that Aermotor used its monopoly power to

dominate or exclude competitors. Plaintiffs Cowley

and Carder maintain that they, in addition to John

Smith of Smith Hardware, were competitors of Aermo-

tor with respect to the distribution of windmills by

virtue of the fact that Aermotor sold windmills

through company outlets as well as through indepen-

dent distributors. This contention is crucial to

plaintiffs’ Section 2 claim because if the plaintiffs are

not competitors of Aermotor they have not suffered

the injury to their business by reason of defendant’s

monopolistic conduct, which is a requirement for

maintenance of a treble damage action under Section 4

of the Clayton Act, 15 USC 15, which provides in per-

tinent part:

“Any person who shall be injured in his business

or property by 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 threefold the damages by him sus-

tained, and the cost of suit, including a reasonable

attorney’s fee.”

This Circuit has adopted the target test for deter-

mining the Clayton Section 4 standing. That approach

focuses on the claimant’s relationship to the area of

the economy injured by the alleged conduct of the de-

fendant. The claimant must prove that he “is within

that area of the economy which is endangered by a

A-10

breakdown of competitive conditions in a particular

industry. Otherwise he is not injured by reason of any-

thing forbidden in the antitrust laws.’’ In Re

Multidistrict Vehicle Air Pollution M.D.L. No. 31, 481

F.2d 122 (9th Cir.1973).

I interpret Multidistrict Vehicle Air Pollution to

require identification of the level of the product mar-

ket or industry against which anticompetitive conduct

was allegedly directed, not simply the relevant indus-

try. For example, the court in the Multidistrict case

studied the complaint, then concluded on the basis of

the assessments that the affected area of the economy

was that concerned with the research, development,

manufacture, installation and patenting of automotive

air pollution control devices. 481 F.2d at 129.

Applying this analysis to the instant case, I conclude

that the allegations encompass the distribution as well

as the manufacture of windmills. However, there is no

evidence that Aermotor intended to or attempted to

monopolize the wholesale or retail distribution of

windmills. Cowley was replaced with another indepen-

dent distributor in Arizona, not with an Aermotor

branch. Bennett Supply of Colorado was also an inde-

pendent distributor. Independent distributors were

installed in Texas and in California. Instead of elimi-

nating independent distributors, Aermotor has

modified its former distribution system that relied en-

tirely on Company outlets. Furthermore, plaintiffs

have never engaged in competition with Aermotor for

wholesale windmill sales. Cowley sold only to accounts

in Arizona and Colorado. Carder’s wholesale sales in

1970-73 did not include any sales to markets outside of

Colorado. It is undisputed that Aermotor refrained

A-11

from competing for wholesale or retail sales in Arizona

and Colorado. There is a limited exception in Arizona

related to the Indian tribes.

The complete absence of any evidence that Aermo-

tor entered into competition with plaintiffs for the sale

of windmills or attempted to take over the distribution

of windmills distinguishes the instant case from those

relied on by plaintiffs.

Plaintiffs cite Poster Exchange, Inc. v. National

Screen Services Corp., 431 F.2d 334 (5th Cir. 1970),

and Eastman Kodak Co. v. Southern Photo Materials

Co., 237 U.S. 359 (1927), for the proposition that verti-

cally integrated manufacturers (those who distribute

in addition to producing) cannot eliminate competitors

at any level without violating Sherman Section 2. Pos-

ter Exchange involved a national manufacturer and

distributor of movie advertising accessories who en-

tered a local market and drove the existing local

distributor out of business by refusing to adequately

supply the local distributor, inflating prices and then

refusing to deal. The trial court specifically found that

National Screen intentionally used the monopoly

power it had at the manufacturing level to eliminate

Poster as a competitor at the distributor-jobber level.

The situation in Eastman Kodak was similar. The de-

fendant, a national manufacturer, bought out a local

dealer who competed with the plaintiff dealer, then

refused to sell plaintiff supplies at the dealer discount.

In both Poster Exchange and Eastman Kodak, a

manufacturer entered into direct competition with a

local distributor—then drove the distributor out of

business by use of unfair tactics. Similarly in In-

dustrial Bldg. Materials, Inc. v. Interchemical Corp.,

A-12

437 F.2d 1336 (9th Cir. 1970), it was alleged that the

defendant manufacturer entered into competition with

the plaintiff distributor and then drove him out of —

business. The court distinguished cases where a manu-

facturer simply changes distributors and commented

that: ,

“When a distributor is replaced by another, the

public is given a substitute with no diminution in

the number of distributors offering services, but

when the manufacturer enters the field and then

removes a distributor, the public is left with only

the manufacturer instead of the manufacturer and

the independent distributor. Accomplishment of

this anti-competitive subjective by a manufacturer

in a dominant market position by means of con-

spiracy and unfair tactics must surely be

proscribed by the antitrust laws.” (“437 F.2d 1336

at 1342-3”)

Finally, Pacific Coast Exports Ass’n. v. Sunkist

Growers, Inc., 526 F.2d 1196 (9th Cir. 1975), makes it

very clear that the former distributor plaintiff's claim

was that the defendant’s control of supply was em-

ployed to extend its monopoly illegally into

distribution. (526 F.2d at 1204). The former distribu-

tor in Sunkist had standing to assert a Sherman

Section 2 claim because the distributor was able to

prove that Sunkist, the supplier, moved into and mo-

nopolized distribution of the product in the Hong

Kong market.

Cowley and Carder make no such claim. Even as-

suming that Aermotor has purposefully acted to

maintain a monopoly position in the manufacture of

windmills, plaintiffs as Aermotor dealers are not in-

jured by reason of the monopoly as would be a

A-13

competing manufacturer like Dempster. The only

proved conduct by defendant which arguably has the

purpose and effect of maintaining Aermotor’s market

position in windmills is use of the exclusive distribu-

torship system. I doubt whether there is a Sherman 2

violation where the defendant has no monopoly pur-

pose and has performed non-predatory affirmative

acts that tend to maintain a dominant market share.

No case cited by plaintiffs actually goes so far.

Territorial Restraints

Plaintiffs claim that Aermotor imposed an illegal

territorial restraint on Cowley’s sale of windmills in

violation of Section 1 of the Sherman Act.

It is well established that Aermotor has announced

the following as its published policy:

“Aermotor will not knowingly ship pump and/or

windmill merchandise from Aermotor stocking

points into the territory of an exclusive distributor

without an order or consent from the distributor

with whom we have an agreement for the terri-

tory.

Aermotor customers are free to sell and/or ship

Aermotor merchandise from their stock in their

territory as they may see fit so long as they do not

violate their agreement by actively soliciting busi-

ness outside their assigned territory.”

Stipulated fact no. 45. Joint pre-trial statement.

Cowley’s claim of territorial restraint is broader,

however, since he claims that Aermotor’s policy during

the time of his distributorship precluded him from

shipment of Aermotor products into the territory of

another distributor under any circumstances. He

claims that his termination as a distributor occurring

A-14

in November of 1971 was the direct result of his re-

fusal to adhere to Aermotor’s policy of prohibiting

shipment of Aermotor products into the territory of

another distributorship. Plaintiffs contend tha! Aer-

motor’s shipment policy and the claimed prohibition

of sales by Cowley into Colorado constitute per se vio-

lations of Section 1 of the Sherman Act and are

unreasonable restraints of trade.

Aermotor denies that it has ever prohibited Cowley

from selling to Colcrado customers and contends that

Cowley’s distributorship ‘in Arizona was terminated by

reason of Cowley’s failure to satisfactorily perform as

an Aermotor distributor in Arizona. Aermotor main-

tains that its shipment policy and distribution system

are reasonable and are not per se violations of Section

1 of the Sherman Act.

There are several threshhold questions. First, it is

necessary to determine Cowley’s standing. The evi-

dence establishes that Cowley was repeatedly

admonished by Fetters to adhere to the shipment pol-

icy on the threat of losing the Arizona distributorship.

The precipitating factor in Cowley’s termination was

Fetter’s belief that Cowley was violating the shipment

policy in handling the shipment to Carder on October

20, 1971. Hence, Cowley has standing to claim that he

was injured by reason of the claim of territorial re-

straint and may maintain his claim under Section 4 of

the Clayton Act. 15 USC 15.

>

A-15

Assuming that Cowley has the requisite standing, it

then becomes necessary to determine the actual extent

of territorial restraint placed upon Cowley by Aermo-

tor.

In 1965 the Aermotor distributor in Arizona was

Moses Pump and Supply of Phoenix. Sta-Rite, a pump

manufacturer, acquired Moses Pump and Supply and

installed a stock of Sta-Rite pumps. Following the

acquisition, Moses Pump, now under the control of

Sta-Rite, began, as a distributor, to change over its

dealers from the Aermotor Pump line to the Sta-Rite

line, which was thought to be more complete. More-

over, Moses Pump and Supply became a factory

branch of Sta-Rite rather than a distributor. At the

time of Sta-Rite’s acquisition of Moses Pump and

Supply, Dixon D. Cowley was employed by Moses

Pump. He then left the employ of Moses Pump and

Supply and organized Cowley Pump and Supply. In

August of 1966 letters were sent by Aermotor to Aer-

motor dealers in Arizona that Cowley Pump and

Supply was the new Aermotor distributor.

At the time Dixon Cowley became Aermotor’s dis-

tributor in August of 1966, hi father at St. Johns,

Arizona, had a truckload of windmills on order. Since

it was unwise to build up a large inventory in wind-

mills, an arrangement was worked out by Cowley and

his father whereby Cowley sold Aermotor windmills

from his father’s stock in St. Johns. Originally the

father, Graham L. Cowley, and Hugh H. Cowley, dba

Cowley Brothers Supply, were plaintiffs but their

claim has since been terminated by a stipulated dis-

missal, as parties.

A-16

In the spring of 1967 Cowley was visited by Carl

Estep, a manufacturer’s representative who traveled

about the State of Arizona and the Southwest. Estep

inquired whether Cowley would be interested in selling

truckload quantities of windmills to Smith Hardware

at Haxton, Colorado. After some negotiation Cowley

agreed to sell Smith truckload quantities of windmills

at Cowley’s cost plus 5 percent. He concluded that on

a truckload basis, which would be a minimum of

10,000 pounds and could be as high as 40,000 pounds,

that the 5 percent commission or profit to him would

be somewhere between $500 and $2000, depending on

the size of the load. His only effort would be to make a

few telephone calls and mail the purchase order and

the expense would amount to a maximum of $10.00.

After the bargain was struck, Smith Hardware, a sub-

stantial dealer, began buying windmills through

Cowley instead of Dean Bennett Supply at Denver. In

May of 1967, Carder of Ranchers Supply at Lamar,

Colorado placed his first order for windmills with

Cowley through Smith.

By February 3 of 1968, Dean Bennett was aware

that someone other than his company was making sub-

stantial sales of Aermotor windmills to dealers in

Colorado. In a letter under that date, Bennett in-

formed Fetters that Dean Bennett Supply had made

no sales to Smith Hardware of Haxton, Colorado after

July 5, 1967. Someone of Dean Bennett Supply calling

upon Smith observed an Aermotor shipping manifest

A-17

for -a shipment to Cowley Pump and Supply of Phoe-

nix, Arizona. In addition, Bennett or his agent located

four 6-foot, twelve 8-foot, and six 10-foot Aermotor

windmills in Smith’s warehouse, at Haxton.

Fetters’ response to Dean Bennett indicated a small

degree of concern and was not at all satisfactory to

Bennett. A further exchange of correspondence took

place. On March 6, 1968, Fetters again wrote Bennett

pointing out that it was difficult for him to understand

how Cowley could sell to Smith since at the relative

time Cowley was buying at standard dealer discount.

Moreover, in July of 1967, Colorado and the West

Coast distributorships were the only areas where dis-

tributor discounts for windmills were provided.

However, Fetters proniised to investigate and find out

where the shipments might be coming from.

Later in March Fetters again wrote Bennett on the

matter. He stated in his letter that inquiry of Aermo-

tor branches in Omaha, Tulsa and Amarillo indicated

that the branches were adhering to Aermotor’s policy

of not shipping into a distributor’s territory unless so

instructed by the distributor. He noted, however, that

there was nothing that could be done about a distribu-

tor selling into another distributor’s territory if this

should be the case.

In June, Fetters made a call upon Cowley at Phoe-

nix. As Fetters recalls it, he made it clear to Cowley

that he was not to ship windmills directly from the

factory warehouse to a customer outside the area of his

distributorship. Cowley was permitted to sell out of his

own territory of Arizona to customers anyplace he

A-18

chose. Fetters also recalls that he advised Cowley that

Aermotor did not consider Cowley Pump a good dis-

tributor. Cowley was not producing sufficient sales

volume in the territory he was supposed to cover.

Cowley recalls it somewhat differently. He testified

that in April, 1968, he received a telephone call from

Fetters complaining that Cowley was causing Aermo-

tor problems by his shipments ‘of windmills to Smith

of Colorado. Fetters further instructed Cowley to pick

up at the Aermotor branch in Amarillo rather than the

windmill warehouse at Tulsa.

I find that Fetters’ purpose of requiring Cowley to

pick up his orders at the Amarillo branch rather than

Tulsa was not to place Cowley at a disadvantage but to

neutralize as much as possible Cowley’s attempts to

ship directly from Aermotor’s outlet in Tulsa to Car-

der in Colorado, contrary to the published distribution

policy. Cowley had as a practical matter created two

additional distributorships in Colorado who were ac-

tively competing with the recognized Aermotor

distributor. Under these circumstances and in view of

Cowley’s dealings, Aermotor was entitled to take rea-

sonable measures to avoid Cowley’s deceitfulness.

Following the phone call from Fetters, Cowley re-

ceived an order from John Carder. In his discussion

with Carder about the order, Cowley noted that while

Aermotor opposed Cowley selling into Colorado there

wasn’t anything that could be said about it if the

windmills were first brought into Arizona. Subse-

quently Cowley placed an order at Aermotor’s

Amarillo branch for John Carder in Boise City, Okla-

homa. This was done so that Carder could pick up the

order in Boise City, avoiding the necessity of bringing

—

A-19

the shipment into Arizona. In Cowley’s words, the

shipment was disguised to go to Oklahoma rather than

Colorado. However, this plan was circumvented when

the Amarillo branch shipped the order to Cowley at

Phoenix who in turn then shipped the order to Carder

in Colorado, passing the freight costs on to Carder.

Cowley, however, testified that on June 13 when

Fetters called upon him at Phoenix, he was told by

Fetters that under no circumstances could he make

any shipments into Colorado and that in the event

that Cowley persisted, his distributorship would be

terminated. Thus Cowley’s claim that in June he was

told that under no circumstances could he ship into

Colorado is somewhat contrary to his understanding

that he conveyed to Carder that Aermotor was not in a

position to say anything about Cowley’s shipments to

customers outside of Arizona so long as the product

came into Arizona. Cowley’s claim of prohibition is

contrary to Fetters’ March 6, 1968 letter to Bennett in

which he told Bennett that there was nothing that

could be done about Cowley selling into Colorado so

long as the shipment was made out of Arizona. It is

also supported by Aermotor’s published distribution

policy.

It is established in the evidence that Dean Bennett

sought to claim that his distributorship in Colorado

gave him an exclusive right to sell Aermotor products

to dealers or retailers in the State of Colorado. Ben-

nett thought all Colorado sales should be his and

repeatedly requested Fetters to take action to stop

Cowley’s sales to Smith and Carder in Colorado. Fet-

ters, however, never agreed to prohibit Cowley’s sales

into Colorado and Cowley was never so instructed. The

A-20

only restraint imposed on Cowley in connection with

his Colorado sales was the requirement that orders to

Cowley from outside his territory be shipped out of

Arizona.

Cowley’s recollection that he was told by Fetters on

June 13, 1968 that he must not sell windmills into

Colorado under any circumstances is probably incor-

rect. I find that the restraint placed upon Aermotor

distributors, including Cowley, to be as spelled out in

the published policy statement. However, there is no

doubt that Aermotor and Dean Bennett Supply com-

bined their efforts to enforce the published policy of

territorial restraint.

It is well settled that an agreement, the purpose or

effect of which was to unreasonably restrain trade,

constitutes a violation of Section 1 of the Sherman

Act. Pacific Coast Agricultural Export Ass’n. v. Sun-

kist Growers, Inc., 526 F.2d 1196 (9th Cir. 1975).

The controlling issue then is whether or not this ter-

ritorial restriction in itself constitutes a violation of

Section 1 of the Sherman Act.

YW

Having found the requisite interest of Cowley and

evidence of an agreement enforcing the territorial re-

striction requiring distributors to sell out of their own

territory, a substantial legal question arises as to

whether the rule of per se illegality established in

United States v. Arnold, Schwinn & Co., 388 U.S. 365

(1967) should be applied to Aermotor’s distribution

policy and practice.

A-21

The per se rule on location limitation has been ac-

cepted in other circuits: Hobart Brothers v. Malcom T.

Gilliland, 471 F.2d 894 (5th Cir. 1973); Interphoto

Corporation v. Minolta Corporation, 471 F.2d 621 (2nd

Cir. 1969). I would recognize the territorial restraint on

Aermotor on the basis of those authorities as a viola-

tion but for the holding of the Ninth Circuit in GTE

Sylvania v. Continental T.V.

In an extensive opinion, the per se rule of Schwinn

has been limited in the contents of the facts of that

case by the Ninth Circuit in GTE Sylvania.

I conclude on the basis of GTE Sylvania that the

per se approach should be rejected in favor of a rule of

reason analysis. And I quote:

“In Schwinn the Supreme Court held illegal per se

a system of vertical restraints affecting both

wholesale and retail distribution. Arnold Schwinn

& Company had created exclusive geographical

sales territories for each of its 22 wholesaler bicy-

cle distributors and had made each distributor the

sole Schwinn outlet for the distributor’s desig-

nated area. Each distributor was prohibited from

selling to any retailers located outside its territory.

Moreover, the restrictions in Schwinn limited the

classes of customers to whom Schwinn’s wholesale

distributors and franchised retailers could sell, by

prohibiting them from selling Schwinn products to

unfranchised retailers. Consequently, Schwinn’s

system completely barred sales to some potential

purchasers of Schwinn products, regardless of

where these customers were located.” GTE Syl-

vania Inc. v. Continental T.V. (9th Cir. 1976)

A-22

Although the vertical restraints at issue in Schwinn

were absolute prohibitions against distributor sales to

any customer outside the distributor’s designated area

as well as to unfranchised dealers within the distribu-

tor’s area, the language used by the majority seems to

strike more broadly at vertical restraints:

“Once the manufacturer has parted with title and

risk, he has parted with dominion over the prod-

uct, and his effort thereafter to restrict territory

or persons to whom the product may be trans-

ferred, whether by explicit agreement or by silent

combination or understanding with his vendee, is

a per se violation of Section 1 of the Sherman

Act.” 388 U.S. at 382.

‘Under the Sherman Act it is unreasonable with-

out more for a manufacturer to seek to restrict

and confine areas or persons with whom an article

may be traded after the manufacturer has parted

with dominion over it. White Motors, supra;

Doctor Miles, supra. Such restraints are so ob-

viously destructive of competition that their mere

existence is enough.” 388 U.S. at 379.

This language has engendered much critical com-

ment and controversy as shown by footnote 13 of GTE

Sylvania.

The facts in GTE Sylvania were that Continental

T.V. lost its Sylvania franchise because it violated Syl-

vania’s practice of franchising dealers to sell Sylvania

products at designated locations only, and prohibiting

the franchisee to move Sylvania merchandise to a new

unapproved location for resale. Since Sylvania’s loca-

RN aete Fite Bib a: hones

A-23

tions practice restricted the shipment of inventory

after title passed to the franchise, the trial court ruled

that the practice was illegal per se based on the sweep-

ing language of the Schwinn opinion.

The Ninth Circuit en banc held that the rule on rea-

son should have been applied by the trial court. The

decision of the Circuit limited Schwinn to its facts in

holding that Schwinn’s proscription of vertical re-

straint, as per se illegal, refers only to manufacturer

restrictions on the location and type of customer to

whom the distributor or dealer may sell.

Applying GTE Sylvania to the facts of the instant

case, I conclude that Aermotor’s conduct must be

examined under the rule of reason analysis. The re-

striction in the instant case is similar to the location

practice of Sylvania in that it limits the location from

which the distributor can sell, not the customer, not

the customer to whom he may sell.

Plaintiffs argue that GTE does not prohibit a per se

ruling in this case because, unlike GTE, this case in-

volves horizontal territorial restrictions and the

additional restriction that distributors may not ac-

tively solicit business outside their assigned territory.

However, the shipping-distribution policy at issue is a

vertical restraint imposed by the manufacturer on dis-

tributors. There is no division of territories by

competing distributors in the guise of a vertical re-

striction. See United States v. Topco Associates, Inc.,

405 U.S. 596 (1972); United States v. Sealy, Inc., 388

U.S. 350 (1967). The fact that Aermotor distributes

products through factory outlets, as well as indepen-

dent distributors, does not automatically convert

Aermotor’s shipping policy into a horizontal arrange-

A-24

ment. The cases relied on by plaintiffs for this

proposition are all distinguishable and have been con-

sidered in the discussion relating to the monopoly

claim.

Turning now to the second argument, it is asserted

that part of Aermotor’s territorial restrictions on its

distributors included a prohibition on actively solicit-

ing business outside of the distributor’s territory. As I

have found, Aermotor’s policies did not preclude sales

by a distributor to customers outside of the assigned

territory so long as the goods were shipped from

within the territory of the distributor. Fetters’ com-

plaints to Cowley occurred because of Cowley’s

shipments to Carder and Smith directly from Aermo-

tor’s warehouses or branches and the use by Cowley of

subterfuge or deceit to conceal the destination of the

shipments. Fetters’ other complaints had not so much

to do with Cowley’s soliciting business outside his ter-

ritory but his failure to develop a sufficient sales

volume within Arizona.

I believe Fetters was aware of and accepted the prin-

ciple that there was nothing he could do about Cowley

selling outside his territory providing the products

were shipped from Arizona. This is in fact what Fet-

ters was willing to settle for and solicitation of

business never seemed to come into it. For so far as I

am able to ascertain, Cowley’s Colorado business was a

result of Carl Estep’s initial proposals and Cowley in

fact undertook no solicitations for business in Colo-

rado. Cowley’s termination occurred because of poor

sales volume in his territory and his use of subterfuge

to defeat Aermotor’s distribution policy. A manufac-

turer may properly designate the geographical areas in

Lat wen tilt ODS ab > “a

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A-25

which distributors may be primarily responsible for

distributing its product and may terminate those who

do not adequately represent or promote its products

within such areas. Reed Brothers v. Monsanto Co., 525

F.2d 486 at 494.

The crux of the matter may be posed thusly: Does

the Aermotor shipping-distribution policy unreasona-

bly restrain trade?

The overall market situation, the purpose of the pol-

icy, the effect of the policy, and whether there are less

restrictive alternatives need to be considered in deter-

mining whether the shipping policy is an unreasonable

restraint.

The purpose of the shipping policy is to effectuate

the exclusive distributorship systems, not to confine

Cowley’s sales to his own territory. Through his direct

factory sale arrangement with Carder and Smith, Cow-

ley was in effect making Carder of Lamar, Colorado

and Smith of Haxton, Colorado unauthorized windmill

distributors in Colorado. If an Aermotor distributor

can, in exchange for a 5 percent commission, make

arrangements whereby a dealer can buy truckload

quantities of windmills at the Aermotor factory or

branch outlet for the distributor discount, any exclu-

sive distributorship wold be rendered illusory.

Aermotor had a valid concern that allowing Cowley’s

deals with Carder to continue might constitute a

breach of the Aermotor-Bennett distributorship con-

tract. Moreover, it defeated Aermotor’s primary

purpose of establishing distributorships to promote its

products.

A-26

Not only did Cowley’s direct shipments to Carder

undermine the Aermotor distributorship system, but

through these arrangements Cowley evadeu perform-

ing the stocking function and its concomitant overhead

which is the essence of a distributorship and which

justified the distributor receiving a discount beyond

that given to dealers. The shipping policy serves to

insure that a distributor actually maintains a stock of

products in his territory and thereby earns his dis-

count.

I conclude that Aermotor adopted the shipping pol-

icy for legitimate business reasons. However, the test

of reasonableness additionally requires that the effect

of the shipping policy upon competition not be sub-

stantially adverse. United States v. Arnold, Schwinn &

Co., 388 U.S. 365, 375 (1966).

The shipping policy had some adverse impact on

intrabrand competition for sales at the wholesale level.

The costs of shipping to Arizona and then on to Colo-

rado would preclude Cowley from affectively

competing with Bennett for sales to dealers in eastern

Colorado, assuming Bennett offered those dealers the

standard dealer discount. This restraint results solely

from economic factors. The impact of the shipping

costs on competition varies according to the geo#raphi-

cal market. For instance, Cowley might not be

disadvantaged with respect to sales to dealers in Ne-

vada or any location more distant from the factory

outlet than is Cowley. Nor was any impact on prices to

the consumer proven. There was no evidence that

windmill retail sales dropped or would drop as a result

of Cowley’s direct sales to Carder and Smith.

he

» Ce ned ent

Se ee ee eS

A-27

When a manufacturer has a very dominant position

in a product market, any restraint imposed on intra-

band competition may have greater impact on the

whole market and harm the consumer more than a re-

straint on interbrand competition. Therefore, such

situations call for very careful scrutiny. Nevertheless, I

do not find based on the facts of this case that Aermo-

tor’s shipping policy has a substantial adverse effect

on competition in the windmill market. I conclude the

shipping policy is not and was not an unreasonable

restraint of trade.

REFUSAL TO DEAL

Plaintiffs claim that Aermotor’s refusal to deal di-

rectly with Carder, Inc. dba Ranchers Supply violates

the Sherman Act.

This claim is closely related to the claim of illegal

territorial restraint. Plaintiffs contend that Aermotor’s

refusal to sell windmills directly from the factory to

Carder was part of an agreement or combination be-

tween Aermotor and Dean Bennett to prevent

plaintiffs from competing with Bennett in Colorado

and with Aermotor branch sales agents in western

Kansas and Nebraska. It is claimed that Aermotor

protected the Colorado market for Bennett and thus

enabled him to charge inflated prices for windmills

and use windmills to push the sale of Aermotor

pumps. Aermotor contends that its refusal to deal with

Carder was a unilateral decision on Aermotor’s part to

retain Bennett as its exclusive distributor in Colorado

and that this conduct is protected under United States

v. Colgate and Company, 250 U.S. 300‘(1919).

A-28

Colgate held that in the absence of any purpose to

create or maintain a monopoly, the Sherman Act does

not restrict a manufacturer from freely exercising his

own independent discretion as to whom he will sell.

The Colgate doctrine is still alive and vital. As applied

to the instant case, Colgate means that Aermotor can

legally refuse to sell directly to Carder as long as (1)

the refusal is purely unilateral and is not motivated by

monopolistic intent, and (2) the refusal is not part of

an agreement or combination that unreasonably re-

strains trade.

As I have discussed previously in connection with

the monopoly claim, there is no evidence that Aermo-

tor intended to monopolize the distribution of

windmills or that Aermotor’s conduct had the effect of

monopolizing the distribution of windmills. In brief,

Aermotor’s refusal to sell windmills on distributor

terms to Carder was not part of a plan to monopolize

distribution. The instant case is thus distinguishable

from those cases cited by plaintiffs in which a sup-

plier’s refusal to deal with a distributor was found to

be in furtherance of a plan to monopolize distribution

of the product. See Pacific Coast Agricultural Export

Ass’n. v. Sunkist Growers, Inc., 526 F.2d 1196 (9th Cir.

1975); Otter Tail Power Co. v. United States, 410 U.S.

366 (1973).

The inquiry does not end here, however, because

Aermotor’s refusal to sell to Carder was not purely

unilateral conduct. The evidence establishes that Aer-

motor refused to deal with Carder because of its

exclusive distributorship contract with Dean Bennett.

Moreover, Fetters discussed the matter of Carder’s

request to buy directly from Aermotor with Bennett

A-29

before he denied Carder’s request and told him to try

to work out better terms with Bennett. This is clearly

sufficient showing of combination for Section 1 pur-

poses under the expanded definition of combination

set forth in United States v. Parke, Davis and Co., 362

U.S. 29 (1960).

The agreement was the exclusive distributorship

arrangement under which Bennett was granted the

exclusive right to buy directly from Aermotor as a dis-

tributor. There was no agreement or combination to

drive Carder out of business or to exclude him from

the Colorado windmill market. In sum, the refusal to

deal with Carder would have violated Section 1 of the

Sherman Act only if the exclusive distributorship ar-

rangement was itself unlawful.

Exclusive distributor agreements are tested under

the rule of reason. Simple exclusive distributor agree-

ments, that is, a contract by which the distributor is

granted the exclusive right to purchase and the manu-

facturer does not restrict the territory or customers to

whom the distributor may resell, have been uniformly

upheld by the courts as reasonable. Packard Motor

Car Co. v. Webster Motor Car Co., 243 F.2d 418 (D.C.

Cir. 1957). Packard, the leading case on the lawfulness

of exclusive distributorships, contains the caveat that

“effective competition exists at both the seller and

buyer levels.” The reasonableness of Aermotor’s distri-

bution scheme is put into question because Aermotor

has a monopoly position in the windmill market.

A-30

Applying the rule of reason now to the refusal to

deal with Carder, I conclude, based on the legitimate

purpose of the refusal and the absence of a substantial

adverse effect on interbrand or intrabrand competi-

tion, that the refusal is not an unreasonable trade

restraint.

The purpose or motive for Aermotor’s refusal to sell

directly to Carder from the factory or branch at a dis-

tributor discount was not, as Carder claims, to exclude

Carder from the Colorado market, but merely to retain

Bennett as the exclusive Aermotor distributor. The

correspondence regarding the 1967 and 1969 meetings

between Carder and Fetters clearly document that

Aermotor refused Carder’s request because Dean Ben-

nett was performing well as an independent Aermotor

distributor. Bennett was strong in pump sales and

Aermotor desired to strengthen its competitive posi-

tion in that market. Carder was a dealer for Sta-Rite

pumps, one of Aermotors serious competitors in a

keenly competitive pump market. Carder made no of-

fer to take on the full line of Aermotor products, such

as pumps as well as windmills. He was interested in

buying windmills at distributor quantities and prices.

Aermotor had legitimate business reasons to reject

Carder’s request.

The critical question is whether Aermotor’s insist-

ence on retaining the exclusive distributorship

arrangement for the State of Colorado had a substan-

tial adverse effect on interbrand or intraband

competition.

4

:

;

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A-31

Bennett Supply had the exclusive right to purchase

Aermotor products directly from the Aermotor factory

or branch outlets. Therefore, all Colorado dealers, like

Carder, had a restricted source of Aermotor products:

they could either purchase from Bennett on his terms

or from independent distributors outside of Colorado.

Contrary to Carder’s contention, the evidence shows

that Bennett offered Carder the normal dealer dis-

count on windmills, 25 plus 5. This discount is the

same as the Dempster dealer discount and Aermotor

windmill prices were competitive with Dempster. Car-

der’s complaints were directed principally to Bennett’s

prices which he contended were above Aermotor’s list

price. it is important to note that Carder had access to

Dempster windmills. In fact, Carder was for a time a

Dempster distributor.

_Carder’s competition in the Colorado windmill mar-

ket included Smith Hardware of Haxton, Colorado,

Dean Bennett of Denver, and American Pipe and

Supply marketing the Dempster windmill.

In sum, there was effective intrabrand competition

at the retail level as well as interbrand competition in

the Colorado windmill market. The restraint which

Carder complains of occasioned by the Bennett exclu-

sive distributorship operated at the wholesale level.

When Carder could no longer obtain Aermotor wind-

mills from the Cowley distributorship, he was forced to

give up the wholesale business in Aermotor windmills.

He continued to serve his retail customers.

A-32

Whether Aermotor’s restrictions against allowing its

own outlets to sell to dealers, such as Carder or Smith,

within the area of an exclusive distributorship under

circumstances where distributor list price is substan-

tially above factory list price constitutes a violation of

the antitrust laws is not presented in this litigation.

I conclude that Aermotor’s refusal to deal with Car-

der of Ranchers Supply as a distributor was based on

sufficient business reasons and did not involve or

amount to a violation of the Sherman Act.

TORT CLAIMS:

Plaintiffs claim that apart from antitrust consider-

ations, Aermotor’s efforts to discourage Cowley from

selling direct from the factory to Carder and Smith

constitutes tortious interference with contract or pro-

spective advantage.

To recover on a claim for tortious interference with

contract rights a claimant must show (1) the existence

of a valid contract; (2) defendant’s knowledge thereof;

(3) breach induced by the defendant; (4) the absence

of privilege or justification; (5) damages resulting

therefrom. Middleton v. Wallichs Music and Enter-

tainment Co., 536 P.2d 1072 (Ct. App. Ariz. 1975). In

that case the lessor covenanted not to rent to the mu-

sic company but was induced by the music company to

do so. Lessee sued the music company.

Although courts have stated that a mere business

expectancy as opposed to an existing contract suffices

for the first element, all the cases that I have found

involve existent contracts in which one of the contract-

ing parties is induced to breach or is prevented from

performing. See among other, Pre-Fit Door, Inc. v.

ee

28 el en Pe ee en Raa I et

A-33

Dor-ways, Inc., 477 P.2d 557 (Ct. App. Ariz. 1970);

Meason v. Ralston Purina Co., 107 P.2d 224 (Ariz.

1940).

There is some evidence that Cowley and Carder had

an expectation of further business dealings in Decem-

ber, 1970, or a potential contract to purchase more

windmills directly from the factory at distributor price

less 5 percent, which never materialized because Cow-

ley was afraid he would lose his distributorship if he

continued to violate the Aermotor shipping policy.

Carder and Smith bought from Burdick and Burdick

after Cowley declined to ship another truckload. How-

ever, the evidence fails to establish that Aermotor had

knowledge of this prospective deal and unjustifiably

acted with the purpose of inducing Cowley not to per-

form.

Fetters’ purpose in warning Cowley to adhere to the

shipping policy was to give effect to its exclusive dis-

tributorship agreement with Dean Bennett. Having

found that the exclusive distributorship agreement was

not an illegal restraint of trade, Fetters was justified in

attempting to enforce it by discouraging Cowley from

arranging direct factory shipments to Colorado deal-

ers. |

PRICE DISCRIMINATION:

Plaintiffs claim that Aermotor knowingly discrimi-

nated against Dixon Crowley and in favor of Dean

Bennett with respect to the prices of Aermotor prod-

ucts and that such conduct violates Sectior 2 of the

Clayton Act, 15 USC 13.

A-34

Section 2 of the Clayton Act, as amended by the

Robinson-Patman Act, 49 Stat. 1526, makes it unlaw-

ful ‘‘to discriminate in price between different

purchasers of commodities of like grade and quality

... where the effect of such discrimination may be

substantially to lessen competition or tend to create a

monopoly in any line of commerce, or to injure, de-

stroy, or prevent competition with any person who

either grants or knowingly received the benefit of such

discrimination, or with customers of either of them

.--” 15 USC 13(a).

When Cowley became an Aermotor distributor in

1966, no standard distributor discount existed. Cowley

was granted a discount, 30 and 5, which was compara-

ble to the discount afforded Burdick and Burdick in El

Paso but less than the discount offered Dean Bennett

of 40 and 5, the distributor in Colorado. Cowley was

aware at that time that he was not getting the maxi-

mum discount. This situation existed until March,

1968, when a uniform Aermotor distributor discount

structure was established.

Assuming that the discount differential in 1966-1968

constitutes a violation of the Clayton Act, Section 2,

Cowley is barred by the four year statute of limitations

in the Act, 15 USC 15(b), from claiming any damages

from this period.

A comparison of the invoices from Cowley Pump

and Supply and Dean Bennett Supply over the 1969-

1971 period shows that some of Cowley’s purchases

were made at a lesser discount than were Bennett’s

purchases during the same period. However, the evi-

dence fails to establish that the discount differential

on any purchase was the result of knowing price dis-

aT male

2 & LEP EAD OUD AIOE EFI FOB ee

A-35

crimination by Aermotor in favor of Bennett. Cowley

may have received lesser discounts because of failure

to take advantage of the extra 5 percent quantity dis-

count for truckload shipments of more than 10,000

pounds from the Tulsa factory warehouse or from lar-

ger discounts offered distributors for factory as

opposed to branch pickup of smaller orders.

During 1969-1971 Aermotor had a uniform discount

structure applicable to windmills and parts which of-

fered an additional 5 percent off the standard 40

percent distributor discount for factory as opposed to

branch pickup and another 5 percent off for shipments

of more than 10,000 pounds which could be ordered

only from the factory. Cowley does not contend that

the longer discounts for quantity purchases and for

factory pickup are not cost justified or discriminate

against him. This case thus distinguishable from cases

in which a quantity discount theoretically available to

all customers was held to violate the Clayton Act be-

cause the quantity discount in fact discriminated in

favor of a select few large customers who alone had the

power to buy at sufficient quantities to warrant the

discount. See, Federal Trade Commission v. Morton

Salt Co., 334 U.S. 37 (1948).

Apart from the claim of price discrimination in

windmill sales, Cowley claims that Dean Bennett was

able to purchase pumps at lower prices during 1970-71

and that Cowley was denied the credit which Bennett

received for pulling defective motors from Aermotor

pump assemblies. :

A-36

Aermotor did afford Dean Bennett a regional com-

petitive discount in submersible pumps for a limited

time during 1970-71 for the purpose of meeting keen

price competition from Berkeley in the Denver mar-

ket. Cowley did not receive the special discount.

However, Cowley did not sell any submersible pumps

in Colorado during this period. There is no evidence

that Cowley ever actually competed with Bennett for

the sale of submersible pumps.

The special discount on submersibles afforded Ben-

nett does not offend the Clayton Act because Cowley

was not a competitor at the time, and therefore the

discount could not possibly have had the effect of in-

juring competition in the sale of submersible pumps.

See, England v. Chrysler Corporation, 493 F.2d 269

(9th Cir. 1974).

Furthermore, the evidence indicates that the special

regional discount was justified by the need to meet the

submersible pump prices of Aermotor’s competitor,

Berkeley.

Finally, Cowley has failed to prove that Aermotor

denied him credit for pulling motors. Cowley did not

show that he had ever requested credit for doing so.

In sum, the evidence is insufficient to sustain the

claim of price discrimination.

STATE ANTITRUST CLAIMS:

Plaintiffs claim that Aermotor’s course of conduct

violates the Colorado and Arizona antitrust statutes, 6

C.R.S., Section 6-4-101 et seq., and A.R.S., Section 44-

1401 et seq. These claims do not require extensive dis-

cussion.

Spee Ae ohas 3.

a a

‘

3

i

}

A-37

Although the wording of the Arizona and Colorado

statutes may differ somewhat from that of the Sher-

man Act, there is no indication that the standards for

determining whether given conduct violates state law

differ from Sherman Act standards. To the contrary,

the Arizona Supreme Court has held that the rule of

reason established in respect to the Sherman Act ap-

plies in construction of A.R.S. 44-1401 et seq. Dattilo

v. Tucson General Hospital, 23 Ariz. App. 392, 533

P.2d 700 (1975). See also, Whipple v. Shamrock Foods

Co., 26 Ariz. App. 437, 549 P.2d 217 (1976), Bonney v.

Northern Arizona Amusement Co., 78 Ariz. 155, 277

P.2d 248 (1955).

Dattilo involved a claim under the Arizona antitrust

statute that was repealed and replaced in 1974 by en-

actment of the Uniform State Antitrust Act. The

present statute expressly provides that courts may

look to federal case precedent as a guide. A.R.S. 44-

1412. .

Likewise, the few court decisions under Colorado

‘ statutes fail to indicate that Colorado courts would

find that business practices which do not violate the

federal antitrust law constitute a violation of C.R.S.

55-4-1. See, among others, People ex rel. Kinsey v.

Sumner, 525 P.2d 512 (Colo. App. 1974).

In sum, having concluded that plaintiffs have failed

to prove a violation of the federal antitrust laws, they

likewise fail to prove any liability under state law. It is

therefore not necessary to reach the constitutional

questions dealing with the supremacy and commerce

clauses raised in the briefs.

A-38

BRADEN’S COUNTERCLAIM:

Finally, the Braden counterclaim. Aermotor Division

has counterclaimed for $12,426.61 which Duke Cowley

owes on open account for purchases of Aermotor prod-

ucts prior to Cowley’s termination as a distributor.

Cowley does not dispute that he owes Aermotor

$12,426.61, but contends that Aermotor is barred from

asserting this claim because Aermotor has not com-

plied with the requirements of A.R.S. 10-481 for

formal qualification of foreign corporations transacting

business in Arizona. Aermotor has not complied with

Section 10-481, see pretrial stipulation number 44.

The statute provides:

“No foreign corporation shall transact business in

this state until it has complied with the require-

ments of Section 10-481, and every act done prior

thereto is void.”

Arizona courts have stated that a corporation must

be engaged in enterprise of some permanence and dur-

ability and must transact a substantial part of its

ordinary business in Arizona for the sanction of A.R.S.

10-482 to apply. L. M. White Contracting Co. v. St.

Joseph Structural Steel Co., 488 P.2d 196 (Ct. App.

Ariz. 1971).

It is not necessary, however, to decide whether the

character and quantity of Aermotor’s business activity

in the State of Arizona is such as to subject Aermotor

to the requirements of A.R.S. 10-481 and the sanctions

of 10-482. Even assuming substantial activity, Section

10-482 does not apply to void a business transaction

Pe

a ee eS eee ae

A-39

that occurs outside the state. Neiderhiser v. Henry’s

Drive-In, Inc., 394 P.2d 420 (Ariz. 1964), holding that

A.R.S. 10-482 does not apply to an act done outside

the state.

The sale of Aermotor products on which the Aermo-

tor counterclaim is based was transacted outside

Arizona. Cowley purchased Aermotor products at the

factory or branch outlet in Oklahoma or Texas and

then brought the products into Arizona. These circum-

stances are virtually identical to those in Ranch House

Supply Corp. v. Van Slyke, 370 P.2d 661 (Ariz. 1962)

which held that the plaintiff was not doing business in

Arizona where plaintiff marketed units through fran-

chised dealers in Arizona but the contract was

executed in California and the purchase price was

fixed at f.o.b. price in California.

I conclude that A.R.S. 10-482 does not bar assertion

of Aermotor’s counterclaim and that the Aermotor

Division of Braden is entitled to recover $12,426.61.

Attorneys for defendant shall prepare, serve and file

a proposed judgment.

B-1

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Drxon D. Cow.ey, dba CowLey Pump AND

Suppty, GRAHAM L. Cow.ey and Hucu H.

Cow .ey, dba Cow ey Bros. Supp.y, and

Carper, Inc., dba RANCHERS SUPPLY

ComPANY,

Plaintiffs-Appellants + Se

a 77-3272

BrADEN INDUSTRIES, INC., a Delaware

corporation doing business in the State of

Defendant-Appellee.

4

Appeal from the United States District Court for the

District of Arizona

Before: CHOY and KENNEDY, Circuit Judges, and

WILLIAMS,' _ District Judge.

KENNEDY, Circuit Judge:

This case arises from a dispute between a manufac-

turer and its former distributor. The distributor, and a

retailer to whom it had made sales, both brought suit

against the manufacturer in the District Court for the

District of Arizona, alleging violations of federal and

state antitrust laws and a state tort claim. The manu-

facturer filed a counterclaim for amounts due on

products delivered to the distributor. The case was

Mi ecaait a vitcas bil ta Big AOI ln aN Ce AN Een LE he a ee tom et

‘ Honorable Spencer Williams, United States District Judge for the

Northern District of California, sitting by designation.

B-2

tried without a jury, and the trial court found for the

manufacturer on all counts of the complaint, and also

on the counterclaim. The distributor and the retailer

appeal from the judgment, and we affirm.

The appellants are Dixon D. Cowley (Cowley), the

former Arizona distributor of Aermotor products, and

Carder, Inc. (Carder), a Colorado retailer which pur-

chased the products in question from Cowley. The

manufacturer is appellee Braden Industries, a corpora-

tion which manufactures windmills and pumps

through its Aermotor Division. We shall refer to

Braden Industries as “Aermotor.”

The principal concern in the litigation is the mar-

keting and distributing system established by

Aermotor for the sale of windmills manufactured by it.

Aermotor has for some years occupied approximately

70 percent of the windmill market-nationwide. The

windmills are used primarily for providing stock water

in cattle ranching country. Aermotor also sold pumps,

though not necessarily for use in conjunction with the

windmills. Aermotor was a relative newcomer in the

pump market.

Aermotor used a bifurcated distribution system. One

channel of distribution was through sales by company-

owned outlets or branches; the other was through sales

by independent distributors. Distributorships were

established to serve particular geographic areas. Aer-

motor agreed its branches would not compete with

distributors in any given territory. In addition, Aermo-

tor established a policy which discouraged distributors

from selling within the territory of another distributor.

Under Aermotor’s announced policy, distributors

could sell outside their territories if: (1) the goods first

er |

i Ne Nl A Sm RN aN i te cs

ne

a me

B-3

came to their territories; (2) the items were placed in

stock; and (3) the distributors were not “actively solic-

iting business outside their assigned territory.”

Cowley held the distributorship for Aermotor prod-

ucts in the State of Arizona. In violation of the

distribution agreement, Cowley began selling wind-

mills to purchasers in Colorado, including Carder,

without first shipping the windmills through Arizona.

Carder was reselling the windmills at substantially

lower prices than the authorized Aermotor dealer for

Colorado, one Dean Bennett. After Bennett com-

plained and Aermotor warned Cowley, Aermotor

terminated Cowley for persisting in making sales to

Carder. Cowley and Carder then commenced the pres-

ent litigation, alleging illegal territorial restraints,

monopolization and attempted monopolization, price

discrimination, refusal to deal, interference with con-

tract rights,? and violations of the antitrust laws of

Arizona and Colorado.

* The district court’s ruling on the Robinson-Patman Act claim is

not being appealed to this court. Upon due consideration of the refusal

to deal and interference with contract claims, we agree with the district

court that they are without merit.

The district court correctly concluded that the validity of the refusal

to deal claim depended on whether the underlying exclusive dealership

arrangement and concomitant territorial restrictions constituted unrea-

sonable restraints of trade. Because we conclude infra that these

restrictions were not shown to be unlawful, the district court’s finding

that there was no illegal boycott was correct.

Appellants’ claim of tortious interference with contract or prospective

business advantage is meritless because appellants proffered no evidence

at trial to indicate that Aermotor had knowledge of a valid contract as

required by Arizona law. See Middleton v. Wallichs Music and Enter-

tainment Co., 24 Ariz. App. 180, 536 P.2d 1072. (1975).

B-4

Territorial Restraints

The principal issue in this case involves Aermotor’s

admitted policy concerning sales to distributors. The

restrictions imposed by the manufacturer on its dis-

tributors to limit sales in a geographic area are a type

of vertical restraint. Although the restraints imposed

by Aermotor did not prohibit outright sales outside of

a distributor’s primary area, their enforcement would

make such sales economically unfeasible or, at least,

significantly less profitable.

Vertical restraints are governed by the rule of rea-

son. See Continental T.V. Inc. v. GTE Sylvania, 433

U.S. 36 (1977), overruling United States v. Arnold,

Schwinn & Co., 388 U.S. 365 (1967). The basic inquiry

under the rule of reason is whether the restraint in

question “is one that promotes competition or one that

suppresses competition.” National Society of Profes-

sional Engineers v. United States, 435 U.S. 679, 688

(1978). Courts determine whether the distribution sys-

tem was unreasonable in view of “the facts peculiar to

the business to which the restraint is applied; its con-

dition before and after the restraint was imposed; the

nature of the restraint and its effect, actual or proba-

ble.” Chicago Board of Trade v. United States, 246

U.S. 231, 238 (1918); Ackerman-Chillingworth v. Pa-

cific Electrical Contractors Ass’n, 579 F.2d 484 (9th ©

Cir. 1978), cert. denied, 439 U.S. 1089 (1979); National

Auto Brokers Corp. v. General Motors Corp., 572 F.2d

953 (2d Cir 1978), cert. denied, 439 U.S. 1072 (1979).

The trial court ruled that appellants failed to estab-

lish the distribution system in question was

unreasonable. Appellants attempt to compensate for

their failure to proffer adequate evidence by claiming

ee eee

|

B-5

that Aermotor, as defendant, had the burden of prov-

ing the restraints reasonable. They argue that when a

defendant with substantial market power restrains

trade, the burden shifts to him to show that the re-

straints are reasonable. Appellants cite Brunswick

Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977),

Purex Corp. v. Proctor & Gamble Co., 596 F.2d 881

(9th Cir. 1979), and Greyhound Computer Corp. v.

IBM, 559 F.2d 488 (9th Cir. 1977), cert. denied, 434

U.S. 1040 (1978), to support this contention.

We find no support in any of these cases for appel-

lants’ argument. None of these cases involved

application of the rule of reason or discussed the bur-

den of proof in such cases. Purex and Brunswick

involved the application of section 7 of the Clayton

Act to corporate acquisitions; Greyhound involved a

claim for monopolization and attempted monopoliza-

tion under section 2 of the Sherman Act.

The burden to prove a vertical restraint unreasona-

ble is part of the plaintiff’s case in chief. See Magnus

Petroleum Co. v. Skelly Oil Co., 599 F.2d 196, 204 (7th

Cir.), cert. denied, 48 U.S.L.W. 3258 (U.S. Oct. 15,

1979). The plaintiff in an antitrust action in which the

rule of reason governs “must evince a substantial ad-

verse effect on competition in the relevant market to

support a viable legal theory.” Mutual Fund Investors

v. Putnam Management Co., 553 F.2d 620, 627 (9th

Cir. 1977). “Unless the alleged anticompetitive con-

duct is per se unreasonable, the fact that the conduct

restrained trade in a relevant market is an essential

part of a plaintiff’s case ... and the burden of estab-

lishing it lies on him.”’ Gough v. Rossmoor Corp., 585

F.2d 381, 385 (9th Cir. 1978) (emphasis added), cert.

B-6

denied, 400 U.S. 936 (1979); Knutson v. Daily Review,

Inc., 548 F. 2d 795 (9th Cir. 1976), cert. denied, 433

.S. 910 (1977); Cataphote Corp. v. DeSoto Chemical

Coatings, Inc., 450 F. 2d 769 (9th Cir. 1971), cert. de-

\_mied, 408 U.S. 929 (1972). Appellants simply failed to

meet this burden. At trial they used lances to tilt with

the windmills and on appeal it is too late to avail

themselves of the proper weapons and a different tar-

get. We decline to alter the burden of persuasion to

compensate for the deficiencies of appellants’ trial

strategy.

In applying the GTE Sylvania standard, the trial

court held that the territorial restraints were reason-

able for three reasons. First, the requirement that a

distributor take goods into his trade area before selling

them improved the efficiency in marketing since it

ensured the distributor’s maintenance of a proper

stock of goods and its intense promotion of sales in the

assigned area. Second, there was no showing by appel-

lants of any effective, alternate means to maintain an

efficient distributor system. Third, there was no evi-

dence that interbrand competition was harmed by

Aermotor’s shipping policy. These findings of fact

were fatal to the appellants’ case.

The findings of the district court will stand unless

they are clearly erroneous and not supported by sub-

stantial evidence. Zenith Radio Corp. v. Hazeltine

Research, Inc., 395 U.S. 100 (1969); Smith v. James

Irvine Foundation, 402 F.2d 772 (9th Cir. 1968), cert.

denied, 394.U.S. 1000 (9169); Chorek v. RKO Radio

ewes 2a od

B-7

Pictures, 196 F.2d 225 (9th Cir. 1952). We are unable,

due to appellants’ failure to adduce sufficient evidence

to show that the restraints violated the rule of reason

standard, to rule that the district court erred.

The district court noted that “the absence of proof

in thise significant areas ... may have been signifi-

cantly affected since the case was presented originally

on the basis of a per se violation under the Schwinn

standard.” When appellants filed their case, the per se

rule of United States v. Arnold, Schwinn & Co., 388

U.S. 365 (1967) was in effect. Nine months prior to the

district court’s judgment, but two months after trial,

we announced our decision in GTE Sylvania Inc. v.

Continental T.V., Inc., 537 F.2d 980 (9th Cir. 1976)

(en banc), aff'd 433 U.S. 36 (1977). In our opinion in

GTE Sylvania, we chose to read Schwinn narrowly,

holding that its per se ban on vertical restraints ap-

plied only to manufacturer restrictions on the sale of

products outside the dealer’s exclusive territory. Be-

cause Aermotor allowed distributors to sell windmills

outside their assigned territories, the district court

correctly concluded that our opinion in GTE Sylvania

was controlling and applied the rule of reason to the

vertical restraints in question.

The Supreme Court affirmed our en banc opinion in

GTE Sylvania but concluded that “Schwinn is indis-

tinguishable from the location restriction in the

present case.” 433 U.S. at 46. In overruling Schwinn,

the Court held that nonprice restrictions should be

tested under the rule of reason. Since we had already

concluded that vertical restrictions such as those in

this case were properly governed by the rule of reason,

the applicable legal standard did not change. The dis-

B-8

trict court issued a second opinion reanalyzing the

vertical restraints in light of the Supreme Court’s deci-

sion in GTE Sylvania and reached the same

conclusions that it did in its first opinion.

Neither in their motion for new trial below nor in

their appeal before this court have appellants argued

that they were prejudiced in any way by the overruling

of Schwinn. Indeed, the thrust of appellants’ argument

on appeal has been that Aermotor’s marketing prac-

tices violated section 1 of the Sherman Act whether

tested under the rule of reason or a per se rule. We

must conclude, due to appellants’ failure to raise the

issue, that no prejudice in fact occurred. See Del Rio

Distributing, Inc. v. Adolph Coors Co., 589 F.2d 176

(5th Cir.), cert. denied, 48 U.S.L.W. 3219 (U.S. Oct. 1,

1979).

Monopoly

Appellants further alleged that Aermotor monopo-

lized or attempted to monopolize the windmill

industry in violation of section 2 of the Sherman Act.

To establish a violation of section 2, it is necessary to

prove two elements: “(1) the possession of monopoly

power in the relevant market and (2) the willful ac-

quisition or maintenance of that power as distin-

guished from growth or development as a consequence

of a superior product, business acumen, or historic ac-

cident.” United States v. Grinnel Corp., 384 U.S. 563,

570-71 (1966). Without addressing the question of

whether appellants had standing to raise a section 2

claim, see In re Multidistrict Vehicle Air Pollution

een eT nee

B-9

M.D.L. No. 31, 481 F.2d 122 (9th Cir. 1972, cert. de-

nied, 414 U.S. 1045 (1973), we believe that the district

court properly concluded that appellants failed to

meet their burden of proof under the Grinnel test.

The district court found, and the evidence estab-

lished, that Aermotor has a predominant position in

the windmill market. It controls between 70 and 80

percent of that market, both nationally and in Colo-

rado and Arizona. Thus, the first part of the Grinnel

test was met. There was no evidence, however, that

Aermotor acquired or maintained its market position

through the use of predatory conduct as required by

the second part. Appellant failed to prove its allega-

tion that Aermotor used its dominant position in the

windmill market to improve its pump sales by tying

pump sales to windmill sales. Further, we have con-

cluded that the territorial restrictions were not shown

to be unreasonable, and there is no evidence that .hese

restraints were used with predatory intent.

STATE CLAIMS

Antitrust Claims

Appellants claimed that Aermotor’s conduct violated

the Colorado and Arizona antitrust laws. Because ap-

pellants have not cited, nor have we found, any

authorities which have held conduct similar to Aermo-

tor’s to be unlawful under Arizona or Colorado

antitrust law, we affirm the judgment of the district

court that there were no state antitrust violations.

Counterclaim

Aermotor counterclaimed for $12,426.61 which Cow-

ley owed for purchases of Aermotor products made

prior to Cowley’s termination as a distributor. Cowley

B-10

does not dispute the’ amount that he owed, but con-

tends that Aermotor is barred from asserting the claim

because it has not complied with Ariz. Rev. Stat. }10-

481 which requires registration of foreign corporations

doing business in the state. Ariz. Rev. Stat. §10-482

further provides:

No foreign corporation shall transact business in

this state until it has complied with the require-

ments of Section 10-481, and every act done prior

thereto is void.

The district court held that it was not necessary to

decide whether the character and quantity of Aermo-

tor’s activities in Arizona were such as to make it

subject to the registration requirement of section 10-

481. The court concluded that, even assuming the ne-

cessity for registration, section 10-482 did not void the

transactions because the products were purchased out-

side the state.

We believe that the district court was correct. See

Neiderhiser v. Henry’s Drive-In, Inc., 96 Ariz. 305, 394

P.2d 420 (1964) (Section 10-482 does not apply to an

act done outside the state.). In Ranch House Supply

Corp. v. Van Slyke, 91 Ariz. 177, 370 P.2d 661 (1962),

the Supreme Court of Arizona held that a corporation

was not doing business in Arizona when it marketed

units through franchise dealers in Arizona when it

marketed units through franchise dealers in Arizona

but the contract was executed in California and the

purchase price was fixed at f.o.b. price in California.

Here, Cowley purchased Aermotor products at factory

id dé welt» -

wer nce es Sine tiats eh alba se ISEB rth. nadainsse ab one ine

B-11

outlets in Texas or Oklahoma and brought the prod-

ucts into Arizona. We conclude that Aermotor was not

transacting business in Arizona for purposes of section

10-482.

Finally, appellants contend that if Aermotor’s con-

duct violated either state or federal antitrust law, then

recovery on the counterclaim is barred under Ariz.

Rev. Stat. \44-1405 (A) & (B) which permits a party to

defend on the ground that the claim grew out of illegal

conduct on the part of the claimant. Because we have

found no violation of federal or state antitrust law, we

find it unnecessary to reach this issue.

AFFIRMED.

ii a i oa esi

Pherae re 5

C-1

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Dixon D. Cow ey, dba CowLey Pump AnD

Supp.y, GRAHAM L. Cow.ey and Hucu H.

Cow ey, dba Cow.ey Bros. Suppy, and

CarDER, INc., dba RANCHERS SUPPLY

CompPaANy, 7

Plaintiffs-Appellants eel 9

BRADEN bedieas: Inc.,a Delaware

corporation doing business in the State of ORDER

Arizona,

Defendant-Appellee.

Before: CHOY and KENNEDY, Circuit Judges, and

WILLIAMS,' _ District Judge.

The panel as constituted in the above case has voted

to deny the petition for rehearing. Judges Choy and

Kennedy have voted to reject the suggestion for re-

hearing en banc, and Judge Williams has recom-

mended rejection of the suggestion for rehearing en

banc.

The full court has been advised of the suggestion for

en banc rehearing, and no judge of the court has re-

quested a vote on the suggestion for rehearing en banc.

Fed. R. App. P. 35(b). | ;

The petition for rehearing is denied and the sugges-

tion for a rehearing en banc is rejected.

' Honorable Spencer Williams, United States District Judge for the

Northern District of California, sitting by designation.