Petition — Zoslaw v. MCA Distributing Corp.

Supreme Court brief1983

Ask Donna

What actually matters in this document.

Text

o> <>} 7% A 6> ) Office-Sy apy ete a

_ - _ & “ey | HHiCe- supreme Court, U.S.

NO. . FILED

IN THE SUPREME COURT FER o9 (983

OF THE ALEXANDER L. STEVAS,

CLERK

UNITED STATES

October Term, 1982

Charles Zoslaw and Jane Zoslaw,

husband and wife,

dba Marin Music Centre,

Petitioners,

vs.

MCA Distributing Corporation, Doug

Robertson Advertising, Inc., MTS,

Inc., Tower Enterprises, Inc.,

Warner/Elektra/Atlantic Corporation,

ABC Records, Inc., Polygram Distribu-

tion, Inc., Capitol Records, Inc. and

Capitol Industries-EMI,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Maxwell Keith

(COUNSEL OF RECORD)

50 California Street

Suite 955

San Francisco, CA 94111

(415) 981-1361

Attorney for Petitioners,

Charles Zoslaw and

Jane Zoslaw, husband

and wife, dba

Marin Music Centre

CUESTIONS PRESENTED

l. Are small ethical retailers of phono-

graph records and tapes entitled to the

protection of the Sherman Act when a

powerful group of seven major nationwide

distributors constituting 80% of the

desired product agree with multi-chain

retailers that their opening of full cata-

logue record stores on a growth basis will

be subsidized by special financial

assistance and advertising funds with

which to advertise the products of the

group a few cents over the price the dis-

tributors sell at wholesale to the small

ethical retailer?

a. Is not such an agreement implied

as a matter of law from the proof of con-

tinuous advertising by the few chain

retailers named here at such prices?

(Example: advertised sell prices of

$3.66, $3.88 and $3.99 on $6.98 list com-

pared to cost of the album to the retailer

of $3.65.)

b. Is not such an agreement to be

proscribed in accordance with the purposes

of the law of conscious parallelism?

2. Can a multi-state chain retailer of

phonograph records and tapes who has ad-

mittedly received the right to purchase at

least 80% of the popular selling records

and tapes at greatly reduced purchase

prices, compared to the prices charged

competitive retailers and who has an-

nounced that he uses this price advantage

to lower prices to "zing" competition

escape liability for predatory pricing

under Section 2 of the Sherman Act because

he is not selling below his cost, although

he knowingly utilizes price discrimina-

tions to sell the product at below the

cost of competitive retailers?

3. a. Does the Sherman Act prohibit a

record company from refusing to sell its

protected products to a retailer because

the retailer has instituted an action to

prove that the exclusively controlled

products are subjects of restraints of

trade?

b. Assuming that Capitol Records can

individually refuse to deal in order to

prevent the litigation of its antitrust

violations, can its refusal to deal pur~«

suant to a conspiracy to monopolize the

Sale of records at wholesale and at retail

be determined in summary judgment on the

showing of parallel conduct by it and its

competitors as to list prices, allowance

of favorable subdistributor prices to the

named chain retailers, of the granting of

special financial terms and advertising

subsidies to the chain retailers and its

attendance at group association meetings?

4. Did the courts have the constitutional

power to determine facts on motions for

summary. judgment especially when such

determinations go to general conspiracy

issues by reason of U.S CONST. art. I,

III; amend. VII?

TABLE OF CONTENTS

I QUESTIONS PRESENTED......+s06-

II LIST OF Pe aes bheeebeasevede

III CITATIONS TO OPINIONS BELOW...

IV GUMLPUECE EME ceeceeeecescecens

V STATUTES TRVGUVEDcceceeeoeccee

VI CONCISE STATEMENT OF THE CASE

Cc.

The Substance of the Case..

The gE ne eee

1. Manufacturers or

DISCELBUCOLB. ccoccccccce

2. Respondent Retailers...

Se GUROE ROCGLLOEB. cccceccs

Concentration of Distribu-

tion of Records and Tapes in

the Hands of Seven Major

Distributors and Price

Uniformity Was Disclosed...

Concurrently With the Con-

solidation of Distribution

in the Hands of Nationwide

and Worldwide Companies,

the Retailing of Phonograph

Records and Tapes Became

Concentrated in the Hands

of Those who were Either

Owned by Nationwide Distri-

butors or Who Assured the

Distributors They Would

Undertake Chain Store

Exjpansion on the West Coast

and Who Would Enter into

"Under the Table" or Frau-

Page

oondreuiwvyt _- &

ARGUMENT

dulent Conduct to Obtain

Discriminatory Allowances..

Analysis of the Relevant

Markets Showed that the

Nationwide Distributors

Subsidized the Growth of

Multi-chain Retailers......

Preliminary: The

‘distribution and

retailing of phonograph

records and tapes......

a. The Basic Products

b. Manner of Distri-

San Francisco-Marin

County: A microcosm...

Combination and Conspiracy

The distributors

directly financed the

growth of the chain

retailers on the West

Ges oh 04 64s a884000068

There existed parallel

refusals to allow peti-

tioners to meet

competition......seeees

The Distributor-Defendants'

Exclusion of Ethical Re-

tailers Spread to the Entire

West Coast and Presumably

the Deen denedeews contac

I. The Decision Below is in Total

Conflict with the Decisions of

this Court Which Prevent Com-

petitive Suppliers From Combining

ii.

to Establish a Fixed and Rigid

POs 6000 60 0b bb.b00 660055685

A. This Court's Holdings

Preventing Group Action by

Those Dominating an Indus-

try Have Been Ignored......

l. Paramount Pictures,

Klors, preclude agree-

ments to discriminate...

B. The Determination That a

Refusal to Deal Based Upon

Reaction to an Antitrust

Complaint is Lawful is in

Conflict With the Decision

of Another Panel of the

Ninth Circuit, and the Third

Geie 5 56ebe ee bb 600 sesee

C. Interstate Circuit Has

Been Erroneously Construed

to Allow Determinations of

Fact by Appellate Courts...

De Deo cbsecesevoescetouseaceos

APPENDICES

Appendices A -- Opinion of the

United States Circuit Court of

Appeals for the Ninth Circuit.

Appendices B -- Opinion of the

United States District Court

for the Northern District of

California.

Appendices C -- Pertinent pro-

visions of the Sherman Act.

Appendix D -- The Robinson-

Patman Act.

iii.

TABLE OF AUTHORITIES —

U.S. Constitution

U.8. Constitution, art. I, Iff,

amend. i; Pere rerrrerrrrer.

Statutes

15 U.S.C. §§ 1 and 2..cccceees

15 U.8.C.w § L3cceccccccccccces

15 U.8.C. § LSecccccccccccvces

28 U.S.C. § L254. ccccccccccces

California Evid. Code § 665...

Rules

F. R. Civ. P. | See ee eee

Trade Practice Rules

Phonograph Industry, FTC Trade

Practice Rules 29 F.R. 1394...

Cases

American Can Co. v. Bruce's

Juices, Inc., 187 F.2d

Bae (SOR SEE. ESSA) vcsvcoves

Beacon Theatres v. Westover,

359 U.S. 500 (1959)........

Bergen Drug Co. v. Parke,

iv.

Page (s)

3,62

Davis & Co., 307 F.2d

Fas C306 Cake 2OGE) savevees

Bigelow v. RKO Radio Pictures,

Inc., 327 U.S. 251 (1946)..

Catalano v. Target Sales, Inc.,

446 a - 643 (1980) cccccoee

Cement Manufacturers' Protective

Association v. United States,

260 GB. BES: CLAS) 6c cccees

Corn Products Refining Co. v.

FTC, 324 U.S. 726 (1945)...

D & S Redi Mix v. Sierra Redi

Mix & Contracting, 1982-83

Trade Cases, ¥ 65,017

(Sth Civ« TOSS) occ cvesseece

FTC v. A.E. Staley Mfg. Co.,

324 Gabe 746 64) eee

FTC v. Cement Institute, 333

oP - 683 CL9GE cee acdevsds

FTC v. National Lead Co.,

352 U.B. 419 (1957) ccccccecs

First National Bank of Arizona

v. Cities Service Co., 391

om 253 (29GS) cccoccvcsecs

Great Atlantic & Pacific Tea

Co. v. FTC, 440 U.S. 69

(ZETO) 60s eudeneseeveveene er

In Re U.S. Financial Securities

Litigation, 609 F.2d 411

(9th Cie, ASTE) 000 ee vesoee

Interstate Circuit, Inc. v.

United States, 306 U.S. 208

CLOSE? cnc ccsecvcescdteceseeses

Klor's, Inc. v. Broadway-Hale

Vv.

57,60

48,60,63

Stores, Inc., 359 U.S. 207

(1959) ccccccccccccceccccese

Lear, Inc. v. Adkins, 395 U.S.

653 (ASSP) coccccoccccccccoece

Morton Salt Co. v. G.S.

Suppiger, 314 U.S. 488

(1942) ccccccccccccccecccccs

Ostrofe v. H.S. Crocker Co.,

Inc., 670 F.2d 1378

(9th Cie. LOGZ) ccoccccccccce

Program Engineering, Inc. v.

Triangle Publications,

Inc., 634 F.2d 1188

(9th Cir. nr

Poller v. Columbia Broadcasting

System, 368 U.S. 464 (1962)

Schine Chain Theatres, Inc. v.

United States, 334 U.S.

110 SEED Se bceeeecoeecscecs

Sola Electric Co. v. Jefferson

Electric Co., 317 U.S. 173

eee eigeseeceeeececcece

United States v. Griffith,

334 U.S. 100 (1948) ccccccce

United State v. New York Great

Atlantic & Pacific Tea Co.,

173 F.2d 79 (7th Cir. 1949),

affirming 67 F. Supp. 626

ce BhLe 1966) cccccccececs

United States v. Paramount

Pictures, Inc., 334 U.S.

47,48

131 (1948) cccccccccccccccecs 47,48,51

United States v. U.S. Gypsum

Co., 438 U.S. 422 (1978)...

vi.

NO,

IN THE SUPREME COURT

OF THE

UNITED STATES

October Term, 1982

Charles Zoslaw and Jane Zoslaw,

husband and wife,

dba Marin Music Centre,

Petitioners,

vs.

MCA Distributing Corporation, Doug

Robertson Advertising, Inc., MTS,

Inc., Tower Enterprises, Inc.,

Warner/Elektra/Atlantic Corporation,

ABC Records, Inc., Polygram Distribu-

tion, Inc., Capitol Records, Inc. and

Capitol Industries-EMI,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Maxwell Keith

(COUNSEL OF RECORD)

50 California Street

Suite 955

San Francisco, CA 94111

(415) 981-1361

Attorney for Petitioners,

Charles Zoslaw and

Jane Zoslaw, husband

and wife, dba

Marin Music Centre

QUESTIONS PRESENTED

l. Are small ethical retailers of phono-

graph records and tapes entitled to the

protection of the Sherman Act when a

powerful group of seven major nationwide

distributors constituting 80% of the

desired product agree with multi-chain

retailers that their opening of full cata-

logue record stores on a growth basis will

be subsidized by special financial

assistance and advertising funds with

which to advertise the products of the

group a few cents over the price the dis-

tributors sell at wholesale to the small

ethical retailer?

a. Is not such an agreement implied

as a matter of law from the proof of con-

tinuous advertising by the few chain

retailers named here at such prices?

(Example: advertised sell prices of

$3.66, $3.88 and $3.99 on $6.98 list com-

pared to cost of the album to the retailer

of $3.65.)

(THIS PAGE INTENTIONALLY LEFT BLANK)

b. Is not such an agreement to be

proscribed in accordance with the purposes

of the law of conscious parallelism?

2. Can a multi-state chain retailer of

phonograph records and tapes who has ad-

mittedly received the right to purchase at

least 80% of the popular selling records

and tapes at greatly reduced purchase

prices, compared to the prices charged

competitive retailers and who has an-

nounced that he uses this price advantage

to lower prices to "zing" competition

escape liability for predatory pricing

under Section 2 of the Sherman Act because

he is not selling below his cost, although

he knowingly utilizes price discrimina-

tions to sell the product at below the

cost of competitive retailers?

3. & Does the Sherman Act prohibit a

record company from refusing to sell its

protected products to a retailer because

the retailer has instituted an action to

prove that the exclusively controlled

products are subjects of restraints of

trade?

b. Assuming that Capitol Records can

individually refuse to deal in order to

prevent the litigation of its antitrust

violations, can its refusal to deal pur-

suant to a conspiracy to monopolize the

sale of records at wholesale and at retail

be determined in summary judgment on the

showing of parallel conduct by it and its

competitors as to list prices, allowance

of favorable subdistributor prices to the

named chain retailers, of the granting of

special financial terms and advertising

subsidies to the chain retailers and its

attendance at group association meetings?

4. Did the courts have the constitutional

power to determine facts on motions for

summary judgment especially when such

determinations go to general conspiracy

issues by reason of U.S CONST. art. I,

III; amend. VII?

LIST OF PARTIES

A list of all the parties at the pro-

ceeding is contained in the caption.

Itt

CITATIONS TO OPINIONS BELOW

The opinion of the trial covrt which

dismissed petitioners' Robinson-Patman Act

Claims against Warner/Elektra/Atlantic,

hereinafter referred to as WEA, is report-

ed at 1977-2 Trade Cases q 61,756; a sim-

ilar ruling in favor of Eric Mainland

appears at 1977-2 Trade Cases q¥ 61,757.

The order denying petitioners' motion for

a preliminary injunction appears at 1977-1

Trade Cases q 61,334. The decision dis-

missing Capitol Records and its parent

Capitol Industries - EMI appears at 1978-2

Trade Cases 4 62,269.

The decision of the trial court dis-

missing petitioners’ Sherman Act claims is

reported at 533 F. Supp. 540 (N.D. Cal.

1980).

The opinion of the Circuit Court of

Appeals for the Ninth Circuit is, as yet,

not officially reported and appears at

1982-83 Trade Cases, 4 65,078. A true

copy of the opinion of the Circuit Court

of Appeals is attached hereto as Appendix

A true copy of the opinion of the

trial court is attached hereto as Appendix

JURISDICTION

The judgment of the United States

Court of Appeals for the Ninth Circuit was

entered on December 1, 1982.

The jurisdiction of this Court is

invoked under 28 U.S.C. § 1254.

STATUTES INVOLVED

The statutory provisions are Sections

1 and 2 of the Sherman Act, 15 U.S.C. §§ 1

and 2 and Section 15 of the Clayton Act,

15 U.S.C. § 15. The provisions of the

Robinson-Patman Act, 15 U.S.C. § 13 are

also pertinent. These statutory pro-

visions are attached hereto as Appendices

C and D.

CONCISE STATEMENT OF THE CASE

A. The Substance of the Case

This is an action brought under the

Sherman Act and Robinson-Patman Act by the

owners of a retail phonograph record and

tape store located in Marin County, Cali-

fornia, known as "Marin Music Centre."

Petitioners opened a music store in

August, 1965. The store was located in

Strawberry Town and Country Shopping Cen-

ter, Mill Valley, California,

approximately 10.7 miles from Tower

Records’ San Francisco store. The Straw-

berry Town and Country Shopping Center is

located off the major U.S. Highway 101.

{Excerpt of the Record (hereinafter "ER")

1352, 1364.] Petitioners remained in

business until May, 1977.

The essence of the complaint and

causes of action is the entry into a

scheme to drive them and other ethical

dealers out of business entered into by

the seven major distributors of phonograph

records and tapes, which as a group, con-

trol approximately 80% of the total

dollars of sales of the product in the

United States (ER 1360-1361, 1865). The

major Cevices used were the subsidizing of

the advertising of records and tapes at

retail prices a few cents over the cost to

the small retailer through the favored

retailers by the group of nationwide dis-

tributors and the preventing of competi-

tion to those prices by uniformly agreeing

to charge wholesale prices to them at

prices which prevented their

competition. In addition, the evidence

disclosed the national distributors to

have subsidized the favored retailers

through the device of granting extended

payment times to them at non-interest

bearing terms; in effect financing their

retail operations.

The Zoslaws lowered their prices in

1974 to match those of Tower Records (ER

1874). Their sales increased but so did

their losses (Id.). The Zoslaws sought an

injunction against the continuation of

these pricing policies (ER 338-340).

After failure the Zoslaws closed their

Marin Music centre.

B. The Parties

1. Manufacturers or Distributors

Warner/Elektra/Atlantic Corporation

(hereinafter "WEA") has been engaged in

the business of distributing phonograph

records and tapes since 1970 (ER 689). It

distributes nationally. It is wholly

owned by Warner Bros., Inc. whose parent

company is Warner Communications (ER

118). It distributes the records and

tapes of Warner Bros. Recording Co., At-

lantic Recording Co. and Elektra. The

classical line is Elektra Nonesuch. It

utilizes the other corporations to manu-

facture its records -- Columbia Records at

Terre Haute, IND. and Specialty Records at

Oliphant, PA. (ER 103). It has seven

regional distribution centers (ER 286).

WEA distributes a host of labels. Some of

the label names are Warner, Atlantic,

Elektra, Reprise, Atco, Cotillion and

Asylum (ER 280, 1448).

MCA Distributing Corp. (hereinafter

referred to as "MCA") is a nationwide

manufacturer and distributor of phonograph

records and tapes (ER 1321 and 1327-28).

It has been involved in sales and distri-

bution of records and tapes since approxi-

mately 1954. It acquired Decca in 1970

(Id.). It manufactures records and tapes

at Pickneyville, IL and Gloversville, NY

(ER 1327) and distributes them through

five distribution centers (Id.).

Polygram Distribution, Inc. was for-

merly known as Phonodisc, Inc. and U.D.C.,

Inc. (ER 1283). During the period from

1971 to 1973, UDC distributed records man-

ufactured by Polydor, MGM and United Ar-

tist (ER 1303). Phonodisc, Inc. acquired

U.D.C. in 1973 (ER 1029) and changed its

name to Polygram Distribution, Inc. on or

about March, 1978 (ER 1303). Polygram is

a joint venture of Philips Lamp Works and

A.G. Siemens (ER 829, 837). Its head-

quarters are in Baarn, Holland. Phonodisc

ceased to distribute United Artist records

in mid-1975 (Id.). Since November, 1973

it has distributed the labels Mercury,

Polydor, DGG (Deutsche Grammophon),

Archive, MGM, Phonogram, Phillips, RSO and

Verve (ER 829). It utilizes the

manufacturing facilities of Columbia

Records and PRC Recording (ER 829).

ABC Records, Inc. (hereinafter "ABC")

is a wholly owned subsidiary of American

Broadcasting Company. It was a national

manufacturer and distributor of records

and tapes. Its labels include ABC,

Dunhill and Impulse (ER 958, 998). It was

acquired by MCA in 1977 (ER 1866).

Capitol Records (hereinafter "Capi-

tol") is a national distributor. It is

wholly owned by Capitol Industries, EMI, a

subsidiary of EMI, Ltd., an English cor-

10.

poration (ER 961, 1003). Capitol has five

manufacturing and six regional distribu-

tion warehouses (ER 1072). Its artists

include: The Beatles, Helen Reddy, Yehudi

Mer. hin, Andre Previn and Beverly Sills

(Id.). It acquired United Artists Records

(ER 1866).

Other nationwide distributors were

named in the complaint: CBS, Inc. and RCA

Corp.

Eric-Mainland was a wholly owned sub-

sidiary of United Artists Music and Re-

cords Groups, Inc. (UAMARGI), owned by

Transamerica. It was named as a

defendant. Eric-Mainland was a regional

distributor and rack jobber. It was ac-

quired by UAMARGI on December 8, 1969 (ER

37, 321-322). It had distributed the A &

M Records and Motown labels (Id.). It

went out of business in 1976 (ER 1390).

2. Respondent Retailers

MTS, Inc. (hereinafter "Tower

Records") is a holding company of the

various stock holdings in operating

ll.

companies founded by Russell Solomon and

an operating company of three stores (ER

959-60, 1039, 1355). It grew from two

stores in Sacramento to 15 stores in Cali-

fornia, Washington and Arizona by August,

1976 (ER 1040, 1355, 397). Tower

Enterprises, Inc. is a store operating

company of the Tower Store in San

Francisco (Id.)

MTS' volume of sales in 1975 was

$20,000,000 (ER 1364). Its majority

stockholder and president, Mr. Russell

Solomon, announced to the trade in a maga

zine interview that “we let our competitor

do his thing and then zing the shit out of

him" (ER 1385 - 1386). MTS purports to do

business as a distributor, Central Valley

Record Rack (ER. 1365, 1451). All named

distributors shipped direct to the Tower

stores and picked and packed to its order

as of the time of the filing of the com-

plaint (ER 1377, 1520 - 1522).

Tower Records was WEA's seventh ranked

account, and ABC's third ranked account.

12.

MCA showed that Tower Records accounted

for 23% of its entire Northern California

Sales and 56% of its San Francisco Bay

Area sales (ER 1364-1365). Analysis of

WEA's 1975 San Francisco branch sales

(excluding IEC) showed Tower Records to

have 24% of the total branch sales. At

24%, Tower Records, was WEA's largest

purchaser in the branch (ER 186-189). By

1975 Tower Records was purchasing a mil-

lion dollars of records a year from Capi-

tol (ER 1099). Phonodisc sales to MTS

were shown to be about $350,000 per pur-

chasing cycle in 1975 (ER 2130).

The Tower store in San Francisco be-

came a showcase. The distributors painted

hot selling album covers on the front of

its stores, entered into extensive perfor-

mer promotions at the store and gave the

store a disproportionate amount of in-

store servicing (ER 1409, 243-249). As

stated in a WEA document dated 1974 dis-

cussing the Tower Records account "I feel

too much time is being spent catering to

13.

the whims of MTS and this habit should be

changed." (ER 254.)3. Other Retailers

3. Other Retailers

Integrity Entertainment Corp. (herein-

after “The Wherehouse" or "IEC" or “Inte-

grity") opened stores in California in

September 1970 (ER 959). It opened a

central warehouse for distribution in 1974

the Gardena warehouse (ER 626, compare to

ER 1986-1988). It began with 6 stores in

the State of California (Id.). It grew to

90 stores by November, 1977 (Id.).

Discount Records (from time to time

called "Disro") acquired in 1969 by CBS,

was a full catalogue retail record store

operating ccupany doing business through-

out the United States (ER 1365). Its

national volume was about $20,000,000 (ER

1366). It operated 7 stores in the San

Francisco Bay Area (Id.).

From the time of acquisition it grew

from a chain of 20 stores to 70 stores in

1973 (ER 1365). In 1976, many Discount

Records stores were acquired by Pickwick

14.

International. Pickwick was identified as

being owned by Heileicher Bros., who also

owned J.C. Marsh Co. and Musicland, a rack

jobber and retailer. Pickwick has since

been acquired by American Can Company (ER

1366).

The Record Factory (Mighty Fine Dis-

tributing) grew to 9 stores in four years,

1971-1975 (Id.). Its 1975 sales were

$3,320,000 (ER 1366). It received the

right to pay for products from WEA on the

basis of non-interest bearing notes for

the period October 1973-1974. Its presi-

dent was Mr. John Iott (Id.).

Odyssey Records (Cash and Carry) ex-

panded to six stores in nine years, 1966-

1975. Its 1974 sales were $3,149,151 (ER

1367). Its president was Rich Bullock, an

ex-employee of Tower Records (ER 1367).

WEA had allowed it to pay for products

with trade acceptances (Id.).

Banana Records (Maya Corp.) was to

grow to nine stores in one year, 1972, and

was allowed non-interest bearing notes by

15.

WEA to pay for its products (ER 1367-1368).

Its 1975 sales were $1,140,942 (ER 1368).

Advertising Agency. Doug Robertson,

Inc. was named as a defendant herein. It

was Tower Records' advertising agency at

all times herein. It owned 5% of many of

MTS's operating subsidiaries (ER 1355).

It allowed Tower the use of invoices from

radio stations to the agency for the pur-

pose of passing on its advertising agency

commission from the media of 15% to Tower

Records in return for salary and stock (ER

1383-1385).

Cc. Concentration of Distribution of

Records an4 Yapes in the Hands of

Seven Major Distributors and

Price Uniformity Was Disclosed.

1. The defendant distributors consti-

tuted approximately 85% of the popular

records and tapes sold by the retailers

involved here (ER 1359-1361, 1865). An

analysis of MTS' 1974 accounts payable

ledger (ER 1917) showed: Columbia Records

- 25.8%; WEA - 9.46%; Capitol - 9.37%; MCA

~ 8.67%; Phonodisc - 10%; RCA - 9.59%;

16.

Eric Mainland Co. - 7.35% (ER 1917, 1865,

1360-1361).

2. The price structure of major

distributors of records are based upon a

list price. The list price has been uni-

formly raised along with uniform increase

in price sheets to each class of trade by

the identified group of major distribu-

tors. Petitioners established the uniform

increase upwards with substantial uniform-

ity as to the increases to each classifi-

cation of trade on three occasions between

the period 1972 and 1978. As of 1972, the

key list price was raised from $4.98 to

$5.98 LP and $6.95 tape. Dealers were

charged between $3.04 and $3.16. The sub-

distributors were charged between $2.86

and $2.89 (ER 1497, 1523, 1454, 1449). By

the fall of 1974 the key prices had been

changed from $5.98 to $6.98 (ER 1498-

1503). Wholesale prices went up from

$3.05-$3.16 to $3.61-$3.65 as to retailers

and $3.38-$3.40 as to the sub-distributors

(ER 1454, 1504).

17.

The entire industry went from $5.98 to

$6.98 with consequent changes at wholesale

in a six month period of time (ER 1400).

No respondent has proffered testimony

that the upward movement of price lists to

identical levels are based upon costs. No

respondent has proffered any cost analysis

to justify its adoption of the industry-

wide key list prices or to justify the

specific prices charged in each category.

The price lists of the seven majors

applied the prices as a national price

without regard to costs of transportation

and volume of orders as to all accounts

from 1971 to the filing of the complaint

Concurrently with the Consolida-

tion of Distribution in the Hands

of Nationwide and Worldwide Cona-

panies, the Retailing of Phono-

graph Records and Tapes Became

Concentrated in the Hands of

Those Who Were Either Owned by

Nationwide Distributors or Who

Assured the Distributors They

Would Undertake Chain Store Ex-

pansion on the West Coast and Who

Would Enter into “Under the Table”

or Fraudulent Conduct to Obtain

Discriminatory Allowances.

18.

A clear division took place between

ethical and unethical dealers. Unethical

retailers received sub-distributor prices

notwithstanding the existence of Federal

Trade Commission Trade Practice Rules for

The Phonograph Industry originally

published in November 8, 1964, 4 CCH Trade

Reg. Rep. @ 41,067; 29 F.R. 1394. (These

Trade Practice Rules were rescinded on

September 22, 1978. 43 F.R. 44, 483; 4

Trade Reg. Rep. @ 41,014, p. 42, 127.)

They required the good faith application

of functional discounts (ER 1358-1359).

See pages 29-30, infra.

It will thus be shown that the indus-

try has determined that the consumer is to

do his shopping at a few subsidized loca-

tions at the option of foregoing substan-

tial price savings. The closing of peti-

tioner's store based on inability to meet

competitive prices is only what has

occurred all over the West Coast of the

United States, and, inferentially, the

entire nation.

19.

E. Analysis of the Relevant Markets

Showed that the Nationwide Dis-

tributors Subsidized the Growth

of Multi-chain Retailers

1. Preliminary: The distribu-

tion and retailing of phonograph

records and tapes

a. The basic products

The basic product is a 33 RPM 12 inch

record album referred to as an LP (ER

1357). Prerecorded tapes are also includ-

ed. They are boxed in cartridges and

cassettes (ER 117). Record albums are

duplicated from master recordings. Master

recordings may be recorded anywhere in the

world (Id.). Record albums and tapes are

sealed in clear plastic wrappers which are

to be opened only by the ultimate pur-

chaser (Id.). There are only a few com-

panies involved in duplicating of tapes.

Tape sales constitute approximately 30% of

the sale of albums (ER 1357). Long play-

ing albums record several performances.

Albums most frequently record the perform-

ances of known artists or groups (Id.).

The record companies, such as Capitol

20.

Records, enter into exclusive performance

contracts with such artists (ER. 1072,

1131). Distributors also distribute

"singles" which consist of a single

performance of short duration (ER 1448).

The product may also be categorized in

terms of the music performed, i.e., pop

and classical (ER 419-424, 1448).

b. Manner of distribution

The major distributors are the nation-

wide distributors or their wholly owned

subsidiaries. Distributors sell direct to

retailers or sub-distributors. Sub-dis-

tributors are divided into “rack jobbers"

or “one stops" (ER 690, 350). Rack job-

bers charge the retailer for the services

of maintaining his inventory and supplying

him with records (ER 350). “One stops"

sell to retailers. "One Stops” do not

maintain a full catalogue or all the new

releases of major distributors. Sub-dis-

tributors charge more than distributors in

the resale to the retailer (Id.). Nation-

al distributors allocate substantial sums

21.

for newspaper and radio advertising. In-

store promotions, promotional appearances

by artists and promotional paraphernalia

are also used to excite interest in re-

cords (ER 1378-1380, 1407-1409). The key

to higher volume is radio play. The

consequent charting of playtime called

"chart action" is self-perpetuating. The

record gathers momentum when more and more

Stations play it. This generates further

orders which generates further promotions

which generate further radio time until

the record reaches the top echelon of the

chart or loses ground. The promotional

funds used in obtaining radio time and

customer recognition is of utmost import-

ance. Extensive dollars are spent by the

major distributors on releases which are

deemed to be potential successes. At this

point a critical cost factor is met.

Newspapers have established two different

rates: nationwide rates and local

rates. Nationwide distributors are

charged higher rates than retail stores.

22.

Radio stations, as do newspapers, grant

volume discounts and enter into special

contracts with volume users (ER 1378).

2. San Francisco-Marin County:

A microcosm

Media newspapers of general circula-

tion: San Francisco Examiner; San Fran-

cisco Chronicle; Sunday Examiner and

Chronicle (ER 362); San Rafael Independent

Journal (ER 349).

Rock/Pop radio stations in San Fran-

cisco: KSAN, KNEW, KYA, KFRC, KDIA, KJAZ,

KSFX, KEEN, KSOL, KIME, KRE, K101, KSJO,

KLIU, KTIM (San Rafael, ER 1363, See also

2071-2072)

Classical radio stations in San Fran-

cisco: KKHI, KDFC.

The only record stores which advertis-

ed in the San Francisco newspapers were

Tower Records, The Wherehouse, Discount

Records, Odyssey, Record Factory, Marin

Music and Gramaphone (a plaintiff ina

similar lawsuit which was to be consol-

idated with the instant case) (ER 1364).

23.

The named retailer conspirators domin-

ated advertising and placed the ethical

retailers into a price squeeze subsidized

by the national distributors. Petitioners

presented a schedule compiled from Doug

Robertson's files containing the notes of

telephone calls from distributor represen-

tatives or media representatives and in-

dicating the price to be advertised (ER

1380, 1455-1463). This schedule showed,

in part, the following:

National Distributor Advertising

of $6.98 List Through Tower Records

1974-1975

Adver- Cost to Radio

tised Zoslaws Station, National

Price (ER 1454) Year Distributor

$3.66 $3.57 1974, KYA MCA

3.66 3.65 1975, KFAC Capitol

3.64 3.99 1975, KSAN ABC

3.64 3.66 1975, KRE Phonodisc

3.65 3.99 KYA WEA(ER 1474)

The record disclosed the total

1976 advertising subsidies to Tower

Records as follows, in part (ER 1476):

MCA $ 29,740

Capitol 127,325

ABC 49,429

Phonodisc 35,429

WEA 138,942

24.

Mr. Zoslaw swore that there were con-

stant price advertisements below his cost

(ER 349, 1385, 1866).

Tower's bin prices (at the store) were

shown to be $3.66 and $4.66 on $6.98 list

(ER 1385). By May, 1976 Tower Records was

advertising with 306 radio spots every

weekend in Northern California based on

subsidized advertising funds from the

major distributors (ER 1383-1385). These

spots advertised the records and tapes of

those defendants as a group, called 8 inl

or 4 in 1 advertising (Id.). The story of

week after week distributor advertising of

$6.98 list at $3.88 and $3.99 through

Tower Records for the entire period 1976-

1977 is disclosed at ER 2041-2104.

The Wherehouse opened in Corte Madera,

California, in 1971. 1971 list price for

LP's was $4.98. Marin Music costs doi’ ‘the

$4.98 list were $2.50 - $2.58. The

advertised sales price of The Wherehouse

for $4.98 list was $2.69 (ER 1386). Its

second anniversary sale was in 1972. It

25.

advertised $5.98 list at $2.99. (Marin

Music Costs were $3.05 to $3.11 (ER

1454); The Wherehouse advertised $5.98

list at $2.99 in 1974 (ER. 1386).).

In 1976 Banana Records and The Record

Factory opened stores in Marin County.

The $6.98 lists were advertised at $3.66,

records and $4.66 tapes (ER 359), $3.77

(ER 360), five for $17.90 (ER 361).

In July 1976, The Wherehouse's Corte

Madera store had window posters showing

$3.66 pricing (ER 1874).

Discount Records were granted exten-

sive funds for advertising in the San

Francisco market (ER 150-165, 186-187,

557, 1099, 2003).

Between the period from 1965 to 1977

six broad category record stores were in

‘operation, and three closed their doors

(ER 1872). During the same period only

seven of 33 limited inventory stores sur-

vived. In composite, only 10 stores out

of 39 which were engaged in selling

records at retail in Marin County during

26.

this period survived past July, 1977 (ER

1873).

PF. Combination and Conspiracy

1. The distributors directly

financed the growth of the chain

retailers on the West Coast.

The nationwide major distributors, as

a group, became banker and consignor to

the chain retailer, affording it the right

to make payments based on special delayed

payment terms, the acceptance of non-in-

terest bearing notes and the granting of

special return allowances. Retailers were

advised that they were to make payment to

the distributor on the basis of 60 days

(WEA: ER 209, 214; MCA: ER 470; CBS: ER

652; Phonodisc: ER 841, 844; ABC: ER

1954; Others: See ER 1393-1394; 1402-

1403; See ER 1480-1481 "past due" refers

to over 60 days; ER 1393).

At meetings of the Credit Managers

Association every month or when called,

each named defendant distributor freely

circulated the violation of the 60 day

terms by the favored retailers and the

27.

acceptance of notes or other devices to

extend time of payments (ER 1393-1394,

1402-1403).

The objective of centralizing the

displaying of and the purchase of the

group's phonograph records and tapes by

the retailer defendants is disclosed in

the following study of Mr. Charles Zoslaw

as to Tower Records showing the acceptance

of non-interest bearing notes by the in-

dividual distributors (ER 1902-1913):

WEA (between 10/76 & 11/74) $2,263,982

MCA (7/73) $34,498

ABC (9/72-3/74) $412,084

CBS (5/73 = 11/74) $615,989

Other chain retailers received the

privilege to pay on such a basis (ER 1366,

1367, 1368).

These credit manager meetings were

used to discuss what action was to be

taken in view of financial developments

with specific West Coast accounts (ER

1393-1394; 1402-1403, 1537-1543, 2119-

2130). Group action was taken to maintain

the chain retailers in operation when

individual judgments would have jeopar-

dized the credit risks freely granted

(Id.). The Wherehouse was kept in busi-

ness by not pulling the string when it

reported a $1,000,000 theft of inventory

(Id.).

The opening of new stores by the fa-

vored retaileis was the result of cooper-

ation and special credit terms among the

distributors (ER 1404-1405). Special

return allowances by the distributors were

generously allowed (ER 186, 557, 1099,

1876-1883).

Defendant distributors became allied

with the west coast or nationwide chain

retailers. The record shows the following:

1. The distributors requested and

received false affidavits that the retail-

ers functioned as subdistributors and did

not own retail stores (Capitol: ER 1370;

MCA: ER 1372-1373; RCA: 1374) or

29.

distributed through central warehouses

(CBS: ER 641-647; 1514-1515).

2. The distibutors granted under the

table or phony discount arrangements at

between 6% to 10% of the chain purchases

(ABC: ER 1369-1370; CBS: ER 1371-1372;

UDC~Phonodisc: ER 1374-1375 (3% or $.05),

1377; WEA: ER 1375-1376; Eric-Mainland: ER

1377-1378 ($.07)).

3. After the filing of the Zoslaw

complaint, WEA and CBS purported to base

pricing on central distribution but enter-

ed into sub rosa arrangements with their

shippers to allow false designation of

Origin of the shipments to be used (ER

1521-1522). MCA failed to apply its

volume purchase structure to Tower Records

and granted it an undeserved classifica-

tion (ER 500-501; ER 1428-1429). This was

at the very time it was attempting to

prevent Tower from taking a 2% unearned

timely discount allowance (ER 1403-1404).

4. Advertising funds were used by the

group to price squeeze the ethical retail-

30.

er into closing their stores or entering

into bankruptcy (See Section “D" supra).

The distributors pretended to extend co-

operative advertising programs to retail-

ers on a proportionately equal basis (ER

204-207, WEA; 2023-2032, ABC; 859-866,

Phonodisc; 470, MCA; 1098-1100, Capitol).

In fact, as has been seen, the distri-

butors called the retailer's advertising

agency or the media, placed the advertise-

ments, specified the advertised sale price

and give the authorization number for the

retailer to make the claim for distributor

payment (ER 1380, 1455, 1463). Often the

distributor would send the radio station a

spot, tag the name of the chain retailer

at the end of the advertsement (ER 1380),

and authorize credits for the radio costs

to the chain retailer (ER 1464-1475).

Petitioners proved the existence of the

practice of Doug Robertson's purchase of

radio time for 4 in 1 or 8 in 1 advertis-

ing whereby a distributors’ labels would

be advertised along with other members of

31.

the group (ER 1384).

5. Grossly disproportionate allocs-

tion of advertising funds was shown: WEA

1975 sales report disclosed $105,002 in

advertising credits to Tower Records or

50.7% of the total advertising credits

shown of $207,291 (ER 186-189). The

record showed a special WEA advertising

authorization log with Integrity (ER 241).

MCA never disclosed to petitioners an

asserted ability of all retailers to ob-

tain 3% of purchases in advertising

credits (ER 620-621). In fact, The Where-

house received $27,820 from MCA in the

first 8 months of 1976 or 5.7% of pur-

chases (ER 557); Tower Records received

$26,508 in 1975 or 3.6% of purchases (ER

556). The MCA advertising log disclosed

disproportionate subsidies (ER 575-590).

ABC's advertising analysis of the last

8 months of 1976 disclosed Tower and The

Wherehouse received $37,852 of coop adver-

tising funds or 27.7% of the total (ER

2002). The small retailers received a

32.

total of $16,078, or 11.9% (Id.).

Capitol Records for the year ended

June 30, 1975 granted Tower Records and

The Wherehouse approximately $140,000 in

advertising subsidies. Marin Music Centre

received $99 (ER 1099).

Phonodisc did not inform petitioners

of their special authorizations and promo-

tions (ER 1533-1534). It subsidized Tower

Records with $35,429 in advertising funds

in 1976 (ER 1476).

Further, the advertising credits

granted by the distributor were knowingly

in excess of the actual cost of the chain

retailers' advertisements (ER 1383-1384).

This allowed the retailers to make a pro-

fit on the advertising itself.

sis to allow petitioners to meet

competition.

Petitioners made a determined and

unsuccessful attempt to obtain price qual-

ity with other retailers. They wrote to

each of the defendants named in the com-

Plaint below and attempted to obtain equal

33.

pricing and treatment. UDC had granted

Marin Music a mid-price and so had London

Records, (ER 1449, 381-382). This effort

commenced about 1973.

Eric Mainland: Mr. Zoslaw attempted

to deduct the believed price differential

granted by Eric-Mainland to the chain

retailers from his payments in 1973. He

was then placed on "hold" (ER 1390).

Elliott Blaine, Eric-Mainland's General

Manager, admitted to Mr. Zoslaw that "in-

equality in business goes on all the time”

(ER 354).

ABC: In August, 1973 petitioners

asked Mr. Lou Verzola, ABC's Manager,

whether ABC sold to "The Wherehouse” at

the same price it sold to him. A luncheon

meeting was held September 1973. Mr.

Verzola then threatened to call Mr.

Zoslaw's employer, the President of the

Oakland Tribune, and tell him that Mr.

zoslaw was running a music store on the

side. ABC had erroneously sent an invoice

to petitioners showing sub-distributor

34.

pricing, but then retracted and corrected

them. At the luncheon meeting Mr. Verzola

admitted that petitioners' competitors

were obtaining better pricing (ER 351),

but ABC refused to grant any allowances on

the prices (ER 1449). Mr. Hartstone's,

President of The Wherehouse, letter to Mr.

Knowland, dated shortly after the luncheon

meeting, complaining of his treatment and

critical of Mr. Zoslaw, was found in the

files of ABC (ER 1945).

Capitol: The Branch Manager of Capi-

tol Records, Mr. Larry Binns, was

contacted in November, 1973. He told Mr.

zoslaw to send him invoices. He was spe-

cifically told that Capitol would like

invoices from one of the following compan-

ies: RCA, WEA, MCA, Columbia (ER 352,

368).

An invoice for an RCA program was sent

by Mr. Zoslaw (Id.). No response was

received and on February 13, 1974 Mr.

zoslaw requested answers. Mr. Zoslaw

followed with a request to Mr. Zimmermann,

35.

Vice President of Marketing of Capitol.

No response was received from Mr. Zimmer-

mann (Id.). The deposition of Mr.

Zimmermann disclosed that Capitol Records

was authorized to accept a retailer's

invoices from UDC or London Records to

justify lower prices (ER 1077) but no one

at Capitol had ever informed Mr. Zoslaw of

this fact (ER 1386). The first complaint

was filed in January, 1975. Settlement

was made in June, 1975 with Capitol.

Immediately after the filing of the dis-

missal, Capitol would no longer sell any

product to the Marin Music Centre (ER 352-

353). It failed to disclose its intention

to refuse to deal during the settlement

negotiations (ER 1075, 453-454).

RCA: In August, 1973, Mr. Zoslaw

requested a meeting with Charles Rice, the

Branch Manager. Mr. Zoslaw informed RCA

that London and UDC (ER 354, 1387-1388)

were selling him phonograph records and

tapes at lower prices than RCA (Id.). The

September, 1973, letter stated (ER 382):

36.

"... in order to combat our sales

losses and image of grossly over-

pricing, I have lowered our sell-

ing price to what apparently is

the real retail price in our mar-

ket. However, to sell at the

competitive price and not to be

purchasing at the equivalent price

structure is a paradox ... we

favor London Classical Catalog

since our net price on the $5.98

list is $2.72 ... Your $6.98 list

nets to us at $3.45 compared to a

net of $3.23 from UDC ...."

On December 22, 1973, Mr. Zoslaw urged RCA

to advise him of its decision. RCA stated

its policy as a two category system, deal-

er and sub-distributor, and a willingness

to sell to a customer at a lower price

when it is satisfied that a major company

is actually selling at a lower price and

that it would meet, but not beat, competi-

tion (ER 383). Mr. Zoslaw pointed out his

ability to qualify for the lower price by

telex 1/16/74 (ER 384). No allowance was

ever received (ER 353).

CBS: Mr. Zoslaw wrote a letter to CBS

in June, 1973. His first communication

was with Mr. Paley, the President (ER

1389). CBS' correspondence disclosed

37.

inconsistent positions. Mr. Zoslaw was

told by Donald E. Biederman that its price

was cost-justified, that specifically The

Wherehouse, a chain of more than 40 stores

was serviced through one central warehouse

and a salesman called at one location ra-

ther than 40, and it billed one account

rather than 40 (ER 353). Mr. Zoslaw

replied by stating that Mr. Biederman's

letter was in direct contrast to the

statements of his West Coast Branch

Manager, Mr. Chuck Inman and Mr. Del

Costello, its West Coast Regional Manager

(ER 353). They stated that CBS would

service and ship direct to the individual

retail stores of Tower and The Wherehouse

but were billing them at the same prices

charged Marin Music (Id.). In truth, of

course, these chains were receiving direct

delivery by store and were receiving sub-

distributor prices (ER 1389). Columbia is

one of the companies that gave "“under-the-

table" credits via a billing transaction,

Code 48, which allowed 6% and 10% of

38.

total chain purchases as credits (ER 374-

375).

WEA: In February, 1974, Mr. Zoslaw

wrote to Russ Bach, Regional Branch Man-

ager, seeking clarification of its pricing

policies. He requested information as to

whether or not other retail dealers in the

Bay Area were charged a price lower than

the Zoslaws, and, if so, what the prices

were (ER 355). On February 26, 1974, Mr.

Bach wrote a letter claiming a policy of

only allowing differentials to accounts

which fulfilled the sub-distributor func-

tion (ER 385). He enumerated six

conditions (ER 385-386): "l. Each sub-

distributor will have a distinct facility

for redistribution. 2. Shipments made by

WEA will be made to the warehouse. Re-

turns must be made from the warehouse.

3. Representatives will call only at the

subdistributor centers. 4. All orders

will be in a factory box lot quantity.

5. Proper representation of WEA product

must be maintained. 6. Account must

39.

redistribute the majority of record labels

to qualify as a sub-distributor. The

"{cledistribution of WEA products alone is

not sufficient.”

This reply was shown to be absolutely

false (ER 355-356). Mr. Hartstone had

written a letter on January 2, 1974 to RCA

at approximately the same time as Mr.

Bach's letter to petitioner (ER 1989). It

was found in the files of ABC (ER 1944-

1945), stating in pertinent part:

"... we receive direct all store

freight prepaid freight services

from all of your competitors ex-

cept Columbia and WEA, and at the

same Or lower prices than charged

by you. Even in the case of WEA

and Columbia there are

‘offsetting’ arrangements from

time to time, including some di-

rect store prepaid shipments

and/or special handling of the

freight involved."

Mr. Zoslaw documented by means of the

special coding between WEA and The Where-

house the direct deliveries to its Corte

Madera store (ER 289~290, 1389, 1479).

WEA had granted Integrity 5% and 10% of

sales as special discounts. Integrity

40.

used blanket bills of lading (ER 356, 387,

279, 141-142). As to Tower Records, Tower

never had a central warehouse, yet

received the equivalent of the sub-distri-

butor price (ER 1520-1522). At the time

of Mr. Bach's letter, WEA was shipping

direct to all Tower stores and it was

giving Tower “under the table" credits of

7% (5% plus 2%) (ER 193-200). In February

1974, Mr. Russell Solomon demanded and re-

ceived the subdistributor price (ER 193-

194). Mr. Solomon knew he did not have a

central warehouse for redistribution; he

knew he did not have a fulfillment ware-

house at any address (ER 93, 195-199,

1377, 1521, 1947, 2138-2160). That the

"A" price was given in 1975 after receipt

of the letter is further evidence of MTS'

commitment to a scheme. A subterfuge

scheme was worked out between Tower and

WEA for shipments to Tower Records. WEA

allowed Tower to designate its warehouse

as a pickup on a will-call basis for or-

ders already picked and packed for deli-

4l.

very to each store. Direct shipment was

made to all of the Southern California

stores of Tower Records. The means used

was a preprinted label provided the truck

lines by Tower which falsely stated that

shipment was from Sacramento to the num-

bered store covertly encoded into the

order number on the carton by its store

number (ER 1521-1522). As for Tower's

Northern California stores, deliveries

were declared to have been made to Tower's

Sacramento facility, but WEA prepacked and

encoded each shipment for individual store

delivery from Sacramento (Id.). Mr.

Solomon does speak the truth when he

stated that MTS “buys its records and

tapes at sub-distributor prices or less

from all of its vendors.” (ER 1451-1452).

Phonodisc: UDC originally allowed the

mid-price to petitioners. The retailer

defendants herein received the rack price

(ER 846-853). Special rebates were also

granted (ER 1377). In the summer of 1975,

after Phonodisc ceased to distribute Unit-

42.

ed Artists records, petitioners were told

that its prices would be raised (ER 1285-

1286). The chain stores continued to

receive the rack price (ER 1377, 1451-52,

1450, 846-653).

MCA: Mr. Zoslaw had registered com-

plaints to MCA (ER 1387). In the latter

part of 1974 the Regional Manager, Mr.

Stan Layton, had visited Marin Music Cen-

ter. Mr. Layton was questioned regarding

the price differential that was in effect

between retailers. He told Mr. Zoslaw it

was wrong for MCA to sell the Zoslaws on a

higher price than its competitors, but, he

exclaimed (ER 354): “But what can I do

about it!"

WEA and other nationwide distributors

made it clear to petitioners that they

ought to close their store. Petitioners

presented the court with an Affidavit of

the Advertising Manager of the Strawberry

Town and Country Village. Mrs. Zoslaw had

invited the WEA Manager, Mr. Perasso, to

have lunch with Mr. Rudolph, the adver-

43.

tising Manager. Discussion was to concern

shopping center mailers. She had been

promised an allowance for the mailer by

WEA. Mr. Perasso arrived and then turned

to her in the presence of Mr. Rudolph and

Stated: "I don't have to do business with

you -- you're just a pest." Mr. Rudolph

declared that he had never seen a repre-

sentative of a reputable company come to

work in the condition le was in and exhi-

bit such a hostile attitude toward his

customer (ER 1544-1545).

CBS' Branch Manager told Mrs. Zoslaw

if it was up to him, he would cut her off

(ER 1407-1408).

MCA's Branch Manager, Jim Fisher in-

formed Mrs. Zoslaw that he simply could

not service the account, that he had nine

Tower stores to cover, and 1l or 12 ac-

counts, that he should be in the Marin

Music Centre every four weeks, but could

not make it (Id.).

WEA and Eric-Mainland placed petition-

ers on hold over any dispute concerning

44.

payment (ER 1390, 253) and Capitol dis-

dained to do any business with the Zoslaws

(supra).

G. The Distributor-Defendants' Ex-

clusion of Ethical Retailers

Spread to the Entire West Coast

and Presumably the Nation.

The files of WEA and MCA expose the

exclusion of the independents through the

pricing and advertising practice disclosed

herein. The WEA files contained a report

by Russ Bach, Los Angeles Regional Manag-

er, to Joel Freidman, President of WEA

dated August 9, 1974. Mr. Bach reported

on conditions at the San Francisco Branch

as follows (ER 1382):

"Rick Galliani reports that most

of the small stores in Sacramento

have been virtually driven out of

business by the Tower Records.

Rick is running to a lot of re-

porting stores to make sure that

the Warner Bros. product is get-

ting airplay reports."

MCA's files contain similar state-

ments. The Jim Fisher Sales Manager

Weekly Report, San Francisco Market,

3/21/75, stated (ER 1382-83):

"Dealers in the San Jose area are

45.

extremely upset and worried about

the June opening of the new Tower

Records store in their area. The

smaller dealers in San Jose are

currently just getting by and will

most likely be completely out of

business following the Tower open-

ing. At this time the two

Wherehouse stores and the Record

Factory in San Jose are getting

most of the business."

The elimination of the ethical retail-

ers was shown to have existed on a nation-

wide basis. The record disclosed that Mr.

Joel Freidman, President of WEA, gave the

following speech at an assocation meeting

of record merchandisers and distributors

Called NARM in April 1974 (ER 1395, 1485-

1493):

"I don't think we are doing our

job too well. Witness the growing

number of bankruptcies throughout

the nation. Witness the number of

retail outlets that are closing

their stores, discarding records,

phonograph departments, largely as

a consequence of their inability

to make a reasonable profit.

eae

Rack jobbers, as well as dealers,

have the same responsibility not

to give their profits away. I

take public issue with Russ Solo-

mon and others like him who adopt

a policy that says they can only

make money by selling for less.

46.

They can only make money, and

continue to make money as long as

we, the manufacturers, the distri-

butors, whether independent or

otherwise, continue to make it

possible for them to do so -- by

the extension of unlimited credit,

by the extension of unlimited

advertising appropriations, by

continued over-zealous selling

practices, by offering unnecessary

discount programs that merely

result in returns."

ARGUMENT

Reasons for Granting the Writ

I. The Decision Below is in Total Con-

flict With the Decisions of This Court

Which Prevent Competitive Suppliers

From Combining to Establish a Fixed

and Rigid Market.

A. This Court's Holdings Preventing

Group Action by Those Dominating

an Industry Have Been Ignored.

l. Paramount Pictures, Klors,

preclude agreements to dis-

criminate.

This is not a case of each distributor

supporting a volume discount price sheet

based upon separate transactions and open-

ly offered to all. This is a case of

alliance and intrigue. The price sheets

shown the court below were overtly based

on functional classifications. Dealers

were charged a distinct price. Those who

47.

performed distribution services to service

retailers were to obtain lower prices.

What is involved here is precisely the

kind of conduct involved in United States

v. Paramount Pictures, Inc., 334 U.S. 131

(1948); Schine Chain Theatres, Inc. v.

ed States v. Griffith, 334 U.S. 100

(1948); Interstate Circuit, Inc. v. United

States, 306 U.S. 208 (1939); Bigelow v.

RKO Radio Pictures, Inc., 327 U.S. 251

(1946); Klor's Inc. v., Broadway-Hale

Stores, Inc., 359 U.S. 207 (1959). Indiv-

idual transactions, justified by reason-

ableness in their context, are not

involved. Continual discriminatory chain

wide deals in which the dominant suppliers

in the industry favor and protect. the

chain, as a group, to the known exclusion

of the independents have been proven.

When the trial court and the appellate

court became aware that the major distri-

butor defendants controlled over 80% of

the nations' phonograph records and tapes

48.

had gone to the extent of financing the

favored chain retailers, as a group, and

had entered into the realm of using the

retailers as advertising agents for their

product, chosing group advertising rather

than individual advertising, the courts

were unable to view this case as indivi-

dual reaction to large mass purchases.

The defendant retailers, as respondent

distributors must admit, are their finan-

cial allies. Distributor financing

virtually created the chain retailers

through their discriminatory credit term

policies, and through their protective

refusal to grant equivalent advertising

and financing terms to others. Major

retailers, The Wherehouse and Tower Re-

cords, were shown to have worked together

through Capitol to prevent retail price

competition in the Los Angeles Area in

1974 on Capitol labels (ER 1073-1074,

1086). Even assuming there was a showing

of limited competition, no decision of

this Court has ever required a plaintiff

49.

in an antitrust case to prove that an

agreement among competitors has ended all

conceivable competition; only that an

independent class of dealers was being

excluded by the agreement. The opinion

below unduly examined the relevant market

as involving advertised retail price com~

petition among the chain dealers. Indeed,

the very showing of such competition as

only among the favored in the very geo-

graphical area which petitioners operated

and in which Capitol expressly disavowed

their right to compete raises an exclu-

sionary inference. Such one-sided analy-

sis, it is respectfully submitted, has no

place in an action brought by an ethical

retailer who has shown an inability to

maintain a presence in a market where his

buying prices are held up by group action,

higher than those charged his unethical

retailer competitors. If the advertised

selling prices were the result of the

chain retailers individual action through

the borrowing of funds from an independent

50.

lending institution paying the going rate

of interest, there might be an entirely

different analysis. But it is these dis-

tributors' monies channeled into hands of

the mass retailer that paid for those

advertisements. Retailers became af-

filiates of the distributors and they were

to be protected. It is clear that Para-

mount Pictures, supra, allows this action

to proceed to trial under alternative

theories of liability: (1) Conspiracy to

monopolize the distribution of phonograph

records and tapes in the United States

through the exclusion of small independent

distributors and retailers; (2) conspiracy

to monopolize the distribution and resale

of phonograph records and tapes in the

geographical areas of (i) West Coast of

the United States; (ii) California; (iii)

San Francisco Bay Area; and (iv) San

Francisco-Marin County Area; (3) vertical

conspiracy between the major distributor

defendants and MTS and TEI and Doug

Robertson Advertising Agency, (4) injury

5l.

arising from the vertical agreements which

discriminate against the independent

classes of trade and which inevitably

spell their exclusion in the affected

geographical areas, or any of them, and

(5) attempted monopolization of the

retailing of records and tapes by MTS.

The court's discussion of proof of

intent to monopolize through predatory

pricing has no pertinency to the facts at

hand. It is well established that parties

are presumed to intend the ordinary conse-

quences of their acts (Cal. Evid. Code §

665). Persistent selling of records at

$3.69, $3.88 and $3.99 when the cost to

the competitor is $3.65, advertised on 307

spots every weekend, is proof of intent.

Indeed, Mr. Solomon expressed his intent

to utilize the prices to "zing the shit

out of competition." (ER 1385-86.) This

statement printed in a well read trade

magazine gave the distributors knowledge

of Mr. Solomon's intended purpose. Con-

tinual subsidizing of this operation was

52.

with knowledge of his intent.

The major distributors involved here

have decreed that the buying public can

only rationally purchase: (a) at stores

which heavily stock the product that they

distribute; (b) with knowledge of current

releases received only through the chosen

retailers which are supplied with their

advertising funds; (c) at prices the group

choses to sell.

The concept of predatory pricing based

upon marginal costs might have application

to a manufacturer in control of his own

costs, but certainly can have no applica-

tion in this case where the major costs

are in products being resold. That price,

in turn, is the object of an agreement to

sell at greatly advantageous prices and

terms. To allow a retailer who enters

into such special allowance arrangements

to escape liability on the grounds that he

is selling above his costs is certainly

not persuasive. It favors and protects

expressly that which Congress outlaws. At

53.

the very least, petitioners have uncovered

a conspiracy of large proportions to vio-

late the Robinson-Patman Act. That

conspiracy is actionable as a Section 1 or

Section 2 Sherman Act violation. Such a

conspiracy on the scale shown here is

violative of Section 2 of the Sherman

Act. It is sufficient to support a spe-

cific evidentiary showing of intent. See

United States v. New York Great Atlantic

and Pacific Tea Co., 173 F.2d 79 (7th Cir.

1949), affirming, 67 F. Supp. 626. Peti-

tioners have been told that they must

overcome the inference of individual ac-

tion because of the business desire for

increased sales to the major chain

stores. But there must first be an over-

all view of the evidence in terms of

protection of antitrust rights and obli-

gation to obey the law. The issues of

intent, commitment, and participation in

light of the evidence of purpose and ef-

fect here cannot be decided in summary.

judgment. Competitive units may not agree

54.

to achieve volume sales by the exclusion

of a class of independents. Clearly, the

significance of meetings between the cred-

it manager of these nationwide distribu-

tors is to be decided only by giving all

favorable inferences to petitioners. The

meetings involve exchange of information

and the discussion of terms of credit

which have been granted to favored retail-

ers. This is unlike Cement Manufacturers

Protective Association v. United States,

268 U.S. 588 (1925). These meetings con-

cern specific discussion of the specific

terms used to finance the chain

retailers. They involve disclosure of the

intended discriminatory terms (ER 1402-

1405, 1511).

The specific function of the Credit

Manager Meetings is to support heavy fi-

nancial assistance to the chain

retailer. The matter of definition is

important. It is said that there is no

exchange of pricing information. Yet the

Ninth Circuit has recently held that the

55.

extension of credit is an attribute of

price. D&S Redi Mix v. Sierra Redi Mix

and Contracting, 1982-83 Trade Cases, 4

65,017 (9th Cir. 1982). Further it ap-

pears erroneous to heed Catalano v. Target

Sales, Inc., 446 U.S. 643 (1980) to the

effect that an agreement to fix credit

terms is an illegal price fix but to ig-

nore circumstantial evidence that such is

precisely what is going on.

The court's discussion as to vertical

conspiracy is out of context with the

facts. The evidence of the favored re-

tailers' low pricing both at promotional

prices and at shelf prices (ER 1385-1386,

2041, 2045-2104) is conclusive on the

factual showing which meets the statement

of law calling for such effect. A term of

the unlawful agreement here is that the

chain retailers will advertise at the

stated prices. Assuming that the pricing

is below cost of the small retailers,

because of the group fixed prices the

record cannot be analyzed in terms of the

zoslaws alone. The small retailers ob-

tained the same price category as did the

zoslaws. The evidence showed the exclu-

sion of petitioners under circumstances

applicable to an entire class. Great

Atlantic & Pacific Tea Co. v. FTC, 440

U.S. 69 (1979) demonstrates the distinc-

tion involved in petitioners showing from

that of an ordinary Robinson-Patman Act

case. This record does not show isolated

transactions but persistent continual

discrimination. The meeting competition

defense does not apply to a classification

system or widespread discriminatory prac-

tice. Corn Products Refining Co. v. FTC,

324 U.S. 726 (1945); FTC v. A.E. Staley

Mfg. Co., 324 U.S. 746 (1945); FTC v.

Cement Institute, 333 J.S. 683 (1948); FTC

v. National Lead Co., 352 U.S. 419

(1957). Further, the respondents did

precisely what they were not to do under

Great Atlantic & Pacific Tea Co., supra;

United States v. U.S. Gypsum Co., 438 U.S.

422 (1978); industry members of an oligo-

polistic industry may not contact each

57.

other to obtain pricing information.

B. The Determination That a Refusal

to Deal Based Upon Reaction to an

Antitrust Complaint is Lawful is

in Conflict With the Decision of

Another Panel of the Ninth Cir-

cuit, and the Third Circuit.

Ostrofe v. H.S. Crocker, 670 F.2d 1378

(9th Cir. 1982); Bergen Drug Co. v. Parke,

Davis and Co., 307 F.2d 725 (3rd Cir.

1962) are in conflict with the instant

decision. See, also, Program Engineering,

Inc. v. Triangle Publications, 634 F.2d

1188 (9th Cir. 1980). The public policy

factors outlined by Judge Browning in

Ostrofe, supra, are fully applicable to

Capitol Records. Capitol enters into

exclusive performance contracts, obtains

the protection of the copyright laws and

subsidizes the advertising of its exclu-

sive performances. Certainly it is no

great burden for the law to decree that

those who utilize the protections which

society grants cannot refuse to deal when

its marketing decisions are deemed to be

violations of the antitrust laws. It has

always been thought that the enforcement

of antitrust laws is of overriding impor-

tance. The common law policy of estoppel

has been held inapplicable for the speci-

fic purpose of allowing adjudication of

antitrust issues for the general protec-

tion. This history of curtailment of

common law doctrines to make certain that

restraints of trade are litigated has not

been applied here. Sola Electric Co. v.

Jefferson Electric Co., 317 U.S. 173

(1942). Morton Salt Co. v. G.S. Suppiger,

314 U.S. 488 (1942); Lear, Inc. v. Adkins,

395 U.S. 653 (1969). Further, Capitol has

been shown to be involved in a conspiracy

to establish a fixed and rigid system of

distribution in the retailing of phono-

graph records and tapes. The learned

court's use of the small quantities of

purchase by the Zoslaws is erroneous. A

court can hardly point to a victim's

smaller purchases of products when it has

seen a deliberate course of conduct by

Capitol and its co-conspirators which

prevents volume purchasing. This Court is

faced with a lower court giving sanction

to the successful means used by Capitol in

driving petitioners out of business. By

reason of congressional intent, as ex-

pressed in the antitrust statutes, such a

viewpoint cannot prevail.

On its face, the decision ignores the

fact that the refusal to deal supports a

Robinson-Patman violation which the deci-

sion allows to go forward. A refusal to

accord proportionately equal treatment to

an established customer may be a violation

of the provisions of Sections 2(d), 2(e)

of the Clayton Act. Corn Products Refining

Co. v. F.T.C., 324 U.S. 726, 743-744 (1945);

American Can Co, v. Bruce's Juices, Inc.,

187 F.2d 919 (5th Cir. 1951).

c. Taterstate Circuit Has Been Erro-

neous Y onstrued to Allow

Determinations of Fact by Appel-

late Courts

In the Interstate Circuit case, supra,

this Court determined that the “combina-

tion or conspiracy" provisions of the

Sherman Act prevent persons from accepting

an invitation to participate in a plan,

the necessary consequences of which, if

carried out, is in restraint of interstate

commerce. In 1962 this court held in

Poller v. Columbia Broadcasting System,

368 U.S. 464 (1962) that summary judgment

was inappropriate in Sherman Act conspir-

acy cases. The thrust of the doctrine of

conscious parallelism has now been

reversed,

It is respectfully submitted that the

learned court of appeals has erroneously

allowed trial courts to weigh the

evidence, to determine the issue of the

credibility of the witnesses and to allow,

not an overall view of the plan, and the

necessary consequences of the plan, viewed

as a whole. Further, it is held that

victims of alleged conspiratorial conduct

must establish a plausible motive for the

plan. The decision of this Court, is

cited for support; First National Bank of

Arizona v. Cities Service Co., 391 U.S.

61.

253 (1968). Cities Service, to the con-

trary, establishes that when alleged

conspirators move for summary judgment in

a conspiracy case, they must conclusively

establish that the facts cannot conceiv-

ably, under any theory, support the

allegations of conspiracy. In reality,

Rule 56 is now being utilized to determine

not whether there are issues of fact, but

what the facts are.

It is respectfully submitted that the

United States Constitution prevents the

courts from weighing the substantial evi-

dence. F. R. Civ. P. 56 does not, and

cannot, allow a departure from the Consti-

tutional prohibitions against court fact

weighing in jury cases. U.S. CONST. art.

I, III, amend. VII. Beacon Theatres v.

Westover, 359 U.S. 500 (1959), In Re U.S.

Pinancial Securities Litigation, 609 F.2d

411 (9th Cir. 1979). Petitioners demanded

a trial by jury. As seen above, there was

a showing of uniformity in list prices,

uniformity in the granting of sub-

distributor prices tc the named retailers,

62.

uniformity in the subsidization of

retailer-defendants, and uniformity in the

disallowance of meeting competition on

behalf of the small retailer. That the

effect of the advertised prices would

result in the elimination of the small

retailers was undisputably shown to have

been known to each of the distributor-

defendants. It was the price which each

specified to be advertised that was

carried over the media. The elimination

of a class of dealers is a restraint of

trade. This case should proceed to a jury

trial on the conspiracy issue.

CONCLUSION

For the foregoing reasons, the peti-

tion for a writ of certiorari should be

granted.

Dated February 18, 1983, San

Francisco, California.

Respectfully submitted

- i

xwe eit

Attorney for Petitioners

63.

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CHARLES ZOSLAW AND JANE

ZOSLAW, husband and wife,

dba MARIN MUSIC CENTRE,

Plaintiff-Appellants,

vs.

MCA DISTRIBUTING CORPOR-

ATION, DOUG ROBERTSON

ADVERTISING, INC., MTS,

INC., TOWER ENTERPRISES,

INC., WARNER/ELEKTRA/AT-

LANTIC CORPORATION, ABC

RECORDS, INC., POLYGRAM

DISTRIBUTION, INC., CAP-

ITOL RECORDS, INC. and

CAPITOL INDUSTRIES-EMI,

Defendants~-Appellees.

)

Nos.

80-4330

80-4429

OPINION

Appeal from the United States

District Court for the Northern

District of California

Honorable Robert F. Peckham,

Chief Judge, Presiding

Argued and Submitted

November 9, 1981

Before: BAZELON,* SKOPIL and POOLE, Cir-

cuit Judges POOLE, Circuit Judge:

*The Honorable David L. Bazelon, Senior

Judge for the United States Court of

Appeals for the District of Columbia

Circuit, sitting by designation.

APPENDIX A-1

This is an appeal by Charles and Jane

zoslaw, the former owners of a retail

record store, from a series of orders

entered by the district court granting

summary judgment in favor of appellee

record distributors: Warner/Elektra/ At-

lantic Corporation (WEA); MCA Distri-

buting Corporation (MCA), Polygram Distri-

bution Inc, (Polygram)2/, ABC Records,

Inc. (ABC) and Capitol Records, Inc. and

its parent corporation, Capitol Indus-

tries-EMI (jointly, Capitol), appellee

retailer, MTS, Inc. (mrs) 2/ and appellee

Doug Robertson Advertising, Inc. (Doug

Robertson). In this appeal the Zoslaws

claim that the district ccurt erred in

finding that they had failed to satisfy

the “in commerce" jurisdictional require-

ment of the Robinson-Patman Price Descri-

mination Act, and in concluding that they

had failed to raise an issue of material

fact concerning their claims under sec-

tions 1 and 2 of the Sherman Antitrust

Act. We reverse the district court's

APPENDIX A-2

ruling as to the Robinson-Patman claims

except as to Doug Robertson and affirm as

to the Sherman Act claims.

I. STATEMENT OF CASE

Appellants operated Marin Music

Centre, a Mill Valley retail store which

sold phonograph records and equipment,

prerecorded tapes and related merchan-

dise. They experienced startup losses in

1965 an 1966 and then claimed to have

operated at a profit for the following two

years. After that period, the store en-

countered financial difficulties from

which it never recovered, suffering losses

from at least 1971 until it went out of

business in 1977.

The district court found that during

the time the Zoslaws were in business the

Marin County record market "changed dra-

matically.” 533 F. Supp. 540, 546 (N.D.

Cal. 1980). Several other retail record

and tape stores opened in the area and the

number of department stores, grocery

stores and drug stores with record depart-

APPENDIX A-3

ments also increased. Charles Zoslaw

readily admitted that the store suffered

losses because other stores sold records

at lower prices.

In January, 1975, appellants filed

this action. They subsequently filed

three amended complaints adding various

defendants and factual contentions. As

thus amended the complaint named all of

the appellee record distributors: WEA,

MCA, Polygram, Capitol and ABC. Several

other named distributors, who subsequently

settled with appellants, were CBS, Inc.,

RCA, Inc., Eric-Mainland Distributing

Company, United Artists Music and Record

Group, Inc. (UAMARGI) and Transamerica

Company, the parent corporation of Eric-

Mainland and UAMARGI. Appellants alleged

that the distributor defendants violated

section 2(a) of the Robinson-Patman Act,

15 U.S.C. § 13(a), by selling records and

tapes to retail chain stores at lower

prices than those offered to single

stores, such as Marin Music Centre, and

APPENDIX A-4

that the distributors violated sections

2(d) and 2(e) of the Act, 15 U.S.C. §§

13(d) and 13(e), by discriminating in

favor of retail chain stores in granting

promotional allowances and furnishing

special services. They also alleged that

the distributor defendants conspired among

themselves and with the retailer defen-

dants to favor the retail chain stores at

the expense of individual stores in viola-

tion of section 12 of the Sherman Act, 15

U.S.C. § l.

Three retailers were named defen-

dants: MTS, Integrity Entertainment Cor-

poration (IEC), and CBS, Inc., doing busi-

ness as Discount Records. The latter two

subsequently settled. Also named defen-

dant was Doug Robertson Advertising Agen-

cy, with which Tower did business. Appel-

lants alleged that the retailers violated

sections 2(d), 2(e), and 2(f£), by knowing-

ly inducing and receiving the alleged

discriminations in price and other terms,

allowances and services. The retailer

APPENDIX A-5

defendants were also charged with violat-

ing section 1 of the Sherman Act by con-

spiring with the distributors to receive

favorable treatment. Finally, appellants

accused MTS with monopolizing or attempt-

ing to monopolize the retail record market

in violation of section 2 of the Sherman

Act.

In the two years after appellants

instituted the action, four distributor

defendants moved for partial summary judg-

ment on the ground that the court lacked

jurisdiction under Robinson-Patman because

the allegedly discriminatory sales were

not “in commerce" as required by that

Act. The district court granted each of

these motions: in fovor of WEA on June

21, 1976, see Zoslaw v. Columbia Broad-

casting System, 1977-1 Trade Reg. Rep.

(CCH) 4 61,756; in favor of Eric-Mainland

on July 20, 1976; in favor of CBS on

April 18, 1977; and in favor of Polygram

(Limited to the period 1974 and 1976) on

August 17, 1977.24

APPENDIX A-6

In October, 1977, appellants filed a

motion for preliminary injunction to pre-

vent the defendant distributors from fa-

voring chain store retailers and to pre-

vent the defendant retailers from accept-

ing such preferences. The motion also

sought to prohibit Capitol Records from

refusing to sell phonograph records, tapes

and cassettes to Marin Music Centre. This

claim arose when Capitol, shortly after

settling with the appellants, ceased sel-

ling merchandise to them. Appellants then

amended their complaint to reinstate

Capitol as a defendant based on its re-

fusal to deal. The district court denied

the motion, finding that appellants had

failed to demonstrate a likelihood of

success on the merits or a showing of

irreparable injury.

In September, 1978, the district court

granted Capitol's motion for summary judg-

ment on the refusal to deal claim, finding

that Capitol had legitimate business rea-

sons for its action.+/ Three of the four

APPENDIX A-7

remaining distributor defendants, WEA,

MCA, and Polygram, as well as MTS and Doug

Robertson, then moved for summary judgment

on all of the remaining claims against

them. In January, 1980, the court granted

all of the defendants' pending motions.

In its opinion, the district court, held,

first, that appellants failed to produce

competent evidence to support their fac-

tual allegation. The court noted that the

appellants’ opposition papers “regularly

and systematically" violated Rule 56 of

the Federal Rules of Civil Procedure as

well as Rule 220-8 of the Local Rules of

the Northern District of California. The

court observed that most of the documents

submitted by appellants with their opposi-

tion lacked authentication and that they

often failed to support the factual in-

ference for which they had been provided.

The court then ruled that even if

appellants had properly supported their

factual allegation, summary judgment was

still appropriate since they had failed to

APPENDIX A-8

advance an adequate legal theory of the

case. The remaining Robinson-Patman

Claims were dismissed against two of the

distributor defendants, MCA and Polygram,

on the finding that appellants had failed

to satisfy the “in commerce" requirement

of the Act. The court also held that it

lacked jurisdiction over appellants'

Robinson-Patman claims against MTS and

Doug Robertson because the Supreme Court's

decision in Great Atlantic & Pacific Tea

Co. v. FTC, 440 U.S. 69 (1979), precluded

jurisdiction under section 2(f) and that

there was no private right of action

against buyers under sections 2(d) and

2(e).

As for the Sherman Act, section 1

Claims, the court found no basis in the

material submitted by appellants to sup-

port any of the claims of conspiracies to

restrain trade alleged by appellants, and

found no reasonable factual inference in

support of appellants' monopolization and

APPENDIX A-9

attempted monopolization claims against

MTS.

In May, 1980, the last remaining de-

fendant, ABC, filed its motion for summary

judgment of both the Robinson-Patman and

Sherman Act claims. The district court

granted this motion and entered judgment

in favor of all of the defendants in June,

1980,2/

Appellants challenge the district

court's findings that the allegedly dis-

criminatory sales were not "in commerce”

as required by Gulf Oil Corp. v. Copp

Paving Co., 419 U.S. 186, 200 (1974), and

therefore not within section 2(a) of the

Robinson-Patman Act. Alternatively, they

contend that even if section 2(a) is in-

applicable, the court still had jurisdic-

tion over the distributor defendants under

sections 2(d) and 2(e), and over MTS and

Doug Robertson under section 2(f). As for

the Sherman Act, appellants claim that the

district court erred in finding no genuine

issue of material fact concerning the

APPENDIX A-10

existence of a conspiracy among distribu-

tors and retailers to favor certain chain

retailers. They also contend that the

district court erred in finding no eviden-

tiary support for their claim that MTS

attempted to monopolize trade. Finally,

appellants contend that the district court

ignored disputed factual issues when it

concluded on motion for summary judgment

that Capitol's refusal to deal was a uni-

lateral act made for legitimate business

reasons.

II. ROBINSON-PATMAN JURISDICTION

A. The Distributor Appellees

Although the district court issued

several opinions in granting summary judg-

ment on the Robinson-Patman claims involv-

ing the distributor appellees, the rele-

vant facts regarding the sales by each

appellee can be briefly summarized,

Two of the distributor appellees, WEA

and Polygram are wholly owned subsidiaries

of corporations engaged in record and tape

production.2/ During the relevant period

APPENDIX A-11l

the other two appellees, ABC and MCA,

manufactured and distributed records and

tapes nationwide.—/ Each distributor

maintained a regional warehouse in Cali-

fornia which supplied records and tapes

for stores in the San Francisco Bay Area,

including MTS and Marin Music Centre.

Depending on the distributor involved,

each of the warehouses received a varying

percentage of records and tapes which were

manufactured out of state. For example,

WEA's California warehouse received ap-

proximately 10% of its records and tapes

from out of state, while Polygram's ware-

house received approximately 15% of its

goods from out of state.’

In certain instances, each distibutor

made "drop shipments” to Bay Area retail

record stores. A drop shipment occurred

when the distributor's California ware-

house was unable to fill an order from a

retail store. In that case the distri-

butor would order the out of state manu-

facturing plant to send a shipment of

APPENDIX A-12

records or tapes directly to the local

retailer. Drop shipments occurred infre-

quently. For example, MCA calculated its

cumulative percentage of dollar sales to

the San Francisco Bay Area attributable to

drop shipments at 0.44%.

To prove justification under section

2(a) of the Robinson-Patman Act, a plain-

tiff must demonstrate: (1) that the de-

fendant is “engaged in interstate com-

merce;" (2) that the price discrimination

occurred "in the course of such com-

merce;" and (3) that "either or any of

the purchases involved in such discrimina-

tion are in commerce." William Ingliss &

Sons Baking Co. v. ITT Continental Baking

Co., 668 F.2d 1014, 1043 (9th Cir.

1981) .2/

In Gulf Oil Corp. v. Copp Paving Co.,

419 U.S. 186 (1974), the Supreme Court

concluded that the jurisdictional "in

commerce" language in section 2(a) is not

as broad as the “affecting commerce" lan-

guage in the Sherman Antitrust Act. In

APPENDIX A-13

particular, the court interpreted the

"purchases . .. in commerce” requirement

as limiting the section's application to

cases “where ‘at least one of the two

transactions which, when compared generate

a discrimination . . . cross[es] a state

line.'" 419 U.S. at 200 (quoting Hiram

Walker, Inc. v. A & S Tropical, Inc., 407

F.2d 4, 9 (5th Cir.), cert. denied, 396

U.S. 901 (1969)). See Ingliss, 668 F.2d

at 1043.

The district court, in applying Gulf

Oil, concluded that the sales by the dis-

tributor appellees were not "in commerce"

and that the drop sales were de minimis

and therefore would not support jurisdic-

tion under section 2(a). Appellants chal-

lenge both of these rulings.

Re Were the Record and Tape Sales to

Bay Area Stores "In Commerce?"

In examining the interstate sales, the

district court recognized that if goods

from out of state are still within the

"practical, economic continuity” of the

APPENDIX A-14

interstate transaction at the time of the

intrastate sale, the latter sale is con-

sidered “in commerce" for purposes of the

Robinson=-Patman Act. See Hampton v. Graff

Vending Co., 516 F.2d 100, 102 (5th Cir.

1975) (quoting Gulf Oil Corp. v. Copp

Paving Co., 419 U.S. at 195). In deter-

mining whether the sales of records here

were therefore in the flow of commerce the

court relied on the traditional intent

test derived from the Fair Labor Standards

Act, and subsequently applied in Robinson-

Patman cases .12/ See Walling v. Jackson-

ville Paper Co., 317 U.S. 564, 570

(1942); Walker Oil Co. v. Hudson Oil Co.,

414 F.2d 588, 590 (5th Cir.), cert.

denied, 396 U.S. 1042 (1969); Food Bas-

ket, Inc. v. Albertson's Inc., 383 F.2d

785 (10th Cir. 1967); 4 J. Von Kalinowski,

Antitrust Laws and Trade Regulation §

26.02[3] (1969 & Supp. 1981).

Under this approach, the flow of com-

merce ends when goods reach their "“intend-

ed" destination. Von Kalinowski, supra.

APPENDIX A-15

In gauging the point of destination courts

consider whether goods coming from out of

state respond to a particular customer's

order or anticipated needs. Walling, 317

U.S. at 567-70. If so, the sales meet the

“in commerce" requirement even though the

goods may be stored in a warehouse before

actual sale to the buyer .22/ Walling, 317

U.S. at 570; Hampton, 516 F.2d at 102-

03. However, goods leave the stream of

commerce when they are stored in a ware-

house or storage facility for general

inventory purposes, that is, with no par-

ticular customer's needs in mind.

Hampton, 516 F.2d at 103; Cliff Food

Stores, Inc. v. Kroger, Inc., 417 F.2d

203, (5th Cir. 1969).

In Walker Oil, 414 F.2d at 588, for

example, the plaintiff service station

owner charged the defendant, Judson Oil,

with selling gasoline at a different price

at its Florida station than at its Alabama

station. Hudson purchased gasoline for

the two stations from a supplier in

APPENDIX A-16

Mobile, Alabama. The Fifth Circuit con-

cluded that since Hudson's purchases from

the Alabama supplier for its Florida sta-

tion were not based on specific needs of

retail customers of the service station,

the flow of commerce ended when the gaso-

line was delivered to the station.

The district court here determined

from affidavits submitted by appellees

that the latter stocked their California

warehouses for general inventory purposes

depending on a record's anticipated per-

formance, and did not order records for

particular customers. That conclusion is

supported by the record, and appellants do

not offer serious dispute. Based on this

finding, the court held that the subse-

quent sales to Bay Area retailers were not

in the flow of commerce.

This emphasis on intended destination

as a key to the statute's coverage has

been criticized by some commentators as

providing a means by which interstate

producers may avoid Robinson-Patman liabi-

APPENDIX A-17

lity by setting up local storage facili-

ties in the secondary states. See l P.

Areeda & Turner, Antitrust Law 4 233(b)

(1978); ABA Antitrust Section, The Robin-

son-Patman Act: Policy and Law 44-45

(1980). On the contrary, the cases relied

on by the district court and cited by

appellees primarily involve sales by out

of state producers to distributors or

retailers who then resell the goods intra-

state at the allegedly discriminatory

price. See, e.g., Walling, 317 U.S. at

564; Food Basket, 383 F.2d at 785;

Hampton, 516 F.2d at 100. In such cases

the analysis of intent is useful in deter-

mining whether the initial sale from the

out of state producer bears sufficient

relationship to the subsequent allegedly

discriminatory sale to conclude that the

latter sale, is part of a continuous in-

terstate transaction and hence in com-

merce. See P. Areeda & D. Turner,

Supra. Conversely, where a producer sim-

ply moves goods manufactured out of state

APPENDIX A-18

into the state and resells at the alleged-

ly discriminatory price, there is no

intermediate sale to break the flow of

commerce. And indeed, it would seem that

Standard Oil Co. v. FTC, 340 U.S. 231

(1951), in which the Supreme Court held

that in state storage of gasoline by an

interstate oil producer did not end the

flow of commerce, imposes some limit upon

the application of the intent rule.

In Standard Oil, the defendant, ac-

cused of discriminating in selling oil to

Michigan jobbers, refined the oil out of

state and then shipped it to its own stor-

age facilities in Michigan from which

delivery was made to customers upon indi-

vidual orders. Although the gasoline

rested up to several months in the storage

facility, the court held that it remained

part of the flow of commerce:

Any other conclusion would fall

short of the recognized purpose

of the Robinson-Patman Act to

reach the operations of large

interstate businesses in competi-

tion with small concerns. Such

temporary storage of the gasoline

APPENDIX A-19

as occurs . . . does not deprive

the gasoline of its interstate

character.

340 U.S. at 237-38 (citations omitted).

Moreover, the Court specifically distin-

guished the early Fair Labor Standard Act

cases, including Walling, noting that in

those cases “interstate commerce ceased on

delivery to a local distributor," while

“the sales involved here are those of an

interstate producer and refiner to a local

distributor." 340 U.S. at 238 n.6.

We interpret Standard Oil to indicate

that interstate producers of goods pro-

duced out of state do not meaningfully

interrupt the flow of commerce by simply

storing them in the state of eventual

sale. Viewed in this light we think the

district court prematurely granted summary

judgment to the appellee distributors. In

particular, the declarations and answers

to interrogatories submitted by ABC and

MCA indicate that both manufactured re-

cords and tapes outside of California,

which were then placed in California ware-

APPENDIX A-20

houses for eventual sale to retailers,

Those actions were not alone sufficient to

remove the goods from the stream of com-

merce,

WEA and Polygram did not themselves

manufacture records, but they were wholly

owned subsidiaries of companies engaged in

record and tape production. Sales to

subsidiaries in such instances do not

necessarily remove such transactions from

Robinson-Patman jurisdiction. See Perkins

v. Standard Oil Co., 395 U.S. 642, 648

(1969) ("We find no basis for immunizing

Standard's price discrimination simply

because the product in question passed

through an additional formal exchange

before reaching the level of Perkin's

actual competitor"). Similarly, "passage

of title or the terms of shipment, al-

though relevant, do not control."

Hasbrouck v. Texaco, Inc., 663 F.2d 930,

934 (9th Cir. 1981); S & M Materials Co.

v. Southern Stone Co., 612 F.2d 198, 200

APPENDIX A-21

(Sth Cir.), cert. denied, 449 U.S. 832

(1980).

Therefore, as to the record and tape

sales by the parent corporations to the

WEA and Polygram warehouses in California,

we examine the extent to which the subsi-

diaries acted as independent distributors

in their pricing and marketing decisions,

in effect, breaking the flow of commerce

between the manufacturer and the local

retailer. See United States v. American

Building Maintenance Industries, 422 U.S.

271, 285 (1975) ;22/ P. Areeda & D.

Turner, Supra, at ¥ 233(b). Such thres-

hold issues of jurisdiction are normally

questions of fact for the jury to

resolve. Hasbrouck, 663 F.2d at 933.

Since the district court did not consider

these controlling principles and it ap-

pears that there are genuine issues of

material fact in dispute regarding their

resolution the grants of summary judgment

in favor of WEA and Polygram were impro-

per.

APPENDIX A~-22

y De minimis interstate drop sales.

After finding the sales to Bay Area

retailers from the distributors' Califor-

nia warehouses not “in commerce," the

district court considered the impact of

the interstate drop sales. It held the

sales so “scattered an insignificant" that

they insufficiently support a Robinson-

Patman Act claim. We have ruled that

summary judgment was improperly granted as

to the sales from the warehouses but to

avoid uncertainty on remand, it should be

stated that in our view the district court

correctly excluded the drop sales as a

basis for jurisdiction.

The principle of de minimis is usually

appropriate in the light of a finding

going to the substance of the action it-

self that a claimed price discrimination

did not "substantially lessen" competition

as required by the statute. See e.g.,

Hanson v. Pittsburgh Plate Glass Indus-

tries, Inc., 482 F.2d 220 (Sth: Cir. 1973),

cert. denied, 414 U.S. 1136 (1974). How-

APPENDIX A-23

ever, in several instances courts have

made de minimis findings regarding juris-

diction under the Act. Thus in Food Bas-

ket, 383 F.2d 785, the court found that

certain "drop-sales" of goods from out of

state suppliers to a grocery chain were

not sufficient to bring the chain under

the Act where it received all of its other

goods from warehouses located in the

State. Accord Skinner v. United States

Steel Corp., 233 F.2d 762 (5th Cir.

1956); Baldwin Hills Building Material

Co. v. Fibreboard Paper Products Corp.,

283 F. Supp. 202 (C.D. Cal. 1968). But

see Von Kalinowski, supra, at § 26.01[2]

(criticizing use of the de minimis test

for jurisdictional purposes).

Since the district court's decision in

this case, we have had occasion to cule on

the applicability of the de minimis rule

to jurisdictional challenges under the

Robinson-Patman Act. In William Inglis,

688 F.2d 1014, the defendant bakery lo-

cated in California marketed its bread

APPENDIX A-24

primarily in state. However, it also made

sales to accounts in Nevada. We rejected

the contention that the Nevada sales were

de minimis and therefore insufficient to

invoke jurisdiction. While recognizing

that interstate sales which were merely

"inadvertent or incidental" to a pattern

of intrastate sales might justify applica-

tion of a de minimis rule, 668 F.2d at

1044 n. 54, 23 concluded that the sales

involved were part of a multi-state mar-

keting operation and therefore not de

minimis. 14.22/

In contrast the drop sales here were

not part of the normal marketing or dis-

tribution pattern of the distributors,

which, instead focused on supplying Bay

Area stores from California warehouses.

Drop sales occurred when there were gaps

in that distribution system. Given their

relative size and sporadic nature the

sales appear as an anomaly in the normal

distribution pattern. See Food Basket,

383 F.2d at 788. We therefore determine

APPENDIX A-25

that the circumstances here involve the

narrow category in which application of de

minimis principles to jurisdictional ques-

tions is appropriate.

3. Jurisdiction under Sections 2(d)

and 2 (e) of the Robinson-Patman

Act.

Appellants contend that even if sec-

tion 2(a) does not apply to the distribu-

tor appellees, sections 2(d) and 2(e)

apply because the jurisdictional test for

those sections is more liberal than the

standard under section 2(a) 4/ Again,

while we reverse the summary judgment that

there was no jurisdiction under section

2(a), we conclude that the court correctly

held that the jurisdictional reach of

sections 2(d) and 2(e) goes no further

than section 2(a).

Section 2(d) relates to payments for

services or facilities and requires that

the seller be “engaged in commerce" and

that the payment or benefit be "in the

course of such commerce." Section 2(e)

covers the furnishing of services or faci-

APPENDIX A~-26

lities for processing and handling and

contains no “in commerce" language. How-

ever, it has been held that the omission

of such language was inadvertent. See

Elizabeth Arden, Inc. v. FTC, 156 F.2d

132, 134 (2d Cir. 1946), cert, denied, 331

U.S. 806 (1947). Neither section contains

language as does section 2(a), referring

to "purchases . .. in commerce." Appel-

lants therefore argue that those sections

are not limited by the requirement that

there be an interstate sale.

Sections 2(d) and 2(e) of the

Robinson-Patman Act were enacted to pre-

vent sellers from circumventing section

2(a) by discriminating between buyers in

respects other than price. See FTC v.

Simplicity Pattern Co., 360 U.S. 55, 68-69

(1959). It would therefore be incongruous

to hold as appellants suggest, that those

sections go beyond the coverage of section

2(a). See W. Patman, Complete Guide to

the Robinson-Patman Act 132 (1963); F.

Rowe, Price Discrimination Under the

APPENDIX A-27

Robinson-Patman Act 393 (1962). There are

decisions to the contrary, see American

Macaroni Manufacturing Co. v. FTC, 321

F.2d 404, 408 (5th Cir. 1963), cert.

denied, 375 U.S. 971 (1964), but in gene-

ral cases have concluded that sections

2(d) and 2(e) have the same jurisdictional

limitation as section 2(a). See L & L Oil

Co. v. Murphy Oil Corp., 674 F.2d 1113,

1116 (5th Cir. 1982); Sun Cosmetic

Shoppe, Inc. v. Elizabeth Arden Sales

Corp., 178 F.2d 150 (2d Cir. 1949); R. S.

E., Inc. v. Pennsy Supply, Inc., 489 F.

Supp. 1227, 1236 (M.D. Penn. 1980), Rohrer

v. Sears, Roebuck & Co., 1975-1 Trade Reg.

Rep. (CCH) 4 60,302 (C.D. Mich. 1975).

B. The Retailer Appellee —- MTS

Section 2(f£) of the Robinson-Patman

Act makes it unlawful for a buyer "engaged

in commerce, in the course of such com-

merce, knowingly to induce or receive a

discrimination in price which is prohi-

bited by this section." (Emphasis

added). In Great Atlantic & Pacific Tea

APPENDIX A~-28

Co,, 440 U.S. at 69 (1979), the Supreme

Court held that a buyer does not violate

section 2(f£) in receiving a discrimination

in price unless the discrimination is

unlawful under section 2(a).

The district court, relying on Great

Atlantic & Pacific Tea Co., correctly

ruled that since the sales by distributors

failed to meet the “in commerce" require-

ment of section 2(a), MTS could not be

liable under section 2(f) for receiving

the allegedly discriminatory prices.

However, since we reverse the court's

grant of summary judgment as to the sec-

tion 2(a) claims, we also reverse the

ruling against the section 2(f) claim for

further consideration in the light of this

15/

opinion.

C. The Appellee Advertiser-Doug

Robertson

The district court found no "factual

or legal basis upon which plaintiffs hope

to hold Doug Robertson Advertising Agency

liable." 533 F. Supp. at 551. We

APPENDIX A=-29

agree. Doug Robertson handled MTS adver-

tising. The uncontested declaration sub-

mitted by it indicates that the only other

connection between the two appellees was

that Doug Robertson owned 5% of several

MTS subsidiary corporations. It is there-

fore clear that Doug Robertson did nothing

to violate sections 2(a), 2(d) or 2(e) of

the Robinson-Patman Act by providing dis-

criminatory prices, promotional or other

services to record retailers. Similiarly,

it received no price discrimination from

the record distributors. Accordingly,

given the absence of any justiciable claim

against it, the district court correctly

granted summary judgment to Doug Robertson

on the Robinson-Patman claims.

III. THE SHERMAN ACT CLAIMS

The district court granted summary

judgment in favor of appellees on all of

appellants’ claims under the Sherman Anti-

trust Act. We are admonished by the

Supreme Court to proceed with caution

inconsidering summary judgment in anti-

APPENDIX A-30

trust cases. Poller v. Columbia Broad-

castina System, 368 U.S. 464, 473

(1962). See Program Engineering v.

Triangle Publications, 634 F.2d 1188, 1192

(9th Cir. 1980); Ron Tonkin Gran Turismo

v. Fiat Distributors, 637 F.2d 1376, 1381

(9th Cir. 1981), cert. denied, 102 S.Ct.

128 (1981). However, the Court has also

indicated that clever pleading does not

entitle an antitrust claimant to a trial

with no regard for Rule 56 of the Federal

Rules of Civil Procedure. First National

Bank of Arizona v. Cities Service, Co.,

391 U.S. 253, 289-90 (1968). See Ron

Tonkin, 637 F.2d at 1381; Betaseed, Inc.

v. U and I Inc., 681 F.2d 1203, 1207-08

(9th Cir. 1982).

Under Rule 56, summary judgment is

appropriate “where the record before the

court on the motion reveals the absence of

any material issue of fact and [where] the

moving party is entitled to judgment as a

matter of law." Portland Retail Druggists

Association v. Kaiser Foundation Health

APPENDIX A-31

Plan, 662 F.2d 641, 645 (9th Cir. 1981).

The burden of demonstrating the absence of

an issue of material fact lies with the

moving party. British Airways Board v.

Boeing Co., 585 F.2d 946, 951 (9th Cir.

1978), cert. denied, 441 U.S. 968

(1979). The opposing party must then

"present specific facts demonstrating that

there is a factual dispute about a mater-

ial issue." Program Engineering, 634 F.2d

at 1193; British Airways, 585 F.2d at

951.

In this case, the district court found

that the appellees carried their burden in

demonstrating the absence of a genuine

issue of material fact. It ruled, how-

ever, that the opposition materials sub-

mitted by appellants did not comply with

the requirements of Rule 56(e) Fed. R.

Civ. P. or Rule 220-8 of the Local Rules

of the Northern District of California.

The court therefore found that appellants

failed to present competent evidence to

dispute appellees' showing.=*

APPENDIX A-32

Our review of the record amply con-

firms the district court's finding. In

the main, appellants sought to oppose the

summary judgment motions by introducing

literally hundreds of pages of documents

purporting in their cumulative effect to

show the existence of a genuine issue of

material fact. To meet the requirements

of Rule 56 as supplemented by the Local

Rules of the district court, such mater-

ials are required to be authenticated by

affidavits or declarations of persons with

personal knowledge through whom they could

be introduced at trial. See United States

v. Dibble, 429 F.2d 598, 602 (9th Cir.

1970) (writings are not admissible under

motion for summary judgment without proper

foundation); California Pacific Bank v.

Small Business Administration, 557 F.2d

218, 222 (9th Cir. 1977). As the district

court observed, most of the documents

lacked any authentication whatsoever.

Moreover, appellants made virtually no

effort to organize the documents in a

APPENDIX A-33

reasonably intelligible manner. In many

particulars, entire correspondence files

or sets of records were included with no

attempt to sort out or identify that ma-

terial which was relevant,

A party may not prevail in opposing a

motion for summary judgment by simply

overwhelming the documentation. (The

district court characterized it as “ersatz

evidence.") But even were that organiza-

tional prerequisite satisfied, we would be

compelled to hold that the materials of-

fered did not, even viewed in the light

most favorable to appellants, give rise to

a genuine issue of material fact suffi-

cient to prevent a motion for summary

judgment. See Cities Services, 391 U.S.

at 253; British Airways, 585 F.2d at 95l-

52.

A. The Section 1 Conspiracy Claims

As the district court stated, appel-

lants' Sherman Act allegations come

through as an attempt to breath new life

into their Robinson-Patman claims by re-

APPENDIX A-34

casting them in the form of a conspiracy

of which appellants suggest two possibili-

ties. The first is an overall conspiracy

among the record distributors and chain

retailers to favor the latter group at the

expense of small record retailers.2 The

second sugestion is of a vertical conspir-

acy to restrain competition between each

distributor and each chain store retailer.

l. The Horizontal Conspiracy

Appellants claim error by the district

court in granting summary judgment on the

basis that there was no genuine issue of

material fact regarding the existence of

an overall conspiracy. We have repeatedly

articulated the test for granting summary

judgment in antitrust conspiracy cases:

Once the allegations of conspir-

ep made in the complaint are

rebutted by probative evidence

Supporting an alternative inter-

pretation of a defendant's con-

duct, if the plaintiff then fails

to come forward with specific

factual support of its allega-

tions of conspiracy, summary

judgment for the defendants be-

comes proper.

APPENDIX A-35

ALW, Inc. v. United Air Lines, Inc., 510

F.2d 52, 55 (9th Cir. 1975); Mutual Fund

Investors, Inc. v. Putnam Management Co.,

553 F.2d 620, 624 (9th Cir. 1977). In

this case, since the appellees' affidavits

all denied any conspiracy with the others,

and since appellants presented no direct

evidence of conspiracy, appellants’ only

chance depended on their presentation of

circumstantial evidence sufficient to

support the inference of a “conscious

parallelism" conspiracy theory and on such

further inferences as appellants might be

able to draw from trade association and

credit managers' meetings among the vari-

ous distributors.

a. Conscious Parallelism

In proof of the hypothesis of consci-

ously parallel business behavior, appel-

lants point to the distributors' use of

similar account classifications, pricing

structures and promotional policies.

However, as the district court determined,

appellants failed to make a proper showing

APPENDIX A-36

of sufficiently similar conduct in such

matters. See Independent Iron Works, Inc.

v. United States Steel Corp., 322 F.2d

656, 661 (9th Cir.), cert. denied, 375

U.S. 922 (1963). Instead, appellees suc-

cessfully demonstrated considerable varia-

tion in the distributors’ account classi-

fication systems as well as variance in

prices offered to retailers by distribu-

tors. Moreover, each distributor offered

its own package of promotional offers and

discounts which, in fact, substantially

encouraged competition in the record busi-

ness.

Yet, even if appellants had success-

fully demonstrated that the allegedly

parallel acts were against each conspira-

tor's self interest, that is, that the

decision to act was not based on a good

faith business judgment. See Theatre

Enterprises, Inc. v. Paramount Film Dis-

tributing Corp., 346 U.S. 537, 540-41

(1954); Syufy Enterprises v. National

General Theatres Inc., 575 F.2d 233, 236

APPENDIX A-37

(9th Cir. 1978); Dahl, Inc. v. Roy Cooper

Co., 448 F.2d 17, 19 (9th Cir. 1971). The

appellees presented sufficient evidence of

legitimate business decisions to justify

their actions. For example, WEA justified

its two-tier account classification system

between “subdistributors” and "retailers"

as a means of meeting the competition of

those distributors who had previously

entered the market and who maintained

multiple-tier account classification. In

addition, it presented evidence that the

lower subdistributor price reflected cost

savings to WEA because subdistributors had

a centralized location for purchases,

billings, returns and deliveries and sub-

distributors made box-lot purchases of the

same records.

Certain distributors did give to chain

store retailers discounts in addition to

those to which they were entitled under

their account classification systems. For

example, WEA apparently gave MTS a sub-

distributor price in 1975 even though MTS

APPENDIX A-38

did not meet WEA's technical definition of

a subdistributor. However, appellants’

own evidence indicated that the distribu-

tors did so because of claims by the large

retailers that they were receiving lower

prices from the distributors' competitors

and that failure to reduce price would

adversely affect .he retailers’ merchan-

dising of the distributor's records. Such

evidence does not indicate a conspiracy to

favor large record stores. In fact, the

Sherman Act is intended’ to encourage such

competition between sellers. See Great

Atlantic & Pacific Tea Co., 440 U.S. at 83

n.16.

Finally, appellants’ conscious paral-

lelism claim is deficient because it never

established a plausible motivation for the

conspirators' conduct. In Cities Service

the court found the plaintiff's conspiracy

theory to be inadequate where the inter-

ests of the alleged conspirators were

divergent. In the absence of any common

motivation, the court concluded, there

APPENDIX A-39

existed no grounds for inferring a con-

Spiracy. 391 U.S. at 287. Accord Venzie

Corp. v. United States Mineral Products

Co,, 521 F.2d 1309, 1314 (3d Cir. 1975).

Here, appellants are unable to advance any

plausible reason why the major record

distributors would conspire to favor cer-

tain retailers, thus limiting the retail

outlets for their own products. Appel-

lants' theory of conspiracy would increase

the bargaining power of the major chain

stores against the distributors them-

selves. Indeed, the statements of Joel

Friedman, of WEA, which appellants at-

tempted to introduce into evidence, indi-

cates that WEA viewed the buying and mar-

keting practices of chain store retailers

as a threat to the distributors. In sum,

aside from the most conclusory allega-

tions, appellants have made no attempt to

show why it should be held to have been in

the interest of the record distributors to

engage in conspiracy the result of which

APPENDIX A-40

would be lowering of prices offered to

18/

their largest customers.

b. Distributors meetings and discus-

sions

Aside fronm their conscious parallel-

ism theory, appellants also attempt to

prove the existence of a conspiracy on the

basis of trade association meetings and

exchanges of credit information among

distributors. They contend that the par-

ticipation of distributors at meetings of

the National Association of Record Manu-

facturers (NARM) evidences a “cartel.”

However, in the absence of any indication

of agreement or consent to an illegal

arrangement, evidence of industry meetings

is not sufficient to prove a conspiracy.

Maple Flooring Manufacturers Association

v. United States, 268 U.S. 563, 575

(1925); Hanson v. Shell Oil Co., 541 F.2d

1352, 1359 (9th Cir. 1976), cert. denied,

429 U.S. 1074 (1977). Moreover, appel-

lants presented no evidence that the dis-

tributors exchanged price information such

APPENDIX A-41

as that found objectionable in United

States v. Container Corp., 393 U.S. 333,

335 (1969) (exchange of information among

competitors as to most recent prices

charged specific customers).

As for the exchange of credit infor-

mation, appellants introduced evidence

that the record distributors’ credit mana-

gers attended meetings of the National

Association of Credit Managers and its

regional affiliate, the Credit Managers

Association of Southern California, and

that at those meetings they exchanged

inforinmation regarding individual retail-

ers' credit histories.

Appellants suggest that the decision

of the Supreme Court in Catalano, Inc. v.

Target Sales, Inc., 446 U.S. 643 (1980),

is that all exchange of credit information

is a per se violation of section 1 of the

Sherman Act. On the contrary, the court

stated that, assuming plaintiff could

prove that the defendants agreed to fix

credit terms to their customers, such an

APPENDIX A-42

agreement would be a per se violation of

section 1. In fact the court in Catalano

Manufacturing Protective Association v.

United States, 268 U.S. 588 (1925), per-

mitting exchange of credit information for

the individual use of each member in de-

termining whether to exercise credit. 446

U.S. at 648 n.12.

The appellants' evidence indicated

that the information exchanged by the

credit managers regarding certain retail-

ers' credit standing was of the sort the

distributors could use for self protection

purposes. For example, the distributors

exchanged information regarding individual

retailers' total indebtedness. However,

there was no indication of any agreement

to fix credit terms aside from appellants'

observation that large retailers in fact

received more favorable credit terms than

Marin Music Centre -- a hardly surprising

result in light of their relative volume

of sales.

APPENDIX A-43

y Vertical Conspiracy

Appellants allege a number of vertical

conspiracies each based on the sales

agreement between a distributor and a

favored retailer which “caused discrimina-

tion in the sale of phonograph records and

tapes to the named retail chain stores."

In essence, appellants suggest that price

discrimination between individual buyers

and sellers which would ordinarily form

the basis of a secondary-line Robinson-

Patman case is also a violation of section

1 of the Sherman Act. Yet the court have

held that such an agreement, without proof

of an arrangement to exclude others from

the buyer's market does not give rise to a

section 1 claim.22/ See e.g., National

Tire Wholesale, Inc. v. Washington Post

Co., 441 F. Supp. 81 (D.D.C. 1977), aff'd,

595 F.2d 888 (D.C. Cir. 1979); Rutledge

v. Electric Hose & Rubber Co., 327 F.

Supp. 1267 (C.D. Cal. 1971), aff'd, 511

F.2d 668 (9th Cir. 1975).

APPENDIX A-44

In National Tire, for example, the

court rejected the plaintiff's claim that

a newspaper's failure to sell its adver-

tising on the same terms as it gave to

plaintiff's main competitor violated sec-

tion 1, stating:

{[P]laintiff does not allege any

basis for a vertical combination

in violation of section l. The

contract for advertising space

between the Post and Market,

albeit a conbination, is not a

combination within the scope of

section 1. The contract sets

forth the terms of dealings be-

tween the parties; plaintiff

does not allege that the terms of

the contract in any way restrict

either party's dealings with

others.

441 F. Supp. at 81.

Here appellants presented no evidence

of any vertical agreement to exclude com-

petitors. Instead, the record indicates

that certain retailers negotiated a favor-

able price . individual distributors.

However, even were we to assume some evi-

dence of an exclusionary effect, we have

held that such vertical arrangements are

not a per se violation of section 1. See

APPENDIX A-45

Ron Tonkin, 637 F.2d at 1382-87; Gough v.

Rossmoor, 585 F.2d 381, 388 (9th Cir.

1978); Mutual Fund Investors, 553 F.2d at

626; Joseph Seagram & Sons, Inc. v.

Hawaiian Oke & Liquors, Ltd., 416 F.2d 71,

78-79 (9th Cir. 1969). Therefore such

agreements do not violate section 1 unless

they are found to be unreasonable. Twin

City Sportservice, Inc. v. Charles O.

Finley & Co., 676 F.2d 1291, 1304 (9th

Cir. 1982), cert. denied, 51 U.S.L.W. 3354

(U.S. Nov. 9, 1982) (No. 82-396). The

reasonableness inquiry is "directed to a

balancing of the competitive evils of the

restraint against the anticompetitive

benefits asserted on its behalf." Gough,

585 F.2d at 388-89.

Here there is simply no indication

that the sales agreements between individ-

ual distributors and retailers constituted

an unreasonable restraint of trade. In-

deed, the Supreme Court has recognized

that the price discrimination which re-

sults where buyers seek competitive advan-

APPENDIX A-46

tage from sellers encourages the aims of

the Sherman Act, a respect in which the

Sherman Act is inconsistent with the aims

of the Robinson=-Patman Act. See Great

Atlantic & Pacific Tea Co., 440 U.S. at

82, 83 n.16; Automatic Canteen Co. v.

FTC, 346 U.S. 61, 73-74 (1953). And while

appellants point to injury to their parti-

cular business, they do not make the ne-

cessary showing of a substantially adverse

affect on competition in the record market

in general. See Ron Tonkin, 637 F.2d at

1388; Mutual Fund Investors, 553 F.2d at

627. In fact, as the district court ob-

served, appellants themselves acknowledge

the competitive character of the record

and tape sales market. Thus the district

court correctly held that appellants had

failed to raise a genuine issue of mater-

ial fact in support of their vertical

conspiracy charge.

APPENDIX A-47

B. The Section 2 Attempted Monopoli-

zation Claim Against MTS

Appellants claim that MTS attempted to

monopolize the retail market in record and

tape sales in the San Francisco Bay Area

in violation of section 2 of the Sherman

Act. An attempted monopoly claim under

section 2 consists of three elements: (1)

a specific intent to control prices or

destroy competition in some part of com-

merce; (2) predatory or anticompetitive

conduct directed to accomplishing the

unlawful purpose; and (3) a dangerous

probability of success. Twin City Sport-

service, 676 F.2d at 1308; Portland

Retail Druggists, 662 F.2d at 647.

William Inglis, 668 F.2d at 1027.

In Inglis we discussed at length the

interrelationship between the three ele-

ments. Thus we observed that intent to

monopolize may be inferred from anticompe-

titive conduct but that to carry such a

burden the conduct "must fall into one of

two categories, either (1) conduct forming

APPENDIX A-48

the basis for a substantial claim of re-

straint of trade, or (2) conduct that is

clearly threatening to competition or

Clearly exclusionary." 668 F.2d at 1029

n.ll. In either case the conduct “must be

such that its anticompetitive benefits

[are] dependent upon its tendency to

discipline or eliminate competition and

thereby enhance the firm's long-term abil-

ity to reap the benefits of monopoly

power." Inglis, 668 F.2d at 1030. In

turn, the dangerous probability of success

requirement, which is usually although not

necessarily, associated with market power

may be inferred from direct evidence of

intent implemented by conduct, or conduct

alone of the sort described above, from

which intent may be inferred. 668 F.2d at

1029.

As the district court observed appel-

lants presented no direct evidence of

specific intent to monopolize, relying

instead on MTS' alleged anticompetitive

conduct to prove a violation of section

APPENDIX A-49

2. Their chief claim in this regard is

that Tower engaged in predatory pricing by

setting its prices for records and tapes

below appellants' cost of doing business.

A predatory price exists “where the

firm foregoes short-term profits in order

to develop a market position such that the

firm can later raise prices and recoup

profits." Janich Brothers, Inc. v.

American Distilling Co., 570 F.2d 848, 856

(9th Cir. 1977), cert. denied, 439 U.S.

829 (1978). In making such a determina-

tion we have had occasion to identify as a

useful standard for predation the test set

out by Professors Areeda and Turner. See

P. Areeda & D. Turner, Predatory Pricing

and Related Practices Under Section 2 of

the Sherman Act, 88 Harv. L. Rev. 697

(1975); Inglis, 668 F.2d at 1033; Janich

Bros., 570 F.2d at 858. Under this ap-

proach a price is not predatory if it

equals or exceeds the average variable

cost of production. P. Areeda & D.

Turner, Predatory Pricing, supra, at

APPENDIX A-50

711. 2/

Pursuing such a guide, appellants’

predatory pricing claim would appear to be

inadequate on its face since it does not

suggest that MTS priced below its own

average variable cost -- but that it was

below only some unidentified cost of ap-

pellants. In Inglis we indicated that a

plaintiff might be able to prove a preda-

tory pricing claim without showing that

the defendant priced below its average

variable cost, see 668 F.2d at 1035, or

even possibly below its average total

cost .22/ However, in such instances it is

the plaintiff's burden to prove that the

defendant “sacrificed greater profits or

incurred greater losses than necessary in

order to eliminate the plaintiff."

Inglis, 688 F.2d at 1036. In the absence

of such a claim on the part of appellants,

much less any evidence of that effect,

appellants' predatory pricing claim is

inadequate as a matter of law. Indeed,

any other conclusion would support the

APPENDIX A-51

perverse rationale that a defendant may

not compete by lowering its prices "if

competition would injure its competi-

tors." California Computer Products, Inc.

v. International Business Machines Corp.,

613 F.2d 727 (9th Cir. 1979).

Appellants’ other example of MTS'

predatory conduct concerns MTS' negotia-

tion of favorable sales terms with the

individual distributors. Yet we have

already concluded that such conduct did

not constitute an unreasonable restraint

of trade under section 1 of the Sherman

Act. And since, as we have previously

stated, the reasonableness standard of

section 1 governs parallel conduct under

section 2, see Inglis, 668 F.2d at 1030

n.14; California Computer Products, 613

F.2d at 737, MTS' actions do not consti-

tute a “substantial restraint of trade” in

violation of section 2. Nor do we consi-

der the attempt to negotiate favorable

terms here “conduct that is clearly

APPENDIX A-52

threatening to competition or clearly

exclusionary."

Our conclusion regarding MTS' conduct

in this case is reinforced by the evidence

in the record concerning its market

power. In Inglis we recognized that a

defendant may introduce evidence "that

market conditions are such that a course

of conduct described by the plaintiff

would by unlikely to succeed in monopoliz-

ing the market.” 668 F.2d at 1030. See

also Hunt-Wesson Foods, Inc. v. Ragu

Foods, Inc., 627 F.2d 919, 936 (9th Cir.

1980), cert. denied, 450 U.S. 921

(1961). Aside from their claim of

"breath-taking growth of monopoly power,"

appellants suggested no evidence of market

power whatsoever. In contrast MTS, intro-

duced evidence that it operated only two

retail stores in the six San Francisco Bay

Area counties which the appellants assert-

ed constituted a relevant geographic mar-

ket and that it accounted for no more than

10% of the total retail record and tape

APPENDIX A-53

sales in that area. 22 The absence of

significant market power on the part of

the MTS and the existence of numerous

other retail outlets lends further weight

to our conclusion that the appellants

failed to raise an isssue of material fact

regarding the attempted monopolization

23/

claim.

Cc. Capitol's Refusal to Deal

Appellants contended that the district

court erred in granting summary judgment

in favor of Capitol on their refusal to

deal claims under sections 1 and 2 of the

Sherman Act. This court has previously

held that a party may refuse to deal with

another “provided there is no effect which

contravenes the antitrust laws." Mutual

Fund Investors, 553 F.2d at 626. In such

cases, the adverse effects of the termina-

tion on the party refused are not relevant

"when the refusal ‘is for business reasons

which are sufficient to the [defendant] in

the absence of any agreement restraining

trade.'" Chandler Supply Co. v. GAF

APPENDIX A-54

Corp., 650 F.2d 983, 989 (9th Cir. 1980)

(quoting Bushie v. Stenocord Corp., 460

F.2d 116, 119 (9th Cir. 1972)). Accord

Marquis v. Chrysler Corp., 577 F.2d 624,

640 (9th Cir. 1977). Such a determination

is not appropriate for summary judgment

where there is a material issue of fact

regarding the defendant's unlawful intent

or the anticompetitive effect of its ac-

tion. California Steel & Tube v. Kaiser

Steel Corp., 650 F.2d 1001, 1004 (9th Cir.

1981); Program Engineering, 634 F.2d at

1196.

The district court concluded that

Capitol's acknowledged aim of attempting

to avoid future litigation after its set-

tlement with appellants constituted a

legitimate business purpose for the termi-

nation. During the period covered by the

complaint, Capitol sold approximately

$3,800 of records and tapes per year to

Marin Music Centre. In June, 1975,

Capitol and appellants entered into an

agreement settling all, of appellants’

APPENDIX A-55

claims existing on that date for $7,500,

but expressly permitting appellants to

bring an action for events occurring after

the date of the settlement. Capitol in-

troduced evidence indicating that it stop-

ped selling to Marin Music because of the

near certainty that continuing business

would give rise to litigation whose costs

would exceed any benefits derived from

that business.

Appellants point to two Ninth Circuit

cases, Knutson v. Daily Review, Inc., 548

F.2d 795, 805 (9th Cir 1976), cert.

denied, 433 U.S. 910 (1977), and Germon v.

Times Mirror Co., 520 F.2d 786, 788 (9th

Cir. 1975), which suggest in dicta that a

court may enjoin a defendant in an anti-

trust action from refusing to deal with

the plaintiff. However, both of those

cases involve the use of injunctions to

preserve the status quo during the litiga-

tion, and more importantly, they recognize

that the termination must be pursuant to a

plan "to foster an unlawful competitive

APPENDIX A-56

scheme." 520 F.2d at 788.

In contrast, in House of Materials,

Inc. v. Simplicity Pattern Co., 298 F.2d

867 (2d Cir. 1962), the court explicitly

held that in the absence of any arrange-

ment to restrain trade a manufacturer's

refusal to deal with a retail store be-

cause of an antitrust suit filed against

it by the store did not constitute an

unlawful purpose in violation of the

Sherman Act:

Appellee does not cite, and we

have not found any case in which a

"refusal to deal" based on a cus-

tomer's prosecution of a suit

against a manufacturer has been

held to constitute an unreasonable

restraint of trade. This when

considered is not astonishing, for

the relationship between a manu-

facturer and his customer should

be reasonably harmonious; and the

bringing of a lawsuit by the cus-

tomer may provide a sound business

reason for the manufacturer to

terminate their relation.

298 F.2d at 871 (citations omitted). Thus

Capitol's acknowledged purpose of avoiding

future litigation whose costs exceeded the

benefits from doing business with appel-

lants qualified as a legitimate business

APPENDIX A-57

reason for refusing to deal. See Marquis,

577 F.2d at 620.

As the district court recognized,

appellants' only attempt to prove that the

termination was otherwise violative of the

antitrust laws was to suggest that it was

connected with the alleged horizontal and

vertical conspiracies among the distribu-

tors and chain store retailers. However,

appellants introduced no evidence indicat-

ing any connection between the conspira-

cies alleged and the termination suffi-

cient to raise an issue of material

fact. See ALW, 510 F.2d at 55. Indeed

Capitol's action did not even prevent

appellants from selling its records.

Capitol introduced evidence that its re-

cords were available from independent

distributors and were in fact carried in

appellants’ store long after the termina-

tion. In any event, since we have con-

cluded that appellants have failed to

raise an issue of material fact regarding

the existence of any such vertical or

APPENDIX A-58

horizontal conspiracy, their allegations

against Capitol based on those conspira-

cies were also appropriate for summary

judgment.

IV. CONCLUSION

The district court's judgment in favor

of appellees on appellants' Robinson-

Patman claims is reversed except as to

Doug Robertson. The court's judgment as

to the Sherman Act claims is affirmed.

The case is remanded for further proceed-

ings consistent with this opinion.

APPENDIX A-59

FOOTNOTES

1/ Polygram Distribution, Inc. is the

company's present name. The company was

known as UDC, Inc. between 1971 and 1973,

and Phonodisc, Inc. between 1974 and 1977.

2/ At the time of the filing of this

action, MTS was the sole shareholder of

Tower Enterprises, Inc., doing business as

Tower Records. Since that time, Tower

Fnterprises, Inc. has merged into MTS.

3/ The district court limited the summary

udgment to this period because the decla-

ration of Dale Johnson, a Polygram employ-

ee, filed in support of the motion, did

not demonstrate personal knowledge for the

1971-73 period. The court denied Poly-

gram's motion for the period 1971-73 with-

out prejudice to its renewal.

4/ The court's order effectively removed

Capitol as a defendant. However, since

Capitol neither requested nor received a

separate judgment under Rule 54(b) of the

Federal Rules of Civil Procedure it did

not take an appeal until after the court

entered final judgment in June, 1980.

5/ In summary, the appellees in this

action include five distributors: WEA,

coonecen? Capitol, ABC, and MCA; one

retailer, MTS; and Doug Robertson Adver-

tising Agency. Appellants appeal the

following rulings with respect to each

defendant:

WEA: June 21, 1976, CR 31l,

partial summary judgment on

the Robinson-Patman claims.

January 17, 1980, CR 808

summary judgment on th Sher-

man Act claims.

APPENDIX A-60

POLYGRAM:

CAPITOL:

MTS-TOWER

August 17, 1977, CR 499,

partial summary judgment on

the Robinson-Patman claims

for 1974-76.

January 17, 1980, CR 808,

summary judgment on the

Robinson-Patman claims for

1971-73 and on Sherman Act

claims.

January 17, 1980, CR 808,

summary judgment on both the

Robinson-Patman and Sherman

Act claims.

September 28, 1978, CR 636,

summary judgment on the

refusal to deal Sherman Act

claim.

May 12, 1980, CR 808,

summary judgment on both the

Robinson-Patman and Sherman

Act claims.

DOUG ROBERTSON: January 17, 1980, CR

808, summary judgment

on both the Robinson-

Patman and Sherman Act

claims.

&/ WEA is a wholly owned subsidiary of

arner Brothers Records, Inc., which in

turn is owned by Warner Communications,

Inc. WEA distributes records and tapes

manufactured by Warner Brothers Records

and two other Warner Communications, Inc.

subsidiaries, Elektra Records and Atlantic

Records.

Polygram is a California corpor-

ation distributing records and tapes pro-

duced by affiliated corporations, Poly-

gram, Inc. and Polydor International.

APPENDIX A-61

7/ MCA is a wholly owned subsidiary of

MCA Records, Inc. From 1971 to 1979 ABC

was a wholly owned subsidiary of American

Broadcasting Companies, Inc. In 1979, it

went out of business and its assets were

sold to MCA.

8/ Although MCA's declaration in support

of its motion for summary judgment does

not contain any percentage figures on the

amount of records and tapes manufactured

outside of California, it seems to indi-

cate that a substantial amount of the

records in its California warehouse were

manufactured in Illinois. ABC's answers

to interrogatories indicate that an uni-

dentified percentage of the records and

tapes in its California warehouse were

manufactured outside of California.

9/ The relevant jurisdictional language

n section 2(a) reads:

It shall be unlawful for any

person engaged in commerce, in

the course of such commerce to

discriminate in price between

different purchases . .. where

either or any of the purchases

involved in such discrimination

are in commerce.

10/ Appellees argue that Gulf Oil super-

seded the "flow of commerce” test and

therefore requires an actual sale across

state line to invoke the Act. However, in

Gulf Oil, the product sold, asphaltic

concrete, was manufactured entirely in

state from products obtained intrastate

and its market was entirely local. 419

U.S. at 192. Therefore, the Court did not

have to address the issue when sales of

goods produced in another state are "in

commerce."

In fact, however, the court in Gulf

Oil repeatedly refers to the flow of com-

APPENDIX A-62

merce test. Thus in comparing the Sherman

Act and Robinson-Patman Act jurisdictional

provisions the Court states:

In contrast to § l, the distinct

“in commerce" language of the

Clayton and Robinson-Patman Act

provisions with which we are

concerned here appears to denote

only persons or activities within

the flow of interstate commerce

-- the practical, economic conti-

nuity in the generation of goods

and services for interstate mar-

kets and their transport and

distribution to the customer.

419 U.S. at 195.

Accordingly, court interpreting sec-

tion 2(a) after Gulf Oil continued to

apply the "flow of Commerce" analysis.

See L & L Oil Co. v. Murphy Oil Corp., 674

F.2d 1113, 1116, (5th Cir. 1982); Great

Atlantic & Pacific Tea Co. v. PTC, 557

F.2d 971, 979 (2d Cir. 1977), oo on

other grounds, 440 U.S. 69 (19

Hampton v. Graff, 516 F.2d 100 (Sth Cir.

11/ The other indicium of intent involves

whether goods have been altered or proces-

sed in some fashion after their arrival in

the state of their eventual sale. Courts

have generally held that where goods are

processed in some substantial way the flow

of commerce ends when they arrive at the

place of alteration. See Belliston v.

Texaco, Inc., 455 F.2d 175 (10th Cir.),

cert. denied, 408 U.S. 928 (1972); Baldwin

Hills Building Material oo. v. Fibreboard

Paper Products Corp., Supp.

(C.D. Cal. 1968); a4 Peisatuckt supra,

at § 26.02[3).

APPENDIX A-63

In this case, since the records and

tapes were sealed after manufacture, this

factor is not relevant.

12/ In American Building Maintenance, the

Supreme Court held that two janitorial

service corporations were not “in com-

merce” as required under section 7 of the

Clayton Act. In particular the court

rejected the United States’ claim the

firms' purchases of cleaning equipment

manufactured out of state provided juris-

diction:

[T]hose products were purchased

in intrastate transactions from

local distributors. Once again,

therefore, the Benton companies

were separated from direct parti-

cipation in interstate commerce

by the pricing and other market-

ing decisions of independent

intermediaries. By the time the

Benton companies purchased their

janitorial supplies, the flow of

commerce had ceased.

422 U.S. at 285. In contrast, here there

is a legitimate question of material fact

whether the record retailers were in fact

insulated from interstate commerce by WEA

or Polygram.

13/ Appellants interpret Inglis to suggest

that any interstate sales by the record

distributors here satisfy the Robinson-

Patman jurisdictional requirements. How-

ever, their reliance on Inglis fails to

recognize the structural ar ttScance be-

tween the two cases. Inglis was a

“primary line" Robinson-Patman case in

which the plaintiff alleged damaged his

bakery. As the court in Inglis noted, in

such a peter y line case the relevant

sales for jurisdictional purposes include

all sales, both intrastate and interstate,

reflecting the price disparity since the

APPENDIX A-64

court is concerned with all sales which

allegedly damaged a competitor's business.

In contrast, this is a “secondary

line" case, in which one buyer complains

of discriminatory treatment between itself

and another buyer. In such a case, the

only relevant sales are those between the

competing buyers. Meyer Paving & Asphalt

Co. v. General Dynamics Corp.,

763, 767 (7th Cir. 1973), cert. denied,

414 U.S. 1146 (1974); P. Areeda & D.

Turner, supra, at 4 233(c). Out of state

sales made by the distributors are irrele-

vant in this case since they were not made

to stores competing with appellants.

14. Sections 2(d) and 2(e) of the

Robinson-Patman Act, 15 U.S.C. §§ 13(d)

and 13(e) provide:

(4d) Discriminatory payments for ser-

vices or facilities

That it shall be unlawful for any

person engaged in commerce to pay or

contract for the payment of anything

of value to or for the benefit of a

customer of such person in the course

of such commerce as compensation or in

consideration for any services or

facilities furnished by or through

such customer in connection with the

processing, handling, sale or offering

for sale of any products or commodi-

ties manufactured, sold, or offered

for sale by such person, unless such

payment or consideration is available

on proportionally equal terms to all

other customers comveting in the dis-

tribution of such products or commodi-

ties.

(e) Discrimination in furnishing

services of facilities

APPENDIX A-65

That it shall be unlawful for any

person to discriminate in favor of one

purchaser against another purchaser or

purchasers of a commodity bought for

resale, with or without processing,

any services or facilities connected

with the processing, handling, sale or

offering for sale of such commodity so

purchased upon terms not accorded to

all purchasers on proportionally equal

terms.

15/ The district court also dismissed

appellants’ claim against MTS under sec-

tions 2(d) and 2(e) for receiving discri-

minatory payments or services. Unlike

section 2(f), sections 2(d) and 2(e) do

not er tdeages for a buyer's liability for

receiving enumerated benefits. See Rowe,

Supra, at § 14.5. Consequently there is

no private right of action against buyers

for violating those sections. See Grand

Union Company V. FTC, 300 F.2d 92 (2d Cir.

1962); Rickles, Inc. v. Frances Denney

Corp., 1980-81 Trade Reg. Rep. (CCH)

7,829 (D. Mass. 1981); General Beverage

Sales Co. v. East Side Winery, 396 F.

Supp. 590 (E.D. Wis. 1975). Cf. American

News Co. v. FTC, 300 F.2d 104 (2d Cir.),

cert. denied, 371 U.S. 824 (1962) (FTC may

reach such conduct as an “unfair trade

practice" under section 5 of the Clayton

Act, 15 U.S.C. § 15).

16/ The district court observed the same

evidentiary shortcomings on appellants’

part in its opinion granting summary judg-

ment in favor of Capitol on the refusal to

deal claim in September, 1978, see 1978-2

Trade Cases 4 62,269 (N.D. Cal. 1978), and

its subsequent opinion granting summary

judgment on the Sherman Act claims in

favor of appellees WEA, MCA, Polygram, MTS

and Doug Robertson of June, 1980. 533 F.

Supp. 540 (N.D. Cal. 1980).

APPENDIX A-66

17/ Appellants also allege a variant of

the overall conspiracy consisting of a

series of conspiracies between all the

distributors and each chain store retail-

er. Summary judgment w23s appropriate as

to this claim for the same reasons as in

our discussion of the overall conspiracy

set out below.

18/ In what appears as an afterthought,

appellants also claim that the distribu-

tors engaged in resale price mainte-

nance. Yet they offered no probative

evidence in support of this proposition.

Moreover, the claim is fundamentally in-

consistent with their principal theory of

the case -- that the Zoslaws were unable

to compete with the large retailers be-

cause the distributors gave those retail-

ers more favorable terms. Under appel-

lants' theory, retail price maintenance

would have been advantageous to them since

it would have restricted the large retail-

ers' ability to undercut their prices.

19/ In contrast, we have recognized that a

predatory pricing claim may form the basis

of both a primary-line Robinson-Patman

case alleging injury to another seller and

a section 2 Sherman Act claim since both

statutory provisions “are directed at the

same evil and have the same substantive

content." William Inglis, 668 F.2d at

1041 (quoting Janich Brothers, Inc. vy.

American Distilling Co., 570 F.2d 848, 855

(9th Cir. 1977)). Here, however, appel-

lants' secondary-line Robertson-Patman

claim -- that they did not receive the

same price as a competing buyer -- has no

direct counterpart under section 1 of the

Sherman Act.

20/ According to Areeda and Turner average

variable cost is actually an imperfect

substitute for marginal cost, made neces-

sary because business firms rarely keep

records reflecting marginal cost. P.

APPENDIX A-67

Areeda & D. Turner, Predatory Pricing,

Supra, at 717. A price equal or exceeding

marginal cost is the appropriate test

because then only less efficient producers

will suffer larger losses per unit. In

addition a price equal to marginal cost

signals to consumers the "true social

cost" of producing the additional unit,

therefore promoting the efficient alloca-

tion of resources. P. Areeda D. Turner,

Predatory Pricing supra, at 710-713;

Inglis, 6 F.2d at 1032.

21/ Inglis specifically reserved the ques-

tion whether a price above the defendant's

average total cost could ever be consi-

dered predatory. 668 F.2d at 1035 n.30.

In that instance the ple 6 recovers the

total cost of production, including fixed

costs, as well as a "normal" rate of re-

turn on its investment, making the price

—— from an economist's view.

Id.

22/ MTS did not operate any stores in

Marin County during the period in ques-

tion. Its two stores in the San Francisco

Bay Area are in San Francisco-Marin County

market since that is the only geographic

area of competition between Marin Music

Centre and MTS. Yet appellants did not

present any evidence nor do they even

argue that MTS' share of this submarket is

larger than its share of the six San Fran-

cisco Bay Area counties. Indeed, MTS only

Operates one store in the "San Francisco-

Marin County" market.

23/ Appellants' complaint also charged MTS

with monopolization of the retail record

and tape market in violation of section 2

of the Sherman Act. The district court

granted summary judgment on this claim and

appellants do not raise this issue on

appeal. In any event, appellants' failure

to respond to MTS' evidence of its rela-

tively small market share made summary

APPENDIX A-68

judgment on this claim appropriate. See

ee Forro Pricision, Inc. v. Interna-

tio

nal Business Machines Corp., 673 F.2d

1045, 1058 (9th Cir. 1982) (evidence of

35% of market share alone insufficient as

Bela of law to support monopolization

claim).

APPENDIX A-69

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CHARLES ZOSLAW AND JANE

ZOSLAW, husband and wife,

dba MARIN MUSIC CENTRE, No, C=-75-0007

RFP

Plaintiffs,

OPINION

vs.

COLUMBIS BROADCASTING

SYSTEM, INC., a

corporation, et al.,

)

Defendants, )

)

I. INTRODUCTION

A. Summary

Plaintiffs, the owners of a retail

music store, brought this antitrust action

in January 1975 against a number of phono-

graph record and tape manufacturers' dis-

APPENDIX B-1

tributors and certain of their retail

customers alleging violations of the

Robinson-Patman and Sherman Act.

In June 1976 and thereafter, this

court granted summary judgments in favor

of several of the defendant's distributors

on the Robinson-Patman claims on the basis

that there was no subject matter jurisdic-

tion because the allegedly discriminatory

sales were not in interstate commerce

In addition, settlements disposed of

Claims against other defendants.”

At this point six defendants remain in

this lawsuit. Presently, five of the six

remaining defendants move for summary

judgment

Having heard argument on these

motions, and after considering the sup~

porting papers and reviewing the volumin-

ous record, it is the decision of this

court to grant defendants' motions for

summary judgment against plaintiffs for

two independent reasons.

APPENDIX B=-2

First, plaintiffs have failed in their

reply to defendants’ motions to produce

competent evidence from which it could be

inferred that the alleged violations oc-

curred, as required by Rule 56(e) of the

Federal Rules of Civil Procedure and our

own Local Rule 220-8.

Second, plaintiffs' factual conten-

tions, even if accepted as we must for the

purpose of ruling on the merits of plain-

tiffs' legal claims, do not support any

viable theory of liability against the

defendants now before the court.

B. Parties

Plaintiff Retailers

Plaintiffs Charles Zoslaw and Jane

zoslaw did business under the name Marin

Music Centre and operated a Mill Valley

retail music store which sold phonograph

records and equipment prerecorded tapes,

and other related merchandise. The store

opened in August 1965 and engaged in busi-

ness until closing in May 1977.

APPENDIX B~3

Defendant Distributors

Three of the five defendants presently

before the court are record

distributors: Warner/Electra/Atlantic

Corporation ("WEA"); MCA Distributing

Corporation ("MCA"); and Polygram Distri-

bution, Inc. ("Polygram").

WEA is a New York corporation engaged

in wholesale distribution of phonograph

records and tapes produced by Warner Com-

munication Corporation.

MCA is a New York corporation which is

a wholly-owned subsidiary of MCA Records,

a manufacturer of phonograph records and

tapes. MCA is engaged in wholesale dis-

tribution of its parent corporation's

goods.

Polygram is a California corporation

which manufactures phonograph records and

tapes and distributes these products

wholesale through its wholly-owned subsi-

diaries. The subsidiaries involved in

this suit are Phonodisc, Inc. and Phono-

disc's predecessor UDC, Inc.

APPENDIX B-4

WEA, MCA, and Polygram through its

subsidiaries sold phonograph records and

tapes to plaintiffs and other retail

stores in the San Francisco Bay Area dur-

ing the time period relevant to this liti-

gation.

Defendant Retailer

The fourth defendant moving for sum-

mary judgment is a record retailer and is

comprised of MTS, Inc. and Tower Enter-

prises, Inc. ("MTS-Tower"). MTS, Inc. is

a California corporation which owns stock

in and operates a number of retail record

and tape stores including 14 stores in

California. MTS, Inc. is the sole share-

holder of Tower Enterprises, Inc., a Cali-

fornia corporation doing business as Tower

Records, a retail record store in San

Francisco. Neither MTS, Inc. nor Tower

Enterprises, Inc. have ever owned or oper-

ated any retail store in Marin County

where plaintiffs' store was located. MTS,

Inc. and Tower Enterprises, Inc. doing

APPENDIX B-5

business as Tower Records have been sued

and have defended jointly.

For purposes cf analysis they may be

treated as a single entity: MTS-Tower.

Defendant Advertiser

The fifth and final moving party de-

fendant is Doug Robertson Aidvertising,

Inc. ("Doug Robertson Advertising"), a

California corporation engaged in the

advertising business. Doug Robertson

Advertising owns five percent of the stock

of five of the retail record stores oper-

ated by MTS-Tower, and Doug Robertson

Advertising was the advertising agency for

MTS-Tower during the time period pertain-

ing to this suit.

C. Background

Four years of discovery reveal that

the facts underlying this action are

straightforward albeit voluminous. For

the most part the facts are uncontroverted

and need only be summarized here.

In 1965 plaintiffs Charles and Jane

Zoslaw opened a retail store, known as

APPENDIX B-6

Marin Music Centre, which sold records,

stereos, television sets, sheet music and

musical instruments from a single location

in a shopping center in Mill Valley. At

the time the Zoslaws opened their store

there were few other record stores in

Marin County. Neither plaintiff had prior

experience in retailing phonograph records

and prerecorded tapes, nor in any other

retail business except for Mr. Zoslaw's

involvement with a family grocery business

in his earlier years.

Plaintiffs suffered startup losses in

1965 and 1966 and claim to have operated

at a profit for the following two years.

After this the store entered financial

difficulties from which it never recov-

ered. The record shows that Marin Music

Centre suffered losses by at least 1971

and that this trend continued until the

store went out of business in May 1977.

Between the onset of Marin Music

Centre's continuing money troubles and the

time it ceased doing business the Marin

APPENDIX B-7

County market changed dramatically. Dur-

ing this period several other stereo and

record retailers, an musical instrument

outlets opened in Marin County. Simulta-

neously the number of record departments

in department stores, drug stores, and

grocery stores also increased. These

record departments compete for sales with

retail stores like Marin Music Centre.

The market became extremely competi-

tive. This court has previously indicated

that the Marin County retail record busi-

ness was characterized by "price wars."

Zoslaw v. Columbia Broadcasting System,

Inc., CCH 1977-1 Trade Cases ¥ 61,334

(N.D. Cal.); Zoslaw v. CBS, Inc., CCH

1978-2 Trade Cases q 62,269 (N.D. Cal.).

As plaintiff testified, Marin Music

Centre's prices were higher than those of

its competitors .4/

In January 1975, a little over two

years before closing the store, the

Zoslaws brought this action. As initially

framed by the complaint, this was essen-

APPENDIX B-8

tially an action for illegal price dis-

crimination against a number of phonograph

record and tape manufacturers, their dis-

tributors and certain of their retail

customers. Plaintiffs alleged that the

distributor defendants sold their products

to retail chain stores at lower prices

than those offered to single stores such

as plaintiffs' Marin Music Centre in vio-

lation of section 2(a) of the Robinson-

Patman Act, 15 U.S.C. § 13(a). Plaintiffs

also alleged that the defendants discrim-

inated in favor of retail chain stores by

granting promotional allowances and by

furnishing special services in violation

of sections 2(d) and 2(e) of the Act, 15

U.S.C. §§ 13(d) and 13(e).

Plaintiffs alleged that certain of

these retail stores knowingly induced and

received these purported price descrimin-

ations and favorable treatment contrary to

sections 2(d), 2(e) and 2(f£) of the

Robinson-Patman Act, 15 U.S.C. §§ 13(d),

13(e) and 13(f).

APPENDIX B-9

Rounding out the complaint, plaintiffs

charged a conspiracy in restraint of trade

in violation of sectin 1 of the Sherman

Act, 15 U.S.C. § l.

In early i976 plaintiffs filed an

amendment complaint adding new defendants

and increasing the amount of damages

sought.

Thereafter this court entered summary

judgment in favor of several of the dis-

tributor defendants on the Robinson-Patman

Act claims. Plaintiffs amended their

complaint by substantially realleging the

Robinson-Patman claims as a series of

conspiracies by the defendants to discrim-

inate. This second amended complaint was

filed in October 1976.

In March 1977 this court denied plain-

tiffs' preliminary injunction motion di-

rected against the alleged discrimina-

tions.

Finally, in November 1977 plaintiffs

amended the comnplaint a third time by

alleging that the defendants had forced

APPENDIX B-10

them out of business. Five of the remain-

ing six defendants now move for summary

judgment.

II. THE LACK OF FACTUAL SUPPORT

FOR PLAINTIFFS' CLAIMS

Plaintiffs filed a massive set of

opposition papers which regularly and

systematically violate the rules governing

responses to motions for summary

judgment. Since plaintiffs’ papers do not

comply with the requirements of the Feder-

al Rules of Civil Procedure or the Local

Rules of the Northern District of Califor-

nia, we find that plaintiffs fail to pre-

sent competent evidence to support either

their Robinson-Patman or Sherman Act

Claims against the summary judgment mo-

tions of the five defendants before the

court. This serious deficiency under Rule

56(e) of the Federal Rules of Civil Proce-

dure and also Local Rule 220-8 is, by

itself, a sufficient ground for entering

summary judgment in favor of defendants.

First National Bank v. Cities Service, 391

APPENDIX B-11l

U.S. 253, 288-90 (1967); Thornhill Pub-

Lishing Co. v. General Telephone & Elec-

tronics, 594 F.2d 730, 738 (9th Cir.

1979); Mutual Fund Investors, Inc. v.

Putnam Management Co., 553 F.2d 620, 624

(9th Cir. 1977).

Rule 56 of the Federal Rules of Civil

Procedure and Local Rule 220-8 provide an

orderly procedure by which parties present

the court with the factual information

necessary to decide motions for summary

judgment. In particular, Rule 56(e) pro-

vides in part:

Form of Affidavits; Further

Testimony; Defense Required.

Supporting and opposing affida-

vits shall be made on personal

knowledge, shall set forth such

facts as would be admissable in

evidence, and shall show affirma-

tively that the affiant is compe-

tent to testify to the matters

stated therein. Sworn or certi-

fied copies of all papers or

parts thereof referred to in an

affidavit shall be attached

thereto or served therewith...

When a motion for summary judg-

ment is made and supported as

provided in this rule, an adverse

party may not rest upon the mere

allegations or denials of his

Pleading, but his response, by

affidavits or as otherwise pro-

APPENDIX B-12

vided in this rule, must set

forth specific facts showing that

there is a genuine issue for

trial. If he does not so res-

pond, summary judgment, if appro-

priate, shall be entered against

him.

The Northern District's Local Rule 220-8

concerning "Affidavits and Declarations"

provides in part:

Factual contentions made... in

opposition to any motion shall he

supported by affidavits or dec-

larations .. . Extracts from

depositions, interrogatory an-

swers, requests for admission and

other evidentiary matter will be

considered only if presented

appropriately authenticated by

affidavit or declaration.

The defendants’ replies to plaintiffs'

opposition to summary judgment, and for

that matter, the entire record are rife

with examples of plaintiffs failure to

comply with the aforementioned rules .2/

This court has only recently admonish-

ed the same plaintiffs, directing their

attention to their duty to provide proper

authentication for the facts upon which

they rely in opposing a summary judgment

motion. In granting defendant Capitol

APPENDIX B-13

Records' motion for summary judgment, we

underscored the gravity of plaintiffs'

disregard of the rules:

Plaintiffs' opposition to the

summary judgment motion is hardly

a model of correct form. No

evidentiary affidavits or declar-

ations are attached, most of the

assertions are undocumented, and

those that are documented are

simply references to answers to

interrogatories or depositions,

many of them self-serving hear-

say, which are contained in the

case file. They do not conform

to the requirements of Fed. R.

Civ. P. 56(e) or Local Rule 220-

8. Plaintiffs' attorney did,

however, attach his own affidavit

to the effect that "there is no

way such an extensive documenta-

tion of evidence can be handled

through the filing of exhibits

attached to declarations in sup-

port of opposition memoranda."

We sympathize with this general

problem, but in this case it

cannot excuse the manifest inade-

quacies of plaintiffs' position.

zoslaw v. CBS, CCH 1978-2 Trade Cases 4

62,269 at p. 75674.

Notwithstanding our admonition, plain-

tiffs' opposition papers to the latest

series of summary judgment motions are

blatantly inadequate under the governing

rules. Here it will serve to illustrate

APPENDIX B-14

by way of example what is, we are afraid,

merely the tip of the iceberg.

Under optimal circumstances the tre-

mendous volume of plaintiffs' opposition

papers would have been burdensome. How-

ever, plaintiffs' careless presentation

and poor organization impedes any con-

scientious effort to review their evi-

dence. Plaintiffs have contended that

attaching evidentiary documents to their

memoranda in compliance with Federal Rule

56(e) and Local Rule 220-8 is impractical,

given the thousands of pages involved. We

agree, but this does not absolve plain-

tiffs from the obligation to make the

supporting documentation readily acces-

sible to the court or to opposing parties

for the purpose of substantiating plain-

tiffs' factual contentions and

inferences. A party should not prevail

simply by clogging the court and smother-

ing the opposition with a heap of ersatz

evidence. If anything, in cases where

evidence is voluminous, as compared to

APPENDIX B-15

simpler controversies, the offering party

is under a greater obligation to organize,

summarize, index and identify the underly-

ing documentation. In this case we found

it necessary to sift through hundreds of

pages of documents in order to find evi-

dence referred to in plaintiffs' memoran-

dum. Sometimes we were unable to ever

locate the referenced document ,£/ and many

documents, characteristically misfiled,

were found only after lengthy searches.’

In addition, plaintiffs' papers fall

far short of the standard for authentica-

tion set by the Ninth Circuit. United

States v. Dibble, 429 F.2d 602 (9th Cir.

1970); see also Mabey v. Regan, 376 F.

Supp. 216, 223 (N.D. Cal. 1974), rev'd on

other grounds, 537 F.2d 1036 (9th Cir.

1976). Plaintiffs’ memorandum regularly

refers to documents which are unathenti-

cated or unexplained. £/ With great fre-

quency plaintiffs attempt to authenticate

cited documents is improper .2/

Further, aside from plainfiffs' fail-

APPENDIX B-16

ure to identify and authenticate docu-

ments, they have not proferred evidence

which supports their factual allega-

tions. Plaintiffs have asserted many

factual allegations for which they provide

no citations whatsoever.+2/ And even

where documents are cited, and can be

located, we find that often the suggested

inferences are implausible.22/

Considering this record in light of

the applicable legal standards we conclude

that summary judgment is appropriate.

Mindful that summary judgments are

disfavored in antitrust cases where motive

or intent is critical, such relief, prop-

erly used, is a valuable means to avoid

squandering judicial time and resources.

Mutual Fund Investors, Inc. v. Putnam

Management Co., 553 F.2d 620, 622 (9th

Cir. 1977). As the Ninth Circuit has

stated, "To hold otherwise would give free

rein to any plaintiff who can draft an

antitrust complaint capable of withstand-

ing a motion to dismiss to go to trial

APPENDIX B-17

with only a wing and a prayer supporting

his well drafted complaint." Id, at 624.

The Supreme Court has specifically

held that a party moving for summary judg-

ment in an antitrust case should prevail,

“once the movant has met his burden, in the

absence of "any significant probative

evidence tending to support the

complaint.” First National Bank of

Arizona v. Cities Service Co., 391 U.S.

253, 290 (1968); Harvey v. Fearless Far-

ris Wholesale, Inc., 589 F.2d 451, 454

(9th Cir. 1979).

In order to prevail, the defendants

are required first to demonstrate pursuant

to Rule 56 of the Federal Rules of Civil

Procedure "the absence of a genuine issue

as to any material fact." In this case

movants clearly met their burden of proof.

Defendants having sufficiently sup-

ported their motion, the plaintiffs must,

if the case is to go to trial, controvert

the defendants' showing. Cities Service,

Supra at 289; Fed. R. Civ. P. 56(e). In

APPENDIX B-18

considering plaintiffs’ opposition we have

construed all evidence and inferences in

the light most favorable to plaintiffs as

we must. United States v. Diebold, 369

U.S. 654, 655 (1962).

We find that plaintiffs failed to

controvert the defendants' showing.

Plaintiffs have not produced any competent

evidence from which it could be inferred

that the alleged violations occurred.

We will not permit plaintiffs to go to

trial on the basis of the allegations in

their complaint, coupled with the hope

that something can be developed at trial

in the way of support for the

allegations. In the words of Mr. Justice

Marshall, “while we recognize the import-

ance of preserving litigants' rights to a

trial on their claims, we are not prepared

to extent these rights to the point of

req

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.