# Petition — JBL Enterprises, Inc. v. Jhirmack Enterprises, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_1232%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1983 - **Citation:** 464 U.S. 829 ## Text 82-2187 jacos | JUN 28 1985 IN THE ALEXANDER L. STEVAS, SUPREME COURT OF THE UNITED STATES CLERK OCTOBER TERM, 1982 JBL ENTERPRISES, INC., JEAN ROBINSON, and LOIS JEAN MILLION, Petitioners, Vv. JHIRMACK ENTERPRISES, INC., Respondent. PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT JOHN A. KITHAS (Counsel of Record) CHARLES LAMONT KITHAS & LAMONT 111 Sutter Street, Suite 2140 San Francisco, California 94104 (415) 981-1492 Attorneys for Petitioners DATED: June 27, 1983 QUESTION PRESENTED The Ninth Circuit's decision in this dis- tributor termination case raises a funda- mental antitrust issue concerning the stan- dard for testing the legality of a vertical restraint on competition. The following issue should be addressed together with the issues to be considered in Monsanto Co. v. Spray-Rite Service Corp., No. 82-914: Is a manufacturer engaged in per se unlawful price-fixing, when it com- bines with others to enforce customer restrictions which limit the sale of its products to those customers who insist on the restrictions pri- marily to avoid retail price com- petition. This issue presents an important ques- , tion of law regarding what conduct continues to be vertical price-fixing since this Court's decision in Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). ii PARTIES TO THE PROCEEDINGS Petitioners JBL Enterprises, Inc., Jean Robinson and Lois Jean Million were appellants below on the issue presented for review. Respondent Jhirmack Enter- prises, Inc. was appellee below on the issue presented for review. JBL Enterprises, Inc. has no parent company, subsidiary or affiliate. Jean Robinson and Lois Million are individuals. iii TABLE OF CONTENT'S Question Preserited ....+:-+«-e-+4ee i Parties to the Proceedings ...... ii Table of Authorities... .. 2 sc « «V Gea maots BOLOW. o's Fn Ge ke ole Ke PURAMEPOCAOR 4 c« hee eo 6 e teks os Statute Involved .....4++e+esee 38 Statement of the Case .......-. 3 Reasons for Granting the 3 ee a de MN tg ag ae OMe a ee ve. es eee Appendix App. A: Ninth Circuit Order denying petition for rehearing and suggestion for rehearing en banc, April 1, 1983 App. B: Ninth Circuit Opinion affirming judgment, February 8, 1983 ‘App. C: District Court Judgment, January 15, 1982 App. D: District Court Memorandum of Opinion and Order, July 9, 1981 iy a App. E: App. F: iv District Court Findings of Fact, Conclusions of Law, and Memorandum of Opinion, February 25, 1981 District Court Order Re Defendant Jhirmack Enter- prises' Motion for Summary Judgment, September 19, 1979 TABLE OF AUTHORITIES Cases Page Blue Shield of Virginia v. 23 McCready, U.S. ; ior S Ce. 2540 (1982) California Retail Liguor 20, 26 Dealers Association v. Midcal Aluminum, 445 U.S. 97 (1980) Catalano, Inc. v. Target 18 Sales, Inc., 446 U.S. 643 (1980) Cernuto, Inc. v. United de. 2G Cabinet Corp., 595 F.2d 19, 20 164 (3d Cir. 1979) Continental T.V., Inc. v. &. as GTE Sylvania Inc., 433 U.S. TG (1977) Dr. Miles Medical Co. v. 4, is, John D. Park & Sons Co., 20, 26 220 U.S. 373 (1911) Federal Trade Commission v. 19 Beech-Nut Packing Co., 257 U.S. 441 (1922) Poller v. Columbia Broadcasting 25 stem, Inc., 368 U.S. 464 Gey United States v. Bausch & Lomb 19 Opticalco., 321 U.S. 707 (1944) vi Cases United States v. Park, Davis & Co., 362 U.S. 29 (1960) United States v. Socony- 19, Vacuum 011 Co., 310 U.S. 150 (1 Statutes 15 U.S.C. § 1 15 U.S.C. § 15 28 U.S.C §1254(1) Other Authorities Steiner, Vertical Restraints and Economic Efficiency, Working Paper No. 66, Bureau of Economics, Federal Trade Commission (June 1982) Page 19 26 31 ’ e : ie i yD feaitigt Sie, ia IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1982 JBL ENTERPRISES, INC., JEAN ROBINSON, AND LOIS JEAN MILLION, Petitioners, Vv. JHIRMACK ENTERPRISES, INC., Respondent. PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Petitioners respectfully request that a writ of certiorari issue to re- view the judgment and decision of the United States Court of Appeals for the Ninth Circuit filed on February 8, 1983. “hi, - ” 4.3 OPINIONS BELOW The opinion of the Court of Appeals is reported at 698 F.2d 1011, 1982-83 Trade Cases 765,199, and appears in Appendix B to this petition. The two opinions of the District Court are re- ported at 519 F.Supp. 1084, 1981-2 Trade Cases 764,158, and 509 F.Supp. 357, 1981-1 Trade Cases 463,870, and appear in Appendix D and Appendix E, respec- tively. JURISDICTION The judgment of the Court of Appeals was filed on February 8, 1983. A timely petition for rehearing with suggestion for rehearing en banc was denied April l, 1983. Appendix A. Jurisdiction of this Court is premised upon 28 U.S.C. §1254(1). STATUTE INVOLVED Section 1 of the Sherman Act, 15 U.S.C. §1, provides in pertinent part: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be iilegal « . «+ -« STATEMENT OF THE CASE This petition raises the question of what conduct is vertical price- fixing. Petitioners contend that a supplier's refusal to deal with one group of discounting retailers at the insistence of another competing group of retailers who desire to avoid price competition, constitutes vertical price- fixing. Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164 (3d Cir. 1979). The Ninth Circuit Court of Appeals disagrees. ~. Ge This petition also presents the im- portant issue, not yet addressed by this Court, as to the proper standard to ap- ply to a vertical restraint of trade which takes both the form of a price- fixing combination and a customer res- triction. The facts of this case clearly involve an interplay between the per se standard consistently applied to vertical price-fixing since Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), and the rule of reason standard applied to vertical customer restrictions since Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). In- deed, this case demonstrates that Mr. Justice White had good reason to be con- cerned when he pointed out in his con- curring opinion in Sylvania that a cus- tomer restriction "prevents discount stores from getting the manufacturer's product and thus prevents intrabrand price competition." 433 U.S. at 60. Petitioners are former distributors of Jhirmack Enterprises, Inc. ("Jhirmack"), a manufacturer of hair care and cosmetic products which are sold throughout the United States. Petitioners allege that they were victims of a price-fixing con- spiracy when their distributorships were cancelled in 1977 and 1978 for failure to confine their sales to beauty salons, barber shops, beauty schools, barber schools and hair-styling establish- ments (the "professional salon trade" or "PST"). Instead, petitioners "di- verted" Jhirmack products for eventual resale by other types of retail outlets that discounted the products, such as drug stores and supermarkets ("over- the-counter” or "OTC" outlets). Peti- tionerse contend that Jhirmack violated 6 section 1 of the Sherman Act, 15 U.S.C. §1, by combining with its distributors and salons to prevent the diversion of Jhirmack products to discounting OTC outlets for the purpose and effect of stabilizing and maintaining retail prices. The District Court Decisions The complaint+/ charges as alter- native causes of action, an illegal price-fixing combination and an unreason- able customer restriction.2/ Although both claims are based on the same facts, 1/detitioners brought this treble damage action under Section 4 of the Clayton Act, 15 U.S.C. §15. 2/petitioner's original resale price maintenance claim was dismissed with leave to amend the complaint to plead a cause of action of "a combina- tion and conspiracy on the issue of re- sale price maintenance." Appendix F. The Court of Appeals correctly recites that resale price maintenance was al- (footnote continued on next page) the Sylvania decision requires that the customer restriction be tested for its impact upon a relevant market. Ac- cordingly, petitioners stipulated to a court trial of issues regarding the relevant market and Jhirmack's share of the relevant market. Petitioners as- serted that the salons so successfully prevailed upon Jhirmack and certain other suppliers of retail shampoos and (footnote continued from preceding page) leged, 698 F.2d at 1014, App. B-4, yet erroneously states that no per se claim of price-fixing was made prior to the market trial. Id., App. B-6. In their Memorandum Re Case Status, written at the district court's request when the case was reassigned, petition- ers said: Plaintiffs believe that price motivation will warrant that a per se standard be applied to i 2 € conduct. However, in the event a rule of reason standard applies, additional issues in- volving relevant market and anticompetitive impact must be addressed, CR 230, pp. 8-9 (See note 3, infra). conditioners to prevent any competition from OTC outlets, that retail sales by salons at premium prices formed a dis- tinct relevant submarket, of which Jhirmack's products comprised a signifi- cant share. After a five-day trial the district court rendered its findings of fact and conclusions of law. 509 F.Supp. 357, Appendix E. The district court focused on the wholesale level of distribution and defined the relevant market as the sale of all beauty products to beauty salons and other professional outlets. Under this definition Jhirmack's market share was less than 5%. Upon Jhirmack's motion for summary judgment, the district court concluded that with such a small market share, Jhirmack could not have imposed an unreasonable restraint upon trade in the relevant market. 519 F.Supp. at 1088, App. D-9. The relevant market trial, however, also produced findings of fact which strongly support petitioners' claim of price fixing. The district court found that beauty salons insulated themselves from price competition with drug stores and supermarkets by insisting that Jhir- mack and other suppliers sell exclusive- ly to them, and not allow the products to be diverted to OTC outlets. Other findings clearly show that Jhirmack's marketing scheme was designed to accommo- date the salons' avoidance of intrabrand price competition. The district court explained how the prevention of competition between beauty salons and OTC outlets succeeded in raising prices: The essence of the entire contro- versy is that beauty salons insist on carrying only shampoos, condi- tioners and other beauty products which are not generally available 10 at OTC outlets. There is abun- dant evidence that beauty salons have discontinued buying certain brands--including Jhirmack--once the brands could be purchased at drug and discount stores and similar outlets. By their course of conduct, therefore, salon operators have generally prevented direct competition with OTC out- lets in the sale of particular brands and have succeeded in maintaining a price range for shampoos and conditioners gene- rally higher than that prevailing at OTC outlets. 509 F.Supp. at 371, .App. E-40 - E-41, The district court graphically described the salons' efforts to insulate themselves from competition with drug stores as a "contrived fencing-in of a segment of the market" and a "patently anti-competitive practice." 509 F.Supp. at 371, 376, App. E-41, E-63. The anti- competitive purpose and effect of such "fencing-in" was that salons charged consumers higher retail prices for Jhir- mack products than would have been charged in a market free of restraint: 11 The testimony establishes that salons could not maintain their price levels for products like Jhirmack if the same product were widely available to the consumer through OTC outlets, and that the salons' ability to charge a prem- ium price for a certain brand de- pends on limited availability of that brand. * * * Plaintiffs have shown that the salon retail prices of brands manu- factured exclusively for salons were substantially higher than prices of the same products sold in OTC outlets through diversion. It appears that when diversion of an exclusive brand like Jhirmack is slight, the limited availabil- ity of the product in OTC outlets at substantially lower prices does not impinge on salons' ability to maintain the regular premium price. When diversion of an ex- Cclusive brand becomes extensive enough to cut into a salon's sales of that brand, salons tend to dis- continue that brand and find an- other. Thus widespread diversion of an exclusive salon brand pro- vides a competitive check on the salon's ability to sell that brand at a premium price. 509 F.Supp. at 374, App. E-53 - E=-54. The district court further found that Jhirmack “catered” to the salons' desire 12 to avoid price competition. As heretofore noted, some manufacturers of shampoo and conditioners produce for dis- tribution exclusively within the salon trade. They cater to a strong demand among salons for brands which are distribu- ted exclusively to salons and project an elite professional image. Many salons decline to sell products available in OTC outlets, primarily in order to avoid price competition. Salons are generally unable to main- tain premium prices for products widely available at lower prices_ in OTC outlets. 509 F.Supp. at 375, App. E-59. Jhirmack published suggested whole- sale and retail price lists for the dis- tributors and salons. CR 404, Exhibit A, pp. 52-55, 57,2! The price structure that Jhirmack promoted gave the salons a 50% profit margin on the sale of re- 3/ The designations "CR" and "TR" refer, respectively, to the dis- trict court clerk's record and the transcript of the market trial, which were transmitted to the Ninth Circuit Court of Appeals. SS 13 tail products. TR 307. Jhirmack's marketing concept was that its products would not be discounted and that the ‘sug- gested prices would be maintained as much as possible. CR 393, Exhibit D, pp. 79-80. When distributors raised wholesale prices to salons and thereby cut into the salons' margins, Jhirmack published the suggested wholesale prices in trade magazines to discourage any such deviations. CR 393, Exhibit G, Exhibit H, pp. 123-124. There is absolutely no question that Jhirmack combined with salon owners and distributors to prevent the sale of Jhirmack products to OTC outlets that would not adhere to Jhirmack's retail prices. The district court expressly recognized that “Jhirmack received com- plaints from salon owners and distribu- tors about instances of diversion to OTC 14 outlets, and took steps to identify the distributors involved and dis- courage this activity." 509 F.Supp. at 363, App. E-9 - E-10. Jhirmack as- sisted and cooperated with salon owners and distributors in policing the market by using batch code or lot numbers from the bottoms of Jhirmack containers to trace distributors, such as petitioners, who sold diverted products. CR 393, Exhibit B, pp. 136-137. Jhirmack's president admitted that she maintained a book with correspondence and lists re- garding code numbers and information on diverted products for the purpose of re- cording instances of diversion. CR 393, Exhibit C, pp. 39-40. While all this policing activity was transpiring, Jhirmack's founder was constantly in personal contact with salon owners at beauty shows, seminars and clinics, re- 15 peatedly assuring them that Jhirmack products would never be sold in drug stores. CR 404, Exhibit B, pp. 40-41, TR 326-327. In the face of all these estab- lished facts, the district court never- theless dismissed the price-fixing claim because there was no evidence "that Jhirmack fixed the resale prices for its products or enforced compliance with a particular price schedule. 519 F.Supp. at 1088, App. D-10. Upon dis- missal of Jhirmack's counterclaims, judgment was entered. Appendix C. Petitioners filed a timely appeal. The Ninth Circuit Decision The Ninth Circuit Court of Appeals affirmed the district court's judgment in all respects. 598 F.2d 1011, Appendix B. Concerning the price-fixing claim, 16 the Court of Appeals agreed with the district court that there was no evi- dence of enforced compliance with a particular price schedule. 698 F.2d at 1015, App. B-10. Petitioners, however, argued in both the district court and the Court of Appeals, that setting prices at a particular level is not a sine gua non of a price-fixing claim. This case falls within the fact pattern and rea- soning of Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164 (3d Cir. 1979). In Cernuto, the plaintiff com- plained it was terminated as a dealer in kitchen cabinets because a competing dealer complained to its supplier that plaintiff was discounting the cabinets. The Third Circuit held that such facts supported a per se claim of price-fixing because the supplier's action was moti- 17 vated by its customer's desire to eli- mMinate price competition. 595 F.2d at 166-169. The Ninth Circuit distinguished petitioners' case from Cernuto on the two grounds that (1) petitioners were not competitors of the salons who were concerned about price competition from OTC outlets, and (2) no distributors complained about price competition from petitioners. 698 F.2d at 1015, App. B-10 - B-1l. Accordingly, the dis- missal of this case on summary judgment was affirmed despite the substantial evidence in the record, recognized by both the district court and the Court of Appeals, that a combination existed for the purpose and effect of eliminating retail price competition between salons and OTC outlets, and that petitioners > ~ 18 were terminated as distributors when they were detected as a source of supply to discounting OTC outlets. REASONS FOR GRANTING THE WRIT The Ninth Circuit rejected the per se price-fixing claim in this case because it concurred with the district court that there was "'no evidence . .. that Jhir- mack fixed the resale prices for its products or enforced compliance with a particular price schedule.' 519 F.Supp at 1088." 698 F.2d at 1015, App. B-10. This narrow definition of price-fixing directly conflicts with the long standing principle established by this Court that price-fixing is more expansive than merely setting prices at exact levels or adhering 4/ to particular price schedules.— 4/ Catalano, Inc. v. Target Sales Inc., 446 U.S. 643, 648 (1580) lelimination (footnote continued on next page) 19 This Court's vertical price-fixing decisions have condemned various forms of concerted action by a manufacturer and its wholesalers to control resale prices and 5/ prevent intrabrand price competition.= (footnote continued from preceding page) of "discount" via uniform credit is price- fixing); United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 720 (1944) (price-fixing is requirement to sell at "locally prevailing prices"); United States ‘v. Socony-Vacuum Oil Co., 310 U.S. 150,223 (1940) (price-fixing is “raising, depressing, fixing, pegging, or stabilizing" prices). See also Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164, 168-169 (3d Cir. 1979) (setting "exact level" of price "is not a sine gua non of a per se violation... under the price-fixing rubric"). 3/ United States v. Park, Davis & Co., 362 U.S. 29, 45 (1960) (wholesalers required not to sell to retailer who deviated from suggested resale prices); United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 720 (1944) (agreements with wholesalers to resell only to licensed retailers who main- tained locally prevailing prices); Federal Trade Commission v. Beech-Nut Packing Co., 257 U.S. 441 (1922) (wholesalers Sermittea to deal only with retailers who maintained suggested retail prices); Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) (written agreements allowing whole- salers to sell only to licensed retailers who entered into price maintenance agree- ments with the manufacturer). 20 Never has this Court suggested that their illegality turned on setting of prices at exact levels or adhering to particular price schedules. The critical point is that any vertical control of prices "des- troys horizontal competition as effectively as if wholesalers ‘formed a combination and endeavored to establish the same res- trictions by agreement with each other.'" California Retail Liquor Dealers Associa- tion v. Midcal Aluminum, 445 U.S. 97, 103 (1980); Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 408 (1911). The Third Circuit Court of Appeals in Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164 (3d Cir. 1979) has recognized that a vertical combination is price- fixing where its motivating factor is the suppression of price competition at the retail level, rather than the promotion of competition at the manufacturer level. 21 595 F.2d at 168. The combination is per se unlawful although it does not set prices at an exact level because its purpose and effect is to restrain price movement. 595 F.2d at 168-169. Cernuto is not inconsistent with this Court's Sylvania decision. £/ However, con- fusion remains in the lower courts as to what conduct is price-fixing, particularly where non-price restraints are part of the price-fixing scheme. The Third Cir- cuit in Cernuto concluded that Sylvania's tolerance of reasonable restraints to im- prove the manufacturer's competitive posi- tion" may not be converted into a blanket allowance of any marketing decision made by a manufacturer." 595 F.2d at 167-168 (original emphasis). &/ This Court expressly noted in Sylvania that vertical price restrictions remain per se illegal. 433 U.S. at 51 n.18, gu py 22 The Ninth Circuit refused to apply the reasoning of Cernuto to the facts of this case, which are certainly sufficient to support petitioners’ claim that a com- bination existed with the purpose and effect of suppressing retail price compe- tition. While cautiously conceding that vertical restraints "may" be illegal where their purpose and effect are to limit horizontal competition, 698 F.2d at 1015, App. B-11 - B-12, the Ninth Circuit nevertheless distinguished peti- tioners' case from Cernuto on two grounds which signify that this Court of Appeals misunderstands the fundamental reason why the conduct in this case is price- fixing. First, the Ninth Circuit points out that petitioners, as distributors, are not competitors of the salons who are retailers complaining about price compe- nee 23 tition from other retailers. 698 F.2d at 1015, App. B-10 - B-1l1. Second, the Ninth Circuit concludes that because no other distributors complained about price compe- tition from petitioners, id., App. B-1l, there is no elimination of horizontal price competition. Id., App. B-12 - B-13. The Ninth Circuit therefore fails to recog- nize that this case concerns a retail price-fixing combination, which petitioners as wholesalers can challenge because their removal as a source of supply to discount- ing retailers was a means of accomplishing the anticompetitive result ._/ This failure is puzzling because the i This Court has already held that a Clayton Act §4 remedy is not "restricted to those competitors whom the conspirators hoped to eliminate from the market,” but is available to those whose injury is "a neces- sary step in effecting the ends of the il- legal conspiracy." Blue Shield of Virginia - McCready, __—Ss«~U.S. ___s,:-'10 »Ct. 2540, Vv 2549 (1982). 24 Ninth Circuit's opinion does observe that salons were concerned with maintaining retail prices and complained about price competition from OTC outlets. 698 F.2d at 1013, 1015, App. B-3, B-10 - Bell. This case does not turn on the un- supported distinctions which the Ninth Circuit makes regarding levels of dis- tribution, but rather on the reason why Jhirmack combined to enforce customer restrictions. The Ninth Circuit fails to grasp this fundamental point, and its decision further confuses the law of 8 / vertical price-fixing.— This is cer- 8/ This confusion is apparent froma citation to this case by the Government in its amicus curiae brief filed in support of the petition for a writ of certiorari in Monsanto Co. v Spray-Rite Service Corp., No. proposition pte “the fact that a distri- bution restriction indirectly exerts some pressure on dealers' prices is not enough to transform a nonprice arrangement into resale price maintenance." Brief for the United States As Amicus Curiae in Support of Petitioner, 18 n. 25. 25 tainly a case in which “motive and intent play leading roles"2/ in determining whether the vertical restraint is price- *“ixing, and the Ninth Circuit and other lower courts faced with vertical res- traint cases should not be allowed to continue to lose sight of that principle. Given Jhirmack's intention that its pro- ducts not be discounted, and its combina- tion with distributors and salons to ex- clude discount outlets from selling its products because of the salons' insistence upon avoiding price competition -- an in- sistence which the district court labeled “patently anticompetitive” -- summary judgment should not have been granted nor affirmed. The summary dismissal in this case is the result of the lower courts' 9/ » Oller v. Columbia Broadcastin Systen, Inc., 368 U.S. 464, 473 (1962) 26 inability to analyze properly what con- duct continues to be price-fixing since Sylvania. The analysis must begin with a con- tinued recognition that a combination which tampers with price structures is an unlawful activity, and this is so even though the members of the price-fixing group are in no position to control the market .22/ Accordingly, combinations formed for the purpose of suppresssing price competition in the sale of only one brand are illegal. In Dr. Miles Medical Co. v. John D. Park & Sons Co, ,r2/ and recently in Cali- fornia Retail Liquor Dealers Association v. Midcal Aluminum Inc. ,22/ this Court con- 10/ United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 221 (1940) 11/ —' 220 U.S. 373, 407-408 (1911). 12/ 445 u.s. 97, 103 (1980), a « 27 cluded that resale price maintenance is equivalent to horizontal price-fixing among dealers or retailers. The per se illegality rests on the reasoning that a manufacturer itself has no economic in- terest in establishing resale priees, therefore no purpose is served other than the anticompetitive one of raising resale prices. The Government, in its amicus curiae brief filed in Monsanto, 23/ chal- lenges the reasoning that resale price maintenance would likely be used by a manufacturer merely as a way to raise resale prices because "a price-fixing combination at the retail level would tend to reduce quantities sold and there- by damage a manufacturer's objectives, "L4/ 13/ —'‘ Monsanto Co. v. Spray-Rite Service Corp. , No . 82-914. 14/ Brief for the United States As Amicus Curiae in Support of Petitioner, 21, 24-25. 28 This case, however, presents an example of why a manufacturer would have an anti-competitive purpose in maintaining resale prices. When Jhirmack products began to appear at discount prices in OTC outlets, salons could not maintain their premium prices, and more importantly, the profit margin that Jhirmack's price struc- ture offered them. As the district court found, salons reacted to such competitive pressure by discontinuing the purchase of brands -- including Jhirmack -- which could be purchased at discount stores. 509 F.Supp at 371, App. E-40 - E.41. Jhirmack could react in several ways to the competitive pressure faced by the salons. It could, of course, maintain its prices and its distributors' suggested wholesale prices, and hope that discount retail prices would eventually result in increased OTC sales, and greater revenues. 29 Second, it could reduce its prices and its distributors' suggested wholesale prices as a way to preserve retail margins and compete for the continued patronage of its salon customers. This method would subject Jhirmack and its distributors to a squeeze on their profits, and would leave them vulnerable to future reduc- tions in margin because of further retail discounting by OTC outlets. Finally, Jhirmack could avoid the pres- sures of retail discounting on its pro- fits by preventing that discounting. Jhirmack elected to pursue that last course of action, which resulted in the maintenance of premium prices to con- sumers and a profit structure dependent upon those premium prices. The essence of competition among manufacturers selling to salons, there- fore, was the maintenance of retail pro- 30 fit margins for the salons. The question which the Court of Appeals and the dis- trict court failed to address in this case is why Jhirmack acted to maintain profit margins. Petitioners contend that this inguiry detemnines the legality of Jhirmack's conduct. There is certainly an issue of fact in this case as to whether Jhirmack can reasonably argue that salon profit margins must be preserved in order to in- sure point-of-sale service. The district court found that "consumers do value a hairdresser's advice," but "the evidence is not convincing that they need such advice," 509 F.Supp. at 375, App. E-58 - E-59. The facts in this case instead suggest that the maintenance of prices and profit margins was caused by the salons' attempts to avoid competition with more efficient retailers. The 31 vertical restrictions in this case merely frustrate distribution effi- ciency rather than achieving it as con- templated by this Court in § lvania.+2/ This Court should not reject the rule of per se illegality applied to vertical price-fixing. Where ample evi- dence exists, as in this case, of a com- bination instituted to eliminate retail price competition, then there is a suf- ficient basis for a per se price-fixing 45/ Vertical restraints are often caused by less efficient dealers and im- pair the advancement of real distribution efficiencies. Steiner, Vertical Res- traints and Economic Efficiency, Working Paper No. 66, Bureau of Economics, Federal Trade Commission (June 1982). The anti- trust laws must be concerned with more than interbrand competition among manu- facturers. The preservation of intra- brand competition among different types of retailers may result in increased dis- tribution efficiency as manufacturers shift to retailers with lower costs and profit margins. Consumers therefore bene- fit from intrabrand competition as well as from interbrand competition. .) 32 claim to be presented to the trier of fact for a determination of what the motive was for the combination. The trier of fact should decide whether the purpose of the combination was to elim- inate intrabrand price competition, or promote interbrand competition. If the purpose of the combination was to elim- inate intrabrand price competition, there is a violation of the Sherman Act. If the purpose of the combination was to promote interbrand competition through reasonably beneficial non-price benefits, there is no violation of the Sherman Act. in the absence of further proof that the combination unreasonably restrained trade in the relevant market. Under this approach, the conflict concerning application of the per se or the rule of reason standard in verti- cal restraint cases, can be reconciled. Sk eid Pa Note A Be 33 CONCLUSION For the foregoing reasons, a writ of certiorari showid issue to review the judgment and opinion of the Court of Appeals for the Ninth Circuit. DATED: June 27, 1983 Respectfully submitted, JOHN A. KITHAS (Counsel of Record) CHARLES LAMONT KITHAS & LAMONT 111 Sutter Street, Suite 2140 San Francisco, California 94104 (415) 981-1492 Attorneys for Petitioners APPENDIX A UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Case No. 82-4102 JBL ENTERPRISES, INC., dba JHIRMACK OF UTAH; JEAN ROBINSON; dba JHIRMACK OF IDAHO and JHIRMACK OF BOISE; LOIS JEAN MILLION, dba JHIRMACK OF NORTH CENTRAL INDIANA, — Plaintiffs-Appellants, Ve JHIRMACK ENTERPRISES, Inc., Defendant-Appellee. Case No. 82-4107 AL BOOTH and THELMA R. BEAN, individually; JHIRMACK OF WASHINGTON, D.C., INC.; WALTER R. CECCHINI, JR., individually; and JHIRMACK OF SOUTHWESTERN PENNSYLVANIA, INC., Plaintiffs-Appellants, Vv. JHIRMACK ENTERPRISES, INC.; IRENE REDDING, ALBERT L. SCHWARTZ and GARY McCORD, indi- vidually; INTERNATIONAL PLAYTEX, INC.,; JOEL E. SMILOW, individually, and ESMARK, INC., Defendants-Appellees. ORDER DENYING PETITION FOR REHEARING AND SUGGESTION FOR REHEARING EN BANC Filed April 1, 1983 eo A-1 ORDER Before: MERRILL, DUNIWAY and FERGUSON, Circuit Judges The panel as constituted in the above case has voted unanimously to deny the petition for rehearing and to reject the suggestion for rehearing en banc. The full court has been advised of the suggestion for en banc rehearing and no judge of the court has requested a vote on the suggestion for rehearing en banc. Fed. R. App. P. 35. The petition for rehearing is denied and the suggestion for a rehearing en banc is rejected. ie a APPENDIX _B- UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No. 82-4102 JBL ENTERPRISES, INC. dba JHIRMACK OF UTAH; JEAN ROBINSON, dba JHIRMACK OF IDAHO and JHIRMACK OF BOISE; LOIS JEAN MILLION dba JHIRMACK OF NORTH CENTRAL INDIANA, F’aintiffs/Appellants, Vv. | JHIRMACK ENTERPRISES, INC., Defendant/Appellee. JUDGMENT Appeal from the United States District Court for the Northern District of California, William W. Schwarzer, District Judge, Presiding. Filed and entered February 8, 1983 s/s - ae tk _ APPEAL from the United States Dis- trict Court for the Northern District of California. THIS CAUSE came on to be heard on the Transcript of the Record from the United States District Court for the Northern District of California and was duly submitted. ON CONSIDERATION WHEREOF, It is now here ordered and adjudged by this Court, that the judgment of the said District Court in this Cause be, and hereby is affirmed. APPENDIX B UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Case No. 82-4102 JBL ENTERPRISES, INC., dba JHIRMACK OF UTAH; JEAN ROBINSON, dba JHIRMACK OF IDAHO and JHIRMACK OF BOISE; LOIS JEAN MILLION, dba JHIRMACK OF NORTH CENTRAL INDIANA, Plaintiffs-Appellants, Vv. JHIRMACK ENTERPRISES, INC., Defendant-Appellee. Case No. 82-4107 AL BOOTH and THELMA R. BEAN, individually; JHIRMACK OF WASHINGTON, D.C., INC.; WALTER R. CECCHINI, JR., individually; and JHIRMACK OF SOUTHWESTERN PENNSYLVANIA, INC., Plaintiffs-Appellants, Vv. JHIRMACK ENTERPRISES, INC., IRENE REDDING, ALBERT L. SCHWARTZ, and GARY McCORD, individually; INTERNATIONAL PLAYTEX, INC.; JOEL E. SMILOW, individually; and ESMARK, INC., . Defendants~-Appellees. OPINION Appeal from the United States District Court for the Northern District of California William W. Schwarzer, District Judge, Presiding. Argued and Submitted December 17, 1982 Decided February 8, 1983 B-1 OPINION Before: MERRILL, DUNIWAY and FERGUSON, Circuit Judges. FERGUSON, Circuit Judge: These appeals arose out of a com- mon scenario. The plaintiffs in both ac- tions are former distributors of defendant Jhirmack Enterprises, Inc. ("Jhirmack"). When their contractual relationships broke down, the disappointed parties sought so- lace (and treble damages) from the court, alleging various antitrust violations and related contract and tort claims. Following summary judgment in favor of the defendants, the plaintiffs appeal. We affirm. FACTS: Jhirmack manufactures hair care and cosmetic products which are distributed throughout the United States by licensed distributors. The company was founded in 1968 by Jheri and Irene Redding. From er ae B-2 1972 to 1979 Jhirmack followed a marketing strategy of making its products available through beauty salons, barber shops, beauty schools, barber schools and hair styling establishments (the "professional salon trade" or "PST") rather than through other types of outlets, such as drugstores, department stores and the like ("over-the- counter" or "OTC" outlets). Such a limited outlet strategy is often adopted by new firms who wish to avoid the large adverti- sing costs necessary to break into the heavily competitive OTC market in hair care and beauty products. To this end Jhirmack contracted with several independent dis- tributors, including the three JBL plain- tiffs and the Booth plaintiffs, giving each an exclusive geographic territory and requiring each to "exclusively devote its entire time and use its best efforts to promote and sell” Jhirmack's products to PST outlets in their respective terri- sleet = B-3 tories. The contracts also provide that Jhirmack "will not appoint another distri- butor within the territory," and set mini- mum purchase quotas for each distributor, based on Jhirmack's estimate of potential PST accounts within the assigned terri- tory. In 1976-77, Jhirmack received complaints from salon owners and distri- butors that its products were appearing in OTC outlets. Salons charge premium prices for products sold to their cus- tomers and prefer the prestige that flows from carrying products not generally avail- able. It is difficult for PST outlets to maintain either prices or pres#ige. if the product can be found in the local supermarket at a substantially lower price. Many PST outlets will therefore refuse to carry products that are general- ly available OTC. On receiving complaints Jhirmack took steps to determine which distributors were "diverting" its products B-4 to OTC outlets and to discourage them from doing so. | In 1978, Jhirmack terminated the JBL distributors for refusing to follow Jhirmack's marketing plan and for failing to meet its order quotas for their respec- tive territories. JBL filed suit, alleging that the terminations were the result of illegal territorial and customer restric- tions, resale price maintenance and illegal tying arrangements in violation of federal. antitrust law, and fraud or negligent mis- representation in setting minimum purchase quotas. By 1979, Jhirmack had developed sufficient name recognition to move into the OTC market. After negotiations with several companies, it. entered an agree- ment with International Playtex, Inc. ("Playtex") in October 1979. In exchange for the exclusive right to distribute Jhirmack shampoos and conditioners to OTC B-5 outlets, Playtex agreed to conduct a na- tionwide marketing campaign, pledging to spend seven million dollars the first year and fifteen percent of annual net sales in succeeding years promoting the products. The contract specifically excluded the professional salon trade, and Jhirmack continued to use independent distributors for its PST distribution. In November 1979, Jhirmack sent new distributor agreements to its PST distributors, requiring them to recognize Playtex as the exclusive OTC distributor of Jhirmack shampoos and conditioners, Booth refused to sign the new agreement and so was terminated by Jhirmack in Decem-. ber 1979. Booth then filed suit alleging that the contract between Jhirmack and Playtex violated the Sherman and Clayton Acts and breached its own contract with Jhirmack. B-6 The JBL and Booth actions were con- solidated for a limited trial on the re- levant market and tying issues. JBL Enter- prises v. Jhirmack Enterprices [sic], Inc., 509 F. Supp. 357 (N.D. Cal. 1981). The definition of the relevant market was cru- cial to a determination of whether Jhirmack possessed sufficient market power that its vertical nonprice restrictions could amount to an unreasonable restraint of trade. At the time no claims of per se antitrust vio- lation had been made except for the tying claim. The district court concluded that the relevant market was the market for the sale of beauty products (including but not limited to shampoos and conditioners) to PST outlets. Under this definition, Jhirmack's market share in 1976-78 was . found to be 2.3%, 3.2% and 4.2%, respec- tively. Jhirmack then moved for summary judgment against the JBL plaintiffs on the B-7 ground that in light of Jhirmack's insig- nificant market share the alleged res- traints could not as a matter of law have had the requisite adverse effect on com- petition. JBL sought to avoid dismissal on two theories: (1) that Jhirmack's small market share did not establish lack of market power because it faced no inter- brand competition; and (2) that Jhirmack engaged in price-fixing, a per se viola- tion. The court rejected both theories. On the fraud claim the court found that JBL had presented no facts on two essential elements. Summary judgment was therefore entered on all counts. JBL Enterprises v. Jhirmack Enterprises, Inc., 519 F. Supp. 1084 (N.D. Cal. 1981). In the Booth action, in opposi- tion to defendants’ motion for summary judgment, the plaintiffs raised a per se claim of price-fixing, alleging that Jhirmack and Playtex conspired to fore- B-8 close price competition between Playtex and Booth in the OTC market in violation of Sherman Act § 1. The court granted summary judgment for the defendants on this issue, as well as on a claim against Playtex for inducing breach of contract, and a claim that Booth's termination breached an im- plied covenant of good faith and fair dealing. Summary judgment was denied on the claim that Playtex's appointment breached the exclusive territory clause of the Booth-Jhirmack contracts, but this claim was later dismissed and that dis- missal has not been appealed. Both sets of plaintiffs appeal the respective grants of summary judg- ment; the JBL plaintiffs also attack the district court's determination of the relevant market. ANALYSIS: I. The JBL Action A. Per Se Price-Fixing In Continental Tv., Inc. v. GTE — ae B-9 Sylvania, Inc., 433 U.S. 36 (1977), the Supreme Court, while it did "not fore- close the possibility that particular applications of vertical restrictions might justify per se prohibition,” id. at 58, held that in general such nonprice restrictions imposed by a manufacturer on distributors or retailers must be tested under the Rule of Reason. The Court found that, while vertical restrictions reduced intrabrand competition, they had redeeming virtues in that they tended to promote interbrand competition. Dealers would be more likely to expend the effort necessary to promote or service a product if they did not have to worry about other dealers of the same product taking a "free ride" on their efforts. Thus the manufacturer who imposed customer or territorial res- trictions would be better able to enter the market as a new competitor or maintain its presence as an existing competitor with other manufacturers. B-10 JBL attempts to place itself out- side the reach of GTE Sylvania by allega- tions of a conspiracy among Jhirmack, other distributors, and salons to eliminate JBL as a competitor so as to reduce price competition. Its attempt fails. First, the district court found "no evidence ... that Jhirmack fixed the resale prices for its products or enforced compliance with a particular price schedule." 519 F. Supp. at 1088. Nor was there any indication that suggested prices were in fact adhered to. Thus JBL cannot rely on United States v. Bausch & Lomb Optical Co., 321 U.S. 707 (1944), where nonprice res- traints were imposed to facilitate a ver- tical price-fixing scheme. Second, JBL was not a competitor -of the complaining salons. Rather, the salons were customers of distributors like JBL. Although the salons may have been concerned with maintaining the prices they B-11 charged consumers, the price competition they faced was not from JBL but from other retailers, especially OTC outlets that . carried competing brands. Third, the other distributors, who would have been in competition with JBL but for the territorial restrictions, were not concerned with eliminating price competition from JBL. There is no indi- cation that the complaining distributors wished (or thought they were permitted) to make sales to the OTC outlets at all, much less at a higher price than that charged by JBL. Rather, the clear indi- cation is that the complaining distri- butors were concerned that their customers (the salons) would stop carrying Jhirmack products if the diversion continued. Per se condemnation of apparently vertical restraints may be appropriate where the purpose and effect of those restraints is to limit horizontal compe- B-12 tition. In Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164 (3d Cir. 1979), plaintiff claimed it had been terminated as a dealer:in United's line of kitchen cabinets because a competing dealer com- plained to the manufacturer that the plain- tiff was discounting the cabinets. The Third Circuit found that "a manufacturer deliberately withdrawing its product from a distributor that resold it for a price less than its competitor at the request of the competitor,” 595 F.2d at 166, would constitute a per se violation. It based its decision on the pernicious ef- fect of the practice--elimination of pos- sible price competition from the foreclosed dealer--and the lack of any redeeming vir- tue. The court noted that generally manu- facturers are free to impose vertical ter- ritorial restrictions, but that two fac- tors made United's alleged action unlaw- ful. First, the action was taken at the - er Se xy ' - ees. we Tee eee B-13 behest of a competitor on the same level as the plaintiff; thus the restraint was hori- zontal rather than vertical in purpose and effect. Second, the complaining dealer was allegedly seeking to eliminate price competition. 595 F.2d at 168. In order to make out a claim un- der the reasoning of Cernuto, JBL would have to allege that a competitor of JBL prevailed on Jhirmack to terminate JBL in order to eliminate either actual or poten- tial price competition from JBL. No such allegation was made, and the district court correctly granted summary judgment on the price-fixing claim, B. Market and Market Share All parties agreed to a separate trial to determine (a) the relevant product and geographic market, (b) Jhirmack's share of that market, and (c) whether Jhirmack imposed per se unlawful tying arrangements. Only the market findings are appealed. These are findings of fact a u 4 sy" “S a ee OT Ny Malet 5 WE! Pit : . rey et Ne ee ok De B-14 and thus subject to a clearly erroneous standard of review. Twin City Sportservice v. Charles 0. Finley & Co., 676 F.2d 1291, 1299 (9th Cir. 1982). Although market defi- nitions are inherently imprecise, the dis- trict court's determination is supported by the available evidence and must be up- held. As this circuit stated in Gough v. Rossmoor Corp., 585 F.2d 381, 389 (9th Cir. 1978), cert. denied, 440 U.S. 936 (1979), analysis of whether a particular action restrains competition involves a consideration of its impact "within the field of commerce in which the plaintiff was engaged and upon those commercially engaged in competition within it." In determining what the field of competi- tion is, “courts are not free to accept whatever market is suggested by the plain- tiff," id. at 389, but must examine the commercial realities within the industry in question. H as B-15 Defining the market in a case such as this one is actually a two-step process. First the field in which the plaintiff was engaged must be defined in geographic and distributional terms. Then the pro- duct (or product line) that competes in that field must be determined. Since the parties stipulated as to the geographic market, the two determinations may be referred to as defining, respectively, the "distributional market" and the "pro- duct market." The district court defined the relevant market as "the sale of beauty products, including but not limited to shampoos and conditioners, to beauty salons and other professional outlets." 509 F. Supp. at 369. Under this definition, Jhirmack's market share was less than 5%. JBL disputes both the product and the dis- tributional market determinations, and argues that the market should be defined Wi B-16 as the sale of shampoos and conditioners alone either to professional outlets or, alternatively, by professional outlets. Although, as stated above, the district court found that the relevant market existed at the wholesale level (sales to salons), it carefully considered claims that a distinct submarket existed in the sale of shampoos and conditioners at the retail level (sales by salons). The court concluded, however, that if the relevant distributional market were to be found at the retail level, PST out- lets faced competition from OTC outlets selling similar products, and so the rele- vant market would be the sale of shampoos and conditioners by all retail outlets. Under this market definition, Jhirmack's market share would have been less than 1% of shampoos and approximately 2% of conditioners. B-17 We find it unnecessary to addres these alternative findings, however, be- cause the district court correctly defined the relevant distributional market. JBL is engaged in the distribution of Jhirmack products to specific retailers, i.e., it operates as a wholesaler. It competes for PST customers with other wholesalers--some of whom also carry a single (competing) line, others of whom carry the products of many manufacturers. The court's product market deter- mination must also be upheld. The stan- dard Sut of the product market is that it comprises those "commodities reasonably interchangeable by consumers for the same purpose." United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395 (1956). However, this principle must be applied with reference to the specific market in- volved. So long as the distributional market is set at the wholesale level, the Ve te SOR ee B-18 fact that face creams and shampoos do not have the same use for the consumer is not as relevant as whether a "cluster" or "product line" of one manufacturer is reasonably interchangeable for that of another by the salon that is making the purchase. This cluster approach is appro- priate where the product package is sig- nificantly different from, and appeals to buyers on a different basis from, the individual products considered separately. Thus the full service features of commer- cial banks led the Supreme Court to find a cluster of products and services as the relevant product market in United States v. Philadelphia National Bank, 374 U.S. 321, 356 (1963), and United States v. Phillipsburg National Bank & Trust Co., 399 U.S. 350, 360 (1970). The rationale was that consumers do not generally shop for individual banking OW *~ ,"s », Y dy a ae ot Ui on B-19 services, especially because it is usually easier to obtain some services, e.g., loans, at the same bank where other ser- vices, e.g., savings accounts, are held. The approach was extended in A.G. Spalding & Bros., Inc., v. FTC, 301 F.2d 585, 604 (3d Cir. 1962), where the court found the relevant market to be “higher priced” athletic goods because each of the major manufacturers promoted and distributed such goods as a line. In this case, eighty percent of Jhirmack's sales were of shampoos and con- ditioners. It did, however, manufacture a full line of beauty products and required each distributor to purchase a small amount of each product for potential sale to PST outlets. The industry generally considers it necessary to carry a full line, and ad- vertising and promotion often group the products. Although salons do purchase individual products, this generally oc- B-20 curs when the particular product is not available in the main product line chosen by the salon. The court thus reasonably concluded that Jhirmack faced competition (at the wholesale level) for PST sales from other product lines, and not only from other shampoos and conditioners. C. Market Power The trial court found that Jhirmack's market share was 2.3%-4.2% of beauty products sold to PST outlets (or 1%-2% of shampoos and conditioners sold by all retail outlets). These shares are too small for any restraint on intrabrand competition to have a substantially adverse effect on inter- brand competition. See, e.g., Ron Tonkin Gran Turismo, Inc. v. Fiat Dis- tributors, Inc., 637 F.2d 1376, 1379 (9th Cir. 1981) (1.87% or 5.2%); Mutual Fund Investors v. Putnam Management Co., 553 F.2d 620, 627 (9th Cir. 1977) (2% or B-21 3%). JBL's contentions that Jhirmack pos- sessed sufficient market power to signi- ficantly affect interbrand competition despite its insignificant market share are unsupported and were properly rejected at trial. D. Fraud or Negligent Misrepresentation JBL's contract with Jhirmack re- quired JBL to purchase a minimum quantity of products each month. The contract states that JBL "acknowledges that the minimum purchase requirements provided herein are fair, just and reasonable." JBL claims that this statement is a fraudulent representation because the quotas were in effect a statement of the minimum revenues JBL could expect from the distributorship. The district court found it "doubt- ful that quotas incorporated into a dis- tributor[']s agreement afford a basis for a later fraud claim based on the distribu- tor's failure to attain them." 519 F.Supp. B-22 at 1089. Such a theory would, in effect, make the manufacturer an insurer of the distributor's business. The court found it unnecessary to reach this issue, how- ever, because it concluded that JBL had failed to factually support two elements: (1) that the representations were made negligently or with intent to defraud; and (2) that JBL relied on the representa- tions. We find no error in this conclu- sion. II. The Booth Action Booth contends that Jhirmack's promise to it of an exclusive distribu- torship meant that if Jhirmack moved into the OTC market within Booth's territory, it would have to do so through Booth, Since the contract also specified that Booth agreed to exclusively devote its full time to the PST outlets, Jhirmack and Playtex contend that the OTC market was excluded from the contract. The district B-23 court denied summary judgment on this is- sue, and Booth has not appealed the later dismissal of the claim. In any event, this contract claim is irrelevant to whether Jhirmack conspired with Playtex to foreclose competition, violated a covenant of good faith and fair dealing, or was induced by Playtex to breach, A. The Antitrust Claims Booth claims that Jhirmack and Playtex conspired to foreclose competition in the OTC market for Jhirmack products in order to allow Playtex to fix prices in that market. It alleges, first, that the agreement between Jhirmack and Playtex, by giving Playtex an exclusive OTC license, violated Sherman Act § 1; and second, that its termination for refusing to accede to that agreement likewise violates the Act. Booth does not dispute that Jhirmack could, without violating the antitrust laws, decide to appoint only B-24 one OTC distributor and refuse to appoint any others, even if the net result of this course of action was to shield the sole distributor from potential price competition. See GTE Sylvania, 433 U.S. at 54-55; Ron Tonkin Gran Turismo, Inc. v. Fiat Distributors, Inc., 637 F.2d at 1388. Booth's position, however, is that there already was competition, or at least potential competition, in the OTC market (i.e., Booth), and that the agreement was designed to eliminate that competition. It is difficult to square the contention that the Jhirmack-Playtex agreement would decrease intrabrand competition without increasing interbrand competition with Booth's position that if Jhirmack wanted to enter the OTC market it would have to do so through Booth, who had an exclusive territorial license. Had Jhirmack taken the route suggested by Booth, it would be Booth, and not Playtex, who would be B=-25 insulated from price competition from any other OTC distributor in its territory. And Booth would not face any intrabrand competition between PST and OTC outlets, since it would control distribution to both. Although there are indications that Jhirmack did not always interpret its contract with Booth as prohibiting sales to OTC outlets, it is clear that, as the district court noted, "“Jhirmack's products had not theretofore been offi- cially distributed to OTC outlets, having been generally limited to professional outlets except for sporadic diversion.” 519 F. Supp. at 1091. It is also clear that Jhirmack considered a substantial promotional campaign as a prerequisite to its ability to compete successfully with other shampoos and conditioners available in OTC outlets. Playtex's promise to spend seven million dollars 0 ee ere ke ‘ i ay, De ae) | ner ue | ‘ie A Te eRe B-26 on promotion during the first year of its distributorship and substantial amounts thereafter fulfilled that prerequisite. While there is no allegation that. Jhirmack would never have entered the OTC market had it not been able to find a distributor able and willing to engage in substantial promotional activity, the admittedly heavy interbrand competition existing in the OTC market for shampoos and condi- tioners makes it extremely unlikely that it would have entered at the time it did or that it would have been able to add effectively to that interbrand com- petition if it had chosen to do so with- out such a campaign. Jhirmack considered such an arrangement necessary and the realities of the market make that assump- tion quite reasonable. The district court was therefore justified in concluding that "(t]he primary effect of the Jhirmack-Playtex agreement on competition in OTC channels B-27 was to add the competitive activity of a major distributor and to increase the amount of Jhirmack products available to consumers in OTC outlets.... More- over, the agreement also provided a new source of intrabrand competition for Jhirmack products sold in salons." 519 F. Supp. at 1091, Since the initial agreement between Playtex and Jhirmack did not violate antitrust law, Playtex could certainly ask Jhirmack for aid in en- forcing it without incurring anti- trust liability. Booth, like JBL, seeks to invoke Cernuto, but again the situa- tion is not analogous. In Cernuto, the manufacturer had not granted an exclusive license to any of its dealers, Rather it was providing kitchen cabinets to both dealers Famous and Cernuto, Famous, how- ever, wanted to eliminate competition, and used its influence over the manufacturer B-28 to secure Cernuto's termination as a dealer, thereby creating a net loss of intrabrand competition without any net increase in interbrand competition. Under Cernuto's circumstances, per se condemnation may be appropriate; under the circumstances presented here, it is clearly inappropriate. B. Good Faith and Fair Dealing Booth claims that Jhirmack breached an implied covenant of good faith and fair dealing by terminating Booth for refusing to recognize Jhirmack's “illegal” contract with Playtex. Since that contract does not violate the antitrust laws, the district court properly rejected this claim, Cc. Tortious Interference The heart of Booth's tortious interference claim parallels its anti- trust claims. Booth argues that its ‘ contract with Jhirmack conferred on it the right to sell OTC, that Playtex knew B-29 Booth had that right, and that Playtex induced Jhirmack to to take that right away from Booth and give it to Playtex. Whether Booth's contract did in fact confer OTC rights on Booth so that Jhirmack could have breached that contract in giving those rights to Play- tex is not at issue here. What matters is whether Playtex knew that Booth had OTC rights in its territory. The ele- ments of a claim of tortious interference are (1) a valid contract, (2) knowledge of the contract and intent to induce its breach; (3) breach; (4) causation, and (5) damages. Richardson v. La Rancherita, 98 Cal.App.3d 73, 80, 159 Cal.Rptr. 285 (1979). In this case it is clear that Playtex had no reason to believe that Booth and other PST distributors had any OTC rights and therefore could not have intended that they be breached, Playtex was worried that distributors who diverted tf J - q v . di psien Latta S34 Mt, , ‘ - bon hus Waa wy), WV Jhb we Pate nl)’ RO AUG as Phra aT Toth ee ey ee ee Py "ee B-30 products to the OTC market had not bound themselves to incur heavy pro- motion costs, and would be able to "free ride” on Playtex's efforts, and undersell it. But there is no indi- cation that it considered that diver- sion to be contractually sanctioned. The district court's judgments are AFFIRMED in all respects, amie Ne) ay APPENDIX C - ‘ | UNITED STATES DISTRICT COURT Sa NORTHERN DISTRICT OF CALIFORNIA Case No. C-78-1227 WWS 4 JBL ENTERPRISES, INC., et al., Plaintiffs, ‘ Vv. Ee v : JHIRMACK ENTERPRISES, INC., : Defendant. | JUDGMENT Filed January 15, 1982. JUDGMENT This action having come on for hearings before this Court, and the Court having dismissed all claims and counter- claims, no disputed issues of material fact appearing, IT IS ORDERED AND ADJUDGED 1. That plaintiffs JBL Enterprises, Inc., Jean Robinson, and Lois Jean Million, take nothing; 2. That counterclaimant Jhirmack Enterprises, Inc., take nothing; 3. That the action, including all counterclaims, be dismissed on the merits; and 4. That each party bear its own costs of the action. DATED: January 15, 1982 s/ William W. Schwarzer WILLIAM W. ER United States District Judge . atl ; SP ite : this ‘ eG ‘ * , - . rye ’ Met) i ot ee Ee, ee 1G ede te. Mee 7 le lene nn) Fp ES Le See de epee hs Pe APPENDIX D UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA Case No. C-78-1227 WWS JBL ENTERPRISES, INC., et al., Plaintiffs, Vv. JHIRMACK ENTERPRISES, INC., Defendant. CONSOLIDATED FOR LIMITED TRIAL WITH Case No. C-80-0249 WWS AL BOOTH, et al., Plaintiffs, v. JHIRMACK ENTERPRISES, INC., et al., Defendants. MEMORANDUM OF OPINION * AND ORDER William W. Schwarzer, District Judge, Presiding. Filed July 9, 1981 > : age Seis. ie BAS aay ¥: Bk 3 rok RT Se OE Pe ON ae 2 eS = Ao eR ree a ES ee a OR fy Fy See MEMORANDUM OF OPINION AND ORDER These cases are before the Court on defendants' motions for summary judgment. Pursuant to Pretrial Order No. l, the Court has heretofore held a separate trial on the issues of the relevant market and the market share of defendant Jhirmack Enterprises, Inc. ("Jhirmack"). The Court determined that for the pur- poses of these actions the relevant mar- ket comprises the sale of beauty products, including but not limited to shampoos and conditioners, to beauty salons and other professional outlets, which is the market in which plaintiffs competed. Defendant Jhirmack's share of that market ranged from 2.3% in 1976 to 4.2% in 1978. Its share of total manufacturers' ship- ments of beauty products for sale at re- tail was 0.3%. Plaintiffs contended, D-2 however, that the relevant market com- prises the sale of shampoos and condi- tioners to consumers for home use. If that market were accepted, the court determined, it would include all re- tail sales, including drug and discount stores and other over-the-counter (“OTC”) outlets, in addition to beauty salons and professional outlets. In that mar- ket, Jhirmack's share of shampoo sales was less than one percent and its share of conditioner sales about two percent. JBL Enterprises, Inc. v. Jhirmack Enterprises, Inc., 509 F. Supp. 357, 366-69, 376 (N.D. Cal. 1981). The Court also determined that Jhirmack's requirement that each dis- tributor order a specified quantity of a new product in his next regular or- der following the product's introduc- tion constituted a tying arrangement but, because of Jhirmack's lack of D-3 market power, did not amount to a per se violation. Accordingly, the lawfulness of that arrangement must be tested, just as the customer and territorial restraints ¢ “plained of here, under the rule of reason. (509 F. Supp. at 376-79) Following the issuance of the Court's ruling, all defendants moved for summary judgment on all claims. Because the res- ponses of plaintiffs in the JBL action and of plaintiffs in the Booth action raise different issues, the actions will be separately treated. I. The JBL Action This action was filed in 1978 by a group of Jhirmack distributors in Utah, Idaho and Indiana. The amended complaint charged that beginning in 1974 Jhirmack (1) coerced plaintiffs into accepting unreasonable territory and customer restrictions precluding plaintiffs from discounting Jhirmack products by divert- . D-4 ing them outside of the assigned chan- nels of trade, i.e., distributing them to others than beauty salons and other professional outlets, and (2) fixed prices by eliminating discounting of its products thereby inhibiting its dis- tributors from competing. In addition plaintiffs charged a tying violation: that as a condition of purchasing Jhrimack's products and using its trade- names and trademarks, plaintiffs were re- quired to make one-time purchases of cer- tain undesired products. (509 F. Supp. at 376) These plaintiffs also alleged that Jhirmack made fraudulent representa- tions regarding the setting of quotas for the sale by distributors of Jhirmack's products. A. The Antitrust Claims Defendants have moved to dismiss the antitrust claims principally on the ground that in view of Jhirmack's insignificant ae a oo ar a - ee ca D-5 market share the evidence as a matter of law establishes that the alleged restraints could not have had the re- quisite adverse effect on competition in the relevant market. See Gough v. Rossmoor Corp., 585 F.2d 381, 389 (9th Cir. 1978), cert. denied, 440 U.S. 936 (1979); DeVoto v. Pacific Fidelity Life Ins. Co., 618 F.2d 1340 (9th Cir.) cert. denied, ‘7,8. , 101 S.Ct. 206 (1980). ‘ The JBL plaintiffs make two argu- ments in response: (1) That the restrictions imposed by Jhirmack had a substantial effect on competition; (2) That Jhirmack combined with certain distributors in enforcing ter- ritory and customer restrictions to elim- inate discounting, thus forming a resale price fixing scheme which was a per se violation of the antitrust laws. D-6 1. Effect on Competition The JBL plaintiffs contend, in sub- stance, that although Jhirmack enjoyed less than 2% of the retail market for shampoos and conditioners, it possessed sufficient market power for its restric- tions to have a substantial impact on competition because it faced no interbrand price competition in the sale of shampoos and conditioners to professional outlets. As they put it: Despite such small market share, Jhirmack possessed the market power to raise retail prices above the competitive price prevailing. (Memorandum, p. 19) The “competitive level” of prices against which plaintiffs measure Jhir- mack's prices are the prices of similar products in OTC outlets. The argument is that Jhirmack shampoos and condi- tioners were sold at higher prices than other brands, even other salon brands, and that it was only when Jhirmack D-7 shampoos and conditioners were available at lower prices at drugstores and super- markets, through diversion, that the salons’ ability to sell Jhirmack products at a premium price was affected. Plain- tiffs conclude that the only price compe- tition faced by Jhirmack products at re- tail was intrabrand competition. In support of these conclusions plaintiffs refer in kaleidoscopic fashion to facts showing the following: (1) The prices of shampoos and con- ditioners sold in salons have been higher as a group than the prices of those sold in OTC outlets, both at wholesale and at retail. (2) In the period extending through 1979, Jhirmack products were sold in salons at prices substantially higher than the prices at which diverted Jhirmack products were sold in OTC outlets. (3) Through 1979, Jhirmack tended to set its suggested salon retail prices -*,~" Se. eS «4 ; Ra 3 "Ss D-8 somewhat higher than those of two of its competitors, Redken and KMS. Plaintiffs’ argument is fallacious. That salon brands may sell at higher prices than OTC products and that Jhirmack pro- ducts sold in salons may, due to a strong consumer preference, command higher prices than certain other shampoos and conditioners and Jhirmack products sold at OTC outlets does not prove the absence of interbrand price competition, let alone that Jhirmack has any power to raise prices in the market for shampoo and conditioner. The prices at which a product sells is a function of supply and demand. That a product is sold at a higher price than other functionally interchangeable pro- ducts is a reflection of the value that the market attaches to that product when sold in a particular volume - it is not probative of the absence of price compe- tition or of power to control price in the market. Every manufacturer of course hee (NT Re , 5 i“ 1 ote ie URES hOe ve D-9 possesses power over the price at which he sells his products but that is rot the po- wer with which the antitrust laws are con- cerned. Based on the evidence at the earlier trial, the Court previously found that shampoos and conditioners were functionally interchangeable, that the salon market was not a distinct submarket, and that price competition and price sensitivity exists across the entire retail market for shampoos and conditioners. (509 F. Supp. at 375) In the lights of those findings, and the record as a whole, no jury could reasonably find that Jhirmack is subject only to intrabrand competition and possesses significant market power. See Ron Tonkin Gran Turismo v. Fiat Dis- tributors, 637 F.2d 1376, 1388 (9th Cir. 1981). Based on this record, the restric- tions complained of must be held as a mat- ter of law not to constitude an unreason- able restraint of trade. iL Ae) le a D-10 2. Vertical Price Fixing The JBL plaintiffs also assert a vertical price fixing claim cognizable as a per se violation. In substance, the argument is that by controlling diversion to discounting wholesalers and retailers, Jhirmack stabilized and maintained resale prices. The evidence shows that Jhirmack took steps to prevent diversion of its products, frequently at the instance of its distributors who complained when icon: ducts appeared in other stores at dis- count prices. There is no evidence, however, that Jhirmaci. fixed the resale prices for its products or enforced com- pliance with a sgt kame price schedule.2/ Plaintiffs' argument is premised on United States v. Bausch & Lomb Optical Co., 321 U.S. 707 (1944), and United States v. Arnold Schwinn & Co., 388 U.S. 365 (1967). In Bausch & Lomb the defendant Soft-Lite Lens Company, Inc., which distributed D-11 lenses specifically manufactured for it by Bausch & Lomb, required its distributors to charge published list prices and its retailers to sell at the prevailing local prices. An elaborate system of control and surveillance was used to enforce ad- herence to this price-fixing scheme. This price-fixing conduct was held to consti- tute a per se violation. The Schwinn case held vertical territory and customer restraints upon the sale by distributors of goods purchased by them from Schwinn to be a per se violation. That holding was overruled in Continental T.V. Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58 (1977), a case plaintiffs did not feel it necessary to cite in this connection. The undisputed facts show that the restrictions in the JBL ‘case were non- price restrictions. Jhirmack did not establish or enforce resale prices. Price and nonprice restrictions may ref- D-12 lect the same motivation on the part of a manufacturer, but they generate entirely dirrerent economic consequences. Restric- tions on price have a tendency to reduce price competition, interbrand as well as intrabrand. Restrictions on customers and territory tend to restrict intrabrand com- petition only and have the potential of strengthening interbrand competition. This reasoning led the Court in GTE Sylvania to overrule Schwinn and reinstate the rule of reason as the standard governing nonprice vertical restrictions. 2/ Plaintiffs' con- tention is wholly without merit and must be rejected. B. The Fraud Claim Plaintiffs contend that Jhirmack made fraudulent or negligent misrepresentations in connection with the setting of minimum purchase quotas. The distributor agree- ment provided that distributors were re- quired to purchase a minimum quantity of products each month, the amounts being sub- ject to change from time to time by Jhir- mack. Appendix C to the agreement sets D-13 forth the agreed minimum quantities and the agreement states that the distributor "acknowledges that the minimum purchase requirements provided herein are fair, just and reasonable." Plaintiffs contend that the latter statement amounts to a fraudulent representation by Jhirmack on the theory that the specified quotas were a representation as to the minimum revenues that distributors could anti- cipate.2/ It is doubtful that quotas incorpor- ated into a distributors agreement afford a basis for a later fraud: claim based on the distributor's failure to attain them. It is not necessary to reach that issue here, however, inasmuch as plaintiff's showing is in any event fatally defective. Plaintiffs have failed to present facts on two essential elements: that Jhirmack made any representation negligently or with intent to defraud, see Kelly Tire - D-14 Service, Inc., v. Kelly Springfield Tire Co., 338 F.2d 248, (8th Cir. 1964); and that plaintiffs acted in reliance on the alleged representations. Accordingly, Jhirmack is entitled to summary judgment on the fraud claim. II. The Booth Action The Booth action was filed in February 1980, shortly after plaintiffs' distributor agreements had been terminated. The pre-_ cipitating cause of the termination was plaintiffs' refusal to execute new dis- tributor agreements with Jhirmack. The new form of agreement had been tendered by Jhirmack to its distributors after it had entered into an agreement with International Playtex, Inc., ("Playtex"), appointing Playtex as the exclusive distributor of Jhirmack products to drug stores and other OTC outlets. The Booth complaint contains 49 pages of rambling and often obscure recitals of D-15 numerous grievances, cast mostly in argu- mentative and conclusory language. It is difficult to discern a cognizable anti- trust violation or other cause of action.+/ The gravamen of the complaint, however, appears to be the charge that Jhiruack and Playtex entered into a conspiracy to terminate plaintiffs in order to enable Playtex to sell Jhirmack products to OTC outlets, thereby depriving plaintiffs of the exclusive territories granted under the distributor agreements. (Comptaint: pp. 5-7) In addition, these plaintiffs assert certain related tort and contract claims under state law. In its prior ruling, the Court ob- served that the charges made by the Booth plaintiffs did not appear to set forth injury of the type the antitrust laws were intended to prevent. That observa- tion was based not only on the complaint but on the argument of Booth's counsel at ee D-16 trial to the effect that the violation con- sisted of the destruction of the distribu- tors' exclusive distribution of Jhirmack products by the entry of Playtex as a dis- tributor to the OTC market. (509 F. Supp. at 365-66) Following issuance of the Court's ruling on the market issues and defendants’ motions for summary judgment, these plain- tiffs in their response for the first time asserted a per se price fixing violation. A. The Antitrust Claim The argument which these plaintiffs now advance in opposition to defendats' motions for summary judgment is that the Jhirmack-Playtex agreement is a per se vio- lation of Section 1 because it is designed to prevent distributors such as plaintiffs from engaging in price competition in the OTC market. The argument goes that Booth was ready, willing and able to enter the OTC market, that the new agreement with T= D-17 Playtex assigned the OTC territory exclu- sively to Playtex, that Booth's old dis- tributor agreement was terminated when Booth was unwilling to sign a new agreement re- cognizing Playtex as the exclusive OTC dis- tributor, and that these actions were "price motivated" in that they were intended to protect Playtex against price competi- tion. Viewing the evidence in the light most favorable to plaintiffs, it shows that Playtex secured the exclusive right to distribute to the OTC market, that it was concerned about the effect of diversion by distributors on its volume and the prices it could charge, and that it sought to have Jhirmack stop such diversion. Playtex's strategy was to price its pro- ducts at relatively high levels compared to other OTC prices and it was concerned that diverting distributors could under- sell it. D-18 The Supreme Court has stated that the per se rule applies only to "certain agree- ments or practices" which are so "plainly anticompetitive," National Society of Professional Engineers v. United States, 435 U.S. 679, 692 (1978); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, _ 50 (1977), and so often "lack - « »« any redeeming virtue,” Northern Pac. R. Co. v. United States, 356 U.S. 1, 5 (1958), that they are conclusively pre- sumed illegal without further examination under the rule of reason generally applied in Sherman Act cases. Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 8 (1979). This is the standard governing the analysis of the Booth plaintiffs' claim of a per se viola- tion based on an alleged conspiracy to re- strain price competition. The Court in Broadcast Music also cautioned against automatic application of the per se rule to any practice’ that may relate to or affect price. More generally, in characteriz- ing this conduct under the per se rule, out inquiry must focus on = tn Se D-19 whether the effect and, here because it tends to show effect, see United States v. United States Gypsum Co., 438 U.S. 422, 436 n. 13 (1978), the purpose of the practice are to threaten the pro- per operation of our predominantly free-market economy--that is, whether the practice facially ap- pears to be one that would always or almost always tend to restrict competition and decrease output, and in what portion of the market, or instead one designed to "in- crease economic efficiency and to render markets more, rather than less, competitive.” Id., at 441 n. 16; See National Society of Professional Engineers v. United States, 435 U.S. at 688; Conti- nental T.V., Inc. v. GTE Sylvania Inc., 433 U.S., at 50 n. 16; Northern Pac. R. Co. v. United States, 356 U.S., at 4, Finally, we have some doubt-- enough to counsel against ap- plication of the per se rule-~ about the extent to which this practice threatens the "“cen- tral nervous system of the economy," United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 226 n. 59 (1940), that is, competitive pricing as the free market's means of allocating resources. Not all arrangements among actual or D-20 potential competitors that have an impact on price are per se violations of the Sherman Act or even unreason- able restraints. Mergers among competitors eliminate competition, including price competition, but they are not per se illegal, and many of them withstand attack un- der any existing antitrust standard. Joint ventures and other cooperative ar- rangements are also not usu- ally unlawful, at least not as price-fixing schemes, where the agreement on price is necessary to market the product at all. 441 U.S. at 19-20, 23. The recent decision in Ron Tonkin Gran Turismo, Inc. v. Fiat Distributors, Inc., 637 F.2d 1376 (9th Cir. 1981), affirming summary judgment for defendant, applies this_reasoning to a closely analogous case. Plaintiff, a foreign car dealer, complained that defendant, a distributor of Fiat auto- mobiles, had refused to appoint plaintiff as a Fiat dealer pursuant to an agreement with the existing Fiat dealer in the area. Because Fiat's share of the relevant mar- D-21 ket was insignificant, the issue was whether defendants' conduct could be held to be illegal per se. The lower court had determined that Fiat's share of total automobile registrations in the area was less than 2% and that its share of the foreign car market did not exceed 5.2%. 637 F.2d at 1379. The court observed that no evidence had been offered to contradict the find- ing that the product market was charac- terized by vigorous interbrand competi- tion which would not be affected by a failure to increase intrabrand competi- tion for a product with a very small market share. 637 F.2d at 1387. The Court also observed that "an important factor” in defendant's decision not to appoint plaintiff as an additional dealer was "its desire to stimulate [an existing distributor's] sales, i.e., its desire to promote interbrand compe- a *~ ~ "2 Bs a Hotta S ne oe Coke a . gf es ; oa, tae * oS ais i Uh. rk % tow rs ‘ ; ra x ‘ és - bert PO Ne Pay AEE PLEO, PEE AT eee Cag eee eT ee, Sa Ce LEME LIE Seer coms” ie “= BS 9 4 Be = Pe Ais D-22 tition.” Noting that the antitrust laws are primarily concerned with interbrand competition, and that the Sailive to in- crease intrabrand competition by failing to appoint plaintiff a dealer in the cir- cumstances presented not only “was not necessarily pernicious” but had the poten- tial of benefitting competition by in- creasing the sales of defendants, the court determined that application of the per se rule would be unjustified. 637 F.2d at 1387-88. The reasoning of the court of appeals is applicable here. As heretofore dis- cussed, Jhirmack's share of the relevant market is too insignificant for any re- straint on intrabrand competition to have a substantially adverse effect on inter- brand competition. See Mutual Fund In- - vestors v. Putnam Management Co., 553 F.2d 620, 627 (9th Cir. 1977). For plaintiffs to recover, therefore, they D-23 must come forward with evidence to show that "the challenged conduct clearly had, or was likely to have, a pernicious Pree 7 ere ‘ OM Beant) Pe bE oe eee MR a ed eer D-31 B. The Tort Claims Breach of Covenant of Good Faith and Fair Dealing Plaintiffs premise their claim for breach of a covenant of good faith and fair dealing on the assertion that "Jhir- mach terminated plaintiffs for refusing to accede to its illegal agreement with Playtex." (Memo., p. 30.) In light of the preceding disposition of plaintiff's antitrust claim, this claim necessarily fails. Inducing Breach of Contract Plaintiffs complain that Playtex tortiously induced Jhirmack to breach its contract with existing distributors in two ways: by appointing Playtex as an additional distributor, and by subsequent- ly barring existing distributors from any part of the OTC trade. To recover on this claim plaintiffs must prove (1) that a valid contract existed; (2) that Playtex D-32 had knowledge of the contract and in- tended to induce its breach; (3) that the contract was in fact breached by Jhirmack; (4) that such breach was proximately caused by Playtex's unjustified and wrong- ful conduct; and (5) that as a result plaintiffs suffered damage. Richardson v. La Rancherita La Jolla, Inc., 98 Cal.App.3d 73, 80, 159 Cal.Rptr. 285 (1980). Plaintiffs' evidence is insufficient to withstand summary judgment on this claim. Defendants' uncontradicted evidence shows that Jhirmack made its decision to engage a new distributor for the OTC trade before Playtex knew of this plan. The alleged breach therefore could not have been prox- imately caused by Playtex. Defendants also show without contradiction that Playtex ‘understood that the existing agreements li- mited existing distributors to salon cus- tomers and that appointing an OTC distribu- tor therefore would not breach the existing D-33 distributor agreements. While the mean- ing of the contract itself presents a factual issue, as discussed below, defend- ants' evidence thus suffices to show that Playtex did not intend to procure its al- leged breach. Defendants are accordingly entitled to summary judgment on this claim. | Cc. The Contract Claim Plaintiffs claim that their distributor agreements granted them exclusive geogra- phical territories and that Jhirmack breached the agreement when it appointed Playtex as its OTC distributor for the en- tire country in October 1979. The dispute centers on the following paragraph of the distributor agreement: 1. TERRITORY. PRODUCER hereby grants to the DIS- TRIBUTOR the exclusive and non-transferable license to market and to promote sales of PRODUCER'S products. DISTRIBUTOR shall be pri- marily responsible for selling PRODUCER'S products to beauty salons, the owners, operators, and apprentices; beauty schools, the owners, D-34 teachers and udents; barber schools,\the owners, teachers and students; men's hairstyling establishments; barber shops, the owners, barbers and apprentices, in and throughout the area des- cribed in Exhibit "A" attached hereto and incorporated here- in by reference. (This area shall be hereinafter referred to as the "territory"). DISTRIBUTOR shall exclusively devote its entire time and use its best efforts to ex- ploit, promote and sell PRODUCER'S products to said customers within the terri- tory. The license granted to DISTRIBUTOR is an exclu- sive licence in that the PRODUCER will not appoint another distributor within the territory. Exhibit A attached to each agreement spe- cifies a georgraphical [sic] area, such as "The entire state of Utah." Defendants argue that the distributor agreement defined the distributors' ter- ritories to exclude the OTC market, so that in appointing Playtex as its OTC distributor Jhirmack did not violate the promise of exclusivity. In support of this argument, defendants refer to the D-35 language quoted above which specifies that the distributor isto "exclusively devote its entire time" to selling Jhirmack products to beauty salons and other customers in the professional salon trade. Defendants contend that the definition of territory contained in the agreement means merely that Jhirmack could not appoint another distributor to service the same class of professional cus- tomers in a given area. In opposition, the Booth plaintiffs argue that the agreement's promise of ex- clusivity pertains to the entire geogra- phical area described in Exhibit A of each agreement. Under this interpreta- tion, Jhirmack's appointment of a dis- tributor like Playtex to service OTC out- lets within those geographical areas would violate the agreement not to appoint another distributor in the territory, re- gardless of whether the agreement enabled D-36 the distributors themselves to sell to OTC outlets. These conflicting interpretations of the exclusive territory clause raise factual issues requiring a trial on the contract claim. Alternatively, defendants move for judgment on the contract claim on the ground that enforcement of the distributor agreement to prohibit sales of Jhirmack products to OTC outlets would be contrary to law and public policy. It is true that in the earlier trial in this case the Booth plaintiffs appeared to suggest such an interpreta- tion of the agreement. Plaintiffs' pre- sent position, however, is that their agreement did not prohibit Jhirmack from marketing its products in OTC channels but merely required that if sneh-naxketing were to be undertaken, it would have to be through Jhirmack's existing distributors. D-37 So stated, the purpose of the agreement cannot be said to offend law or public policy. Defendants further contend that the Booth plaintiffs' contract claim is barred by the limitations period contained in the distributor agreement. Section 9 of the agreement provides that "no actions + « « May be brought by Producer, or Distributor, against each other, arising out of or relating to this Agreement more than thirty (30) days after a cause of action occurs." Plaintiffs argue, however, that the distributor agreement is a “contract for sale" within the meaning of California Commerical Code Section 2725, which pro- vides that the parties to such a contract may not reduce the period of limitation to less than one year .2/ If plaintiffs are correct, the 30 day limitation period contained in the contract is not enforce- D-38 able. The issue turns, then, on the characterization of the distributor agreement. According to Commercial Code Sec- tion 2106, the term "contract for sale” “includes both a present sale of goods and a contract to sell goods at a future time." Section 6 of the distributor agreement states that it "constitutes the entire understanding and agreement between the parties with respect to the sale of Producer's products." Section 2 provides that "(t]he Distributor shall purchase Producer's products ... at prices scheduled on the Producer's price list," which "Producer, in its sole opi- nion, may change from time to time.” A price list is attached as an exhibit to the agreement. Section 3 requires monthly minimum purchase requirements, set forth in detail in an exhibit appended to the agree- ment. D-39 Thus the distributor agreement com- mits the distributor to purchasing mini- mum amounts of Jhirmack products within certain fixed periods, and defines the terms and conditions for those purchases, While the agreement contains terms not relating strictly to sales, its purpose and effect is clearly to provide for the sale of goods by Jhirmack to its distribu- tors. The distributor agreement is there- fore a contract to sell goods at a future time and hence a "contract for sale" with- in the meaning of Commercial Code §§ 2106 and 2725. See Hachten v. Stewart, 42 Cal. App.3d Supp. 1, 116 Cal.Rptr.631 (1974) (gasoline dealer's contract); Steiner v. Mobil Oil Corp., 20 Cal. 3d 90, 98, 141 Cal.Rptr. 157 (1977) (gasoline dealer's contract); Warner Motors, Inc. v. Chrysler Motors Corp., 5 U.C.C.Rep.Serv. 365 (E.D. Pa. 1968) (automobile dealership agree- ment). Under §2725, the 30 day limitation D-40 period provided in the contract is unen- forceable, and does not bar plaintiffs' breach of contract claim.2/ If at the trial it is found that Jhirmack breached its contract with plain- tiffs by appointing Playtex as its OTC distributor in October 1979, the issue of the proper measure of damages will arise. The agreement entitled either party to terminate on 30 days' written notice. Jhirmack gave plaintiff written notice of termination in December 1979, and plaintiffs do not contend that the no- tice of termination was not effective. Plaintiffs' damage claim would therefore be limited to lost profits during the period from the date of the alleged breach (October 1979) to the effective date of the termination (January 1980). ORDER 1. Summary judgment is granted in favor of defendant Jhirmack Enterprises, D-41 Inc. in action C-78-1227, defendant to recover costs. 2. Summary judgment is granted in favor of defendants Redding, Schwartz, Playtex, Smilow, and Esmark and against plaintiffs on all claims in action C-80- 0249, defendants to recover costs, 3. Summary judgment is granted in favor of defendant Jhirmack Enterprises, Inc. on all claims in action C-80-0249 except the claim for breach of contract. 4. Further proceedings will be governed by the following provisions: a. The court will hold a pre- trial conference on the re- maining claim on Friday, August 28, 1981, at 3 p.m. b. Plaintiffs in action C-80-0249 are directed to serve and file by August 21, 1981, their pretrial statement with respect to their con- D-42 tract claim, setting forth i. ii. iii. iv. The name of each witness to be called and a brief summary of the testimony to be given; A Gescription of each ex- hibit to be offered; A detailed computation of the damages claimed, together with specific references to the source for each figure used in the computation. Any additional discovery required for trial. Jhirmack shall serve and file by August 21, 1981, a pretrial statement with respect to any counterclaim it intends to take to trial, conforming to the preceding paragraph b. D-43 d. Trial of all remaining claims will begin on September 21, 1981, at 9:30 a.m. IT IS SO ORDERED. DATED: July 9, 1981. /s/ William W. Schwarzer WILLIAM W. SCHWARZER United States District Judge FOOTNOTES i/ Plaintiffs' claim of resale price maintenance has heretofore been dismissed. Moreover, at the prior hearing, counsel represented that no claim of a price- fixing agreement was being made, (Tr. 1137) 2/ and 19. 3/ See second amended complaint, para. VIII, Ix. 4/ At oral argument counsel for these plaintiffs advised that the only claims now being asserted by them were a horizontal price fixing claim under federal and state antitrust laws, a claim against Jhirmack for breach of the distributor agreement and breach of a convenant of good faith, and a claim against Playtex for inducing breach of contract. See 433 U.S. at 51-58, notes 18 3/ Another factor considered by the court in Ron Tonkin was the motivation be- hind the challenged conduct. Regarding the negotiation of the Jhirmack-Playtex agreement, Playtex General Counsel Joel Coleman testified, "I knew that getting an exclusive right to sell to the OTC trade was essential to us... [the effect of the agreement was to] grant Playtex the rights that it needed." (Dep. of July 25, 1980) Playtex evident- ly considered the restriction complained of necessary to achieve the procompeti- tive results envisioned. As the court said in Ron Tonkin, 637 F.2d at 1387, "The courts have recognized the benefit to encouraging the promotion of inter- brand competition which occurs by allow- ing a business to distribute its pro- ducts in a particular fashion," citing GTE Sylvania, 433 U.S. at 54. D-45 8/ See 509 F. Supp at 365-66, note 3; complaint pp. 6-7. z/ For the same reasons, other authorities cited by plaintiffs are in- apposite. See Alloy Int'l. Co. v. Hoover=-NSK Bearing Co., Inc., 635 F.2d 1222 (7th Cir. 1980); Girardi v. Gates Rubber Co. Sales Division, Inc., 325 F.2d 196 (9th Cir. 1963). United States v. General Motors Corp., 384 U.S. 127 (1966), involved a conspiracy between an association of Chevrolet dealers and General Motors to force dealers to stop selling to discounters by policing their sales, forcing them to repurchase cars and threatening termination. 8/ California Commercial Code § 2725 provides in relevant part: (1) An action for breach of any contract for sale must be commen- ced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limita- tion to not less than one year but may not extend it. 9/ Jhirmack cites Hancock Oil Co. v. McClellan, 135 Cal.App.2d 667 (1955), which held a gasoline dealership con- tract not to be a "contract of sale." That case is distinguishable. First, as the case preceded the adoption of the Uniform Commercial Code in Califor- nia, the court was not concerned with the definition of "contract for sale" in §2106, nor does the opinion contain a cognate analysis. Second, the contract in that case defined the terms of future sales with much less precision than the contract here; the court found it "too uncertain to constitute a valid contract." 135 Cal.App.2d at 670. APPENDIX E UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA Case No. C=-78=-1227 WWS JBL ENTERPRISES, Inc., et al., Plaintiffs, Vv. JHIRMACK ENTERPRISES, INC., Defendant. CONSOLODITED FOR LIMITED TRIAL WITH Case No. C-80-0249 WWS AL BOOTH, et al., Plaintiffs, Vv. JHIRMACK ENTERPRISES, INC., et al., Defendants. FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OF OPINION ON ISSUES OF RELEVANT MARKET, MARKET SHARE AND LAWFULNESS OF TYING ARRANGEMENT William W. Schwarzer, District Judge, Presiding. Filed February 25, 1981 FINDINGS OF FACT, CONCLUSIONS OF LAW, AND MEMORANDUM OF OPINION ON ISSUES OF RELEVANT MARKET, MARKET SHARE AND LAWFULNESS OF TYING ARRANGEMENT I. PROCEDURAL BACKGROUND JBL Enterprises, Inc,, et al. v, Jhirmack Enterprises, Inc., C-78-1227-WWS, This action is brought by three former distributors, JBL Enterprises, Inc. (formerly doing business as Jhirmack of Utah); Jean Robinson (formerly doing business as Jhirmack of Idaho and Jhirmack of Boise); and Lois Jean Million (formerly doing business as Jhirmack of Indiana and Jhirmack of North Central Indiana), against Jhirmack Enter- prises, Inc. ("Jhirmack"), the manufacturer of a line of beauty and cosmetic products sold throughout the United States under the name "Jhirmack" and formerly distributed by plaintiffs. The three plaintiffs allege that Jhir- mack violated Sections 1 and 2 of the Sher- man Act and Section 3 of the Clayton Act by imposing unreasonable customer and ter- E-2 ritorial restrictions, tying undesired products to the right to purchase desired products and to the right to use Jhirmack's name, and wrongfully terminating distribu- torships. Additional counts allege breach of contract, fraud, negligent misrepresenta- tion and interference with business. Alfred Booth, et al. v. Jhirmack Enterprises, Inc., et al., C-80-0249-WWS. This action is brought by two former dis- tributors of Jhirmack, Jhirmack of Washington, D.C., Inc.; Thelma R. Bean and Alfred Booth, respectively president and vice president of Jhirmack of Washington, D.C., Inc.; Jhirmack of Southwestern Pennsylvania, Inc.; and Walter Cecchini, president of Jhirmack of Southwestern Pennsylvania, Inc., against Jhirmack; Mrs. Irene Redding, president and chief executive officer of Jhirmack; Albert L. Schwartz, Secretary- Treasurer of Jhirmack; Gary McCord, vice E-3 president of Jhirmack for marketing; International Playtex, Inc. ("Playtex"); Joel E. Smilow, president of Playtex; and Esmark, Inc., the parent corporation of Playtex. The Booth complaint alleges various antitrust violations arising out of the agreement between Jhirmack and Playtex assigning to Playtex the exclusive rights to distribute Jhirmack products nationally to over-the-counter outlets. Plaintiffs allege that the contract violates Section 1 of the Sherman Act, that Playtex and Jhirmack have monopolized, conspired to monopolize and attempted to monopolize in violation of Section 2 of the Sherman Act, that plaintiffs were wrongfully ter- minated in violation of Section 3 of the Clayton Act, that the option agreement between Playtex and Jhirmack violates Section 7 of the Clayton Act, and that Jhirmack committed various other anti- trust violations including tying and E-4 territorial restrictions. The remaining 16 counts of the complaint, based on the same facts, consist of counts of false labelling and interference with the Constitutional right of free association, and various pendent state claims including fraud, breach of contract, negligent and intentional interference with contract, intentional infliction of emotional distress, etc. On June 12, 1980, pursuant to Fed.R. Civ.P. 42, the Court, with the consent of the parties, consolidated the two actions for a separate trial of all issues re- garding (1) the relevant market, (2) de- fendant Jhirmack's share of the relevant market, and (3) whether Jhirmack insti- tuted an unlawful tying arrangement as to any of its products. See Pretrial Order No. 1, a copy of which is attached as Exhibit A. The Pretrial Order reserved for later trial issues regarding justifi- E-5 cation, causation, and damages for any proven tying arrangement, and other liability issues. On August 15 and September 12, 1980, pretrial conferences were held to discuss subsequent proceed- ings.2/ Pursuant to the provisions of para- graph 5 of the Pretrial Order, the parties made written submissions before the trial. Plaintiffs filed a joint trial brief, and narrative written statements by James Schilt, a financial analyst, on market share, Gary McCord, former vice president of marketing for defendant Jhirmack and himself a named defendant who settled with plaintiffs, on various marketing poli- cies of Jhirmack; John Williams, president of plaintiff JBL Enterprises, Inc., on his company's experiences as a Jhirmack dis- tributor; Walter Cecchini, plaintiff and president of plaintiff Jhirmack of South- western Pennsylvania, Inc., on his company's E-6 experience as a Jhirmack distributor; and Alfred Booth, plaintiff and vice president of plaintiff Jhirmack of Washington, D.C., Inc., On his company's experience as a Jhirmack distributor. Defendant Jhirmack filed a brief, and narrative written statements by Irene Redding, president and chief executive of- ficer of defendant Jhirmack and a named defendant, regarding the relevant market and tying issues; Dr. G. Stephen Jizmagian, an economist, regarding the relevant market; Rafael Akyuz, vice president for research and development of defendant Jhirmack, on flexibility of production in the beauty and cosmetics industry; and Robert Cordell, vice president for manufacturing of defend- ant Jhirmack, on flexibility of production in the beauty and cosmetics industry. Defendant Playtex filed a brief, and narrative written statements by Mark Lowenthal, director of marketing for the E-7 Family Products division of defendant Playtex, on relevant market, Playtex's marketing analysis and decisions, and the effect of the Jhirmack-Playtex marketing agreement on competition; and Dr. James Carman, professor of business administra- tion, on relevant market, Jhirmack's share of the relevant market, and the effect of the alleged restraint upon competition in the relevant market. On September 22, 23, 24, and 25, 1980, and January 12, 1981, the relevant market, market share, and tying issues were tried to the Court. Mrs. Redding, Mr. McCord, Mr. Schilt, Mr. Williams, Mr. Lowenthal, Mr. Booth, Mr. Cecchini, Dr, Jizmagian, and Dr. Carman appeared, their written statements were received as exhibits and they were examined and cross-examined by counsel. The narrative written statements of Mr. Akyuz and Mr. Cordell were received as exhibits. Plaintiffs also called as a E-8 witness John White, a beauty supply dis- tributor and former sales manager and distributor coordinator for defendant Jhirmack. The parties have submitted briefs and oral argument has been heard... The ruling which follows constitutes the Court's findings of fact and conclusions of law on the foregoing bifurcated issues. II. FACTUAL BACKGROUND Defendant Jhirmack manufactures a line of hair care and beauty products which are distributed throughout the United States by licensed distributors. The company was founded in 1968 by Jheri Redding and his wife Irene Redding. Jhirmack introduced its first line of hair and beauty products in 1972. Presently shampoos and condi- tioners account for approximately 80% of its production. Jhirmack initially ar- ranged to market its products to consumers exclusively through what are called profes- sional outlets or the salon trade, con- E-9 Sisting of beauty salons, barber shops, hair styling establishments, beauty schools, barber schools, and beauty sup- ply houses. Jhirmack assigned geographic areas to independent distributors, who were required to devote their best efforts to distribute Jhirmack products to profes- Sional outlets. Although Jhirmack initially manu- factured its products for resale exclu- Sively through professional outlets, some of Jhirmack's products were "diverted" by distributors for eventual resale to con- sumers through other distributors and other types of outlets, including discount houses, drug, food, and department stores (referred to as "over-the-counter" or "OTC" outlets). Jhirmack received com- plaints from salon owners and distributors about instances of diversion to OTC out- lets, and took steps to identify the dis- tributors involved and to discourage this at _ a) le E-10 activity. Since 1974, Jhirmack, relying on the provision in the distributor agreements obligating distributors to comply with company policies asd procedures, has re- quired its distributors to place an initial order for a specified quantity of each new product. Under this "new product quota" program, Jhirmack calculated each distribu- tor's quota based on the number of potential professional accounts in that distributor's territory. Jhirmack warned its distributors that it would not fill orders which did not include the new products required under the quota program, and on occasion has rejected orders for that reason. In April 1978 Jhirmack cancelled the distributorship of plaintiff JBL Enter- prises, Inc. JBL had refused over a period of several months to order certain new pro- ducts as required under the quota program, and had participated in diverting Jhirmack E-11 products to OTC outlets, On October 9, 1979, Jhirmack arranged to market its products through OTC outlets by appointing Playtex exclusive distribu- tor of its products "for all channels of trade excluding the professional salon trade." The agreement obligated Playtex to make certain expenditures for promo- tion and advertising of its Jhirmack products. Playtex presently distributes seven Jhirmack iment and conditioner products, including two shampoos and four conditioners known as the "Basic Six" (E.F.A. Shampoo, Gelave Shampoo, Moisture- pHlex Conditioner, pHinale Conditioner, N.C.A. Conditioner, and NutriPak Condi- tioner). These six products accounted for approximately 67 to 68% of Jhirmack's sales in 1977, 1978, and 1979. Following the execution of the mar- keting agreement with Playtex, Jhirmack sent new distributorship agreements to its E-12 existing distributors under which they were to continue the exclusive distribution of Thirmack products through professional out- lets but with the understanding that Playtex would soon begin operating as exclusive dis- tributor of Jhirmack products to OTC outlets. The Booth plaintiffs are former Jhirmack distributors who were offered the revised distributorship contracts at that time but refused to sign them. Jhirmack terminated those plaintiffs' distributorships in December 1979. This opinion addresses two issues: (1) What is the relevant market for the purpose of determining whether the res- traints allegedly imposed by Jhirmack on its distributors' selling outside of their territory and to purchasers other than pro- fessional or salon outlets, and the alleged tying arrangements, could be found to have an impact on competition; and (2) Does Jhirmack's new product quota, requiring its distributors to place an ini- E-13 tial order for each new product, consti- tute an unlawful tying agreement. Part III of the opinion will deal with the first issue, part IV with the second. III. THE ALLEGED RESTRAINTS ON CUSTOMERS AND TERRITORY-RELEVANT MARKET For purposes of this opinion, the Court accepts the allegations of the com- plaints to the effect that Jhirmack imposed customer and territorial restrictions on the sale of its products by its distributors. Those restrictions are alleged to be unreason- able restraints of trade .2/ Under the rule of reason analysis, plaintiffs must demonstrate that defendant's alleged conduct had an impact on competition in the relevant market. In DeVoto v. Pacific Fid. Life Ins. Co., 618 F.2d 1340, 1344-45 (9th Cir.), cert. denied, 101 S.Ct. 206 (1980), the Ninth Circuit stated the control- ling principles as follows: A crucial aspect of a plain- tiff's case under the rule of E-14 reason is a demonstration that the alleged conduct of the defendant had some mar- ket impact. See Times- Picayune Publishing Co. v. United States, 345 U.S. 594, 615, 73 S.Ct. 872, 883-84, 97 L.Ed. 1277 (1953); As- sociated Press v. United States, 326 U.S. 1, 27, 65 S.Ct. 1416, 1428, 89 L.Ed. 2013 (1945) (Frankfurter, J., concurring); American Motor Inns, Inc. v. Holiday Inns, Inc., 521 F.2d 1230, 1247 (3d Cir. 1975). As this court recently stated, "Un- less the alleged anticompe- titive conduct is per se un- reasonable, the fact that the conduct restrained trade in a relevant market is an essential part of a plain- tiff's case . .. and the burden of establishing it lies on him." Gough v. - Rossmoor Corp., 585 F.2d 381, 385 (9th Cir. 1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59 L.Ed.2d 494 (1979). This court and others have repeatedly em- phasized that "[t]he anti- trust laws .. . were en- acted for 'the protection of competition, not competitors.'" Brunswick Corp. v. Pueblo Bow-O-Mat, Inc. [sic], 429 U.S. 477, 488, 97 S.Ct. 690, 697, 50 L.Ed. 2d 701 (1977) (quoted in Gough, supra, 585 F.2d at 386) (empha- Sis in original) (citation omit- ted), and therefore the plain- tiff must show something more E-15 than simply an adverse effect on his own business; he must show "an adverse impact on the competitive conditions in general as they exist within the field of commerce in which the plaintiff is engaged." Gough, supra, 585 F.2d at . Absent per se viola- tion, competitive injuries must be defined in terms of a discrete market. * * * The Supreme Court has stated that the appropriate focus in determining rea- sonableness under section 1 focuses on "the percent- age of business controlled, the strength of the re- maining competition, [and] whether the action springs from business requirements Or purpose to monopolize." United States v. Columbia Steel Co., 334 U.S. 495, 527, 68 S.Ct. 1107, 1124, 92 L.Ed. 1533 (1948) (quoted in Times- Picayune Publishing Co. v. United States, 345 U.S. 594, 615, 73 S.Ct. 872, 884, 97 L.Ed. 1277 (1953)). The analysis must therefore begin with a determination of the relevant market, i.e., "the field of commerce in which the plain- tiff was engaged." Gough, 585 F.2d at 389. E-16 The burden of proving the relevant market rests on plaintiff. Id., 585 F.2d at 385. At the trial plaintiffs undertook to prove a relevant market comprising sales of shampoos and conditioners at retail by beauty salons and professional outlets. The Court rejects the market proposed by plaintiffs for two separate and indepen- dent reasons: (1) It does not comprise the field of commerce in which plaintiffs are engaged; (2) It does not constitute a dis- tinct submarket within the market comprising the sale of shampoos and conditioners to consumers. In the discussion which follows, the Court will analyze the evidence bearing on each of the foregoing propositions. Before doing so, however, a threshold is- sue must be addressed with respect to the E-17 Booth action: whether the injury complained of is cognizable antitrust injury. A. The Booth Action Does Not Allege Injury Cognizable Under the Antitrust Laws. Section 4 of the Clayton Act (15 U.S.C. § 15) permits recovery of damages under the antitrust laws by "[a]ny person who shall be injured in his business or property by reason of anything forbidden in the anti- trust laws ..." To recover damages plain- tiff "must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlaw- ful." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977) (emphasis in original). As the Ninth Circuit stated in Cal. Computer Products v. Intern, Business Machines, 613 F.2d 727, 732 (9th Cir. 1979): Satisfying the latter burden is dependent on a showing that the injury was caused by a reduction, rather than an increase, in competition flowing from the defendant's acts, since "[t])he antitrust E-18 laws .. . were enacted for ‘the protection of competition not competitors,'”" Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. at 488, 97 S.Ct. at 697, quoting Brown Shoe Co. v. United States, 370 U.S. 294 320, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). See Oreck Corp v. Whirlpool Corp., 579 F.2d 126, 133 (2d Cir. 1978). Accordingly, the plaintiff must demonstrate that the defendant's conduct was intended to or did have some anticompetitive effect beyond his own loss of business or the market's loss of a competitor. The Booth action appears to have been initiated in total disregard for these clear and settled principles. The substance of the complaint's charging allegations is con- tained in paragraph 17, which states in relevant part that fAefendants Jhirmack, Redding, Schwartz, McCord, and each of them, have engaged in agree- ments, combinations, and con- spiracies with defendants Play- tex, Smilow, Esmark, and other unnamed co-conspirators, and each of them, to unlawfully restrain the aforesaid trade and commerce in violation of Section 1 of the Sherman Act, and have specifically entered into a marketing agreement which would grant defendants E-19 Playtex, and each of them, [sic] a license to sell the Jhirmack products to re- tailers; have attempted to monopolize, have monopolized, and will continue to mono- polize, and have combined and conspired to monopolize, the aforesaid trade and com- merce in violation of Section 2 of the Sherman Act by wrong- fully terminating without cause the Distributor Agree- ments of plaintiffs, and each of them, in order to allow defendants Playtex, Smilow, Esmark, unnamed conspirators, and each of them, to enter the territory of plaintiffs and to market said Jhirmack products over-the-counter in retail stores, thereby com- peting unfairly and substan- tially lessening competition and tending to create a mono- poly in the aforesaid trade and commerce in violation of Section 3 of the Clayton Act. Paragraph 18 enlarges on these allega- tions, complaining that because of Jhirmack's agreement with Playtex, providing for the distribution of Jhirmack products by Playtex through OTC channels in addition to the existing distribution to professional outlets by Jhirmack's own distributors, E-20 plaintiffs lost the exclusive terri- tories and markets they had developed in the salon trade. These allegations on their face do not state a claim actionable under the antitrust laws .2/ Even if, as the Booth plaintiffs claim, their ability to sell Jhirmack pro- ducts to salons has been injured by Playtex's distribution of Jhirmack shampoos and condi- tioners to OTC outlets, given the preference of salons to sell brands having no OTC dis- tribution, that injury results from an in- crease in competition, not a restraint on competition. The antitrust laws are intended to protect competition, not individual com- petitors. Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848, 855 (9th Cir. 1977), cert. denied, 439 U.S. 829 (1978). Regardless of the outcome of the relevant market analysis, the Booth plaintiffs would be precluded from recovering for injury to their businesses for failure to show anti- E-21 trust injury under Brunswick. See BBD Transportation Co. v. Southern Pacific Transportation Co., 627 F.2d 170, 172 (9th Cir 1980); Murphy Tugboat Co. v. Crowley, 454 F.Supp. 847, 852 (N.D. Cal, 1978) (on appeal). This matter will be considered in further proceedings as pro- vided below. Apart from the foregoing defect, however, the Booth action would be governed by the same relevant market analysis as the other actions discussed in the following sections. B. The Relevant Market Comprises the Sale of Beauty Products to Professional Outlets. 4/ Under Gough v. Rossmoor Corp., the rele- vant market consists of the field of com- . Merce in which plaintiff is engaged. 585 F.2d at 389. The initial step in the rule of reason analysis must be the "consideration of the impact of the restraint on the compe- titive conditions within the field of commerce E-22 in which the plaintiff was engaged." Id. } Plaintiffs were engaged in the dis- tribution and sale of beauty products, prin- cipally but not exclusively shampoos and conditioners, to beauty salons and other types of professional outlets. The alleged restraints affected plaintiffs in the whole- sale distribution of Jhirmack products. Thus, JBL's first amended complaint alleges that plaintiffs' distributorship agreements with defendant Jhirmack were "subject to unreasonable territorial and customer res- traints, thereby precluding its distribu- tors from free and unrestricted competition." (p.4) The customer restraint alleged was the specification in the distributorship agreement that distributors were to sell Jhirmack products to beauty salons, beauty schools, barber schools, and men's hairstyl- ing establishments. Plaintiffs complain that they were not allowed to sell ghirmack pro- E-23 ducts to other distributors, This res- triction had the effect of "eliminating the discounting of defendant's products by distributors, subdistributors, beauty and barber supply houses, cash-and-carry stores, salons, discount houses, drug stores and other entities . .. thereby precluding its distributors and other sellers of the products from free and un- restricted competition." (p.4) Even if the effects of any restraint may have been felt throughout the chain of distribution, the impact of the alleged territorial and customer restrictions fell upon plaintiffs in their sales to professional outlets. The distribution of shampoos and conditioners, and other beauty products as well, occurs through several channels, as the following diagram shows: " 4 My t Serler ant Beauty Salon Distributors Supply Hones oe Distributors ‘. ° ’ . . Me J Independent Inteqrated Wholesslers Wholesalers 4 Ar ' ae \ ¢ “i 4 . > ‘ ¢ , ‘ Phe n Noor to-door Oaper vrent foot Ong mes Salons, Shops, Salespersons} Stores Stores Stores terchwndisers Schools CONSUMERS (Def. Ex. IPT -B) v7-a E-25 Plaintiffs, at least according to the position they have taken in this trial, sell only to salon and other professional outlets. That field of commerce is distinct from other channels of distribution. Plain- tiffs compete with other so-called single line distributors, i.e., distributors car- rying the products of only a single manu- facturer. They also compete wich barber and beauty supply houses, or jobbers, which carry a number of different lines for dis- tribution to the professional trade. Fi- nally they compete to a minor extent with those manufacturers who sell directly to the professional trade. The relevant market in which plaintiffs compete - and in which the impact of any restrictive practice must be evaluated - is therefore the market for the sale of relevant products to the professional trade. See Tire Sales Corp. v. Cities Service Oil Co., 410 F.Supp. 1222 (N.D. Ill. 1976) (rele- E-26 vant market defined as sales of tires, batteries and accessories to service sta- tions and other retail outlets in South Chicago); South End Oil Co. v, Texaco, Inc., 237 F.Supp. 650 (N.D. 111.1965) (rele- vant market consisted of discount houses and other retailers to which plaintiff sold). Plaintiffs contend that the relevant products must be limited to shampoos and .conditioners. They argue that shampoos and conditioners represent about 80% of Jhir- mack's sales, and that the Playtex arrasee- ment for OTC distribution applies only to 5/ shampoos and conditioners.= Plaintiffs rely on the general principle that the relevant product market consists of “those commodities reasonably interchangeable by consumers for the same purpose." United States v. E.I. du Pont & Co,, 351 U.S. 377, 395 (1956). The principle of reasonable inter- E-27 changeability must, however, be applied with reference to the specific market in- volved. While shampoo and lipstick are, of course, not interchangeable f [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_1232%3A1. Public record. Not legal advice.