# Appendix — Knuth v. Erie-Crawford Dairy Cooperative Ass'n > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1698%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1973 - **Citation:** 410 U.S. 913 ## Text — la APPENDIX A (Filed June 28, 1972.) UNITED STATES COURT OF APPEALS For rue Turmp Circuit — Nos. 71-1541 thru 71-1548 Rossxt M. Kxwurn, on behalf of himself and on behalf of all other members of the class who are similarly situated, Exe-Crawrorp Damy CoopreRraTIvE Association, Wi11AM Courervans & Sows, Ivc., Kuzrs Damy, LixceRLicnt Damy Company, Scuxemwer’s Darry, Ixc., Syee Damy Compaxy, Ente Damy Laxo, Ixc., GoLpEN Crows Darry, Scurver’s Damy, Yarue’s Damy, Ixc., Gotpex Giow Damy, Seautest Foops, Division oF Natrowat Damy Provvcts Corporation, Howarp Yost, Joux Havas, Russet Raysuck, Micron CULBERTSON, DowaLp Tris- cvrr, Raymonp Boyp, Catvix Henry, Roy Brack, Lorex Mireuett, Cartes Spap. Rosext M. Kxvtn axp Rosert W. Braver and others simi- larly situated by their attorney, Pavut A. Suumons, Applicants in No. 71-1541. Enre-Crawrorp Darry Cooperative AssociaTion, Appellant in No. 71-1542. Howanrp Yost, Appellant in No. 71-1543. Wuuus Coureryany & Sons, Lyc. Appellant in No. 71-1544. Lixcerticut Dairy Company, Appellant in No. 71-1545. Exe Damy Lanp, Ixc., Appellant in No. 71-1546. Goupex Guow Dary, Appellant in No. 71-1547. Yarie’s Damy, Ixc., Appellant in No. 71-1548. (D.C. Civil Action No. 65-1328.) 2a Appeal rrom THe Usrrep States Distaictr Cover yor THE WesTeRN District or PeNNsYLvaNua Argved April 17, 1972. Before Adams, Gibbons and Rosenn, Circuit Judges, Grssons, Circuit Judge This case is before us for the second time. Originally it came before us on the appeal of the class representative (the plaintiff) from an order dismissing his complaint for failure to state a claim. The complaint was in three counts and the appeal challenged only the dismissal of Counts | and III. Count I alleged violations of sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§1, 2 and sought under section 4 of the Clayton Act, 15 USC. § 15. Count III alleged a conversion under Pennsylvania law and claimed pendent jurisdiction. We held that the allegations of Count I, though confused and obscure, alleged a claim under § 4 of the Clayton Act sufficient to escape dismissal under Fed. R. Civ. P. 12(b)(6). We remanded with a direction that the court follow the proce. dures specified in Fed. R. Civ. P. 23(c) in determining whether a class action was properly involved, and if so, the proper ambit of the class." We also held that the conver- sion count was within the district court’s pendent jurisdic. tion. Knuth v. Erie-Crawford Dairy Coop. Association, 395 F.2d 420 (3d Cir. 1968). Following the remand the district court caused notice to be mailed to 1200 Pennsylvania milk producers whom the plaintiff sought to represent. Approximately 900 of the 1200 opted out. Thereafter the case proceeded to trial before a jury on the issue of liability only. At the conelv- sion of the plaintiff’s case the district court granted defend- ants’ motion for a directed verdict on Count I and denied, 1 Hereinafter alternatively referred to as the plaintiffs and the producers. —_ 3a axept for two defendants, a similar motion on Count IIT. That count went to the jury at the end of defendants’ case on written interrogatories which resulted in verdicts against each remaining defendant. Thereafter the district court granted motions for judgments notwithstanding the verdict n favor of several individual defendants. It also granted a notion for judgment notwithstanding the verdict in favor of all defendants contrary to jury interrogatory Number 8 on the issue whether the Pennsylvania six year statute of jmitations had been tolled. It ruled that damages would ie limited to those suffered by the class members who had skected against opting out of the class action. The district court certified that there was a controlling question of law the disposition of which would materially advance the ulti- mate termination of the litigation. We granted a petition for an interlocutory appeal. 28 U.S.C. §1292(b). The plaintiff and those defendants against which a verdict was allowed to stand have appealed. The several appeals pres- ent a variety of issues. The dispute arises out of the persistent and largely futile efforts of the Pennsylvania Milk Control Commission (the Commission) acting under a statutory mandate to insulate the Pennsylvania dairy industry from price competition.” The plaintiffs-producers are dairy farmers whose herds produce milk in Erie and Crawford Counties in western Pennsylvania. The defendant Erie-Crawford Dairy Coop. Association (the Cooperative) is a non-profit agricultural cooperative marketing association organized under Penn- sylvania law, of which the plaintiffs are member-stock- holders. The producers, during the relevant period, entered into contracts with the Cooperative whereby each agreed to consign all milk and eream produced by him to the € £ }- : ‘ ™ 3] Pa. Stat. Ann. § 700j-101 et seq. See Milk Control Board v. Eisenberg Farm Products, 306 U.S. 346 (1939); Penn Dairies v. Wilk Control Commission, 344 Pa. 635, 26 A-2d 431 (1942), aff’d 18 U.S. 26] (1943); Colteryahn Sanitary Dairy v. Milk Control Commission, 332 Pa. 15, 1 A-2d 775 (1938). & z > aati PI | ry 4a Cooperative for sale ‘‘. . . to such parties and by such methods as the Board of Directors shall deem to be to the best advantage of the Producer’? (Exhibit 109, Article Third). Under the standard contract the Cooperative has the right to pool the proceeds of sale of milk or cream derived from all the producers. It then must pay each producer his share of the proceeds of sale ‘‘. . . after making all authorized deductions hereinafter provided for or authorized by law’’ (Exhibit 109, Article Third). The agreement provides for deduction from the proceeds of sale of amounts to cover statutory reserves, dividends on pre- ferred or common stock, and ‘‘. . . all operating expenses including transportation, selling and processing costs . . .” (Exhibit 109, Article Fourth). The individual defendants (the directors) are producers who served as directors of the Cooperative between the years 1957 and 1965. With the exception of Howard Yost none were officers of the Cooperative during those years, Two individual defendants made a successful motion for a directed verdict. The jury verdict found the remaining individual defendants liable for conversion, but with the exception of Yost all were granted judgment notwithstand- ing the verdict. From 1957 through 1965 the Cooperative sold milk and cream to various milk distributors (the handlers)? who 2 The following handlers received price adjustments and were named as defendants in this action: Colvins Dairy Erie, Pennsylvania Erie Dairyland, Inc., Erie, Pennsylvania Golden Crown Dairy, Erie, Pennsylvania Golden Glow Dairy, Erie, Pennsylvania Klein’s Dairy, Farrell, Pennsylvania Lingerlight Dairy Co., New Castle, Pennsylvania Rieck Dairy Co., Erie, Pennsylvania Schneider’s Dairy, Inc.. Pennsylvania Snee Dairy, Inc., Pittsburgh, Pennsylvania William Colteryahn & Sons, Pittsburgh, Pennsylvania Yaples Dairy, Inc., Erie, Pennsylvania Schruer’s Dairy, Edinboro, Pennsylvania 5a processed the milk and sold it either as fluid milk or in manufactured milk products. During those years a portion of the milk industry in the Erie and Pittsburgh markets was subject to regulation by the Commission. The Com- mission specified minimum producer prices which handlers were required to pay for milk received at Pennsylvania plants from Pennsylvania producers. For purposes of state regulation the Cooperative is deemed a producer. Each of the handler defendants in all or part of the years 1957 through 1965 had a plant in Pennsylvania and bought milk for that plant from the Cooperative. At the same time, each handler defendant was at all times free under Pennsylvania law to purchase milk for its Pennsylvania plants from producers in adjoining states. The jurisdiction of the Commission did not extend to such interstate sales of milk. The only practical limitation on the ability of a Pennsylvania milk handler to purchase milk from producers in other states was the cost of refrigerated transportation. Under the Commission’s regulations the price paid by handlers to producers depended upon a system of classifi- eation reflecting the use to which the milk was put by the handlers, although all milk met the same standards of quality and purity. In western Pennsylvania in the years in question the Commission had established four use classi- fications : Class I Bottled Drinking Milk, Skim Milk, Butter- milk Class II Fluid Cream, Ice Cream Mix, Cottage Cheese, Sour Cream Class III Butter, Cheese, Skim Milk Powder Class IV Evaporated Milk Class I is called ‘‘fluid’’ milk. All other classes are called “non fluid’’ or ‘‘manufactured”’ milk. At all relevant times the Commission’s fixed price for Class I or ‘‘fluid’’ milk was much higher than that for all other classes. Thus it was Ee we one 92 SE EQN a 6a in the best interest of a producer to dispose of his milk to a handler whose resale business produced a high Class | utilization. When the producer sent his milk to the Cooperative he did not know for what purpose it would be used. Moreover the proceeds of sale which he would ultimately receive were determined only after three steps: (1) (2) (3) Calculation of the handler’s blend price. At the end of each month the handler reported to the Commission and to the Cooperative its utilization in each class. The handler paid a price per hun- dred-weight calculated by applying to the class prices fixed by the Commission a percentage of utilization in that class. The result was a blend price per hundred-weight, which would vary down. ward from the Class I price depending on the percentage of ‘‘non fluid’’ uses to which the milk had been put. The blend price was further ad- justed to reflect the butterfat content of the milk received from various sources. Calculation of the Cooperative’s pool price. The Cooperative collected the monthly blend price from each handler. These receipts were all pooled. From the pooled receipts the Cooperative de- ducted the operating expenses and reserves re- ferred to hereinabove. The total number of pounds of milk received each month was then divided into the net pool proceeds to derive the pool price per hundred-weight for each hundred-weight sold, cal- culated on the basis of a standard butterfat con- tent. Calculation of each producer’s share of the pro- ceeds. The Cooperative would adjust each pro- ducer’s share of the proceeds depending on the cost of collecting his milk on the farm and the butterfat content of the milk he shipped. ——— Ta During the years in question milk production rose sub- stantially throughout the Northeast. At the same time the prices fixed by the Commission for intrastate sale of Penn- sylvania milk were substantially higher than the price of similar milk produced in Ohio, New York, and other states. Thus even when the cost of refrigerated transportation was taken into account each handler with a plant in western Pennsylvania could supply the fluid milk requirements of that plant with out of state milk at prices substantially jower than the Class I price fixed by the Commission. This left the Cooperative with these choices: 1. It could sell its members’ milk to handlers outside of Pennsylvania free of price control by the Com- mission, at the available market price which was lower than the Pennsylvania Class I price. 9. It could sell its members’ milk to Pennsylvania handlers for non-fiuid uses at a price level where the Pennsylvania non-fiuid price and the interstate price equalized. 3. It could seek to hold as customers those handlers whose resale business resulted in a high utilization of fluid milk by offering to meet the interstate price. SIAIE Re ar RARER ny MECE SEY The third alternative was illegal under Pennsylvania Law: It was, however, the course in fact pursued in a number of instances. THE ANTITRUST CLAIM. Plaintiff’s antitrust claim, as explicated in our earlier decision, was that the defendants conspired to fix the price of milk shipped into Pennsylvania, to boycott out of state producers, and to suppress and eliminate competitors by a concerted refusal to deal with out of state producers, 3'The defendants offered to prove that the Commission knew of the price adjustments and approved of them. This evidence was excluded. © eI TRIE Oe Se Sat tee SN Spay ee | 8a all to the damage of the Pennsylvania producers. While it was not then clear how the Pennsylvania producers would have been injured in their business or property by such activity, the complaint so alleged, and we held that the plaintiff should be given an opportunity to offer evidence, At the end of the plaintiff’s case the factual picture had become much clearer. First, there is no evidence of any horizontal activity among any of the defendant handlers looking toward boy- cotting or toward price fixing on any level. Compare, e.g, United States v. General Motors Corp., 384 U. S. 127 (1966). The Cooperative dealt separately with each hand. ler, and there is no evidence that any handler was aware of the arrangement for rebating worked out with any other. Next, there is no evidence that the Cooperative attempted to impose upon any handler or that any handler agreed to any vertical arrangement respecting resale milk prices. Compare, e.g. Sanitary Milk Producers v. Bergjans Farm Dairy, Inc., 368 F.2d 679, 689 (8th Cir. 1966) ; United States v. Milk Drivers Local 471, 153 F. Supp. 803 (D. Minn. 1957). The handlers’ resale prices were actually fixed by the Commission. The evidence is that the Cooperative negotiated separately with each handler about the net price it would receive for the milk of its producers. Various methods or subterfuges for avoiding the Commission’s wholesale fixed prices were resorted to. In each instance the pricing arrangement was agreed to between the Co- operative and the handler prior to the sale. In all cases the handler filed his utilization report with the Com- mission and paid the Cooperative the official blend price calculated on the basis of that report. In the case of some handlers the Cooperative had a prior agreement that the official blend price would be adjusted to reflect an agreed rather than actual utilization. Thus a handler who actually used 80% of the Cooperative’s milk for Class I purposes might receive an adjustment on his blend price to reflect an agreed 60% Class I use. In other cases handlers re- _ 9a ceived agreed adjustments at a fixed rate per hundred- weight, agreed adjustments to the price in the Youngstown federal milk marketing order, agreed adjustments of fixed amount per quart of milk sold at retail, a flat dollar amount per month, or an agreed adjustment for handling milk of jow butterfat content. In each case the method of calculat- ing the adjustment was negotiated separately between the Cooperative and a single handler prior to the sale. In each case the adjustment was made in the form of a rebate from the official blend price. The plaintiff’s own evidence sug- é gests that the economic effect of the price adjustments was that the Cooperative received more for its members’ milk : than it would have received had it insisted on the official : blend price fixed by the Commission and that it thereby & lost as customers those handlers with high Class I utiliza- f tion. This evidence, the district court held, was insufficient to go to the jury on the antitrust claim. We agree. The plaintiff’s case establishes that the Cooperative, a sales agent with authority to sell milk to such parties and by such methods as its Board of Directors deemed to the best advantage of its members, negotiated individual con- tracts of sale with individual handlers at the best prices it could obtain from time to time in the face of competition from out of state producers. The handlers did not act in concert for any purpose. The Cooperative and individual handlers acted in concert only with respect to the price of individual sales contracts. There is no evidence even of conscious parallel action on the part of the handlers to exact larger rebates, to stabilize prices at any level or to boycott out of state producers. Indeed the evidence is that some handlers negotiated for better prices than others. Undoubtedly the officers and directors of the Cooperative acted with the common purpose of obtaining the best price they could obtain for their members’ milk. Each handler, on the other hand, exacted the best price concession it could obtain for itself. Such individual sales contracts, negotiated ER IS Rie” EO I LGN ee | cm 10a at arm’s length without knowledge on the part of the pur- chasers of the prices being charged others similarly sit- uated, cannot be regarded as contracts or combinations in restraint of trade. While the individual contracts may have been illegal under Pennsylvania law, they were not illegal under the antitrust laws. Plaintiff argues that conscious parallel action among all of the defendants was sufficiently inferable from the evidence that the existence of a conspiracy was a jury question. No specific evidence is referred to, and our own review of the record discloses no evidence tending to show that any handler was ever aware of the price arrangement of any other. Evidence from which a conspiracy may be inferred is simply absent. Having advanced a contention not supported by any evidence plaintiff goes on to concede: ‘‘However, the Plaintiffs are willing to rest their plea for summary judgment “) on the undisputed and ad- mitted facts that each of the Dairy Defendants [handlers] entered into a separate agreement with the Defendant Erie-Crawford [the Cooperative] to accept rebates on the price of milk sold and delivered to them which restrained commerce between the States in violation of Section One of the Sherman Act, there- by making each Dairy Defendant liable for the amount of money received by it as a rebate and making De- fendant Erie-Crawford liable in damages for all of the several transactions with all of the Dairy De- fendants.’’ (Appellant’s brief in 71-1541 at 30). Plaintiff’s ultimate contention, then, is that an individual price rebate arrangement is, without more, a per se viola- [4] The plaintiff made a motion for a new trial and for summary judgment on the antitrust claim at the end of the case. LEE PONE A I ET I EOL APE —— lla tion of Section One of the Sherman Act. We know of no case which has ever so held, and the same contention has peen rejected. Checker Motors Corporation v. Chrysler Corporation, 405 F.2d 319 (2d Cir. 1969) cert. denied, 394 TS. 999 (1969). The district court properly granted a directed verdict on the antitrust claim. THE CONVERSION CLAIM. The pendent claim for conversion under Pennsylvania law rests upon the same facts recited above. Plaintiff’s theory of the case is that the payment of the rebates by the Cooperative was a conversion of money belonging to the members and that the Cooperative and the recipients are jointly liable for these amounts. The district court ac- cepted plaintiff’s theory, and charged the jury: “The property which the plaintiff contends was con- verted in this case was money which came into the hands of the cooperative association. The plaintiff contends that when the co-op gave money back to the dairymen or handlers, this deprived the plaintiff of the possession of that money. They contend, further, that they did not consent to this transfer of the money to the dairies, and that the co-op had no lawful justi- fication for the action in giving back the money to the dairies. Plaintiffs contend, also, that the dairies had no right to receive this money, knowing that it was the lawful property of the plaintiffs. The defendants, on the other hand, contend that because of the marketing agreement which each of the plaintiffs had signed, that they authorized the de- fendant to sell the milk at the best price possible, or as the contract phrases it, ‘to the best advantage of the farmers.’ They claim that it would not have been possible to sell the milk had not an agreement been made to refund part of the price to the dairies, and Pyrerentt- Cine Hat dee es MA eee | se SAI a 12a that by giving the milk to the co-op on a consignment, the farmers authorized such transaction. The contract between the farmers and the co-op must be read in light of the existing law, that is, it is implied in every contract, even if it is not written there, that it must be performed in accordance with the law. Therefore, when a contract provides that the milk must be sold and disposed of to the best advantage of the producer, it is understood to mean ‘in accordance with the law.’ Therefore, I instruct you that when the farmers or producers turned over the milk to the co-op, it was with the condition, and as part of the contract, that the milk be sold at the legal price.’’ (919-921b) The court then read 31 Pa. Stat. Ann. § 700j-807 and charged: ‘‘Therefore, the term of an agreement between the co-op and a dealer which required the co-op to refund part of the officially set price for the milk was illegal and could not be enforced by the dealer. There was, therefore, no legal way in which the co-op could have been forced to pay back to the dealer any amount which it had agreed upon in advance as a refund or as a discount.’’ (923b) The only defense which the court permitted the jury to consider was the defense that some members of the class might knowingly have consented to the rebates. Sum- marizing at a later point the court charged: ‘‘Now, to sum up once again the elements of a con- version—it is the deprivation of the right of property in, and in this case, money, or other interference with the money without the owner’s consent, and without lawful justification. If a conversion occurs, and the 13a plaintiffs prove the damages, the damges recoverable :s the actual loss to the plaintiffs.”’ (923b). The foregoing amounted to a directed verdict that the il- legal rebates were conversions, and it is not surprising how the jury answered interrogatory No. 1: “ oe 2 r4 A “ 4, iS ¥ 4 7] a a se [ 2IESOR LIONEL SI ONE IE RIA, . ‘ RT UE Te ERNE ROE 5 a , :. ERO ERTL EE GABE ONE BEI PLN EAI. CRRA ETE CaO Tes judice for failure to state a claim.* We might add that if plaintiff feels our construction of the claims asserted under Count I does not encompass all those intended, he should apply to the district court for leave to amend to assert them. We recognize that the confused and obscure quality of many of the allegations of the complaint may understanda- bly have influenced the district court’s decision, particularly since it had granted leave to file an amended complaint. But the subject matter of the lawsuit is too important to allow such prejudicial consequences to flow from impre. cision in pleadings. We note that the record shows that the defendants also filed an alternative motion below for a more definite statement. It was not reached by the district court. We therefore are not called upon to express an opin- ion as to the merits of that motion. Count III of the amended complaint alleges that defend- ants violated Pennsylvania law by fraudulent conversion of plaintiff’s money, by tortious interference with plain- tiff’s advantageous business relations and by violations of the Pennsylvania Milk Control Act. Jurisdiction is alleged to be pendent to the antitrust violations asserted in Count L The district court dismissed Count ITI on the grounds that the federal claims were insubstantial; that the subject mat- ter did not bring the Count within the court’s pendent jurisdiction and; that if it did, the Count should neverthe- less be dismissed pursuant to an exercise of its sound dis- cretion. In 1966 the United States Supreme Court illuminated the pendent jurisdiction concept by its opinion in United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d ®* The defendant Sterling Milk, Inc. seeks to have the dismissal upheld as to it on the ground that no specific damages are claimed from it in the amended complaint. We think the resolution of this contention at this stage of the proceedings would be premature. there is power in federal courts to hear the whole.” 983 U.S. at 725, 86 S.Ct. at 1138, footnotes omitted. Nor, at this stage, can we agree with the district court that the subject matter of the federal and state claims do not bring this Count within the court’s pendent jurisdiction. The court seemed to believe that in order to invoke pendent jurisdiction both the federal and state claims must derive from a common nucleus of operative facts and an invaded right which is common to both. We think this is too PRR EE TN © narrow an approach to the issue, particularly in the light of the discussion in the Gibbs case. A right allegedly violated in a Sherman Act case and a right allegedly invaded under the common law may well have a common factual basis although the source of the “‘right”’ is different. Such a case 0 ye eee single trial. Certainly the fact that different remedies may be involved in disposing of the claims does not alter this conclusion. Since we think the district court had the power to enter. tain Count III under its pendent jurisdiction, we next con sider whether, in the exercise of a sound discretion as is permitted by Gibbs, it was nevertheless justified in dis missing the claim. We shall consider the reasons given by the district court and our evaluations thereof. 1. The district court “‘found”’ that the federal claim, to which the state claim was sought to be joined, was insub stantial. We have of course now held to the contrary. 2. The court’s second ground for its decision was the fact that the allegations of Count III were based solely on a state claim asserted against certain non-diversity defend ants. We fail to see how this ground is, in and of itself, suf- ficient to justify a refusal to exercise pendent jurisdiction. The situation mentioned is quite common in pendent juris- diction matters and is, indeed, the reason why pendent jur- isdietion is invoked. 3. The district court “‘determined,”’ apparently from « reading of the amended complaint, that the state claim actually constituted the basis of the claims in all the Counts. The district court “‘found”’ that it was “‘clear’’ that the supposed federal questions were ‘‘appendages or vehicles employed to bring the state claim under the jurisdiction of a federal court.’’ While we have no doubt that under the Gibbs case the propriety of asserting pendent jurisdiction remains open throughout the litigation, we think that the ‘*findings’’ here made solely on the basis of the amended complaint were unwarrante‘. cho filed a notice of appeal, and he appealed only as an iedividual and not in his capacity as representative of the follows : “Robert M. Knuth, on behalf of himself and all others similarly situated, Plaintiffs * * *.”” The body of the notice then recites in part: “Take Notice that Robert M. Knuth, plaintiff above named, does hereby appeal*** from the judgment * © © (He then refers to all three counts of the amended complaint. ] We think a fair reading of the caption and body of the Notice of Appeal conveys the information that plaintiff was appealing all the rulings below, which included the class action ruling. Liberality « f interpretation im such a matter is most desirable. Cf. Foman v. Davis, 371 US. 178, 83 S.Ct. 29 F.2d 65 (3rd Cir. 1958). 46a We come then to the correctness of the district court’; dismissal of the class action. In granting the motion to dismiss the amended complaint insofar as it purported to assert a class action, the district court relied on the following analysis: “Of the 56 farmer-producers listed in Exhibit A, 15 subsequently filed affidavits withdrawing from the suit, and 83 other farmer-producers filed affidavits averring that they were members and stockholders of Erie. Crawford and did not wish to be represented by the plaintiff. The Ohio and New York farmer-members seem to be totally ignored (see f.n. 3, supra). Thus, considerable doubt is cast upon plaintiff’s claim to rep. resent the interests of the alleged spurious class, whether that class is 1200 or 56 Pennsylvania farmer. producers. Since we think it appears that plaintiff inadquately represents the class, we are constrained to follow the ruling of this District Court in the Hayes case and grant the motion to dismiss insofar as the Amended Complaint purports to state a class action.” We interpret the district court’s language to mean that because 98 Pennsylvania farmer-producers filed affidavits either withdrawing from the suit or indicating that they did not want to be represented by plaintiff, sufficient doubt was thereby thrown on plaintiff’s class claim to justify its denial at that point, and that was so regardless of the size of the class. Plaintiff sought to represent a class consisting of approx- imately 1200 Pennsylvania producers. The court therefore had expressions from only a small percentage of the alleged total class. To the extent the decision as to the right to maintain this class action involved ‘‘numbers,’’ the district court, in our view, had an inadequate factual basis for its conclusion. We think the use of the procedure provided by new F.R.Civ.P. 23(c) would have been more likely to have ‘id not disclose the precise basis of its decision, and thus it is not particularly helpful here. We note further that an from that order was dismissed by this court on motion. An examination of the grounds of the motion reveals that they related solely to jurisdictional ob) ions. Thus, the merits of the class action aspect of the decision in the Hayes case were not reached by this court. ’ We therefore reverse the class action judgment without prejudice so that the Rule 23(c) procedure may be followed. The determination as to whether a class action is properly ‘volved, and if so, the ambit of the class, can then be made in light of the more fully developed facts. Compare Penn- sa Co. for Insurances on Lives and Granting Annui- ties v. Deckert, 123 F.2d 979 (3rd Cir. 1941). The Supreme Court of the United States adopted this procedure with respect to the new Intervention Rule (Rule 24). Cascade Nat. Gas Corp. v. El Paso Nat. Gas. Co., 386 U.S. 129, 87 S.Ct. 932, 17 L.Ed.2d 814 (1967). We think the Cascade approach is also appropriate here. ®See Order, 383 U.S. 1031 (1966). 1 Hayes v. Sealtest Foods, C.A. No. 65-1072. 8h er Oe ae) . DOPE ROE POSE! BO? ogee sel Biel el ee The judgment of the district court as to Counts I and III will be reversed and the matter remanded for proceedings consistent herewith. Katopyer, Cireuit Judge (dissenting). I would affirm the March 30, 1967 Order of the District Court dismissing Counts I and II of the appellants’ Com- plaint for failure to state claims upon which relief can be granted, and dismissing Count III of the Complaint, with- out prejudice. I would do so for the reasons so well stated by District Judge Marsh in the Opinion which accompanied his stated Order. This too must be said. Count III alleges conduct on the parts of the defendants in violation of the ‘‘Statutory and Common Law of Pennsylvania’’, and jurisdiction is alleged to be pendent to the antitrust violations asserted in Counts land IL. The District Court dismissed these two counts on the ground that they failed to state a cause of action, and further dismissed Count III on the grounds that pendent jurisdiction did not exist for that reason, and that, assum- ing the contrary, ‘‘consideration of it [Count III] should be refused in a proper exercise of judicial discretion.” I ean discern no basis for a holding that the District Court abused its discretion under the existing circumstances. ON PETITION FOR REHEARING Before Hastie, Chief Judge, and McLaventin, Kaopner, Freepman, Serrz and Van Dusey, Cireuit Judges. OPINION OF THE COURT Serrz, Cireuit Judge. This is a petition for rehearing in bane on an opinion of this court dated May 3, 1968. We decided, inter alia, that the district court erred in dismissing the class action aspects of the amended com- plaint. We reversed without prejudice and ordered the dis- — 49a trict court to use the procedure provided by new F.R.Civ.P. 93(c). It was felt that this procedure was more likely to uce trustworthy evidence for the district court to use in deciding whether, ‘“‘numberwise at least,’’ plaintiff could fairly and adequately protect the interest of the class. Petitioner asserts that we erred in ordering the district court to apply the provisions of 23(¢) to determine whether plaintiff fulfilled the 23(a) (4) requirement that ‘‘the rep- resentative parties will fairly and adequately protect the interests of the class.’’ Petitioner further requests that if rehearing is not granted, the question of whether the inquiry into adequacy of representation is to be made under 93(¢)(2) or 23(d)(2) should be clarified. While we deny rehearing in bane, we do agree that clarification of the class action aspect of the opinion is appropriate. At the outset we affirm our belief that the use of F.R.Civ. P. 23, as amended Feb. 28, 1966, eff. July 1, 1966, is entirely feasible and will work no injustice in this case. We wish to make it perfectly clear that we were not finally deciding the ‘‘class action”’ issue. Thys, we direct that the district court’s judgment dismissing the class action aspects of this case be vacated rather than reversed. The district court will, at the appropriate time, decide the issue as to whether the action may be maintained as a class action. Consequently, our opinion reference to 23(c) should not be taken as an implied judgment that the action is main- tainable under 23(b) (3). Nor was that language intended to be understood as precluding the use of some other notice procedure (e.g., 23(d)) to assist the district court in deter- mining whether, numberwise, the plaintiff could fairly and adequately protect the interests of the class. The petition for rehearing will be denied. Geratp McLavcuurn, Circuit Judge, votes to deny the petition for rehearing. Katopner, Circuit Judge, would grant the petition for rehearing. 50a APPENDIX D Rosert M. Knuts, on behalf of himself and all others similarly situated, Plaintiffs Vv. Enre-CrawFrorp Darry Cooperative ASSOCIATION, and others, Defendants. Civ. A. No. 65-1328 United States District Court W. D. Pennsylvania. April 15, 1971. Paul A. Simmons, Monongahela, Pa., for plaintiffs. W. Walter Braham Jr., Frank L. Seamans, Clyde W. Armstrong, Henry E. Rea, Jr., Pittsburgh, Pa., Errol Ful. lerton, New Castle, Pa., for defendants. OPINION Wes, District Judge. ‘*Milk and honey”’ sounds of sweetness and serenity in story and song but ‘‘milk’’, ‘‘Commission”’ and ‘*Co-Op”’ in conjunction connote confusion, contradiction and contro- versy in this case in court. This is a class action brought on behalf of approximately 300 of a total of 1200 farmers who were members of the Erie-Crawford Dairy Co-Operative Association during the years of 1957 to 1965. The defendants are the Co-Op itself, its individual directors who served during that period of time, and a number of dairies or dealers to whom Erie- Crawford made sales of milk during the period in question. Erie-Crawford was an agricultural cooperative organized under the laws of Pennsylvania whose members and dairy customers, sometimes called ‘‘handlers’’, were primarily 5la from the Western Pennsylvania area, concentrated mainly in the Pittsburgh and Erie areas. The plaintiffs, also designated a ‘‘producers”’, had con- signed their milk to Erie-Crawford for sale to the various dairies and claim that as a result of rebates or refunds granted by the Co-Op to the various dairies, the class has been deprived of monies rightfully belonging to it. Suit was filed on two theories, first, that of violation of the antitrust laws and second, that of a conversion based upon state law. In earlier proceedings in this case, the Court of Appeals * determined that, at least from the standpoint of pleadings, the plaintiffs’ allegations were adequate to set forth a claim under the antitrust laws and that this Court could exercise pendent jurisdiction over the count for conversion based on state law. During the period of time in question, each of the plain- tiffs sent his milk to Erie-Crawford in accordance with a form contract providing that the Association was to sell the milk to such parties and by such methods as the Board of Directors deemed to be to the best advantage of the farmer. Authority was also given to ‘‘pool’’ proceeds derived from the sale of milk consigned by other members and to autho- rize the deduction of certain overhead expenses by the Co- Op. The result was that each milk producer would receive the same adjusted price for his milk regardless of the dair- ies to whom sales were made, even if at varying prices. In Pennsylvania the price of milk, both at retail and on sale from the producer to the dairy, is subject to regulation by the State Milk Control Commission.’ Free and open competition in the industry, therefore, did not exist in Western Pennsylvania during the period under study. 1395 F.2d 420 (3d Cir. 1968). 231 Purdon’s Statutes § 700j-101 et seq. — 52a However, the Commission’s authority and jurisdiction extended only to sales made in Pennsylvania by Pennsyl- vania farmers to Pennsylvania dairies. Milk sold by the Co-Op or its producers to customers outside the state was not subject to the milk control price nor was milk shipped into the Erie or Pittsburgh area from outside Pennsylvania subject to control by the Commission. Western Pennsylvania milk farmers were adversely affected by economic conditions in the early 1950’s which developed in this area as a result of the unrealistic prices set by the Milk Control Commission. The mandated price for Class 1 milk (the fluid drinking milk) was higher than that of the similar product which was available in the ad- joining States of Ohio and New York. During this same period, production rose substantially and consequently there were increasing quantities of milk in Ohio and New York which were available to Pennsylvania dairies at prices substantially below that set for the Penn- sylvania farmers by Commission fiat. Although the Commission regulations specified the mini- mum prices at which sales could be made to the dairies, the Co-Op nevertheless during this period by various methods lowered its prices so that they would be at a similar level to those available to dealers who purchased out of state. This was done by the use of ‘‘price adjustments’’, as the defend- ants say, or ‘‘rebates’’, as the plaintiffs choose to term the arrangements. The method of varying the price and the amount of the reduction was accomplished in a number of different ways. However, in each instance the Co-Op would collect the entire amount called for by the Milk Control Commission schedule and then refund the amount of the agreed conces- sion to the dairy by means of a check. The total amount of the refunds granted by the Co-Op during the years in question totaled more than one and a half million dollars. =_7_ 53a Not all of the customers of Erie-Co-Op were granted this price relief and the testimony disclosed that only those cus- tomers who complained of lower prices available from out of state producers were given favorable treatment. The reductions were not uniform and the Co-Op did not inform any of its customers, including participants in the arrange- ments, that some were being given financial preferences. The refunds were terminated some time in 1965 when minimum price schedules were reduced by the Milk Control Commission and hearings by that body on complaints of the rebating practice were held. Suit was filed by these plain- tiffs on December 8, 1965. At the conclusion of plaintiffs’ case, a motion of dismis- sal was granted as to the counts brought under Section 1 of the Sherman Act but the jury was permitted to pass upon the claim of conversion. Answers to special interrogatories were returned in favor of the plaintiffs against all of the defendants, finding that conversions had taken place, that actual damages had been incurred, and that the Pennsyl- vania limitation period of six years had been tolled. The plaintiffs have filed motions for a new trial and for sum- mary judgment with respect to the dismissal of antitrust claim. The defendants have filed motions for new trial and judgment n. o. v. with respect to the count for conversion. THE ANTITRUST COUNT At the time the Court of Appeals considered the plain- tiffs’ case, there were allegations of three types of conduct f violating the antitrust laws, arranged under these headings: I. Rebates; II. Interstate shipping of Pennsylvania milk; III. Boycott. The latter two of these counts were abandoned at time of trial and the plaintiffs proceeded only on the theory of rebate. “— The Appellate Court’s analysis of the plaintiffs’ Com- plaint was that ‘‘the defendants conspired to fix the price of milk shipped into Pennsylvania by the use of rebates to the processors on milk produced in Pennsylvania and pur. chased by them from Erie-Crawford.* * * Rebates given solely on Pennsylvania milk allegedly result in the suppres- sion and elimination of competition by preventing the free flow of milk in interstate commerce from sources outside the State of Pennsylvania into the State of Pennsylvania, The object of this alleged combination and conspiracy was to accomplish the raising, fixing, controlling, setting, stabilizing and affecting the price of milk shipped in inter- state commerce.’’ (395 F.2d 420, 423-424.) It was because the plaintiffs failed to produce the facts to sustain these allegations that the dismissals of the antitrust counts were granted. Unquestionably the plaintiffs did prove that rebates were given to various dairies, in fact this was conceded by the defendants. It seems clear, also, that while the practice of selling milk at prices less than those set by the Commission was contrary to state law, the granting of rebates in and of itself does not establish a violation of the Sherman Act. Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319 (2nd Cir. 1969), cert. den. 394 U.S. 999, 89 S.Ct. 1595, 22 L.Ed.2d 777. The plaintiffs failed to establish that prices were “‘fixed”’ within the meaning of the antitrust laws; evidence was lacking to prove that there was any restraint imposed upon interstate commerce; and there was no proof that the free flow of milk from sources outside Pennsylvania had been hindered or impaired by the price adjustments. What the plaintiffs’ case did develop was uncontradicted testimony that prices outside Pennsylvania were lower than those set by the Milk Control Commission and that as a result of this unnatural and unfavorable economic climate, Erie-Crawford lost two of its large customers in the early 55a 1950’s. In order to prevent the loss of all its markets and to meet competition, Erie-Crawford did agree to lower its prices to meet those offered by Co-Ops which sold milk produced in Ohio and New York. In no instance was there a showing that Erie-Crawford had undercut its rivals but rather it seems that it was content to meet the competition on equal grounds. Ina fact situation like this, to hold that a seller is helpless and must stand by watching its business being destroyed would be a perversion of the result sought to be obtained by the Sherman Act. The antitrust laws were designed to encourage competition and to prevent predatory action. To outlaw the action of the Co-Op in defending its markets by the time-honored and legal sanctioned method * of meeting competition would be to turn the shelter of the antitrust legislation into a weapon which would kill free enterprise instead of protecting and promoting it. Plaintiffs argue vigorously that they proved ‘‘price fix- ing’”’ but actually what they showed fell far short of what was required, because to agree upon a price with a customer in the absence of other circumstances is not within the legal prohibition. Decisional law has established that ‘*price fix- ing” within the intent of the Sherman Act is either horizon- tal (dealing with arrangements among competitors) * or vertical (attempting to control the resale price). Neither was present in this case. The Co-Op was not a competitor of the plaintiffs but was simply their agent. It did not and could not attempt to con- 3 See Balian Ice Cream Co. v. Arden Farms Co., 231 F.2d 356 (9th Cir. 1955), cert. den. 350 U.S. 991, 76 S.Ct. 545, 100 L.Ed. 856. Jones v. Borden Co., 430 F.2d 568 (5th Cir. 1970). 4E. g. United States v. Masonite Corp., 316 U.S. 265, 62 S.Ct. 1070. 86 B.Ed. 1461 (1942). 5 Also known as resale price maintenance agreements. E. g. Al- brecht v. Herald Co., 390 U.S. 145, 88 S.Ct. 869, 19 L.Ed. 2d 998 LAER AY SET, SLRS URR A PRI 8 7 9 Re. ee 56a trol the resale price of milk since that was already pre- empted by the Milk Control Commission nor indeed was there any evidence to indicate that any attempts were made in this direction. There was no evidence that any of the dairies had agreed among themselves to set prices at which they would purchase milk from Erie-Crawford. To the contrary, all the evidence was that each price adjust- ment was set by Erie-Crawford individually with the partic. ular dairy involved without the knowledge of any others. The adjustments were not the same and obviously the Co- Op was attempting to grant the smallest concession neces. sary in order to retain the business of the particular hand- ler. There was no showing of any restraint upon interstate commerce. The mere fact that an inference might be drawn that because Erie-Co-Op met the price of out of state milk and that consequently some of it was not shipped into and sold in Pennsylvania does not establish an unlawful restraint upon trade in the circumstances of this case. To hold otherwise would be to legalize and sanction predatory activity by the out of state milk suppliers who could flood the Pennsylvania market with their product and remove the hapless Co-Op and its members from the ranks of effective competition. Much of the problem in the case was brought about by the collision of two antithetic philosophies—free and open com- petition as espoused by the Sherman Act versus close and rigid supervision by the state via price control as set out in the Milk Control Law. Plaintiffs and defendants alike seek support in the particular statute which supports their position but both must struggle with the inconsistencies generated by the application of the incompatible legislative enactments.* *For a discussion of this problem in another case involving Pennsylvania Milk Commission imposed milk prices, see Morton v. National Dairy Products, 287 F.Supp. 753 at 763, 764 (E.D.Pa. 1968). 57a Although it might be thought to be implicit in the earlier ruling of the Court of Appeals that the plaintiffs have standing to recover damages under the antitrust laws, the fall development of the facts which were brought about by the trial tends to cast some doubt upon that assumption. There is a divergence of view expressed by case law as to the class of people which is entitled to invoke the provisions of the Sherman Act, with the not unusual caveat that much depends upon the factual background.’ One of the more recent cases is Billy Baxter, Inc. v. Coca- Cola Company, 431 F.2d 183 (2nd Cir. 1970), cert. den. 401 TS. 923, 91 S.Ct. 877, 27 L.Ed.2d 826 (1971), which holds that the plaintiff must show a link indicating that his pro- perty loss was in the “target area’’ of the illegal conduct. The opinion in that case reads: "There must be a causal connection between an anti- trust violation and an injury sufficient for the trier of fact to establish that the violation was a ‘material cause’ of or a ‘substantial factor’ in the occurrence of damage. [citations]. And this connection must also link a specific form of illegal act to a plaintiff engaged in the sort of legitimate activities which the prohibition of this type of violation was clearly intended to pro- tect. While any antitrust violation disrupts the com- petitive economy to some extent and creates entirely forseeable ripples of injury which may be shown to reach individual employees, stockholders or consumers, it has long been held that not all of these have the requisite standing to sue for treble damages * * * Con- sequently, a plaintiff must allege a causative link to his injury which is ‘direct’ rather than ‘incidental’ or which indicates that his business or property was in the 1 See Standing to Sue for Treble Damages under §4 of the Clayton Act, 64 Col.L.R. 570. TS ND Thee a Tad On aeadied reek ‘target area’ of the defendant's illegal act.”” (page 187) * As Judge Learned Hand put it in Bookout v. Schine Chain Theatres, Inc., 253 F.2d 292, 295 (2nd Cir. 1958) : ‘The action at bar will not lie because all claims under the Anti-Trust Acts rest upon wrongs done by the sup- pression of competition and must be initiated by a party whose commerce has been directly injured.”’ See also Harrison v. Paramount Pictures, inc., 211 F.2d 46 (3rd Cir. 1954). Here the concessions granted by the Co-Op were not to those in competition with the plaintiffs. If it be assumed, arguendo, that the effect of price reductions was to restrict to some extent the amount of milk flowing into Pennsyl- vania, this would not be a cause of harm to the plaintiffs but could only be a benefit by increasing their opportunities for sales. The damages claimed by the plaintiffs were the amount of the rebates. This loss was suffered by the plaintiffs not in an attempt by the Co-Op to restrict its markets but only to protect their very existence. The parties who might claim to be aggrieved because of the lowering of prices by the Co-Op would have been the out of state producers who were in the target area and who were the ones who could claim loss of sales because of this activity. Certainly the plaintiffs did not fall within this group. Recognition of the difficulties that are involved in prov- ing conspiracy requires that wide latitude must be given to * See comment on this case and a discussion of the “‘target area” concept by Milton Handler in The Twenty-Third Annual Trust Review, 71 Col.L.R. (1971). supra ; Jones v. Borden Co., supra. The granting of the motion to dismiss was required by the posture of the case on not one, but several grounds. CONVERSION Conversion has been defined as ‘‘an act of willful inter- ference with the dominion or control over a chattel, done without lawful justification, by which any person entitled thereto is deprived of its use and possession.’’ 37 P.L.E. Trespass § 82. See also Cenna v. United States, 402 F.2d 168 (3rd Cir. 1968). Motive or intent, good faith or mis- take of law or fact,’ leading to erroneous belief of right * See Morissette v. United States, 342 U.S. 246, 270, 72 S.Ct. 240, 9% L.Ed. 288 (1952). Se ee ee a — 60a of possession are not defenses. The theory of conversion is based on the general principle that a person is entitled to his property and if another mistakenly or otherwise interferes with the possession of that property or disposes of it without consent of the owner, he is entitled to have it returned nevertheless. Pearl Assurance Company v. National Insurance 151 Pa.Super. 146, 30 A.2d 333 held that under Pennsyl. vania law money may be the subject of conversion. That case dealt with an assertion by an insurance company that its agent had converted premiums which had been collected from various assureds. The Superior Court said: ‘The obligation resting on the defendants was to collect the premiums and when collected to pay over the amount so collected less an agreed percentage to compensate defendants for their services. The money so collected by defendants, over and above the percentage deductible as compensation for services, never became the property of the defendants, but at all times was the property of the plaintiff insurance company. The transaction totally negatives any idea of a sale on credit of the policies to the defendants or either of them. They never had any property in them.” (page 156, 30 A.2d page 337). In this case the claim is based upon the premise that the milk was consigned to the Co-Op for sale with the under- standing that when payment wus received from the buyers, Erie-Crawford was to deduct the amount necessary to meet the agreed overhead charges and pay the remainder to the farmer. When the Co-Op did not remit all of the money but instead rebated part of the funds to the handlers, this constituted a conversion, according to plaintiffs, because they had not agreed to the refund. The jury specifically found that there had been no consent and that a conver- sion in fact had occurred. 6la The defense is that the milk was sold to the dairy on the condition and with the explicit understanding that part of the price would be returned to the buyer. It is argued, therefore, that the plaintiffs never had any property in- terest in the amount which was subject to refund because this money had been entrusted to the Co-Op by the dealer only for the purpose of compliance with the Milk Commis- sion price schedule. Erie-Crawford says further that the consignment contract which required sales by the Co-Op “to the best advantage of the producer’’ was authorization to proceed in this manner. The jury was instructed that every contract must be performed in accordance with the law and when the farm- ers turned over the milk to the Co-Op, it was with the im- plied condition that the sale be at the legal price. Further, the Court charged that it was contrary to law for Erie- Crawford to sell to a dairy agreeing to give a rebate, that any agreement to refund part of the purchase price was illegal, and could not be enforced by the dairy involved. Defendants contend that this instruction was not only erroneous but prejudicial as well. The Pennsylvania courts have had occasion to pass on various attempts to evade the price structure set by the Milk Control Commission in Pennsylvania and have been firm in refusing to permit any subterfuge. Thus, in Milk Control Commission v. McAllister Farm Dairy, 384 Pa. 459, 464, 121 A.2d 144, 147, the Supreme Court of Penn- sylvania said: “By the cleverly conceived plan of rebates through redemption the actions of the appellant were a plain and simple circumvention of the Commission regula- tions and of the court’s order that milk be not sold below the minimum prices. To have found otherwise than the court did here would have been deliberately to close its eyes to the actual facts.’’ 62a In Milk Control Commission v. Rieck Dairy Division, 193 Pa.Super. 32, 37, 163 A.2d 891, 894 (1960), the Court said: “The motive is not important. It is the effect of the transaction which determines whether it constitutes a method or device to sell milk at a price less than the minimum set by the Commission * ° °. ‘The methods and devices whereby milk can be sold at a price less than the minimum fixed by the commis. sion are as unlimited as the genius of man ° * °. ‘‘ Milk control is found upon price control. As soon as dealers find a method or device to break down the commission’s control over the price actually being paid, milk control will become chaotic, and soon non- existent. The legislature understood this. It is evi- dent from reading Section 807 of the Milk Control Law, supra, that it attemp‘ed, by every conceivable means, to close every ‘loop hole’ which would enable one dealer to obtain a price advantage over another.” In Shearer’s Dairies, Inc. v. Pennsylvania Milk Control Commission, 191 Pa. Super. 574, 577, 159 A.2d 268 (1960), it was said: ‘‘No matter how far we follow the maze of corporative activities and involved contractual relationships, it will bring us back to this procedure, which, in our opinion, constitutes a device to sell milk at a price less than the minimum established by the commission, and is in violation of section 807, supra, of the Milk Control Law. Neither the ingenuity of the contract, nor the intricacies of the corporate structure change this transaction into anything but such a device.” The statute is quite clear that no method is lawful by which milk is sold at a price less than the minimum applic- pees —_ ; aa 63a able, whether by rebate, or otherwise.*° Consequently, the defendants are estopped to invoke their illegal agreement with the dairies in order to show that the plaintiffs had no property in the amount of money which was refunded. There is no doubt that before any specific rebate was made, the farmer had a legally enforceable right as to the funds in the hands of the Co-Op as contrasted with the dairy which would have been barred by its violation of the Com- mission regulations. There was no question of fact to be submitted on this issue, the interpretation of the statute being one for the Court and not for the jury. It seemed to be desirable to explain to the jury the basis for the ruling, particularly in view of the fact that this trial had taken some five weeks to try, that there had been innumerable references to the Milk Control Act, to the prices set by the Commission, and to rebates. To state that the action of the Co-Op in refunding the money was illegal was not to characterize it as criminal, as 10 § 700}-807. “After the commission shall have fixed prices to be charged or paid for milk * * * , it shall be unlawful for a milk dealer or handler or producer, knowingly or unknowingly, or any other person knowingly * * * to sell * * * deliver * * * make available on consignment or otherwise * * * buy * lied receive * * * offer to sell or deliver * * * purchase * * * milk at any price below the minimum price * * * applicable to the particular transaction. “No method or device shall be lawful whereby milk is bought * * * sold * * * handled on consignment or otherwise * * * at a price less than the minimum price applicable to the par- ticular transaction, whether by * * * discount * * * rebate * * * extension of credit * * * “Jt shall be unlawful for any milk dealer or handler, know- ingly or unknowingly, or any other person knowingly * * * to # © ® sol] * * * deliver * * * buy or receive or handle on con- signment * * * milk at a price computed upon false or erron- eous weight, * * * butterfat test, grade, classification, or at a price from which have been made deductions, not authorized by law © © 9” a : _— | PELE RIEL LI LLL EI LEI SIE TD OR Fy ACU RFE Say a 64a defendants assert, nor did the definition amount to a di- rected verdict of conversion. Whether the plaintiffs had knowledge of the activities of the Co-Op and whether they consented to the price adjustments were still issues of fact to be determined and the jury was told that there would not be a conversion in the event of positive findings to these questions because the element of unauthorized acts of dominion over the property would be lacking. The instructions containing the Court’s interpretation of the Milk Control Act were necessary to present the issues to the jury in unequivocal fashion, particularly since the testimony of the defendants’ expert appeared to imply that economic necessity might justify a violation of the state law. PENDENT JURISDICTION Defendants also contend that once the antitrust matter had been dismissed the Court should have refused to exer- cise pendent jurisdiction over the conversion count. How- ever after a case has been waiting for years to reach the courtroom and then testimony had been taken for several weeks, sound judicial administration dictates that the trial continue to a conclusion. Furthermore, it would not simply be a matter of remanding to the state court or to the Milk Control Commission to proceed to a conclusion because in those forums the statute of limitations could be raised as an almost insurmountable defense to the plaintiffs’ cause."? Indeed, it would probably have been an abuse of discretion not to conclude the case. 11 At oral argument on the post trial motions some of the de- fendants agreed that if the matter were remanded to the Milk Con- trol Comission in conformance with the Act of 1806—infra, they would waive the Statute of Limitations. This concession was not made during the trial, however. —_7 65a LIABILITY OF THE INDIVIDUAL DIRECTORS The jury found that all of the defendants, including the directors of the Co-Op, individually, were liable in con- yersion. The charge to the jury permitted such a result as to the directors if it were determined that they had knowledge amounting to acquiescense or that they partici- pated in the rebating operation. The question of the personal responsibility of the direc- tors in this case is a difficult one. The president of the corporation during most of the period in question, one John Barney, was a salaried em- ployee who actually performed the negotiations with all the dairies with the exception of a few instances when Howard Yost, the vice president, was substituted. Barney apparently was a forceful individual with long experience in the field of milk marketing, including service on the Milk Control Commission. It was obvious that he was the dominant force in the operation of the Co-Op both in day to day activities as well as long range policies. The idea of rebating apparently was his—at least insofar as it was carried out by Erie-Crawford. It was Barney who met with the representative of the various dairies and bargained for the price adjustments— it was he who instructed the employees of the Co-Op to issue the refund checks—it was he who determined the formula to be used in calculating the price reductions and, apparently, he also had some conversations with members of the Milk Control Commission about the situation. By contrast, the membership elected the directors who were farmers not participating in the day to day operation of the Co-op but who only met monthly to review opera- tions generally. For this service they received a fee of $7.00 per meeting plus an allowance for mileage. It was uncontroverted that none of the directors profited person- ally from any of the conversions. EL NAO PIR YL TET Ie ND EP NAR SD Oe eee WO; ante 2 Bt lew dealegd Coed eat EL Sa Re SOL ae ae ace eae eet 66a The director-defendants admitted candidly that they knew of the price adjustments, the rebating, and that they approved of the policy because they thought there was nothing else that could be done to preserve Erie-Crawford’s markets. In considering the legal problem involved, it must be observed at the outset that the standard of duty between a director and the corporation is not applicable because here the plaintiffs are in the position of third parties who seek damages for their personal loss, rather than reim- bursement on behalf of the corporation. There appear to be no special circumstances in this case which would require the individual farmers and the directors to deal other than at arms length. Binns v. Copper Range Company, 335 Pa. 257, 6 A.2d 895 (1939); Imbrie v. Community Loan Com- pany, 131 Pa.Super. 398, 200 A. 149 (1938). As is not unusual, no Pennsylvania decisions clearly rule the issue raised by the facts in this case. One basic prin- ciple does emerge from a study of the cases, however—that being that a director is not liable for the tort of a corpora- tion unless he ‘‘knowingly participates in a wrongful act.” Chester-Cambridge Bank & Trust Co. v. Rhodes, 346 Pa, 427, 31 A.2d 128 (1943). In Martin v. Wood, 400 F.2d 310, 314 (3rd Cir. 1968), the Court in applying Pennsylvania law held that neither the president nor vice president of a company was individ- ually liable for an employee’s personal injuries when neither of the officers ‘‘were actually present at the time of the accidents nor had they been in any way physically connected with the operations in the*blast furnace area.” Zubik v. Zubik, 384 F.2d 267 (3rd Cir. 1967) refused to fasten personal liability upon a director for loss result- ing from the collision of a barge which had been swept from its moorings, even though it appeared that the de- fendant had some actual knowledge of the dangerous con- ditions on the river existing before the breakaway. The —7>~—" 67a Court rested its decision on the fact that others in the corporation on whom the defendant relied had actually done the mooring and were aware of conditions on the parge and the river. Apparently the leading case in this state dealing with a director’s accountability for conversion is Cohen v. Maus, 997 Pa. 454, 147 A. 103 (1929). There the court declined to attach legal responsibility to directors who had no actual knowledge of the conversion but could have learned of it by examination of the corporation’s books. An additional problem was discussed, similar to our present case, when the Court said: ‘“The situation would however, seem to be different so far as the defendant Maus is concerned. He was not only a director, but also general manager of the corporation. He not only knew of the sale of the mer- chandise to plaintiffs, but actually made it. While it is earnestly argued that he did not participate in the resale of their goods and in the conversion, we have reached the conclusion that this question is sufficently doubtful to warrant its fuller investigation on another trial * * * If Maus actually converted plaintiff’s goods, he would be personally liable to them notwithstanding that the proceeds went to the corporation and not to him.’’ (page 457, 147 A. page 104.) It is significant that the Court seemed to require actual participation in the sale and that mere knowledge of the transaction was not enough. td Then we come to the case of Fisher v. Rose, 319 Pa. 446, 181 A. 507 (1935) which the opinion says is anomalous. There the individual defendant was said to have converted certain stock which had been pledged to the corporation of which he was the president. Conceding that the defend- aut personally had made the sale, the Court said: ‘‘Under the existing circumstances, however, no infer- ence can be drawn that Rose [the defendant] was SNe a ere ee ae a eee es eee, 68a acting other than on behalf of his company; certainly we cannot assume such to be true in the absence of specific and direct averment that it was the fact. Rose’s acts were therefore, in legal contemplation those of the company, for which he is not, individually, respons. ible.’’ (pages 447-448, 181 A. page 508) While it is true that other jurisdictious might agree with the jury’s finding in the case at bar,’ Pennsylvania deci- sional law indicates that nothing short of direct participa. tion will impose personal liability on a director in the type of circumstance with which we are concerned here. That essential factor was not present and therefore judgment n.o.v. will be entered for the individual defendants. Defendants’ brief concedes that since Yost participated directly, he is not entitled to judgment n.o.v. Barney died before trial commenced and his estate was not made a party to the suit. THE ACT OF 1806 AND ITS APPLICATION TO THIS CASE At the trial and in post trial motions, the defendants contended that the Act of 1806, 46 Purdon’s Statute § 156, denied jurisdiction to the court as to a matter encompassed within the Pennsylvania Milk Control Law. The Act reads: ‘‘ Acts of assembly to be strictly pursued. In all cases where a remedy is provided, or duty enjoined, or any- thing directed to be done by any act or acts of assembly of this commonwealth, the directions of the said acts shall be strictly pursued, and no penalty shall be in- flicted, or anything done agreeably to the provisions of the common law, in such cases, further than shall be necessary for carrying such act or acts into effect.” 12 Cf, Armour and Company v. Celic, 294 F.2d 432 (2nd Cir. 1961). See also Fletcher, Cyclopedia Corporations §§ 1140, 1142. ——— 69a Defendants claim that this statute requires the plain- tiffs to pursue their remedies against the milk dealers and Erie-Crawford before the Commission exclusively, citing the broad statement of legislative policy in the Milk Control Law, 31 Purdon’s § 700j-301 : ‘The board is hereby declared to be the instrumental- ity of the Commonwealth for the purpose of adminis- tering the provisions of this act and to execute the legislative intent herein expressed, and it is hereby vested with power to supervise, investigate and regu- late the entire milk industry of this Commonwealth, including the production, transportation, disposal, man- ufacture, processing, storage, distribution, delivery, handling, bailment, brokerage, consignment, purchase and sale of milk and milk products in this Common- wealth, and including the establishment of reasonable trade practices, systems of production control and marketing area committees in connection therewith.’’ No decision of the Pennsylvania courts has held that the Milk Control Commission is the exclusive forum, nor in- deed has any appellate decision been concerned with cor- relation between these two statutes. The Statutory Construction Act of Pennsylvania, 46 Pur- don’s §558, provides in part, that provisions of law de- creasing the jurisdiction of a court of record shall be strictly construed. The Milk Control Act itself does not contain any flat statement purporting to vest exclusive jurisdiction in the Commission but defendants point to § 1005, which says in part: ‘Appropriate proceedings against any milk dealer ** violating this act * * *, may be instituted before the i 4 2 : ; i. a a TiS ati) eae 18 During the period from 1957 to 1965, a cooperative was con- sidered a producer (§ 103). After December 15, 1965, by virtue of an amendment, a cooperative was considered a ‘‘dealer’’ when it had milk on consignment which it sold to dealers. SPIEL SP A AR Gh TOME PIM RE NE 1c any Pn ee a 70a Board by any producer to whom the lawful price of milk has not been paid or to whom such price has not been fully pai * @ > However, we think it is not without significance that the permissive ‘‘may’’ is used rather than ‘‘shall’’ and there is no proviso to prohibit action in the courts. Furthermore, § 1003 provides in part: « — EEE LEILA EIEN SOE | eB A SDE TRAE LEER GAEL EPCS ES — 74a Complaint is also made that plaintiffs’ counsel exceeded the bounds of fair comment in his summation when he spoke of ‘‘law and order’’, the necessity for all to obey the law, and what children were being taught in college. While the remarks were strong, they fairly met inferences and statements of the defendants’ expert whose testimony con- veyed an impression of willingness to condone statutory violation, if necessary, in the pursuit of financial profit. The defendants are in no position to complain of the plaintiffs’ closing argument—which in this case we do not consider prejudicial. EVIDENTIARY RULINGS The defendants sought to produce evidence of statements by an accountant employed by the Milk Control Commis- sion,expressing his views on the legality of the rebate pro- cedures. An offer was made, also, to introduce a letter written by the Secretary of the Milk Control Commission, apparently giving tacit approval to the milk price adjust- ments procedures followed by the Co-Op. This letter said in part: ‘<* * * we believe we stated that where a milk dealer paid a producer for milk shipped and the producer voluntarily and without suggestion, pressure, threat or duress, returned the portion of the money volun- tarily, the transaction was completed as far as pay- ment to producers was concerned and no violation of the law existed. ‘*We still feel that this is a proper analysis in a par- ticular situation.’’ The plaintiffs had originally asked for punitive dam- ages but abandoned that claim as the trial got under way. The proffered testimony might have had some relevancy on the issue of good faith on the part of the defendants so long as the exemplary damage count was viable but when it was removed from the case, the reason for the introduc- 2 Sn ORB DONT cg De OE BET OF OE Ry tes SES a | a Sa RAS RN RN Br EI SR — 4 75a tion of the evidence was no longer applicable. The evidence would have had no further pertinency to the issues and might have resulted in confusion in the juror’s mind as to the proper interpretation of the Milk Control Act. Furthermore, it is apparent that the secretary’s inter- pretation of the statute was in flagrant disregard of its plain meaning. In view of the strong language of the Supreme Court of Pennsylvania in the McAllister case, supra, (decided some 4 years before the letter), it is in- eredible that an official of the Commission would believe that return of part of the purchase price by a producer to a dealer did not violate the spirit and intent of the Milk Control Law. It strains credulity beyond the breaking point to accept as a reality of life a situation where a F farmer would voluntarily and without suggestion, pressure, ‘ threat, or duress, return part of the money which he had E received for milk which he had sold to a dealer. The evi- dentiary rulings on these points and others raised on post trial motions were not error. LETTE EO TP ETL IPM E RN ORE EE ELE AIL NG IE EN ET LOTT LT SINE LES: MITIGATION OF DAMAGES The jury was instructed that proof of a technical con- version, without more, entitled the plaintiffs to only nomi- nal damages, that if any further sums were to be awarded, the burden was on the plaintiffs to establish actual loss, and that the defendants were entitled to show in reduction of damages facts or circumstances tending to reduce the amount required to compensate the plaintiffs.* The jury in answer to an Interrogatory found no reduction was to be made.”® 14418 Am.Jur.2d, Conversion § 102. 89 C.J.S. Trover and Conversion § 180. 15°°6 Are the defendants entitled to a reduction in the damages claimed by the plaintiffs? Yes No \/” TCR STR — . ' 2 aL I a IB I a A cee a ea aa Ca a RR RL id * EYE PB BEES LCRA BEA SINE LRAT —_— 76a The case was to be tried on liability first, with damages to be determined thereafter by a Master in a series of com- putations. This arrangement was necessary because there are several hundred claimants involved and the amount of damage which each sustained must be determined on a num- ber of variables including the quantity of milk sold by the Co-Op for the individual, the percentage of butterfat ad- justment which would be applicable, incentive arrange- ments for sale of milk during certain seasons of the year, ete. A corporation of this magnitude would have been im- practicable for a jury. On the other hand, as a class, the plaintiffs contended that their loss amounted to the total of the rebates paid to the dairies. The defendants contended that there was in fact no such loss because it would have been impossible for the plaintiffs to have sold their milk on the open market at any better price than that which the Co-Op secured. To buttress their position, the defendants submitted ex- tensive marketing data, complete with charts and the testi- mony of an expert witness. It was against this background of the damages which might be available to the class as a whole that the jury was permitted to determine if the plaintiffs were entitled to nominal damages, the full amount of the rebates as they claimed or some lesser amount which might be determined in conjunction with the defendants’ evidence on market conditions. ‘“‘In an action conversion, although the plaintiff is generally entitled to recover the value of the property converted, the defendant is permitted to show the ex- istence of facts which would make it unjust to allow the plaintiff to recover such amount.’’ 18 Am.Jur.2d, Con- version § 102. ‘As a general rule defendant is entitled to show in mitigation or reduction of damages any facts or cir- cumstances which would tend to reduce the amount re- a ea a 7 SE PL NRE MTR SAL LEA, BAP ARIE PNAS REIL A TENSE EP EGR LIEN LLG TA ERR ASAE” Sa eenee, | 77a quired justly to compensate plaintiff for the actual loss he has sustained as the proximate result of defendant’s act.’? 89 C.J.S. Trover and Conversion § 180. RS TSN NGS: ota me: Here the jury determined that the plaintiffs were entitled to the full amount of their loss and this was in its province to do so. The defendants contend that they were misled by the pretrial arrangements with respect to reference to a Mas- ter and were unprepared to meet the reduction of damages issue at the trial. However, the contention is not well taken. The defendants were thoroughly prepared on the issue of market conditions and produced such extensive and exhaustive evidence that it is difficult to conceive of any other testimony which could be found to have a bearing on the matter. The evidence on this point was that which would apply to the class of the plaintiffs as a whole. It does not and is not intended to bar testimony on other matters of de- fense which might apply in the assessments of damages in individual cases, although, certainly, the matter of mar- ket conditions has been resolved by the jury’s finding. SESE RISES GASES T IRIS A ASOT CU RRR Ay NSS iar ee It may well be, as the plaintiffs contend that the defend- ants were not even entitled to have this matter submitted to the jury. However, we do think the question was fairly raised by the evidence and was within the jury’s domain. The charge to the jury on this point was an accurate state- ment of the general law. The defendants contend that it was error to submit In- terrogatories on this point to the jury but it’s difficult to follow this reasoning when it is noted that a favorable answer to the question would have been beneficial, but the failure to submit the issue would have deprived the defend- ants of an opportunity to substantially better their position. PE EI aE ERLE LENA ASS RES EE TE PUD IARI I #8 WT ea 2 78a The defendants also object to the interrogatory following which would have permitted a reduction in percentages," claiming there was no basis for the jury’s determination, The market conditions testimony, however, if accepted by the jury, could have furnished a guide and its findings would have been no more speculative than many items of damage which juries pass upon daily. In any event, since it was determined that no reduction was applicable, the ob- jection is moot. DAMAGES RECOVERABLE BY THE CLASS In accordance with the opinion of the Court of Appeals suggesting consideration of the application of Rule 23, argu- ments were held and Orders were entered by this Court on January 22, 1969 and February 28, 1969. The first Order determined that the matter should be handled as a class action, and the second required that a notice be given to each eligible member of the Co-Op, ad- vising that he could be excluded from the class and partici- pation in the suit if a request was submitted in writing and sent to the Clerk of the Court. Absent such affirmative ac- tion, those who were members of Erie-Crawford during the years in question would be considered as part of the class,” the notice adding, ‘‘the judgment entered, whether favor- able or not, will be binding upon you and no other suit may be brought by you on the claims alleged in this lawsuit.” The potential participants were further advised, ‘‘If the defendants are found to be liable to the class members, in order to recover any amount from them, you will be re- quired to prove your specific damages.’’ 16«*7, Tf the answer is ‘Yes’, indicate what percentage of re- duction the defendants are entitled to. ...... " 17 They were also given the option of retaining their own attor- ney if that was desired. 79a Plaintiffs now assert that they should be entitled to re- cover all of the damages sustained by the class, even by those who had requested exclusion from the suit. We reject this contention and hold that only the damages sustained by members of the class as presently constituted may be assessed against the defendants. Plaintiffs’ position is unsound in two respects. First, if the present members of the class wish to collect all of the damages sustained by all without distributing the shares to those who chose not to continue in this suit, then there would be unjust enrichment. The law of Pennsylvania, as in other common law jurisdictions, is that tort actions are brought for compensation for loss suffered. Absent punitive damages, no other recovery should be permitted. Second, if damages could now be awarded to those who had pre- viously decided not to participate, the whole purpose of giving notice under 23(d) would be thwarted and the Rule would be in shambles. The procedures of Rule 23 are designed to facilitate the disposition of litigation where large numbers of litigants are involved. It has already raised many practical prob- lems and if the procedure is to continue to serve the pur- pose for which it was designed, it must be carefully utilized. Professor Charles Alan Wright in his discussion of class actions, 47 F.R.D. 169, 181 said: “Critical to the entire operation of the revised rule is the effect of the judgment. It is clearly contemplated that every judgment in every class action will bind all of the members of the class, except for those who have asked to be excluded in a (b) (3) action. ‘‘The absentee has an absolute right to be excluded from a (b) (3) action. If he does, and the judgment ultimately is favorable to the class, he should not be AEM RMT ELAM ¢ AIMEE an SaeegR ARAL LLL OLED DE AEE ™ 80a entitled to rely on it as collateral estoppel, in those jurisdictions that departed from the requirement of mutuality for estoppel. To permit him to do this would make a mockery of the (b) (3) procedure, and would restore in a different form the ‘one way’ intervention that the amended rule was expressly intended to pre- clude. Notions of collateral estoppel are not so in- exorable that a party who has affirmatively obtained exclusion from a judgment need be allowed later to claim the benefits of the judgment.’’ A fortiori, an excluded plaintiff should not be entitled to share in the damage award nor should a defendant who thought he was dealing with damages sustained by several hundred suddenly be required to meet those claimed by a thousand. Finally, if there was any doubt, Rule 23(c) (3) provides: ‘‘The judgment in an action maintained as a class ac- tion under subdivision * * * (b) (3), whether or not favorable to the class, shall include and specify or de- scribe those to whom the notice provided in subdivi- sion (c) (2) was directed, and who have not requested exclusion, and whom the court finds to be members of the class.’’ (emphasis provided) Appropriate Orders will be entered. reer ftp 8la APPENDIX E Interrogatories to the Jury. IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA Civil Action No. 65-1328 Rosert N. Kuru, on behalf of himself and all others similarly situated, Plaintiffs vs. Erre-Crawrorp Dairy Cooperative ASSOCIATION, and others, Defendants Interrogatories to the Jury 1. Were the plaintiffs deprived of money to which they had a right of possession by the payment of rebates? (Do not consider Rieck Dairy or Sealtest in answering this question). YES x NO 9. Did the plaintiffs consent to the granting of rebates to the handlers or dairies? YES NO Xx If the answer is ‘‘Yes’’, indicate the date. 3. Did the adjustment given to Rieck Dairy (Sealtest) deprive the plaintiffs of money to which they had the right of possession? YES x NO SNe RS Se TOF or Oe ea 4. Are the following officers and directors of Erie Craw. ford personally liable for the conversion? (Answer as to each individual defendant). NO Charles Spaid Howard Yost John Hanas Russell Raybuck Milton Culbertson Donald Triscut Raymond Boyd Calvin Henry Roy Biack Loran Mitchell x pe pe fe fe pe fe fe be 1 If you answer either 1, or 3, or 4 ‘‘Yes’’, and 2 ‘“‘No”, please answer the following interrogatory : 5. Did the conversion of plaintiff’s property by the de- fendants result in only nominal ($1.00) damages to the plaintiffs? YES NO x If your answer is ‘‘No’’, please answer the following interrogatories : 6. Are the defendants entitled to a reduction in the dam- ages claimed by the plaintiffs? YES NO x reduction the defendants are entitled to: 8. Is the Statute of Limitations a defense as to events which occurred before May 31, 1960 as to any of the fol- jowing defendants? (Answer ‘‘Yes’’ or ‘“‘No’”’ as to each). YES No 83a 7. If the answer is ‘‘Yes’’, indicate what percentage of =| William Colteryhan & Sons Erie Dairyland Golden Crown Golden Glow A. H. Hilgendorf = Home Dairy Lingerlight Dairy = Peninsula Dairy Rieck Dairy Schneider’s Dairy Snee Dairy Erie-Crawford Dairy Co-Onerative Charles Spaid Howard Yost John Hanas Russell Raybuck Roy Black PRLS CATE OF Ee STS PU SS an | --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1698%3A2. Public record. Not legal advice.