Milsen Company v. Southland Corporation

• Decision Date: 25 January 1972
• Docket Number: No. 71-1413.,71-1413.
• Parties: MILSEN COMPANY, a corporation, et al., Plaintiffs-Appellants, v. The SOUTHLAND CORPORATION, a corporation, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

454 F.2d 363 (1971)

MILSEN COMPANY, a corporation, et al., Plaintiffs-Appellants, v. The SOUTHLAND CORPORATION, a corporation, et al., Defendants-Appellees.

No. 71-1413.

United States Court of Appeals, Seventh Circuit.

December 13, 1971.

Rehearing Denied January 25, 1972.

Barbara B. Hirsch, Chicago, Ill., for plaintiffs-appellants.

Kenneth J. Glick, Libertyville, Ill., for intervenor.

G. Duane Vieth, Washington, D. C., Earl E. Pollock, Donald E. Egan, Chicago, Ill., for defendants-appellees.

Before DUFFY and HASTINGS, Senior Circuit Judges, and SPRECHER, Circuit Judge.

SPRECHER, Circuit Judge.

This is an appeal from the trial court's denial of a preliminary injunction against termination of franchise agreements pending the trial of an antitrust suit against the franchisor.¹

Plaintiffs operate various Open Pantry Food Marts, which are "convenience" grocery stores in the Chicago area. The Open Pantry defendants signed franchise agreements with plaintiffs at different times between December 1965 and January 1969. Defendant Southland, which sponsors a system of convenience stores under the name "7-Eleven," acquired Northern Illinois Open Pantry on November 18, 1970, and assumed control of the regional Open Pantry system. Southland bought defendant Wanzer, a dairy producer, in 1969. Defendant M. Loeb is a grocery wholesaler.

On March 8, 1971, plaintiffs filed their complaint, alleging that defendants had violated sections of the Sherman and Clayton Acts.² On April 15, defendants answered the complaint; Northern Illinois filed a counterclaim for franchise fees and rents allegedly in arrears. On the same day, Northern Illinois served notices of default on plaintiffs and on the owners of six other franchised stores. The notices stated that the franchise agreements would be terminated in 15 days if the outstanding fees and rents were not paid.

Five days later, plaintiffs filed an emergency motion for preliminary injunction, in which they sought to enjoin defendants from terminating their franchises for failure to pay rents and franchise fees. Plaintiffs presented documentary evidence and testimony at the hearing on the motion to support their claims that defendants were guilty of antitrust violations and that the violations were effectuated by the franchise fees defendants sought to collect from the plaintiffs.

Plaintiffs alleged and offered evidence to prove the following violations:

1. Combining to restrain trade through tie-ins and price fixing (15 U.S.C. § 1). The franchise agreement requires the store owner to stock items designated and in quantities specified by the franchisor. The franchisor's agreement to replace stock which is not sold in a reasonable time does not apply to items not recommended by the franchisor. In another clause of the agreement, the store owner agrees to sell only those products which are approved by the franchisor's merchandising service. He agrees to buy equipment under the direction of the franchisor. The plaintiffs who took the stand testified that Open Pantry required them to buy groceries from defendant M. Loeb, to buy dairy products from defendant Wanzer, and to enter into leases and insurance and loan agreements with Open Pantry or companies designated by it.

The franchise agreement states that Open Pantry will not replace merchandise marked at a price higher than its recommended maximum price. The "Store Owners' Manual" is more explicit: "The maximum retail price of all merchandise sold will be established by the regional office."

Reprisals for failure to follow Open Pantry's "recommendations" came in the form of letters or telephone calls. Open Pantry officers warned plaintiffs to bring their pricing and merchandising practices into line or risk losing their franchises.

2. Attempting to monopolize the wholesale and retail grocery businesses through the above practices (15 U.S.C. § 2).

3. Requiring the store owners not to buy goods from competitors of the designated suppliers (15 U.S.C. § 14). The basis for this alleged violation is described above. In addition, Open Pantry forbade the store owners to display merchandise, set up in-store promotions or talk to salesmen from food distributors except when authorized by the franchisor.

4. Acquiring corporations with the effect of lessening competition (15 U.S.C. § 18). Southland offered Open Pantry store owners inducements to convert their store to the "7-Eleven" chain, also owned by Southland. In some instances plaintiffs' primary competitors were 7-Eleven stores. Also, Open Pantry required its franchisees to buy their dairy products from another Southland subsidiary, Wanzer & Sons.

Plaintiffs also alleged but did not attempt to prove discrimination in prices, discounts and services (15 U.S.C. §§ 13 and 13a).

There is little doubt that plaintiffs have established at least a prima facie case of antitrust violations under the four categories enumerated above. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969) (tying prefabricated houses to loans); F T C v. Texaco, Inc., 393 U.S. 223, 89 S.Ct. 429, 21 L.Ed.2d 394 (1968) (tying leases and gasoline contracts to tires, batteries and accessories); Siegel v. Chicken Delight, Inc., 311 F.Supp. 847 (N.D.Cal.1970), aff'd except on damages issue, 448 F.2d 43 (9th Cir. 1971) (tying trademarks to supplies). Price-fixing violations were found in Albrecht v. Herald Co., 390 U.S. 145, 88 S.Ct. 869, 19 L.Ed.2d 998 (1968); Simpson v. Union Oil Co., 377 U.S. 13, 84 S.Ct. 1051, 12 L.Ed.2d 98 (1964); and United States v. Parke, Davis & Co., 362 U.S. 29, 80 S.Ct. 503, 4 L.Ed.2d 505 (1960). The Brown Shoe cases are examples of exclusive dealing in violation of 15 U.S.C. § 14 (F T C v. Brown Shoe Co., 384 U.S. 316, 86 S.Ct. 1501, 16 L.Ed.2d 587 (1966)), and vertical and horizontal mergers which lessen competition (Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962)).

Under the district judge's view of the case, he did not need to (and did not) make any finding on whether antitrust violations were shown. It is necessary for us to review the record and the law to determine the probability of plaintiffs' success on the merits,³ to evaluate the equities between the parties, and to provide a background for considering the relationship between the alleged antitrust violations and the threatened terminations of the franchise agreements.

Many courts have held that defendants who are or may be guilty of anticompetitive practices should not be permitted to terminate franchises, leases or sales contracts when such terminations would effectuate those practices.⁴ Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970); Sahm v. V-1 Oil Co., 402 F.2d 69 (10th Cir. 1968); Broussard v. Socony Mobil Oil Co., 350 F.2d 346 (5th Cir. 1965); Bergen Drug Co. v. Parke, Davis & Co., 307 F.2d 725 (3d Cir. 1962); Bateman v. Ford Motor Co., 302 F.2d 63 (3d Cir. 1962); Interphoto Corp. v. Minolta Corp., 295 F.Supp. 711 (S.D.N.Y.), aff'd, 417 F.2d 621 (2d Cir. 1969); Wurzberg Brothers, Inc. v. Head Ski Co., 276 F. Supp. 142 (D.N.J.1967); Madsen v. Chrysler Corp., 261 F.Supp. 488 (N.D. Ill.1966), vacated as moot, 375 F.2d 773 (7th Cir. 1967); McKesson and Robbins, Inc. v. Charles Pfizer & Co., 235 F.Supp. 743 (E.D.Pa.1964).⁵

The most common situation is a suit by an automobile dealer under the "Dealer's Day in Court Act,"⁶ which provides for damages only. In reversing the denial of a preliminary injunction against termination of one such dealership, the Third Circuit Court of Appeals said: "A judgment for damages acquired years after his franchise has been taken away and his business obliterated is small consolation to one who . . . has had a . . . franchise since 1933." Bateman, supra, 302 F.2d at 66. The Second Circuit expressed a similar sentiment in Semmes, supra, 429 F.2d at 1205: "Franchisees want to sell automobiles, not to live on the income from a damages award." These cases recognize the vested interest a franchisee builds in his business through years of effort and expenditure, as noted by this court in Beloit Culligan Soft Water Service, Inc. v. Culligan, Inc., 274 F.2d 29, 34 (7th Cir. 1959).

Courts which have entered injunctions against terminations have weighed the equities and found the plaintiffs' side more substantial, even though in each case the plaintiff had violated the terms of the franchise or sales agreement and had given defendant a contractual basis for termination. The public interest in encouraging antitrust prosecutions by private parties (Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 494, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968)) and the need for such parties to continue in their businesses while the legal claims are tried have persuaded courts to restrain terminations pendente lite.

The Open Pantry store owners have presented an appropriate case for preliminary injunction. They have fulfilled the requirements stated recently in American Family Life Assurance Co. v. Aetna Life Ins. Co., 446 F.2d 1178, 1180 (5th Cir. 1971): (1) plaintiffs have no adequate remedy at law and will be irreparably harmed if the injunction does not issue, because they will lose their stores and may not be able to finance the trial on their legal claims if they lose their businesses now; (2) the balance of hardships tilts toward plaintiffs, because defendants risk little in allowing plaintiffs to continue operating their stores; and (3) plaintiffs have at least a reasonable likelihood of success on the merits, because they have proved on a prima facie basis a number of serious antitrust violations.

Despite the persuasive factual situation and the legal precedents outlined above, the district judge denied the preliminary injunction because he deemed controlling a line of cases exemplified by Kelly v. Kosuga, 358 U.S. 516, 79 S.Ct. 429, 3 L.Ed.2d 475 (1959). He found that defendants desired to...