GAF CORPORATION v. Circle Floor Co., Inc., 668
| Decision Date | 05 July 1972 |
| Docket Number | No. 668,Docket 71-1956.,668 |
| Citation | 463 F.2d 752 |
| Parties | GAF CORPORATION, Appellant, v. CIRCLE FLOOR CO., INC., et al., Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Terence H. Benbow, New York City (Edwin J. Wesely and Steven A. Berger, Winthrop, Stimson, Putnam & Roberts, New York City, on the brief), for appellant.
Charles G. Moerdler, New York City (Stephen A. Block and Robert P. Stein, Stroock, Stroock & Lavan, New York
City, on the brief), for appellees Paul Milstein, Morris Milstein, Seymour Milstein, and Gloria Milstein Flanzer.
Robert S. Smith, New York City (Martin London, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, on the brief), for appellee Circle Floor Co., Inc.
Before WATERMAN, HAYS and FEINBERG, Circuit Judges.
Appellant GAF Corporation filed a complaint in the United States District Court for the Southern District of New York alleging that four individuals and Circle Floor Company conspired to restrain and attempted to monopolize interstate commerce, in violation of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2 (1970), by seeking to gain working control of GAF through stock acquisitions and proxy solicitations. A violation of § 7 of the Clayton Act, 15 U.S.C. § 18 (1970), was also alleged. The individual defendants and Circle Floor moved separately for dismissal of the complaint for failure to state claims on which relief could be granted and for summary judgment. These motions were granted in two orders, D.C., 329 F.Supp. 823, from which GAF now appeals. We affirm the dismissal of the complaint on the ground that GAF has failed to allege damages resulting from the alleged violations of the antitrust laws that are compensable under § 4 of the Clayton Act, 15 U.S.C. § 15 (1970).
In order to understand more clearly the exact nature of the alleged antitrust violations set forth in the complaint, it is necessary to describe in some detail the parties to this action and their relationships with each other.
GAF Corporation is a large, diversified publicly-held corporation which manufactures, among other things, floor tile. GAF sells the floor tile it manufactures to "national accounts," distributors of building materials, and contractors who install finished floors in buildings. GAF alleges that, for purposes of this antitrust suit, the relevant product markets are the manufacture and contract installation of floor tile, and the relevant geographic market is the New York City metropolitan area. GAF alleges that it is the largest manufacturer of floor tile in the New York area, and that the floor tile manufacturing market is "highly concentrated" with seven companies manufacturing over 90% of the total production of floor tile in the New York area. GAF alleges that the seven largest manufacturers sell 49.5% of the floor tile produced to contractors, and the six largest contractors purchase 34.165% of the floor tile produced by the seven largest manufacturers, and that this amounts to two-thirds of the floor tile purchased by all contractors in the New York area. GAF alleges that it sells 28% of the total amount of floor tile sold to the six major New York area contractors.
Until July, 1968, the stock of Circle Floor Company was held almost entirely by the Milsteins, the individual defendants named in the complaint. At that time Circle Floor was acquired by Kinney National Services, Inc. Circle Floor is engaged "in the business of contracting or subcontracting to install finished floors (mainly floor tile) primarily in buildings being constructed in the New York" area. GAF alleges that Circle Floor is the largest contract installer of floor tile in the New York area; in 1970 Circle Floor allegedly purchased 28% of the floor tile purchased by "major contractors" in the New York area, and over 50% of Circle Floor's purchases of floor tile was from GAF. In sum, GAF alleges that it and Circle Floor stand in a verticle supplier-customer relationship, with GAF the largest supplier and Circle Floor the largest contract purchaser of floor tile in the relevant geographic market.
Appellee Paul Milstein is president of Circle Floor, and, after the acquisition of Circle Floor by Kinney, he was elected to the Kinney board of directors. Morris Milstein, father of Paul, is chairman of the board of Circle Floor. Paul Milstein owns 95,272 shares of GAF's $1.20 convertible preferred stock and 103,650 shares of GAF common stock. Morris Milstein owns 38,642 shares of GAF $1.20 convertible preferred. It is not alleged that the two other individual defendants, Seymour Milstein and Gloria Milstein Flanzer, brother and sister of Paul Milstein, had any direct relationship with Circle Floor or Kinney, but GAF alleges that they own, respectively, 94,750 shares of GAF convertible preferred and 105,650 shares of GAF common stock, and 95,682 shares of GAF convertible preferred. Thus the Milstein family owns a substantial portion of the outstanding stock of GAF, but, although Paul and Morris Milstein are members of the five-man board of directors of Circle Floor, the Milstein family owns no shares of Circle Floor and less than 1/2 of 1% of the outstanding stock of Kinney, the company that owns Circle Floor. When the complaint was filed, Circle Floor owned 420 shares of GAF convertible preferred.
The substance of GAF's charge of antitrust violation is that Circle Floor and the Milsteins sought to acquire working control of GAF in order to be in a position to establish a vertically integrated corporation that would have competitive advantages over other manufacturers and contract installers of floor tile, thus unreasonably restraining trade in violation of the Sherman and Clayton Acts.
In May, 1970 Paul Milstein commenced a derivative action against the directors of GAF charging waste. In December, GAF commenced an action against the Milsteins alleging violations of the Williams Act, 15 U.S.C. § 78m(d) (1970), and Rule 10b-5, 17 C.F.R. 240.10b-5 (1972). In January, 1971, the Milsteins announced the formation of the GAF Stockholders Protective Committee the purpose of which, according to the complaint, was "the solicitation of proxies to be voted at the GAF annual stockholders meeting scheduled for April to replace the incumbent Board of Directors of GAF and thus acquire control of the corporation. . . ." In February, GAF commenced the instant action, which included in the prayer for relief a request for an injunction prohibiting the Milsteins from soliciting or voting proxies. In March, the Milsteins commenced an action against the president and chairman of the board of directors of GAF alleging violations of § 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) (1970) and rules promulgated thereunder. In May, 1971 it was announced that the management had defeated the challengers in the proxy fight.
The complaint attempts to set forth violations of §§ 1 and 2 of the Sherman Act and § 7 of the Clayton Act. The essence of all three of the alleged violations—whether premised on a § 1 conspiracy allegation, a § 2 attempt allegation, or a § 7 indirect acquisition allegation—is that Circle Floor and the Milsteins sought "to acquire control of GAF which, if successful, would allow defendants, through their common control of Circle Floor and GAF, to monopolize the floor tile installing and manufacturing markets." The result of such control, the complaint alleges, would be the "elimination of GAF as a source of supply to major contractors, other than Circle Floor" thus giving Circle Floor "decisive competitive advantages over other major contractors . . . since Circle Floor would have access to an almost unlimited source of supply of floor tile at whatever price it wanted to pay. . . ." In addition, such acquisition of control of the largest manufacturer of floor tile by the largest purchaser would, the complaint alleges, raise barriers to entry into both the floor tile manufacturing and contract installation businesses.
The facts alleged in the complaint to support the charges of conspiracy to restrain trade through vertical integration, attempted monopolization, and restraint of trade by the indirect acquisition of shares of GAF by Circle Floor fall into two basic categories. First, plaintiff alleges that the defendants sought to depress the market price of GAF stock in order to be able to increase their voting strength by purchasing additional shares and thus to acquire control of GAF, their ultimate objective being the verticle integration of the two companies. The complaint alleges that Circle Floor cut its purchases of floor tile from GAF in 1968, 1969, and 1970 in order to inflict "economic injury upon GAF and to embarrass the management of GAF." In addition, the complaint alleges that the defendants sought "to disparage unfairly the management of GAF" so as to depress the value of GAF stock, and that one of the devices to accomplish this result was the derivative action commenced by Paul Milstein in May, 1970. The second category of factual allegations deals with the defendants' efforts to obtain additional voting strength in order to oust the incumbent management of GAF. Plaintiff alleges that the defendants purchased additional shares of GAF through nominees "without publicly disclosing such increase as required by law;" that defendants failed to file on time an accurate Schedule 13D; and that defendants formed the GAF Stockholders Protective Committee to solicit proxies.
Circle Floor moved to dismiss the complaint and for summary judgment. On April 1, 1971 the district court (Cooper, J.) ruled that, because of the allegations "that Circle participated in an unlawful conspiracy . . . aimed at enhancing the likelihood of success of the allegedly projected Milstein takeover," and the allegation of "an intentional reduction of purchases by Circle of GAF goods in 1968-70," issues of fact existed which...
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