521 F.2d 1230 (3rd Cir. 1975), 74-1911, American Motor Inns, Inc. v. Holiday Inns, Inc.

Docket Nº:74-1911.
Citation:521 F.2d 1230
Party Name:AMERICAN MOTOR INNS, INC. v. HOLIDAY INNS, INC., Appellant, International Association of Holiday Inns, Intervenor-Defendant.
Case Date:June 30, 1975
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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Page 1230

521 F.2d 1230 (3rd Cir. 1975)

AMERICAN MOTOR INNS, INC.

v.

HOLIDAY INNS, INC., Appellant,

International Association of Holiday Inns, Intervenor-Defendant.

No. 74-1911.

United States Court of Appeals, Third Circuit

June 30, 1975

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Argued March 3, 1975.

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Donovan, Leisure, Newton & Irvine, New York City, Pitney, Hardin & Kipp, Newark, N. J., for appellee; Sanford M. Litvack, Paul A. Alexis, Clyde A. Szuch, Newark, N. J., of counsel.

David Berger, P. A., Warren D. Mulloy, Bruce K. Cohen, Warren Rubin, Philadelphia, Pa., Harold Brown, Brown & Leighton, Boston, Mass., for Frank L. Hawkins.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for appellant; Milton Handler, Fred A. Freund, Elizabeth Head, Richard M. Steuer, New York City, of counsel.

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Lowenstein, Sandler, Brochin, Kohl & Fisher, Newark, N. J., Murray J. Laulicht, Newark, N. J., on the brief, for amicus curiae International Ass'n Holiday Inns.

Before HASTIE, ADAMS and WEIS, Circuit Judges.

OPINION

ADAMS, Circuit Judge.

The largest chain of motor hotels in the nation is operated under the Holiday Inn trademark. Holiday Inns, Inc. (HI), the owner of the trademark, not only licenses the trademark to franchisees who wish to operate Holiday Inns at specified sites, but also owns and manages a number of inns itself. American Motor Inns, Inc. (AMI), HI's largest franchisee, operates 48 Holiday Inns. The antitrust suit which forms the basis for the present appeal was precipitated by HI's denial of AMI's application for a franchise to open a Holiday Inn adjacent to the new passenger terminal at the Newark, New Jersey airport. Pursuant to the terms of its standard licensing agreement, HI also refused to allow AMI to build any other type hotel at the Newark location.

AMI charged in its complaint that HI's franchising practices resulted in a horizontal allocation of the hotel-motel market among HI and its franchisees in violation of the Sherman Act. The district court, sitting without a jury, concluded that HI had transgressed the law.

This appeal by HI from the judgment in favor of AMI raises several important issues regarding the application of section 1 of the Sherman Act 1 in the setting of a franchise arrangement:

  1. Did the district court err in finding that HI had unlawfully conspired with one or more of its existing franchisees in the Newark vicinity to restrain trade unreasonably when AMI's application for a Holiday Inn franchise at the Newark airport was denied?

  2. Did the district court err by misleading HI into believing that the suit involved only the denial of AMI's Newark application rather than a challenge to the national operation of HI's procedures for granting franchise applications? 2

  3. Does HI unreasonably restrain trade by requiring that its franchisees not operate any hotels or motels which are not franchised by HI?

  4. Does the combination of three characteristics of the Holiday Inns franchising system the "radius letter" practice; the prohibition on franchisees' operation of non-Holiday Inns; and HI's alleged practice of permitting only parent company-owned inns to be established in specified towns constitute an unreasonable restraint of trade?

    1. THE DISTRICT COURT OPINION.

    The trial judge found that on December 31, 1972 the Holiday Inns system consisted of 1380 Holiday Inns throughout the country. HI and its subsidiaries owned or operated 281 of these Inns. The remaining 1099 were owned by independent parties who operated the motor lodges pursuant to franchise agreements with HI, which licensed the franchisee to use the Holiday Inn trademark.

    At the time of the district court's decision, AMI, in addition to operating 48 Holiday Inns, had licenses to build eight inns and commitments from HI for five additional franchises.

    Prior to trial the International Association of Holiday Inns was permitted by the trial court to intervene as a defendant.

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    The membership of the Association is composed of all the Holiday Inns, whether franchised or operated by HI. The Association was, on its own motion, dismissed as a defendant at the close of AMI's case, but was allowed to continue to participate in the proceedings as an amicus curiae.

    After the parties agreed to a bifurcated trial, the court conducted proceedings on the issue of liability. Following a decision which concluded that HI was liable to AMI, the parties stipulated to treble damages in the amount of $4 million, plus attorneys fees and costs. In addition, both sides agreed to equitable relief including a declaratory judgment that the clause in HI's standard licensing agreement barring HI franchisees from owning non-Holiday Inns 3 was unlawful; an injunction against enforcement of that clause by HI; and an injunction against HI's soliciting comments or objections from its existing franchisees when considering an application for a new franchise.

  5. AMI's Application for a Franchise at Newark Airport and the Operation of the Radius Letter Procedure

    The events which provided the impetus for this litigation between HI and AMI began with AMI's application for a franchise to open a Holiday Inn near the Newark airport. In February, 1971 the City of Elizabeth, New Jersey invited bids for the purchase of a parcel of land close to the proposed site of a new terminal at the Newark airport. AMI submitted the highest bid, and in December, 1971, received a deed for the property, subject to the condition that $1 million worth of construction on a hotel-motel complex be completed at the location within eighteen months. AMI then applied to HI for a license to operate a Holiday Inn on the Elizabeth property.

    The normal HI procedure upon receiving an application for a franchise was to send written notices of the application referred to as radius letters to at least the three Holiday Inns nearest the proposed location. The recipients of the radius letters were invited to forward to HI their written comments on the application, but were under no obligation to respond. Any replies to the radius letters received by HI were referred to the Franchise Committee, which then reviewed the application.

    Ordinarily HI's Franchise Committee had the authority to grant or to deny any franchise application. However, the district court found that if, as a result of the radius letters, HI received an objection to the proposed franchise by an existing franchisee, the only definitive action the Franchise Committee could take was to deny the application. It could not approve the application. Once an objection had been lodged, the franchise could be awarded only by the Executive Committee of the Board of Directors of HI. According to the trial judge, in order for the Executive Committee to consider an objection by any existing franchisee, the Franchise Committee must already have recommended that the franchise be granted. In 1972 the Executive Committee reviewed 75 applications for franchises to which one or more existing franchisees had objected, and denied 43 of them. The trial court found as a fact that "these 43 applications would have been granted but for objections from existing franchisees." 4

    With regard to AMI's application for a franchise for the Elizabeth property, HI sent radius letters to its licensees in downtown Newark and Carteret, New Jersey, as well as to Arthur and Edwin Fleck, the holders of a franchise for a Holiday Inn near the existing passenger terminal at the Newark airport. The Flecks' motel was approximately 1.25 miles from the AMI property. The

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    Flecks previously had plans to expand their own inn, and, prior to AMI's acquisition of the Elizabeth property, had notified HI that they were interested in building another Holiday Inn on the property eventually purchased by AMI. Indeed, the Flecks submitted a bid for that specific property, but were outbid by AMI.

    The Carteret franchisee and the Flecks advised HI that they opposed the grant of AMI's application. The district court found that the objections of the Flecks and the Carteret licensee "were dispositive to the (Franchise) Committee", 5 and the Committee rejected AMI's application. HI informed AMI of the denial of its request for the franchise, noting that AMI's proposed inn would have been in competition with the Fleck's existing inn. In discussing with AMI the alternatives available in light of the rejection of the application, the Chairman of the Board of HI recommended that AMI contact the Flecks "to try to 'work something out with them,' " adding later that if AMI and the Flecks "were able to make a deal", 6 HI would be satisfied. After consideration of this evidence the trial judge decided that "AMI's application for a franchise located on the (Elizabeth) property was rejected because of Fleck's (sic) objections, which were treated as a veto by HI." 7

    After the denial of its request for a Holiday Inn license, AMI sought to have HI waive the non-Holiday Inn clauses in AMI's existing licenses to enable AMI to build a Sheraton Inn on the Elizabeth site. HI refused.

    With respect to the events surrounding AMI's request for a license to construct a Holiday Inn on the Elizabeth property, the district court concluded that the denial of the application was the result of a combination or conspiracy to allocate territories among competitors. The trial court considered that combination or conspiracy to be essentially horizontal in character, and therefore an unreasonable restraint of trade repugnant to the Sherman Act.

    The district court also determined that HI's radius letter policy, as it operated nationally, created in effect a horizontal allocation...

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