Northern v. McGraw-Edison Co.

Decision Date05 November 1976
Docket NumberNo. 75-1738,GRAW-EDISON,75-1738
Citation542 F.2d 1336
Parties1976-2 Trade Cases 61,091 James E. NORTHERN and Shirley Northern, Plaintiffs-Appellees, v. McCOMPANY, Defendant-Appellant, Betty Soper and Jeffson Industries, Inc., Intervenors-Appellees.
CourtU.S. Court of Appeals — Eighth Circuit

Malcolm D. Young, Omaha, Neb., Leland C. White, Harland, Iowa, and Jerome Waterman, Kansas City, Mo., for McGraw-Edison Co.

Joseph A. Sherman and Paul L. Wickens, and Sheridan Morgan, Kansas City, Mo., for James E. Northern, Shirley Northern, Betty Soper, Jeffson Industries, Inc.

Before GIBSON, Chief Judge, ROSS and HENLEY, Circuit Judges.

GIBSON, Chief Judge.

Defendant, McGraw-Edison Company (McGraw), appeals from a judgment entered by the District Court 1 upon a jury verdict in favor of plaintiffs James and Shirley Northern (Northern), Betty Soper and Jeffson Industries, Inc. (Jeffson), 2 on various antitrust and fraud claims. This litigation arose out of the sale to plaintiffs of four Arnold Palmer Cleaning Centers (A.P. Centers), which were distributed by defendant through its dealer, John Jacobson. 3 Northern and Soper each purchased one of the A.P. Centers and Jeffson purchased two.

Plaintiffs' individual complaints sought a judgment against defendant on three counts. Count I alleged that defendant violated § 3 of the Clayton Act, 15 U.S.C. § 14 (1970), and § 1 of the Sherman Act, 15 U.S.C. § 1 (Supp. V, 1975), by distributing A.P. Centers pursuant to an illegal tying arrangement in which the purchaser was obligated to purchase equipment and incidental materials from defendant in order to secure the A.P. Center franchise and "Arnold Palmer" trademark. 4 Count II alleged that defendant and Jacobson made certain misrepresentations to induce plaintiffs to purchase the A.P. Centers and that plaintiffs were entitled to actual damages for economic injury sustained due to these false statements. Count III alleged that the misrepresentations in Count II were made willfully and maliciously and that plaintiffs were entitled to punitive damages.

In order to better comprehend the nature of the case, it is beneficial to initially review the relationship between Jacobson and defendant, to consider the activities of Jacobson preceding the sales of the A.P. Centers to the plaintiffs and to discuss the method of distributing A.P. Centers utilized by defendant. Thereafter, each plaintiff's case will be segregated and the facts relating to each purchase summarized.

In 1965 Jacobson, who maintained interests in various dry cleaning operations, attended a National Institute of Dry Cleaners convention. At that convention he met with two representatives of the Arnold Palmer Cleaning Center Sales Division (A.P.C.C.S.), which was the division responsible for distributing A.P. Centers on defendant's behalf. After extolling the economic virtues of a dry cleaning franchise identified with the name of Arnold Palmer, the representatives induced Jacobson to become an authorized dealer of A.P. Centers. Following his execution of the dealership agreement, Jacobson attended numerous indoctrination meetings with A.P.C.C.S. personnel, where he was advised of how to sell, promote and advertise A.P. Centers. He was also instructed on how to fill out the various forms which had been printed by A.P.C.C.S. and which were required to be used in consummating the sales of A.P. Centers. In addition to providing Jacobson with printed sales forms, A.P.C.C.S. forwarded catalogs, machinery price lists, site evaluation forms, financial projection forms for prospective franchisees, advertising manuals, dealer memoranda and periodic newsletters to Jacobson.

Armed with his training and promotional materials, Jacobson proceeded to sell A.P. Center franchises to interested investors. Favorable locations for A.P. Centers were hard to find and, since a dealer had not always secured a willing buyer of a franchise when a good location became available, A.P.C.C.S. encouraged Jacobson and other dealers to utilize a purchase-resale procedure as a method of distributing A.P. Centers. Pursuant to this procedure, a dealer would select a favorable location for an A.P. Center and secure confirmation of his selection from A.P.C.C.S. Upon confirmation, the dealer would personally execute a lease for the location. The dealer would then enter into a franchise agreement with A.P.C.C.S., which authorized the dealer to use the name "Arnold Palmer" in association with the dry cleaning business for a period of five years. Finally, the dealer would execute a Sign and Back Drop Lease Agreement with A.P.C.C.S. which permitted the dealer to place a large "Arnold Palmer Cleaning Center" sign on the exterior of the building and to use a specially designed back drop in the interior. The dealer would also arrange to make the A.P. Center operational by purchasing all equipment from A.P.C.C.S. at dealer's cost. In most instances, the dealer would finance the equipment purchase through Edison Acceptance Corporation (E.A.C.), which, like A.P.C.C.S., was a subsidiary of defendant McGraw.

The dealer would thereafter attempt to sell the A.P. Center as a "package deal" to prospective franchisees. If such a sale were arranged, the dealer and the franchisee generally executed three documents: (1) an assignment of the lease on the location from the dealer to the franchisee; (2) an assignment of the Sign and Back Drop Lease Agreement with A.P.C.C.S. from the dealer to the franchisee; and (3) an Assumption Agreement by which, upon E.A.C. approval, the franchisee would secure rights to the A.P. Center equipment by taking over the dealer's payments to E.A.C. A dealer would negotiate for the highest price obtainable when marketing A.P. Centers in this fashion. The dealer would be entitled to any profit secured from the sale.

In three of the four A.P. Centers involved in this litigation, Jacobson utilized this purchase-resale procedure. Of these three, one was sold to plaintiff Soper's husband and two were sold to plaintiff Jeffson. The fourth A.P. Center, purchased directly by Northern, had not previously been rendered operational by Jacobson, nor had Jacobson become a franchisee for that Center. Each of these sales will be discussed below in relation to the individual plaintiff's case.

A. Northern v. McGraw-Edison Company. The litigation as to Northern arose out of the purchase of an A.P. Center in Raytown, Missouri. Northern was an architect who became interested in a dry cleaning operation for investment purposes. Northern contacted Jacobson, who showed Northern a potential Raytown location. Jacobson also completed for Northern's benefit a Financial Projection Form, which had been printed by A.P.C.C.S. and which reflected that Northern could anticipate a monthly income in excess of $1,000 from the A.P. Center. Northern eventually agreed to become a franchisee and he and Jacobson executed a lease for the Raytown location. Northern signed the A.P.C.C.S. franchise agreement, as well as the Sign and Back Drop Lease agreement, on June 28, 1967. Northern was informed by Jacobson on numerous occasions that in order to obtain the franchise, the franchisee must purchase the whole equipment package. Furthermore, the franchise and equipment were billed as a package item. No detailed or listed price was invoiced for the separate items making up the package. Accordingly, the package of equipment was sent by A.P.C.C.S. to Jacobson, who in turn sold the equipment to Northern for approximately $30,000.

At trial in the District Court, Northern's Count I claim that defendant's mode of distribution constituted an illegal tying arrangement was dismissed. 5 On the Count II misrepresentation claim, Northern was awarded $15,000 by the jury. Northern also received a $100,000 award of punitive damages pursuant to Count III.

B. Soper v. McGraw-Edison Company. Soper's claim emanates from the purchase by her husband of an A.P. Center in Liberty, Missouri. This Liberty A.P. Center was purchased from Jacobson pursuant to the purchase-resale distribution procedure outlined above. Jacobson had become the franchisee of the Liberty store in December, 1965. He purchased the equipment for the store from A.P.C.C.S. at dealer's cost and financed the purchase through E.A.C. Jacobson then sold the Liberty A.P. Center to Soper's husband on October 10, 1968. The parties then executed an assignment of the franchise agreement and the Sign and Back Drop Lease agreement. Also, Soper's husband assumed Jacobson's E.A.C. obligation. Soper's husband died in 1970 and Soper operated the store until it was eventually sold on December 31, 1972. At trial Soper obtained a jury award of $10,000 on her Count I antitrust claim (trebled to $30,000 by the court), $8,000 for fraud, $100,000 in punitive damages on Count III and attorneys' fees of $36,200.

C. Jeffson v. McGraw-Edison Company. In 1963 Jacobson and Roy Jeffress organized and incorporated Jeffson Industries, Inc., for the purpose of establishing a chain of coin-operated car washes. In late 1966 the principals of Jeffson decided that Jeffson should diversify and expand into the dry cleaning business. Pursuant to this decision, Jeffson purchased two 6 A.P. Centers from Jacobson. These stores were located at 95th and Blue Ridge in Kansas City, Missouri (Blue Ridge store), and the Gladstone Plaza Shopping Center in Gladstone, Missouri (Gladstone store). Both stores were purchased by Jeffson from Jacobson pursuant to the purchase-resale distribution method.

Jacobson purchased the equipment for the Blue Ridge store in 1965 and executed the requisite franchise agreement at that time. The store was set up as a pilot store where potential franchisees could view the typical operation of an A.P. Center. In 1969 Jeffson purchased the Blue Ridge store from Jacobson. Jeffson assumed the balance of...

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