Lektro-Vend Corp. v. Vendo Co.

• Citation: 545 F.2d 1050
• Decision Date: 16 July 1976
• Docket Number: LEKTRO-VEND,75-1793,Nos. 75-1792,s. 75-1792
• Parties: 1976-1 Trade Cases 60,919 CORPORATION, a Delaware Corporation, et al., Plaintiffs-Appellees, v. The VENDO COMPANY, a Missouri Corporation, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1050

545 F.2d 1050

1976-1 Trade Cases 60,919

LEKTRO-VEND CORPORATION, a Delaware Corporation, et al Plaintiffs-Appellees, v. The VENDO COMPANY, a Missouri Corporation, Defendant-Appellant.

Nos. 75-1792, 75-1793.

United States Court of Appeals Seventh Circuit.

Argued Dec. 8, 1975.

Decided May 28, 1976.

Rehearing and Rehearing En Banc Denied July 16, 1976.

Certiorari Granted Oct, 4, 1976. See 97 S.Ct. 55.

Earl E. Pollock, Chicago, Ill., L. M. Ochsenschlager, Aurora, Ill., for defendant-appellant.

Barnabas F. Sears, James E. S. Baker, Chicago, Ill., for plaintiffs-appellees.

Before SWYGERT and SPRECHER, Circuit Judges, and WARREN, District Judge. ¹

SWYGERT, Circuit Judge.

The overall question is whether the district court properly issued a preliminary injunction in this antitrust case, thereby staying enforcement proceedings in the Illinois state courts to collect two judgments entered in a suit on an employment contract that contained a noncompetition covenant. Among the specific issues raised is whether section 16 of the Clayton Act, 15 U.S.C. § 26, comes within the "expressly authorized" exception of the anti-injunction statute, 28 U.S.C. § 2283. We hold that it does. We also hold that the district judge did not abuse his discretion in finding the plaintiffs have a likelihood of success on the merits and they would suffer irreparable injury absent an injunction. We therefore affirm the district court's grant of a preliminary injunction.

The Vendo Company is located in Kansas City, Missouri. In 1959 it was a leading manufacturer and seller of vending machines for cold beverages, ice cream, and certain other products. It did not manufacture vending machines for candy, cigarettes, sandwiches, or coffee, but was conducting research and development in that area.

Stoner Manufacturing Corporation, located in Aurora, Illinois, was principally engaged in the manufacture of candy vending machines that had a nationwide market. Compared with Vendo it was a smaller and less diversified enterprise. Harry B. Stoner, his wife, and other members of his family owned all of the Stoner Manufacturing stock. Stoner was the president and controlled the company.

Following negotiations with Stoner, Vendo purchased the assets of Stoner Manufacturing Corporation in April 1959 with the exception of its real estate and buildings. (Upon consummation of the purchase, Stoner Manufacturing was reorganized as Stoner Investments, Inc.) The sales agreement imposed a ten-year noncompetition restriction on Stoner Manufacturing not to own, control, or manage any business engaged in the manufacture or sale of vending machines. In addition, an employment contract between Vendo and Harry B. Stoner was executed whereby the latter would serve Vendo as a consultant for five years at an annual salary of $50,000. This contract had a noncompetition covenant also. Stoner agreed that during the term of the contract and for five years following the termination of his employment he would not "(D)irectly or indirectly, in any of the territories in which the Company (Vendo) . . . is at present conducting business and also in territories which Stoner knows the Company . . . intends to extend and carry on business . . . " enter into the vending manufacturing business. The employment contract provided that Stoner "(S) hould regulate his own hours of employment and shall determine the amount of time and effort he shall devote . . . " to Vendo. ²

Almost immediately after the Stoner Manufacturing assets were acquired by Vendo, friction developed between Stoner and his employer. Stoner complained that his services as a consultant were not being utilized and that he was being treated as a mere figurehead. Very likely this state of affairs prompted the development of the events that led to the litigation in both the state and federal courts.

For several years before the sale to Vendo, Rod Phillips was the Stoner plant superintendent and his son, Bill, the assistant superintendent. Because of their disagreement with the policies and operations of Vendo, the father and the son resigned from their respective positions in mid-1960. Bill Phillips after quitting Vendo began the design of an electronic coin detecting device and attempted to interest Stoner in financing its development. Stoner evinced interest and agreed to pay the younger Phillips $650 per month to develop the device. It was agreed that any patents on the invention would belong to Stoner Investments. By the end of 1960 a model was completed and a patent applied for. The patent was issued in October 1960 and was assigned to Stoner Investments; however, the patented device was never produced commercially.

About this same time Rod and Bill Phillips developed a machine for vending candy that was radically different from any previous machine. It combined in a novel yet practical design three existing vending machine features: stock rotation (known as "first-in, first-out"), a window to display the product to be vended, and a capacity for stocking mixed items in a single conveyance. ³ At Rod Phillips's request Stoner agreed to finance the development of this new machine; however, neither Stoner nor Stoner Investments was to have any ownership or control over the venture. Interest-free loans aggregating $200,000 were made by Stoner to the Phillipses during 1961-62. Stoner also made available a building in Aurora rent free.

By October 1962 prototypes of the machine developed by Rod and Bill Phillips had been constructed and were exhibited at a trade show in San Francisco. The machine won favorable interest in the industry. In the meantime Lektro-Vend Corporation had been organized. The original stockholders were Rod and Bill Phillips, Ruth Netrey (Stoner's sister-in-law), and several employees of the corporation.

In December 1962 Mrs. Netrey loaned the Phillipses $350,000. The loan was later increased to $525,000. The proceeds of those borrowings were used in part to pay off the $200,000 loan made by Stoner. During that same month Stoner asked Vendo to be released from his employment contract, saying that he had an opportunity to invest in the Lektro-Vend venture. Vendo refused to accede to his request and Stoner was told that Vendo itself was interested in buying the Lektro-Vend machine. Stoner was asked to learn whether Rod Phillips was interested in selling and, if so, to arrange a meeting between Phillips and representatives of Vendo. Stoner reported that Rod Phillips was asking $1,500,000.

Rod Phillips met with certain Vendo officials in January 1963 to show them the operation of the machine. Stoner was present, but took no part in the meeting. In March Stoner wrote Vendo's vice-president that he had told Phillips that he assumed in the absence of any word from Vendo that Vendo no longer had any interest in the patent. The vice-president responded that Vendo was still interested, but that the asking price was too high.

During the summer of 1963 Stoner had a conversation with Vendo's president. Upon inquiry from the latter as to the actual extent of Stoner's involvement with Phillips, Stoner said that his relationship was confined to loans which had been repaid by another person. He did not disclose that the other person was his sister-in-law.

In March 1964 Stoner Investments contracted to sell Lektro-Vend a new plant which had been built in Aurora by Stoner Investments during the previous year. The deal was financed through a bank loan which was subject to an agreement that Stoner Investments would repurchase the property in the event of default.

Stoner's contract of employment terminated June 1, 1964. During that same month Lektro-Vend issued 5,000 shares of stock to Mrs. Stoner and in July it issued 5,000 shares of stock to Stoner Investments. In March 1965 Stoner sent a letter to fifty vending machine operators in which he identified himself with the old Stoner Manufacturing Company and said that he was now interested in Lektro-Vend. He went to great lengths to recommend the Lektro-Vend product. Litigation soon followed.

Vendo sued Stoner and Stoner Investments in the Illinois state court in August 1965. In October 1965 Lektro-Vend, Stoner, and Stoner Investments sued Vendo in the federal court. The action in the state court was finally terminated in November 1974 when the Illinois Supreme Court denied a petition for rehearing of its decision affirming judgments against Stoner and Stoner Investments, Inc. in excess of $7,000,000. ⁴

The complaint in the federal action alleged violations by Vendo of sections 4 and 16 of the Clayton Act (15 U.S.C. §§ 15 and 26). The case lay dormant until June 1975 when the district court granted plaintiffs' motion for a preliminary injunction staying defendant's efforts to collect its state court judgments until the merits of the federal suit could be determined. That action precipitated the present appeal under the provisions of 28 U.S.C. § 1292(a).

I

The threshold question relates to the authority of a federal court to enjoin a proceeding pending in a state court. Specifically, the question is whether section 2283 of the Judicial Code ⁵ prevented the district court from issuing a preliminary injunction staying the efforts of Vendo to collect its state court judgments against Stoner and Stoner Investments, Inc. ⁶

The underlying purpose of this section, grounded in federalism is "(T)o prevent needless friction between state and federal courts." Oklahoma Packing Co. v. Oklahoma Gas & Electric Co., 309 U.S. 4, 9, 60 S.Ct. 215, 218, 84 L.Ed. 537, 540 (1940). The statute is to be strictly applied, Amalgamated Clothing Workers v. Richman Bros. Co., 348 U.S. 511, 515-16, 75 S.Ct. 452, 455, 99 L.Ed. 600 (1955). Unless one of the three exceptions listed in the statute is evident, it constitutes an absolute ban upon a federal court injunction against a pending state court proceeding. Atlantic Coast Line R. R. Co. v. Brotherhood of Locomotive Engineers,...