Knutson v. Daily Review, Inc.

Citation548 F.2d 795
Decision Date02 December 1976
Docket Number74-3423,Nos. 74-2802,s. 74-2802
Parties1976-2 Trade Cases 61,196, 2 Media L. Rep. 1376 Douglas K. KNUTSON et al., Plaintiffs-Appellants, v. The DAILY REVIEW, INC., a corporation, et al., Defendants-Appellees. The DAILY REVIEW, INC., a corporation, et al., Defendants-Appellants, v. Douglas K. KNUTSON et al., Plaintiffs-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Timothy H. Fine (argued), San Francisco, Cal., for appellants/cross-appellees.

Michael N. Khourie (argued), of Broad, Khourie & Schultz, San Francisco, Cal., for appellees/cross-appellants.

Before MERRILL and HUFSTEDLER, Circuit Judges, and SMITH, * District Judge.

HUFSTEDLER, Circuit Judge:

The appeals and cross-appeals in this case present a potpourri of antitrust problems in the context of a newspaper distribution system before and after the publishers' conversion of the system from independent dealer-distributors to employers of the newspaper publishers.

We first identify the dramatis personae : All the plaintiffs are independent distributors of the newspapers published by Daily Review, Inc. ("DRI"). Defendants are two corporations and individual officers or employees of those corporations. DRI publishes The Daily Review a daily afternoon newspaper; The Argus, a daily morning paper; and The Daily Review Shopping News, a "throwaway" advertising circular. Bay Area Publishing Company ("BAPCO") publishes the Tri-Valley Herald, a daily morning paper; and the Tri-Valley News, a three day per week, controlled circulation afternoon paper. BAPCO is a wholly-owned subsidiary of DRI. The individual defendants are Floyd L. Sparks, William Chilcote, Dallas Cleland and John Clark. Sparks is the controlling shareholder of DRI, the president of DRI and BAPCO, and the publisher of both companies' newspapers. William Chilcote is a vice-president and business manager of DRI and a member of the Board of Directors of DRI and BAPCO. Cleland is the director of circulation of the four newspapers published by BAPCO and DRI. Clark is the circulation promotion manager for The Daily Review and The Argus.

Plaintiffs allege that defendants entered into horizontal and vertical agreements in restraint of trade. They claim that the dealership contracts used by DRI/BAPCO fixed resale prices and imposed territorial restraints in violation of the Sherman Act, Section 1. (15 U.S.C. § 1.) They also claim that DRI's termination of its independent dealer system violated Section 1. Finally, they argue that the defendants violated Section 2 of the Sherman Act (15 U.S.C. § 2) by attempting to monopolize the newspaper trade. The district court found for the plaintiffs on the price-fixing count, but awarded neither damages nor injunctive relief. The court found for the defendants on the remaining Section 1 counts and on the Section 2 claim. Defendants have not appealed the price-fixing holding. We affirm the district court on the other Section 1 counts, remand for a new trial on damages, and a limited remand on the Section 2 count. 1

In 1950 Sparks adopted an independent dealer system for the distribution of his newspapers to home subscribers. Under this system, distributors purchased newspapers from the publisher and resold them to carriers (newspaper boys/girls), who delivered/resold the papers to the subscribers. There were, therefore two independent units in the distribution system: the distributors and the carriers, both of which purchased the paper from the level above. From 1950 until 1969, relationships between the papers and the distributors were governed by a standard form Dealer's Agreement which provided that the dealer would sell newspapers to the subscribers within his route or territory at a fixed subscription price and that the subscription price, the price paid to the publisher by the dealer, and the size and boundaries of the territory were subject to change by the publisher in his sole discretion. The dealer could not assign, transfer or hypothecate rights arising under the agreement without the prior written consent of the publisher.

In 1969, a dispute arose before a state agency as to whether the BAPCO distributors were independent contractors or employees. With the assistance of a consulting firm, a new agreement was drawn up and used by DRI and its distributors. A similar agreement was used by BAPCO. The agreement fixed retail prices. 2 It provided for a dual rate wholesale price for newspapers supplied to a distributor for his route, i. e., a certain price up to a specified number of newspapers and a different price for papers above that number. The agreement permitted him to transfer his rights to another party on 60 days' notice; the transferee had to be bondable, qualified, and fully trained to DRI/BAPCO's satisfaction. Finally either party could terminate the agreement on 30 days' notice.

On May 14, 1973, plaintiffs' counsel wrote Sparks a letter stating that certain provisions of the dealer agreements used by DRI and BAPCO constituted unlawful restraints of trade. In July 1973, DRI and BAPCO, pursuant to the 30-day termination provision, notified all distributors that they were terminating their entire independent dealer system for home delivery and converting to a system of employee-distributors. Under the internal system of distribution, employees of DRI and BAPCO sold the newspapers directly to the independent carriers. Each terminated dealer was offered employment as a salaried district manager within the new system.

On August 6, plaintiffs filed this action; defendants agreed to continue to sell newspapers to the plaintiffs and to hold open the offers of employment. 3 This agreement was later formalized in a stipulated temporary injunction.

Plaintiffs allege that defendants entered into both horizontal and vertical contracts, combinations or conspiracies. They claim that the post-1969 agreements were unlawful contracts to fix resale prices and to impose territorial restraints on the distributors. They also claim that the termination provision and the actual terminations were violations of Section 1.

I

A. Intraenterprise Conspiracy.

Plaintiffs assert that DRI and BAPCO conspired to appropriate the distribution organizations without compensation by converting the entire distribution system. The district court found that there was no conspiracy in fact since the plaintiffs "presented no evidence other than Sparks' decision, such as the active participation of other corporate officers or agents in this decision (to terminate), which would support a finding that DRI and BAPCO combined or conspired to violate § 1." (383 F.Supp. at 1359.)

Section 1 prohibits conspiracies in restraint of trade between two or more people in economic entities. As a purely verbal matter, the officers or directors of a corporation can "conspire," and any contract they make restrains trade. For antitrust purposes, if the Sherman Act forbids such activities it:

" . . . would be socially inconvenient and historically surprising. So long as the business enterprise is regarded as an individual economic unit, it must be permitted to act." (P. Areeda, Antitrust Analysis 319 (2d ed. 1974).)

The problem has been to define an economic unit. In Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc. (1951) 340 U.S. 211, 215, 71 S.Ct. 259, 95 L.Ed. 219, the Supreme Court held that two separately incorporated subsidiaries within the same corporate family can conspire: "common ownership and control does not liberate (them) from the impact of the antitrust laws . . . especially . . . where (the corporations) hold themselves out as competitors." (Kiefer-Stewart, supra, 340 U.S. at 215, 71 S.Ct. at 261 (wholly-owned subsidiaries). Accord: Perma Life Mufflers v. Int'l Parts Corp. (1968) 392 U.S. 134, 141-142, 88 S.Ct. 1981, 20 L.Ed.2d 982 (parent and wholly-owned subsidiary); Timken Roller Bearing Co. v. United States (1951) 341 U.S. 593, 598, 71 S.Ct. 971, 95 L.Ed. 1199 (parent and partially-owned subsidiary).) At the other extreme, we have held that regardless of internal corporate structure, there can be no conspiracy as long as only one corporation is involved. (Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd. (9th Cir. 1969) 416 F.2d 71, 80-84.) The heretofore unanswered question is what, if any, limits should be and can be drawn on Section 1 conspiracies in the separate incorporation situation.

Antitrust law is concerned with the concerted action of distinct economic entities. In any case, whether such action has occurred turns on the particular facts. 4 Separate incorporation is just one among many factors; it may be significant in an antitrust sense or it may be only a technicality, a byproduct of decisions with no antitrust impact. The corporate structure itself determines whether there are separate units or one entity. (In re Penn Central Securities Litigation (E.D.Pa.1973) 367 F.Supp. 1158 (subsidiaries each covered a different geographical region); I. Haas Trucking Corp. v. N. Y. Fruit Auction Corp. (S.D.N.Y.1973) 364 F.Supp. 868; See also, Beckman v. Walter Kidde & Co., Inc. (E.D.N.Y.1970) 316 F.Supp. 1321, aff'd (2d Cir. 1971) 451 F.2d 593.)

DRI and BAPCO form a single unified structure. The relationship between them far exceeds DRI's mere ownership of the subsidiary's stock, and therefore, this is not a case of parent and independent subsidiary, but of a single business unit separated only by the technicality of separate incorporation. The same individual, Sparks, is controlling shareholder of DRI, president of both corporations and publisher of all five newspapers. Both corporations have the same individuals in charge of important operations, such as circulation. The two alleged individual co-conspirators. Chilcote and Cleland, are employees and/or officers of both firms. All three daily newspapers have the same sports page, financial...

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