Davis-Watkins Co. v. Service Merchandise, DAVIS-WATKINS

• Decision Date: 23 August 1982
• Docket Number: DAVIS-WATKINS,No. 81-5057,81-5057
• Citation: 686 F.2d 1190
• Parties: 1982-2 Trade Cases 64,901, 1982-83 Trade Cases 65,151, 11 Fed. R. Evid. Serv. 1234 COMPANY, Plaintiff-Counter Defendant-Appellee, and Amana Refrigeration, Inc., Counter Defendant-Appellee, v. SERVICE MERCHANDISE, Defendant-Counter Plaintiff-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1190

686 F.2d 1190

1982-2 Trade Cases 64,901, 1982-83 Trade Cases 65,151,

11 Fed. R. Evid. Serv. 1234

DAVIS-WATKINS COMPANY, Plaintiff-Counter Defendant-Appellee and Amana Refrigeration, Inc., Counter Defendant-Appellee, v. SERVICE MERCHANDISE, Defendant-Counter Plaintiff-Appellant.

No. 81-5057.

United States Court of Appeals Sixth Circuit.

Argued April 13, 1982.

Decided Aug. 23, 1982.

Donald F. Mintmire, Barrett, Alagia & Carey, St. John Barrett, Washington, D. C., for Service Merchandise.

Steven A. Riley, Bass, Berry & Sims, Robert J. Walker, Nashville, Tenn., for Amana Refrigeration, Inc.

Stephen J. Holtman, Simmons, Perrine, Albright & Ellwood, Cedar Rapids, Iowa, F. Clay Bailey, Jr., John R. Edwards, Nashville, Tenn., for Davis-Watkins Co.

Before MARTIN and CONTIE, Circuit Judges, and TUTTLE ^*, Senior Circuit Judge. ^*

CONTIE, Circuit Judge.

Service Merchandise Company, Inc., (SMC) appeals the disposition of its antitrust counterclaims brought under section 1 of the Sherman Act, 15 U.S.C. § 1, against Amana Refrigeration, Inc., (Amana) and the Davis-Watkins Company (D-W). SMC asserts that the district court erroneously dismissed its per se theories of price stabilization, group boycott and horizontal market divisions on cross-motions for summary Judgment. ¹ SMC also asserts that the jury was erroneously instructed on the application of the rule of reason under its vertical restraint claim. ²

In August 1980, Amana and D-W filed for partial summary judgment on SMC's per se claims alleging that this case was indistinguishable from the case Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). They asserted that inasmuch as SMC challenges non-price vertical restraints the case should be submitted to the jury only under the rule of reason test. SMC responded with a cross-motion requesting judgment on all of its claims. The district court granted Amana and D-W's motion finding the case to be controlled by Sylvania, supra.

The case, therefore, was submitted to the jury only under the rule of reason and only in regard to non-price vertical restraints. And, after a seven-week trial, the jury returned a verdict in favor of the appellees finding no restraint of trade in violation of 15 U.S.C. § 1.

I.

SMC is a Tennessee corporation engaged in a showroom catalog business marketing name-brand consumer goods and jewelry for retail sales from 110 showrooms in 25 states. Sales occur either through the mails or in one of SMC's showrooms. Amana is a Delaware corporation that manufactures household appliances, including countertop microwave ovens for household use. D-W is Amana's exclusive distributor for the territory of central Tennessee and adjoining parts of Alabama, Georgia and Kentucky. ³

In 1976 SMC attempted to enter the market of retailing a particular model of Amana Radarange. Since mid-1978, however, it has been unable to obtain such ovens from Amana, D-W or any other Amana distributor or dealer. SMC contends that the reason it has been unable to obtain any Amana Radarange ovens is that Amana and its distributors have established geographic, customer and location restrictions in order to maintain and enhance wholesale and retail prices, to insulate distributors from price competition from other distributors and dealers and to prevent SMC and other discount retail dealers from dealing in Amana countertop microwave ovens.

The microwave oven industry has recently emerged, marketing the only "new" major kitchen appliance. By 1975 there were 20 manufacturers and 27 different brands of microwave ovens. Amana, however, was one of the first producers of countertop microwave ovens. And, during the period 1972 through 1979 Amana controlled between 11% to 18% of this market. Amana has built up a certain degree of prestige within the industry as a result of its market position.

Prior to January 1, 1978, Amana distributors were assigned by agreement to a primary territory for concentration of sales efforts. Distributors were free to select retailers without execution of franchise agreements and they were not prohibited from selling outside of their primary territory.

Also during the period prior to 1978, wholesale and retail prices varied as much as 30% between territories due to differing distributor and dealer transportation and operating costs. Because of this difference in price two marketing problems developed in Amana's distribution system: retailer price-shopping and transhipping. First, where retailers had outlets in more than one territory, retailers began to buy all of their needed product in the territory with the lowest prices. To discourage price-shopping, therefore, Amana encouraged and assisted distributors in two types of selling arrangements to such retailers: 1) a distributor would supply the retail outlets in his area only but at agreed prices, or 2) a distributor would supply retailers within and outside his territory but would pay a commission to the distributor whose territory was affected.

The second problem, related to retailer price-shopping, known as transhipping, occurred when ovens were purchased within one territory, where the price was favorable to the purchaser, for resale and/or use within another territory. The purchaser could sell at lower prices because his original purchase was less than that of retailers in the transhipped-to territory.

These problems and especially transhipping did not present a problem to Amana or its distributors until late 1976. Before the end of 1976 the demand for Amana Radaranges continued to increase so that distributors did not accumulate large inventories. Consequently, absent a need to unload inventories, there was very little transhipping between territories. However, inventories began to accumulate in 1976 and transhipping became a serious problem within Amana's marketing system.

Amana increased its production of countertop microwave ovens from 173,000 units in 1975 to 321,000 units in 1976. During 1976, however, several Japanese manufacturers entered the microwave market which caused a decrease in market demand for Amana Radaranges. For example, the general market increased from 1,749,000 units in 1976 to 2,157,000 units in 1977 but Amana's share of the market dropped from 18% to 11%. Amana decreased the number of units shipped to distributors from 321,000 units in 1976 to 240,000 units in 1977. The accumulation of large inventories by Amana's distributors and dealers caused them to seek outlets to unload upon. Consequently, transhipping began to occur with increased frequency.

As a result, unauthorized dealers were obtaining Amana ovens at low prices in one territory for resale in another territory. Prices set by authorized dealers were undercut by the transhippers. Price competition resulted among Amana dealers and between these dealers and transhippers. It is important to note, however, that the unauthorized dealers who were transhipping were outside the Amana marketing system and were thereby able to offer a low price because they offered no product services. Unlike Amana's authorized distributors and dealers, the transhipper did not incur the cost of providing services associated with Amana's microwave ovens. Such services were, however, necessarily offered by the authorized Amana distributors and dealers. ⁴

In November of 1976, while large inventories of Amana microwave ovens were accumulating, SMC attempted to purchase one Amana Radarange model from D-W. SMC requested 600 ovens but D-W refused to fill the order. From that time until mid-1978, SMC attempted to obtain the ovens from several other Amana distributors but was denied by each. ⁵ SMC did obtain Radaranges from diverters, however, in 1976 and 1977 and sold them at lower prices than did Amana dealers. ⁶

In December of 1976, D-W by letter complained to Amana concerning SMC's low prices, attaching a copy of an SMC advertisement of Amana Radaranges, and asserting that such competition had to be eliminated. Starting in January of 1977, Amana received other complaints from other dealers and distributors concerning SMC's low prices as well as the low prices of other unauthorized discount catalog-showroom dealers. Also during this period, D-W requested that Amana supply it with the identity of the transhipper.

On October 3, 1977, Amana announced to its distributors a clarification of its policy on transhipping. The crux of the clarification notice was that Amana's incentive rewards would be given to the distributor in whose area sold merchandise is used rather than to the selling distributor irrespective of whether the seller is a distributor or dealer. The incentive programs included were the profit opportunity program (distributor profits increased as volume sales increased), merchandising and promotional allowances, display programs, coop programs and special advertisement programs. Amana also warned that the source of its Radaranges would be tracked through its computer tracking system. ⁷

Starting on January 1, 1978, Amana revised its distributor agreements by adding the following resale restrictions: 1) distributors agreed to sell only to authorized Amana dealers, 2) authorized dealers had to be located within the distributor's exclusive territory, 3) distributors had to obtain the agreement of authorized dealers to restrict resales from their authorized locations and only to consumers, and 4) distributor promotional and service charge-back policy pursuant to the October 3, 1977, transhipping letter remained in effect. In February, Amana sent new authorized dealer sales and service agreements to its distributors for the purpose of imposing these restrictions upon authorized dealers by agreement. As a result of these restrictions, SMC's sources dried up and the Amana Radarange was dropped from its catalog.

II.

At issue in this case are two divergent marketing strategies. Amana's marketing strategy is aimed at enhancing...