Multiflex, Inc. v. Samuel Moore & Co.

• Decision Date: 22 July 1983
• Docket Number: No. 81-2405,81-2405
• Citation: 709 F.2d 980
• Parties: 1983-2 Trade Cases 65,507, 13 Fed. R. Evid. Serv. 1876 MULTIFLEX, INC., Plaintiff-Appellee, v. SAMUEL MOORE & COMPANY, and Eaton Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 980

709 F.2d 980

1983-2 Trade Cases 65,507, 13 Fed. R. Evid. Serv. 1876

MULTIFLEX, INC., Plaintiff-Appellee, v. SAMUEL MOORE & COMPANY, and Eaton Corporation, Defendants-Appellants.

No. 81-2405.

United States Court of Appeals Fifth Circuit.

July 22, 1983.

Max Hendrick, III, Stephen C. Tarry, Houston, Tex., for defendants-appellants.

Bernarr Roe Pravel, Thomas F. Marsteller, Jr., Houston, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before WILLIAMS and JOLLY, Circuit Judges, and WILL , District Judge.

JERRE S. WILLIAMS, Circuit Judge.

This is an antitrust case under sections 1 and 2 of the Sherman Antitrust Act, , , seeking damages under section 4 of the Clayton Act, . The plaintiff, Multiflex, Inc., is a relatively new corporation that manufactures hydraulic hose bundles for use in oilfield drilling equipment. The defendant, Samuel Moore & Co., is a long-established maker of similar hydraulic hose bundles and other technical industrial hoses. At trial, Multiflex sought monetary damages for conspiracy in restraint of trade and attempted monopolization. The district court entered judgment of $549,362.98 before trebling. We affirm in part, reverse in part, and remand.

I. THE STAGE SETTING

A. The Industry in Perspective.

Hydraulic hose bundles are sets of long, high-pressure hoses that are bundled, or wrapped, with plastic or other sheathing substances to produce an integral, cable-like unit. The main use for these bundles is in the oilfield equipment industry, where they are used as a component of blow-out prevention (BOP) systems. BOP devices are sophisticated, high-pressure hydraulic systems designed to monitor oilfield activities to prevent blow-outs.

The market for BOP devices is dominated by three original equipment manufacturers (OEMs), which design, manufacture, install, and guarantee a virtual turn-key system. The OEMs quote a price to the end users for a complete system that includes hydraulic hose bundles and all other system components. The OEM benefits under this "total systems" approach because it can tack a profit margin onto its wholesale cost for the hose bundles and other system components. The end user benefits from the simplicity of buying from a single vendor and relying on a single guarantee. Although an end user occasionally buys original hoses or replacement bundles directly from the manufacturer, most sales of hydraulic hose bundles are made through the OEMs as middlemen.

B. The Parties in Perspective.

The company credited with establishing the hydraulic hose bundle market is Samuel Moore & Co. (Moore). Moore holds a patent on its method of bundling the cables, and has been at the forefront of helping the OEMs incorporate these hose bundles into their BOP systems. For many years up until 1978, Moore enjoyed a dominant position in the hydraulic hose market, controlling at least an 80% share of the U.S. market.

Bruce W. McConkey, the President of appellee Multiflex, Inc., worked for Samuel Moore & Co. from 1964 to 1974. His ultimate position was national sales manager of the Synflex division, the Moore unit that sold hydraulic hose bundles. In 1974, McConkey left Moore and became associated with Flow Products of Houston, Inc., an industrial distributor. Due to McConkey's close and friendly relationship with Moore, Synflex dropped all other distributors in the Houston area and appointed Flow Products its exclusive distributor in this major market. This arrangement continued amicably for three years.

In 1977, McConkey decided to start producing hydraulic hose bundles in competition with Moore. He contracted with Gates Rubber Co. to arrange for a dependable supply of hosing, and made other preliminary arrangements. The new company, called Multiflex, Inc., was incorporated in March, 1977. Its first business goal was to purchase basic hosing from Gates Rubber Co., sheathe the hosing into bundles, and sell the hydraulic hose bundles as oilfield equipment.

Moore learned of Multiflex's existence in May, 1977, at which point Moore and McConkey reached a peaceable agreement to terminate Synflex's distributorship with Flow Products due to conflicts of interest. Multiflex was still making preparations for production at that point, and did not achieve manufacturing capability until November 1, 1977.

C. The Competitive Process in Perspective.

Multiflex approached the three OEMs in late 1977, just before it developed production capability. It hoped to show that its superior product at lower cost was a better deal than Moore's bundles. But the OEMs placed no orders with Multiflex at this time preferring to remain loyal to Moore. Earlier entrepreneurial attempts to enter this market had met a similar lack of success.

In October, 1977, a Dallas-based drilling company, the Sedco Co., was in the market for a hydraulic hose bundle. Multiflex approached Sedco to offer its product, and Sedco was interested in a price quote. Multiflex, however, claims it asked Sedco to obtain a quote directly from the OEM that would be manufacturing the complete device, because it did not wish to disturb the established channels of distribution. Sedco obtained a quote for a Multiflex bundle from the OEM.

Moore, learning of the Multiflex bid, then submitted a lower-than-normal bid directly to Sedco, bypassing its normal distributor network. The price was slightly higher than the OEM bid based on the use of the Multiflex bundle. Moore pressured the OEM to promote the Moore product. The evidence shows that the Multiflex product was at least equal in specifications to the Moore bundle, and that Multiflex, unlike Moore, was able to promise the required short delivery time. Nevertheless, a Moore bundle was used on the Sedco job. This lost sale was later used as evidence of Multiflex's "fact of damage" in its antitrust charges.

Multiflex made a few small sales in 1977, but decided that to remain competitive it would need to bypass the traditional marketing structure utilizing the OEMs and approach the end users directly. The end users, mostly offshore drilling contractors, were quite favorably impressed with the new Multiflex line, and 1978 sales totaled over $560,000, mostly to end users. Eventually, even the OEMs began placing some orders through Multiflex. Multiflex expanded in the U.S., and established a manufacturing facility in the United Kingdom. In 1979, Multiflex's sales totaled over $1,650,000, almost doubling Moore's 1979 sales of approximately $850,000. By 1979, Multiflex was the dominant supplier in the U.S. market for hydraulic hose bundles with over a 60% market share, while Moore's share dropped from over 80% to approximately 38%.

Throughout, Moore had kept a careful eye on the upstart competitor sired by its former employee. When Multiflex bought its first hose from Gates Rubber Co. and produced its first hydraulic hose bundles, Moore closely investigated the completed bundles to see if they infringed upon the Moore patent covering many aspects of hydraulic hose bundle design and manufacture. After an investigation and a call to its patent attorneys, Moore filed a patent infringement action against Multiflex on March 22, 1978.

Multiflex answered the suit by denying the patent infringement charges and counterclaiming with several antitrust charges. It later became clear that Gates and Multiflex had taken steps after the first few months of production to change the Multiflex design and eliminate any possibility of patent infringement. Moore eventually dropped its patent claims. Multiflex, however, continued to pursue its antitrust charges. Its amended complaint included claims under sections 1 and 2 of the Sherman Act, , , and the treble damages provision of section 4 of the Clayton Act, . The parties were appropriately realigned, and these antitrust claims constitute the present suit. Jurisdiction in the district court was proper under .

The case was presented to a jury in a trial lasting six weeks. The jury found the relevant market to be the U.S. market for hydraulic hose bundles; found section 1 liability and awarded section 1 damages of $382,963.07; found section 2 liability and awarded section 2 damages of $205,964.73. Multiflex accepted a slightly-reduced judgment of $549,362.98 and amended its pleadings to conform with the verdict. The trebled award was entered for $1,648,088.94, before costs and fees. The trial court denied motions for judgment n.o.v. or new trial. Moore files this timely appeal, .

II. SECTION 1 CLAIM

Multiflex charges that Moore entered into a conspiracy in restraint of trade, in violation of section 1 of the Sherman Act. It alleges that Moore met with the three OEMs during the early days of Multiflex's existence to convince the OEMs not to enter into contracts with Multiflex.

A. The Applicable Law.

Under the Sherman Act, conspiring in restraint of trade is illegal, even if the conspiracy does not in fact lead to an actual restraint of trade. (1st Cir.1932). Unlike a contract or other combination in restraint of trade, a conspiracy violates the Sherman Act even without proof of injury because of the surreptitious, pernicious effect a conspiracy ultimately can have upon a free market. Violation of the Sherman Act is therefore not dependent on damage, although no damages can be recovered unless proved. Federal law does not provide for automatic monetary damages as an antitrust remedy. (5th Cir.), cert. denied, (1982) (discussing Sec. 2(a) of the Robinson-Patman Act, (a)), (1977).

The term restraint of trade could not cover all possible restraints, or else the antitrust laws would eliminate the entire system of commerce. (1948). Rather, the term includes two types of unlawful acts. The major category, unreasonable restraints of trade, includes business practices that violate general principles of fair dealing and free trade. The legal standard, generally called the rule of reason, leaves the...