Business Electronics Corp. v. Sharp Electronics Corp.

• Decision Date: 21 January 1986
• Docket Number: No. 84-2618,84-2618
• Citation: 780 F.2d 1212
• Parties: , 1986-1 Trade Cases 66,923, 19 Fed. R. Evid. Serv. 1252 BUSINESS ELECTRONICS CORPORATION, Plaintiff-Appellee, v. SHARP ELECTRONICS CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1212

780 F.2d 1212

54 USLW 2405, 1986-1 Trade Cases 66,923,

19 Fed. R. Evid. Serv. 1252

BUSINESS ELECTRONICS CORPORATION, Plaintiff-Appellee, v. SHARP ELECTRONICS CORPORATION, Defendant-Appellant.

No. 84-2618.

United States Court of Appeals Fifth Circuit.

Jan. 21, 1986.

Rehearing and Rehearing En Banc Denied Feb. 20, 1986.

David Harvin, Scott J. Atlas, Houston, Tex., Peter J. Gartland, Lawrence M. Harnett, Lance Gotthoffer, Peter A. Dankin, New York City, for defendant-appellant.

Gary V. McGowan, H. Lee Godfrey, Kenneth S. Marks, Houston, Tex., for plaintiff-appellee.

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

Before CLARK, Chief Judge, and THORNBERRY and JONES, Circuit Judges.

CLARK, Chief Judge:

Defendant-appellant Sharp Electronics Corporation (Sharp) appeals from a jury verdict in favor of plaintiff-appellee Business Electronics Corporation (BEC), a former dealer in Sharp calculators, in BEC's claim that Sharp committed a per se violation of section one of the Sherman Act by agreeing with a competing dealer to terminate BEC because of its price cutting. Sharp contends that (1) the district court erred in instructing that it must find per se liability without regard to any agreement on price, (2) the evidence was insufficient to support a jury finding of per se liability, (3) there should be no rule of per se liability in vertical price fixing cases, (4) the district court committed prejudicial error in making certain evidentiary rulings and (5) the district court accepted an erroneous measure of damages. Because the jury was improperly instructed on point (1), we reverse and remand for a new trial.

I

Sharp is a supplier of various consumer and business products, including electronic calculators, throughout the United States. Sharp distributed its calculators through a network of retail dealers that bought the calculators from Sharp and resold them to end users. Sharp provided retail price lists which suggested resale prices to its dealers.

In 1968, Sharp appointed Kelton Ehrensberger as its sole electronic calculator dealer in the Houston area. Ehrensberger later incorporated as BEC and continued his dealership under that name. BEC's sales strategy involved keeping retail prices low and BEC often sold at prices lower than those on Sharp's retail price lists.

It is apparent that, several years after Ehrensberger became a Sharp calculator dealer, Sharp became dissatisfied with BEC's performance. The parties disagree, however, on the reason for Sharp's dissatisfaction. Sharp presented evidence that BEC failed to meet sales quotas and that Sharp remonstrated with it for this poor sales performance. BEC, on the other hand, presented evidence that Sharp was concerned about BEC's discounting and wanted BEC to "clean up [its] pricing structure."

In mid-1972, Sharp's problems with BEC led to the appointment of Gilbert Hartwell as a Sharp calculator dealer in the Houston area. The record indicates that Sharp may have initially promised Hartwell that his dealership would be exclusive, but Sharp subsequently decided to retain BEC until more was learned about the market.

Hartwell was very upset about BEC's pricing policies and suggested to Ehrensberger that the dealers avoid a "discount" situation. He also complained bitterly to Sharp that BEC was undercutting him in the market. There was evidence that Sharp shared Hartwell's concern, although Hartwell testified that Sharp consistently told him that it could not tell BEC what prices to charge. Hartwell also testified that he was not concerned about BEC's price cutting in general but only about BEC's "free riding" on Hartwell's investment in product promotion and other sales-related services. He stated that the customers which he developed through these means would then buy from BEC at lower prices.

In June, 1973, Hartwell presented an ultimatum to Sharp--unless Sharp terminated BEC within 30 days, Hartwell would terminate his own Sharp dealership. Sharp responded by terminating BEC.

The evidence showed that Hartwell usually, but not always, adhered to Sharp's suggested retail prices. According to Hartwell's testimony, he was under no obligation to sell at any particular price. The prices of Sharp calculators have dropped since 1973.

II

The district court submitted this case to the jury on the theory that an agreement between Sharp and Hartwell to terminate BEC because of the latter's price cutting constitutes a per se violation of section one of the Sherman Act. The district court charged the jury:

The Sherman Act is violated when a seller enters into an agreement or understanding with one of its dealers to terminate another dealer because of the other dealer's price cutting. Plaintiff contends that Sharp terminated Business Electronics in furtherance of Hartwell's desire to eliminate Business Electronics as a price-cutting rival.

The court also submitted a special interrogatory to the jury, which it described as follows:

Question number 1 asks you whether you find by a preponderance of the evidence that there was an agreement or understanding between Sharp and Hartwell to terminate Business Electronics as a Sharp dealer because of Business Electronics' price-cutting.

This theory, which does not require an agreement between Sharp and Hartwell to maintain resale prices, is an incorrect one. This court's decision in Aladdin Oil Co. v. Texaco, Inc., 603 F.2d 1107 (5th Cir.1979), demonstrates both the error committed in this case and the proper standard of liability. In Aladdin Oil, the plaintiff sought to acquire the assets of a Texaco distributorship which was going out of business. However, defendant Texaco, the supplier of oil and gasoline products, consulted with defendant Powertram, the other Texaco distributor in the area, and decided that Texaco did not need two distributors in the same area. Therefore Texaco, which had an option to purchase the failing distributorship, decided to assign its option to Powertram and prevent the plaintiff from acquiring a distributorship in competition with Powertram. This court held that this conduct alone did not violate the antitrust laws. The fact that plaintiff alleged that Texaco and Powertram had prevented it from acquiring a distributorship in order to lessen intrabrand competition made no difference because "abstract lessening of intrabrand competition is not enough." Id. at 1116. The court indicated, however, that had Texaco's action been taken pursuant to a price maintenance agreement with Powertram, it would have violated the antitrust laws. Id. at 1117.

Similarly, in the present case it was not enough for the jury to find that BEC was terminated to reduce price competition; the jury should have been required to find that the termination was pursuant to a price maintenance agreement between Sharp and Hartwell. St. Petersburg Yacht Charters, Inc. v. Morgan Yacht, Inc., 457 So.2d 1028, 1050 (Fla.Dist.Ct.App.1984); see also Borger v. Yamaha Int'l Corp., 625 F.2d 390, 397 (2d Cir.1980) (improper for jury instructions to state that a dealer termination was unlawful "solely on the basis of a purpose to restrict intraband competition"). Additional support for this proposition may be found in Muenster Butane, Inc. v. Stewart Co., 651 F.2d 292, 294-95 (5th Cir.1981), where the court treated the termination of a dealer, apparently to protect another dealer from "intense competitive pricing," as a vertical non-price restraint to be tested under the rule of reason. See also Joe Regueira, Inc. v. American Distilling Co., Inc., 642 F.2d 826, 833 (5th Cir.1981) (plaintiff was required to show that its termination "was the result of a combination ... which had as its purpose or effect the fixing of wholesale and retail prices") (emphasis added). An example of the type of instruction that would have been proper in this case may be found in Pierce v. Ramsey Winch Co., 753 F.2d 416, 428 n. 14 (5th Cir.1985).

We recognize that the standard of liability we set forth conflicts with the rule enunciated in Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164, 170 (3d Cir.1979) and followed by a number of other circuits. E.g., Victorian House, Inc. v. Fisher Camuto Corp., 1985-2 Trade Cases p 66,706 at 63,382 (8th Cir. July 18, 1985); Zidell Exploration, Inc. v. Conval Int'l, Ltd., 719 F.2d 1465, 1469 (9th Cir.1983); Bostick Oil Co. v. Michelin Tire Corp., 702 F.2d 1207, 1215 (4th Cir.), cert. denied, 464 U.S. 894, 104 S.Ct. 242, 78 L.Ed.2d 232 (1983). The Cernuto rule is that "if a manufacturer deliberately withdraws its product from a price-cutting distributor at the request of a competing distributor as part of a conspiracy to protect the requesting distributor from price competition, the manufacturer has committed a per se violation of the antitrust laws." Zidell, supra, 719 F.2d at 1469. The courts following this rule reason that if the manufacturer and dealer wish to protect the dealer from price competition then they must intend that prices be higher once the price-cutting dealer is terminated.

This circuit has not adopted this reasoning. See St. Petersburg Yacht Charters, supra, 457 So.2d at 1048-49 (citing Muenster Butane, Inc., supra, 651 F.2d at 294-95). An agreement to terminate a price cutter does not fix prices at any specific or general level but merely frees the complaining dealer to set prices as he chooses. St. Petersburg Yacht Charters, supra, 457 So.2d at 1043-45. It is true that the effect of terminating the price cutter may be to raise prices but this is equally true of the granting of an exclusive dealership, which we have held not to be per se illegal. Carlson Machine Tools, Inc. v. American Tool, Inc., 678 F.2d 1253, 1259 (5th Cir.1982) (the grant of an exclusive dealership is not a per se violation of the Sherman Act because "such a grant does not seek to impose resale price maintenance on the distributor"). Any vertical non-price restriction may...