Parts and Elec. Motors, Inc. v. Sterling Elec., Inc.

• Decision Date: 18 August 1987
• Docket Number: No. 86-1715,86-1715
• Citation: 826 F.2d 712
• Parties: 1987-2 Trade Cases 67,693 PARTS AND ELECTRIC MOTORS, INC., an Illinois Corporation, Plaintiff-Appellant, v. STERLING ELECTRIC, INC., a Delaware Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 712

826 F.2d 712

1987-2 Trade Cases 67,693

PARTS AND ELECTRIC MOTORS, INC., an Illinois Corporation Plaintiff-Appellant, v. STERLING ELECTRIC, INC., a Delaware Corporation, Defendant-Appellee.

No. 86-1715.

United States Court of Appeals Seventh Circuit.

Argued Nov. 4, 1986.

Decided Aug. 18, 1987.

John H. Ward, Antonow & Fink, Chicago, Ill., for plaintiff-appellant.

Stephen C. Neal, Kirkland & Ellis, Chicago, Ill., for defendant-appellee.

Before BAUER, Chief Judge, CUDAHY and RIPPLE, Circuit Judges.

CUDAHY, Circuit Judge.

This is an antitrust case brought by Parts and Electric Motors, Inc. ("P & E") against Sterling Electric, Inc. ("Sterling"). P & E is a terminated distributor of Sterling brand electric motors and parts. P & E charges that Sterling violated Section 1 of the Sherman Act, 15 U.S.C. Sec. 1, and Section 3 of the Clayton Act, 15 U.S.C. Sec. 14, by tying sales of its electric motors (the tied product) to sales of its replacement parts (the tying product). The jury delivered a verdict for P & E on its tying claim. The verdict was set aside in a post-trial order entering judgment n.o.v. and granting a new trial contingent on reversal of the judgment n.o.v. We reverse the judgment n.o.v. and remand the new trial order.

I.

Sterling, which is a wholly-owned subsidiary of A.O. Smith Corp., manufactures various types of electric motors (also called "finished products") as well as replacement parts for them. Sterling concedes that its parts are unique and that it has 100% dominance in the market for Sterling replacement parts, which are usable only on Sterling finished products. No one else makes parts usable on Sterling finished products. From 1980 to 1984, Sterling sales ranged between $9 million and $12 million annually. Sterling accounts for less than 1% of the market in which its finished products are sold.

P & E has been a Sterling distributor for a number of years but has always carried and continues to carry a number of other brands of electric motors and/or parts. In 1981 and 1982 P & E was the largest national distributor of Sterling parts. In terms of total purchases of Sterling electric motors P & E was third nationally in 1981 and seventeenth of seventy-seven in 1982, a year shortened by Sterling's termination of P & E's distributorship. P & E purchased $90,778 of Sterling electric motors in 1981 and $43,418 in 1982. Its corresponding purchases of parts were larger: $160,593 and $293,262, respectively.

When Sterling was acquired by A.O. Smith, there were over four hundred non-exclusive wholesale distributors of its products. Under its new management, Sterling instituted new distribution programs. Sterling contracted with ten "stocking" parts distributors, including P & E, and a number of "referral" parts distributors. All of Sterling's distributors were non-exclusive. Stocking distributors were able to purchase at lower prices than referral distributors. In turn, Sterling required that each of its stocking parts distributors buy from it and aggressively promote minimum quantities of Sterling electric motors. Under its contractual arrangements with stocking distributors Sterling had the right to terminate the distributors for failure to take the agreed minimum quantities of finished products. Sterling thus conditioned its stocking distributors' rights to purchase Sterling parts upon their purchase of Sterling motors.

In June and July of 1982, Sterling warned that if P & E did not purchase more Sterling finished products, P & E would risk termination of its relationship with Sterling, including the right to continue to buy parts. In response to these admonitions, P & E began steering customers toward Sterling electric motors even though P & E would have recommended other brands if its access to Sterling parts were not in jeopardy. P & E increased its purchases of Sterling motors in June and August 1982; nevertheless, on October 1, 1982, Sterling terminated P & E as a distributor of its electric motors and replacement parts because it regarded P & E's level of Sterling electric motor purchases as insufficient.

P & E then brought this lawsuit. It charges that Sterling's linking of mandatory finished product purchases, the tied product, to continued availability of Sterling parts, the tying product, constituted an illegal tying arrangement. At the jury trial P & E presented evidence with respect to the elements of a per se tying case as well as evidence in accord with an alternative rule of reason analysis. Sterling made three motions for directed verdict: one at the end of P & E's case, one at the end of its own case and one at the end of all the evidence. Sterling's first two directed verdict motions were substantially identical to the one it presented at the close of all the evidence, which stated in pertinent part:

D.... Plaintiff has introduced no evidence to show that there was any effect in the tied market. There is no evidence in the record that plaintiff purchased any motors it did not desire to purchase or did not purchase any motors which it wished to have purchased.

E.... In this case, Defendants' activity in restructuring its distribution network was pro-competitive and caused no antitrust injury.

F.... The evidence produced by Plaintiff shows only a manufacturer with a miniscule market share seeking to improve the competitive position of its product in the market place which is economically beneficial to customers.

Defendant's Motion for Directed Verdict At the Conclusion of All the Evidence, R. 78 at 3.

As further discussion will disclose, none of Sterling's motions appears to have asserted that P & E was required to prove the likelihood or danger of Sterling's obtaining market power in the market for the tied product (Sterling electric motors or finished products) as an element of the tying violation.

At the instruction conference, the district court adopted an Instruction 28a which stated in part:

Market power with respect to the tied product, which is electric motors, is not relevant.

Tr. at 955. The remainder of the instruction described the criteria the jury should apply to determine the existence of market power in the tying product market. Sterling's only objection to Instruction 28a was as follows:

Defendant objects to Court's 28a in that it's an improper definition of market power since it contains no consideration of profit.

Tr. at 925.

The district court relied on this objection as preserving Sterling's point that a threat of market power in the tied product was an essential ingredient of a tying violation. The district court asserted that the reference to "profit" meant power over price and that this in turn was a reference to market power in the tied product (electric motors).

Sterling's objection to the district court's Instruction 28a came after its own instruction corresponding to 28a, Sterling's proffered Instruction 42a, was rejected by the district court. That instruction stated in pertinent part as follows:

In order to establish the existence of ... an illegal tying agreement, the burden is upon the Plaintiff to prove each of the following elements by a preponderance of the evidence:

....

The Second element that the Plaintiff must prove is that the "tying" product has sufficient economic power or significant market leverage in the market for replacement parts for electric motors to appreciably restrain or foreclose free competition in the market for the "tied" product.

....

The Third element that the Plaintiff must prove in support of its anti-trust claim is that the alleged tying arrangement involved a "not insubstantial amount of commerce." In deciding this question you must look to the total dollar volume of sales in interstate commerce by the Defendant to the Plaintiff of the products, if any, which you find to have been tied to the alleged "tying" product. For your guidance in this respect, the Supreme Court of the United States has found that annual sales of almost $200,000 are not insubstantial.

Sterling's Proposed Jury Instruction 42(a), R. 146 at 2-4.

In addition, the court gave an instruction 32a, which permitted a verdict on the "rule of reason" without proof of market power in any market, to which Sterling offered no objection. ¹

Further, Sterling tendered, and the Court gave, six special interrogatories. These required the jury to determine whether or not P & E had proven each of five contested elements of a per se case. In addition, Special Interrogatory No. 6 inquired of the jury whether Sterling's conduct constituted an unreasonable restraint of trade. The jury answered each of the six special interrogatories in favor of P & E and found Sterling liable. It subsequently determined damages to be $1,231,992.00, which amount was trebled to $3,695,976.00.

Sterling filed a motion in the alternative for judgment notwithstanding the verdict or for a new trial. In its post-trial motion, Sterling contended, among other things, that "[e]ven if the Sterling distribution program were a tying arrangement, plaintiff has failed to demonstrate the requisite anticompetitive impact on the relevant market." Sterling Motion for N.O.V. or New Trial, R. 107 at 3.

The district court granted Sterling's motion for judgment n.o.v. and ordered a new trial conditionally upon reversal or vacatur of the judgment n.o.v. The district court held that P & E was required, but had failed, to prove a substantial danger that "[Sterling] will acquire market power in the tied product [electric motor] market." In this regard, the district court relied upon Will v. Comprehensive Accounting Corp., 776 F.2d 665, 674 (7th Cir.1985) (quoting Carl Sandburg Village Condominium Ass'n No. 1 v. First Condominium Dev. Co., 758 F.2d 203, 210 (7th Cir.1985)), cert. denied, 475 U.S. 1129, 106 S.Ct. 1659, 90 L.Ed.2d 201 (1986). The Will opinion was issued on October 28, 1985--more than a month after the verdict was returned and the judgment entered in this case...