Com. of Pa. ex rel. Zimmerman v. PepsiCo, Inc.

• Decision Date: 04 January 1988
• Docket Number: No. 87-5351,87-5351
• Citation: 836 F.2d 173
• Parties: , 1987-2 Trade Cases 67,814 COMMONWEALTH OF PENNSYLVANIA, ex rel. LeRoy S. ZIMMERMAN, Attorney General of Pennsylvania, Appellant, v. PEPSICO, INC., Allegheny Pepsi-Cola Bottling Company, Inc., and Confair Bottling Company, Inc.
• Court: U.S. Court of Appeals — Third Circuit

Page 173

836 F.2d 173

56 USLW 2405, 1987-2 Trade Cases 67,814

COMMONWEALTH OF PENNSYLVANIA, ex rel. LeRoy S. ZIMMERMAN, Attorney General of Pennsylvania, Appellant, v. PEPSICO, INC., Allegheny Pepsi-Cola Bottling Company, Inc., and Confair Bottling Company, Inc.

No. 87-5351.

United States Court of Appeals, Third Circuit.

Argued Nov. 17, 1987.

Decided Jan. 4, 1988.

Fred A. Freund (Argued), Richard M. Steuer, Kaye, Scholer, Fierman, Hays and Handler, New York City, Rod J. Pera, Alan R. Boynton, Jr., McNees, Wallace & Nurick, Harrisburg, Pa., Gerard W. Casey, Robert K. Biggart, PepsiCo, Inc., Somers, N.Y., for appellees PepsiCo., Inc. and Allegheny Pepsi-Cola Bottling Co., Inc.

James B. Kobak, Jr. (Argued), Robert J. Sisk, David W. Wiltenburg, Hughes, Hubbard & Reed, New York City, J. David Smith, McCormick, Rieder, Nichols, Sarno, Bahl & Knecht, Williamsport, Pa., for appellee Confair Bottling Co., Inc.

Eugene F. Waye (Argued), LeRoy S. Zimmerman, Carl S. Hisiro, Kelly H. Greensmith, Harrisburg, Pa., for appellant.

Before SEITZ, HUTCHINSON and ALDISERT, Circuit Judges.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

The question for decision in this antitrust case of first impression under the Soft Drink Interbrand Competition Act of 1980, 15 U.S.C. Secs. 3501-3503, is whether the Commonwealth of Pennsylvania, as a parens patriae plaintiff, properly set forth a claim on which relief could be granted in its complaint against PepsiCo, Inc., a soft drink manufacturer, and two Pepsi-Cola bottlers. After affording Pennsylvania an opportunity to amend, the district court analyzed the amended complaint's allegations and, concluding that the plaintiff had failed to mount the hurdles imposed by the Soft Drink Act, dismissed the action for failure to state a claim under Rule 12(b)(6), F.R.Civ.P., 658 F.Supp. 816. Pennsylvania has appealed and we will affirm.

The district court had jurisdiction under 28 U.S.C. Sec. 1337. Jurisdiction on appeal is proper based on 28 U.S.C. Sec. 1291.

I.

PepsiCo, Inc. makes soft drink syrup and concentrate, the flavoring ingredients in its trademarked soft drinks. Allegheny and Confair are two Pepsi-Cola bottlers; Allegheny is a wholly-owned subsidiary of PepsiCo. The bottlers buy syrup and concentrate from PepsiCo to produce and sell carbonated soft drinks. Each is licensed by PepsiCo to produce and market its soft drinks within an exclusive geographic territory in Pennsylvania. Both Allegheny and Confair sell soft drinks to distributors, retailers, and other resellers. These resellers are independent operators having no licensing agreements with either PepsiCo or the bottlers.

Although resellers generally sell retail, some sell wholesale to other resellers. Under such circumstances, the wholesaling reseller becomes a competitor of the wholesaling bottler. When resellers sell to other resellers outside of their bottler's territory, the practice is known as "transshipping."

Pennsylvania alleges that PepsiCo, Allegheny, and Confair have conspired to eliminate horizontal competition between bottlers and resellers by prohibiting sales between resellers. Specifically, Pennsylvania claims that the three defendants have engaged in the following practices: using a coding identification system to trace and monitor soft drink sales; fining bottlers when their product is shipped out of their territory; refusing to deal with resellers who engage in transshipping; refusing to deal with resellers who buy from or sell to other resellers; threatening termination of resellers who engage in such sales; and limiting sales to resellers to the amount the reseller needs solely for its own retail sales, in order to prevent that reseller from wholesaling.

Pennsylvania brought a parens patriae action in the district court, alleging that defendants' practices violated section 1 of the Sherman Act, 15 U.S.C. Sec. 1, and seeking an injunction against defendants pursuant to the Clayton Act, 15 U.S.C. Sec. 26. Defendants moved to dismiss for failure to state a claim on which relief could be granted. Rule 12(b)(6), F.R.Civ.P. Pennsylvania filed an amended complaint. defendants again moved to dismiss. On April 28, 1987, the district court granted defendants' motion. Our standard of review of the district court's dismissal is whether, taking the allegations of the complaint as true, and liberally giving the plaintiff the benefit of all inferences that may be drawn therefrom, it appears beyond doubt that the plaintiff can prove no set of facts upon which relief could be granted. Wisniewski v. Johns-Manville Corp., 759 F.2d 271, 273 (3d Cir.1985).

II.

Pennsylvania's case stands or falls on federal statutory authority. Just as the Sherman and Clayton Acts were designed to define antitrust violations, the Soft Drink Act was enacted to remove certain soft drink industry practices from the reach of the antitrust laws:

Nothing contained in any antitrust law shall render unlawful the inclusion and enforcement in any trademark licensing contract or agreement ... of provisions ... limiting the licensee, directly or indirectly, to the manufacture, distribution, and sale of such product only for ultimate resale to consumers within a defined geographic area: Provided, That such product is in substantial and effective competition with other products of the same general class in the relevant market or markets.

15 U.S.C. Sec. 3501.

The Act insures that "[n]othing contained in any antitrust law" shall render enforcement of territorial restraints unlawful, except where it is alleged and proved that competition among soft drink brands--i.e., interbrand competition--is not substantial and effective.

The Act also includes a second substantive section that provides:

Nothing in this chapter shall be construed to legalize the enforcement of provisions described in section 3501 of this title in trademark licensing contracts or agreements described in that section by means of price fixing agreements, horizontal restraints of trade, or group boycotts, if such agreements, restraints, or boycotts would otherwise be unlawful.

15 U.S.C. Sec. 3502.

The genesis of the Act is in the Supreme Court's rulings on vertical restraints, and in the effect of those rulings on standard soft drink industry distribution practices. See Note, The Soft Drink Interbrand Competition Act of 1980: Antitrust Loses its Fizz, 18:1 Harv. J. on Legis. 91 (1981) (hereinafter "Note"). In 1967, the Supreme Court, in the now overruled Schwinn decision, held that, under certain circumstances, manufacturer-imposed territorial restraints are per se illegal under section 1 of the Sherman Act. United States v. Arnold, Schwinn & Co., 388 U.S. 365, 382, 87 S.Ct. 1856, 1867, 18 L.Ed.2d 1249 (1967). The Schwinn decision helped launch a Federal Trade Commission investigation into soft drink industry distribution practices. In 1971, that investigation culminated in the filing of complaints against seven soft drink syrup companies. See Note, supra, at 108.

During the pendency of those actions, the Supreme Court overruled the Schwinn decision in Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). In Sylvania, the Court held that the law should "return to the rule of reason that governed vertical restrictions prior to Schwinn." Id. at 59, 97 S.Ct. at 2562. In 1978, relying in part on Sylvania, the FTC ruled that certain territorial restrictions existing in the soft drink industry were unlawful. Coca Cola Co., 91 F.T.C. 517 (1978), 642 F.2d 1387 (D.C.Cir.1981) (remanding for dismissal); PepsiCo, Inc., 91 F.T.C. 680 (1978), 642 F.2d 1387 (D.C.Cir.1981) (same). Those decisions were the primary stimuli to the enactment of the Soft Drink Act in 1980. See H.R.Rep. No. 1118, 96th Cong., 2d Sess. 6, reprinted in 1980 U.S. Code Cong. & Admin. News 2373, 2375; Note, supra, at 106.

The Soft Drink Act was adopted after Congress conducted an intensive investigation into the soft drink industry. In passing the Act, Congress determined that the exclusive territorial distribution agreements common to the soft drink industry warranted protection because that industry was a prototype of industries in which territorial restraints foster interbrand competition. See H.Rep. No. 1118, reprinted in 1980 U.S. Code Cong. & Admin. News at 2377. Such restraints encourage each bottler to invest and promote in his own territory, and prevent "free riding" by sellers from outside the territory on the bottler's investment and effort. As described in the Senate Report accompanying the Act:

Under the trademark licensing system which exists in the soft drink industry, the franchise company produces and sells syrups or flavoring concentrates pursuant to trademark licensing agreements with independent bottlers, participates in advertising and promotional expenditures made in connection with the trademarked products, provides advice and technical assistance on production, quality control, management, and sales problems, and assists in development and test marketing of new products and containers.

The bottler, in turn, manufactures, distributes and sells the trademarked products and provides the capital investment necessary for his market. He determines the plant and equipment to be used, the volume of production by size and type of container, the product mix, the wholesale price to be charged, and the manner in which he can maximize his market penetration to secure the widest possible distribution of his products throughout the territory.

S.Rep. No. 645, 96th Cong., 2d Sess. 3 (1980).

Congress considered what would happen if the long-standing practice of territorial exclusivity was eradicated:

If territories are eliminated, wholesale prices for non-returnable packages may fall temporarily for large volume accounts, principally chain stores. However, it is the committee's opinion that it is unlikely that chain stores will pass on these reduced prices to their...