Les Shockley Racing, Inc. v. National Hot Rod Ass'n

• Decision Date: 06 September 1989
• Docket Number: 88-5789,Nos. 88-5748,s. 88-5748
• Parties: 1989-2 Trade Cases 68,745 LES SHOCKLEY RACING, INC.; Les Shockley; Robert W. Correll; Gary G. Cerveny; Douglas J. Malewicki; Aero-Visions, Inc.; Gary M. Krolczyk; Larry C. Parks; Dorothy M. McClure, Plaintiffs-Appellants, v. NATIONAL HOT ROD ASSOCIATION; K & K Insurance Agency, Inc., Defendants-Appellees. LES SHOCKLEY RACING, INC.; Les Shockley; Robert W. Correll; Gary G. Cerveny; Douglas J. Malewicki; Aero-Visions, Inc.; Gary M. Krolczyk; Larry C. Parks; Dorothy M. McClure, Plaintiffs-Appellees, v. NATIONAL HOT ROD ASSOCIATION, Defendant-Appellant, and K & K Insurance Agency, Inc., Defendant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 504

884 F.2d 504

1989-2 Trade Cases 68,745

LES SHOCKLEY RACING, INC.; Les Shockley; Robert W.

Correll; Gary G. Cerveny; Douglas J. Malewicki;

Aero-Visions, Inc.; Gary M. Krolczyk; Larry C. Parks;

Dorothy M. McClure, Plaintiffs-Appellants, v. NATIONAL HOT ROD ASSOCIATION; K & K Insurance Agency, Inc.,

Defendants-Appellees.

LES SHOCKLEY RACING, INC.; Les Shockley; Robert W.

Correll; Gary G. Cerveny; Douglas J. Malewicki;

Aero-Visions, Inc.; Gary M. Krolczyk; Larry C. Parks;

Dorothy M. McClure, Plaintiffs-Appellees, v. NATIONAL HOT ROD ASSOCIATION, Defendant-Appellant, and K & K Insurance Agency, Inc., Defendant.

Nos. 88-5748, 88-5789.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 8, 1989.

Decided Sept. 6, 1989.

Ellen A. Pansky, Bayne & Markle, Van Nuys, Cal., for plaintiffs-appellants-cross-appellees.

David A. Pash, Kinsella, Boesch, Fujikawa & Towle, Los Angeles, Cal., for defendants-appellees-cross-appellants.

Appeals from the United States District Court for the Central District of California.

Before HUG, HALL and WIGGINS, Circuit Judges.

HUG, Circuit Judge:

Plaintiffs are owners and operators of jet-powered trucks and jet-powered motorcycles, which allegedly have been banned from exhibition racing (racing without prize money) at drag racing events sponsored and controlled by the National Hot Rod Association ("NHRA"). Plaintiffs sued the NHRA and its insurance broker, K & K Insurance Agency, Inc. ("K & K"), alleging that the ban resulted from a conspiracy among the NHRA, K & K, and unnamed NHRA members who own or operate drag racing tracks throughout the United States. Plaintiffs appeal the order dismissing their claim under Sherman Act Sec. 1, 15 U.S.C. Sec. 1 (1982), for failure adequately to state a claim for relief and their pendent state law claims for lack of subject matter jurisdiction. The NHRA cross-appeals the order denying its motion for sanctions against plaintiffs under Fed.R.Civ.P. 11.

Plaintiffs' appeal requires us to decide whether they adequately alleged injury to competition and whether the district court abused its discretion in declining to exercise jurisdiction over the pendent claims. The NHRA's cross-appeal requires us to decide whether plaintiffs' complaint, considered in its entirety, was frivolous within the meaning of Fed.R.Civ.P. 11. We resolve each of these issues in the negative and affirm both orders of the district court.

FACTUAL AND PROCEDURAL BACKGROUND

In their original complaint, plaintiffs sought damages and injunctive relief for alleged violations of both sections one and two of the Sherman Act, 15 U.S.C. Secs. 1, 2 (1982), and for a variety of alleged state law torts. The district court dismissed this complaint but granted plaintiffs leave to amend. The court based its dismissal of the Sherman Act Sec. 1 claim on the absence of sufficiently alleged facts showing injury to competition. The court described the complaint as devoid of allegations that competition suffered injury "aside from the [allegation] that plaintiff[s] ... [were] precluded from the market."

In amending their complaint, plaintiffs dropped the Sherman Act Sec. 2 claims but retained the Sherman Act Sec. 1 claim and the pendent state law claims. Only the facts alleged in support of the section one claim together with all reasonable inferences that Plaintiffs also allege that the NHRA has never licensed jet-powered motorcycles nor permitted their exhibition at NHRA-sanctioned events. For several years preceding 1987, however, the NHRA permitted plaintiffs to operate their jet-powered trucks during NHRA-sanctioned events at speeds up to 175 m.p.h. This permission was modified in January 1987 when the NHRA and K & K banned the exhibition of jet-powered trucks at speeds greater than 55 m.p.h. Thereafter, NHRA member track owners and operators refused to purchase plaintiffs' exhibition drag racing services because operation of jet-powered trucks at or below 55 m.p.h. lacked sufficient spectator appeal. Following 1987, the NHRA banned the exhibition of jet-powered trucks at any speed.

are favorable to the plaintiffs need now concern us. Plaintiffs allege they are in the business of staging exhibition drag races of their jet-powered trucks and motorcycles at race tracks throughout the United States where drag racing events are held. Plaintiffs conduct their business by selling their exhibition drag racing services to the owners and operators of these race tracks for presentation at specific racing events. A majority of the race tracks where plaintiffs could exhibit their jet-powered vehicles are owned or operated by members of the NHRA. The NHRA, both directly and through K & K and other agents, controls the purchase of exhibition drag racing services at the race tracks owned and operated by its members. The NHRA is the largest sanctioning organization of drag racing events in the United States.

Based on these allegations in the amended complaint, plaintiffs repeated their claim that the NHRA, K & K, and NHRA members who own or operate race tracks conspired or agreed to restrain trade unreasonably in violation of Sherman Act Sec. 1. The district court again dismissed the section one claim on the ground that plaintiffs had failed adequately to plead an injury to competition that exceeded mere injury to themselves. The court also declined to exercise pendent jurisdiction over the remaining state law tort claims and ordered the entire complaint dismissed without leave to amend. Finally, the district court denied the NHRA's motion to sanction plaintiffs pursuant to Fed.R.Civ.P. 11 for their filing of the amended complaint. We have jurisdiction to review both orders of the district court under 28 U.S.C. Sec. 1291 (1982).

DISCUSSION

I. Sherman Act Sec. 1 Claim

We review de novo the dismissal of plaintiffs' Sherman Act Sec. 1 claim under Fed.R.Civ.P. 12(b)(6). Rutman Wine Co. v. E. & J. Gallo Winery, 829 F.2d 729, 732 (9th Cir.1987). Plaintiffs are entitled to have all of their allegations of material fact accepted as true and construed in a favorable light. Western Reserve Oil & Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir.1985), cert. denied, 474 U.S. 1056, 106 S.Ct. 795, 88 L.Ed.2d 773 (1986). We may affirm the dismissal only if proof of no set of facts outlined by the complaint would justify relief. Rutman Wine, 829 F.2d at 732.

The parties do not dispute that the rule of reason controls this case. The rule of reason requires a claimant under Sherman Act Sec. 1 initially to establish three elements: "(1) an agreement or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intend to harm or restrain competition; and (3) which actually injures competition." Oltz v. St. Peter's Community Hosp., 861 F.2d 1440, 1445 (9th Cir.1988) (citations omitted). After the claimant has established these elements, the factfinder must weigh the anticompetitive effects and the procompetitive effects or business justifications advanced for the challenged restraint to determine whether it is unreasonable. Id. This examination must include a thorough examination into all of the circumstances surrounding the restraint.

The district court dismissed plaintiffs' Sherman Act Sec. 1 claim for failure sufficiently to allege an unreasonable restraint of or injury to competition. In order successfully to allege injury to competition Ordinarily, the factual support needed to show injury to competition must include proof of the relevant geographic and product markets and demonstration of the restraint's anticompetitive effects within those markets. Thurman Indus., Inc. v. Pay 'N Pak Stores, Inc., 875 F.2d 1369 (9th Cir.1989). Avoiding such market analysis requires proof of actual detrimental competitive effects such as output decreases or price increases. Id. Because plaintiffs failed to allege any actual detrimental competitive effects from the challenged restraint, they had to allege injury to competition within a framework of market analysis.

a section one claimant may not merely recite the bare legal conclusion that competition has been restrained unreasonably. Rather, a claimant must, at a minimum, sketch the outline of the antitrust violation with allegations of supporting factual detail. Rutman Wine, 829 F.2d at 736.

Plaintiffs' complaint describes the relevant market as the market for "exhibition drag racing services." In this market, plaintiffs maintain they compete with all others who own and operate jet-powered vehicles for sales of services to racetrack owners and operators who sponsor events at which spectators pay to observe drag racing. The United States appears to be the geographical dimension of the suggested market, and the staging of exhibition drag races between all varieties of jet-powered vehicles constitutes the product dimension of the market. Plaintiffs allege that defendants, as buyers of exhibition drag racing services, collectively possess a degree of monopsony power--power to affect the price and amount of the services exchanged in the relevant market. Defendants allegedly derive this power because NHRA members own or operate a majority of the tracks where exhibition drag racing is possible and because the NHRA controls its members' purchases of exhibition drag racing services. Because of this collective buying power, plaintiffs allege that the NHRA's ban on jet-powered truck and motorcycle exhibition at NHRA-sanctioned events has effectively blocked their access to the relevant market.

Plaintiffs insist that their allegation of market exclusion and resulting loss of income are sufficient to plead an outline of facts showing injury to competition that would enable a factfinder to conclude that defendants violated Sherman Act Sec. 1. We cannot agree. Although proof of plaintiffs' allegations would establish harm to their business interests, such proof would not, standing alone, show injury to competition in the...