Cranfill v. Scott & Fetzer Co.

• Decision Date: 09 May 1991
• Docket Number: No. S-82-181-CA.,S-82-181-CA.
• Parties: Jerry CRANFILL, et al. v. The SCOTT & FETZER COMPANY, et al.
• Court: U.S. District Court — Eastern District of Texas

773 F. Supp. 943

Jerry CRANFILL, et al. v. The SCOTT & FETZER COMPANY, et al.

No. S-82-181-CA.

United States District Court, E.D. Texas, Sherman Division.

May 9, 1991.

COPYRIGHT MATERIAL OMITTED

Roger D. Sanders, Sherman, Tex., for plaintiffs.

Barry L. Springel, John R. Henderson, Jones, Day, Reavis & Pogue, Dallas, Tex., for defendants.

MEMORANDUM OPINION

COBB, District Judge.

I. INTRODUCTION

In 1979, plaintiff Jerry Cranfill was a distributor for the defendant The Scott Fetzer Company,¹ and specifically for The Kirby Company Division of The Scott Fetzer Company ("Kirby"). In her deposition testimony, Jerry Cranfill admitted that in 1979, in direct violation of her Distribution Agreement, she submitted false sales and warranty information to Kirby (Cranfill Depo., p. 52). In December 1979, pursuant to the Distributor Agreement between Kirby and plaintiffs, Kirby cancelled Jerry Cranfill's distributorship for false reporting.

Jerry Cranfill and her husband Miller Cranfill then filed this action, claiming, in essence, that Kirby's cancellation of the Cranfill distributorship was not motivated by a legitimate purpose (termination for false reporting). Instead, plaintiffs claim Kirby's actions were "in retaliation" for plaintiffs' alleged failure to abide by purported Kirby policies relating to price maintenance or price advertising. Plaintiffs also claim that Kirby's action was "in retaliation" for plaintiffs' failure to abide by an alleged territorial restriction, called the Installation, Service and Administration (ISA) fee. In addition, plaintiffs claim that in retaliation for plaintiffs' failure to abide by Kirby's allegedly anticompetitive policies, Kirby and others conspired and refused to deal with the plaintiffs after their Kirby distributorship was cancelled.

Plaintiffs have combined the above allegations in an attempt to state claims under the Sherman Act (Counts I, II, III, IV and V of the Plaintiffs' Second Amended Original Complaint. (Am.Compl.)), the Texas antitrust statute in existence before 1983 (Am.Compl. Count VI), and under Texas common law (Am.Compl. Count VII).

THE FACTS OF THE CASE

A. The Kirby Business

The defendants in this case are The Scott Fetzer Company ("Scott Fetzer") and The Kirby Sales Company. Scott Fetzer has a division called the Kirby Company. The Kirby Sales Company is a wholly owned subsidiary of Scott Fetzer. The Kirby Sales Company has done business exclusively in the State of Texas since the middle of 1980. Both the Kirby Company Division and the Kirby Sales Company are in the business of manufacturing and selling vacuum cleaners and accessories throughout the United States and around the world. Of the eleven major sellers of vacuum cleaners in the United States and around the world, Kirby ranks fifth. Further, Kirby's market share of all vacuums sold in the United States at all relevant times has been approximately six to eight percent. (Affidavit of Marshall R. Herron (Herron) at para. 1, 2).²

Traditionally, Kirby has not and did not directly market its products to end users. Rather, Kirby contracted with numerous distributors who, in turn, marketed Kirby products. The distributors were not employed by Kirby. For the most part, the relationship between Kirby and the distributor was that of vendor and vendee. Distributors could sell Kirby products directly to end users or could contract with dealers who would then sell products to customers. The distributor-dealer relationship was also that of a vendor and vendee. (Herron at para. 3).³

Beginning in 1978, each distributor was assigned an "area of primary responsibility" which could overlap with another distributor's area. Distributors were free to sell outside of their area. Distributors do, in fact, sell products outside of their areas (Herron at para. 4).

1. The Importance of In-Home Sales to Kirby

Kirby believes a Kirby vacuum cleaner has a number of unique features which may not be readily apparent from merely viewing the product. For example, Kirby vacuum cleaners may be used with a variety of accessories and attachments which do more than merely vacuum rugs or carpets. Because of this unique aspect of Kirby products, Kirby has determined that Kirby products should be sold by in-home sales demonstrations. Because Kirby believes in-home demonstrations are essential, it required that each distributor with which Kirby contracts make a commitment to build and maintain an in-home sales force. (Herron at para. 6).

Kirby had traditionally published a suggested retail price for its products. Kirby had also advised distributors that prices for Kirby products should permit the distributor to make a profit so that the distributor could stay in business. Ultimately, however, the price for which a distributor or dealer sells a Kirby product was left to the determination of the distributor or dealer. (Herron at para. 7; Affidavit of Adrian E. Budlong, Jr. (Budlong) at para. 4;⁴ Affidavit of Peter B. Menke (Menke) at para. 4⁵).

2. Kirby's Distributor Agreement

In 1978, Kirby instituted a program called the Installation Service and Administration (or "ISA") fee. The ISA fee became part of every Kirby Distributor Agreement. The ISA program generally worked as follows. For every Kirby vacuum cleaner sold to a distributor, Kirby would charge an additional $38.00 as an ISA fee. If the distributor sold that product within the distributor's "area of primary responsibility" (a geographic area defined in the distributor's agreement) and if the distributor turned in both a sales report form including that sale and a properly completed warranty card completed by the distributor and the customer, Kirby would return the $38.00 ISA fee plus a $2.00 sales producer dividend plan ("SPDP") fee to the distributor. If the distributor sold the product outside the distributor's "area of primary responsibility," then the distributor with an office deemed to be closest to the customer would receive $30.00.⁶ To receive the $30.00, the non-selling distributor was required to contact the customer, verify that the customer had received the demonstration of the product (and demonstrate the product if a demonstration had not been given) and provide any necessary service for that product. (Herron at para. 9).

The ISA program had several purposes. First, the program was designed to ensure that every end user-purchaser of a Kirby product received a demonstration of the product. Second, the ISA program created an incentive for distributors to build an in-home sales force concentrated within the distributor's "area of primary responsibility." Third, and perhaps most important, the ISA program assured that customers purchasing Kirby products would receive adequate service from authorized Kirby distributors. The ISA program attempted to compensate those distributors who would be responsible for providing warranty service for Kirby products. Fourth, the ISA program — and particularly the requirement of a completed and accurate customer and warranty information — provided Kirby with a data base which Kirby could use for product warranty and recall purposes, and for marketing purposes generally (Herron at para. 10; Budlong at para. 6). Kirby included a provision in its 1978 Distributor Agreement which required the distributor to provide such information accurately and which specifically made failure to adhere to this requirement cause for cancellation of the distributor's agreement. (Herron at para. 11).

B. Plaintiffs' Dealings with Kirby

Plaintiff Jerry Cranfill became involved in the Kirby business in the 1960s (Am. Compl. para. VI). Mrs. Cranfill's distributorship, which may or may not have been owned jointly with her husband, plaintiff Miller Cranfill (Deposition and Answers of Jerry L. Cranfill), entered into a series of distributorship agreements with Kirby. The last agreement was signed in 1978 (Am.Compl. para. VI).

Plaintiff's area of primary responsibility included a multi-county area which included and surrounded Sherman, Texas (Am. Compl. para. V). However, plaintiffs sold Kirby products outside of their area of primary responsibility. Plaintiffs encountered competition both inside and outside of their area of primary responsibility. For example, Jerry Cranfill admitted that Kirby products competed with at least five other brands of vacuum cleaners that were available to customers in the area where she was selling (Id. at 13-14). She testified, "There's lots of people in town that sell vacuum cleaners." (Id. at 14).

Plaintiffs operated their business as a business independent of Kirby. For example, plaintiffs were the only ones that could set what prices they charge. As Jerry Cranfill testified:

Q. Now as to sales that you personally made ..., you set your own price?

A. On the machines I sold myself?

Q. Yes.

A. Yes.

Q. You charged whatever you wanted to charge?

A. I charge whatever I had to charge to make a profit, yes.

(Cranfill Depo. at 44). Further, in reports that Jerry Cranfill mailed to plaintiffs for twenty years, Kirby never sought any information on the prices that plaintiffs charged to customers (Id. at 41). Indeed, Jerry Cranfill had no recollection of ever telling anyone at Kirby what prices she charged (Id. at 42).

In late 1979, Kirby personnel, in the regular course of Kirby's business, sought to verify sales reports filed by Jerry Cranfill. Such verifications were done on a random basis. Kirby discovered several errors in Cranfill's sales reports. In November 1979, Kirby determined that Jerry Cranfill was sending false warranty information in reports to Kirby (Herron at para. 16). On December 13, 1979, Kirby cancelled plaintiffs' Distributor Agreement for furnishing incorrect sales reports and warranty information (Id.).

C. Plaintiffs' Claims

Plaintiffs' claims boil down to these propositions: (a) Kirby imposed an installation, service and administration fee which allegedly restricted the territory in which p...