Bascom Food Products v. Reese Finer Foods, Civ. A. No. 89-1138.

• Citation: 715 F. Supp. 616
• Decision Date: 01 June 1989
• Docket Number: Civ. A. No. 89-1138.
• Parties: Re BASCOM FOOD PRODUCTS CORPORATION and John A. Fressie v. REESE FINER FOODS, INC., John Beers, Gary Greenhouse, Jerry Kehe, Jerry Dorf, Carl McCraw and Norm Wine.
• Court: U.S. District Court — District of New Jersey

715 F. Supp. 616

Re BASCOM FOOD PRODUCTS CORPORATION and John A. Fressie v. REESE FINER FOODS, INC., John Beers, Gary Greenhouse, Jerry Kehe, Jerry Dorf, Carl McCraw and Norm Wine.

Civ. A. No. 89-1138.

United States District Court, D. New Jersey.

June 1, 1989.

Gerald Krovatin, Lowenstein, Sandler, Kohl, Fisher & Boylan, Roseland, N.J., and Jeffrey L. Kessler, Weil, Gotshal & Manges, New York City, for Plaintiffs Bascom Food Products Corp. and John A. Fressie.

Frank Holahan and Harwood Lloyd, Hackensack, N.J., and Jack L. Lahr, Foley & Lardner, Washington, D.C., for defendant Reese Finer Foods, Inc.

Raymond R. Wiss, Winne, Banta, Rizzi, Hetherington & Basralian, Hackensack, N.J., for defendants John E. Beers, Gary L. Greenhouse, Jerry Kehe and Carl G. McCraw.

Charles J. Walsh, Sills, Cummis, Zuckerman, Radin, Tischman, Epstein & Gross, Newark, N.J., for defendants Jerry Dorf and Norman L. Wine, Jr.

OPINION AND ORDER

LECHNER, District Judge.

This matter is currently before the court on the application of John A. Fressie ("Fressie") and Bascom Food Products ("Bascom Food") (collectively the "plaintiffs"), for preliminary injunctive relief requiring certain affirmative action on the part of defendant Reese Finer Foods, Inc. ("Reese Foods") and several individual defendants (collectively the "defendants"). For the reasons that follow, plaintiffs' application for injunctive relief is granted.

Facts¹

In short, this case involves two plaintiffs who are being denied access to a supply of food products which they would like to distribute. Plaintiffs claim that defendants' collective refusal to sell them various food products constitutes at least two per se violations of the antitrust laws. As per se violations, it is claimed that the purported reasonableness of the defendants' selling restrictions should not even be considered by the court under the so called "rule of reason" analysis. Defendants, on the other hand, claim that because the selling restrictions do not constitute per se violations of the antitrust laws, the restrictions should be considered under the rule of reason. It is further claimed the restrictions should not be deemed anticompetitive because they promote "inter-brand competition."

Fressie is the president and sole shareholder of Bascom Food. In addition, Fressie is a shareholder of defendant Reese Foods. From 1971 until June 23, 1988, Fressie served as president, chief executive officer and director of Reese Foods. From 1971 until January 31, 1989, Bascom Food performed various general management functions for Reese Foods. According to the Complaint, Bascom Food did virtually everything for Reese Foods including sourcing, purchasing, product development, financing of Reese Foods' working capital through lines of credit and pursuant to Fressie's personal guarantees, order entry, billing, bookkeeping and all other administrative functions. In addition, Bascom Food performed other functions for Reese Foods such as warehousing and manufacturing. Complaint, ¶¶ 17, 18.

As discussed below, Fressie's and Bascom Food's positions at Reese Foods have been terminated.² Certain of the individual defendants now control Reese Foods. These defendants have entered into a voting trust agreement, pursuant to which plaintiffs claim the defendants have garnered a controlling interest in Reese Foods for the purpose of enforcing anticompetitive restraints.³

Reese Foods (previously known as "V.I. P. Foods") was incorporated in 1971 under the laws of Delaware. The founding members of Reese Foods, including Fressie, desired to create a buying and distribution cooperative composed of, and owned by, a group of specialty food distributors. Through the group's collective buying power it was contemplated Reese Foods would be able to purchase specialty food products at favorable prices, which would enable the members to better compete in the marketplace. Mains Cert., ¶ 2.

In many respects, Reese Foods appears to be more of conduit for, and of, the members of the purchasing cooperative than a stand alone entity. Reese Foods appears to have generated no actual profits for itself. Instead, it has sold specialty food products (mostly under its own private Reese Foods or Reese Foods-owned labels) to its shareholder/distributors at market discounts and with substantial cash rebates. Reese Foods has no plant and equipment, no hard assets, and no employees to speak of. According to the Complaint, Reese Foods is, in many respects, a "paper corporation"⁴ consisting essentially of a distribution network of competing individuals (or their companies) with the right to sell Reese Foods products. Complaint, ¶ 14. Historically, Reese Foods has had retained earnings of approximately $30,000 to $50,000 annually. In addition to the market discounts on goods sold, Reese Foods has distributed over $7 million in cash rebates to its shareholder/distributors since 1972. Id.

The original concept of Reese Foods was to give each distributor the exclusive right to sell Reese Food products in his own geographic territory. Fressie Aff., p. 4. It is alleged the Reese Foods shareholders and distributors operate separate and independent companies at the same horizontal level of the specialty foods market, selling specialty foods to individual retail distributors.

Reese Foods currently sells private label brands of spices, seasonings, gourmet food items and other high-quality food products ("specialty food products") to approximately thirty distributors throughout the United States. Twenty of the distributors are presently shareholders of Reese Foods. At one time all distributors were shareholder/members of Reese Foods; today certain distributors have been selected who are not shareholders. The majority of distributors, however, continue to be shareholder/members of Reese Foods.

Reese Foods' distributors are, generally speaking, independently operated and are under no contractual obligation to purchase any products from Reese Foods. As indicated below, however, the original shareholders have had an affirmative obligation to sell Reese Foods products. Over the years, the number of individual products in the Reese Foods specialty food product line has grown substantially. On August 20, 1971 (when Fressie and three other specialty food distributors, Norm Wine, Sr., Harry Mains, and Jack Heffner, each invested a few hundred dollars in exchange for one share of stock in V.I.P.) each shareholder agreed he would purchase two hundred cases of popcorn salt which Bascom Food would manufacture and sell to V.I.P. and which V.I.P., in turn, would sell to each of the three individual shareholder/distributors. Since that time, Reese Foods has grown into a diverse specialty foods distributor, with revenues in 1988 of approximately $43 million.

Fressie has played a significant role in the growth of Reese Foods. He has allegedly created distinctive Reese Foods brand names and labels (including El Rio, Da Vinci, Ty Ling), as well as its art, advertising and packaging. He allegedly provided all of the financing for Reese Foods through lines of credit guaranteed by Bascom Food and Fressie personally. Since 1971, with the popcorn salt and "cheezybuttery" popcorn seasoning, Fressie developed new specialty food items and generated marketing interest among the shareholders. Reese Foods now has a product line of over five hundred items. Complaint, ¶ 22.

According to Fressie, "in many other products such as smoked oysters, artichokes and capers, Reese is the dominant market factor." Fressie Reply Aff., ¶ 13. As a general matter, it is alleged that trade in specialty food products is a significant element of interstate commerce. Complaint, ¶ 9. The defendants, on the other hand, maintain that Reese Foods has neither monopoly position nor dominant market share in any of its markets. It is asserted that Reese Foods is price-competitive.

Da Vinci pasta, for example, allegedly competes with DiCecco and other pastas manufactured by Borden Co. which, according to trade reports, sells approximately eight hundred million pounds of pasta per year. Reese Foods sells seventeen million pounds of pasta per year. Defendants claim there are at least a dozen brands of pasta with which they compete. In addition, there are approximately thirty-five companies that belong to the National Pasta Association, a national association of pasta suppliers to the grocery market.⁵ Beers Aff., ¶ 4.

Reese Foods' line of El Rio Mexican food products, according to the defendants, competes with many manufacturers including the Old El Paso brand, marketed by a division of Pet, Inc., and Oretega, La Preferida and Tio Sanchez brands. Defendants similarly argue that Reese Foods' Ty Line Oriental food line competes with Kikkoman, the China Bowl brand of Estee, as well as Ka-Me brand, a division of Shafer Clarke, Inc. Market share figures for these Mexican and Chinese food products were not supplied.

Fressie claims that Reese Foods, with $43 million in annual sales, is the largest specialty food company in the United States. Defendants dispute this, arguing that The Specialty Food/Knorr Division of CPC International and The Specialty Food Division of Heinz International are believed to be larger. Defendants further argue that the size of Reese Foods is not particularly relevant in light of the intensive product competition in the retail grocery store business. According to defendants, "although Reese Foods has products in one or two categories that are especially popular," Reese Foods products generally are not the major brand in the particular product category. Beers Aff., ¶ 6.

There has not been adequate evidence offered to determine, on a product-by-product basis, whether Reese Foods dominates —or is a significant factor—in any particular submarket for specialty food products. Attached as Appendix A to this opinion is a listing of revenues earned by Reese Foods in a number of product lines.⁶ While...