Beloit Culligan Soft Water Service, Inc. v. Culligan, Inc., 12613.

Citation274 F.2d 29
Decision Date12 January 1960
Docket NumberNo. 12613.,12613.
PartiesBELOIT CULLIGAN SOFT WATER SERVICE, INC., a Wisconsin Corporation; Adolph H. Samuels, dba Culligan Soft Water Service; Merrill R. Fie, dba Culligan Soft Water Service of Denver; John J. Burnham and Irene Burnham, a partnership, dba Culligan Soft Water Service Co. of Ogden, Utah; James W. Fisher and John W. Fisher, dba Culligan Soft Water Service, Santa Rosa, California; L. A. McRae, dba Culligan Soft Water Service of Palo Alto, California and George W. Geiger, dba Culligan Soft Water Service of San Bruno, Plaintiffs-Appellees, v. CULLIGAN, INC., a Delaware corporation, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Robert A. Sprecher, B. L. Pollak, Frank A. Karaba, Gerald White, Chicago, Ill., for defendant-appellant.

David R. Macdonald, Kirkland, Ellis, Hodson, Chaffetz & Masters, Chicago, Ill., for plaintiffs-appellees, E. Houston Harsha, Chicago, Ill., of counsel.

Before HASTINGS, Chief Judge, and DUFFY and SCHNACKENBERG, Circuit Judges.

DUFFY, Circuit Judge.

This is a suit for a declaratory judgment to require defendant, Culligan, Inc., (hereinafter called "Culligan") to recognize the validity of certain dealership franchise agreements entered into between Culligan and the respective plaintiffs.

In the period 1945 to 1947, five of the plaintiffs entered into franchise agreements with Culligan, which were substantially identical except for names, territory, termination date and number of service units to be purchased. These contracts are known as "First Post War Contracts." The respective expiration dates are: December 4 and December 21, 1960; November 20, 1970; June 25, 1972 and October 1, 1972.

In 1954 and 1956, respectively, the other two plaintiffs entered into franchise agreements with Culligan which were substantially identical with each other except as to items similar to those noted in the preceding paragraph. These contracts are known as "Second Buff Contracts." The expiration dates are June 1, 1964 and January 26, 1966.

Each of the First Post War Contracts contained an undertaking by Culligan to sell, and by the respective plaintiffs to purchase, all of the plaintiff's requirements of water softening units, equipment, parts and materials. In the Second Buff Contracts there was the undertaking by the dealers to purchase specified equipment and materials including Culligan's water conditioning minerals and service tanks and other parts, although equipment and material not specified could be purchased from other dealers.

In each of the First Post War Contracts, the dealer undertook "to use his best endeavors in the sale and promotion" of water conditioning services and Culligan's products. In the Second Buff Contracts, the dealer promised "to diligently and loyally promote and foster" the increase of the use and acceptance of Culligan soft water service.

In both types of contract, the dealer agreed that he would provide capital to establish offices, sales rooms and service plants acceptable to Culligan, and that he would maintain sufficient stock and equipment, and would maintain in serviceable and clean condition all service units in accordance with Culligan standards. He also agreed to cooperate with Culligan in formulating sales promotion plans.

In the First Post War Contracts, Culligan granted to each plaintiff a designated territory within which each plaintiff had the exclusive right to distribute Culligan's water conditioning products. In the Second Buff Agreements each plaintiff was given the right to operate exclusively in a designated territory under the Culligan plan which is a comprehensive soft water service plan.

Both types of contract contained severability clauses. The First Post War Agreement contained the following: "If any provision of this agreement is held to be invalid or unenforcible, this contract shall, as to such provisions, be considered divisible, and the balance of the agreement shall be valid and binding." The Second Buff Agreement provides: "Any provision of this Agreement prohibited by law shall be ineffective to the extent of such prohibition without in any way invalidating or affecting the remaining provisions of this Agreement."

Each plaintiff expended substantial sums of money in developing territories granted to him or it by Culligan. Extensive advertising was undertaken, through media such as newspapers, billboards, radio and television. This advertising was done under the name of "Culligan Soft Water Service," and often the names of the dealers were not mentioned.

On October 31, 1956, the Federal Trade Commission filed a complaint against Culligan charging a violation of Section 3 of the Clayton Act (15 U.S. C.A. § 14), by requiring its dealers not to purchase or deal in water softening products made by competitors of Culligan. Later, Culligan agreed to a consent order which became effective May 23, 1957. Culligan agreed to desist from making any contract or continuing in effect any existing contract for the sale of its products on condition the purchaser shall not use, deal in, or sell similar or related products supplied by any competitor.

The order also provided: "* * * nothing in this order shall prohibit respondent from entering into an agreement with its dealers prohibiting them from using or selling for use, in the Culligan plan, parts, equipment or material which would adversely affect respondent's water conditioning service unit."

By letter of July 9, 1957, Culligan notified its dealers including plaintiffs, that the consent order "* * * by its nature invalidated all Culligan franchises." Later, Culligan submitted a new form of franchise agreement to its dealers, including plaintiffs, which terminated any pre-existing franchise, and granted the dealer a non-exclusive territory. Fifty-seven dealers, including plaintiffs, declined to execute the new agreement, although a large majority did so. By letter of December 29, 1958, Culligan wrote to each plaintiff purporting to cancel plaintiff's existing franchise agreement on the sole ground that plaintiff had failed to execute the new form of franchise. Culligan informed plaintiffs it would no longer sell its product to them, and demanded they discontinue the use of the name "Culligan" in their business. There was no claim that any plaintiff had breached his or its franchise agreement.

Culligan argues that the contracts sought to be enforced are invalid and unenforceable because they contain provisions which are in violation of section 3 of the Clayton Act. Defendant insists the illegal provisions invalidate the entire contract. The District Court held otherwise, and entered a declaratory judgment in favor of plaintiffs. The Court also issued an injunction restraining Culligan from interfering with the rights of plaintiffs in their franchise agreements.

The District Court concluded that the consent order effective May 23, 1957 did not affect the rights of plaintiffs under their franchise agreements and did not excuse Culligan from performing its contractual obligations under such agreements. The Court was of the view that the severability clauses were valid and effective, and that the agreements were valid in all respects other than the requirements clause.

Section 3 of the Clayton Act, 15 U.S. C.A. § 14, provides, in part:

"It shall be unlawful for any person engaged in commerce, in the course of such commerce, to * * * make a * * * contract for sale of goods, wares, merchandise, machinery, supplies, or other commodities, * * * on the condition, agreement, or understanding that the * * * purchaser thereof shall not use or deal in the goods, wares, merchandise, machinery, supplies, or other commodities of a competitor * * * of the * * * seller, where the effect of such lease, sale, or contract for sale or such condition, agreement, or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce."

In arguing that the respective franchise agreements are unenforceable, Culligan has cited a number of court decisions where price-fixing provisions of contracts have been considered. In United States v. Socony-Vacuum Oil Co., Inc., 310 U.S. 150, 60 S.Ct. 811, 84 L.Ed. 1129, the Court held price-fixing agreements to be in violation of the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note and to be illegal per se. In United States v. Line Material Co., 333 U.S. 287, at page 307, 68 S.Ct. 550, at page 560, 92 L.Ed. 701, the Court said: "In the absence of patent or other statutory authorization, a contract to fix or maintain prices in interstate commerce has long been recognized as illegal per se under the Sherman Act." In that case the Court also stated, 333 U.S. at page 308, 68 S.Ct. at page 561: "It is equally well settled that the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly." At a later date the Court held illegal an agreement to hold down prices by limiting maximum prices. Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211, 71 S.Ct. 259, 95 L.Ed. 219. Again, in United States v. McKesson & Robbins, Inc., 351 U.S. 305, 309, 310, 76 S.Ct. 937, 100 L.Ed. 1209, the Court emphasized that price fixing is conclusively presumed to be unreasonable.

The Supreme Court has adopted a different approach in considering exclusive dealing provisions or requirement contracts which are prohibited by Section 3 of the Clayton Act. The Court has emphasized the importance of the part of that statute which provides exclusive dealing agreements are illegal "where the effect of such * * * contract * * * may be to substantially lessen competition or tend to create a monopoly in any line of commerce." 15 U.S.C.A. § 14.

In the earlier cases, the Court applied the "Rule of Reason" of the Sherman Act,1 to Section 3 of the Clayton Act.2 However,...

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