Calnetics Corporation v. Volkswagen of America, Inc.

• Decision Date: 30 June 1972
• Docket Number: No. 70-2185.,70-2185.
• Citation: 348 F. Supp. 606
• Court: U.S. District Court — Central District of California
• Parties: CALNETICS CORPORATION, Plaintiff, v. VOLKSWAGEN OF AMERICA, INC., et al., Defendants.

348 F. Supp. 606

CALNETICS CORPORATION, Plaintiff, v. VOLKSWAGEN OF AMERICA, INC., et al., Defendants.

No. 70-2185.

United States District Court, C. D. California.

June 30, 1972.

COPYRIGHT MATERIAL OMITTED

Blecher & Collins, Maxwell M. Blecher, Harold R. Collins, Jr., Gary W. Hoecker, Los Angeles, Cal., Gottlieb & Schwartz, Bernard Weisberg, Melvin E. Pearl, Chicago, Ill., for plaintiff.

Harry B. Swerdlow, Allan Albala, Swerdlow, Glikbarg & Shimer, Beverly Hills, Cal., for Volkswagen of America, Inc.

Sandler & Rosen, Raymond C. Sandler, Nelson Rosen, Los Angeles, Cal., for Volkswagen Pacific, Inc.

MEMORANDUM OPINION AND ORDER

REAL, District Judge.

This matter comes on for decision after trial by jury of damages claimed by plaintiff against defendants as the result of alleged violations of Section 7 of the Clayton Act 15 U.S.C. § 18, and trial to the court sitting without a jury to compel a divestiture of the acquisition of Delanair Engineering Co., Inc. by Volkswagen of America, Inc., on September 26, 1969.

THE PARTIES

Plaintiff Calnetics Corporation (hereinafter referred to as Calnetics) is a California corporation operating a group of related divisions engaged in the businesses of manufacturing and selling air conditioners, components and parts thereof, sheet metal fabrication, tool and part machinery, and plastic moldings and extrusions. Plaintiff is the successor in interest to Sudmeier Engineering Corporation. Plaintiff complains here of antitrust violations affecting its Meier-Line division in the manufacture and sale of air conditioners, components and parts thereof, for use in Volkswagen automobiles.

Defendants are various entities engaged in the distribution of Volkswagen automobiles within the United States. Defendant Volkswagen of America, Inc. (hereinafter referred to as VWoA) is a New Jersey corporation. It is a wholly owned subsidiary of Volkswagen Werk A.G., a German corporation, the manufacturer of Volkswagen automobiles in Germany. VWoA imports Volkswagen, Porsche and Audi automobiles into the United States for sale through fourteen distributorships set up regionally throughout the United States. Five of these distributorships are wholly owned subsidiaries of VWoA. The remaining nine are independently owned and operated.

Volkswagen Pacific, Inc., a California corporation (hereinafter referred to as VPI), is an independently owned and operated distributor of Volkswagen, Porsche and Audi automobiles in Southern California, Southern Nevada, Arizona and Hawaii.

Volkswagen Products, Inc., a Texas corporation (hereinafter referred to as VPC), is the successor in interest to Delanair Engineering Co., Inc. (hereinafter referred to as Delanair). Delanair and its successor VPC have engaged in the manufacture and sale of air conditioners, components and parts thereof, for use in automobiles. Delanair was acquired by VWoA on September 26, 1969, as a wholly owned subsidiary, and has with its change of name to VPC remained so during all times material to this litigation. It is this acquisition which brings the parties before the court.

Other parties are brought before the court by way of counterclaim on behalf of VWoA but are not necessary to the issues to be decided herein and are therefore omitted from identification as parties.

THE LITIGATION

This litigation was commenced by the filing of a complaint by Calnetics on September 28, 1970 charging defendants VWoA, VPI and VPC with violations of Sections 1 and 2 of the Sherman Act 15 U.S.C. §§ 1, 2 and defendant VWoA with violation of Section 7 of the Clayton Act 15 U.S.C. § 18. Plaintiff sought damages and injunctive relief resulting from the claimed violations of the antitrust laws of the United States.

During the pretrial proceedings of the action, the Court, pursuant to Rule 42(b) of the Federal Rules of Civil Procedure, severed the claimed violation of Section 7 of the Clayton Act 15 U.S.C. § 18 and the matter proceeded to trial against defendant VWoA upon those claims alone, reserving the remaining claimed violations of Sections 1 and 2 of the Sherman Act 15 U.S.C. §§ 1, 2 for later trial.

Defendants' alleged violation of Section 7 of the Clayton Act 15 U.S.C. § 18 is alleged to have damaged plaintiff by substantially lessening competition and tending to create a monopoly in the manufacture, distribution and sale of air conditioning systems for Volkswagen, Karmann Ghia and Porsche automobiles and the foreclosure of that market to plaintiff. The relationship created by the acquisition of Delanair by VWoA is claimed to destroy incentive to compete and deter new entry into the line of commerce foreclosed to plaintiff. The claim for damages proceeded to trial before the Court sitting with a jury and resulted in a judgment for directed verdict for defendant pursuant to Rule 50(a).

Proceeding without a jury the Court heard further evidence upon the equitable relief claims of plaintiff. After the completion of the evidence and summation of counsel, the Court submitted the matter for decision.

THE ISSUES

1. Does plaintiff have a claim for treble damages and/or injunctive relief for claimed violations of Section 7 of the Clayton Act?

2. What constitutes the line of commerce or product market?

3. What is the geographic territory or section of the country involved?

4. Does the acquisition of Delanair by VWoA violate Section 7 of the Clayton Act?

5. Is the proffered "failing company" defense available to defendant VWoA?

THE FACTS

The Calnetics story commences, for the purposes of this litigation, with the increasing recognition during the 1960s of a need for an air conditioner compatible to Volkswagen automobiles with their low horsepower and rear-mounted air-cooled engines.

Calnetics in its Meier-Line division completed its development in 1967 in what it considered a unique air conditioner compatible to low horsepowered automobiles. This development, so far as Calnetics was concerned, was limited to a compressor unit and clutch assembly designed to minimize the horsepower drawn from the automobile engine. All other parts of the air conditioner marketed by Calnetics were standard items available from manufacturers engaged in the business of marketing components and parts in the general air conditioner field. Calnetics was then an assembler of standard parts into an air conditioning unit adaptable to low horsepower automobiles of foreign and domestic manufacture. Calnetics, however, chose during 1967 and 1968¹ to limit itself to manufacture (in the assembly aspect of manufacturing) of air conditioning units for the Type I automobile in the Volkswagen family.² This limitation resulted from two factors — 1. the limited production facilities of Calnetics,³ and 2. a recognition that Volkswagen automobile owners represented the best available market to exploit this new development in automobile air conditioning.

Competitively, Calnetics entered a market then (1967-68) being supplied by Delanair and DPD⁴ with very negligible market intrusions in various Volkswagen and Porsche models by ARA, Parkomat, Novi, Behr and Coolaire. The marketing potential⁵ as recognized and exploited by Calnetics in these early stages of production was twofold — 1. independent distributors of automotive products,⁶ and 2. Volkswagen dealers franchised by VPI to sell the Volkswagen family of automobiles within the VPI territory. In addition to these markets, Calnetics through its then president William Sachko was undertaking activities⁷ which would in late 1968 result in the entire production of Calnetics being assigned to VPI directly for distribution to Volkswagen dealers in the VPI marketing area. Mr. Sachko's machinations brought Calnetics to the position as the exclusive supplier for VPI and lost to Calnetics the future potential of marketing its air conditioners with independent automotive accessory distributors. The sales efforts⁸ of then Sales Manager (and later President) of the Meier-Line division of Calnetics, Mr. Charles Howseman, were completely nullified by Mr. Sachko. All of these negotiations with VPI were carried on by Mr. Sachko without consultation with Mr. Howseman.

In 1969 Calnetics, now armed with an exclusive VPI contract, moved to a new production facility and began full production in June of that year to meet the demands being made upon it by VPI. Increases were in fashion. Production increased, sales increased⁹ and so did the problems, both financial and quality of product. Warranty claims and dealer complaints reached such a point that by the time production facilities had been developed to the capacity of the anticipated potential of increased sales, VPI was compelled to, and did begin to offer both DPD and Meier-Line air conditioners to its Volkswagen dealers. DPD's competitive intrusion into the VPI territory was not only aided by Calnetics' failures but also with the quality problems being simultaneously experienced by Delanair.

Delanair's story is equally interesting. Delanair started its existence sometime prior to 1963 as a division of Overseas Motors Corporation of Fort Worth, Texas, manufacturing air conditioning units as an add-on¹⁰ primarily for Jaguar, Rolls-Royce and Volkswagen automobiles. Sometime in 1963 a British Company, Delaney-Galley, became interested in and did acquire the air conditioner manufacturing division of Overseas Motors and incorporated Delanair Engineering Co., Inc. as a subsidiary of Delaney-Galley to succeed to the business of this division. Though the acquisition by Delaney-Galley was to obtain expertise in the air conditioning field, it soon found itself with an operating and profitable¹¹ business in the United States. Because of restrictions by the British government of the export of money,¹² the financing of Delanair's operations was accomplished by United States bank loans guaranteed by Lindustries, Ltd., the British parent corporation of Delaney-Galley. That guarantee extended a line of credit...