Carl Sandburg Village Condominium Ass'n No. 1 v. First Condominium Development Co.

Decision Date27 March 1985
Docket NumberNo. 84-1558,84-1558
Parties1985-1 Trade Cases 66,497 CARL SANDBURG VILLAGE CONDOMINIUM ASSOCIATION NO. 1, et al., Plaintiffs- Appellants, v. FIRST CONDOMINIUM DEVELOPMENT CO., et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Reuben L. Hedlund, Latham & Watkins, Chicago, Ill., for plaintiffs-appellants.

Richard J. Gray, Jenner & Block, Arlene C. Erlebacher, Sidley & Austin, Chicago, Ill., for defendants-appellees.

Before FLAUM, Circuit Judge, PELL, Senior Circuit Judge and EVANS, District Judge. *

FLAUM, Circuit Judge.

This case presents the issue of whether a condominium developer's sale of condominium units subject to two-year management contracts with an unaffiliated company constitutes an unlawful tie-in pursuant to section one of the Sherman Act. The district court dismissed with prejudice the plaintiff condominium associations' Sherman Act count for failure to state a claim. The court also dismissed the plaintiffs' remaining counts, brought under state law theories, without prejudice for want of subject matter jurisdiction. On appeal, we affirm the decision of the district court.

I.

In early 1979, the defendants First Condominium Development Company and Eagle II (the "Condominium Developers") purchased and converted Carl Sandburg Village from rental apartments to condominium units. The Condominium Developers proceeded to market and sell condominium units in four of the buildings of Carl Sandburg Village to individual members of the plaintiff class. When the buildings were converted, about eighty percent of the tenants in the buildings purchased their respective units.

During the conversion process, the Condominium Developers established the plaintiff Carl Sandburg Village Condominium Associations Numbers 1 and 2 (the "Condominium Associations") in order to manage and maintain the property's common elements. On July 13, 1979, the Condominium Associations, under the direction of the Condominium Developers, consented to be parties to condominium management agreements with co-defendant Arthur Rubloff and Company ("Rubloff"). Rubloff had been managing the buildings since 1965 when they were first built. The individual unit owners of the Condominium Associations were indirectly subject to the condominium management agreements with Rubloff by virtue of their status as members of the Condominium Associations. The management agreements appointed Rubloff as the managing agent for two years and gave the Condominium Associations the right to terminate the management agreements upon thirty days' notice if Rubloff did not meet its obligations under the agreements. As compensation for these services, Rubloff was to receive a fee computed and payable monthly in the amount of $5.25 per occupied condominium unit.

On September 16, 1982, the Condominium Associations and their individual members sued the Condominium Developers Rubloff, and Rubloff's resident manager in a nine-count complaint, seeking treble damages of over $15 million and such other relief as the court deemed proper. In Count I, the plaintiffs alleged that the defendants agreed and conspired to tie the sale of Rubloff management services to the sale of condominium units at Carl Sandburg Village in violation of section 1 of the Sherman Act. 15 U.S.C. Sec. 1 (1982). The plaintiffs alleged that the conspiracy to tie management services to condominium units had the effect of reducing competition, causing plaintiffs to incur excessive fees, and perpetuating Rubloff's control of management services for an unreasonable period of time. This tie-in purportedly precluded the plaintiffs from selecting an independent management service at a lower cost. The plaintiffs also alleged various state claims in counts II through IX for violation of the Illinois Antitrust Act by virtue of the tie-in, for breach of fiduciary duty in failing to disclose defects in the buildings, for negligent misrepresentation, for violation of the Chicago Municipal Code and Illinois Consumer Fraud and Deceptive Practices Act, for negligent construction, for breach of contract, and for breach of express and implied warranties of workmanship.

In dismissing plaintiffs' count I tying claim with prejudice, the district court found that the Condominium Developers as sellers of the tying product (condominium units) did not have a sufficient economic interest in the sale of the tied product (management services) to support a tying claim. Carl Sandburg Village Condominium Association No. 1 v. First Condominium Development Co., 586 F.Supp. 155, 160 (N.D.Ill.1983). The court reasoned that although the defendants may have schemed to conceal faults from potential purchasers of condominium units, they had not used their market power to alter the competitive structure of the market for management services or to squeeze a profit out of a second market. Id. at 157-59. The court then dismissed the plaintiffs' remaining state law claims for want of subject matter jurisdiction because the plaintiffs' only federal count was dismissed before trial. Id. at 160. 1 On plaintiffs' motion to reconsider, the district court held that the plaintiffs had also failed to state a claim under the rule of reason. Carl Sandburg Village Condominium Association No. 1 v. First Condominium Development Co., 586 F.Supp. 155, 160, 161-62 (N.D.Ill.1984).

On appeal, the plaintiffs claim that the district court assumed the resolution of factual issues and erroneously dismissed plaintiffs' tie-in claim and that the court erroneously ruled on the pleadings that there was no rule of reason violation alleged by the plaintiffs. We will address each of these claims in turn below. 2

II.
A. Dismissal for Want of Economic Interest in the Alleged Tying Arrangement

Following the filing of the complaint by the Condominium Associations, the Condominium Developers and Rubloff filed a motion to dismiss or for summary judgment. The district court held the defendants' motion for summary judgment in abeyance and issued its opinion dealing with the motion to dismiss. We are asked to decide whether it was proper for the district court to dismiss the Condominium Associations' complaint for failure to state a claim.

According to rule 12(b)(6) of the Federal Rules of Civil Procedure, a defendant may make a motion to dismiss asserting a failure by the plaintiff to state a claim upon which relief can be granted. In interpreting this rule, the Supreme Court has held that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); Kurek v. Pleasure Driveway and Park District, 557 F.2d 580, 586 (7th Cir.1977), vacated and remanded on other grounds, 435 U.S. 992, 98 S.Ct. 1642, 56 L.Ed.2d 81 (1978), reinstated, 583 F.2d 378 (7th Cir.1978), cert. denied, 439 U.S. 1090, 99 S.Ct. 873, 59 L.Ed.2d 57 (1979). The Supreme Court has also held that a court should grant motions to dismiss in the antitrust context very sparingly since proof of the conspiracy may be in the hands of the alleged conspirators. Hospital Building Co. v. Trustees of Rex Hospital, 425 U.S. 738, 746, 96 S.Ct. 1848, 1853, 48 L.Ed.2d 338 (1976). Although we have recognized the Supreme Court's "exceedingly forgiving attitude" toward pleading deficiencies, we have also held that this lenient attitude has never been taken literally. Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir.1984); Sutliff, Inc. v. Donovan Companies, Inc., 727 F.2d 648, 654 (7th Cir.1984). This circuit has held that a complaint must state either direct or inferential allegations concerning all of the material elements necessary for recovery under the relevant legal theory. Sutliff v. Donovan, 727 F.2d at 654 (quoting In Re Plywood Antitrust Litigation, 655 F.2d 627, 641 (5th Cir.1981), cert. dismissed, 462 U.S. 1125, 103 S.Ct. 3100, 77 L.Ed.2d 1358 (1983)). In view of the potential expense of an antitrust suit and the increasingly heavy federal caseload, we have concluded that the parties should not be forced to commence pretrial discovery and that a court can properly grant a motion to dismiss on the pleadings if there is no reasonable prospect that the plaintiff can make out a cause of action from the events related in the complaint. Car Carriers v. Ford Motor, 745 F.2d at 1106; Sutliff v. Donovan, 727 F.2d at 654.

The Supreme Court has defined a tying arrangement as an agreement by one party to sell a product (the tying product) to another on the condition that the buyer also purchase a different product (the tied product). Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-6, 78 S.Ct. 514, 518-519, 2 L.Ed.2d 545 (1958). In order to establish the per se illegality of a tying arrangement, a plaintiff must show that: (1) the tying arrangement is between two distinct products or services, (2) the defendant has sufficient economic power in the tying market to appreciably restrain free competition in the market for the tied product, and (3) a not insubstantial amount of interstate commerce is affected. Id.; Moore v. Matthews & Co., 550 F.2d 1207, 1212 (9th Cir.1977). In addition, this circuit has held that an illegal tying arrangement will not be found where the alleged tying company has absolutely no economic interest in the sales of the tied seller, whose products are favored by the tie-in. Ohio-Sealy Mattress Manufacturing Co. v. Sealy, Inc., 585 F.2d 821, 835 (7th Cir.1978), cert. denied, 440 U.S. 930, 99 S.Ct. 1267, 59 L.Ed.2d 486 (1979); Warner Management Consultants, Inc. v. Data General Corp. 545 F.Supp. 956, 967 (N.D.Ill.1982). The courts have imposed this economic interest requirement because when the seller of the tying goods has no interest in the sale of the tied product, he...

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