Cernuto, Inc. v. United Cabinet Corp.

• Decision Date: 16 March 1979
• Docket Number: No. 78-1872,78-1872
• Citation: 595 F.2d 164
• Parties: 1979-1 Trade Cases 62,509 CERNUTO, INCORPORATED, a corporation t/d/b/a C & C Builders Supply Company, Appellant, v. UNITED CABINET CORPORATION, a corporation, Famous Furnace & Supply Company, a corporation and Robert L. Lappin Company, Inc., a corporation, Appellees.
• Court: U.S. Court of Appeals — Third Circuit

Page 164

595 F.2d 164

1979-1 Trade Cases 62,509

CERNUTO, INCORPORATED, a corporation t/d/b/a C & C Builders

Supply Company, Appellant, v. UNITED CABINET CORPORATION, a corporation, Famous Furnace &

Supply Company, a corporation and Robert L. Lappin

Company, Inc., a corporation, Appellees.

No. 78-1872.

United States Court of Appeals, Third Circuit.

Argued Jan. 16, 1979.

Decided March 16, 1979.

Howard A. Specter, Michael D. Buchwach (argued), Litman, Litman, Harris & Specter, P.A., Pittsburgh, Pa., for appellant.

Donald E. Seymour, Michael R. Plummer (argued), Kirkpatrick, Lockhart, Johnson & Hutchinson, Pittsburgh, Pa., for appellees.

Before ADAMS and WEIS, Circuit Judges, and WEINER, District Judge. ^*

OPINION OF THE COURT

ADAMS, Circuit Judge.

We are confronted in this appeal with the termination, by a manufacturer of kitchen cabinets, of one of its customers, a discount house, at the urging of another customer, a retailer, allegedly because of price considerations. Although the manufacturer's action was destructive to competition between the two customers, under the circumstances present here the plaintiff may recover only if the challenged conduct is termed a Per se violation of the Sherman Act, because under a "rule of reason" analysis the necessary anti-competitive effects as to a particular commodity in a relevant market cannot be proven. ¹ Inasmuch as we believe, based on the allegations set forth by the plaintiff, that a Per se violation of the Act might be found, we reverse the summary judgment entered in favor of the defendants, and remand the case for trial.

I.

Plaintiff, Cernuto, Inc. (Cernuto), is a seller in Western Pennsylvania of supplies and appliances used in the construction or remodeling of buildings. One of these products is kitchen cabinets. Beginning in March, 1974, United Cabinet Corporation (United), through its sales representative, Robert L. Lappin Company (Lappin), agreed to supply Cernuto with United cabinets for at least a two year period. In return Cernuto agreed to promote, display and sell United's cabinets, and undertook to advertise them and alter its display area so as to feature them prominently. Only three months after entering into the contract, however, Lappin informed Cernuto that United would cease supplying the cabinets. Plaintiff alleges that Famous Furnace & Supply Co. (Famous), a retail store selling United cabinets in the same competitive area as Cernuto, complained to United about the discounter's price competition. Because this appeal concerns a grant of summary judgment, we must view the record in the light most favorable to the plaintiff, and consequently must infer that Famous' conduct was the cause of United's decision to terminate Cernuto's supply, and that Famous was motivated by direct price competition between it and Cernuto. ²

Cernuto brought the present action against United, Lappin, and Famous, alleging, Inter alia, conduct violative of § 1 of the Sherman Act. After completion of discovery and the filing of pretrial narrative statements, defendants moved for summary judgment on two counts of the complaint, including the Sherman Act claim. The district judge concluded that plaintiff could not recover on these counts and that there was no just reason for delay. He therefore entered a judgment as to both counts, and Cernuto took a timely appeal to this Court. ³

II.

Because almost all business agreements may be interpreted as restraining trade to some degree, § 1 of the Sherman Act has been construed for the most part to proscribe only those combinations that "unduly" restrain trade. In the classical § 1 controversy, therefore, a "rule of reason" is applied, and the plaintiff must prove "that the combination or conspiracy produced adverse, anti-competitive effects within relevant product and geographic markets . . .." ⁴ Thus, to demonstrate an antitrust violation under the "rule of reason" in the present case, Cernuto would have to show an actual anti-competitive impact on the sale of cabinets in Western Pennsylvania. However, Cernuto does not allege, and apparently cannot prove, such harmful effects. Other sources of cabinets were available, and it is clear from its pretrial narrative statement that plaintiff was not prepared to offer any market analyses at trial. Plaintiff's claim, therefore, is grounded entirely on the alleged Per se illegality of the defendants' combination. ⁵

The Per se violations of the Sherman Act those requiring no proof of an actually harmful impact are specific exceptions to the general rule of reason. They were described by Justice Black in Northern Pacific Railroad Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958), as:

. . . agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.

Among those business practices that have been treated as Per se violations are price fixing, ⁶ resale price maintenance, ⁷ group boycotts, ⁸ tying arrangements, ⁹ and certain types of reciprocal dealing. ¹⁰ The question we must consider is whether the conduct at issue here a manufacturer deliberately withdrawing its product from a distributor that resold it for a price less than its competitors at the request of a competitor should be classified as a Per se violation of the Act. Following Justice Black's formulation, the activity under consideration in this case must be seen to have a pernicious effect on competition without having any redeeming virtue. The pernicious effect is apparent: one competitor has succeeded in excluding another from dealing in United cabinets through a combination with United and its agent, and, in so doing, has eliminated the possibility of price competition by the foreclosed dealer. Although this harm may have its impact solely in the market for United kitchen cabinets, rather than in the general market for kitchen cabinets, it is not for that reason, beyond the reach of the antitrust laws. ¹¹

The difficult problem here, as we read the case law, is whether the business decision that has been brought into question has the same redeeming pro-competitive virtues that have been relied upon in rejecting a Per se rule in other arguably similar cases. The conduct at issue, it might be said, is merely a decision by a manufacturer to terminate a customer. It is therefore, the argument goes, comparable to the conduct at issue in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), a case notable for the importance the Supreme Court placed on the pro-competitive aspects of the manufacturer's marketing plan. There, the Court upheld the right of a company to terminate a distributor of its television sets when that distributor began to sell them at an outlet outside of its allotted territory. The Supreme Court reasoned that the manufacturer's exclusive-franchise marketing plan was in fact beneficial to competition among the various television manufacturers and should therefore be governed by a "rule of reason."

For the most part, the Supreme Court has been disinclined to apply harsh or rigorous rules when reviewing unilateral decisions made by a single manufacturer in arranging its distribution structure. The interest of the manufacturer in controlling the marketing of its own product has been thought to justify restrictions on those who distribute it, or those who would like to do so. Thus, a manufacturer may sell its product to whomever it wishes, and a unilateral refusal to deal has not been considered to be a violation of the Act. ¹² Moreover, a manufacturer may include in its marketing strategy certain restraints designed to improve its overall competitive position. Nor is it either uncommon or illegal for a manufacturer to enter into contracts that provide particular customers exclusive rights to sell the product in designated geographical areas. ¹³ And, under certain circumstances, a manufacturer may change its strategy, franchising new dealers or substituting new dealers for less productive old ones. ¹⁴ The result in GTE Sylvania, then, is not out of keeping with the law's traditional tolerance of unilateral decisions on the part of a manufacturer.

The ultimate reach of the GTE Sylvania decision is still uncertain, and continues to be a subject of considerable controversy, ¹⁵ but we are not persuaded that the law's tolerance of reasonable restraints designed to improve the manufacturer's competitive position may be converted into a blanket allowance of Any marketing decision made by a manufacturer. As Professor Sullivan has suggested in his treatise on the antitrust laws:

"It does not follow from the fact that a manufacturer may, when franchising a dealer, commit itself not to franchise another in a territory defined by the manufacturer, that it may, having earlier franchised two or more dealers, agree at the request of one to terminate the others." ¹⁶

When a marketing decision, although ostensibly taken by a manufacturer, is in fact the result of pressure from another customer, such a decision must be scrutinized more closely than solely unilateral action might be. This Court recently observed in a different context:

Particularly where the refusal to deal is not unilateral but rather is prompted by an understanding with other parties, an antitrust violation may be found, Either by application of a per se Rule or through a 'rule of reason' analysis. ¹⁷

Thus, to the extent that the conduct here differs from the conduct held to be justifiable in other cases involving manufacturer decisionmaking, application of a Per se rule may be warranted.

Two of the most crucial differences between the conduct under consideration here and other accepted manufacturer actions are, upon analysis, readily apparent. When a...