Copy-Data Systems, Inc. v. Toshiba America, Inc.

• Decision Date: 30 November 1981
• Docket Number: COPY-DATA,No. 6,D,6
• Citation: 663 F.2d 405
• Parties: 1981-2 Trade Cases 64,343 SYSTEMS, INC., and Synergistics, Inc., Plaintiffs-Appellees, v. TOSHIBA AMERICA, INC., Defendant-Appellant. ocket 80-9048.
• Court: U.S. Court of Appeals — Second Circuit

Page 405

663 F.2d 405

1981-2 Trade Cases 64,343

COPY-DATA SYSTEMS, INC., and Synergistics, Inc., Plaintiffs-Appellees, v. TOSHIBA AMERICA, INC., Defendant-Appellant.

No. 6, Docket 80-9048.

United States Court of Appeals, Second Circuit.

Argued Sept. 14, 1981.

Decided Nov. 2, 1981.

As Amended Nov. 30, 1981.

John J. Witmeyer, III, New York City (Thomas R. Esposito, Michael L. Anania, Stuart C. Levene, Ford, Marrin, Esposito & Witmeyer, New York City, of counsel), for defendant-appellant.

Allan P. Hillman, Baltimore, Md. (Robert G. Levy, Berryl A. Speert, Frank, Bernstein, Conaway & Goldman, Baltimore, Md., of counsel), for plaintiffs-appellees.

Before OAKES and MESKILL, Circuit Judges, and BLUMENFELD, District Judge. ^*

MESKILL, Circuit Judge:

Toshiba America, Inc. ("TAI"), a New York corporation and a wholly-owned subsidiary of Toshiba Corporation, a Japanese corporation, appeals from a judgment of the United States District Court for the Southern District of New York, Owen, J., awarding $1,320,000 in treble antitrust damages to Copy-Data Systems, Inc., a New Jersey corporation. ¹ Judge Owen found that TAI employed "varied tactics" to "eliminate competition between itself and Copy-Data" in various geographical markets for Toshiba brand copying equipment. The court concluded that TAI's actions constituted a per se violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and resulted in the destruction of Copy-Data's business, valued by the court at $440,000. TAI challenges Judge Owen's findings of fact and determination of damages, but asserts that even if these findings are correct, they do not constitute a per se violation of the Sherman Act. Because we agree that the facts as found by the district court do not establish a per se violation, we reverse. ²

BACKGROUND

TAI markets office copying equipment, parts and supplies manufactured by TAI's Japanese parent, Toshiba Corporation, under the brand name "Toshiba." In 1970 Copy-Data, a company engaged in the wholesale distribution of office copying equipment and supplies, negotiated with TAI for an exclusive right to distribute Toshiba copying machines for the states of New York, New Jersey, Connecticut, Rhode Island and Massachusetts (the Northeast), and a non-exclusive right to distribute Toshiba copiers in Maine, New Hampshire and Vermont. At its own expense Copy-Data undertook to establish the name of Toshiba in the northeastern market for copiers. Copy-Data identified potential retail dealers and solicited them through public and private showings and demonstrations. Later, TAI made Copy-Data its exclusive distributor in Maryland, Virginia, Pennsylvania, Delaware, West Virginia and the District of Columbia (the Middle Atlantic), and Copy-Data began to develop dealers in these areas. Still later, Copy-Data's territory was extended to the Chicago area.

Shortly after Copy-Data began to develop the Chicago market, TAI informed Copy- In early 1973 TAI asked Copy-Data for a complete list of Copy-Data's dealer-customers. Copy-Data initially resisted this request, but complied after TAI promised to limit its use of the list to informing Copy-Data's dealer-customers of new Toshiba products, marketing techniques and price changes.

Data that it intended to distribute directly in that area and asked Copy-Data to turn over its Chicago customer information. Not wishing to offend TAI, Copy-Data complied with this request.

In November 1973, despite expressed satisfaction with Copy-Data's service, TAI's marketing manager informed Copy-Data that TAI was going to distribute directly in the Middle Atlantic and that Copy-Data should cease selling in that area. TAI told Copy-Data that a refusal to exit the Middle Atlantic would jeopardize Copy-Data's exclusive Northeast distributorship. Fearing loss of its right to distribute in the sizeable Northeast market and hoping to take advantage of the anticipated success of Toshiba's forthcoming plain paper copier, the BD-702, Copy-Data reluctantly gave TAI its Middle Atlantic customer records. Copy-Data suffered a loss of $20-$25,000 per month in revenues as a result of losing its right to distribute Toshiba copiers in the Middle Atlantic.

In April 1974 TAI informed Copy-Data of its plan to take over distribution of Toshiba copiers in the Northeast and in the Southeast, replacing Copy-Data and TAI's southeastern distributor, Atlantic Dictating & Business Equipment Company. In August 1974 TAI began to implement this plan and told Copy-Data that it was no longer authorized to hold itself out as the exclusive distributor of Toshiba copiers in the Northeast.

In September 1974 TAI persuaded Copy-Data to accept unneeded equipment on the representation that the purchase would not be charged to Copy-Data's credit line. This representation was either false when made or was dishonored shortly thereafter when TAI announced that Copy-Data's credit line had been reduced and that Copy-Data would be required to pay in advance by certified check for any new machines.

In October 1974 TAI told Copy-Data that its "primary area of responsibility" would be limited to New Jersey. ³ Later, TAI told Copy-Data that it would be required to pay down its entire credit line.

Despite the restrictions imposed on TAI, Copy-Data continued to distribute Toshiba equipment in the Northeast and in New Jersey. Unfortunately, serious technical problems with Toshiba's plain paper copier developed shortly after its introduction. Copy-Data was forced to accept returns of BD-702s from its customers and to credit the customers' accounts. Contrary to accepted industry practice and to TAI's own practice with other distributors, TAI refused to accept returns of faulty BD-702s from Copy-Data or to give Copy-Data credit for the defective machines. Because Copy-Data was paying in advance for these BD-702s but was unable to resell them, a serious cash flow problem developed which eventually drove Copy-Data into bankruptcy.

Copy-Data's position in the district court was that TAI's tactics along with Copy-Data's coerced withdrawal from the Middle Atlantic constituted a horizontal market division which was per se illegal under Section 1 of the Sherman Act. See, e. g., United States v. Topco Associates, Inc., 405 U.S. 596, 608, 92 S.Ct. 1126, 1133, 31 L.Ed.2d 515 (1972); White Motor Co. v. United States, 372 U.S. 253, 263, 83 S.Ct. 696, 702, 9 L.Ed.2d 738 (1963). Copy-Data elected to proceed on a per se violation theory alone, stipulating that if its classification of the conduct as horizontal failed, Copy-Data was "prepared to abandon ship," not wishing to proceed under the rule of reason. J.App. at 101 & 661.

After hearing argument from both parties, Judge Owen ruled that TAI had imposed a territorial restriction on Copy-Data which resulted in an allocation of geographical markets between Copy-Data and TAI. He labeled this allocation "horizontal" and illegal per se. Judge Owen reasoned that while Continental T.V., Inc., v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), allows a manufacturer or supplier to impose territorial restrictions on independent distributors to further the manufacturer's marketing strategy, Sylvania does not protect a manufacturer that employs similar territorial allocations among independent distributors and its own direct distribution arm. In the latter situation, the district court stated, the manufacturer is not attempting to improve its ability to compete against other manufacturers, but is simply protecting itself from price competition at the distributor level in order to generate "selling profits."

DISCUSSION

The traditional framework of analysis under § 1 of the Sherman Act is familiar and does not require extended discussion. Section 1 prohibits "(e) very contract, combination ..., or conspiracy, in restraint of trade or commerce." Since the early years of this century a judicial gloss on this statutory language has established the "rule of reason" as the prevailing standard of analysis. Standard Oil Co. v. United States, 221 U.S. 1 (31 S.Ct. 502, 55 L.Ed. 619) (1911). Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition. Per se rules of illegality are appropriate only when they relate to conduct that is manifestly anticompetitive.

Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49-50, 97 S.Ct. 2549, 2557, 53 L.Ed.2d 568 (1977) (footnote omitted). To be considered "manifestly anticompetitive" and illegal per se, a restrictive agreement must have a "pernicious effect on competition and lack of any redeeming virtue ...." Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). While restrictive agreements among independent business entities at the same level of the market, so-called "horizontal" agreements, are illegal per se, United States v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972), restraints imposed by a manufacturer or supplier upon its distributor retailer-customers, so-called "vertical" restraints, can significantly benefit competition and are permissible unless they violate the rule of reason. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977). In the instant case we have dual distributorship-a business structure in which one party, in this case TAI, operates a branch or dealership on the same market level as one or more of its customers. Since TAI was a supplier of Copy-Data, the parties were vertically related. Since both Copy-Data and TAI were engaged in the wholesale distribution of copiers, they were also horizontally related. A dual distributorship like the one in this case can generate agreements which at once appear horizontal and unredeemably damned under Topco, and vertical and conditionally approved under Sylvania. Thus the...