Eastex Aviation, Inc. v. Sperry & Hutchinson Co.

Decision Date14 November 1975
Docket NumberNo. 74-1235,74-1235
Citation522 F.2d 1299
Parties1975-2 Trade Cases 60,585 EASTEX AVIATION, INC., Plaintiff-Appellee, v. The SPERRY AND HUTCHINSON CO. et al., Defendants-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

Donald Scott Thomas, Jr., J. Sam Winters, Austin, Tex., Harold L. Russell, Atlanta, Ga., Claus Motulsky, Dale W. Hagen, New York City, for defendants-appellants.

Jack N. Price, Longview, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before RIVES, GODBOLD and GEE, Circuit Judges.

GODBOLD, Circuit Judge:

The Sperry & Hutchinson Company (S & H) is in the business of selling its trading stamps, known as Green Stamps, to retailers who use them to attract customers and increase sales. This case raises the question of whether methods which S & H employs in distributing Green Stamps violate § 1 of the Sherman Act 1 under the standards announced in U. S. v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967). The District Court found S & H was violating the antitrust laws and enjoined the unlawful practices. We agree with the District Court's conclusion and affirm.

I

For more than 80 years S & H has been in the trading stamp business. This business involves a three-stage series of transfers of the stamps "small pieces of gummed paper about the size of postage stamps." 2 First, S & H sells Green Stamps to participating retailers. A retailer may enter into an agreement with S & H whereby S & H agrees to provide him with Green Stamps, promotional advertising signs, and a supply of books to be distributed to and used by customers for the purpose of collecting the stamps. S & H agrees to redeem the stamps when a customer presents them at an S & H redemption center. Also it agrees not to enter into a similar agreement with neighboring competitors of the contracting retailer. In return the retailer agrees to buy Green Stamps from S & H at a specified price, generally approximately $2.65 per 1000 stamps. He agrees to distribute Green Stamps to all customers at the rate of one stamp per 10 cents of merchandise purchased in cash. The retailer is forbidden to sell or distribute Green Stamps in any other manner, except that under some circumstances he may issue additional stamps to a customer. Finally, he agrees to advertise his distribution of Green Stamps and to display the signs supplied by S & H. 3 The sale of stamps by S & H to participating retailers thus involves a variety of subsidiary agreements and restrictions, several of which lie at the center of the present controversy.

The second stage involves a transfer of Green Stamps from retailer to cash customer at the agreed rate of one stamp for each 10 cents of merchandise purchased in cash. 4 The customer pays nothing directly for the stamps he receives.

In the final stage the collector transfers Greens Stamps to S & H in exchange for merchandise at one of the redemption centers maintained by S & H throughout its areas of operation. 5 Alternatively S & H will give the collector cash for his stamps at a specified rate of exchange. Recent figures indicate that approximately 87% Of all Green Stamps distributed by retailers are redeemed.

The operation of S & H's business is demonstrated by the facts of the present case. Defendant Gregg Aviation, Inc. (Gregg) is a "fixed base operator" at the Gregg County Airport, Longview, Texas. It sells to customers such goods and services as aviation gasoline, oil, parts and accessories, flight instructions, charter flights, airplane rentals and mechanical services. Gregg has for several years purchased and distributed S & H Green Stamps pursuant to a contract such as the one described above.

Plaintiff Eastex Aviation, Inc. (Eastex) is also a fixed base operator at the same airport. Eastex and Gregg are thus in direct competition for the same customers. Eastex, determining that Gregg was obtaining a competitive advantage due to its distribution of Green Stamps, contacted S & H in an attempt to become another distributor of Green Stamps. S & H refused to sell stamps to Eastex because Eastex was in a similar business and geographically proximate to Gregg.

Unable to contract with S & H, Eastex employed three schemes to meet Gregg's competition. First it made an agreement to purchase and distribute trading stamps of a competitor of S & H. This was not a successful means of meeting Gregg's competitive advantage, because S & H dominates the trading stamp market in the Longview area and is the only trading stamp company to maintain a redemption center in the area.

Next Eastex offered a cash discount on each sale equal to or greater than the value of the Green Stamps which would be given on such a sale. This also failed, largely because many sales at the airport were to pilots of corporate aircraft who preferred to charge their purchases to their corporate employers and receive Green Stamps which they would retain for themselves.

Eastex's final effort was to purchase stamps from two authorized distributors of Green Stamps, although under the contract employed by S & H it is impermissible for a distributor to sell Green Stamps in bulk to another retailer. S & H learned of Eastex's supply of stamps, traced the sources, and threatened to terminate its agreements with the supplying retailers if they continued to sell stamps to Eastex. Both sources then discontinued sales of Green Stamps to Eastex.

Unsuccessful in its attempts to meet Gregg's competition, Eastex brought this suit seeking an injunction forbidding S & H to refuse to license it as a distributor of Green Stamps or, alternatively, forbidding S & H to interfere with any of its licensees who wish to resell stamps to plaintiff. S & H counterclaimed, seeking an injunction preventing Eastex from interfering with S & H's contractual relationships with licensees by encouraging them to sell stamps to Eastex. The District Court held that S & H was free to refuse to license Eastex but that S & H's restrictions on resale of Green Stamps were in violation of § 1 of the Sherman Act as interpreted in Schwinn, supra. The court enjoined S & H from conditioning its dealings with licensees upon their making no resales of stamps to Eastex. Relief was denied on the counterclaim since it sought protection of S & H's rights under an illegal agreement.

II

We reject S & H's threshold contention that its methods of restricting resale of Green Stamps were approved by this court in Sperry and Hutchinson Co. v. FTC, 432 F.2d 146 (CA5, 1970), aff'd, modified and remanded, 405 U.S. 233, 92 S.Ct. 898, 31 L.Ed.2d 170 (1972). The issue before us was not reached in that case.

In 1965 FTC issued a complaint alleging that S & H engaged in unfair methods of competition and unfair acts and practices in commerce in violation of § 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. The Commission ultimately concluded that S & H was involved in illegal combinations or conspiracies and was pursuing illegal unilateral practices and issued an order proscribing unilateral practices of S & H including its attempts to halt trafficking in Green Stamps. Trafficking involved the operation of trading stamp exchanges where stamps of various companies could be purchased, sold or exchanged, and the operation of retail businesses offering discounts on sales of merchandise when the customer partially paid for the merchandise with Green Stamps. S & H feared that this trafficking would reduce the demand for its stamps from authorized distributors and consequently injure its sales of Green Stamps. The FTC found that S & H's efforts to stop trafficking constituted an unfair trade practice, and a portion of its order enjoined such efforts. 6 It was solely from this portion of the order that S & H appealed.

On appeal this court held that the Commission has the power to declare unfair only practices which fall in one of three categories: "(1) a per se violation of antitrust policy; (2) a violation of the letter of either the Sherman, Clayton, or Robinson-Patman Acts; or (3) a violation of the spirit of these Acts as recognized by the Supreme Court of the United States." 432 F.2d at 150 (footnote omitted). We then concluded that the anti-trafficking practices at issue did not fall within any of these classes and, accordingly, that the FTC had exceeded its authority in issuing its order concerning these practices.

The Supreme Court granted certiorari and on appeal held that this court had erred in its narrow reading of the FTC's authority, but, nevertheless, affirmed its judgment vacating the Commission's order. That order reflected the FTC's determination that S & H was violating the letter and spirit of the antitrust laws. Since the FTC on appeal to the Supreme Court did not challenge the Court of Appeal's contrary determination that S & H's anti-trafficking practices did not violate the letter and spirit of the antitrust laws, 7 the Court held the FTC's order was properly vacated.

For two reasons S & H v. FTC has no bearing on the present case. First, the practices of S & H at issue in that case anti-trafficking were different from those in the present case preventing non-licensed retailers from distributing Green Stamps. Although there is language in the court of appeals decision indicating that the issuing of Green Stamps by unlicensed retailers was included in the trafficking at issue, 8 the opinions of both this court and the Supreme Court indicate that the FTC was attacking S & H's practices regarding stamp exchanges and retailers who redeemed Green Stamps.

Second, the question of whether S & H's resale restrictions were in violation of Schwinn was specifically left undecided by the FTC and was not at issue before this court when we held that S & H was not violating the letter or spirit of the antitrust laws:

The Commission did explicitly decline to assess S & H's conduct in light of one leading...

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