Evans v. S. S. Kresge Co.

• Decision Date: 02 November 1976
• Docket Number: Nos. 75-1782 and 76-1181,s. 75-1782 and 76-1181
• Citation: 544 F.2d 1184
• Parties: 1976-2 Trade Cases 61,148 John EVANS, Trustee in Bankruptcy for Hempfield Stores, Inc., a Bankrupt, Appellant, v. S. S. KRESGE COMPANY, a Foreign Corporation, Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 1184

544 F.2d 1184

1976-2 Trade Cases 61,148

John EVANS, Trustee in Bankruptcy for Hempfield Stores, Inc., a Bankrupt, Appellant, v. S. S. KRESGE COMPANY, a Foreign Corporation, Appellee.

Nos. 75-1782 and 76-1181.

United States Court of Appeals, Third Circuit.

Argued Feb. 27, 1976.

Decided Nov. 2, 1976.

Howard A. Specter, David R. Brown, Litman Litman Harris & Specter, P.A., Pittsburgh, Pa., for appellant.

Richard M. Abrams, Michael M. Baylson, Henry T. Reath, Duane, Morris & Heckscher, Philadelphia, Pa., for appellee; James C. Tuttle, Troy, Mich., of counsel.

Before ADAMS, HUNTER and GARTH, Circuit Judges.

OPINION OF THE COURT

GARTH, Circuit Judge.

This appeal requires us to examine the business and license arrangement into which the parties entered to determine if the price and product restrictions imposed upon the licensee constituted an antitrust violation. We conclude that we have jurisdiction to conduct this inquiry and that the defendants did not violate Section 1 of the Sherman Anti-Trust Act by their marketing requirements.

The plaintiff, trustee in bankruptcy for Hempfield Stores, Inc. ("Hempfield"), brought this treble-damages suit under Section 4 of the Clayton Act, 15 U.S.C. § 15, against the S. S. Kresge Co. ("Kresge") for its alleged violations of Section 1 of the Sherman Act, 15 U.S.C. § 1. ¹ The district court, 394 F.Supp. 817 (W.D.Pa.1975), granted Kresge's motion for summary judgment. First, it held that subject matter jurisdiction was lacking, as "the activities complained of did not occur in the flow of interstate commerce nor did they substantially affect it." 394 F.Supp. at 833. Second, despite its conclusion that jurisdiction was lacking, the court discussed and found that Kresge's conduct did not violate the Sherman Act: "the license agreements challenged here had a legitimate primary purpose; (furthermore,) the alleged restraints of trade were not unreasonable and are justifiable under the ancillary restraints doctrine." Id. at 849. ² Hempfield appeals from the judgment in favor of Kresge. ³

We conclude, contrary to the conclusion of the district court, that Sherman Act subject-matter jurisdiction was present. However, as we also conclude that on this record the alleged restraints of trade were justifiable under the rule of reason, we affirm the district court's judgment for Kresge. ⁴

I.

Briefly, the facts are as follows: ⁵ Under the registered exclusive service trade name "K-Mart", Kresge operates a number of discount department stores. The district court's opinion states:

Defendant has used the "K-Mart" trade name in an effort to develop a reputation as a low mark-up, highly competitive merchandiser selling quality merchandise at discount prices. From its inception the plan was designed and its success was dependent on high volume sales with a low per item profit margin. Kresge felt that the best way to achieve high volume sales was to draw on the potential buying power of those who made frequent food purchases. However, since Kresge had no prior experience in food merchandising and did not have any source of distribution, it elected to license its registered trade name to independent food store operators who would conduct a K-Mart Food Store operation as part of or adjacent to a K-Mart department store. This arrangement, it was felt, would provide "one-stop shopping" and enhance customer acceptance of the K-Mart program.

394 F.Supp. at 824. In 1964, Hempfield opened two food stores sharing the same building with K-Mart stores. By agreement with Kresge, Hempfield was permitted to use the name "K-Mart Foods" for a term of years at each store. Hempfield operated both stores until July 1969, when its leases were terminated. Hempfield's petition in bankruptcy followed shortly.

The Hempfield grocery stores, although "under one roof" with the K-Mart store, under the K-Mart name and thus presented to the public as a part of the K-Mart complex, were in fact run independently. Once past the supermarkets' K-Mart marquees, this independence became obvious:

None of the goods sold by Hempfield was permitted to carry the K-Mart or any other Kresge brand name. Nor was Hempfield permitted to use the name "K-Mart" on its checks, its business stationery or even its pricing labels. Neither sold any goods or services to the other and Kresge did not dictate Hempfield's source of supply. ⁶

Most of Hempfield's groceries came from a local Pennsylvania wholesaler, Fox Grocery Company. Still, Hempfield "received a substantial quantity of goods via direct shipment from out of state suppliers which amounted to in excess of $400,000 per year at cost." ⁷ Gross annual sales at the two stores amounted to approximately four million dollars. Most of this amount came from the sale of groceries. A small percentage of Hempfield's sales (about 2-5%) ⁸ came from those non-food items "customarily found in grocery stores, e. g., health and beauty aids." ⁹

The district court summarized the various provisions of the license agreements giving rise to the plaintiff's complaint. Under these provisions, Hempfield was required to:

(1) charge prices identical to those charged by Kresge on "like items," i. e., items sold by both the food stores and the department stores which prices were established by defendant in the event the parties were unable to arrive at a mutually agreeable price; ((2)) maintain merchandise "competitive" in price with the same or similar goods offered for sale in the trading area; (3) limit non-food merchandise offered for sale to specific categories of goods; (4) refrain from entering into fair trade agreements; (5) refrain from issuing trading stamps without express permission from Kresge; and (6) use certain equipment furnished by defendant. ¹⁰

Kresge responded by claiming a lack of subject matter jurisdiction and by denying that the restrictions contained in the agreements between the parties constituted unreasonable restraints of trade. In support of its motion for summary judgment, Kresge filed an affidavit of Frank J. Zapalla, Jr., who was the former secretary of SkatZap, Inc. (the predecessor corporation to Hempfield) and was the individual who negotiated the Kresge license that is the subject of this litigation. The uncontested portions of his affidavit reveal that (1) both parties fully intended that the food operation be presented to the public as one with the K-Mart department store; ¹¹ (2) neither party contemplated or intended that it would compete with the other; ¹² and (3) that the "like items" price restrictions were generally acceptable to Hempfield's predecessor ¹³ and applied only to goods not purchased from Kresge and, at the retail level, "freely available to the public at competitive prices in other stores throughout the (relevant) marketing area." ¹⁴

For its part, Hempfield, in an effort to substantiate jurisdiction, sought additional pretrial discovery, which the district court denied. That ruling is appealed, as is the district court's grant of summary judgment in favor of Kresge.

II.

In holding that Hempfield's suit was barred by a lack of Sherman Act subject-matter jurisdiction, the district court characterized its inquiry as: "Does the defendant's conduct have a sufficient relationship with interstate commerce so as to be a proper subject of federal regulation?" 394 F.Supp. at 827.

The district court measured this relationship by the allegations in Hempfield's complaint. Those allegations, as the district court noted, ¹⁵ "must allege either (1) activities that are in the flow of interstate commerce, or (2) activities which though occurring purely on a local level substantially affect interstate commerce." Doctors, Inc. v. Blue Cross of Greater Philadelphia, 490 F.2d 48, 50 (3d Cir. 1973) (citations omitted.) In other words, the district court required the plaintiff to meet either the test of "in commerce" or that of "affecting commerce":

If an alleged restraint occurs within the flow of interstate commerce, that is "in commerce," substantial effect on that commerce is presumed as a matter of law and no showing need be made that any particular amount of commerce has been affected. On the other hand, when dealing with restraints which are alleged merely to have affected interstate commerce, that effect must be substantial in order to justify federal regulation.

394 F.Supp. at 829. As our discussion need only address the "affecting commerce" test, ¹⁶ we focus our inquiry on the element of substantiality.

As noted by the court in Rasmussen v. American Dairy Association, 472 F.2d 517 (9th Cir.), cert. denied, 412 U.S. 950, 93 S.Ct. 3014, 37 L.Ed.2d 1003 (1973): ¹⁷

There is no bright line dividing cases in which the effect upon interstate commerce is sufficient to permit Congress to prohibit particular anticompetitive activity under the commerce clause from those cases in which it is not sufficient. In this area perhaps more than in most, each case must turn on its own facts.

Id. at 526. ¹⁸ The absence of such a bright line troubled this Court in Doctors, supra, and it remains to trouble us here.

Doctors involved a suit by a single hospital against the consortium that coordinated health care services in the Philadelphia area. Blue Cross, the defendant, sought to terminate the plaintiff hospital's membership, an action which plaintiff alleged had been taken in an attempt by Blue Cross to control all hospital services in the area. This Court, looking only to the fact that "the volume of supplies which are allegedly purchased by (the hospital) from companies located outside Pennsylvania each year ($233,430 in 1972) will be affected by the alleged activities," ¹⁹ found a substantial effect on interstate commerce and, therefore, held that Sherman Act jurisdiction was established.

The Doctors panel was careful to note, however, that the "affecting commerce" test would still be a bar to jurisdiction in some actions. 490 F.2d at 53-54, citing Lieberthal...