Grappone, Inc. v. Subaru of New England, Inc.

• Decision Date: 04 April 1988
• Docket Number: No. 87-1538,87-1538
• Citation: 858 F.2d 792
• Parties: , 1988-2 Trade Cases 68,299 GRAPPONE, INC., Plaintiff, Appellee, v. SUBARU OF NEW ENGLAND, INC., Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 792

858 F.2d 792

57 USLW 2278, 1988-2 Trade Cases 68,299

GRAPPONE, INC., Plaintiff, Appellee, v. SUBARU OF NEW ENGLAND, INC., Defendant, Appellant.

No. 87-1538.

United States Court of Appeals First Circuit.

Heard April 4, 1988.

Decided Sept. 30, 1988.

Harold E. Magnuson, Boston, Mass., (antitrust issues) and John W. Barto, Concord N.H., (attorneys' fees) with whom Martin, Magnuson, McCarthy & Kenney, Boston, Mass., and Barto and Puffer, P.A., Concord, N.H., were on brief for defendant, appellant.

Jay N. Varon with whom Dennis A. Henigan, Denise T. DiPersio, Foley & Lardner, Washington, D.C., Howard B. Myers and Myers, Jordan & Duffy, Concord, N.H., were on brief for plaintiff, appellee.

Before COFFIN, BREYER and SELYA, Circuit Judges.

BREYER, Circuit Judge.

Subaru of New England, Inc. (SNE), a regional Subaru distributor, appeals an antitrust treble damage award totalling $51,729.59, 534 F.Supp. 1282, (plus $200,590.18 costs and attorneys fees). The award rests upon the district court's determination that SNE, as a condition of making Subaru cars available to Grappone, Inc. (Grappone), a local automobile dealer, required Grappone to buy some spare Subaru parts. The court held that this conditioned sale constituted a "tying" arrangement, unlawful under Section 1 of the Sherman Act, 15 U.S.C. Sec. 1 (1982 & Supp. II 1984), and Section 3 of the Clayton Act, 15 U.S.C. Sec. 14 (1982). Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 104 S.Ct. 1551, 80 L.Ed.2d 20 (1984); International Salt Co., Inc. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 2 (1947). SNE argues that the district court's determination of liability rests upon an overly mechanical, and legally erroneous, application of the law prohibiting tying. We agree; and, we reverse the judgment.

I

The basic facts are as follows: In 1973, SNE's supplier, Subaru of America (SOA), was worried that Subaru dealers had not had, and in 1974 might not have, enough spare parts to make repairs to recently purchased Subaru cars. After a review of past buyers' needs and consultation with Subaru headquarters in Japan, SOA made up a list of spare parts kits that it wished both regional distributors and local dealers to have on hand. In particular, it wanted each local dealer to have several "dealer's kits," each with 88 parts for the 1974 cars (plus a few parts for previous models) and also to have "supplemental kits," each with 44 spare parts, out of a total of approximately 4,000 to 5,000 different Subaru parts. SOA said that readily available spare parts would help Subaru sell its cars, which at that time (1973/74) accounted for a very small share of American, New England, and New Hampshire auto sales. In fact, in 1974, Subaru accounted for 3.4 percent of all auto imports in New Hampshire, 2.8 percent in New England, and 1.5 percent in the United States. (Our own research indicates that in 1974, imports accounted for 15.9 percent of all auto sales, which means that Subarus likely accounted for about one-quarter of one percent of auto sales in that year in the United States, and apparently under one percent of all auto sales in New England and New Hampshire. U.S. Dept. of Commerce, Statistical Abstract of the United States 1988, Chart No 992.)

As part of the "replacement part availability" effort, SNE (the regional distributor) told Grappone, Inc. (the local dealer) that it must have on hand, in 1974, two dealer kits and two supplemental kits. Grappone objected on the ground that the parts kits were overly inclusive. Grappone believed the combined kits should contain fewer parts and sell for about $2,000, instead of about $3,300, leaving it free to obtain the extra parts elsewhere. SNE insisted that Grappone take the kits, and it told Grappone that it could not have its allocation of Subaru cars in 1974 unless it did so. Although Grappone sold AMC, Pontiac, and Jeep cars, and (from another site) Toyotas and Peugeots (indeed the full name on the stationary is "Grappone Pontiac, Inc."), it wanted the Subarus as well. Grappone went 10 months without the new 1974 Subarus; it then agreed to take the kits; SNE accepted Grappone's July 1974 car order; and Grappone brought this lawsuit. After many legal events, which we need not recount, Grappone eventually won the verdict mentioned, on the basis of its tying claim. In our view, however, even that small victory was without adequate legal basis.

II

The case law has long indicated, regardless of whether a plaintiff charges a violation of Sherman Act Sec. 1 or Clayton Act Sec. 3, that a "tying arrangement" is unlawful where (1) the seller has "market power" in the tying product, Jefferson Parish, 466 U.S. at 17-18, 104 S.Ct. at 1560-61; Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 499, 89 S.Ct. 1252, 1256, 22 L.Ed.2d 495 (1969) ("Fortner I "); (2) the tie links "two separate products," Jefferson Parish, 466 U.S. at 18, 19-22, 104 S.Ct. at 1561, 1562-64; Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 613-14, 73 S.Ct. 872, 883, 97 L.Ed. 1277 (1953); and (3) the tie forecloses a "not insubstantial" amount of potential sales for the "tied" product, International Salt, 332 U.S. at 396, 68 S.Ct. at 15 (Sherman Act Sec. 1, Clayton Act Sec. 3); see also Jefferson Parish, 466 U.S. at 16, 104 S.Ct. at 1560; Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 11, 78 S.Ct. 514, 521, 2 L.Ed.2d 545 (1958) (Sherman Act Sec. 1); Wells Real Estate, Inc. v. Greater Lowell Board of Realtors, 850 F.2d 803, 814 (1st Cir.1988). In our view, the plaintiffs in this case have failed to show the first of these essential elements.

1. We have reached our conclusions after examining with care the Supreme Court's recent analysis of tying arrangements in Jefferson Parish, supra. Although the Court divided 5-4 over whether courts should treat tying as unlawful per se, we read both majority and concurring opinions as accepting the following basic propositions.

First, in Jefferson Parish, as in previous cases, the Court recognizes that the antitrust laws exist to protect the competitive process itself, not individual firms. Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S.Ct. 1502, 1521, 8 L.Ed.2d 510 (1962); Will v. Comprehensive Accounting Co., 776 F.2d 665, 673-74 (7th Cir.1985), cert. denied, 475 U.S. 1129, 106 S.Ct. 1659, 90 L.Ed.2d 201 (1986). And, the antitrust laws protect the competitive process in order to help individual consumers by bringing them the benefits of low, economically efficient prices, efficient production methods, and innovation. See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 19-20, 99 S.Ct. 1551, 1562, 60 L.Ed.2d 1 (1979); Interface Group, Inc. v. Massachusetts Port Authority, 816 F.2d 9, 10-11 (1st Cir.1987); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 231, 234-35 (1st Cir.1983).

Second, the Court recognized that, typically, the way in which tying may hurt the competitive process itself is by helping to maintain or to augment pre-existing market power, defined by the Court as the power to "raise[ ] [price] above the levels that would be charged in a competitive market." Jefferson Parish, 466 U.S. at 27 n. 46, 104 S.Ct. at 1566 n. 46.

Third, both the majority and minority opinions in Jefferson Parish recognized that tying's anticompetitive mechanism is not obvious. Compare Jefferson Parish, 466 U.S. at 11-12, 14-15, 104 S.Ct. at 1558, 1559-60 (recognizing some combined sales are consistent with rather than compromise "competitive ideal" of Sherman Act), and at 34, 35-36 (O'Connor, J., concurring) (need for "elaborate inquiry into ... [tying's] economic effects") with International Salt, 332 U.S. at 396, 68 S.Ct. at 15 ("the tendency of the [tying] arrangement to accomplishment of monopoly seems obvious"); Northern Pacific, 356 U.S. at 6, 78 S.Ct. at 518 ("Where [tying] ... conditions are successfully exacted[,] competition on the merits ... is inevitably curbed."). Rather, to understand the harm that tying may cause requires a fairly subtle antitrust analysis. One cannot infer an automatic harm to the competitive process simply because a Seller refuses to sell Product A to a Buyer unless the Buyer also buys Product B. That is to say, a tie does not "obviously" hurt a Buyer by making it take a product it does not want. Indeed, the tie itself cannot automatically, in and of itself, force the Buyer to take an inferior Product B or to pay more than it wishes for that product. If the Seller does not have market power in respect to product A, it cannot force buyers to take a more expensive or less desirable Product B, for if the Seller tries to do so, buyers will simply turn elsewhere for Product A. If the Seller does have, and has been fully exercising, market power, it also cannot force buyers to take a more expensive or less desirable Product B, unless it provides buyers equivalent compensation by lowering the price of Product A (or maintaining Product A's price at a level lower than the Seller has the power to charge), for otherwise buyers, who were already paying as much as the Seller could charge them (with its degree of market power) would also likely switch to other sellers or discontinue use of Product A. See Jefferson Parish, 466 U.S. at 39 & n. 8, 40, 104 S.Ct. at 1572 & n. 8, 1573 (O'Connor, J., concurring). This is simply to make the logical point that "fully exploited" buyers would not take a less desirable Product B without compensation, for otherwise they were not being "fully exploited." See id.; 3 P. Areeda and D. Turner, Antitrust Law p 725b (1978 & Supp.1987) (hereafter Areeda and Turner); see, e.g., Moore v. Jas. H. Matthews & Co., 550 F.2d 1207, 1213 (9th Cir.1977) (buyers interested in end price of product). Scholars have elaborated and refined this logical point, taking account, for example, of the fact that sellers typically do not set individualized prices and that typically...