Guild Wineries' & Distilleries v. J. Sosnick & Son

• Decision Date: 29 January 1980
• Court: California Court of Appeals Court of Appeals
• Parties: , 1980-1 Trade Cases P 63,258 GUILD WINERIES AND DISTILLERIES, a California cooperative corporation, Plaintiff, Cross-Defendant and Respondent, v. J. SOSNICK & SON, a California Corporation, Defendant, Cross-Complainant and Appellant. Civ. 42953.

Page 87

162 Cal.Rptr. 87

102 Cal.App.3d 627, 1980-1 Trade Cases P 63,258

GUILD WINERIES AND DISTILLERIES, a California cooperative corporation, Plaintiff, Cross-Defendant and Respondent, v. J. SOSNICK & SON, a California Corporation, Defendant, Cross-Complainant and Appellant.

Civ. 42953.

Court of Appeal, First District, Division 4, California.

Jan. 29, 1980.

Rehearing Denied Feb. 25, 1980.

Thomas R. Fahrner, Richard S. E. Johns, Furth, Fahrner & Wong, San Francisco, for defendant, cross-complainant and appellant.

Godfrey L. Munter, Jr., Martin, Munter & Keegin, San Francisco, for plaintiff, cross-defendant and respondent.

BRUNN, ^* Associate Justice.

This is a Cartwright Act private antitrust case. We hold that it is unlawful for a manufacturer who also distributes its own products in one geographic area to terminate an independent distributor when a substantial factor in bringing about the termination is the distributor's refusal to accept the manufacturer's attempt to enforce or impose territorial or customer restrictions among distributors. We reverse a judgment in favor of the manufacturer because of instructions to the jury inconsistent with this principle.

I

Guild Wineries and Distillers (hereinafter Guild) sued J. Sosnick & Son (Sosnick) seeking monies due for liquor which Guild had sold Sosnick. Sosnick filed a cross-complaint alleging violations of the Cartwright Act (Bus. & Prof. Code, § 16700 et seq.) and seeking treble damages. Before trial the parties stipulated to the amount Sosnick owed Guild. The trial proceeded on the issues joined on the cross-complaint. The jury decided in favor of Guild. Sosnick appeals from the resulting judgment.

Guild is a wine marketing cooperative controlled by its member grape growers. Guild's share of the Northern California wine market was about two percent at pertinent times. Guild was not a wholesale distributor of its products before 1975, but marketed them through several independent wholesalers who also handled wines of Guild's competitors.

Sosnick is a wholesaler of food and beverages based in South San Francisco. During the period which this litigation concerns, Sosnick handled hundreds of items of food and wine.

Fourteen wholesalers distributed Guild wines in Northern California. Guild assigned to each of them an area of primary responsibility adjacent to the wholesaler's headquarters. Sosnick concentrated its Guild wine marketing in San Mateo County. The territories were not entirely exclusive in practice; distributors would sell Guild products outside their territory because of overlapping customer accounts. A distributor who represented Guild in one county might wholesale another company's products in a second county and not infrequently would sell Guild wines to retainers in the latter area. Not surprisingly, this led to complaints by distributors to Guild. The evidence is in conflict as to whether Guild tried to dissuade distributors from poaching on each other's territory.

In 1975, the Guild wholesale distributorship in Fresno terminated. Guild wanted to increase its sales in the Fresno area where most of its growers were concentrated. Guild therefore took over the Fresno wholesaling itself under the name "Valley Distributors." Valley Distributors was not a separate entity, but merely a name under which Guild acted as a distributor.

The previous Fresno distributor had also been selling Guild wines to the Lucky Stores chain, whose central purchasing operations were in San Leandro and not in the Fresno area. When that distributor stopped handling Guild products, Sosnick (who was already selling Kosher foods to Lucky) began selling Guild wines to the chain at Lucky's request. A Guild executive then called Sosnick at least twice and asked Sosnick to cease selling to Lucky because Guild wanted to handle the Lucky account itself through its new Valley Distributors operation. Martin Sosnick testified that the last request was angry and threatening. The Guild executive denied making threats. About two weeks later, Guild terminated Sosnick's contract as a distributor. Several Guild executives testified that the decision to cancel Sosnick preceded the Lucky Stores incident and was not related to it.

It is undisputed that the evidence would support, although not compel, a finding that Sosnick's insistence on selling to Lucky was a substantial factor in Guild's decision to terminate Sosnick's distributorship. The evidence would also support the opposite finding.

The basic disagreement between the parties is whether liability can be predicated upon the former finding. The disagreement arose in a conflict over instructions to the jury. Guild requested and the trial court gave instructions under which Guild would be liable only if, in terminating Sosnick it joined in and acted in furtherance of an agreement or conspiracy among the competing independent wholesalers to divide the territory and customers between themselves. ¹ The jury was precluded from imposing liability if Guild had acted alone, even if it had cancelled Sosnick for his refusal to yield the Lucky account to Guild. ² Sosnick's proposed instructions, which the trial court declined to give were based on the theory that such conduct would violate the antitrust laws if it were carried out to enforce an illegal customer allocation agreement. ³

II

In discussing whether the court's instructions were prejudicially erroneous, we note preliminarily that the Cartwright Act "is patterned upon the federal Sherman Act and both have their roots in common law; hence federal cases interpreting the Sherman Act are applicable with respect to the Cartwright Act." (Chicago Title Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.2d 305, 315, 70 Cal.Rptr. 849, 855, 444 P.2d 481, 487.)

We observe next that "a refusal of a manufacturer to deal with a distributor can constitute a 'combination' in restraint of trade within the purview" of the Sherman Act. (Bushie v. Stenocord Corporation (9th Cir. 1972) 460 F.2d 116, 119; United States v. Parke, Davis & Co. (1960) 362 U.S. 29, 80 S.Ct. 503, 4 L.Ed.2d 505; Albrecht v. Herald Co. (1968) 390 U.S. 145, 88 S.Ct. 869, 19 L.Ed.2d 998.)

The question is whether this is one of the situations where a manufacturer's refusal to deal runs afoul of the antitrust laws. The answer hinges on whether Guild's alleged conduct is unlawful per se or whether it is to be judged under the "rule of reason." Sosnick does not contend that the evidence would support antitrust liability under the "rule of reason" approach; were that approach to be taken, the trial court's instructions would either be correct or harmless error.

We conclude that this case assuming, of course, that Sosnick's refusal to agree to turn the Lucky account over to Valley was a substantial factor in Guild's decision to terminate Sosnick is governed by a per se principle.

It is settled that distributors cannot lawfully agree to divide territories or customers. Such conduct is sometimes called a "horizontal restraint," and is a per se violation of the Sherman Act. (United States v. Topco Associates (1972) 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515.) The principle has deep roots, going back to Addyston Pipe & Steel Co. v. United States (1899) 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136. When Guild became a distributor the same rule became applicable to it. Guild could not lawfully coerce a fellow distributor into allocating customers any more than Sosnick and other distributors could lawfully agree to such an allocation. (American Motor Inns, Inc. v. Holiday Inns, Inc. (3d Cir. 1975) 521 F.2d 1230, 1253-1254 (territorial restrictions imposed by motel chain on its franchisees are horizontal restraints and illegal per se where the chain also operates motels); Hobart Brothers Co. v. Malcolm T. Gilliland, Inc. (5th Cir. 1973) 471 F.2d 894, 899 (illegal horizontal restraint for manufacturer who also distributes to some accounts to limit territories of its distributors so as to eliminate competition between the manufacturer and its distributors).) Hobart Brothers and American Motor Inns cover the situation before us. (For a recent application of the same principle, see Krehl v. Baskin-Robbins Ice Cream Co. (C.D.Cal.1978) 78 F.R.D. 108, 123.)

Per se principles are formulated where the conduct involved is manifestly anticompetitive and has no clearly discernible benefits to competition. (Continental T.V., Inc. v. GTE Sylvania Inc. (1977) 433 U.S. 36, 50, 97 S.Ct. 2549, 53 L.Ed.2d 568; Marin County Bd. of Realtors v. Palsson (1976) 16 Cal.3d 920, 934, 130 Cal.Rptr. 1, 549 P.2d 833.) The undesirable effects of a manufacturer restraining a distributor from selling to particular customers are that "they serve to suppress all competition between manufacturer and distributors for the custom of the most desirable accounts . . . (without) . . . countervailing tendencies to foster competition between brands." (White Motor Co. v. United States (1963) 372 U.S. 253, 272, 83 S.Ct. 696, 707, 9 L.Ed.2d 738 (Brennan, J., concurring).) The anticompetitive consequences were also lucidly noted in Industrial Bldg. Materials, Inc. v. Interchemical Corp. (9th Cir. 1970) 437 F.2d 1336, 1342, as follows:

"The appellee cites many cases for the proposition that a manufacturer is free to agree with others to replace a distributor. In each of those cases, however, the manufacturer did not enter into competition with a distributor, and there was no removal of a competitor of the manufacturer from the market. In none of those cases did the agreement have an anticompetitive purpose or effect. (Citation.) When a distributor is replaced by another, the public is given a substitute with no diminution in the number of distributors offering services, but when the manufacturer enters the field and then removes a distributor, the public is left with only the manufacturer instead of the manufacturer and the independent distributor." (Fn. omitted.)

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