H. L. Moore Drug Exchange v. Eli Lilly and Co., 9
| Decision Date | 16 October 1981 |
| Docket Number | No. 9,D,9 |
| Parties | 1981-2 Trade Cases 64,335 H. L. MOORE DRUG EXCHANGE, division of/and Levitt Industries, Inc., Plaintiff-Appellee, v. ELI LILLY AND COMPANY, Defendant-Appellant. ocket 81-7090. |
| Court | U.S. Court of Appeals — Second Circuit |
Jack Kaufmann, New York City (Edward N. Sherry, David B. Howorth, Robert M. Peak, Dewey, Ballantine, Bushby, Palmer & Wood, New York City, of counsel), for defendant-appellant.
I. Scott Bass, New York City (Sheldon S. Lustigman, Bass, Ullman & Lustigman, New York City, of counsel), for plaintiff-appellee.
Before LUMBARD, MANSFIELD and VAN GRAAFEILAND, Circuit Judges.
In this action pursuant to § 4 of the Clayton Act, 15 U.S.C. § 15, defendant Eli Lilly and Company ("Lilly"), one of the nation's largest manufacturers and distributors of pharmaceutical products, appeals Guided by the standard that the evidence must be viewed in the light most favorable to the prevailing party (see pp. 940-941, infra), we summarize the record proof. Since at least 1896, Lilly has sold its drug products only to authorized wholesalers, and currently sells to some 367 wholesalers throughout the country. As part of its wholesaler-only policy, Lilly has long had an announced corollary policy of selling only to wholesalers not affiliated with retail pharmacies. On October 23, 1973, Lilly reaffirmed its "non-affiliation policy" in a letter to all its wholesalers which stated that Lilly was continuing "some long-established policies," namely that it
from an order of the Southern District of New York entered by Judge Robert W. Sweet, denying Lilly's motion for judgment notwithstanding the verdict or for a new trial, made after a jury trial resulted in a special verdict finding Lilly liable for unlawful termination of H. L. Moore Drug Exchange ("Moore"), one of its wholesalers, in violation of § 1 of the Sherman Act, 15 U.S.C. § 1 (1976), and from a judgment awarding damages, attorneys' fees, and granting injunctive relief against Lilly. From 1971 to 1976 Moore, a nationwide wholesaler of pharmaceuticals, was an authorized wholesaler for Lilly. Moore claimed that its termination in April, 1976, was due to a conspiracy between Lilly and certain of its wholesalers to restrict territories and maintain prices. We reverse on the ground that there was insufficient evidence of the alleged illegal conspiracy to support the jury verdict. 1
Moore first became a Lilly wholesaler in 1971, as part of the settlement of an earlier antitrust suit filed by Moore against Lilly. That suit arose out of Lilly's refusal to sell to Moore when Moore first entered the wholesale business as an innovator in wholesale techniques, offering discounts to retailers and using the mails to expand its market nationally. Lilly based this earlier refusal to sell to Moore on the fact that Lilly had an adequate distribution system and that Moore was not a member of the National Wholesale Druggists Association ("NWDA"). Until 1966, however, Moore was able indirectly to obtain Lilly products by purchasing them from authorized Lilly wholesalers, some of whom had actively sought Moore's clientele. In 1966 these sources refused to continue supplying Moore. Moore then filed suit against Lilly, alleging that Lilly had obtained the identities of these suppliers and was responsible for the cut-off. That suit was settled by Lilly's agreeing to sell to Moore.
At the time of the 1971 agreement Moore was owned by Parkway Distributors, which also owned over 100 "Big L" stores. The latter are retail discount stores carrying, among other things, certain non-prescription Lilly products. Although Parkway was a signatory to the 1971 wholesale agreement between Lilly and Moore, and was named in Moore's annual reports submitted by request to Lilly, Parkway's ownership of the Big L stores was not known to Mr. Manning, the Lilly executive in charge of wholesale relations, until late 1973 or early 1974. When Lilly discovered Moore's affiliation with the Big L stores, it conducted an investigation and concluded that, since the latter were not retail pharmacies but retail stores selling health and beauty aids along with some non-prescription Lilly products, they did not violate the non-affiliation policy, which was expressly limited to affiliations with "retail pharmacies."
During the course of the Big L investigation, an officer of one of Lilly's wholesalers, Gerald Rosow, passed along to Harold Katz, a Lilly salesman, an unsolicited article from a trade publication discussing among other things Parkway's ownership of both Moore and the Big L stores. Katz was one of over 1,200 Lilly sales representatives whose primary duty was to promote Lilly products to physicians. Following his normal procedure, Katz passed the article on to Phil Shockman, Lilly's Boston District Manager, who a month or so before had spoken with Katz about Lilly's investigation of the Big L stores. Katz attached to the article a handwritten memorandum (the so-called "nail-in-the-box" memorandum), making reference to Shockman's earlier request for information and speculating about Rosow's motive for giving him the article: 2
The article and the memorandum eventually reached Mr. Manning, who at that time had already received other reports concerning the Big L stores. According to Mr. Manning, while the article may have been important, the attached memorandum was "unimportant." In any event, as already indicated, Lilly took no action concerning the Big L stores, having concluded that they were not retail pharmacies and therefore did not violate the non-affiliation policy.
Some time after the 1971 agreement Parkway, Moore's parent company, acquired Northeast Medical Supplies, Inc. ("Northeast"), which filled specialized prescriptions for various health facilities. A Lilly memorandum addressed to Mr. Manning dated January 15, 1974, mentioned Parkway's ownership of Northeast. Mr. Manning testified that this brief reference made no impression on him at the time and that as a result Lilly never made a determination whether the Northeast affiliation violated Lilly's policy. 3 Thus, with respect to both the Big L and the Northeast affiliations, Lilly did not understand Moore then to be in violation of nonaffiliation policy. Moreover, in March, 1974, Lilly was explicitly informed by Moore, in response to a questionnaire Lilly had sent to all its wholesalers, that Moore "did not have an ownership or control relationship of the character described" in Lilly's October 23, 1973, letter reaffirming its non-affiliation policy. The questionnaire response was signed by Mr. Rome, the executive vice-president and general manager of Moore.
Some time in November, 1975, Lilly learned that in October Moore had acquired In December, 1975, Mr. Manning called Mr. Rome of Moore to ascertain information about Moore's acquisition of Mall Drug Stores and to remind Moore of Lilly's non-affiliation policy. Mr. Rome confirmed the acquisition, explaining that it was part of Moore's plan to expand its business. He stated that Moore had no intention of divesting itself of the Mall Drug Stores and that if Lilly had further questions it should contact Moore's lawyers. Lilly decided then to wait and see if Moore would divest itself of its retailer affiliation. When it became clear that Moore had no intention of divesting, Lilly notified Moore in April of 1976 that its then current contract, due to expire on June 30, 1976, would not be renewed because of Moore's continued affiliation with the Mall Drug Stores.
a chain of retail pharmacies known as the Mall Drug Stores which, unlike the Big L stores, clearly fell within the proscription of Lilly's nonaffiliation policy. The acquisition was reported in trade publications as well as the regular press, including the Wall Street Journal. In addition, at the annual meeting of the NWDA in November, Moore's acquisition was called to Lilly's attention in a general way by several wholesalers, and more specifically by Spectro Industries, a conglomerate of wholesalers located in the Northeast. 4 The executives of Spectro met with the Lilly executives, in keeping with Spectro's practice at the NWDA gatherings to meet with each of its 25 or so major suppliers in order to discuss general business matters such as sales promotion. During the course of this meeting, which was a private meeting according to Mr. Manning and which covered many topics, Spectro asked if Lilly still adhered to its non-affiliation policy, and pointed out that Moore had recently acquired a chain of retail pharmacies. Lilly responded that the policy was still in effect, and that the matter was under consideration and would be investigated. 5 There is no evidence of any agreement at the meeting relating in any way to Moore's termination or to matters such as price maintenance or territorial restrictions
Moore then instituted the present suit, claiming that the non-affiliation policy was a mere pretext, masking an unlawful conspiracy between Lilly and certain of its wholesalers to restrict territories and control prices. Moore's complaint alleged that Lilly's termination of Moore violated §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2 (1976), § 3 of the Clayton Act, 15 U.S.C. § 14 (1976), and § 2 of...
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