Hanover Shoe, Inc. v. United Shoe Machinery Corporation

• Decision Date: 12 August 1965
• Docket Number: Civ. No. 5395.
• Citation: 245 F. Supp. 258
• Parties: The HANOVER SHOE, INC., Plaintiff, v. UNITED SHOE MACHINERY CORPORATION, Defendant.
• Court: U.S. District Court — Middle District of Pennsylvania

245 F. Supp. 258

The HANOVER SHOE, INC., Plaintiff, v. UNITED SHOE MACHINERY CORPORATION, Defendant.

Civ. No. 5395.

United States District Court M. D. Pennsylvania.

April 28, 1965.

Supplemental and Amended Findings of Fact, Conclusions of Law and Opinion August 12, 1965.

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Nogi, O'Malley & Harris, Scranton, Pa., Donovan, Leisure, Newton & Irvine, New York City, for plaintiff.

Warren, Hill, Henkelman & McMenamin, Scranton, Pa., Davis, Polk, Wardwell, Sunderland & Kiendl, New York City, for defendant.

SHERIDAN, Chief Judge.

I. INTRODUCTION

This is a private antitrust action which arises under Section 2 of the Sherman Act, Act of July 2, 1890, c. 647, 26 Stat. 209, as amended, 15 U.S.C.A. § 2, and under Section 4 of the Clayton Act, Act of October 15, 1914, c. 323, 38 Stat. 731, 15 U.S.C.A. § 15, to recover treble damages for defendant's alleged monopolization of the shoe machinery industry, and, particularly, its alleged monopolistic practices with respect to substantially all shoe machinery required and used by plaintiff, The Hanover Shoe, Inc. (Hanover).

The complaint, as amended, alleges in paragraph 14 that "Prior to and continuously from the year 1912 the defendant, United Shoe Machinery Corporation United, has been violating the antitrust laws of the United States by: (a) monopolizing interstate trade and commerce in the shoe machinery industry of the United States; (b) monopolizing interstate trade and commerce of the United States in "substantially all shoe machinery required and used by Hanover in the manufacture of men's and boys' shoes." In paragraph 15 it is alleged that "Monopolization by United as aforesaid and the exercise by it of its monopoly powers has enabled United to dominate and control the market in shoe machinery, to restrict actual competition and to exclude potential competition in said market."

The complaint then sets forth allegations with respect to the principal means used by United to accomplish the violation of law. It is alleged that "At all times prior to May 17, 1954, the date of the decision of the United States Supreme Court affirming a judgment that United violated Section 2 of the Sherman Act by monopolizing the shoe machinery trade and commerce among the several States, United declined to sell most of its shoe machines and made such machines available to shoe manufacturers only upon leases * * *" and that United "offered on lease only all of the major, important machines used by Hanover" in the shoe manufacturing operations described in other paragraphs of the complaint. It is alleged that United's leases for most of its machines, including all such leases with Hanover, provided flat rental charges or unit rental charges based on the number of shoes produced or on the number of operations performed by the machines, and on the rest of its machines, including those on lease to Hanover, provided for payment of both rental and unit charges. It is alleged that in these leases, the 10 year term, full capacity, minimum charge, and machine return clauses, alone or in combination with one or more of the other clauses, deter and prevent shoe manufacturing lessees, including Hanover, from replacing with a competitive machine each of the machines leased from United.

Other means used by United to deter competition are alleged to be the establishment of a "right of deduction fund" whereby a percentage of rentals was set aside by United to be applied by United, if desired by the lessee, to machine return charges or minimum rental charges; the requirement that lessees pay transportation and parts replacement costs, and a sum equaling either 25 or 50 percent of the remaining rental for the term if a lessee, including Hanover, desired to replace a United machine with that of a United competitor; and United's voluntary assumption of machine repair with no separate charge to the lessee, thereby deterring the establishment and growth of competitive repair service organizations. The complaint alleges that as a further means of preventing competition, United, when faced with competition, reduced its own rates on machinery types threatened by competition; introduced new models at lower rates than those rates for comparable old models; maintained rates on a particular machine type despite a policy of increasing rates on other machine types to meet increased costs of manufacture; and introduced new models so designed and priced as to reach only that area of the shoe manufacturing industry in which a competitor was attempting to market a machine.

Hanover alleges that these practices affected it in the following ways: (a) United collected from Hanover excessive, arbitrary and non-competitive rental, unit and other charges for its products and services; (b) Hanover was prevented from acquiring shoe machinery, new or used, as owner either from United or elsewhere; (c) United extracted from Hanover for the use of its shoe machinery, large sums of money in excess of the reasonable value of such machinery and of the service rendered by United on such machinery.

Hanover claims damages of $2,000,000, and pursuant to the treble damage provisions of the Clayton Act, requests judgment of $6,000,000.

In its answer United denied many of the significant allegations of the complaint and set up as affirmative defenses the statute of limitations, laches, estoppel, waiver and acquiescence on the part of Hanover. United also contends that its pre-eminence in the shoe machinery industry is due to its initiative and enterprise and its business methods, which were adopted to promote success of manufacturers generally, and has been accompanied by an increase of opportunity for Hanover.

The action was tried to the court without a jury.

II. FINDINGS OF FACT, CONCLUSIONS OF LAW

A. Background:

Plaintiff, The Hanover Shoe, Inc., is a corporation organized and existing under the laws of the State of Pennsylvania, with its principal office and place of business in Hanover, Pennsylvania.

Defendant, United Shoe Machinery Corporation, is a corporation organized and existing under the laws of the State of New Jersey, with its principal office and place of business in Boston, Massachusetts, and also with offices and a place of business in Harrisburg, Pennsylvania, within this district.

Since 1899 Hanover has engaged in the manufacture of men's shoes by the Good-year welt process, and until the early 1950's also engaged in the manufacture of boys' shoes by the same process. Except for large quantities of military shoes manufactured during World War II, and for shoes sold to Montgomery Ward and J. C. Penney since World War II, Hanover has sold the shoes it manufactured directly through retail men's shoe stores operated by its wholly owned subsidiary, Sheppard & Myers, Inc. There are currently about 110 retail stores. Hanover's manufacture of shoes during the period from 1939, the beginning of the complaint period of this action, to 1955, the year in which the action was instituted, ranged in volume from a low of 1,006,768 pairs in 1939 to a high of 1,939,289 pairs in 1944. In 1955 Hanover was one of the 35 largest of approximately 1,000 shoe manufacturers in the United States.

Until 1956 all of the capital stock of Hanover was owned by or for the benefit of H. D. Sheppard or C. N. Myers, the original shareholders, or members of their families, except for small blocks of stock sold to key employees, beginning in 1940. In 1956 approximately 25 percent of the then outstanding capital stock was sold to the public.

United is the successor of a combination of shoe machinery companies which consolidated in 1899. Since that time United has engaged in the manufacture and distribution of shoe machinery. Most of the machinery was manufactured at its factory in Beverly, Massachusetts, and was distributed in interestate commerce to shoe manufacturers, which included machinery supplied to Hanover at its principal plant in Hanover, Pennsylvania, and at its other factories in East Berlin, Pennsylvania, and Middletown and Emmitsburg, Maryland.

Most of the important operations in Hanover's manufacture of shoes are done by machine, and Hanover could not engage competitively in quantity production without the use of shoe machinery.

During the complaint period United made available its more complicated machines to shoe manufacturers, including Hanover, on leases only. The more complicated machines are those which have greater importance in the manufacture of shoes. These machines produced the largest revenue for United. In 1951 United had 178 machine types on a lease-only basis. The complaint in this action relates to United's practices with respect to 58 such machine types which Hanover had on lease during the complaint period. The rental for these machines was either a stated amount, a stated amount plus royalties, or royalties only, payable monthly. Of the 58 machine types, 20 accounted for more than 80 percent of the rentals and royalties paid United by Hanover during the complaint period, and 18 of the 20 types were on a royalty or royalty plus rental basis.

United also marketed machines less complicated than the major machines, on an alternate lease or sale basis, at the customer's option. In 1951 United had 122 of these machine types, hereafter referred to as optional machines. The rental for these machines was on a flat rate basis, payable monthly.

In 1951 United had 42 machine types available for purchase only.

All new leases to shoe manufacturers, including Hanover, of machinery involved in this action were for 10 year terms. Renewal leases were for 5 years. From 1922 to May 17, 1954, all of United's leases were substantially uniform. They are known as "Form A" leases. Three clauses important to this action are the full capacity, term, and return charge.¹ A fourth clause, Clause 2, provided, among other things, that the lessee shall...