House of Materials, Inc. v. Simplicity Pattern Co.

• Decision Date: 23 January 1962
• Docket Number: Docket 26968.,No. 92,92
• Citation: 298 F.2d 867
• Parties: HOUSE OF MATERIALS, INC., Plaintiff-Appellee, v. SIMPLICITY PATTERN CO., Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

298 F.2d 867 (1962)

HOUSE OF MATERIALS, INC., Plaintiff-Appellee, v. SIMPLICITY PATTERN CO., Inc., Defendant-Appellant.

No. 92, Docket 26968.

United States Court of Appeals Second Circuit.

Argued November 29, 1961.

Decided January 23, 1962.

Amos J. Peaslee, Jr., New York City (Fischer & Shilkoff, Roosevelt, N. Y., Peaslee, Brigham, Albrecht & McMahon, New York City, of counsel), for plaintiff-appellee.

William Simon, Washington, D. C. (Howrey, Simon, Baker & Murchison, and John Bodner, Jr., Washington, D. C., House, Grossman, Vorhaus & Hemley, and Sidney Greenman, and Ira J. Goldstein, New York City, on the brief), for defendant-appellant.

Before CLARK, FRIENDLY and KAUFMAN, Circuit Judges.

KAUFMAN, Circuit Judge.

Simplicity Pattern Co., Inc. (Simplicity) appeals from a preliminary injunction ordered by Judge Bryan¹ which, in effect, requires it to continue business dealings with appellee House of Materials, Inc. (Materials), one of its former customers, pending final disposition of a private antitrust action in which both parties are involved.

The present dispute is the outgrowth of a decision by the Supreme Court in FTC v. Simplicity Pattern Co., Inc., 360 U.S. 55, 79 S.Ct. 1005, 3 L.Ed.2d 1079 (1959) which upheld a cease and desist order of the Federal Trade Commission charging Simplicity with certain violations of Section 2(e) of the Clayton Act, as amended, 15 U.S.C.A. § 13(e). Specifically, Simplicity² was found to have provided, without charge, display cabinets and pattern catalogs to its large variety-store customers, although it did not provide these facilities to its small fabric-store customers. This was held to be an unlawful discrimination.³

Soon after that decision was rendered, three of Simplicity's small fabric-store customers brought a treble damage action against it pursuant to Section 4 of the Clayton Act, 15 U.S.C.A. § 15. Their complaint alleged the Section 2(e) violations which the Supreme Court had sustained, and also several others.⁴ Insofar as the allegations were identical with those litigated in the Federal Trade Commission proceedings, plaintiffs relied on the Supreme Court decision as prima facie evidence of the violations under 15 U.S.C.A. § 16. Materials was one of forty small fabric-store customers of Simplicity that were subsequently allowed to intervene in the action.

Sometime after the lawsuit was instituted, Simplicity notified two of the original plaintiffs that it intended to terminate business relations with them at the approaching expiration of their contracts. This action was taken pursuant to a provision in those contracts which specified that unless either party gave such notice the contracts would automatically be renewed for an additional five years.⁵ Later, when the additional customers intervened in the action, Simplicity sent notices to a number of them including Materials, which were similar to those sent to the original plaintiffs.

In March, 1960, the three original plaintiffs applied to Judge Dimock (S.D. N.Y.) for a preliminary injunction against Simplicity to prevent the manufacturer from ending their contracts. The motion was denied without opinion. In July, 1960, these same plaintiffs, joined by three intervening plaintiffs, including Materials, renewed their application to the District Court for a preliminary injunction against Simplicity. This time their efforts met with success, and the injunction issued. Five of the plaintiffs, however, failed to post the bond required by the lower court's decree and the injunction was vacated as to them. As a result, Materials is the only appellee before us.

The District Court found, on the basis of affidavits alone, that the sole motivation for Simplicity's refusal to deal with the plaintiffs below was its desire to retaliate for the treble damage action brought against it by those plaintiffs. The court found also that a prime purpose of Simplicity's action was to exert economic pressure on the plaintiffs in order to discourage them from continuing with their litigation. After an extensive review of the relevant authorities, the court concluded that this refusal to deal was itself a violation of the anti-trust laws.⁶ Sua sponte it directed that the complaint be amended to include a count alleging the refusal to deal, and enjoined Simplicity from refusing to sell its patterns to the plaintiffs on the terms contained in the contracts, which, as we have said, the manufacturer had attempted to terminate.

On appeal Simplicity argues that the refusal to deal did not violate the anti-trust laws and that, as a result, the lower court had no power under Section 16 of the Clayton Act⁷ to issue an injunction. It contends also that even if we are to assume that the court had power to enjoin it from refusing to deal with Materials, the court's exercise of that power under these circumstances amounted to an abuse of discretion.

Although we are in sympathy with Judge Bryan's commendable attempt to prevent conduct which he believed was undertaken for the purpose of impeding enforcement of the antitrust laws through a private action, we are constrained to agree with appellant that the injunction cannot be sustained.^7a

I.

Section 1 of the Sherman Act provides that, "Every contract, combination * * * or conspiracy, in restraint of trade * * * is declared to be illegal." 15 U.S.C.A. § 1. It is to be noted that this provision requires some type of joint action, as well as an (undue) restraint of trade.

A.

Contract, Combination or Conspiracy.

In the often cited case of United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct. 465, 468, 63 L.Ed. 992 (1919), the Supreme Court held that the Sherman Act "does not restrict the long recognized right of a * * * manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal."⁸ Colgate, it was believed, stood for the proposition that, in the absence of an unlawful agreement between a manufacturer and its customer, a refusal to deal with a mere unilateral act which could not violate Section 1 irrespective of the manufacturer's motives. Although much water has gone over the dam since that decision, see Warner & Co. v. Black & Decker Mfg. Co., 277 F.2d 787, 789 (2nd Cir., 1960), and this interpretation of the Act has been substantially limited, see United States v. Parke, Davis & Co., 362 U.S. 29, 80 S.Ct. 503, 4 L.Ed.2d 505 (1960), the Colgate case has not been expressly overruled.⁹ Instead, it appears that:

"The Supreme Court has left a narrow channel through which a manufacturer may pass even though the facts would have to be of such Doric simplicity as to be somewhat rare in this day of complex business enterprise." Warner & Co. v. Black & Decker Mfg. Co., supra, at p. 790 of 277 F.2d.

We believe that in the instant case the facts are of such "Doric simplicity." Assuming as we do that the proof warranted the inference that Simplicity's action was motivated by Materials' prosecution of the treble damage action, appellant has done nothing except exercise its right to terminate the contract in accordance with its terms. There is no indication that Simplicity went "beyond mere announcement of his policy and the simple refusal to deal," or that it has employed "other means" to effect that policy by means of a combination within the rule of United States v. Parke, Davis & Co., supra, at p. 44 of 362 U.S., at p. 512 of 80 S.Ct. There is no claim that Simplicity has exacted a contract, express or implied, United States v. A. Schrader's Sons, Inc., 252 U.S. 85, 40 S.Ct. 251, 64 L.Ed. 471 (1920), or that it engaged in conduct tantamount to an agreement, F.T.C. v. Beech-Nut Packing Co., 257 U.S. 441, 42 S.Ct. 150, 66 L.Ed. 307 (1922), or in a conspiracy, United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 64 S.Ct. 805, 88 L.Ed. 1024 (1944); nor is there present here any concerted refusal to deal. While it is true that the practical effect of Simplicity's conduct was to exert pressure on appellee to acquiesce to Simplicity's desire that it discontinue the lawsuit, we observe that this kind of "coercion" was present (although for another purpose) in Colgate as well, and Colgate specifically stated that the manufacturer "may announce in advance the circumstances under which he will refuse to sell." 250 U.S. 307, 39 S.Ct. 468.

B. Restraint of Trade

Even if we were to assume that the Colgate rule does not extend to the present facts, or that Colgate no longer represents the controlling law, and that Simplicity's conduct amounted to a "contract, combination, * * * or conspiracy," we cannot say that a refusal to deal under the circumstances present here amounts to an undue restraint of trade. The greater number of the Section 1 "refusal to deal" cases involve retail price maintenance schemes or other methods of eliminating competition. See Barber, Refusals to Deal Under the Federal Antitrust Laws, 103 U.Pa.L.Rev. 847, 857-62 (1955). Appellee does not cite, and we have not found any case in which a "refusal to deal" based on a customer's prosecution of a suit against a manufacturer has been held to constitute an unreasonable restraint of trade. See 62 Colum.L.Rev. 181, 184 (1962). This, when considered, is not astonishing, for the relationship between a manufacturer and his customer should be reasonably harmonious; and the bringing of a lawsuit by the customer may provide a sound business reason for the manufacturer to terminate their relations. Bergen Drug Co. v. Parke, Davis & Co., (D.N.J. October 18, 1961). Congress has not indicated an intention to interfere with ordinary commercial practices. United States v. Bausch & Lomb Optical Co., supra. Indeed, when Congress enacted the Clayton Act, it rejected a provision which would have prohibited arbitrary refusals to sell because it was being projected into a field of legislation "untried, complicated and dangerous."¹⁰ On the other hand, we should...