Hudson Distributors, Inc. v. Eli Lilly & Co.

• Citation: 209 N.E.2d 234,4 Ohio Misc. 73
• Decision Date: 14 July 1965
• Docket Number: No. 730118,730118
• Parties: , 33 O.O.2d 104 HUDSON DISTRIBUTORS, INC., a corporation, Plaintiff, v. ELI LILLY & COMPANY, a corporation, Defendant.
• Court: Court of Common Pleas of Ohio

Page 73

4 Ohio Misc. 73

209 N.E.2d 234, 33 O.O.2d 104

HUDSON DISTRIBUTORS, INC., a corporation, Plaintiff, v. ELI LILLY & COMPANY, a corporation, Defendant.

No. 730118.

Court of Common Pleas of Ohio, Cuyahoga County.

July 14, 1965.

Lane, Krotinger & Santora, Cleveland, for plaintiff, Ernest C. T. Santora, John E. Purdy, Morlee A. Rothchild, Cleveland, of counsel.

Henderson, Quail, Schneider & Peirce, Cleveland, for defendant, Louis S. Peirce, Phillip A. Ranney, Cleveland, Raymond E. Rauch, Indianapolis, Ind., of counsel.

DONALD F. LYBARGER, Judge.

In an action to enforce the Ohio Fair Trade Act, where an injunction is sought and relief equitable in nature is possible, the decision depends to the greatest extent upon the facts involved in the individual case. There are no reported Ohio cases in point on the subject. All too frequently opinions from other jurisdictions which have come to the attention of the Court in this field of law have lacked a satisfactory review of the facts involved, hence are of limited value as precedents. The Court, therefore, sets forth at length the basic facts on which its decision is made.

History of the Case

This suit was brought in October, 1959 by Hudson Distributors, Inc. (hereafter called Hudson) against Eli Lilly & Co. (hereafter called Lilly) to obtain a declaratory judgment which would construe the Ohio Fair Trade Act, Revised Code §§ 1333.27 to 1333.34 that became effective October 22, 1959, and declare the Act constitutional. After the filing of an amended petition in January, 1960 Lilly answered and cross-petitioned. By agreement the case went to trial only on the constitutional question and in July, 1960 this Court declared the Fair Trade Act unconstitutional. On review the Court of Appeals of this county, by a two to one decision (reported in 117 Ohio App. 207, 176 N.E.2d 236) on May 8, 1963 reversed this Court and held the law constitutional. In the Supreme Court of Ohio four of the judges declared the Fair Trade Act unconstitutional and three determined it was valid. By reason of Article IV, Section 2 of the Constitution of Ohio (requiring the concurrence of all but one of the judges to pronounce a law void except when affirming a judgment of the Court of Appeals that declares a law unconstitutional) the Fair Trade Act of 1959 was held to be constitutional (174 Ohio St. 487, 190 N.E.2d 460). The Supreme Court of the United States on June 1, 1964 held that '[t]he price fixing authorized by the Ohio Fair Trade Act and involving goods moving in interstate commerce would be, absent approval of Congress, clearly illegal under the Sherman Act. * * * Congress, however, in the McGuire Act has approved state statutes sanctioning resale price maintenance schemes such as those involved here.' Therefore the Court affirmed the Supreme Court of Ohio (377 U.S. 386, 84 S.Ct. 1273, 12 L.Ed.2d 394).

In July, 1963 a visiting judge assigned to this Court tried the second phase of the case wherein the defendant Lilly seeks on its cross-petition to recover from the plaintiff, Hudson Distributors, Inc., affirmative relief under favor of R.C. §§ 1333.27 to 1333.34. After a judgment for Lilly a new trial was granted. For four weeks in June, 1965 this Court heard testimony on the issues raised by Lill's cross-petition, Hudson's answer thereto, and Lilly's reply.

Statement of Facts

Hudson, a Michigan corporation, is owner of a small retail drug store at 415 Euclid Avenue, Cleveland, Ohio (opened in March, 1959), where it sells vitamins, drugs, patent and proprietary medicine and many other items which are manufactured by numerous firms in interstate commerce, and on which minimum retail prices have been set. Presently it does not dispense prescriptions. A year and one-half after the filing of this action it became a subsidiary of Revco D. S., Inc.; and, although separately owned, it has since June, 1961 been known as a 'Revco Discount Drug Center' and has been so identified in newspaper and other advertising. Hudson continues to operate the store involved in this case.

Lilly, an Indiana corporation doing business in the Cleveland area, manufactures pharmaceutical and other commodities and distributes them in Ohio and throughout the United States. Lilly identifies almost all of its commodities by its trade mark, trade names and brand names; excepting prescription items, they are in free and open competition with commodities of the same general class produced by others and offered for sale in the same general market area; and such commodities have been promoted and advertised throughout the United States in trade journals, magazines of national circulation and other media. There is no evidence, however, that Lilly has made any other specific effort in this community to create good will for the manufacturer or its products.

October 1, 1959 Lilly gave written notice to Hudson and all other known pharmaceutical outlets selling its commodities in Ohio, that its policy was to establish minimum retail resale prices for its commodities pursuant to R.C. §§ 1333.27 to 1333.34, and that it had set up such prices; and it invited them to enter into so-called fair trade contracts with Lilly. Hudson did not sign such an agreement with Lilly or any other firm. Many other pharmaceutical outlets in Cuyahoga County, however, did make such contracts with Lilly. Lilly witnesses professed not to be informed as to how many signed fair trade contracts it had in this area. The testimony, however, brought out the names of at least a dozen drug outlets which had entered such contracts in 1959 or early in 1960, among them several of the largest chains with stores throughout the community. In its opinion on the constitutional question in this case the United States Supreme Court noted that more than 65% of all retail pharmacists in Ohio had signed fair trade contracts with Lilly. After receiving the above-mentioned notice, Hudson acquired commodities bearing Lilly's trade names, trade mark and brand names, and from then until the present time has offered for sale, advertised and sold the same for less than the established minimum resale prices. From time to time down to the present Lilly has informed Hudson of changes in its resale prices.

Lilly notified Hudson not to sell its products below fair trade prices but Hudson has continued to do so. Presently Hudson prominently displays Lilly products in its store, illustrates the same in its printed advertising and invites the public to purchase Lilly and other pharmaceuticals at reduced prices.

Lilly maintains a district office in the Cleveland area and employs a force of 18 salesmen who call on physicians, dentists and retail drug outlets. They make frequent calls to introduce and promote the sale of Lilly products and at times take orders for the same. Retail stores, however, deal generally with wholesalers in this area, from whom they buy Lilly products at uniform established wholesale prices. For a brief period prior to July, 1963 Lilly's salesmen were instructed to check on discount price sales in the area. They have not done so since.

There are in Cuyahoga County about 500 retail drug stores. Of this number approximately 145 are affiliated with chains as follows: Leader Discount 35, Marshall 26, Revco 25, Gray Rexall 19, Sherwood 11, Miller 9, Jay 6, Rudd 4, Shauter 4, Avellone 3, and Baskind 3. The corporate set-up of these chains and the ownership of individual stores in them are not established by testimony. In addition, pharmaceuticals, and particularly vitamins, are sold in other outlets that do not hold themselves out primarily as drug stores.

As early as 1958, before the coming of Hudson, more than a dozen drug stores throughout the area were advertising cutrate drugs, among them a store run by one of Lilly's witnesses.

After the present Fair Trade Act became effective in 1959, almost immediately the selling of pharmaceuticals and other fair-traded products at less than established resale prices became quite general. For example, the operator of one large chain on February 12, 1960 signed a contract with Lilly agreeing to abide by its minimum resale prices and by March 24, 1960 was violating the contract by cutting below these prices.

The testimony, particularly of Hudson's witnesses but also of Lilly's, clearly establishes that from 1960 to date selling at reduced prices, under the established minimum resale prices of Lilly and many other competing manufacturers, has been open, notorious, continuous, general and popular throughout Cuyahoga County. It is practiced by small individually owned stores and by outlets affiliated with all of the so-called chains. By shopping in all parts of the area and in all types of stores Hudson's witnesses established without challenge that they had made purchases at reduced prices in well over one hundred outlets, including places whose owners had fair trade contracts with Lilly. On behalf of Lilly eight pharmacists appeared, one the operator of a large chain. All testified they had entered into fair trade contracts with Lilly and had proceeded almost immediately to violate the same without having terminated the contract by notice. Each justified his breach of contract on essentially the same ground: 'Our retail competitors are sellinb below minimum resale prices. Upon satisfactory proof that our competitors have stopped discounting Lilly products then we shall comply.' Several singled out Hudson or Revco for special blame as discounters. Although it has been well aware of such breaches of contract Lilly at no time has sought to enforce in court the clear terms of its written agreements against any such violators.

In addition to selling at reduced prices, the evidence establishes that many stores (some individually owned and others in large chains) throughout the community have been offering concessions in the form of trading stamps or merchandise exceeding in extrinsic value the amount permitted by ...