Island Tobacco Co., Ltd. v. R. J. Reynolds Tobacco Co., 6685

• Decision Date: 20 April 1981
• Docket Number: No. 6685,6685
• Citation: 63 Haw. 289,627 P.2d 260
• Parties: , 1981-1 Trade Cases P 64,121 ISLAND TOBACCO CO., LTD., Plaintiff-Appellee, Cross-Appellant, v. R. J. REYNOLDS TOBACCO COMPANY, R. J. Reynolds Tobacco Company (Hawaii), and R. J. Reynolds Industries, Inc., Defendants-Appellants, Cross-Appellees.
• Court: Hawaii Supreme Court

Page 260

627 P.2d 260

63 Haw. 289, 1981-1 Trade Cases P 64,121

ISLAND TOBACCO CO., LTD., Plaintiff-Appellee, Cross-Appellant, v. R. J. REYNOLDS TOBACCO COMPANY, R. J. Reynolds Tobacco

Company (Hawaii), and R. J. Reynolds Industries,

Inc., Defendants-Appellants, Cross-Appellees.

No. 6685.

Supreme Court of Hawai'i.

April 20, 1981.

Reconsideration Denied May 27, 1981.

Syllabus by the Court

1. The broad prohibitions of HRS § 480-4(a) can be traced to the broad proscriptions against combinations in restraint of trade embodied in § 1 of the Sherman Act, 15 U.S.C. § 1.

2. The antecedents of HRS § 480-9's general condemnation of monopoly and attempts to monopolize are clearly visible in § 2 of the Sherman Act, 15 U.S.C. § 2.

3. HRS § 480-4(b) specifically condemns certain practices deemed per se violations of the federal antitrust law by the Supreme Court.

4. Putative violations of HRS §§ 480-4(a), 480-4(b), and 480-9 should be judged consistently with precepts developed in the enforcement of pertinent federal law. However, federal rulings will not be blindly accepted; they will, as contemplated by the legislature, serve primarily as guides to the interpretation and application of state law in the light of the economic and business conditions of this State.

5. In text, HRS § 480-2 is a virtual counterpart of § 5(a)(1) of the Federal Trade Commission Act. While HRS § 480-3 conveys a legislative intent that interpretations of § 5(a)(1) by the Federal Trade Commission and the federal judiciary should guide our courts, relevant legislative history also renders it clear that HRS § 480-2 must be interpreted and applied in light of conditions in Hawaii.

6. HRS § 480-2 differs from § 5(a)(1) of the Federal Trade Commission Act in one essential aspect, enforcement. The federal act vests power to enforce its provisions in the Federal Trade Commission; it contains no express private remedy. And federal courts historically have found that no right to private actions could be implied from the Act. The enforcement provisions of Hawaii's law, on the other hand, do not impede private suits for treble damages based on violations of HRS § 480-2.

7. HRS § 480-2 is designed to aid "competitors" as much as to protect "competition." Unlike the Federal Trade Commission Act, the policy of the Hawaii law, as expressed in HRS § 480-13, is to foster private suits grounded on unfair or deceptive trade practices, even where the unlawful acts do not culminate in injury to "competition."

8. HRS § 481-3 's roots are firmly imbedded in the California Unfair Practices Act. Like the California statute it followed the Hawaii statute prohibits below-costs sales for the purpose of injuring competitors and destroying competition. Related legislative history clearly establishes it was designed in part to prevent practices that unfairly injure competitors. Thus, § 481-3 may be employed for the protection of individual competitors without the necessity of a showing of injury to the general public.

9. HRS § 481-3 must be read as part of HRS Chapter 481 and in harmony with other provisions thereof.

10. An agreement, combination, or conspiracy in restraint of trade and price-fixing in violation of HRS § 480-4 require a plurality of participants.

11. Courts, for the most part, have hesitated to find conspiracy within a vertically integrated enterprise in the absence of other factors indicating unlawful purpose or design. A parent-subsidiary corporate relationship without more generally has been deemed insufficient to establish a capacity for unlawful conspiracy.

12. To "conspire" within the meaning of HRS § 480-4, corporate entities within a single organization must be sufficiently independent of each other for their concerted action to raise antitrust concerns.

13. The offense of monopoly under HRS § 480-9 has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

14. In concept, the "relevant market" is the area in a line of commerce where effective competition exists and where monopoly power might be exercised. Its definition in a given situation entails the determination of a "geographic market" and a "product market."

15. The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.

16. A practice expressly designated an unfair trade practice by HRS § 481-3 may also be an unfair trade practice under HRS § 480-2.

Harold R. Schmidt, Pittsburgh, Pa. (Rose, Schmidt, Dixon, Hasley, Whyte & Hardesty, Pittsburgh, Pa., of counsel); Vernon F. L. Char and George T. Okamura, Honolulu (Damon, Key, Char & Bocken, Honolulu, of counsel; with them on answering and reply briefs, Max H. Crohn, Jr., Asst. Gen. Counsel for R. J. Reynolds Industries, Inc., Winston-Salem, N. C.), on the briefs, for defendants-appellants, cross-appellees.

Robert Patrick Jaress, Honolulu (Susan M. Ichinose, Honolulu, on opening brief and with him on answering and reply briefs; Mukai, Ichiki, Raffetto & MacMillan, Honolulu, of counsel), for plaintiff-appellee, cross-appellant.

Before RICHARDSON, C. J., and OGATA, MENOR, LUM and NAKAMURA, JJ.

NAKAMURA, Justice.

These interlocutory appeals by both plaintiff and defendants involve the application of several discrete but related provisions of two seldom-used chapters of the Hawaii Revised Statutes, Chapter 480, Monopolies and Restraint of Trade, and Chapter 481, Fair Trade Regulations. The principal questions presented by plaintiff's appeal are whether the circuit court erred in ruling that defendants comprise a single business entity for purposes of antitrust litigation under Chapter 480 and whether the trial court erred in awarding defendants summary judgment on plaintiff's allegations of price-fixing and other concerted activity in violation of HRS §§ 480-4 and 480-9. The primary question presented by defendants' appeal is whether the trial court erred in concluding defendants fostered below-cost sales of cigarettes through a written agreement. Finding no error in the rulings on the major issues in plaintiff's appeal as well as in the rulings on other issues raised by plaintiff, we affirm those portions of the circuit court's orders from which it appeals. But finding the circuit court erred in concluding defendants made below-cost sales of cigarettes, we reversed the court's award of a partial summary judgment to plaintiff and remand the case for further proceedings.

I.

A.

Plaintiff-appellee-cross-appellant Island Tobacco Company, Ltd. (hereafter Island Tobacco) purchases cigarettes and other tobacco products from manufacturers for sale and delivery to approximately 500 retailers on Oahu. Being a "service jobber," the delivery of these wares to retail outlets is an important element of its jobbing function. Essentially, it is involved in the wholesaling of all major brands of cigarettes and other tobacco products to smaller retailers. This litigation stems from a decision reached in 1974 by the largest American manufacturer of cigarettes to engage in, through a wholly owned subsidiary corporation, the "service jobbing" of its cigarettes and other products on Oahu, a function theretofore performed exclusively by Island Tobacco.

Defendant-appellant-cross-appellee R. J. Reynolds Tobacco Company, a New Jersey corporation (hereafter Reynolds Tobacco), is the largest cigarette manufacturer in the United States. It is a wholly owned subsidiary of Defendant-appellant-cross-appellee R. J. Reynolds Industries, Inc., a Delaware corporation (hereafter Reynolds Industries). Prior to January 20, 1975, Reynolds Tobacco distributed its products in Hawaii through an unincorporated division of the company. The distributive process involved sales to military accounts, to wholesalers such as Y. Hata & Co., Ltd. and Certified Corporation, and to large retailers like Foodland and Safeway, as well as to Island Tobacco, then and now the lone "service jobber" on Oahu.

In 1973, Reynolds Tobacco deduced from several events and information at hand ¹ that Island Tobacco was in dire financial straits. Reynolds Tobacco therefore refused to extend further credit and Island Tobacco was compelled to purchase Reynolds' products on a "check with delivery" or "C. O. D." basis after December of 1973. This apparently was a customary practice. Liggett & Meyers, another major cigarette manufacturer, also adopted the same policy with respect to purchases made by Island Tobacco.

In the meanwhile, Reynolds Tobacco observed a decrease in the volume of purchases by Island and a concomitant decline in its share of the Oahu market for cigarettes. It also noted a significant disparity between the performance of its brands of cigarettes in the national market, where they continued to occupy a pre-eminent position, and in the Oahu market. Since cigarettes are considered a pre-sold commodity whose popularity in the market place primarily hinges upon national advertising conducted by manufacturers rather than the efforts of retail sellers, Reynolds Tobacco ascribed the noticeable decline to the service jobber's neglect to fully stock and promote its cigarettes and other product lines.

When an on-the-scene review of the problem in late 1974 by the Assistant National Sales Manager confirmed to its satisfaction that evaluations made by employees in the Hawaii division about Island Tobacco's derelictions were valid, Reynolds Tobacco decided a change in the mode of distributing its product lines on Oahu was in order. It decided to expand the distribution system already in operation to include direct sales to smaller retailers. And a decision to convert the Hawaii division to a wholly owned subsidiary corporation followed. Thus, Defendant-appe...