Island Tobacco Co. v. RJ Reynolds Industries

• Decision Date: 25 August 1981
• Docket Number: Civ. No. 78-0088.
• Citation: 513 F. Supp. 726
• Parties: ISLAND TOBACCO CO., LTD., Plaintiff, v. R. J. REYNOLDS INDUSTRIES, INC., R. J. Reynolds Tobacco Co., R. J. Reynolds Tobacco Co. (Hawaii), Defendants.
• Court: U.S. District Court — District of Hawaii

513 F. Supp. 726

ISLAND TOBACCO CO., LTD., Plaintiff, v. R. J. REYNOLDS INDUSTRIES, INC., R. J. Reynolds Tobacco Co., R. J. Reynolds Tobacco Co. (Hawaii), Defendants.

Civ. No. 78-0088.

United States District Court, D. Hawaii.

April 21, 1981.

As Amended August 25, 1981.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

R. Patrick Jaress, Susan M. Ichinose, Ann L. Kurihara, Mukai, Ichiki, Raffetto & Macmillan, Honolulu, Hawaii, for plaintiff.

Vernon F. L. Char, Michael K. Kawahara, Damon, Key, Char & Bocken, Honolulu, Hawaii, Max H. Crohn, Jr., Winston-Salem, N. C., Harold R. Schmidt, Rose, Schmidt, Dixon, Halsey, Whyte & Hardesty, Pittsburgh, Pa., for defendants.

ORDER DENYING IN PART AND GRANTING IN PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND ALSO DENYING IN PART AND GRANTING IN PART DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

SAMUEL P. KING, Chief Judge.

I. Factual Background

Plaintiff, Island Tobacco Co., Ltd., has brought this suit against Defendants R.J. Reynolds Industries, Inc., R.J. Reynolds Tobacco Co., and R.J. Reynolds Tobacco Co. (Hawaii) claiming violations of federal and state antitrust laws.

Island Tobacco Co., Ltd. ("Island Tobacco") is a Hawaii corporation with its principal place of business in Honolulu, Hawaii. Island Tobacco sells cigarettes and tobacco products as a wholesaler and more specifically as a service jobber. A service jobber is distinguished from other types of tobacco wholesalers by the fact that it makes store-door deliveries to independent retailers. The company purchases approximately 80 brands of cigarettes from six major cigarette manufacturing companies¹ and delivers these cigarettes to 500-600 individual retailer accounts such as grocery stores, restaurants, and supermarkets in Oahu, Hawaii. Island Tobacco also sells and distributes other products such as cigars, pipe tobacco, chewing tobacco, lighters, pipes and pipe cleaners, and candy, but at all times relevant to this action the bulk of Island Tobacco's business was the sale of cigarettes. Island Tobacco has been in the cigarette service jobbing business for approximately 28 years. Prior to January 1975, it was the only such service jobber in Hawaii.

Island Tobacco is owned by Harold T. Okimoto, who is the sole stockholder, president and overall financial manager of the company. Harold's brother, Thomas Okimoto, is vice-president and general manager and is responsible for the day-to-day business operations.

Defendant R.J. Reynolds Industries, Inc. ("RJR Industries") is a Delaware corporation with its principal place of business in Winston-Salem, North Carolina. RJR Industries was incorporated in 1970, and is a holding company for a number of subsidiaries including R.J. Reynolds Tobacco Co.

R.J. Reynolds Tobacco Co. ("RJR Tobacco") is a New Jersey corporation with its principal place of business in Winston-Salem, North Carolina. RJR Tobacco is a wholly-owned subsidiary of RJR Industries. RJR Tobacco is one of the six major cigarette manufacturers in the United States. In 1974, RJR Tobacco enjoyed approximately a 33 1/3 percent share of the national market for tobacco products. RJR Tobacco is presently the largest tobacco manufacturer in the United States; it sells about one-third of all the cigarettes sold in the United States.

R.J. Reynolds Tobacco Co. (Hawaii) ("RJR Hawaii") is a Delaware corporation with its principal place of business in Hawaii. RJR Hawaii is a wholly-owned subsidiary of RJR Tobacco. It was incorporated on January 9, 1975, and was registered to do business in the State of Hawaii on January 14, 1975. RJR Hawaii functions as a service jobber and is operationally very similar to Island Tobacco except for the fact that RJR Hawaii sells only RJR Tobacco's products. RJR Hawaii sells its products only in the State of Hawaii.

Prior to January 1975, RJR Tobacco had been selling its products to Island Tobacco and other "direct accounts" through an unincorporated division. In December 1973, RJR Tobacco terminated Island Tobacco's credit, and placed it on an "all cash" basis. Due to what it saw as distribution problems with Island Tobacco, RJR had decided as early as November 1974 to set up its own distribution system in Hawaii.

The new direct distribution system, which became operational on January 20, 1975, required RJR Hawaii to solicit retail customers and to call on each retail outlet at least once weekly at which time cigarettes and other items were sold to the retailer directly from a company truck.² RJR Tobacco normally distributes its products through independent wholesalers and service jobbers. Prior to the set-up of the Hawaii operation, the only other area where RJR Hawaii had initiated an inhouse wholesale operation was in Puerto Rico.

Part of the agreement in setting up RJR Hawaii required that a "transfer price" be fixed for products sold by RJR Tobacco to RJR Hawaii. In addition, the agreement provided that RJR Tobacco would reimburse RJR Hawaii for all expenses such as warehousing, distribution, and selling.

Plaintiff claims that the "transfer price" is discriminatory under section 2 of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. §§ 13(a)-(f) (1970). Plaintiff also claims that the "low" transfer price together with the cost reimbursement agreement have allowed Defendants to set their prices at predatory below cost rates in violation of Hawaii Rev.Stat. § 480-2.

Plaintiff also alleges in its complaint that Defendants have violated sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2. Appended to Plaintiff's complaint are state claims for violations of Hawaii Rev.Stat. § 480-4 (conspiracy in restraint of trade), and Hawaii Rev.Stat. § 480-9 (monopolization and attempt to monopolize).

Plaintiff's complaint is set forth in four counts:

(1) Count I alleges below cost pricing in violation of Hawaii Rev.Stat. § 481-3 and the Robinson-Patman Act, 15 U.S.C. § 13.

(2) Count II alleges a conspiracy to fix prices and restrain trade and a conspiracy to monopolize in the State of Hawaii in violation of the Sherman Act, 15 U.S.C. § 1 and Hawaii Rev. Stat. §§ 480-4 and 480-9.

(3) Count III alleges monopolization and an attempt to monopolize in violation of the Sherman Act, 15 U.S.C. § 2 and Hawaii Rev.Stat. § 480-9.

(4) Count IV alleges discriminatory pricing with the intent to destroy competition in violation of section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13 and Hawaii Rev.Stat. § 481-1.

Defendants have moved for Summary Judgment on each of these four counts.

II. Plaintiff's Motion for Partial Summary Judgment

Plaintiff moves this Court for Partial Summary Judgment pursuant to Rules 56(a) and 56(d) Fed.R.Civ.P. on the following issues:

1. The "transfer price" is discriminatory within the meaning of section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act; and

2. The "transfer price" that Defendant RJR Tobacco charges its Hawaii service jobber, RJR Hawaii, is predatory in nature and an unfair method of competition in violation of Hawaii Rev.Stat. § 480-2.

The facts underlying this Motion for Summary Judgment are not in dispute. After RJR Hawaii became operational on January 20, 1975, the parent company, which had previously been doing business with Island Tobacco through an unincorporated division, stopped selling cigarettes to Island Tobacco and other "direct" accounts and began selling solely to RJR Hawaii. RJR Hawaii then took over the operations of the unincorporated division and began selling cigarettes to these "direct" accounts which included large volume purchasers such as drug stores, food chains, and wholesalers. As part of the new direct distribution system, RJR Hawaii began soliciting and selling to 500-600 retail accounts, many of which were also accounts of Island Tobacco.

RJR Hawaii began its business in Hawaii with an offer to sell cigarettes to retail customers at "attractive" prices. Immediately prior to RJR Hawaii becoming operational, RJR Tobacco was selling its king size and regular cigarettes to "direct" accounts for $2.33 per carton. As of January 20, 1975, RJR Tobacco stopped selling cigarettes to these "direct" accounts and began selling to RJR Hawaii for $2.33 per carton. RJR Hawaii resold these cigarettes for the same $2.33 per carton to the former "direct" accounts of RJR Tobacco. After January 20, 1975, RJR Hawaii sold cigarettes to its retail accounts for $2.36 per carton, a three-cents mark-up as fixed by RJR Tobacco.

Prior to RJR Hawaii becoming operational in January 1975, Plaintiff purchased its cigarettes through RJR Tobacco's unincorporated division for $2.33 per carton. After January 20, 1975, Plaintiff was forced to purchase its cigarettes from RJR Hawaii for $2.33 per carton. Plaintiff claims that it has been unable to compete with the low "attractive" price of $2.36 offered by RJR Hawaii to its retail customers. In 1969, approximately 20 percent of Island Tobacco's business involved the sale of RJR Tobacco's cigarettes. Plaintiff claims to have lost approximately 95 percent of this business since RJR Hawaii's prices went into effect.

RJR Tobacco and RJR Hawaii entered into a "cost compensation" agreement which was memorialized in a July 15, 1975, writing. Paragraph 4 of that contract states in pertinent part that "RJR Tobacco will pay RJR Hawaii for the services listed in paragraphs 1 and 2, above, an amount which, since January 14, 1975, have sic equalled, and hereinafter may continue to equal, the costs incurred by RJR Hawaii in performing such services."³

In a companion case filed in state court, the Circuit Court of the First Circuit ruled that "because of these payments for its expenses associated with its service jobbing activities, R. J. Reynolds (Hawaii) has been able to continue its sales of tobacco products in the service jobber market at a 1% markup, which is below its fully allocated cost of doing business." Island Tobacco Co.,...