JBL Enterprises, Inc. v. Jhirmack Enterprises Inc.

• Decision Date: 08 February 1983
• Docket Number: 82-4107,Nos. 82-4102,s. 82-4102
• Citation: 698 F.2d 1011
• Parties: 1982-83 Trade Cases 65,199 JBL ENTERPRISES, INC., dba Jhirmack of Utah; Jean Robinson, dba Jhirmack of Idaho and Jhirmack of Boise; Lois Jean Million, dba Jhirmack of North Central Indiana, Plaintiffs-Appellants, v. JHIRMACK ENTERPRISES, INC., Defendant-Appellee. Al BOOTH and Thelma R. Bean, individually; Jhirmack of Washington, D.C., Inc.; Walter R. Cecchini, Jr., individually; and Jhirmack of Southwestern Pennsylvania, Inc., Plaintiffs-Appellants, v. JHIRMACK ENTERPRISES, INC.; Irene Redding, Albert L. Schwartz, and Gary McCord, individually; International Playtex, Inc.; Joel E. Smilow, individually; and Esmark, Inc., Defendants- Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1011

698 F.2d 1011

1982-83 Trade Cases 65,199

JBL ENTERPRISES, INC., dba Jhirmack of Utah; Jean Robinson,

dba Jhirmack of Idaho and Jhirmack of Boise; Lois

Jean Million, dba Jhirmack of North

Central Indiana, Plaintiffs-Appellants, v. JHIRMACK ENTERPRISES, INC., Defendant-Appellee.

Al BOOTH and Thelma R. Bean, individually; Jhirmack of

Washington, D.C., Inc.; Walter R. Cecchini, Jr.,

individually; and Jhirmack of

Southwestern Pennsylvania, Inc., Plaintiffs-Appellants, v. JHIRMACK ENTERPRISES, INC.; Irene Redding, Albert L.

Schwartz, and Gary McCord, individually;

International Playtex, Inc.; Joel E.

Smilow, individually; and

Esmark, Inc.,

Defendants-

Appellees.

Nos. 82-4102, 82-4107.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 17, 1982.

Decided Feb. 8, 1983.

John A. Kithas, Kithas & Lamont, San Francisco, Cal., Hugh Latimer, Bergson, Borkland, Margolis & Adler, Washington, D.C., for JBL.

Eugene Crew, Mark J. LeHockey, Khourie & Crew, San Francisco, Cal., for International Playtex.

William Lukens, Lukens, St. Peter & Cooper, San Francisco, Cal., for Jhirmack Enterprises.

Appeal from the United States District Court for the Northern District of California.

Before MERRILL, DUNIWAY and FERGUSON, Circuit Judges.

FERGUSON, Circuit Judge:

These appeals arose out of a common scenario. The plaintiffs in both actions are former distributors of defendant Jhirmack Enterprises, Inc. ("Jhirmack"). When their contractual relationships broke down, the disappointed parties sought solace (and treble damages) from the court, alleging various antitrust violations and related contract and tort claims. Following summary judgment in favor of the defendants, the plaintiffs appeal. We affirm.

FACTS:

Jhirmack manufactures hair care and cosmetic products which are distributed throughout the United States by licensed distributors. The company was founded in 1968 by Jheri and Irene Redding. From 1972 to 1979 Jhirmack followed a marketing strategy of making its products available through beauty salons, barber shops, beauty schools, barber schools and hair styling establishments (the "professional salon trade" or "PST") rather than through other types of outlets, such as drugstores, department stores and the like ("over-the-counter" or "OTC" outlets). Such a limited outlet strategy is often adopted by new firms who wish to avoid the large advertising costs necessary to break into the heavily competitive OTC market in hair care and beauty products. To this end Jhirmack contracted with several independent distributors, including the three JBL plaintiffs and the Booth plaintiffs, giving each an exclusive geographic territory and requiring each to "exclusively devote its entire time and use its best efforts to promote and sell" Jhirmack's products to PST outlets in their respective territories. The contracts also provide that Jhirmack "will not appoint another distributor within the territory," and set minimum purchase quotas for each distributor, based on Jhirmack's estimate of potential PST accounts within the assigned territory.

In 1976-77, Jhirmack received complaints from salon owners and distributors that its products were appearing in OTC outlets. Salons charge premium prices for products sold to their customers and prefer the prestige that flows from carrying products not generally available. It is difficult for PST outlets to maintain either prices or prestige if the product can be found in the local supermarket at a substantially lower price. Many PST outlets will therefore refuse to carry products that are generally available OTC. On receiving complaints Jhirmack took steps to determine which distributors were "diverting" its products to OTC outlets and to discourage them from doing so.

In 1978, Jhirmack terminated the JBL distributors for refusing to follow Jhirmack's marketing plan and for failing to meet its order quotas for their respective territories. JBL filed suit, alleging that the terminations were the result of illegal territorial and customer restrictions, resale price maintenance and illegal tying arrangements in violation of federal antitrust law, and fraud or negligent misrepresentation in setting minimum purchase quotas.

By 1979, Jhirmack had developed sufficient name recognition to move into the OTC market. After negotiations with several companies, it entered an agreement with International Playtex, Inc. ("Playtex") in October, 1979. In exchange for the exclusive right to distribute Jhirmack shampoos and conditioners to OTC outlets, Playtex agreed to conduct a nationwide marketing campaign, pledging to spend seven million dollars the first year and fifteen percent of annual net sales in succeeding years promoting the products. The contract specifically excluded the professional salon trade, and Jhirmack continued to use independent distributors for its PST distribution.

In November 1979, Jhirmack sent new distributor agreements to its PST distributors, requiring them to recognize Playtex as the exclusive OTC distributor of Jhirmack shampoos and conditioners. Booth refused to sign the new agreement and so was terminated by Jhirmack in December 1979. Booth then filed suit alleging that the contract between Jhirmack and Playtex violated the Sherman and Clayton Acts and breached its own contract with Jhirmack.

The JBL and Booth actions were consolidated for a limited trial on the relevant market and tying issues. JBL Enterprises v. Jhirmack Enterprises, Inc., 509 F.Supp. 357 (N.D.Cal.1981). The definition of the relevant market was crucial to a determination of whether Jhirmack possessed sufficient market power that its vertical nonprice restrictions could amount to an unreasonable restraint of trade. At the time no claims of per se antitrust violation had been made except for the tying claim. The district court concluded that the relevant market was the market for the sale of beauty products (including but not limited to shampoos and conditioners) to PST outlets. Under this definition Jhirmack's market share in 1976-78 was found to be 2.3%, 3.2% and 4.2%, respectively.

Jhirmack then moved for summary judgment against the JBL plaintiffs on the ground that in light of Jhirmack's insignificant market share the alleged restraints could not as a matter of law have had the requisite adverse effect on competition. JBL sought to avoid dismissal on two theories: (1) that Jhirmack's small market share did not establish lack of market power because it faced no interbrand competition; and (2) that Jhirmack engaged in price-fixing, a per se violation. The court rejected both theories. On the fraud claim the court found that JBL had presented no facts on two essential elements. Summary judgment was therefore entered on all counts. JBL Enterprises v. Jhirmack Enterprises, Inc., 519 F.Supp. 1084 (N.D.Cal.1981).

In the Booth action, in opposition to defendants' motion for summary judgment, the plaintiffs raised a per se claim of price-fixing, alleging that Jhirmack and Playtex conspired to foreclose price competition between Playtex and Booth in the OTC market in violation of Sherman Act Sec. 1. The court granted summary judgment for the defendants on this issue, as well as on a claim against Playtex for inducing breach of contract, and a claim that Booth's termination breached an implied covenant of good faith and fair dealing. Summary judgment was denied on the claim that Playtex's appointment breached the exclusive territory clause of the Booth-Jhirmack contracts, but this claim was later dismissed and that dismissal has not been appealed.

Both sets of plaintiffs appeal the respective grants of summary judgment; the JBL plaintiffs also attack the district court's determination of the relevant market.

ANALYSIS:

I. The JBL Action

A. Per Se Price-Fixing

In Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977), the Supreme Court, while it did "not foreclose the possibility that particular applications of vertical restrictions might justify per se prohibition," id. at 58, 97 S.Ct. at 2561, held that in general such nonprice restrictions imposed by a manufacturer on distributors or retailers must be tested under the Rule of Reason. The Court found that, while vertical restrictions reduced intrabrand competition, they had redeeming virtues in that they tended to promote interbrand competition. Dealers would be more likely to expend the effort necessary to promote or service a product if they did not have to worry about other dealers of the same product taking a "free ride" on their efforts. Thus the manufacturer who imposed customer or territorial restrictions would be better able to enter the market as a new competitor or maintain its presence as an existing competitor with other manufacturers.

JBL attempts to place itself outside the reach of GTE Sylvania by allegations of a conspiracy among Jhirmack, other distributors, and salons to eliminate JBL as a competitor so as to reduce price competition. Its attempt fails.

First, the district court found "no evidence ... that Jhirmack fixed the resale prices for its products or enforced compliance with a particular price schedule." 519 F.Supp. at 1088. Nor was there any indication that suggested prices were in fact adhered to. Thus JBL cannot rely on United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 64 S.Ct. 805, 88 L.Ed. 1024 (1944), where nonprice restraints were imposed to facilitate a vertical price-fixing scheme.

Second, JBL was not a competitor of the complaining salons. Rather, the salons were customers of distributors like JBL. Although the salons may have been concerned with maintaining the prices they charged consumers, the price competition they faced was not from JBL but from other retailers, especially OTC outlets that carried competing brands.

Third, the other distributors, who would have been in competition with JBL but for the territorial restrictions, were not...