JBL Enterprises, Inc. v. Jhirmack Enterprises

• Decision Date: 09 July 1981
• Docket Number: No. C-78-1227-WWS,C-80-0249-WWS.,C-78-1227-WWS
• Citation: 519 F. Supp. 1084
• Parties: JBL ENTERPRISES, INC., et al., Plaintiffs, v. JHIRMACK ENTERPRISES, INC., Defendant. Al BOOTH, et al., Plaintiffs, v. JHIRMACK ENTERPRISES, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of California

519 F. Supp. 1084

JBL ENTERPRISES, INC., et al., Plaintiffs, v. JHIRMACK ENTERPRISES, INC., Defendant.

Al BOOTH, et al., Plaintiffs, v. JHIRMACK ENTERPRISES, INC., et al., Defendants.

Nos. C-78-1227-WWS, C-80-0249-WWS.

United States District Court, N. D. California.

July 9, 1981.

COPYRIGHT MATERIAL OMITTED

Kithas & Lamont, San Francisco, Cal., for JBL Enterprises, Inc., et al.

Hugh Latimer, Bergson, Borkland, Margolis & Adler, Washington, D. C., for Al Booth, et al.

Lukens, St. Peter & Cooper, Eugene C. Crew, Mark J. LeHocky, Broad, Khourie & Schulz, San Francisco, Cal., for defendants.

MEMORANDUM OF OPINION AND ORDER

SCHWARZER, District Judge.

These cases are before the Court on defendants' motions for summary judgment.

Pursuant to Pretrial Order No. 1, the Court has heretofore held a separate trial on the issues of the relevant market and the market share of defendant Jhirmack Enterprises, Inc. ("Jhirmack"). The Court determined that for the purposes of these actions the relevant market comprises the sale of beauty products, including but not limited to shampoos and conditioners, to beauty salons and other professional outlets, which is the market in which plaintiffs competed. Defendant Jhirmack's share of that market ranged from 2.3% in 1976 to 4.2% in 1978. Its share of total manufacturers' shipments of beauty products for sale at retail was 0.3%. Plaintiffs contended, however, that the relevant market comprises the sale of shampoos and conditioners to consumers for home use. If that market were accepted, the court determined, it would include all retail sales, including drug and discount stores and other over-the-counter ("OTC") outlets, in addition to beauty salons and professional outlets. In that market, Jhirmack's share of shampoo sales was less than one percent and its share of conditioner sales about two percent. JBL Enterprises, Inc. v. Jhirmack Enterprises, Inc., 509 F.Supp. 357, 366-69, 376 (N.D.Cal.1981).

The Court also determined that Jhirmack's requirement that each distributor order a specified quantity of a new product in his next regular order following the product's introduction constituted a tying arrangement but, because of Jhirmack's lack of market power, did not amount to a per se violation. Accordingly, the lawfulness of that arrangement must be tested, just as the customer and territorial restraints complained of here, under the rule of reason. (509 F.Supp. at 376-79)

Following the issuance of the Court's ruling, all defendants moved for summary judgment on all claims. Because the responses of plaintiffs in the JBL action and of plaintiffs in the Booth action raise different issues, the actions will be separately treated.

I. The JBL Action

This action was filed in 1978 by a group of Jhirmack distributors in Utah, Idaho and Indiana. The amended complaint charged that beginning in 1974 Jhirmack (1) coerced plaintiffs into accepting unreasonable territory and customer restrictions precluding plaintiffs from discounting Jhirmack products by diverting them outside of the assigned channels of trade, i. e., distributing them to others than beauty salons and other professional outlets, and (2) fixed prices by eliminating discounting of its products thereby inhibiting its distributors from competing. In addition plaintiffs charged a tying violation: that as a condition of purchasing Jhirmack's products and using its tradenames and trademarks, plaintiffs were required to make one-time purchases of certain undesired products. (509 F.Supp. at 376) These plaintiffs also alleged that Jhirmack made fraudulent representations regarding the setting of quotas for the sale by distributors of Jhirmack's products.

A. The Antitrust Claims

Defendants have moved to dismiss the antitrust claims principally on the ground that in view of Jhirmack's insignificant market share the evidence as a matter of law establishes that the alleged restraints could not have had the requisite adverse effect on competition in the relevant market. See Gough v. Rossmoor Corp., 585 F.2d 381, 389 (9th Cir. 1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59 L.Ed. 494 (1979); DeVoto v. Pacific Fidelity Life Ins. Co., 618 F.2d 1340 (9th Cir.) cert. denied, 449 U.S. 869, 101 S.Ct. 206, 66 L.Ed.2d 89 (1980).

The JBL plaintiffs make two arguments in response:

(1) That the restrictions imposed by Jhirmack had a substantial effect on competition;

(2) That Jhirmack combined with certain distributors in enforcing territory and customer restrictions to eliminate discounting, thus forming a resale price fixing scheme which was a per se violation of the antitrust laws.

1. Effect on Competition

The JBL plaintiffs contend, in substance, that although Jhirmack enjoyed less than 2% of the retail market for shampoos and conditioners, it possessed sufficient market power for its restrictions to have a substantial impact on competition because it faced no interbrand price competition in the sale of shampoos and conditioners to professional outlets. As they put it:

Despite such small market share, Jhirmack possessed the market power to raise retail prices above the competitive price prevailing. (Memorandum, p. 19)

The "competitive level" of prices against which plaintiffs measure Jhirmack's prices are the prices of similar products in OTC outlets. The argument is that Jhirmack shampoos and conditioners were sold at higher prices than other brands, even other salon brands, and that it was only when Jhirmack shampoos and conditioners were available at lower prices at drugstores and supermarkets, through diversion, that the salons' ability to sell Jhirmack products at a premium price was affected. Plaintiffs conclude that the only price competition faced by Jhirmack products at retail was intrabrand competition.

In support of these conclusions plaintiffs refer in kaleidoscopic fashion to facts showing the following:

(1) The prices of shampoos and conditioners sold in salons have been higher as a group than the prices of those sold in OTC outlets, both at wholesale and at retail.

(2) In the period extending through 1979, Jhirmack products were sold in salons at prices substantially higher than the prices at which diverted Jhirmack products were sold in OTC outlets.

(3) Through 1979, Jhirmack tended to set its suggested salon retail prices somewhat higher than those of two of its competitors, Redken and KMS.

Plaintiffs' argument is fallacious. That salon brands may sell at higher prices than OTC products and that Jhirmack products sold in salons may, due to a strong consumer preference, command higher prices than certain other shampoos and conditioners and Jhirmack products sold at OTC outlets does not prove the absence of interbrand price competition, let alone that Jhirmack has any power to raise prices in the market for shampoo and conditioner.

The prices at which a product sells is a function of supply and demand. That a product is sold at a higher price than other functionally interchangeable products is a reflection of the value the market attaches to that product when sold in a particular volume — it is not probative of the absence of price competition or of power to control price in the market. Every manufacturer of course possesses power over the price at which he sells his products but that is not the power with which the antitrust laws are concerned.

Based on the evidence at the earlier trial, the Court previously found that shampoos and conditioners were functionally interchangeable, that the salon market was not a distinct submarket, and that price competition and price sensitivity exists across the entire retail market for shampoos and conditioners. (509 F.Supp. at 375) In the light of those findings, and the record as a whole, no jury could reasonably find that Jhirmack is subject only to intrabrand competition and possesses significant market power. See Ron Tonkin Gran Turismo v. Fiat Distributors, 637 F.2d 1376, 1388 (9th Cir. 1981). Based on this record, the restrictions complained of must be held as a matter of law not to constitute an unreasonable restraint of trade.

2. Vertical Price Fixing

The JBL plaintiffs also assert a vertical price fixing claim cognizable as a per se violation. In substance, the argument is that by controlling diversion to discounting wholesalers and retailers, Jhirmack stabilized and maintained resale prices.

The evidence shows that Jhirmack took steps to prevent diversion of its products, frequently at the instance of its distributors who complained when products appeared in other stores at discount prices. There is no evidence, however, that Jhirmack fixed the resale prices for its products or enforced compliance with a particular price schedule.¹

Plaintiffs' argument is premised on United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 64 S.Ct. 805, 88 L.Ed. 1024 (1944), and United States v. Arnold Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967). In Bausch & Lomb the defendant Soft-Lite Lens Company, Inc., which distributed lenses specially manufactured for it by Bausch & Lomb, required its distributors to charge published list prices and its retailers to sell at the prevailing local prices. An elaborate system of control and surveillance was used to enforce adherence to this price-fixing scheme. This price-fixing conduct was held to constitute a per se violation. The Schwinn case held vertical territory and customer restraints upon the sale by distributors of goods purchased by them from Schwinn to be a per se violation. That holding was overruled in Continental T. V. Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58, 97 S.Ct. 2549, 2561, 53 L.Ed.2d 568 (1977), a case plaintiffs did not feel it necessary to cite in this connection.

The undisputed facts show that the restrictions in the JBL case were non-price restrictions. Jhirmack did not establish or enforce resale prices. Price and nonprice restrictions may reflect the same motivation on the part of...