Johnson v. Nationwide Industries, Inc.

• Decision Date: 29 August 1983
• Docket Number: No. 81-1347,81-1347
• Citation: 715 F.2d 1233
• Parties: 1983-2 Trade Cases P 65,580 Robert W. JOHNSON, et al., Plaintiffs-Appellees, v. NATIONWIDE INDUSTRIES, INC., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1233

715 F.2d 1233

1983-2 Trade Cases P 65,580

Robert W. JOHNSON, et al., Plaintiffs-Appellees, v. NATIONWIDE INDUSTRIES, INC., et al., Defendants-Appellants.

No. 81-1347.

United States Court of Appeals Seventh Circuit.

Argued Sept. 28, 1981.

Decided Aug. 29, 1983.

Robert W. Berliner, Jr., Levy & Erens, Sheldon O. Collen, Friedman & Koven, Chicago, Ill., for defendants-appellants.

Thomas H. Fegan, Johnson, Cusack & Bell, Ltd., Chicago, Ill., for plaintiffs-appellees.

Before BAUER, Circuit Judge, FAIRCHILD, Senior Circuit Judge, and BROWN, Senior District Judge. ^*

FAIRCHILD, Senior Circuit Judge.

This is an appeal from denial of defendants' motions to dismiss or for summary judgment. ¹

Each of the two plaintiffs (suing also as class representatives) purchased and owns one unit of a high-rise condominium on Chicago's lakefront. It contains 940 units. They complain that defendants, some of whom were involved in the conversion of a rental building into this condominium in 1973 and some in later sales, ² violated § 1 of the Sherman Act by tying a building management contract to the sale of the units. ³ Defendants contend that the sale of a unit subject to a proportionate obligation under a pre-existing management contract is a sale of a single product.

On August 23, 1973, a trustee executed a declaration of condominium ownership for the building in question. Shortly thereafter the developer defendants contracted with one of their number, Moss Financial Corporation, for the management of the condominium's common elements. By its terms, the contract was to extend until five years after the date by which 80% of the units had been sold by the developer. About two and one-half years after the conversion to a condominium, the developer defendants sold the last 430 unpurchased residential units and all of the commercial properties except the garage to the Invsco defendants and assigned the management contract to American Invsco Management, Inc., one of the Invsco defendants. The condominium's developer-controlled board of directors ⁴ (Johnson Dep. 109-14, 214-18) approved the assignment and agreed with the assignee to interpret the contract so that it would extend for the five years beginning January 1, 1976 and ending December 31, 1980. After December 31, 1980, American Invsco Management, Inc., ceased managing the condominium's common areas.

In denying defendants' motions for summary judgment, the district court rejected defendants' argument that there could be no tying arrangement because only a single product was sold. Noting that "a tying arrangement may avoid per se unreasonable status if it is shown to be reasonable and justifiable as a business necessity," the court concluded that the reasonableness of the management contract purchased from defendants is a factual issue.

A tying arrangement conditions the sale of a tying product upon the buyer's purchase of a distinct tied product. Northern Pacific Railway v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). Courts associate tying with the exclusion of competitors from the market in the tied product and the restraint of buyers' independent judgment, both of which the courts perceive as fundamental economic evils. Therefore they have condemned such arrangements. Id. at 6, 78 S.Ct. at 518. In rejecting tying arrangements, courts often refer to tying by a party with "sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product," as a per se antitrust violation whenever "a 'not insubstantial' amount of interstate commerce is affected." Id.

The Illinois Condominium Property Act obligates each unit owner to pay his proportionate share of the common expenses. Ill.Rev.Stat. ch. 30, § 309. We have no doubt that such expenses include charges under management contracts executed by the developer, initially, or, later, by the board of managers pursuant to §§ 318.2 to 318.4. The unit owner's obligation with respect to the common elements is inseparable from the ownership of his unit, and the sale by a developer to a unit owner is prima facie a sale of one property interest (the unit and appertaining percentage of ownership in the common elements) and not two (the unit and share of common elements plus a share of a management contract). The choice of whether and with whom to contract for management belongs to the unit owners' association, once it assumes control from the developer, and not to unit owners individually.

Defendants would have us focus on the sale of the unit, treating the management contract as "pre-existing." Where, however, the same person or group has both created the management contract and made the sale of a unit, we think the antitrust analysis must focus on the creation of the contract and the sale as if they were one transaction. Thus the original developer is not saved from a claim of antitrust violation by the fact that if one looked at the sale separately, no more than one product would be involved.

The substance of the matter would be different as to a group of units purchased at arm's length by another, subject to the management contract. Such purchasers would bear no responsibility for the pre-existing unity of the contract and the property. Therefore in selling to unit owners they would be selling only one product in substance as well as form. Plaintiff Johnson purchased his unit from one of the developer defendants, and plaintiff Hansen claims to have purchased later from one of the Invsco groups. It is conceivable that their cases may have different results on this account. The Invsco defendants have not, up to now, claimed any difference in position on this basis, and there may be facts as to their relationship which would defeat any such claim if made.

It seems clear to us that in development and sale of a large condominium there is great advantage, perhaps necessity, in the existence of a management contract of substantial duration during the period of sale. The sale process may continue over a substantial period. Prospective purchasers will be highly interested in the identity and reputation of the manager, as well as the tenure and expense of the arrangement. Stability in management is essential to unit owners, and delay in an independent choice until there are enough unit owners to act collectively seems inevitable.

Affidavits submitted to the district court to support a request for reconsideration assert that it is the practice of the condominium industry in the Chicago area to contract for professional management services prior to unit sales and for a period thereafter. Prospective purchasers are reluctant to purchase in a building not professionally managed, and proper management helps protect the developer against loss in value of unsold units. Lenders generally require such contractual arrangements, and virtually all the large condominium buildings in the Chicago area have such contracts during and after the period of sales by the developer.

The decision dealing most directly with sale of condominium units subject to a management contract is Foster v. West Alexandria Properties, Inc., 1980-1 CCH Trade Cases p 63,223 (E.D.Va.1980). There the court held that only one product was sold. It determined that it is neither possible nor practical for a unit and management services to be sold individually in a condominium with 800 units; that there was no evidence of hindrance in the market for condominiums or purchasers or diminution of the number of management service companies; and that it is the universal practice of the industry in the area to contract for the services of a professional management corporation. The court did emphasize the reasonableness of the provisions involved, which permitted earlier termination of the contract than in the present case. The unit owners' association was permitted to choose a manager once unit owners held 75% of the units, and only eleven months needed to elapse before the decision could become effective. The court found this arrangement manifestly not unreasonable. The court noted that in Jones v. 247 East Chestnut Properties, 1975-2 CCH Trade Cases p 60,491 (N.D.Ill.1974) unit owners were required to maintain the same management company for five years after the sale of the last unit, and found Jones factually distinguishable on that...