North Cent. Watt Count v. WATT COUNT ENGIN. SYSTEMS, 3-86-0836.

• Decision Date: 02 February 1988
• Docket Number: No. 3-86-0836.,3-86-0836.
• Citation: 678 F. Supp. 1305
• Parties: NORTH CENTRAL WATT COUNT, INC. v. WATT COUNT ENGINEERING SYSTEMS, INC., et al.
• Court: U.S. District Court — Middle District of Tennessee

678 F. Supp. 1305

NORTH CENTRAL WATT COUNT, INC. v. WATT COUNT ENGINEERING SYSTEMS, INC., et al.

No. 3-86-0836.

United States District Court, M.D. Tennessee, Nashville Division.

February 2, 1988.

Michael A. Meyer, David N. Burn, Burn & Meyer, Nashville, Tenn., for plaintiff also for third-party defendants Ray Busby and Allen Bowman.

Gail P. Pigg, Nashville, Tenn., for defendant.

Henry E. Hildebrand, Jane P. North, Passino, Delaney & Hildebrand, Nashville, Tenn., for third-party defendant Michael Busby.

MEMORANDUM

WISEMAN, Chief Judge.

Plaintiff North Central Watt Count, Inc. (NCWC) initiated this lawsuit in September, 1986 against defendants Watt Count Engineering Systems, Inc. (WCES), Watt Count Marketing Corporation (WCM), Watt Count of Middle Tennessee, Inc. (WCMT), and several individually-named defendants.¹ In its complaint, NCWC alleged that defendants violated both the Sherman Act, 15 U.S.C. § 1 et seq. (1973), and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961-68 (1984). In October, 1986, the Court issued a preliminary injunction against defendants, restraining them from engaging in certain types of activity.² Defendants subsequently moved to dismiss NCWC's complaint for failing to state a claim upon which relief could be granted and for lack of subject-matter jurisdiction. The Court denied defendants' motions on July 2, 1987. The case is presently before the Court on cross-motions for summary judgment filed by NCWC and defendants on both the antitrust and RICO claims. For the reasons explained below, the Court denies both NCWC's and defendants' motions for summary judgment on the antitrust claim, and grants defendants' motion for summary judgment on the RICO claim.

I. Factual Background

A. The Watt Count Organization and System

WCES and WCM, its wholly-owned subsidiary, form the basis of a business organization that provides and markets energy conservation systems primarily for new and existing single and multi-family residential housing units. WCES, the parent corporation, provides computerized engineering analyses, designs insulation, ventilation and air-conditioning specifications, and issues written guarantees which insure that annual energy consumption levels in units equipped with the Watt Count System will not exceed a particular guaranteed amount. The issuance of these written guarantees is what distinguishes the service provided by the Watt Count Organization from that provided by other energy conservation system businesses.³ In return for its services, WCES charges its area dealers a flat rate of fourteen cents per square foot of conditioned living space.⁴

WCM is the marketing arm of the Watt Count Organization. Although its primary function is to sell Watt Count area dealerships, WCM also provides area dealers with certain technical support, and marketing and promotional aids and supplies. In return for its services, WCM receives approximately four percent of an area dealer's gross sales.

The Watt Count System is actually promoted, sold, and installed by Watt Count area dealers. At the time this lawsuit was filed, Watt Count area dealers were located in several states.⁵ In addition to caulking the framework of a structure, blowing insulation into cavities created by wall t's and corners, and installing heatshield — a metallized polyethylene material that is placed between the structure's insulation and dry wall on virtually all exterior walls and top-floor ceilings — area dealers inspect the installation of insulation, and heating and cooling duct systems to make certain that such installation complies with the design specifications provided by WCES.

B. The Present Dispute

In essence, this lawsuit involves a rather convoluted territorial dispute between two Watt Count area dealers — NCWC and WCMT. WCMT first became associated with the Watt Count Organization in 1982 when it purchased the Watt Count area dealership for Williamson County, Tennessee.⁶ Shortly thereafter, WCMT purchased the Watt Count area dealership for Davidson County, Tennessee.⁷ Defendants Keith Crowe, Reese Smith, Jr., Reese Smith, III, and Stephen B. Smith were the original shareholders of WCMT and were members of WCMT's original Board of Directors. Defendant Donald Terrell was a member of WCMT's original Board, but only recently became a WCMT shareholder. WCMT has had no other shareholders or directors since its incorporation. Although collectively the Smiths constitute a majority of WCMT's Board, defendants Terrell and Crowe are responsible for conducting WCMT's daily operations.

Like WCMT, NCWC first became involved in the Watt Count Organization in 1982. At that time, NCWC purchased the Watt Count area dealership for Sumner, Macon, Trousdale, Smith, and Wilson counties in Tennessee. NCWC originally was owned by a group of investors which included William Cutting, Charles Parks, Porter Jones, and WCES. WCES' interest in NCWC was represented by its President at the time, Michael Busby. Michael Busby, who has been named as a counterclaim defendant in this lawsuit, served as President of WCES until the fall of 1986. In 1983, the ownership of NCWC changed hands. Since that time, NCWC has been owned by Raymond Busby — Michael Busby's father and Secretary-Treasurer of NCWC — and Allen Bowman — Michael Busby's brother-in-law and President of NCWC.

Toward the latter part of 1983, WCMT learned that NCWC was actively soliciting customers and engaging in business in Davidson County. Believing that such conduct violated NCWC's dealership agreement, which WCMT interpreted as providing for exclusive sales territories,⁸ defendants Terrell and Crowe contacted Michael Busby, then President of WCES, and asked him to stop NCWC from engaging in business in WCMT's territory. According to both Michael Busby and defendant Crowe, Michael Busby informed defendants Terrell and Crowe that WCES could not legally impose territorial restrictions on NCWC in order to stop it from doing business in WCMT's territory.⁹ According to defendant Terrell, however, Michael Busby informed them that he had talked to and reprimanded NCWC, and that he had taken care of the problem.¹⁰

In September, 1983, WCMT's attorney sent a letter to Michael Busby objecting to NCWC's continued intrusion into WCMT's territory. In a letter addressed to WCMT's attorney dated October 28, 1983, Michael Busby purportedly set forth WCES' response to WCMT's complaint. In that letter, he stated:

First, as to the matter of exclusivity of geographical area, the franchise prospectus was prepared to provide that no other area dealership would be established by Watt Count in the franchisee's territory during the term of his contract.... To avoid a violation of antitrust laws, Watt Count could not prohibit the salespersons of one franchise from selling in another franchise territory.¹¹

According to this letter, therefore, WCES' position, was that it never intended to restrict or prohibit salespersons of one area dealer from selling in another area dealer's territory, and that neither WCES nor any of its sales representatives made any representations to the contrary. It was WCES' belief that the most it could do was prohibit area dealers from establishing an office or place of business in another area dealer's territory.¹² This was also the understanding of both the original and present owners of NCWC.¹³

WCMT's Board was "stunned" by WCES' response. Defendants contend that at the time defendants Terrell and Crowe negotiated for the purchase of the Williamson and Davidson County area dealerships, both Michael Busby and Jim Pemberton, then President of WCM, represented that the dealership territories would be exclusive and that area dealers would not be permitted to solicit or do business in another area dealer's territory.¹⁴ It is the defendants' position that the dealership agreements were intended to, and did in fact impose such territorial restrictions.¹⁵ Defendants further contend that Michael Busby never presented WCMT's letter to WCES' Board, that the Board, therefore, never addressed WCMT's objection to NCWC's actions, and that Michael Busby falsified the portion of WCES' response which concerned that objection.¹⁶ NCWC, however, claims that Busby distributed a copy of the letter to all directors present at WCES' October 25, 1983 Board meeting, and that the Board addressed all of the issues presented by the letter and directed Busby to draft the above response.¹⁷

During the months following this exchange of letters, both NCWC and WCMT solicited customers and engaged in business in each other's territories.¹⁸ WCMT, however, continued to complain and object. Apparently in response to WCMT's complaints, Michael Busby prepared and WCES' Board, at its September 25, 1984 meeting, adopted a proposed policy statement which would have required area dealers who solicited and did business in another dealer's territory to pay that dealer a five percent commission on any completed project. By its terms, however, the policy did not become effective unless it was approved by all area dealers. Because NCWC refused to approve the policy, it was never adopted.¹⁹ Interterritory competition between NCWC and WCMT, therefore, continued.

In late 1985 and early 1986, WCES was sold to a group of investors, including defendants Terrell, Crowe, and the Smiths. Following the completion of that transaction, the composition of WCES' Board changed drastically. The new board consisted of defendants Terrell, Crowe, the Smiths, W.C. Allen, and Michael Busby. Although defendants Terrell, Crowe, and the Smiths acquired only 44 percent of WCES, they constituted a majority of WCES' newly-formed Board.

Shortly after ownership of WCES changed hands, WCMT lost several jobs in Davidson County in direct competition with NCWC. Had WCMT secured those jobs, it would have received approximately $120,000 to $150,000 in gross revenues. WCMT admittedly lost those jobs because...