Ohio-Sealy Mattress Mfg. Co. v. Kaplan, OHIO-SEALY
| Decision Date | 21 September 1984 |
| Docket Number | OHIO-SEALY,83-2405,Nos. 83-2321,s. 83-2321 |
| Citation | 745 F.2d 441 |
| Parties | 1984-2 Trade Cases 66,213 MATTRESS MANUFACTURING COMPANY, Sealy Mattress Company of Houston, Sealy Mattress Company of Fort Worth, Sealy Mattress Company of Puerto Rico, Inc., Sealy of the Northeast, and Sealy Mattress Company of Georgia, Plaintiffs-Appellants, v. Morris A. KAPLAN, Sealy Mattress Company of Illinois, William H. Walzer, Sealy Connecticut, Inc., Sealy Greater New York, Inc., Waterbury Mattress Company, Morton H. Yulman, Sealy of Eastern New York, Inc., Sealy of Minnesota, Inc., Peter D. Brown, Sealy Mattress Company of Michigan, Inc., T.C. Englehardt, Jr., Fred G. Hodges Bedding Company (a/k/a Sealy Mattress Company of Reading, PA), Sealy of Des Moines, Inc., Walter Hertz, Sealy Mattress Company of New Jersey, Inc., Joseph V. Moffitt, Sealy of the Carolinas, Peerless Mattress Company, Lloyd B. Rosenfeld, Sealy Mattress Company of Oregon, Joseph R. Rudick, Maryland Bedding Company, James Thompson, Howard G. Haas, Sealy, Incorporated, Sealy Spring Corporation, Sealy Mattress Company of Colorado, Inc., Sealy Mattress Company of Northern California, Inc., Sealy Mattress Company of Southern California, Inc., Sealy Mattress Company of Arizona, Inc., Sealy Mattress Company of Florida, Inc., Sealy Mattress Company of Pittsburgh, Inc., and Sealy Mattress Company of Philadelphia, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Frederic F. Brace, Jr., P.C., Brace & O'Donnell, Chicago, Ill., for plaintiffs-appellants.
Rodney D. Joslin, Jenner & Block, Chicago, Ill., for defendants-appellees.
Before PELL and WOOD, Circuit Judges, and WEIGEL, Senior District Judge. *
This case which, for purposes of clarity, we shall label Ohio II, is the second of six civil suits brought by the Ohio-Sealy Mattress Manufacturing Company (Ohio) against its licensor, Sealy, Incorporated (Sealy), and other defendants. The first civil suit, which we shall label Ohio I, was filed in 1971, and, following two appeals to this court, ultimately resulted in Ohio's obtaining a substantial damages award as well as an order of equitable relief. 1 The present appeal in Ohio II is taken from two orders of the district court entered on August 1, 1980, and June 16, 1983. The appeal, involving two challenging questions regarding the doctrine of res judicata, requires us to determine the preclusive effects of the Ohio I litigation on the Ohio II case.
Both Ohio I and Ohio II are antitrust suits brought by Ohio, one of the most successful and aggressive licensees of appellee Sealy, which owns numerous trademarks to a popular brand of mattresses
and other bedding products. The resolution of this appeal makes necessary our examination of the procedural history of each suit.
Ohio I, a marathon case which, from the filing of the complaint to its final disposition on appeal, lasted over one decade, had its origins in a 1967 Supreme Court case United States v. Sealy, Inc., 388 U.S. 350, 356, 87 S.Ct. 1847, 1852, 18 L.Ed.2d 1238 (1967). In United States v. Sealy, Inc., the Supreme Court invalidated Sealy's system of allocating mutually exclusive manufacturing and sales territories to its manufacturer-licensees. The Court found that Sealy was a joint venture of its stockholder-licensees and that the licensees were "themselves directly, without even the semblance of insulation, in charge of Sealy's operations." Id. at 353, 87 S.Ct. at 1850. Sealy's system of assigning each manufacturer an enclave free of intrabrand competition, the Court held, was therefore a horizontal market allocation per se violative of Section 1 of the Sherman Act. 3 Approximately four weeks after the Court handed down its decision, the licensee-directors of Sealy met to discuss the ramifications of the Court's ruling. Concern was expressed over the competition that could be expected from "renegade," "out of control," and "predatory" licensees no longer constrained by the exclusive territory system. Sealy thereafter developed a new Uniform License Agreement that all its licensees signed in 1968, save one whose license was reacquired by Sealy some years later. The new agreement preserved the same territories (designated Areas of Primary Responsibility or "APRs") as had been used before, and Sealy agreed not to permit any other manufacturer to produce Sealy products in a licensee's territory. The Agreement was thus exclusive as to manufacture, but it was not on its face exclusive as to sales. A licensee was permitted to sell Sealy products in another licensee's APR. Any licensee who would be inclined to sell outside his own APR, however, faced several disincentives. First, each licensee was held accountable for adequate sales in his APR. As an incentive to sell only within his APR, each licensee, once he achieved a quota of sales in his APR, had to pay only one-half the standard royalty to Sealy for all subsequent sales of Sealy products made that year inside or outside his APR. Second, there was a surcharge placed on sales outside a licensee's APR. The surcharge was termed a "passover payment," and the seller had to remit it to Sealy, which in turn paid it over to the licensee in whose territory the seller had successfully marketed his product. Although Sealy characterized the payment as one designed to prevent an out-of-APR licensee from taking a "free ride" on a fellow licensee's advertising efforts, Sealy itself conducted the great bulk of the advertising for the Sealy brand. The passover charge could run as high as eleven percent. Third, a licensee making an out-of-APR sale had to pay a one percent "product service repair" charge to Sealy. As originally conceived, Sealy was to hold these payments in a fund from which it would reimburse licensees who actually made repairs on products they had not sold, but in practice Sealy paid the charges over to "invaded licensees" whether or not they in fact made any repairs. Fourth and finally, the 1968 Uniform License Agreement limited a licensee to manufacture Sealy products at specified plant locations and prohibited the adding of plant locations without Sealy's written approval. A licensee contemplating an out-of-APR Sealy also inserted into the Uniform License Agreement a clause giving Sealy the "right of first refusal" should a licensee desire to sell his business. Sealy exercised this clause against Ohio on three occasions between 1970 and 1972, thereby blocking Ohio's efforts to obtain the Philadelphia, Florida, and Pittsburgh licensees. In 1970, Ohio contracted to buy the Philadelphia licensee, but upon a complaint from the neighboring Baltimore licensee, Sealy exercised the right of first refusal and the Philadelphia licensee retracted its offer to sell. In 1972, the same sequence of events took place, but this time Sealy acquired the Philadelphia licensee. In 1970, the principal of the Florida licensee reached an agreement to transfer his business to Ohio, but he withdrew his business from sale after Sealy exercised its right of first refusal. In 1972, Ohio for a second time contracted to buy the Florida licensee but Sealy exercised its right of first refusal and acquired the Florida concern. A similar scenario was played out with respect to the Pittsburgh licensee in 1972 and 1973.
sale faced high transportation costs because of the bulk and weight of the product, and the plant location clause exacerbated this impediment to competition. A licensee who wanted to locate a plant at the periphery of his APR in order to compete more effectively against his neighboring licensees was prevented from so doing. Ohio twice sought permission to construct a plant in Toledo, Ohio, in order to compete more effectively against the Detroit licensee. On both occasions, Sealy denied Ohio's request.
In 1971, Ohio and four wholly owned subsidiaries brought suit against Sealy and other defendants seeking both damages and injunctive relief. The claims in the complaint fell largely into two categories. First, there were claims related to the post-1967 market allocation we have just described. Second, there were claims based upon Sealy's use of tying arrangements with respect to bedding components. The latter category of claims need not concern us further. With respect to the former category of claims, Ohio sought the following: First, it requested recovery of the passover payments and product service repair charges it had remitted to Sealy, plus an injunction against future imposition of those charges. Second, Ohio sought damages based upon Sealy's refusal to allow it to locate a plant in Toledo, plus an injunction against future enforcement of the plant location clause. Third, it requested lost profits and preparatory expenses with respect to the failed acquisitions of the Philadelphia, Florida, and Pittsburgh licensees, plus divestiture by Sealy of those licensees. Finally, Ohio sought an injunction against future enforcement of the exclusive manufacturing territories provision. Following extensive pre-trial discovery, the damages claim was tried to a jury, and in April 1975 the jury returned a general verdict in excess of six million dollars in favor of Ohio.
Approximately one year after the general verdict of April 1975, district court Judge Parsons denied Sealy's motion for a new trial upon the condition that Ohio accept a fifty percent remittitur. Ohio acceded to the remittitur and thus, after trebling, received damages in excess of ten million dollars. Eight months later, Judge Parsons denied Ohio equitable relief.
Ohio I came to this Court for the first time on appeal in 1978. See Ohio-Sealy Manufacturing Co. v. Sealy, Inc., 585 F.2d 821 (7th Cir.1978), cert. denied, 440 U.S. 930, 99 S.Ct. 1267, 59 L.Ed.2d 486 (1979). Sealy argued on appeal that there was insufficient evidence upon which the jury could have found a system of market...
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