Pfotzer v. Aqua Systems

• Decision Date: 23 July 1947
• Docket Number: No. 241,Docket 20557.,241
• Citation: 162 F.2d 779
• Parties: PFOTZER et al. v. AQUA SYSTEMS, Inc., et al.
• Court: U.S. Court of Appeals — Second Circuit

162 F.2d 779 (1947)

PFOTZER et al. v. AQUA SYSTEMS, Inc., et al.

No. 241, Docket 20557.

Circuit Court of Appeals, Second Circuit.

July 23, 1947.

Frederick W. P. Lorenzen and Dwight, Harris, Koegel & Caskey, all of New York City, (Caesar L. Pitassy, of New York City, of counsel), for appellants.

Louis J. Wolff and Menken, Ferguson & Idler, all of New York City, (John A. Hayes, Jr., of New York City, of counsel), for appellees.

Before L. HAND, CHASE, and CLARK, Circuit Judges.

L. HAND, Circuit Judge.

This appeal is from a judgment for the defendants, entered upon the verdict of a jury in an action to recover treble damages for a conspiracy to violate §§ 1 and 2 of the Sherman Act.¹ The only points raised are errors alleged to have been committed by the judge during the course of the trial. The first and most important of these is his failure to charge the jury properly as to the rights of the plaintiffs and the liability of the defendants under the statutes involved. The next is his exclusion of the record of a conviction upon a plea of nolo contendere, offered to impeach the defendant, Kaestner, when he was upon the stand. The last was the exclusion of certain correspondence and documents to which the defendants were parties. We shall take up these in their order; but to the understanding of the case it is necessary to make some statement of the facts, as the evidence permitted the jury to find them.

The plaintiffs are partners in the general construction business, and were in 1940 more especially engaged in work for the United States Government. In July of that year, they entered into a contract with the "Bureau of Yards and Docks" of the Navy, to build a naval air station at Pensacola, Florida: a large job, part of which was a "hydraulic gasoline and oil distribution system." Such a distributing system depends upon the principle that gasoline, being lighter than water, will float upon the surface; and that it is therefore possible to use a tank containing both gasoline and water, forcing the gasoline out at the top by increasing the water pressure below, and filling gasoline in at the top by drawing water from the bottom. Such a system involves a number of valves, strainers, traps, lines and tanks and other apparatus, the details of which did not appear in the evidence and which it is not necessary to know. The Aqua Company was the patentee of a number of the parts which were necessary to the assembly; but, so far as we can gather, it had no patent upon the assembly as a whole. The defendant, Kaestner, implied as much in his testimony, although the system as a whole was at times referred to as a "patented system." On August 13, 1940, the plaintiffs asked both the Aqua Company and another corporation — Flotation Systems, Inc., — to bid upon the materials and service necessary for the installation of such a system at Pensacola; and on the 15th, the Aqua Company did submit a bid of $6,573.00 for the "detailed plans, specifications, operating instructions," for the necessary "special parts," — patented parts — and for the supervision of the installation of the system. The plaintiffs eventually accepted this bid, the defendants furnished the parts and did the work promised and the plaintiffs paid all but the last ten per cent of the agreed price. The action is to recover three times the difference between the amount so paid and the reasonable cost of the installing of the system, had the defendants not unlawfully restrained competition.

The Aqua Company was organized in 1925 and in 1928 took over the business of its only competitor at that time, the Farr Company, after which until 1938 there was no other company making a hydraulic gasoline distribution system. In that year or 1939 two other companies came into the field in California and combined to form the Flotation Company, just mentioned. On January 12, 1940, the Aqua Company and the Flotation Company made a contract the substance of which was as follows. In consideration of stipulated royalties and of the purchase of its patented parts and its services, the Aqua Company licensed the Flotation Company under thirty patents relating to the hydraulic system within "three territorial groups" of states. The Aqua Company promised not to license anyone else within "Group One," but reserved the right, not only to grant licenses in the other two "groups," but to compete with the Flotation Company in "Group One." In this competition it promised, however, "to quote and sell its patented systems and patented parts * * * at a figure not less than fifteen percent (15%) higher than the price which Flotation pays for said patented system and patented parts"; and to share the profits equally with the Flotation Company, if it made any contract at such an advance. The Flotation Company promised not to install any other system than the defendants', assembled with the patented parts; and not to manufacture the patented parts. "Group One" assigned to the Flotation Company consisted roughly of the Pacific Coast states; the rest of the country — except Alabama and Missouri — was reserved to the Aqua Company. The Flotation Company agreed to buy the patented parts at prices shown in two appended price lists — A and B — but it was free to buy unpatented parts where it pleased. If the Flotation Company bought "List A" parts, it would pay a royalty of one cent a gallon on the capacity of its storage tanks installed in "Group One"; one and one-half cents on those installed in "Group Two"; and two cents on those installed in "Group Three." If it bought "List B" parts, it would pay $500 as a royalty on each tank installed in "Group One"; $600, in "Group Two"; and $650, in "Group Three."

On August 16th, the Aqua Company, which had received the plaintiffs' request for a bid, wrote to the Flotation Company suggesting that it "should not quote" — to the plaintiffs — "less than $6800" for the patented parts necessary for the system, and concluding as follows: "for your information, Pfotzer did not get a price from us before he put his bid in and he was considerably low on the job. They, furthermore, do not have a very strong credit rating and apparently lack working capital. On terms, therefore, I would quote them 25 per cent with the order, 50 per cent sight draft bill of lading, balance 30 days thereafter." The terms eventually agreed on between the Aqua Company and the plaintiff were considerably easier than these (10% on execution of the agreement, 40% on bills of lading, another 40% thirty days thereafter, and 10% on the completion of the whole job). On the other hand the Flotation Company on August 22nd, not only bid $7453. for the same work, but imposed as terms exactly those suggested by the Aqua Company By 1940 or 1941 the Aqua Company's system may have ceased to be the only hydraulic gasoline distribution system available; another and cheaper system was at least in experimental use, called the "Bowser" system. The differences between this system and the Aqua system the testimony did not clearly describe; apparently the principal one was in the position and electrical operation of the "shut-off valve." The plaintiffs submitted to the naval authorities an estimate of the cost of installing the "Bowser" system and sought to have it substituted; but they were unsuccessful, and on March 15, 1941, they entered into the contract with the Aqua Company.

On March 17, 1942, the grand jury for the Southern District of New York returned an indictment against the defendants and others, including the Flotation Company, charging them with a conspiracy to violate the Anti-Trust Acts; on December 9th of that year both defendants pleaded nolo contendere to this indictment, and the Aqua Company was fined $10,000, and Kaestner was fined $6,250. While Kaestner was on the stand, the plaintiffs offered the record of this prosecution to impeach his credibility; but the judge excluded it. The plaintiffs also offered in evidence the correspondence between one, Wrightson, who had charge of the installation of gasoline distribution systems for the Navy, and Kaestner, which, they argued, showed the intimacy of the two, and went to support an inference that the defendants had successfully induced Wrightson to insist upon the installation of their own distribution system. This the judge excluded. The plaintiffs also offered in evidence a report, dated February 11, 1940 (the proper date would seem to have been 1941) from one, Sullivan, an employee, to Kaestner, indicating that Sullivan had been in communication with the naval authorities, and that they proposed to hold the plaintiffs strictly to their contract. It is possible to interpret this report as also showing that it was Sullivan who had prevailed upon the authorities to adopt this position. Part of this the judge admitted, part he excluded. Finally the judge excluded parts of the depositions of Kaestner, taken before trial.

On its main outlines the plaintiffs' case was two-fold: first, the Aqua Company had originally established a monopoly of all the producing capacity of hydraulic gasoline distribution, by buying out the Farr Company and later by making the contract with the Flotation Company. As corroborating evidence of this purpose they also depended upon the correspondence between Kaestner and Wrightson, the admissions in the report of Sullivan, and the Flotation Company's acceptance of the suggestion to overbid the Aqua Company's bid. Second, they argued that the contract with the Flotation Company was by its terms unlawful, because it restrained competition by what was in substance a division of territory. With this as a premise the plaintiffs say that the judge wholly failed properly to explain the law to the jury, or to make clear the issues upon which the case turned; and this is the first question to be considered. After some preliminary remarks which are not relevant, the judge stated: "Now, the gravamen of this action is that a...