Response of Carolina, Inc. v. Leasco Response, Inc.

• Decision Date: 02 September 1976
• Docket Number: No. 75-3052,75-3052
• Citation: 537 F.2d 1307
• Parties: 1976-2 Trade Cases 61,045 RESPONSE OF CAROLINA, INC., Florida Computer Response, Inc., Datatron Corporation, Response of Colorado, Inc., Plaintiffs-Appellants, v. LEASCO RESPONSE, INC., Defendant-Appellee. LEASCO RESPONSE, INC., Plaintiff-Appellee, v. John WRIGHT, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1307

537 F.2d 1307

1976-2 Trade Cases 61,045

RESPONSE OF CAROLINA, INC., Florida Computer Response, Inc., Datatron Corporation, Response of Colorado, Inc., Plaintiffs-Appellants, v. LEASCO RESPONSE, INC., Defendant-Appellee.

LEASCO RESPONSE, INC., Plaintiff-Appellee, v. John WRIGHT, Defendant-Appellant.

No. 75-3052.

United States Court of Appeals, Fifth Circuit.

Sept. 2, 1976.

J. Kirk Wood, R. Benjamine Reid, Joseph W. Womack, Miami, Fla., for plaintiffs-appellants.

Anthony F. Phillips, New York City, for defendant-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before DYER, SIMPSON and RONEY, Circuit Judges.

DYER, Circuit Judge:

This is an appeal from a judgment in favor of Leasco Response, Inc. (Leasco) in a suit brought by four of its former franchisees for alleged violations of the anti-trust laws. In a bifurcated trial, the district court directed a verdict for Leasco at the close of franchisees' case. The franchisees, Response of Carolina (Carolina), Florida Computer Response (Miami), Datatron Corporation (Datatron) and Response of Colorado (Denver) alleged that Leasco imposed territorial restrictions on their sale of computer time-sharing services and that Leasco tied the sale of the franchise to the lease of computer hardware from Leasco. The question presented here is whether, particularly in light of the bifurcated trial procedure, the district court erred in directing a verdict for Leasco, having found that there was no substantial evidence under the standard of Boeing Co. v. Shipman, 5 Cir. 1969, 411 F.2d 365 (en banc), to establish Leasco's antitrust liability. We affirm.

I.

Leasco entered the computer time-sharing business in 1969. Using a modified Hewlett-Packard 2000A central processing unit as the core of its system, it opened service branches in several major cities in the United States. The computer system was called "Response I."

In 1970, Leasco decided to franchise the Response I system. Its first franchise was opened in September, 1970, in Phoenix, Arizona. Two of the plaintiffs, Carolina and Datatron, began operations in Charlotte, North Carolina, and Louisville, Kentucky, respectively in June, 1971. The Denver plaintiff opened its doors in September, 1971, and the Miami plaintiff started in March, 1972.

The franchise agreement was called the Data Network Contract (DNC). While each of the four contracts involved in this case contained slight differences, their pertinent provisions are the same for all plaintiffs.

According to the DNC, Leasco granted to its franchisee the exclusive right to market Response Service ¹ using franchise-controlled computer hardware, together with a license to use any rights that Leasco may have in the name "Response" within an area of primary responsibility.

The area of primary responsibility (APR) was described in an exhibit to each DNC, listing the counties within the area. Leasco agreed not to offer Response Service to any other person in the area except that Leasco was permitted to sell and solicit the sale of its time-sharing service to companies having offices both within and without franchisees' areas, so called "national accounts." Each franchisee agreed to "diligently promote the sale of Response Service" throughout the area of primary responsibility.

The DNC did not prohibit extra-territorial sales by franchisees. It provided for royalty payments to Leasco of 15 percent of monthly gross sales to customers within the area. However, the royalty was increased to 70 percent for sales to customers outside of the area. ² It is this paragraph of the DNC which gives rise to the claimed territorial restriction.

"Response Service" provided under the DNC did not include computer hardware, ³ although it referred to a Hewlett/Packard computer. ⁴ In Paragraph 4 of the DNC Leasco stated its willingness to lease to franchisees the items of equipment listed in Exhibit B to the contract, ⁵ according to the terms of the lease also incorporated in Exhibit B. If this offer was accepted, Leasco agreed to set up and install the Response Equipment without charge on the franchisee's premises. Each franchisee signed an equipment lease for a term of 60 months. ⁶ As is explained more fully, infra, franchisees' tying argument centers around the lease of this equipment.

On June 21, 1973, Leasco filed suit against Carolina in a North Carolina state court to collect unpaid rentals, maintenance fees, and other amounts due under the lease and to recover possession of the leased equipment. One day later, Carolina filed suit in the United States District Court for the Southern District of Florida against Leasco alleging that Leasco violated the antitrust laws ⁷ by (1) the imposition of territorial restrictions on the area within which Carolina might sell Response Service by exacting 70 percent of monthly gross sales to customers outside of Carolina's area of primary responsibility; (2) price fixing; (3) discriminatorily favoring its branches over its franchises; and (4) attempted monopolization. ⁸ On August 3, 1973, Miami filed suit against Leasco on similar grounds. Datatron's complaint followed on August 16, 1973, and Colorado's was filed on August 20, 1973. ⁹ No allegations of a tying arrangement were made in any of the complaints. On April 16, 1974, the cases were consolidated.

Extensive discovery was had by all parties in 1973 and the first nine months of 1974. On October 15, 1974, the parties filed a pre-trial stipulation wherein they agreed on no issues of fact or law. However, in this document both franchisees and Leasco stated that a tying claim was an issue to be considered at trial. ¹⁰

On October 18, 1974, at a pre-trial conference the district court stated that it was its disposition "to try liability first and then go to damages," using the same jury. ¹¹ Leasco objected to this bifurcation procedure, but there was no discussion of the objection by the district court. Later in the conference, franchisees' counsel asked whether an order would be entered as to the separation of the trial into two stages. The district court stated simply that liability would be tried first. There was no other discussion by the district court and counsel of this decision anywhere in the pre-trial record.

On November 11, 1974, the trial commenced and plaintiffs concluded presentation of their evidence on February 20, 1975. On February 28, 1975, the district court heard arguments on Leasco's motion for a directed verdict on the antitrust and fraud counts of the complaints. ¹² On March 3, 1975, the district court granted Leasco's motion with respect to all antitrust issues raised by franchisees. It denied the motion with respect to the fraud issues and the trial proceeded. After a jury verdict for Leasco on the fraud counts ¹³ the district court entered its final judgment in favor of Leasco.

Franchisees' motions for a new trial asserting error in directing a verdict for Leasco on the antitrust claims were subsequently denied and they appealed. They address their appeal solely to the propriety of the district court's directed verdict for Leasco on the territorial restriction and tying claims.

II.

The district court found that "firm and resolute" or, at least, some measure of enforcement of a vertical territorial restriction is necessary to render it actionable. Since it found no evidence of enforcement, it directed a verdict in Leasco's favor on this alleged antitrust violation. Franchisees contend that this was error.

Section one of the Sherman Antitrust Act, 15 U.S.C.A. § 1, provides that "every contract, combination . . . or conspiracy in restraint of trade or commerce . . . is . . . illegal." "Every" is not meant literally; rather the standard of reasonableness has been adopted to judge the lawfulness of the restraint, Standard Oil Co. v. United States, 1911, 221 U.S. 1, 66, 31 S.Ct. 502, 55 L.Ed. 619; Chicago Board of Trade v. United States, 1918, 246 U.S. 231, 238, 38 S.Ct. 242, 62 L.Ed. 683.

Certain practices have such a "pernicious effect on competition," Northern Pacific Ry. Co. v. United States, 1958, 356 U.S. 1, 5, 78 S.Ct. 514, 2 L.Ed.2d 545, that they are considered to be per se violations of Section one. ¹⁴ Vertical territorial restraints were excluded from that category initially, White Motor Co. v. United States, 1963, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738, but later were included, United States v. Arnold, Schwinn & Co., 1967, 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249.

In White Motor, the Supreme Court was faced for the first time with territorial and customer restrictions. White Motor's agreement with its distributors and dealers expressly limited the territory within which and the customers to whom they might sell trucks and parts. The Supreme Court held that the legality of these vertical restraints should be determined only after a trial since it did not know enough about the "economic or business stuff out of which these arrangements emerge" to be certain of their purpose or effect. "We need to know more than we do about the actual impact of these arrangements on competition to decide whether they have such a 'pernicious effect on competition and lack . . . any redeeming virtue' . . . and therefore should be classified as per se violations of the Sherman Act." 372 U.S. at 263, 83 S.Ct. at 702.

Four years later in Schwinn, the legality of such restraints suffered the opposite fate. Schwinn had two principal methods of selling its bicycles. It sold to retailers by means of consignment or agency arrangements with 22 distributors under the so-called Schwinn Plan which involved direct shipment by Schwinn to the retailer with Schwinn invoicing the retailer, extending credit, and paying a commission to the distributor taking the order. And it sold bicycles to distributors who maintained an inventory to supply retailers with emergency and "fill-in" requirements. ¹⁵ Schwinn assigned specific...