A.O. Smith Corp. v. Lewis, Overbeck & Furman

• Decision Date: 09 December 1992
• Docket Number: No. 91-3763,91-3763
• Citation: 979 F.2d 546
• Parties: , 1992-2 Trade Cases P 70,023 A.O. SMITH CORPORATION and 16752 Corporation, f/k/a Sterling Electric, Inc., Plaintiffs-Appellants, v. LEWIS, OVERBECK & FURMAN, Douglas A. Lindsay, Robert A. Subkowsky and Robert A. Wolz, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 546

979 F.2d 546

61 USLW 2318, 1992-2 Trade Cases P 70,023

A.O. SMITH CORPORATION and 16752 Corporation, f/k/a Sterling Electric, Inc., Plaintiffs-Appellants, v. LEWIS, OVERBECK & FURMAN, Douglas A. Lindsay, Robert A Subkowsky and Robert A. Wolz, Defendants-Appellees.

No. 91-3763.

United States Court of Appeals Seventh Circuit.

Argued Sept. 18, 1992.

Decided Nov. 9, 1992.

Rehearing and Rehearing En Banc

Denied Dec. 9, 1992.

Scott W. Hansen (argued), Anne W. Reed, Brian D. Trexell, Reinhart, Boerner, Vandeuren, Norris & Rieselbach, Milwaukee, Wis., James D. Holzhauer, Javier H. Rubinstein, Mayer, Brown & Platt, Chicago, Ill., for plaintiffs-appellants A.O. Smith Corp. and 16752 Corp. fka Sterling Elec., Inc.

Stephen R. Swofford, George W. Spellmire (argued), Thomas P. McGarry, D. Kendall Griffith, G.J. Bazydlo, Hinshaw & Culbertson, Chicago, Ill., for defendants-appellees Lewis, Overbeck & Furman, Douglas A. Lindsay, Robert A. Subkowsky and Robert A. Wolz.

Before CUMMINGS, COFFEY, and EASTERBROOK, Circuit Judges.

CUMMINGS, Circuit Judge.

This is the third time that this antitrust claim has come before this Court in one form or another. ¹ In its latest incarnation the losing party is suing its lawyers for agreeing to an allegedly faulty jury instruction in the original trial in 1985. In that case, Parts and Electric Motors, Inc. ("P & E") brought a tying claim under Section 1 of the Sherman Act (15 U.S.C. § 1) and Section 3 of the Clayton Act (15 U.S.C. § 14) against Sterling Electric, Inc. ("Sterling") after Sterling canceled P & E's contract to distribute Sterling brand electric motors and parts. In the 1985 trial, P & E requested and Sterling's lawyers acceded to a jury instruction that characterized market power in the tied product as irrelevant to a successful tying claim. Sterling now asserts that the $5,844,022.41 judgment against it was due to this allegedly erroneous jury instruction. Sterling, which is defunct, and its parent A.O. Smith Corporation ("A.O. Smith") seek to recoup the nearly $6 million from its former counsel, Lewis, Overbeck & Furman as well as three attorneys in the firm (collectively "Lewis, Overbeck"). The district court dismissed Sterling's action on the premise that market power in the tied product market is not required for a successful tying claim. 777 F.Supp. 1405. We reverse. Without deciding whether antitrust law now demands proof of market power in the tied product, such proof was required in this Circuit in 1985 when the original trial was held.

I.

At the time of the 1985 trial that gives rise to the current dispute between Sterling and its former lawyers, Sterling was a manufacturer of electric motors and parts. P & E was a Sterling distributor, principally of Sterling brand parts. Indeed, P & E was the largest national distributor of Sterling parts in 1981 and 1982. Sterling conceded that its electric parts, which fitted only Sterling brand electric motors, formed a unique market in which the company had 100 percent market dominance. However, Sterling's share of the new electric motors market was only about one-tenth of 1 percent during the relevant period.

P & E had carried Sterling products for many years but, like the approximately 400 other Sterling wholesale distributors, it sold other brands of electric motors as well. After A.O. Smith acquired Sterling in 1980, it sought to bolster Sterling's position in the finished product market above its anemic .1 percent share. According to P & E, Sterling tried to improve its position through an illegal tying arrangement. Tying arrangements involve an agreement to sell one product (the tying product) only on the condition that the purchaser buy a second product (the tied product). Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-6, 78 S.Ct. 514, 518-19, 2 L.Ed.2d 545. In this instance, Sterling used its strong position in the parts market (the tying market) to gain leverage in the new motors market (the tied market).

Sterling's efforts centered on encouraging certain of its distributors to market more aggressively Sterling's new electric motors. To this end, it created two tiers of distributorship. One set of relationships was with so-called "stocking" parts distributors, including P & E, who would be able to purchase Sterling products at lower prices than would be available to the second tier of distributors. In return, these "stocking" distributors were contractually obligated to buy and promote a minimum number of Sterling electric motors. Sterling reserved the right to cancel contracts with "stocking" distributors who failed to purchase a requisite number of motors.

P & E claimed that pressure from the manufacturer forced it to steer customers toward purchases of Sterling motors. Nevertheless, despite increasing sales of Sterling electric motors after warnings from the manufacturer in mid-1982, P & E's distributorship contract for both parts and motors was terminated for selling too few motors. As noted, P & E sued Sterling for violating Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section 3 of the Clayton Act, 15 U.S.C. § 14, which prohibit certain tying or tie-in arrangements.

At trial, the district court adopted a jury instruction that stated in part, "Market power with respect to the tied product, which is electric motors, is not relevant" ("Instruction 28a"). Sterling's counsel and defendant in this action, Lewis, Overbeck, did not dispute P & E's characterization of tied market power as irrelevant. Its only objection to the instruction was as follows:

Defendant objects to Court's 28a in that it's an improper definition of market power since it contains no consideration of profit.

A Chicago jury returned a $1,231,992 verdict in actual damages against Sterling, which was trebled under Section 4 of the Clayton Act (15 U.S.C. § 15), as well as a $13,690.54 award for breach of contract, and a counterclaim in favor of Sterling for $37,196.94.

Judge Holderman granted Sterling's motion for judgment notwithstanding the verdict because P & E had not proved market power in the tied market (new motors), which he determined to be an essential element of a tying claim. Indeed, it is unlikely that P & E could have proved market power in new electric motors given Sterling's .1 percent share of that market. However, Sterling's conversion to the religion of tied market power had come too late. On appeal, this Court reinstated the jury award because Lewis, Overbeck had waived the tied market power issue by failing to object specifically to P & E's jury instruction. Parts and Elec. Motors v. Sterling Elec. Inc., 826 F.2d 712, 716-717 (7th Cir.1987) ("P & E I "). Though Lewis, Overbeck objected to Instruction 28a, it faulted only the definition of market power for containing "no consideration of profit," rather than Instruction 28a's essential depiction of market power in the tied product market as irrelevant. Id. at 717. Lewis, Overbeck offered no competing instruction regarding market power in the tied market and it did not object to the court's failure to include such an instruction. Id. Having waived the tied market power argument, Sterling's basis for j.n.o.v. evaporated. Sterling made a number of other arguments--for example, that P & E had not proved market power in the tying market and that competition had not been foreclosed in the tied product market--but the panel rejected these. The Court remanded the case to Judge Holderman to determine whether the verdict for P & E was against the manifest weight of the evidence.

Judge Holderman did not think so. Sterling appealed again with recycled arguments. As Judge Bauer's majority opinion noted, "this case should not be here. In our view, it represents Sterling's second attempt to wriggle out of a legal theory it argued unsuccessfully to the jury." Parts and Elec. Motors, Inc. v. Sterling Elec., 866 F.2d 228, 234 (7th Cir.1988) ("P & E II "). The P & E II majority upheld the "threadbare" antitrust claim because Sterling should be forced to "live with the theory it presented at trial." Id. Judge Posner would have been more lenient on the manufacturer. In dissent, he ridiculed the notion that parts designed exclusively for Sterling motors represented a market unto itself for antitrust purposes. He speculated that Sterling's share of the market for electric parts generally was roughly equivalent to its share of the market for new electric motors, or less than 1 percent. Without market power even in the tying market, Judge Posner found the jury award "irrational. * * * So clear is the verdict's unreasonableness that we can order a new trial even though Judge Holderman, perhaps out of pique at our decision reversing him, refused to do so." Id. at 236 (Posner, J., dissenting).

The Supreme Court denied certiorari. 493 U.S. 847, 110 S.Ct. 141, 107 L.Ed.2d 100. Having failed in two appeals, Sterling instituted this action against Lewis, Overbeck for legal malpractice and breach of contract. The district court dismissed the breach of contract claim because legal malpractice actions sound in tort law, and he dismissed the tort action for lack of causation after determining that proof of tied market power is not required.

II.

This Court reviews de novo a district court's dismissal of an action. Rockford Mut. Ins. Co. v. Amerisure Ins. Co., 925 F.2d 193, 195 (7th Cir.1991). Dismissal is appropriate if there are no facts in a well-pleaded complaint which, if accepted as true, would support a plaintiff's claim for recovery. New Burnham Prairie Homes, Inc. v. Burnham, 910 F.2d 1474, 1477 (7th Cir.1990).

Dismissal of the tort action was not appropriate here. The opinion below undertakes an exhaustive but unnecessary tour through recent antitrust case law in the Supreme Court and in this Circuit. The district court decision, dwelling as it does on a number of cases decided after the 1985 trial, assumes that the relevant question is whether proof of tied...