State of Arizona v. Cook Paint and Varnish Co.

• Decision Date: 13 March 1975
• Docket Number: Civ. No. 73-562-PHX-CBR.
• Citation: 391 F. Supp. 962
• Parties: STATE OF ARIZONA, in its own behalf and on behalf of its agencies, departments, commissions and political subdivisions, et al., Plaintiffs, v. COOK PAINT AND VARNISH COMPANY, a Delaware Corporation, et al., Defendants.
• Court: U.S. District Court — District of Arizona

391 F. Supp. 962

STATE OF ARIZONA, in its own behalf and on behalf of its agencies, departments, commissions and political subdivisions, et al., Plaintiffs, v. COOK PAINT AND VARNISH COMPANY, a Delaware Corporation, et al., Defendants.

Civ. No. 73-562-PHX-CBR.

United States District Court, D. Arizona.

March 13, 1975.

Robins, Davis & Lyons, James L. Fetterly, Minneapolis, Minn., Fennemore, Craig, von Ammon & Udall, Calvin H. Udall, Phoenix, Ariz., for plaintiffs.

Gust, Rosenfeld, Divelbess & Henderson, Richard A. Segal, Phoenix, Ariz., Blackwell, Sanders, Matheny, Weary & Lombardi, William H. Sanders, David C. Trowbridge, Kansas City, Mo., for Cook Paint and Varnish Co.

Ryley, Carlock & Ralston, G. Read Carlock, Phoenix, Ariz., for The Flintkote Co.

Snell & Wilmer, John J. Bouma, Phoenix, Ariz., Brobeck, Phleger & Harrison, Moses Lasky, San Francisco, Cal., for PPG Industries, Inc.

Evans, Kitchel & Jenckes, N. R. Porter, Phoenix, Ariz., for Reichhold Chemicals, Inc.

Jennings, Strouss & Salmon, Charles R. Hoover, Phoenix, Ariz., Covington & Burling, Henry P. Sailer, Washington, D. C., for Upjohn Co.

MEMORANDUM OF OPINION

RENFREW,^* District Judge.

On September 14, 1973, plaintiffs brought this action on behalf of themselves and on behalf of other members of a purported class¹ consisting of all commercial, industrial, agricultural and governmental users of rigid polyurethane foam insulation products against five defendants, who are alleged to have manufactured and marketed these products under various trade names during the years 1965 to the filing of the action. Plaintiffs' complaint, as amended, contains four counts: count one alleges a conspiracy and combination by defendants to restrain trade in violation of Section 1 of the Sherman Act, 15 U.S. C. § 1; count two is predicated on a theory of strict liability in tort; count three charges the defendants with negligence; and count four alleges fraudulent representation. Jurisdiction as to count one is invoked pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15, and as to counts two, three and four pursuant to 28 U.S.C. § 1332, by virtue of diversity of citizenship.

Although plaintiffs' claims will be set forth in detail below, essentially all four counts revolve around alleged flammability characteristics of the polyurethane foam insulation products manufactured and marketed by defendants, and alleged misrepresentations concerning those characteristics.

After two pretrial conferences, at which numerous motions by various parties were heard, the Court, by order dated November 13, 1974, directed that final judgment be entered in the action. At the request of plaintiffs, count four was dismissed without prejudice as to all defendants and counts two and three were dismissed without prejudice as to two of the defendants. For the reasons developed in the opinion below, count one was dismissed with prejudice as to all defendants, and counts two and three were dismissed with prejudice as to the three remaining defendants.

Count One

In their original complaint plaintiffs enumerated some eleven purposes of the defendants' purported conspiracy and combination in restraint of trade. For purposes of analyzing the antitrust implications of this conspiracy, the most important of these alleged purposes were the following: (1) "actively misrepresenting the flammability characteristics of the product and concealing from distributors, specifiers and users the true flammability characteristics of the product, all for the purpose of restraining trade, increasing the price of the product to users and creating an artificial market for the product" and (2) "fixing uniform, arbitrary and non-competitive price levels at which the product is sold". Among the alleged effects of this conspiracy were that "prices of the product sold by defendant corporations to plaintiffs and others were raised, fixed, stabilized, and maintained at non-competitive levels" and that "competition between and among defendants was restricted and suppressed and purchasers of the product including plaintiffs, have been deprived of the benefits of free and open competition". At the first pretrial conference the Court noted the ambiguity inherent in plaintiffs' theory of antitrust liability: was the conspiracy charged a conspiracy to misrepresent the flammability characteristics of the product which had the effect of permitting the product to be sold at higher prices than would otherwise have prevailed or was it a conspiracy to establish higher prices for the product, pursuant to which defendants misrepresented its flammability characteristics? With candor much appreciated by the Court and in keeping the highest traditions of the profession, plaintiffs' counsel conceded, by letter dated September 11, 1974, that they had no evidence to support the latter formulation of the conspiracy. Accordingly, plaintiffs amended their complaint to reflect a theory which they believed the evidence would support. As amended, the complaint in the critical paragraph charges that defendants conspired to "actively misrepresent the flammability characteristics of the product and * * conceal from distributors, specifiers and users the true flammability characteristics of the product, for the purpose of restraining trade, creating an artificial demand for the product, and thereby raising and stabilizing the price of the product". Although the quoted language is not entirely free from ambiguity, in light of the plaintiffs' letter of September 11, 1974, and subsequent argument at the second pretrial conference on October 26, 1974, it is clear that the conspiracy charged is one the conscious purpose of which was the misrepresentation of flammability characteristics of polyurethane foam insulation products, and one of the effects of which was the raising and stabilizing of prices of those products. In support of their antitrust claim as reformulated, plaintiffs urge essentially two theories: first, that defendants must be deemed to have intended the natural and probable consequences of their acts, a natural and probable consequence of the misrepresentations was the raising and stabilizing of prices, and therefore a constructive purpose of the conspiracy was price fixing, a per se violation of Section 1 of the Sherman Act, and second, that a conspiracy to engage in cooperative false advertising is, by itself, a conspiracy in restraint of trade proscribed by Section 1 of the Sherman Act.

Turning to the first of these theories, the Court finds that it far too broadly conceives the scope of conduct which has been, or ought to be, considered price fixing. Although plaintiffs have cited several cases which they believe support their constructive price fixing theory, an analysis of the facts in those cases reveals that they are inapposite to the situation presented here. In each case an actual, as opposed to constructive, purpose of the conspiracy was to affect prices, though the means used to accomplish this objective were varied, and in some cases indirect.²

It might, of course, be argued, as plaintiffs eloquently urged, that the Court should break new ground by recognizing a doctrine of constructive price fixing in cases where a natural and probable effect, thought not an actual purpose, of the conspiracy or combination is to affect prices. This the Court declines to do. The range of collaborative conduct, the natural and probable consequence of which might be said to be an effect of some type on the price at which goods are sold, and thus the range of conduct embraced by such a doctrine, is almost limitless. Following the logic of plaintiffs' theory to its inexorable conclusion, all such conduct would be per se violative of Section 1 of the Sherman Act.

Such a result manifestly would be inconsistent with the justification for per se rules under Section 1. The Supreme Court has explained it thusly: "There are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use." Northern Pacific R. Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). With respect to the application of this standard, the Supreme Court has noted that "it is only after considerable experience with certain business relationships that courts classify them as per se violations of the Sherman Act." United States v. Topco Associates, 405 U.S. 596, 607-608, 92 S.Ct. 1126, 1133, 31 L.Ed.2d 515 (1972). A classic example of such a relationship is one whose actual purpose is to affect or regulate prices. By contrast courts do not have similar experience in dealing with the myriad types of relationships, business and otherwise, a natural and probable consequence of which may be to affect prices in some manner. Indeed many such relationships could not be deemed restraints of trade, let alone unreasonable restraints of trade, within the purview of the Sherman Act.³

The constructive price fixing theory, therefore, is an unsuitable vehicle with which to analyze the antitrust implications of the conduct alleged here. Rather it must be asked, in the first instance, whether cooperative false advertising is a restraint of trade, and if so, it must further be asked whether the restraint is unreasonable. Plaintiffs' second theory of antitrust liability is predicated upon affirmative answers to both of these questions. Accordingly, the Court addresses the issue of whether cooperative false advertising is a restraint of trade within the purview of the Sherman Act.

To support their contention that cooperative false advertising is such a restraint, plaintiffs rely upon a series of cases decided under Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.⁴ The leading case of this group is Federal Trade...