State v. Lawn King, Inc.

• Decision Date: 31 July 1980
• Citation: 84 N.J. 179,417 A.2d 1025
• Parties: , 1980-2 Trade Cases P 63,488 STATE of New Jersey, Plaintiff-Appellant, v. LAWN KING, INC., a corporation of the State of New Jersey and Joseph Sandler, Defendants-Respondents.
• Court: New Jersey Supreme Court

Page 179

84 N.J. 179

417 A.2d 1025, 1980-2 Trade Cases P 63,488

STATE of New Jersey, Plaintiff-Appellant, v. LAWN KING, INC., a corporation of the State of New Jersey and Joseph Sandler, Defendants-Respondents.

Supreme Court of New Jersey.

Argued Feb. 20, 1980.

Decided July 31, 1980.

Laurel A. Price and Robert J. Clark, Deputy Attys. Gen., for plaintiff-appellant (John J. Degnan, Atty. Gen., attorney; Robert J. Clark, Laurel A. Price and Edwin H. Stern, Deputy Attys. Gen., on brief.)

John A. Craner, Mountainside, for defendants-respondents (Craner & Nelson, Mountainside, attorneys).

The opinion of the Court was delivered by

HANDLER, J.

This appeal raises important issues of first impression for this Court. Involved are allegations of illegal restraints of trade in the operation of a franchise business in violation of the New Jersey Antitrust Act, N.J.S.A. 56:9-1 et seq. (L.1970, c. 73). The trial court convicted and sentenced both the corporate defendant and the individual defendant on several counts of the indictment thereunder. The Appellate Division reversed all convictions and entered judgments of acquittal. We now affirm these judgments of acquittal.

I

Defendants are Lawn King, Inc. (Lawn King), a New Jersey corporation organized in August 1970, and Joseph Sandler, the president and chief operating officer of Lawn King and owner of ninety-five percent of the corporation's common stock. The corporation presently operates as a business structured under the Franchise Practices Act, N.J.S.A. 56:10-1 et seq. (L.1971, c. 356). See Finlay & Associates, Inc. v. Borg-Warner Corp., 146 N.J.Super. 210, 215-221, 369 A.2d 541 (Law Div. 1976), aff'd o.b. 155 N.J.Super. 331, 382 A.2d 933 (App.Div.1978), certif. den. 77 N.J. 467, 391 A.2d 483 (1978). It functions at the apex of a pyramidal, three-tier distribution system which provides lawn care to individual customers through Lawn King dealers. The intermediaries between Lawn King and its dealers are the Lawn King distributors. Each Lawn King dealer and distributor holds a franchise from the franchisor corporation. These franchises sold by Lawn King to the distributors and the dealers are territorial, with the distributorship franchises being county-wide and the dealership franchises covering part or all of one of more municipalities. Thus, each distributor serves several dealers.

The provisions of the franchise contracts form the basis of most of the antitrust charges here involved. Under the Dealer Franchise Agreement in use at the times relevant hereto,¹ each dealer was granted for a renewable period of five years the exclusive rights to sell Lawn King services and products to individual customers within specified geographic boundaries (each area contained a minimum of 6,000 "operable" lawns). Lawn King, the dealers' franchisor, agreed pursuant to these agreements (1) to lend to each dealer a Lawn King combine, a tractor-drawn machine which in a single operation aerates the lawn, deposits designated amounts and types of chemicals and seed, and rolls the lawn; (2) either to sell to the dealer the seeds, chemicals, and fertilizers necessary to the business or to provide the dealer with "approved sources" from which to purchase such items; (3) to sell or lease to the dealer a modified farm-type tractor and any other equipment, excluding the combine, for use in the business; (4) to permit the dealer to use the registered Lawn King trade name and service mark or logo;² (5) to supply the dealer with one copy of the Lawn King Operating Manual; (6) to arrange advertising and promotional programs for the dealers' benefit; (7) to furnish newsletters, bulletins, and advertising materials as well as an initial supply of stationery and business forms; (8) to train the dealer and assist him or her in both selecting a location and setting up the dealership; (9) to arrange for national and regional sales meetings; (10) to maintain a dealer advisory service in its home office, and (11) to appoint a distributor to operate as an intermediary between the corporation and several dealers and thus to assist in the performance of many of these enumerated items.

In return, under the Dealer Franchise Agreements, the franchise dealer agreed (1) to pay Lawn King $12,500 plus a weekly franchise fee of ten percent of the dealer's gross revenues for that week; (2) to provide Lawn King with a weekly revenue report; (3) to participate with other dealers in a particular region in cooperative advertising ventures, paying in proportion to the circulation of the particular advertising medium within the dealership area; (4) to purchase from Lawn King a carry-all trailer and a modified farm-type tractor for use in the business and to use only that equipment or company-approved substitutes; (5) to borrow from the corporation a lawn service combine and to use only that combine in servicing the lawns; (6) to confine sales and services to the limited geographic area for which the franchise was granted; (7) to purchase all seeds, chemicals, fertilizers, and other supplies only from a Lawn King distributor or from an "approved source"; (8) to meet quality standards and maintain a uniform image; (9) to use and display the Lawn King trademark and service mark or logo in accordance with company instruction; (10) to maintain specified amounts of liability insurance; (11) to employ only corporation-approved advertising formats, concepts, and systems, and (12) to abide by the general operating procedures of the corporation. Each Dealer Franchise Agreement also contained a fixed series of "additional terms" attached thereto; these included (1) a restrictive covenant as to the dealer's subsequent employment upon termination of the franchise; (2) a right of first refusal by the corporation if the dealer should decide to transfer the franchise; (3) provisions regarding franchise termination procedures, and (4) a reaffirmation that the nature of the relationship between Lawn King and the dealer is that of franchisor-franchisee. At the time of the indictment, there were 154 such dealer franchises in operation, 58 in New Jersey and 96 in other states.

The Distributor Franchise Agreement was similar in format. Thus, a distributorship franchise was assigned a renewable five-year exclusive franchise to conduct a business under the Lawn King name within a specified territory, usually a county, in consideration for payment of an "Activity Guarantee Fee" of $10,000. The functions of a distributorship consisted, according to the agreements, of (1) advertising for, negotiating and consummating sales of franchises to prospective dealers; (2) assisting dealers with selecting locations and with initially establishing the dealerships; (3) planning dealers' initial advertising; (4) purchasing seeds and chemicals from Lawn King or from approved sources for resale to dealers; (5) performing quality control inspections of dealerships; (6) enforcing the provisions of the Dealer Franchise Agreements; (7) organizing the cooperative media advertising within the distributorship territory; (8) maintaining a "Showcase" dealership,³ and (9) meeting a quota for dealer franchises established within the distributorship territory. For these efforts, each distributor received as remuneration 25% of Lawn King's 10% weekly franchise fee collected from each dealer within the distributor's territory, $750 for each franchise established within the distributor's territory, and a mark-up of 20% on the distributor's sales of chemicals and seeds to dealers. A list of additional terms similar to those contained in the Dealer Franchise Agreements was also appended to each Distributor Franchise Agreement.

On June 15, 1973, a State Grand Jury returned a multiple-count indictment charging Lawn King and Joseph Sandler with several restraints of trade in violation of Section 3 of the State Antitrust Act (N.J.S.A. 56:9-3).⁴ Count I alleged various vertical restraints; Count II essentially tracked Count I but alleged that these practices constituted illegal horizontal trade restraints; Counts III through VI alleged various illegal tying arrangements, and Count VII alleged an illegal conspiracy among Lawn King, its distributors, and a supplier to restrict access of Lawn King dealers to chemicals and seeds.

The trial court, in a reported opinion, 150 N.J.Super. 204, 375 A.2d 295 (Law Div. 1977), after initially finding that the State Antitrust Act, N.J.S.A. 56:9-1 et seq., was not preempted by the federal Sherman Antitrust Act, 15 U.S.C.A. §§ 1-7, 150 N.J.Super. at 217-220, 375 A.2d 295, determined that the proper test or standard to apply in determining the illegality of the alleged restraints of trade was the per se rule, relying inter alia on United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967). 150 N.J.Super. at 224, 375 A.2d 295. The court then proceeded to find both defendants guilty of the following restraints of trade in violation of the State Antitrust Act: (1) price-fixing or resale price maintenance, i. e., requiring Lawn King dealers to offer their services at a fixed or designated price (Counts I and II), id. at 227, 375 A.2d 295; (2) territorial restrictions, i. e., prohibiting the dealers from selling Lawn King goods or services outside of their franchise areas (Counts I and II), id. at 230, 375 A.2d 295; (3) an illegal tying arrangement by which dealers were required to purchase necessary seeds and chemicals either from Lawn King (distributors) or from "approved sources" (Count VI), id. at 238, 375 A.2d 295; (4) compelling the dealers to engage in cooperative advertising (Count I), id. at 241, 375 A.2d 295, and (5) imposing a right of first refusal upon the dealers' power to sell their franchises (Count I), ibid. The court found defendants not guilty of all other charges. Defendants' motions (1) to set aside the verdict, (2) for a directed verdict of acquittal n. o. v., and (3) for a new trial...