State v. Lawn King, Inc.

• Decision Date: 03 July 1979
• Citation: 404 A.2d 1215,169 N.J.Super. 346
• Parties: , 1979-2 Trade Cases P 62,800 STATE of New Jersey, Plaintiff-Respondent, v. LAWN KING, INC., a Corporation of the State of New Jersey and Joseph Sandler, Defendants-Appellants.
• Court: New Jersey Superior Court — Appellate Division

Page 346

169 N.J.Super. 346

404 A.2d 1215, 1979-2 Trade Cases P 62,800

STATE of New Jersey, Plaintiff-Respondent, v. LAWN KING, INC., a Corporation of the State of New Jersey and Joseph Sandler, Defendants-Appellants.

Superior Court of New Jersey, Appellate Division.

Argued April 24, 1979.

Decided July 3, 1979.

John A. Craner, Mountainside, for defendants-appellants (Craner & Nelson, Mountainside, attorneys; Elizabeth A. Truly, Mountainside, on the brief).

Robert J. Clark and Laurel A. Price, Deputy Attys. Gen., for plaintiff-respondent (John J. Degnan, Atty. Gen., attorney; Martha K. Kwitny, Deputy Atty. Gen., on the brief).

Before Judges HALPERN, ARD and ANTELL.

The opinion of the court was delivered by

ANTELL, J. A. D.

Defendants appeal from their convictions under the first, second and sixth counts of an indictment charging multiple violations of the New Jersey Antitrust Act, N.J.S.A. 56:9-3. The judgment under review, entered after a nonjury trial, rests upon findings of vertical trade restraints in the form of price fixing, allocation of exclusive territories, tying arrangements, advertising restrictions and restraints upon alienation. It was within the context of dealer and distributor franchise arrangements for the furnishing of automated lawn care maintenance service to the public that the offending practices were found. Defendant Sandler was president and controlling stockholder of the corporate defendant, which functioned as franchisor, and the gist of the charges is that defendants illegally restrained competition between the franchisees.

The judgment below was accompanied by a formal opinion, reported at 150 N.J.Super. 204, 375 A.2d 295 (Law Div.1977), and followed by another reported at 152 N.J.Super. 333, 377 A.2d 1214 (Law Div.1977), which comprehensively outline the circumstances of the case. We therefore find it unnecessary to restate the complex factual details, but instead incorporate them by reference to the opinions below.

Paramount among the grounds urged for reversal is defendants' contention that the trial judge erred in refusing to analyze the evidence under the "rule of reason" and by holding that the business behavior here questioned is illegal Per se. They also urge that the findings and evidence are insufficient to support his determinations that defendants were guilty either of price fixing or tying arrangements, or to support his conclusion that defendants' advertising restrictions and restrictions upon resales of the franchises constituted unreasonable restraints of trade or commerce.

Our analysis begins with the statute under which the indictment was returned, N.J.S.A. 56:9-3, which provides:

Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce, in this State, shall be unlawful.

This section should be read together with N.J.S.A. 56:9-18, which states:

This act shall be construed in harmony with ruling judicial interpretations of comparable Federal antitrust statutes and to effectuate, insofar as practicable, a uniformity in the laws of those states which enact it.

Also see Exxon Corp. v. Wagner, 154 N.J.Super. 538, 544, 382 A.2d 45 (App.Div.1977).

In the federal jurisdiction it is settled that the comparable provision of the Sherman Anti-Trust Act, 15 U.S.C.A. § 1, does not embrace all restraints of trade. It prohibits only those which "unreasonably" curtail competition. Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958); Standard Oil Co. v. United States, 221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 619 (1911); Note, "Vertical Restraints Legality of Non-price Vertical Restraints Determined Under Rule of Reason," 9 Seton Hall L.Rev. 496, 502 (1978). For guidance in application the United States Supreme Court adopted what is known as the rule of reason test. The most frequently cited statement thereof is the following by Justice Brandeis in Board of Trade of City of Chicago v. United States, 246 U.S. 231, 38 S.Ct. 242, 62 L.Ed. 683 (1918):

Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences. (246 U.S. at 238, 38 S.Ct. at 244)

Accord, White Motor Co. v. United States, 372 U.S.. 253, 262, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963). "Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 97 S.Ct. 2549, 2557, 53 L.Ed.2d 568 (1977).

Faced with the necessity of dealing with overwhelmingly complicated factual patterns, the court concluded that some business practices are Per se violations. As it explained in Northern Pacific Ry. Co. v. United States, Supra :

* * * 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. This principle of Per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable an inquiry so often wholly fruitless when undertaken. (356 U.S. at 5, 78 S.Ct. at 518)

Refining this somewhat, the court in United States v. Topco Associates, Inc., 405 U.S. 596, 607-608, 92 S.Ct. 1126 1133, 31 L.Ed.2d 515 (1972), commented that "It is only after considerable experience with certain business relationships that courts classify them as Per se violations of the Sherman Act." Elsewhere it has been observed, "The usual assumption is that a Per se rule would grow out of a history of rule of reason cases all arriving at the same verdict." Northwest Power Products, Inc. v. Omark Industries Inc., 576 F.2d 83, 88 (5 Cir. 1978), Cert. den. --- U.S. ----, 99 S.Ct. 1021, 59 L.Ed.2d 75 (1979). Only after careful and deliberate study have the federal courts over the years classified certain forms of business behavior as illegal Per se.

The applicable judicial methodology is demonstrated in the following passage from Kentucky Fried Chicken v. Diversified Packaging, 549 F.2d 368 (5 Cir. 1977), wherein the court weighed the factors appropriate for determining whether the Per se rule should be applied to "approved source" requirements in franchise agreements.

When we turn from tying to approved-source requirements, however, the situation is somewhat different. The threat that franchisors will abandon franchising does not affect us, but the potential pro-competitive effects of franchising lead us to proceed cautiously lest we unduly shackle franchisors without achieving discernible competitive benefits. We must encourage business ingenuity so long as it is not competitively stifling. We deal here not with tie-ins, whose adverse effects and lack of redeeming virtue are by now quite familiar, but instead with approved-source requirements. When we become more familiar with large-scale franchising and with approved-source requirements, we may discern that the latter are wholly unnecessary to the former. Indeed, we may one day learn that approved-source requirements are consistently hurtful of competition or that sorting the anti-competitive provisions from the innocuous ones is a task too elusive or time consuming to warrant the effort. It will be time enough, however, to declare such requirements to be per se violations when that day arrives. It is enough to decide today's cases today and leave future cases to the wisdom and experience of future years. Economic decisions derive from contemporary economic analysis. (at 379-380)

In determining whether Per se rules are appropriate because of " manifestly anticompetitive" effects, Continental T.V. Inc. v. GTE Sylvania Inc., Supra, 97 S.Ct. at 2558, signal regard is often given to whether a particular restraint is horizontal or vertical. The former occurs among competitors at the same level of market structure, whereas the latter involves combinations of business organizations at different levels. United States v. Topco Associates, Inc. supra, 405 U.S. at 608, 92 S.Ct. 1126. Horizontal restraints are regarded as "classic examples" of Per se violations. Id. They "are naked restraints of trade with no purpose except stifling of competition." White Motor Company v. United States, Supra, 372 U.S. at 263, 83 S.Ct. at 702. On the other hand,

A vertical territorial limitation may or may not have that purpose or effect. We do not know enough of the economic and business stuff out of which these arrangements emerge to be certain. They may be too dangerous to sanction or they may be allowable protections against aggressive competitors or the only practicable means a small company has for...