Sunshine Books, Ltd. v. Temple University

• Decision Date: 28 December 1982
• Docket Number: No. 81-3129,81-3129
• Citation: 697 F.2d 90
• Parties: 1982-83 Trade Cases 65,110, 8 Ed. Law Rep. 600 SUNSHINE BOOKS, LTD., Appellant, v. TEMPLE UNIVERSITY, of the Commonwealth System of Higher Education, Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 90

697 F.2d 90

1982-83 Trade Cases 65,110, 8 Ed. Law Rep. 600

SUNSHINE BOOKS, LTD., Appellant, v. TEMPLE UNIVERSITY, of the Commonwealth System of Higher Education, Appellee.

No. 81-3129.

United States Court of Appeals Third Circuit.

Argued Sept. 15, 1982.

Decided Dec. 28, 1982.

Scott D. Patterson (argued), Saul, Ewing, Remick & Saul, Philadelphia, Pa., for appellant.

Matthew M. Strickler (argued), Michael L. Lehr, Geoffrey A. Kahn, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., for appellee.

Before ADAMS, HUNTER and BECKER, Circuit Judges.

OPINION OF THE COURT

BECKER, Circuit Judge.

Price competition in the retail sale of undergraduate textbooks at Temple University prompted this antitrust suit by appellant Sunshine Books, Ltd. ("Sunshine"), against appellee Temple University ("Temple"). Temple has long operated a student bookstore (the "Bookstore"); Sunshine sells student textbooks from a truck or trailer parked on the street near the Bookstore. Complaining that the Bookstore's one-week "manager's special" on fifty undergraduate textbook titles (offered at fifteen percent off suggested retail price) represented an attempt by Temple to monopolize the sale of undergraduate course textbooks to students at the University by means of predatory pricing, Sunshine brought this action against Temple under Section 2 of the Sherman Act, ¹ 15 U.S.C. Sec. 2 (1976). ²

Temple moved for summary judgment on the ground that its discounted prices were above average variable cost and, therefore, were presumptively not predatory. The district court allowed a brief period of discovery limited to issues raised by the motion. Then, relying exclusively on the Areeda-Turner definition of predatory pricing, ³ the court concluded that there were no genuine issues of material fact and that Temple had not priced the books sold during the "manager's special" below marginal or average variable cost; it therefore granted summary judgment for Temple. Sunshine Books, Ltd. v. Temple University, 524 F.Supp. 479, 481, 483-484 (E.D.Pa.1981).

Although this Court has reserved the question whether the Areeda-Turner standard represents the appropriate definition of predatory pricing, O. Hommel Co. v. Ferro Corp., 659 F.2d 340, 352 (3d Cir.1981), cert. denied, --- U.S. ----, 102 S.Ct. 1711, 72 L.Ed.2d 134 (1982), we need not reach that question here, for we find the existence of a genuine issue of material fact even within the Areeda-Turner framework. We therefore will vacate the decision below and remand for further proceedings.

I. FACTUAL AND PROCEDURAL BACKGROUND

Temple University operates five bookstores; the one whose practices are at issue here is located at the University's main campus in North Philadelphia. ⁴ That store carries each of the approximately 3,800 textbook titles used each semester in Temple's undergraduate and graduate courses and also stocks clothing, gifts, greeting cards, newspapers, magazines, and other publications of general interest.

In January 1979, Sunshine began to sell various school supplies and some graduate and undergraduate textbooks, at approximately ten percent off suggested retail prices, from a truck or trailer parked near Temple's Bookstore. ⁵ This enterprise, which continued only for the first two or three weeks of the semester, was repeated at the beginning of subsequent semesters.

The events that triggered the present suit began on the first day of Temple's Fall 1980 term, when the Bookstore ran a one-week "manager's special," offering fifty undergraduate textbook titles at fifteen percent below their suggested retail prices. The only titles discounted, with two or three exceptions, were those also sold by Sunshine. Upon hearing of the "manager's special," Sunshine posted the Bookstore's prices on its trailer and undercut those prices by an additional twenty-five cents. Sunshine then brought this action, alleging that Temple had attempted to monopolize the sale of undergraduate textbooks to students at the University by means of predatory pricing. Sunshine predicated its Sherman-Act claim essentially on the allegation that Temple had priced the books sold during the "manager's special" below cost, thereby forcing Sunshine to sell its own books below cost in order to compete. ⁶

Temple moved to dismiss or, in the alternative, for summary judgment, relying solely on its assertion that it had not sold the textbooks below cost and therefore could not have violated the Sherman Act. The district court allowed discovery on the cost issue and then granted Temple's motion. ⁷

II. APPLICABLE LEGAL PRINCIPLES

This Court hardly needs to reiterate that the purpose of the Sherman Act always has been to promote vigorous competition. Gordon v. New York Stock Exchange, Inc., 422 U.S. 659, 689, 95 S.Ct. 2598, 2614, 45 L.Ed.2d 463 (1975). Congress envisioned that rival sellers, seeking to enlarge their market shares, would lower prices in order to woo buyers from competing merchants. Such price competition undeniably would injure some sellers but also would improve the lot of consumers. Thus, "[t]he antitrust laws ... protect competition, not competitors; and stiff competition is encouraged, not condemned." Travelers Insurance Co. v. Blue Cross of Western Pennsylvania, 481 F.2d 80, 84 (3d Cir.), cert. denied, 414 U.S. 1093, 94 S.Ct. 724, 38 L.Ed.2d 550 (1973).

At the same time, prices that are calculated to destroy, rather than reflect, competition do not comport with the Act's purposes. "A firm which drives out or excludes rivals by selling at unremunerative prices is not competing on the merits, but engaging in behavior that may properly be called predatory." 3 P. Areeda & D. Turner, Antitrust Law p 711, at 150 (1978). Firms engage in such conduct with the intent of " 'foregoing present profits in order to create a market position in which [they] could charge enough to obtain supra-normal profits and recoup [their] present losses.' " O. Hommel Co. v. Ferro Corp., supra, 659 F.2d at 348 (quoting Hanson v. Shell Oil Co., 541 F.2d 1352, 1358 (9th Cir.1976), cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792 (1977)). Thus, a court confronted with an allegation of predatory pricing, as in this case, must determine whether the defendant in fact had been selling at "unremunerative prices," or below cost.

Before it can make such a determination, the court must decide precisely what constitutes the "cost" against which the price is to be measured. Professors Areeda and Turner have advanced the theory that only those prices below marginal cost or average variable cost ⁸ imply the existence of the kind of predatory pricing that offends the Sherman Act, ⁹ Areeda & Turner, supra note 3, at 716, and a number of courts have employed the Areeda-Turner analysis or in some degree adopted the Areeda-Turner prescription, see, e.g., Northeastern Telephone Co. v. American Telephone and Telegraph Co., supra note 9, 651 F.2d at 88 (agreeing with Areeda and Turner "in the general case at least"); International Air Industries, Inc. v. American Excelsior Co., supra note 3, 517 F.2d at 723-24; Weber v. Wynne, 431 F.Supp. 1048, 1059-60 (D.N.J.1977); cf. Monroe & Hill, The Predatory Pricing Controversy: Academic Theories Enter the Courtroom, 13 U.Tol.L.Rev. 539, 542-46 (1982) (discussing judicial treatment of Areeda-Turner and other cost-based tests). But see D & S Redi-Mix v. Sierra Redi-Mix and Contracting Co., 43 Antitrust & Trade Reg.Rep. (BNA) 893 (9th Cir. Nov. 2, 1982) ("This circuit has chosen not to adopt the simple Areeda and Turner formula."). The district court also adopted the Areeda-Turner analysis in this case and concluded that only those prices below average variable cost could be shown to be predatory. ¹⁰ Sunshine Books, Ltd. v. Temple University, supra, at 481. For purposes of this appeal, we shall assume, without deciding, the correctness of the district court's position that the average-variable-cost standard offers the preferred way to approach a claim of predatory pricing. ¹¹ Cf. O. Hommel Co. v. Ferro Corp., supra, 659 F.2d at 352 (declining to declare adherence to Areeda-Turner thesis "or any other economic theory proposed").

III. DISPUTED ALLOCATIONS OF COST: IS THERE A GENUINE ISSUE OF MATERIAL FACT?

Adhering to the precepts of Areeda-Turner analysis, the district court examined the accounting evidence submitted by the parties and compared Temple's revenues with its incurred costs in order to determine whether the fifteen-percent-off "manager's special" resulted in sales of textbooks below average variable cost. Total sales of the fifty titles included in the "manager's special" amounted to $118,427.85, with an invoice price of $108,012.40. Temple's gross margin was thus $10,415.45. The district court further reduced this margin to $6,720.70 by deducting several other expenditures that either were undisputed or were resolved in accordance with the figures offered by Sunshine: freight-in charges of $2,134.65; freight charges for returned books of $1,056.82; bad-check expenses of $355.28; and handbill printing costs of $148.

The dispute in this case focused on the payroll expenses and the amount--if any--that should be allocated for "inventory shrinkage" (i.e., theft). The district court determined that Temple's payroll expenses in connection with the sale were $3,787.97 but that the cost of theft should not be considered a variable cost. Subtracting $3,787.97 from $6,720.70, the court found that Temple had received a return of $2,932.73 above variable cost and therefore had not engaged in predatory pricing. Sunshine, however, argues that the "manager's special" cost Temple $7,839.19 in payroll expenses and that a 2.9 percent inventory-shrinkage charge (amounting to $3,434.41) also should have been included as a variable cost; acceptance of either or both of Sunshine's figures would reduce Temple's return below average variable cost--a result that Areeda-Turner analysis would...