U.S. v. Coca-Cola Bottling Co. of Los Angeles, COCA-COLA

• Decision Date: 28 March 1978
• Docket Number: 77-2778,COCA-COLA,Nos. 77-2683,s. 77-2683
• Citation: 575 F.2d 222
• Parties: 1978-1 Trade Cases 61,973 UNITED STATES of America, Plaintiff-Appellee, v.BOTTLING COMPANY OF LOS ANGELES and Arrowhead Puritas Waters, Inc., Defendants, and Aqua Media, Ltd., and A. M. Liquidating Co., Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 222

575 F.2d 222

1978-1 Trade Cases 61,973

UNITED STATES of America, Plaintiff-Appellee, v. COCA-COLA BOTTLING COMPANY OF LOS ANGELES and Arrowhead

Puritas Waters, Inc., Defendants,

and

Aqua Media, Ltd., and A. M. Liquidating Co., Defendants-Appellants.

Nos. 77-2683, 77-2778.

United States Court of Appeals, Ninth Circuit.

March 28, 1978.

Rehearing and Rehearing En Banc Denied May 18, 1978.

Dale E. Fredericks (argued), Sedgwick, Detert, Moran & Arnold, San Francisco, Cal., for defendants.

Catherine G. O'Sullivan (argued), of U. S. Dept. of Justice, Washington, D. C., for plaintiff-appellee.

Appeal From The United States District Court For The Central District of California.

Before CARTER and GOODWIN, Circuit Judges, and SOLOMON, ^* District Judge.

JAMES M. CARTER, Circuit Judge:

These are consolidated interlocutory appeals from a preliminary injunction and from an order denying appellants' motion to dissolve the same injunction. The injunction arose in a suit by the United States against both the buyers and the sellers in a corporate acquisition which is alleged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18. The complaint sought divestiture or rescission of the acquisition as alternative remedies. To preserve the possibility of a decree of rescission at the conclusion of trial, the district court, on motion of the government, issued a preliminary injunction maintaining the status quo pendente lite. The sellers contend on appeal: (1) the remedy of rescission is not legally available to redress violations of Section 7 of the Clayton Act, and (2) even if legally permissible, rescission is precluded by the particular facts of this case. We AFFIRM.

I. FACTS.

A. Background and Parties.

The buyer-defendants below are Coca-Cola Bottling Company of Los Angeles (CCLA) and its wholly-owned subsidiary, Arrowhead Puritas Waters, Inc. (Arrowhead). The seller-defendants, appellants herein, are A. M. Liquidating Company, a closely held California corporation presently in liquidation, and Aqua Media, Ltd., a California limited partnership. Appellant A. M. Liquidating Company was formerly called Aqua Media, Inc., but when the majority of the assets of Aqua Media, Inc. were sold to Arrowhead the corporation changed its name and began liquidation. The limited partnership, Aqua Media, Ltd. was formed at the time of the sale by certain stockholders of Aqua Media, Inc. to purchase and operate the company's remaining manufacturing and service business. For convenience both appellants are sometimes collectively referred to as "Aqua Media".

The defendants in the antitrust suit below are all industrial water service companies engaged in the provision of high purity industrial water services. Numerous categories of industrial and commercial businesses require water from which substantially all the impurities have been removed. ¹ This chemically and biologically pure water is obtained either by purchasing it directly from industrial water service companies or by purchasing the purification equipment itself from the same companies. ²

Aqua Media, Inc. was incorporated in 1967. ³ Its primary line of business was the provision of purified water to industrial and commercial users. Most of its business centered in California, but eventually the company's services expanded into Arizona, New Mexico, Texas and the Pacific Northwest. Certain foreign countries also purchased from the corporation.

In 1972 Aqua Media, Inc. developed a secondary line of business the manufacture of systems and equipment for industrial water purification. Originally the company considered its two lines of business to be compatible, but by early 1976 its board of directors had determined that the best vehicle for expansion into national and international markets was the provision of systems and equipment rather than provision of the water itself. Because the California market was considered to be finite the board concluded that Aqua Media, Inc., as then capitalized, did not have sufficient working capital to expand into the national and international markets while at the same time maintaining its California water provision services. It was in this posture that Aqua Media, Inc. received Arrowhead's invitation to enter negotiations for the sale of its California service business and related assets.

B. The Acquisition.

On May 3, 1976, in contemplation of the possible sale of its California service business to Arrowhead, Aqua Media, Inc. adopted a plan of complete liquidation in compliance with the Internal Revenue Code, § 337. The plan, designed to make the eventual sale tax free at the corporate level, was contingent upon the company entering a binding contract of sale with Arrowhead.

Aqua Media, Inc. then negotiated with Arrowhead and on July 20, 1976, the two entered an asset purchase agreement whereby Arrowhead acquired "substantially all of the California industrial water service business assets of Aqua Media." R. 632. The purchase price was $4,750,000, payable $2,750,000 cash on closing and $2,000,000 in promissory notes payable February 28, 1977.

In addition three ancillary agreements were entered: (1) a letter agreement dated July 19, 1976, provided that Arrowhead would provide certain water purification support services for Aqua Media's customers outside California; (2) a distributorship agreement executed August 2, 1976, appointed Arrowhead to be Aqua Media, Inc.'s exclusive distributor for the sale in California of Aqua Media's water purification systems and equipment; and (3) a parol agreement on or about August 2, 1976, granted to Arrowhead certain of Aqua Media's customer accounts in Nevada.

The acquisition agreement was closed on August 2, 1976, when Arrowhead paid the $2,750,000 cash and delivered two promissory notes in the aggregate of $2,000,000 payable on February 28, 1977. Aqua Media passed clear title to the assets sold.

On the next day, pursuant to its plan, Aqua Media, Inc. sold its remaining assets ⁴ to the newly formed limited partnership, Aqua Media, Ltd. ⁵ Aqua Media, Inc. then changed its name to A. M. Liquidating Company.

The liquidating company proceeded to collect its assets, pay its liabilities and make liquidating distributions to its shareholders. Prior to December 23, 1976, the date on which this action was filed, liquidating distributions of $2,091,000 had been authorized and paid. On December 23, 1976, the company had assets of $2,488,075 subject to liquidated and undisputed liabilities of $240,015 and certain contingent and disputed liabilities. It was then estimated that upon completion of the plan an additional $1,394,000 would be distributable to the shareholders.

C. Procedural History.

The Department of Justice filed its complaint on December 23, 1976, naming both the buyers (CCLA and Arrowhead) and the sellers (A. M. Liquidating Company and Aqua Media, Ltd.) as defendants. The complaint sought divestiture or rescission as alternative remedies "to prevent and restrain the continuing violation by the defendants . . . of Section 7 of the Clayton Act (15 U.S.C. § 18)." Appellants moved alternatively for dismissal, summary judgment or an order striking the prayer for rescission. They contended that Section 7 of the Clayton Act applies only to the conduct of buyers in prohibited acquisitions, not that of sellers. Accordingly they maintained rescission was not an available remedy in Section 7 cases. They also argued that even if rescission was available in proper cases, as a matter of law it is not available in the facts of this case. The motion was denied from the bench.

The government then moved immediately for a temporary restraining order and a preliminary injunction to prevent A. M. Liquidating Company and Aqua Media, Ltd. from further implementing the plan of liquidation by distributing the proceeds of the sale, except for certain payments currently due to bona fide creditors. By stipulated order appellants were temporarily enjoined pending a hearing on the government's motion. On March 14, 1977, after a hearing, the district judge granted the government's motion. He explained:

"In our view the government has sustained its burden of showing substantial likelihood of its success on the merits when the action is tried and, further, that the public interest outweighs the hardships claimed by the Defendants.

"While we concur with the abstract proposition that sellers are not liable under the Clayton Act, we hold that in this case the requested injunction may issue because on the record before us an effective remedial order, if the merger is completed, would be either impossible or severely limited.

"The argument that rescission here is not available is inconclusive, and the Court retains that option.

"A preliminary injunction, in our view, is necessary to maintain the status quo."

The preliminary injunction order was filed April 27, 1977, accompanied by extensive findings of fact and conclusions of law. ⁶ Appellants moved to dissolve the injunction on the same grounds they originally argued. Their motion was denied. From the preliminary injunction and the denial of their motion to dissolve it A. M. Liquidating Company and Aqua Media, Ltd. appeal.

II. LEGAL AVAILABILITY OF RESCISSION.

We note at the outset that this case is before us in a unique posture. The district judge has not held a trial on the merits and has not decreed any final relief. We are only conducting an interlocutory review of the preliminary injunction. Yet the injunction is forward-looking, preserving the status quo pendente lite in contemplation of a potential decree of rescission. Appellants' arguments center not on any immediate harm caused them by the injunction itself, but on the legal and factual availability of the ultimately possible remedy of rescission. Thus our review of the legal issue involved the availability of rescission in Clayton § 7 cases is conducted largely in the abstract. And our review of the factual...