United States v. Crown Zellerbach Corporation

• Decision Date: 11 April 1956
• Docket Number: No. 55 C 1480.,55 C 1480.
• Citation: 141 F. Supp. 118
• Parties: UNITED STATES of America v. CROWN ZELLERBACH CORPORATION, American Linen Supply Company, Frank G. Steiner, Jonas H. Mayer, and Wayne Brown.
• Court: U.S. District Court — Northern District of Illinois

141 F. Supp. 118

UNITED STATES of America v. CROWN ZELLERBACH CORPORATION, American Linen Supply Company, Frank G. Steiner, Jonas H. Mayer, and Wayne Brown.

No. 55 C 1480.

United States District Court N. D. Illinois.

April 11, 1956.

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Earl A. Jinkinson, Bertram M. Long,

Raymond C. Nordhaus, Chicago, Ill., for plaintiff.

William J. Friedman, Joseph T. Zoline, Jack H. Oppenheim, Chicago, Ill., Philip S. Ehrlich, Philip S. Ehrlich, Jr., San Francisco, Cal., for defendants Crown Zellerbach Corp. and Wayne Brown, Friedman, Zoline & Rosenfield, Chicago, Ill., of counsel.

Leo F. Tierney, Roger W. Barrett, Charles L. Stewart, Jr., Chicago, Ill., for defendants American Linen Supply Co., Frank G. Steiner and Jonas H. Mayer, Mayer, Friedlich, Spiess, Tierney, Brown & Platt, Chicago, Ill., of counsel.

HOFFMAN, District Judge.

This proceeding in equity was brought by the United States under the provisions of Section 4 of the Sherman Anti-Trust Act, 15 U.S.C.A. § 4, 26 Stat. 209 as amended, to enjoin alleged offenses under Section 1 of the Sherman Act, 15 U.S.C.A. § 1, 26 Stat. 209 as amended. The suit was originally commenced in the District Court for the Eastern District of Wisconsin, and was transferred to this court upon the defendants' motion under the provisions of § 1404 of the Judicial Code, 28 U.S.C.

Named as defendants are two corporations and three individuals. The defendant American Linen Supply Company (hereafter referred to as ALSCO) is a Nevada corporation with principal offices in Chicago. ALSCO's president, Frank G. Steiner, and its vice-president, Jonas H. Mayer, are also joined. The other corporate defendant is Crown Zellerbach Corporation (hereafter referred to as Crown), also incorporated under the laws of Nevada, and maintaining its principal offices in San Francisco. The defendant Wayne Brown is presently assistant vice-president of Crown and was formerly sales manager for Crown's Eastern Division. All are charged in the complaint with a conspiracy to restrain trade and commerce in the sale of paper towel cabinets and paper towels in violation of Section 1 of the Sherman Act.

The matter is now before the court upon a group of motions by the defendants directed against the complaint. ALSCO and Crown have moved for dismissal upon the ground that the complaint is legally insufficient. The three individual defendants seek dismissal of the action as to them upon the ground that the complaint fails to state a claim upon which relief can be granted against them. And all of the defendants have presented combined motions for an order striking certain allegations of the complaint or, in the alternative, for an order directing the plaintiff to provide a more definite statement of these allegations.

Allegations of the Complaint.

The controversy arises, according to the plaintiff's complaint, out of an arrangement between ALSCO and Crown which had its beginnings in 1938. ALSCO was then engaged in the business of manufacturing and distributing cabinets for dispensing linen and paper towels, and of selling paper towels. It was the owner of certain patents covering the mechanisms of paper towel cabinets which control the rate of dispensing rolled towels. These cabinets, and the towels dispensed by them, were distributed to various industrial concerns, stores, restaurants, Government agencies, and institutions, through independent distributors classified either as linen supply companies or as paper jobbers. Broadly speaking, the complaint defines linen supply companies as distributors of paper towel cabinets and paper toweling who also supply cloth towels, table-cloths, napkins, uniforms, and other cloth products to their customers. Paper jobbers, on the other hand, supply only paper goods and cabinets for dispensing them.

The method of distribution employed by ALSCO involved a sale of the paper towel cabinet, with an accompanying lease of the patented mechanism, to the distributing linen supply company or paper jobber. These distributors, in turn, installed the paper towel cabinets in the places of business of their customers without charge upon the condition that the customers would purchase their total requirements of paper towels from the distributor making the installation. ALSCO also operates its own linen supply companies, dealing directly with the customers.

In 1938, ALSCO entered into a written agreement with Crown, a corporation similarly engaged in distributing paper towel cabinets and of producing and selling paper towels. Under the terms of this agreement, it is alleged, ALSCO licensed Crown to use and to distribute ALSCO's patented paper towel cabinets in the continental limits of the United States east of the Mississippi River. ALSCO reserved to itself the territory west of the Mississippi, and, in addition, agreed that Crown's license to distribute the patented cabinets in the eastern territory should be exclusive except for the right to distribute to customers in the linen or cloth towel supply business, which ALSCO reserved exclusively to itself. The effect of this alleged agreement was to give Crown the sole right to sell the cabinets to paper jobbers in the eastern United States, and to reserve to ALSCO the linen supply company customers in that area. All customers west of the Mississippi were reserved to ALSCO.

Crown also agreed, the complaint continues, that it would not sell but would only lease the patented cabinets to the distributors, and that each such lease would require the cabinet to be used only to dispense paper towels purchased from Crown. Crown agreed in addition not to manufacture, purchase, or lease any other paper towel cabinet in its territory, and not to contest ALSCO's present or future patents on paper towel dispensing appliances. Competition between the respective distributors of Crown and ALSCO was foreclosed by Crown's agreement that it would not sell or lease any cabinets to replace cloth or paper towel cabinets installed by any of ALSCO's distributors, and by ALSCO's agreement that any of its linen supply company distributors who replaced cabinets installed by one of Crown's jobbers would lose the right to be protected from competition from Crown's paper jobbers.

This agreement was modified, according to the complaint, on May 29, 1942 and again on January 1, 1949. These modifications consisted in the deletion of (1) any reference to the restriction on Crown's manufacturing, purchasing, or leasing any other paper towel cabinets in its territory, (2) any reference to the agreement that leases made by Crown should require the cabinet to be used to dispense towels purchased from Crown only, and (3) any reference to the restriction upon the jobbers of ALSCO and Crown from competing with each other by raiding each other's customers and replacing cabinets installed by the other.

Subsequently, on February 1, 1952, ALSCO's president, the defendant Frank G. Steiner, terminated the exclusive territorial rights of Crown in the territory east of the Mississippi, leaving ALSCO or some other licensee it might designate free, on the face of the written agreement, to sell and lease paper towel cabinets containing ALSCO's patented parts in that area.

Notwithstanding these modifications of the 1938 agreement, the government charges, the defendants have continued to carry out and to effectuate many of the terms of the original 1938 contract and the practices it provided. Thus although the exclusive nature of Crown's license was withdrawn, ALSCO agreed to confer with Crown before appointing as its distributor any paper jobber in the territory east of the Mississippi. ALSCO continues to prevent Crown from selling or leasing the paper towel cabinets covered by the license in the territory, reserved to ALSCO, west of the Mississippi. Crown is still prohibited from dealing with linen supply companies, in any part of the United States. And the defendants have agreed to prevent their jobbers and distributors from competing for each other's customers.

Under the defendants' arrangements, ALSCO has marketed the paper towel cabinets containing the patented mechanism under the trade name "American Automatic," while Crown has distributed the same cabinets under its license as "Tymatic" towel dispensers. The government claims in its complaint that in order to prevent their respective distributors from competing for each other's customers and to prevent other manufacturers of paper toweling from competing with the defendants, Crown and ALSCO have devised a scheme known as "bootleg control." This consists of fitting each cabinet with attachments and special groovings so that only specially designed rolls of paper towels can be used. At the time of filing the complaint, it is said, ALSCO's "American Automatic" cabinets can thus accomodate only paper towels sold by ALSCO, and Crown's "Tymatic" cabinets require Crown's paper towel rolls.

Until some time in 1952, the complaint continues, ALSCO purchased its total requirements of paper towels from Crown. Since that time it has produced and manufactured a part of its needs, has purchased part from Crown, and has obtained the remainder of its needs from other paper producers.

In enforcing the agreements and understandings between them, the defendants, according to the government's claim, have investigated compliance with their terms and have compelled observance, have required their jobbers who have violated the agreements to make restitution for customers they have taken, and have threatened to cancel and have cancelled their jobber's agreements with jobbers who fail to conform.

On the question of the quantitative substantiality of the commerce affected, the complaint sets forth that in 1949 ALSCO had approximately 125,000 of its paper towel cabinets installed and in use, and in that year sold an estimated 140,000 cases of paper towels. At the time of the...