Guild Wineries & Distilleries v. J. Sosnick & Son

102 Cal. App. 3d 627, 162 Cal. Rptr. 87, 1980 Cal. App. LEXIS 1515

Opinions

Opinion

BRUNN, J.

Footnotes

•

*

* (1a) This is a Cartwright Act private antitrust case. We hold that it is unlawful for a manufacturer who also distributes its own products in one geographic area to terminate an independent distributor when a substantial factor in bringing about the termination is the distributor’s refusal to accept the manufacturer’s attempt to enforce or impose territorial or customer restrictions among distributors. We reverse a judgment in favor of the manufacturer because of instructions to the jury inconsistent with this principle.

I

Guild Wineries and Distillers (hereinafter Guild) sued J. Sosnick & Son (Sosnick) seeking monies due for liquor which Guild had sold Sosnick. Sosnick filed a cross-complaint alleging violations of the Cartwright Act (Bus. & Prof. Code, § 16700 et seq.) and seeking treble damages. Before trial the parties stipulated to the amount Sosnick owed Guild. The trial proceeded on the issues joined on the cross-complaint. The jury decided in favor of Guild. Sosnick appeals from the resulting judgment.

Guild is a wine marketing cooperative controlled by its member grape growers. Guild’s share of the Northern California wine market was about 2 percent at pertinent times. Guild was not a wholesale distributor of its products before 1975, but marketed them through several independent wholesalers who also handled wines of Guild’s competitors.

Sosnick is a wholesaler of food and beverages based in South San Francisco. During the period which this litigation concerns, Sosnick handled hundreds of items of food and wine.

Fourteen wholesalers distributed Guild wines in Northern California. Guild assigned to each of them an area of primary responsibility adjacent to the wholesaler’s headquarters. Sosnick concentrated its Guild wine marketing in San Mateo County. The territories were not entirely exclusive in practice; distributors would sell Guild products outside their territory because of overlapping customer accounts. A distributor who represented Guild in one county might wholesale another company’s products in a second county and not infrequently would sell Guild wines to retailers in the latter area. Not surprisingly, this led to complaints by distributors to Guild. The evidence is in conflict as to whether Guild tried to dissuade distributors from poaching on each other’s territory.

In 1975, the Guild wholesale distributorship in Fresno terminated. Guild wanted to increase its sales in the Fresno area where most of its growers were concentrated. Guild therefore took over the Fresno wholesaling itself under the name “Valley Distributors.” Valley Distributors was not a separate entity, but merely a name under which Guild acted as a distributor.

The previous Fresno distributor had also been selling Guild wines to the Lucky Stores chain, whose central purchasing operations were in San Leandro and not in the Fresno area. When that distributor stopped handling Guild products, Sosnick (who was already selling Kosher foods to Lucky) began selling Guild wines to the chain at Lucky’s request. A Guild executive then called Sosnick at least twice and asked Sosnick to cease selling to Lucky because Guild wanted to handle the Lucky account itself through its new Valley Distributors operation. Martin Sosnick testified that the last request was angry and threatening. The Guild executive denied making threats. About two weeks later, Guild terminated Sosnick’s contract as a distributor. Several Guild executives testified that the decision to cancel Sosnick preceded the Lucky Stores incident and was not related to it.

It is undisputed that the evidence would support, although not compel, a finding that Sosnick’s insistence on selling to Lucky was a substantial factor in Guild’s decision to terminate Sosnick’s distributorship. The evidence would also support the opposite finding.

The basic disagreement between the parties is whether liability can be predicated upon the former finding. The disagreement arose in a conflict over instructions to the jury. Guild requested and the trial court gave instructions under which Guild would be liable only if, in terminating Sosnick, it joined in and acted in furtherance of an agreement or conspiracy among the competing independent wholesalers to divide the territory and customers between themselves.¹ The jury was precluded from imposing liability if Guild had acted alone, even if it had cancelled Sosnick for his refusal to yield the Lucky account to Guild.² Sosnick’s proposed instructions, which the trial court declined to give, were based on the theory that such conduct would violate the antitrust laws if it were carried out to enforce an illegal customer allocation agreement.³

II

In discussing whether the court’s instructions were prejudicially erroneous, we note preliminarily that the Cartwright Act “is patterned upon the federal Sherman Act and both have their roots in common law; hence federal cases interpreting the Sherman Act are applicable with respect to the Cartwright Act.” (Chicago Title. Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.2d 305, 315 [70 Cal.Rptr. 849, 444 P.2d 481].)

We observe next that “a refusal of a manufacturer to deal with a distributor can constitute a ‘combination’ in restraint of trade within the purview” of the Sherman Act. (Bushie v. Stenocord Corporation (9th Cir. 1972) 460 F.2d 116, 119; United States v. Parke, Davis & Co. (1960) 362 U.S. 29 [4 L.Ed.2d 505, 80 S.Ct. 503]; Albrecht v. Herald Co. (1968) 390 U.S. 145 [19 L.Ed.2d 998, 88 S.Ct. 869].)

The question is whether this is one of the situations where a manufacturer’s refusal to deal runs afoul of the antitrust laws. The answer hinges on whether Guild’s alleged conduct is unlawful per se or whether it is to be judged under the “rule of reason.” Sosnick does not contend that the evidence would support antitrust liability under the “rule of reason” approach; were that approach to be taken, the trial court’s instructions would either be correct or harmless error.

We conclude that this case—assuming, of course, that Sosnick’s refusal to agree to turn the Lucky account over to Valley was a substantial factor in Guild’s decision to terminate Sosnick—is governed by a per se principle.

It is settled that distributors cannot lawfully agree to divide territories or customers. Such conduct is sometimes called a “horizontal restraint,” and is a per se violation of the Sherman Act. (United States v. Topeo Associates (1972) 405 U.S. 596 [31 L.Ed.2d 575, 92 S.Ct. 1126].) The principle has deep roots, going back to Addyston Pipe & Steel Co. v. United States (1899) 175 U.S. 211 [44 L.Ed. 136, 20 S.Ct. 96]. When Guild became a distributor the same rule became applicable to it. Guild could not lawfully coerce a fellow distributor into allocating customers any more than Sosnick and other distributors could lawfully agree to such an allocation. (American Motor Inns, Inc. v. Holiday Inns, Inc. (3d Cir. 1975) 521 F.2d 1230, 1253-1254 [territo rial restrictions imposed by motel chain on its franchisees are horizontal restraints and illegal per se where the chain also operates motels]; Hobart Brothers Co. v. Malcolm T. Gilliland, Inc. (5th Cir. 1973) 471 F.2d 894, 899 [illegal horizontal restraint for manufacturer who also distributes to some accounts to limit territories of its distributors so as to eliminate competition between the manufacturer and its distributors].) Hobart Brothers and American Motor Inns cover the situation before us. (For a recent application of the same principle, see Krehl v. Baskin-Robbins Ice Cream Co. (C.D.Cal. 1978) 78 F.R.D. 108, 123.)

Per se principles are formulated where the conduct involved is manifestly anticompetitive and has no clearly discernible benefits to competition. (Continental T. V., Inc. v. GTE Sylvania Inc. (1977) 433 U.S. 36, 50 [53 L.Ed.2d 568, 580, 97 S.Ct. 2549]; Marin County Bd. of Realtors v. Palsson (1976) 16 Cal.3d 920, 934 [130 Cal.Rptr. 1, 549 P.2d 833].) The undesirable effects of a manufacturer restraining a distributor from selling to particular customers are that “they serve to suppress all competition between manufacturer and distributor for the custom of the most desirable accounts.... [without]... countervailing tendencies to foster competition between brands.” (White Motor Co. v. United States (1963) 372 U.S. 253, 272 [9 L.Ed.2d 738, 752, 83 S.Ct. 696] [Brennan, J., conc.].) The anticompetitive consequences were also lucidly noted in Industrial Bldg. Materials, Inc. v. Interchemical Corp. (9th Cir. 1970) 437 F.2d 1336, 1342, as follows: “The appellee cites many cases for the proposition that a manufacturer is free to agree with others to replace a distributor. In each of those cases, however, the manufacturer did not enter into competition with a distributor, and there was no removal of a competitor of the manufacturer from the market. In none of those cases did the agreement have an anticompetitive purpose or effect. [Citation.] When a distributor is replaced by another, the public is given a substitute with no diminution in the number of distributors offering services, but when a manufacturer enters the field and then removes a distributor, the public is left with only the manufacturer instead of the manufacturer and the independent distributor.” (Fn. omitted.)

Guild urges that Continental T. V., Inc. v. GTE Sylvania Inc., supra, 433 U.S. 36, changes the law. That case held that vertical, nonprice restraints by a manufacturer on distributors—e.g., manufacturer allocation of distributor territories—are not automatically unlawful but are to be tested under the rule of reason, i.e., by looking at the economic ef fects on competition. In that case, the restrictions required franchisees to sell the products from assigned locations. The manufacturer did not compete with its distributors. Not only is the case factually inapposite, but the court took pains to note that its decision did not alter the rule as to horizontal restraints: “There may be occasional problems in differentiating vertical restrictions from horizontal restrictions originating in agreements among the retailers. There is no doubt that restrictions in the latter category would be illegal per se, see, e.g., United States v. General Motors Corp., 384 U.S. 127 (1966); United States v. Topco Associates, Inc., supra [405 U.S. 596]....” (433 U.S. 36 at p. 58, fn. 28 [53 L.Ed.2d at p. 585].)

Thus, the per se rule of Topco (with which we started this discussion) remains unimpaired. Post -Continental T. V., Inc. cases have repeatedly so held, and have held further that horizontal restraints continue to be illegal per se. (See, e.g., Gough v. Rossmoor Corp. (9th Cir. 1978) 585 F.2d 381, 386; Oreck Corp. v. Whirlpool Corp. (2d Cir. 1978) 579 F.2d 126, 131 [cert. den. 439 U.S. 946 (58 L.Ed.2d 338, 99 S.Ct. 340)]; Eiberger v. Sony Corp. of America (S.D.N.Y. 1978) 459 F.Supp. 1276, 1284; Krehl v. Baskin-Robbins Ice Cream Co., supra, 78 F.R.D. 108 at p. 123; Du Pont Glore Forgan, Inc. v. Am. Tel. & Tel. Co. (S.D.N.Y. 1977) 437 F.Supp. 1104, 1113; Pitchford Scientific etc. v. PEPI, Inc. (W.D.Pa. 1977) 435 F.Supp. 685, 688.) Krehl is a post -Continental T. V., Inc. decision which continues to apply the principles of American Motor Inns and Hobart Brothers, supra. We follow these cases to conclude that Continental T. V. did not sub silentio overrule Topeo, American Motor Inns or Hobart Brothers.

At bottom, an antitrust decision of this kind is not an exercise in labeling a particular restraint “vertical” or “horizontal.” That can deteriorate into “formalistic line drawing.” (Continental T. V, Inc. v. GTE Sylvania Inc., supra, 433 U.S. 36 at pp. 58-59 [53 L.Ed.2d at p. 585].) What matters is that the conduct produces only anticompetitive effects without “countervailing benefits,” as we have noted above.

The dissent focuses on conceivably valid reasons of Guild’s termination of Sosnick, particularly Guild’s claim that he “refused to deliver promotional presale services to retail outlets, and thereby hampered Guild’s efforts to increase its market share.” Nothing we have said prevents Guild from offering evidence in support of this contention on retrial. Should the jury conclude that Guild terminated Sosnick because of his inadequate promotion, Guild would prevail. On the other hand, if the termination was caused by his competition for the Lucky account, and not by his alleged failure to promote Guild’s products, he would prevail on the liability issue. The concern expressed by the dissent, to the effect that Guild may take reasonable steps to enhance interbrand competition, is thus served.

The dissent would deny recovery to Sosnick, even if he proves that his termination was caused by his refusal to give up the Lucky account, on the ground that he did not also prove that Guild’s conduct was “lacking in any redeeming virtue.” Such a burden of proof is not necessary for the purpose of enabling the jury to deal with the economic realities of the situation. Moreover, for the reasons we stated earlier, the rule urged by the dissent is contrary to the controlling decisions and would frustrate rather than advance the purposes of the antitrust laws.

III

To sum up, Guild’s liability depended on the causes of Sosnick’s termination or the factors substantially affecting it. If one of these causes or factors was Sosnick’s refusal to enter into an arrangement effecting a territorial or customer allocation among distributors, an antitrust violation is established. (See Interphoto Corporation v. Minolta Corporation (S.D.N.Y. 1969) 295 F.Supp. 711, 719-723 [affd. per curiam (2d Cir. 1969) 417 F.2d 621]; Cornwell Quality Tools Co. v. C. T. S. Company (9th Cir. 1971) 446 F.2d 825, 832.) Guild’s proposed instructions Nos. 36 and 37, which were given by the trial court, were prejudicial because they informed the jury that liability could not be established unless they first found an “existing” agreement between Guild distributors to “divide the market and allocate customers” and further found that Guild “knowingly joined and acted as a party” to the agreement. In fact, there need not have been a concert of action among distributors, or an overt conspiracy between Guild and the several distributors, in order to establish a per se violation of the antitrust laws. “‘If the arrangement or combination... is put together through the coercive tactics of the seller alone, this is sufficient.’” (Hobart Brothers Co. v. Malcolm T. Gilliland, Inc., supra, 471 F.2d 894 at p. 900 [quoting from Osborn v. Sinclair Refining Company (4th Cir. 1963) 324 F.2d 566, 573-574, fn. 13]. See also United States v. Parke, Davis & Co., supra, 362 U.S. 29 at pp. 46-47 [4 L.Ed.2d 505 at pp. 516-517].) Such an agreement, combination or conspiracy may also be inferred from Guild’s conduct. (See United States v. Parke, Davis & Co., supra, at p. 40 [4 L.Ed.2d at p. 513].)

Guild’s instructions Nos. 36 and 37 should therefore not have been given with respect to the Lucky Stores matter, and Sosnick’s instructions Nos. 17 and 19 (or a modification embodying the basic principle of liability which we have outlined) should have been given.

Finally, Sosnick contends that the court should not have instructed on the duty to mitigate damages. Under the circumstances, the giving of that instruction was not prejudicial, but a broad mitigation rule finds no support in appellate antitrust decisions. In the event of a retrial, the court may instruct instead that as an element of damage Sosnick must show the lack of an alternative comparable substitute for the products formerly obtained from Guild. (Elder-Beerman Stores Corp. v. Federated Dept. Stores, Inc. (6th Cir. 1972) 459 F.2d 138, 148.)

The judgment is reversed. The purported appeal from the order denying a new trial is dismissed.

Rattigan, Acting P. J., concurred.

Assigned by the Chairperson of the Judicial Council.

1

The trial court gave Guild’s instruction No. 37: “Under the facts of this case any restrictions and limitations on territories or on customers imposed by Guild on its distributors would not constitute a violation of the antitrust laws entitling Mr. Sosnick to recover unless the acts were taken by Guild not as a producer or manufacturer interested in the distribution of its product, but rather were taken to enforce an agreement or conspiracy among the competing independent wholesalers of its product to divide the territories and customers between themselves.

“If you find that such an agreement existed, that is an agreement between the independent wholesalers to divide the market and to allocate the customers and that Guild, in terminating Sosnick, knowingly joined and acted as a party or acted in furtherance of that agreement, then you must find in favor of Sosnick and against Guild on this issue.”

2

The court also gave Guild’s instruction No. 36: “I instruct you that if Guild, provided it was acting alone and not pursuant to an unlawful conspiracy asked Sosnick to cease dealing with Lucky Stores because it wanted to service Lucky Stores and then terminated Sosnick because he refused, an antitrust violation could not be established for that termination.”

3

Sosnick’s proposed instructions Nos. 17 and 19 stated: “A seller of goods has a legal right to announce to his customers that he has established a policy prohibiting such customers from reselling the goods to a specified person or persons, and to refuse to deal with any customer who does not follow the policy. But it is illegal for the seller to take affirmative action, such as threatening to stop selling to his customer, to enforce his policy. Furthermore, the law imposes two important limitations on this right:

“First, if a seller announces to his customer a policy which—if accepted by the customer—would result in an illegal horizontal customer allocation agreement, it is illegal for the seller to go beyond a mere announcement of the policy and use other means— such as threats of termination if the customer refuses to comply—which effect adherence to the policy.

“Second, it is illegal for the seller to refuse to deal with a customer, if the refusal is made pursuant to an illegal combination or conspiracy.” (Inst. No. 17.)

“If a supplier (such as Guild) having an ongoing business relationship with a distributor (such as Sosnick) requests the distributor to enter into an agreement which would violate the Cartwright Act; if the distributor refuses to enter into the proposed illegal agreement; if the supplier exerts pressure upon the distributor to accept the illegal agreement; and if the supplier terminates the distributor because of the distributor’s refusal to accept, then the termination itself is in violation of the Cartwright Act.” (Inst. No. 19.)