Source: http://openjurist.org/660/f2d/255
Timestamp: 2014-04-21 10:14:57
Document Index: 628507619

Matched Legal Cases: ['§ 1', '§ 1', '§ 7', '§ 18', '§ 16', '§ 26', '§ 2283', '§ 2283']

660 F2d 255 Lektro-Vend Corporation v. Vendo Company | OpenJurist
660 F. 2d 255 - Lektro-Vend Corporation v. Vendo Company	Home660 f2d 255 lektro-vend corporation v. vendo company
660 F2d 255 Lektro-Vend Corporation v. Vendo Company 660 F.2d 255
1981-2 Trade Cases 64,258
LEKTRO-VEND CORPORATION, a Delaware corporation, Ann Stoner,As Administrator of the Estate of Harry B. Stoner,Deceased, and Stoner Investments, Inc.,a Delaware corporation,Plaintiffs-Appellants,v.The VENDO COMPANY, a Missouri Corporation, Defendant-Appellee.
No. 80-2120.
Argued Feb. 10, 1981.Decided Aug. 27, 1981.Certiorari Denied Jan. 25, 1982.See 102 S.Ct. 1277.
James E. S. Baker, Sidley & Austin, Chicago, Ill., for plaintiffs-appellants.
Earl E. Pollack, Chicago, Ill., for defendant-appellee.
Before PELL, Circuit Judge, MARKEY,* Chief Judge, and WOOD, Circuit Judge.
This appeal represents the culmination of nearly sixteen years of litigation over complex antitrust issues at all levels of the Illinois and federal court systems. In this most recent appeal, the plaintiffs contest the district court's findings that a certain acquisition by the defendant company in 1959, and the concomitant execution of covenants not to compete, did not violate §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and § 7 of the Clayton Act, 15 U.S.C. § 18.
The plaintiffs in this case are Lektro-Vend Corporation (Lektro-Vend) and Stoner Investments, Inc. (Stoner Investments), both Delaware corporations, and Ann Stoner, Administrator of the estate of Harry B. Stoner.1 Harry Stoner (Stoner), an innovative design genius in the vending machine manufacturing industry, was president and controlling owner of Stoner Manufacturing Corporation (Stoner Manufacturing) prior to its 1959 sale to the Vendo Company (Vendo). Stoner Manufacturing primarily manufactured and marketed candy vending machines. The defendant, Vendo, is a Missouri corporation which manufactures and markets various types of vending machines. After the 1959 sale, Stoner held the office of president of Vendo's Aurora, Illinois Division until June 1, 1964. He also served as a Vendo director from May 28, 1959 to April 21, 1964.
Plaintiff Lektro-Vend was developed with Harry Stoner's assistance beginning in 1961 to manufacture candy and snack pastry vending machines. It was formally incorporated in September, 1963. Plaintiff Stoner Investments, successor to Stoner Manufacturing, is a real estate and investment company which owns almost 80% of Lektro-Vend's stock. Stoner Investments was wholly owned by Harry and Ann Stoner prior to Harry Stoner's death.
Vendo's 1959 Acquisition of Stoner Manufacturing
Vendo primarily manufactured beverage and ice cream vending machines prior to 1959. By that time, Vendo was a leading vending machine manufacturer and was considering expanding its product line to include several types of machines it did not then manufacture including a candy machine. Stoner Manufacturing had previously approached Vendo in 1955 to suggest that Vendo acquire Stoner Manufacturing, but those negotiations had proved fruitless. In October 1958, prompted by Harry Stoner's failing health and the death of Stoner Manufacturing's executive vice-president, Clarence Adelberg, Stoner Manufacturing again initiated negotiations with Vendo. In an affidavit submitted to the Federal Trade Commission to gain premerger clearance, Stoner explained his reasons for selling the business:
The stock of the Corporation is owned by four members of our family. There are 870 shares outstanding, of which I own 245 and my wife owns 155.
My own health has never been robust.... Nevertheless, I had always felt able to, and had, managed the business without difficulty until the death of Clarence R. Adelberg.... Since his death there has been a void in management which has not yet been filled.
... I am concerned because the principal asset of each of the stockholders is his Stoner Mfg. Corp. stock. I feel that the strain of my responsibility is too great in the present state of my health.
Vendo seemed to be a logical purchaser because no other prospective purchaser had any management people capable of running the business without being educated in the vending machine field. Vendo being experienced in that field will be able to take over with less assistance from me.
I am interested in having the business continued, by people who have capable management and who will continue to employ and be compatible with our present officers and employees and with a minimum of dislocation of business practices and employment security. I do not want to let the business just drift and carry on of its own momentum because this cannot continue indefinitely and there is great risk of loss involved in such a program....
The district court found that Vendo acquired Stoner Manufacturing to expand its line of vending machines.2 Robert Wagstaff, Vendo's chief negotiator in the acquisition, testified at trial that:
(W)e wanted to acquire its candy machine and add it to our line. We liked the capabilities that Stoner Manufacturing represented in connection with some other plans, although it mainly was a desire on our part to enlarge the line of equipment so that we could take care of this demand for full line vending, which was a very real thing in those days. We thought that was the main that was the main reason for our acquiring to (sic) Stoner.
We thought Harry Stoner would be an asset to our board of directors. He had a fine reputation in the industry, and we thought the name on his equipment was helpful.
On April 3, 1959, Vendo and Stoner Manufacturing entered into a sales contract. Vendo purchased Stoner Manufacturing's assets, including inventions, patents, drawings, designs, and research and development work, in exchange for $3,400,000 in cash and 60,000 shares of Vendo stock.3 The acquisition agreement contained a covenant prohibiting Stoner Manufacturing from any affiliation with
any business engaged in the manufacture and sale of vending machines under any name similar to the Company's present name, and, for a period of ten (10) years after the closing, the Company will not in any manner, directly or indirectly, enter into or engage in the United States or any foreign country in which Vendo or any affiliate or subsidiary is so engaged, in the manufacture and sale of vending machines or any business similar to that now being conducted by the Company.
... (and that Stoner Manufacturing will)
co-operate with Vendo to prevent the use by others of the names "Stoner" and "Stoner Manufacturing Corp." in connection with any business similar to that now carried on by the Company and also agrees not to disclose to others, or make use of, directly or indirectly any formulae or process now owned or used by the Company.
An employment contract was executed on June 1, 1959, which provided that Stoner would serve as an officer or function in whatever other executive or advisory capacity Vendo requested, subject to his health limitations, for five years at an annual salary of $50,000. Stoner stipulated that he would also become a director of Vendo for no additional compensation. The employment contract included the following clause:
During the term of this agreement and for a period of five (5) years following the termination of his employment hereunder, whether by lapse of time or by termination as hereinafter provided, Stoner shall not directly or indirectly, in any of the territories in which the Company or its subsidiaries or affiliates is at present conducting business and also in territories which Stoner knows the Company or its subsidiaries or affiliates intends to extend and carry on business by expansion of present activities, enter into or engage in the vending machine manufacturing business or any branch thereof, either as an individual on his own account, or as a partner or joint venturer, or as an employee, agent or salesman for any person, firm or corporation or as an officer or director of a corporation or otherwise, ... (but this does not prevent Stoner from working for Vendo or trading in the investment securities market).
The contract provided that Stoner would regulate his own working hours "it being understood that the value of Stoner's services ... are not measured by the amount of time or effort devoted to the business by Stoner but by the value of his advice and counsel in the operation of the Aurora, Illinois, facility, and his know-how, experience and reputation in the vending machine field."
The time span covered by the noncompetition covenants was identical to the period during which Vendo (1) had the option to purchase the Stoner Manufacturing plant, (2) was to pay a stipulated share of profits from the use of the acquired assets, and (3) was to pay out a specified share of income from foreign production of the acquired machinery.
The Parties' Post-Acquisition Relationship
Rising tensions between Harry Stoner and Vendo officers catalyzed the rapid disintegration of their relationship shortly after the acquisition was consummated. Stoner Manufacturing's engineering, research, and new product research and development departments, as well as executive control of operations, sales, and finance, were moved from Aurora, Illinois to Kansas City, Missouri, Vendo's principal place of business, soon after the acquisition and without consulting Harry Stoner. Thus, no executives in Stoner's division ever reported to Stoner as president of Vendo's Aurora Division. At a June 24, 1959, meeting, Vendo's then chief executive officer, Robert Wagstaff, advised Stoner that his post as president of the Aurora Division was advisory only. Although Vendo occasionally consulted Stoner regarding business problems,4 he exercised few actual duties and felt that no one at Vendo heeded his advice. Consequently, Stoner refused to attend any board of directors' meetings during the first year and one-half following the acquisition.
As the district court found, Harry Stoner was particularly disappointed by Vendo's failure to place him on Vendo's Products Planning Committee. Wagstaff, however, testified that Vendo would have assigned Stoner to that Committee "if we could have ever gotten him to take an interest in the operation of the company."
The plaintiffs urge that these circumstances illustrate that Vendo hired Stoner primarily to shelve his genius: "Vendo was thus paying Stoner not to compete rather than employing him for the performance of actual services." Contrarily, as Wagstaff's testimony indicates, Vendo attributed the breakdown of the parties' relationship to Stoner's obstinacy:
Q: What tasks, if any, did you call upon Mr. Stoner to perform during the five years of his employment contract?
A: Well, very few. We did specifically request he attend directors meetings and take an interest in those meetings, and we asked his opinion on many matters of policy and things of that sort, and actually at the beginning we discussed changes that we desired to make with him in the plant and got his viewpoint, but Harry felt our viewpoint was so contrary to his that it got to the point that the discussions were just completely incompatible, and there was no point to having them. They outraged him and got him upset, and so those things by attrition just sort of phase out, but not by policy. I think, thought, and still think that one of the difficulties in anything of that sort is getting people to agree, and I think Harry could have made quite a contribution to the operation if he had not been so irritated at us, which he was.
The Creation and Development of Lektro-Vend
Rod Phillips and his son Bill, former Stoner Manufacturing engineers, resigned from Vendo in mid-1960. They subsequently succeeded in enlisting Stoner's support in their efforts to develop a new type of vending machine. Stoner Investments advanced approximately $200,000 in interest-free loans during 1961 and 1962, and also paid the Phillipses and two other former Stoner Manufacturing/Vendo employees monthly salaries aggregating $1,150. In addition, Stoner allowed them to use a building he owned rent-free. They subsequently designed the revolutionary Lektro-Vend "FIFO" (first in-first out) vending machine that featured stock rotation, a window permitting product display, and the capacity to stock mixed goods on a single conveyor. These features made the Lektro-Vend machine superior to the "drop-shelf" machine manufactured by Stoner Manufacturing at the time of the acquisition.5 In October 1962, a prototype of the new machine was exhibited at a San Francisco trade show with positive results.
In December of the same year, Stoner's sister-in-law, Ruth Netrey, lent $350,000 to Phillips. This principal amount, later increased to $525,000, was used in part to repay Harry Stoner for his earlier advancements.
During that same month, Harry Stoner sought to be released from his employment contract with Vendo, citing his opportunity to invest in the new Lektro-Vend endeavor as the reason for his request. Stoner apparently did not then reveal his prior financial support for Lektro-Vend. Vendo rejected Stoner's request and instead directed Stoner to inquire whether Phillips would sell the machine to Vendo.
Stoner later reported that Rod Phillips would sell the machine for 1.5 million dollars, the amount which a third company was allegedly willing to pay. In March 1963, Stoner wrote Vendo that:
Rod Phillips has been inquiring with regards to Vendo's interest in his vending machine. I have advised him that, inasmuch as he had not heard from you, and that I had heard nothing further from you, that I felt that sufficient time had passed so that he could be relinquished of his promise to give Vendo first chance for acquiring it. I think that the future will show that this represents a serious mistake on your part, but, inasmuch as there are other people interested, Rod feels that he is obliged to investigate the depth of their interest in the near future.
Spencer Childers, a Vendo vice-president, replied that Vendo was still interested but would not pay the $1.5 million asking price. Instead, he suggested that Vendo pay all out-of-pocket expenses incurred in developing the machine plus a fair profit margin to the Lektro-Vend creators.
Childers, Stoner, and Phillips met in Aurora on April 30, 1963. During that meeting, Rod Phillips reiterated his request for $1.5 million. On May 17, 1963, Stoner wrote to Vendo chairman Elmer Pierson inquiring whether Pierson wanted him to take any further action, but Stoner received no response.
Pierson testified that Childers had ultimately reported "that he didn't think it would be advisable for our company to go on with the negotiations." When asked if Vendo declined the opportunity to purchase the Lektro-Vend machine because of its price, Pierson testified that "(a)pparently that was what the group decided at that time.... Apparently I was told that they came to that conclusion, that it was too high."
In the spring or summer of 1963, Pierson asked Harry Stoner to explain his actual connection with Rod Phillips. Stoner replied that he had lent money to Phillips, but that the loan had been repaid by a third party.6
Lektro-Vend was formally organized as a corporation on September, 1, 1963. At about that time, Ruth Netrey's loan was repaid. Lektro-Vend's initial shareholders were Rod and Bill Phillips, a few other employees, and Netrey.
In March, 1964, Stoner Investments executed a contract to sell to Lektro-Vend a new plant it had completed building the previous year. Lektro-Vend financed the purchase with a bank loan secured by Stoner Investments' promise to repurchase the property in the event of default.
Stoner's position as Vendo director expired on April 1, 1964. His employment contract, which ended on June 1, 1964, was not renewed. Subsequently, on June 10, 1964, Lektro-Vend issued 5,000 shares of stock to Ann Stoner, and issued another 5,000 shares to Stoner Investments on July 15, 1964.
The following March, Stoner sent a letter endorsing Lektro-Vend to fifty vending machine operators which stated, in part, that:
As you may know, my association with Stoner Mfg. Co. was terminated last year after 32 years as its President. I am now interested in the new LEKTRO-VEND CORP. ...
... I am willing to risk my reputation as a vending machine designer and manufacturer to say that the LEKTRO-VEND products will set new highs in earnings to operators and will be the standard of comparison for the next 50 years.
The purpose of the letter was to allay rumors that Lektro-Vend hovered near the brink of financial collapse. Stoner sent a copy of the letter to Vendo's Elmer Pierson because Stoner believed that Lektro-Vend's recent set-backs were "primarily due to the tale of woe and gloom that your (Vendo's) salesmen have spread, right up to making flat statements that they have seen documentary proof that this company has filed bankruptcy." Pierson transmitted the letter to Vendo's general counsel, Glenn Carbaugh, noting that Stoner had gone "to(o) far."
Vendo filed a complaint in state court against Harry Stoner and Stoner Investments on August 10, 1965, alleging breach of noncompetition covenants and theft of trade secrets relating to the development of the Lektro-Vend machine. In their answer, Stoner and Stoner Investments claimed that the state court suit violated federal antitrust laws.7 On December 16, 1966, after a bench trial, the state court found Harry Stoner liable for $250,000 in damages, and adjudged Stoner and Stoner Investments to be jointly liable for an additional $1,100,000. The court enjoined the defendants from further acts of competition.
On appeal, the Illinois Appellate Court, in Vendo Co. v. Stoner, 105 Ill.App.2d 261, 245 N.E.2d 263 (1969), ruled that Vendo had not proven theft of trade secrets, but that the covenants not to compete were enforceable and had been breached by the defendants, 105 Ill.App.2d 261, 288, 245 N.E.2d 263. The court determined that the trial court had incorrectly stricken the affirmative defense of violation of the federal antitrust laws, and remanded the case for a correct determination of damages and further proceedings. Id. at 291, 295-99, 245 N.E.2d 263.
Stoner and Stoner Investments, defendants in the state lawsuit, withdrew the antitrust defense on remand. The trial court this time entered a judgment against the defendants jointly for $7,345,500 plus costs, and against Harry Stoner individually for $170,835 plus costs. The Illinois Appellate Court again overturned the trial court's judgment and remanded for an assessment of damages in accordance with the appellate court's original opinion. 13 Ill.App.3d 291, 300 N.E.2d 632 (1973). This time the remand never materialized because, on appeal, the Illinois Supreme Court reversed the appellate court and affirmed the trial court's judgment on a theory neither advanced by Vendo nor relied upon by the trial court, i. e., breach of fiduciary duty, 58 Ill.2d 289, 321 N.E.2d 1 (1974), cert. denied, 420 U.S. 975, 95 S.Ct. 1398, 43 L.Ed.2d 655 (1975).
At this point the drama shifted to the federal courts. The plaintiffs in the present case (the state court defendants) sought a preliminary injunction to prevent Vendo from collecting the state court judgment pending resolution of the federal antitrust claims. On June 27, 1975, Judge McLaren granted the plaintiffs' motion finding that § 16 of the Clayton Act, 15 U.S.C. § 26, which provides for preliminary injunctive relief, was an expressly authorized exception to the Anti-Injunction Act, 28 U.S.C. § 2283, and alternatively, that the injunction was necessary in aid of the federal court's jurisdiction, a separate exception to § 2283. 403 F.Supp. 527, 536-37 (N.D.Ill.1975). The Seventh Circuit affirmed on the first ground. 545 F.2d 1050 (7th Cir. 1976). In a divided opinion, the United States Supreme Court reversed, ruling that the injunction was not authorized on either of the grounds relied upon by the trial court. 433 U.S. 623, 97 S.Ct. 2881, 53 L.Ed.2d 1009 (1977).
In June 1978, a bench trial on the merits of the federal antitrust claims finally commenced and continued for twenty-three days. The district court found in favor of the plaintiffs on collateral estoppel, in pari delicto, and statute of limitations issues, but ultimately rejected all of the antitrust claims.
In light of the gravity of the issues and the substantial commitment of the time and resources of all parties in this protracted litigation, we examine each of the appellants' claims in some detail. We will not review all of the findings of facts and conclusions of law at this juncture, however, but will discuss them separately hereinafter as they relate to each antitrust violation alleged.
Pursuant to Fed.R.Civ.P. 52(a), this court is bound to uphold the district court's findings of fact unless clearly erroneous and cannot weigh complex antitrust evidence de novo. Trabert & Hoeffer, Inc. v. Piaget Watch Corp., 633 F.2d 477, 479 (7th Cir. 1980) (per curiam). Conclusions of law and mixed fact/law questions, of course, are subject to a broader scope of review. United States v. General Motors Corp., 384 U.S. 127, 141-42 n. 16, 86 S.Ct. 1321, 1328-29 n. 16, 16 L.Ed.2d 415 (1966); United States v. Parke, Davis & Co., 362 U.S. 29, 44, 80 S.Ct. 503, 511, 4 L.Ed.2d 505 (1960).
The plaintiffs urge that the particular circumstances of this case require the application of a broader standard of review to the district court's findings of fact than that ordinarily granted under Rule 52(a). Where the evidence presented to a trial court is essentially documentary with few live witnesses, it is urged that appellate review may be broadened beyond the traditional application of Rule 52(a). Augmented review may arguably be appropriate in a "paper case" because a major rationale behind Rule 52(a) the factfinder's opportunity to determine the credibility of witnesses is not implicated.8
In the recent case of City of Mishawaka v. American Electric Power Co., 616 F.2d 976, 979 (7th Cir. 1980), cert. denied, 449 U.S. 1096, 101 S.Ct. 892, 66 L.Ed.2d 824 (1981), this court acknowledged that "a broader rule" might be appropriate in a "paper case," but noted that even though "evidentiary documentation (was) voluminous, we see no need in these circumstances to go behind the findings of the trial judge" because nine live witnesses had testified at trial, and the trial judge had questioned the credibility of some of the witnesses. Similarly, we cannot agree with the plaintiffs that the case at bar was a "paper case." Eleven live witnesses testified at the trial. Judge Roszkowski's findings were influenced by some credibility determinations. The court, for example, rejected the testimony of the plaintiffs' expert regarding Vendo's dominance and market power in the industry.9
The plaintiffs also complain that many portions of the district court's opinion found their source in the defendant's post-trial brief or proposed findings of fact and conclusions of law. This circuit does not forbid a district court's partial or entire adoption of one party's findings of facts or conclusions of law. Rather, the use of this procedure is left to the discretion of the district court. Scheller-Globe Corp. v. Milsco Manufacturing Co., 636 F.2d 177, 178 (7th Cir. 1980); Norfolk & Western Railway Co. v. B.I. Holser & Co., 629 F.2d 486, 489 (7th Cir. 1980); City of Mishawaka v. American Electric Power Co., 616 F.2d 976, 979-80 (7th Cir. 1980), cert. denied, 449 U.S. 1096, 101 S.Ct. 892, 66 L.Ed.2d 824 (1981); Reese v. Elkhart Welding & Boiler Works, Inc., 447 F.2d 517, 520 (7th Cir. 1971). We realize that the adoption procedure is not flawless since such findings "do not reflect the original products of a disinterested mind." Norfolk, 629 F.2d at 489; Flowers v. Crouch-Walker Corp., 552 F.2d 1277, 1284 (7th Cir. 1977). Nonetheless this practice can be useful as an aid to the trial judge in complicated cases, Scheller-Globe, 636 F.2d at 178; Reese, 447 F.2d at 520, and "as a practical matter in these times a busy trial judge may in some circumstances be properly assisted with some of the paper work resulting from his own determination of the issues." City of Mishawaka, 616 F.2d at 980.
In this case, moreover, the adopted portions did not constitute the entire opinion. The district court rejected the defendant's affirmative defenses of collateral estoppel, in pari delicto, and statute of limitations. Furthermore, the district court's opinion spanned seventy-five pages, much of which did not represent the work of Vendo. While contending that the last thirty-five pages of the opinion were substantially adopted from Vendo's proposals, the plaintiffs conceded in oral argument that "there's a reasonable amount of Roszkowski in the first half of the opinion."
Having critically review