Opinion ID: 333774
Heading Depth: 1
Heading Rank: 6

Heading: territorial restrictions.

Text: 56
57 PEI chose Pitchford in 1945 to be its first dealer in the United States. Pitchford's office was in Pittsburgh, Pennsylvania, but PEI originally authorized Pitchford to sell anywhere in the United States. Beginning in 1955, however, territorial clauses were inserted in Pitchford's annual dealership agreements. These clauses explicitly precluded Pitchford from selling outside the specified territory. PEI agreed not to assign more dealers to the designated territory, but it reserved the right to deal directly with federal and state governments and national business accounts within the assigned territory. Pitchford was to receive full commission credit for sales by PEI to such government or business accounts. Over a period of time, Pitchford's territory was steadily reduced by PEI, despite attempts by Pitchford to have it enlarged. 58 In the late 1960's, PEI re-evaluated its distribution system and gradually replaced dealerships in particular territories with branches; these branches were part of the PEI organization. As a result, dealerships in the District of Columbia, Ohio, Illinois, and California were eliminated. Pitchford was terminated in 1970, and by the conclusion of the trial there were only two PEI dealerships remaining in the country. 22 59 Under PEI's policy, sales by a dealer outside its territory diverted at least a portion of the sales commission to the dealership or branch that had jurisdiction over the area where the buyer was located. PEI intervened at the behest of various dealerships and branches to settle disputes over commissions and territories. 60 In addition, there appear in the record instances of the enforcement, just prior to and during the damage period, of PEI's policy to discourage all extraterritorial sales. Thus, Robards, president of the Cleveland dealership that was terminated, testified to a telegram sent by PEI approximately eight months prior to the beginning of the damage period. The telegram concerned the installation by Robards of equipment outside his territory: 61 It is against Philips policy to have dealers contact prospects in other dealer territories without prior notification to dealer involved. . . . It is directly opposed to the Philips dealer franchise to accept orders for equipment to be installed in other dealer territories. . . . As a result full dealer discount and quota credit involved in aforementioned (sale) . . . will be assigned to . . . the (dealer in territory where buyer is located). 62 Pitchford contended that PEI's policy to discourage sales by a dealer outside its territory continued during the damage period. 23 In this regard, Pitchford introduced a letter sent by PEI in January, 1967 that threatened to terminate Robards' dealership because of sales made by Robards outside his territory. 63 A controversy erupted in 1969 between a branch salesman of PEI and VWR Scientific, the PEI West Coast dealer, over their competition for a sale of Pye Unicam equipment to a Texas college. The salesman's complaint prompted a letter from the sales manager, G. L. Dienes, to VWR: 64 Phelan states he increasingly is running into (VWR) sales activity (in his territory). . . . 65 I am also attaching recent correspondence from Pye Unicam alleging (VWR) trying for Unicam business in Taiwan. Ted, this extra-curricular activity on the part of your sale representatives speaks well for their aggressiveness. However, I would appreciate it if you would investigate these two situations and let me know what plans you have for eliminating this inter-competition in the future. (emphasis supplied) 66 Deichert, PEI's director of marketing, received a copy of the Dienes letter, but raised no objection to the sentiments expressed in it. 67 In 1971, Dienes' successor sent another letter to VWR Scientific, questioning a sale by VWR in North Dakota, an area assigned to PEI's Chicago branch. A copy of this inquiry also passed over the desk of PEI's director of marketing without comment or correction. 68 Further, there is evidence that, in cases where a prospective customer asked for bids from various PEI dealerships in order to obtain the best price, PEI encouraged the dealers outside the territory of the customer to quote prices higher than the home dealer. A request for bids from an Hawaiian hospital was forwarded by PEI to its dealers around the country with this suggestive paragraph attached: 69 (VWR, the home dealers) have been in continuing contact with (the hospital) and, of course are in a position to provide service in Hawaii. We assume that other dealer organizations will be forced to quote additional monies for the travel expenses associated with installation of (the equipment) in the islands. This is, of course, a matter of personal concern for individual dealer offices. (emphasis supplied.) 70 The evidence of enforcement of territorial restrictions against Pitchford itself during the damage period is wholly circumstantial. In 1964, however, prior to the damage period, Pitchford was denied the commission on an order by a U.S. Steel plant in Gary, Indiana, which was outside Pitchford's territory. Evidence was presented about several other potential sales by Pitchford that were all thwarted by PEI's territorial policies, but these potential sales also appear to have arisen prior to the damage period. 71 Nonetheless, Pitchford claims that the Robards and VWR experiences reflected a continuing territorial allocation program by PEI. The President and General Manager of PEI, George Crosby, testified that the advent of his tenure in 1966 saw no change in PEI's territorial policies. Thus, urges Pitchford, the evidence supports the inference that the policies that prevented the Pitchford sales prior to the commencement of the damage period were still in force during the damage period. 72 PEI, however, insists that its territorial arrangement is reasonable, and exists primarily to assure proper installation and maintenance of its sophisticated and 'hazardous' product. It asserts that no violation could be possible under the territorial restriction count 'because of the critical importance of service and installation in the ability to successfully conduct business.' Indeed, PEI maintains that Pitchford sustained a benefit from the territorial policy because Pitchford was under no compulsion from PEI to overextend its 'meager' service staff by selling beyond its territory. PEI claims that the territorial limitation was so in keeping with Pitchford's capabilities that 'in the last four or five years of its distributorship, 'Pitchford never made' any real efforts to make sales outside its territory.' Finally, PEI contends that the Pitchford dealership profited from the territorial system because direct sales by PEI into the Pitchford territory generated full commissions for Pitchford, amounting to 21 per cent of its sales in 1969. 73
74 In United States v. Arnold Schwinn & Co., a manufacturer's practice of restricting its dealers to sales in prescribed territories was held to constitute a vertical restraint and a per se violation of the Sherman Act. 24 The Schwinn rule forbids a manufacturer from enforcing restraints limiting a distributor's customers, either by geographic sales boundaries or otherwise, if the manufacturer has surrendered dominion and control over its product. Because there is evidence that Pitchford purchased PEI's goods for resale, the jury could properly have found that PEI had surrendered dominion and control to Pitchford. 75 Both prior to and during the damage period, PEI wrote to Robards, VWR, and other PEI dealers objecting to violations of PEI's territorial allocation. There was a termination threat to Robards during the damage period, at least partially attributable to his violation of PEI's territorial policy. PEI's termination of many dealers, its use of warnings to dealers, Pitchford's experience with PEI's territorial policy prior to the damage period, and the evidence that there was no change in PEI policy during the damage period, would enable a jury to find that PEI enforced its territorial policy during the damage period. 76 If a manufacturer cannot impose a vertical division of markets, neither can it police a division of markets for the benefit of horizontal competitors. 25 This Court in American Motor Inns, Inc. v. Holiday Inns, held that a chain of motels could not permissibly enforce territorial entry restrictions which gave existing franchisees a veto over the entry of any new franchises nearby. 77 In the present case, there is evidence that PEI responded to branch and dealer complaints about sales made without regard to the territorial allocation and actively sought to prevent entry by one dealer into another dealer's territory. If an extra-territorial sale was consummated, the selling branch or dealer had to surrender all or a portion of its commission to the branch or dealer having jurisdiction over the customer's place of business. In addition, the record reveals an explicit agreement between PEI and each dealer to divide territories. Thus, a horizontal restraint, a per se violation of the Sherman Act, could be found on this record, even if the Schwinn prohibition of vertical restraints were not dispositive. 78 PEI seeks to avoid the impact of the per se rule against vertical and horizontal restraints by arguing, first, that the facts of this case show only a vertical restraint and second, that, because of the circumstances here, a court must apply a rule of reason analysis similar to that employed in Tripoli Co. v. Wella Corp. 26 In Tripoli this Court applied a rule of reason approach to limitations on distributor sales because the restrictions there were found necessary to prevent injury to inexpert users of professional hair care solutions. PEI argues that the restraints here were essential to assure customers of adequate service by the dealer who had sold them the instruments. But, unlike the situation in Tripoli, PEI has not offered any evidence to show that if PEI's territorial restraints were removed there would have been a danger of public injury similar to that suggested in Tripoli. 79 Nor does PEI, as it contends, come within the exception to the per se prohibitions found in United States v. Jerrold Electronic Corp. 27 In Jerrold, Judge Van Dusen, then a district court judge, found an exception to the per se rule prohibiting the tying of products and services when such tying is essential to the introduction of a new product under conditions of technological uncertainty. Judge Van Dusen characterized that case as a 'rather unique situation.' 28 In this case, which involved territorial restrictions rather than a product-service tying arrangement, PEI alleged that Pitchford was not providing adequate service. There was no evidence, however, that the territorial restraints employed by PEI were necessary to the initial success or failure of an industry with an uncertain and developing technology. Even assuming that the Jerrold exception applies equally to product-service tying and territorial limitations, no evidence was produced to sanction an exception to the per se rule in this case. 80 Here there is evidence of territorial restrictions imposed by the manufacturer, there is no basis for employing a rule of reason analysis, and the case does not fall within an exception to the general rule prohibiting territorial restraints by a manufacturer. Accordingly, the jury could properly have found a violation of section 1 of the Sherman Act. 81
82 In order to establish a cause of action for territorial restrictions, it must be demonstrated that there was an antitrust infraction and that the plaintiff has suffered 'fact of damage' in consequence of that infraction. 29 Hence, Pitchford must show with 'reasonable certainty' some injury to the dealership in consequence of the territorial restrictions imposed by PEI. 30 83 PEI is correct in noting that there was no presentation of a specific instance during the damage period when Pitchford lost sales or profits because of PEI's territorial policy. Pitchford introduced evidence, however, that (1) PEI was enforcing its territorial policy prior to and during the damage period, requiring commission reduction for extra-territorial sales and threatening the termination of at least one dealership because of violation of the policy; (2) Pitchford was denied three sale possibilities prior to the damage period because of PEI's territorial policies; (3) during the damage period Pitchford was required to sign an agreement with explicit territorial restrictions in order to continue its dealership; (4) Pitchford had the capability during the damage period to make sales beyond its assigned territory; and (5) from 1960 and into the damage period Pitchford had unsuccessfully attempted to have its territory expanded. 84 In addition, Pitchford produced witnesses and exhibits to show that, had it been permitted to compete in an expanded territory, it would have made additional sales, even considering competition from other PEI branches and dealers. After accounting for the costs and taxes that would necessarily accompany such an increased gross revenue, Pitchford would still have made an additional profit from the lost sales, according to the calculations of its witness. 85 This evidence was more than mere conjecture. 31 The jury might reasonably have concluded that PEI's policy of restricting dealers to limited territories had been applied directly to Pitchford during the damage period when PEI denied Pitchford's request that its territory be expanded. The jury might also have reasonably concluded that being confined to an assigned territory caused Pitchford to lose sales it might otherwise have made. 86 It is not sufficient to show fact of damage by mere speculation or guesswork. But, in the circumstances of this case, it would be unduly harsh to require Pitchford to document each sale that it might have made had it contravened the PEI territorial policy and attempted to do business outside its restricted territory during the damage period. The jury could have credited the expert testimony adduced by Pitchford and could have found that Pitchford lost some profits by virtue of the loss of sales attributable to the territorial restrictions imposed on it by PEI. 87 Thus, it would have been inappropriate for the trial court to grant PEI's motion for a judgment n.o.v. with respect to the territorial restriction count. The disposition of this count, however, depends upon the resolution of PEI's assertions respecting trial error. 88