Opinion ID: 447879
Heading Depth: 2
Heading Rank: 1

Heading: Liability for Conduct.

Text: 16 Whether applying a rule of reason or per se analysis, the defendants assert that their conduct was not an unreasonable restraint of trade. 12 However, even if we find the defendants' conduct was an unreasonable restraint of trade, they further assert that the other element of a Sherman Act Sec. 1 violation--an agreement, combination or conspiracy--is absent in this case. 17 Mr. Gromlovitz, testifying for the plaintiffs, stated in effect that he considered membership in the BIA and TMA and participation in the certification program a prime ingredient for success as a boat trailer manufacturer. Mr. Reed also testified that he could not recall any one major manufacturer or distributor who was not a member of the Association. 13 Further, the record shows a sharp decrease in Model 701 sales to members of the Association after the Association threatened the revocation of certification for any member using the plaintiffs' product. From this evidence, it is apparent that the certification program possessed market power. See Phil Tolkan Datsun v. Greater Milwaukee, Etc., 672 F.2d 1280, 1286 (7th Cir.1982) (failure to demonstrate the market power of an association fatal to a per se claim). It is clear that when an association takes on the responsibility of self-regulation by issuing a certificate of approval, that certification must be equally available to qualifying association members and non-association companies. See, e.g., Bogus v. American Speech & Hearing Ass'n., 582 F.2d 277 (3d Cir.1978). Because of the complete lack of due process afforded the plaintiffs and their product by the Association in reviewing the Model 701's qualifications and the discriminatory manner in which certification was denied, the certification was not equally available and thus we believe the defendants' conduct in this case falls within the holdings of Silver v. New York Stock Exchange, 373 U.S. 341, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963) (and its progeny, see, e.g., McCreery Angus Farms v. American Angus Ass'n., 379 F.Supp. 1008 (S.D.Ill.1974), aff'd., (unpub. order), 506 F.2d 1404 (7th Cir.1974)), and Radiant Burners v. Peoples Gas Co., 364 U.S. 656, 81 S.Ct. 365, 5 L.Ed.2d 358 (1961). 18 In Silver, the defendant, New York Stock Exchange, summarily ordered all members to cut all communication wires connected to the plaintiffs. The plaintiffs were individual over-the-counter traders who needed those connections in order to trade. No prior notice or opportunity for a hearing was given to the plaintiffs detailing the reasons for the cessation of business. One of the plaintiffs was allegedly forced out of business while the other's business was greatly diminished. Silver, 373 U.S. at 344-45, 83 S.Ct. at 1250. Silver did not automatically condemn the Exchange's actions as a per se violation. Instead it recognized that the Exchange's actions would violate Sec. 1 of the Sherman Act absent any justification derived from the policy of another statute or otherwise.... Silver, 373 U.S. at 348-49, 83 S.Ct. at 1252-53. This became known as the Silver exception, as subsequently labeled by this and other circuits. See, e.g., U.S. Trotting Ass'n v. Chicago Downs Ass'n., Inc., 665 F.2d 781, 789 n. 14 (7th Cir.1981) citing McCreery Angus Farms v. American Angus Ass'n., 379 F.Supp. 1008, 1019 (S.D.Ill.1974), aff'd. (unpublished order), 506 F.2d 1404 (7th Cir.1974); see also Pacific Stat. & Printing v. Northwest Wholesale, 715 F.2d 1393, 1397 (9th Cir.1983), cert. granted, --- U.S. ----, 104 S.Ct. 1905, 80 L.Ed.2d 455 (1984). 14 Under this exception, an industry's attempt at self-regulation will be evaluated under the rule of reason, and will usually be found lawful (L. Sullivan, Handbook of Antitrust, Sec. 88 at 253), as long as procedural safeguards are employed to assure that the restraints are no more extensive than necessary to accomplish the association's legitimate purpose. Id.; see also, Silver, 373 U.S. at 364-67, 83 S.Ct. at 1260-62. 19 In holding the Exchange liable, Silver noted that by failing to accord the plaintiffs due process the Exchange has plainly exceeded the scope of its authority under the Securities Exchange Act to engage in self-regulation and therefore has not even reached the threshold of justification.... Id. 15 In noting the importance of a proper review by the sanctioning organization prior to its denial of a valuable service, Silver stated [i]n addition to the general impetus to refrain from making unsupportable accusations that is present when it is required that the basis for charges be laid bare, the explanation or rebuttal offered by the non-member will in many instances dissipate the force of the ex parte information upon which an exchange proposes to act. Id. at 362, 83 S.Ct. at 1259. Hence the affording of procedural safeguards not only will substantively encourage the lessening of anti-competitive behavior outlawed by the Sherman Act but will allow the anti-trust court to perform its function effectively. Id. at 363, 83 S.Ct. at 1260. Thus, by focusing on the use of ex parte information, the absence of input by the censured non-member, and the failure to explain the decision reached, Silver certainly requires that before a business association takes action which will affect a non-member's ability to compete in a particular market, some sort of notice and hearing must be provided in order to prevent abusive practices by an organization that wields considerable market power. Courts will normally not intrude into the decision-making process of a trade organization so long as these minimal protections are provided. See McCreery Angus Farms, 379 F.Supp. at 1010-11; see also L. Sullivan, Handbook of Antitrust, Sec. 88 at 253. However, where the affected party is not allowed to present its case in defense of its product prior to imposition of sanctions and where adopted industry standards are applied in a discriminatory manner (see Radiant Burners v. Peoples Gas Co., 364 U.S. 656, 658-59, 81 S.Ct. 365, 366-67, 5 L.Ed.2d 358 (1961)) 16 and a competitor is thus harmed in the market in which he seeks to compete, liability will attach. 20 In applying the controlling precedent just discussed, we must assess the record presented in this case and consider the evidence and its inferences in the light most favorable to the plaintiffs in determining whether the defendants were entitled to judgment n.o.v. See, e.g., William Inglis, etc. v. ITT Continental Baking Co., 668 F.2d 1014, 1026 (9th Cir.1981). On paper the certification program itself is a commendable effort on the part of the Association to promote compliance with the federal standards; however, the record discloses, and the jury certainly was entitled to infer, that the implementation of that program was arbitrary and denied the plaintiffs' Model 701 even minimal due process prior to the sanction imposed. 21 Concerning the lack of due process afforded the plaintiffs' product, Mr. Gromlovitz testified that during the Association's meeting in September, 1976 17 Mr. Reed stated that the Model 701 was not DOT approved. Reed's statement was based upon an unsubstantiated and ex parte report submitted to Reed from a competitor of the plaintiffs and member of the Association's certification committee, the Wesbar Corporation, and without doubt helped to convince the jury that the decline in the Model 701 sales during the latter portion of 1976 was attributable to his statement. See note 10. Dennis Moore also testified that after he heard what had transpired at the meeting he went to the Association booth with the Model 701's compliance certificates in hand. He was told by an official of the Association that they would look into the matter; however, Moore never heard anything further. Reed, on the other hand, testified that he understood that all subsequent contacts after the September trade meeting were to be through the attorneys for either side. However, as the district court found in assessing the jury's verdict, [f]ollowing the meeting there appears to have been no real effort to discuss with the Moores the possible areas of non-compliance and the means of assuring compliance, although the adversarial posture of the matter from and after the meeting leaves it unclear whether such an approach was thereafter feasible. The Association did test the Model 701 to determine if it met the required photometric output requirements, but this testing occurred after the damaging statements had been made. This testing, which was not only performed improperly since the masking covered too much of the light but also performed on misassembled lights, was cited in the Association January 1977 Technical Bulletin as the reason for the denial of certification for the Model 701. 18 22 It was also established that many manufacturers of boat trailer lights had experienced similar noncompliance problems that the Model 701 had experienced. Yet, their certificates of approval, like the Model 701's certificate, were never withdrawn by the State of California, apparently because the deficiencies were not considered of such a severity to warrant revocation of the state's compliance certificate or they were corrected in a timely manner. In fact, it was revealed at trial that 55% of all lights tested by the CHP failed inspection. It was also revealed that Wesbar, an Association member, which was on the certification committee and submitted the report to Reed, had experienced similar problems in the past with the photometric output requirements. In that case, the Association sent a letter to Wesbar suggesting that if there was a problem the lights should be brought into compliance. However, upon receipt of the information, the Association did not conduct independent tests on the product or revoke Wesbar's certificate of approval for lights to be used on members' trailers; rather it contacted Wesbar and was assured by them that the compliance problems had been rectified. The plaintiffs also point to the BIA's certification program for its members trailers, which also followed federal Standard 108, where if upon reinspection by the Associations (such reinspection being performed on a regular basis) defects are found, the matter is taken up with the manufacturer, corrections made, and the product continues to be included in the certification program. As admitted by Reed on cross-examination, the only product ever sanctioned by the Association was the Model 701. The district court accurately summarized the evidence when it found that 23 [t]he Association and Reed had never inquired of anyone as to whether they had any information respecting other lights. They had not inquired of California as to its judgment as to whether compliance was so substantial as to jeopardize certification. The Moores were not advised of the intention to test these lights and therefore were unable to participate in any way in assuring themselves that the tests were properly conducted upon properly submitted lights. Indeed, they strenuously contended that the subsequent tests had been improper. 24 In fact, the regulatory procedures in effect at that time provided for the fair and expeditious resolution of the problem. The DOT is required by law to grant or deny, within 120 days, petitions by interested persons filed in respect of alleged non-conforming lights, and to state its reasons for denying a petition. See 15 U.S.C. 1410a; 49 C.F.R. Sec. 554. If the DOT does investigate, a hearing is held where both sides are given a chance to present their case. Id. The Association apparently chose not to pursue this approach because, according to Reed, it would have been too time consuming. However, should an association of this nature decide to forego the legally established procedures, the least it should have done was to assure that the protections set forth in the federal statutes were afforded to the plaintiffs. 25 Finally, the Association argues that the photometric problems the plaintiffs had with the side marker light justify its conduct. However, those photometric problems were similar in nature to those experienced by other manufacturers of tail lights and do not excuse the Association's arbitrary application of its certification program that deprived the plaintiffs of the opportunity to develop a market for the Model 701. As the Silver Court noted, [s]ince ... the Exchange can offer no justification ... for its collective action in denying petitioners the private wire connections without notice or opportunity for hearing ... there is no occasion for us to pass upon the sufficiency of the reasons which the Exchange later assigned for its action. Silver, 373 U.S. at 365, 83 S.Ct. at 1261. 26 The defendants attempt to distinguish Silver, Radiant Burners, and the cases following those cases on the basis that there was no total foreclosure from dealing with members of the TMA. Defendants reply brief at 18. However, it is clear from the figures presented at trial that the Association members were not purchasing the Model 701, as evidenced by the sales to Association members that dropped to 36 pairs during the later portion of 1976. 19 The defendants further argue that there was no market foreclosure since the plaintiffs made sales of their other models to several Associations members beginning in 1978. However, as previously noted, the sale of other tail light models to Association members cannot and does not legitimize the Association's conduct in threatening to revoke its certificate of approval if members used the Model 701. See Silver, 373 U.S. at 348-49 n. 5, 83 S.Ct. at 1252-53 n. 5. According to Gromlovitz, the Model 701 represented a new generation of lights that was especially resistant to water damage. Further, the record demonstrates that the Model 701, a seven-function light incorporating in one casing all of the federal regulatory lighting requirements, was introduced into the market in late 1974. Even considering the fact that the plaintiffs made sales of their other models in 1978 to Association members, this does not account for the fact that the Model 701 was a new product and that the plaintiffs were in essence precluded for a period of three years (1976 through 1978) from developing a market for direct sales of the Model 701 to trailer manufacturers. 27 Section 1 of the Sherman Act also requires that unlawful conduct result from a contract, combination in the form of trust or otherwise, or conspiracy .... 15 U.S.C. Sec. 1. The defendants assert that even if their conduct is considered an unlawful restraint of trade, no proof was presented establishing that a contract, combination or conspiracy existed, and thus the jury verdict must be overturned. We disagree and note that there is sufficient evidence in the record to demonstrate that the members acted in response to the threat by the defendants to revoke the members' certificate of approval if they used the Model 701; thus, the necessary concerted action was established. 28 The defendants assert that in cases such as Silver, U.S. Trotting Ass'n. and McCreery Angus Farms, 20 the requisite agreement was established from the fact that members of the organizations involved were subject to their organization's by-laws. The Association would distinguish this case on the basis that their members participation in the certification program was voluntary. However, in U.S. Trotting Ass'n the requisite agreement was established through that association's reminding its members of the bylaws prohibiting members from racing their horses at non-USTA tracks. Members who violated this prohibition were subject to the revocation of their racing certificates. See U.S. Trotting Ass'n, 665 F.2d at 785, 788. This threatened sanction and the members' response provided the requisite concerted action. See id. at 788. 21 See also, Gibson v. F.T.C., 682 F.2d 554, 568 (5th Cir.1982). The Association, however, argues that it was Reed's unilateral decision to deny certification to members using the Model 701 and that the record is bare of evidence that any other association member participated in the decision. Appellants' brief at 21. Reed, however, as the director of engineering, was acting on behalf of the Association that had cloaked him with the apparent authority necessary to act on its behalf. See Am. Soc. of Mech. Eng'rs v. Hydrolevel Corp., 456 U.S. 556, 102 S.Ct. 1935, 72 L.Ed.2d 330 (1982). The members of the Association had agreed upon a certification program in an attempt to regulate themselves. Similar to the situation in Trotting, where the USTA gained compliance through the use of sanctions, Reed stated that Model 701 was not DOT approved and subsequently issued a Technical Bulletin advising the Association's members that certification would be denied to their products if they installed the Model 701 lights on their trailers. The members responded by not purchasing the Model 701 with the obvious effect of a drastic decline in the sales of Model 701. Nonetheless, the defendants assert that the reason their members did not purchase the Model 701 was the fact that they were afraid of government sanctions, such as a recall, if they used the non-complying light, and thus they engaged in a unilateral decision not to use the plaintiffs' light. However, it was the Association's January 1977 Technical Bulletin threatening revocation of the Association's certificate of approval, which the evidence discloses was a valued item used by manufacturers for marketing purposes, that was used as the mechanism to enforce the Association's will. This threat and the subsequent action on the part of the Association members in refusing to purchase the Model 701 is enough to establish the necessary concerted action. 22 Of course, the agreement by itself is not sufficient to establish a Sec. 1 Sherman Act violation. However, we hold that the record demonstrates sufficient unlawful conduct to establish a Sec. 1 Sherman Act violation and thus it was proper for the district court to deny the defendant's motion for judgment n.o.v. 29