Opinion ID: 360355
Heading Depth: 2
Heading Rank: 2

Heading: Tying and Price-Fixing of Mattress Components

Text: 40 It is undisputed that Sealy required its licensees to manufacture Sealy products in accordance with certain specifications. The specifications required use in mattress foundations of a torsion bar element called a Posturegrid, which is a patented product of the Universal Wire Spring Company. Sealy also insisted that certain other specified components be purchased from designated approved suppliers. Mattress springs are the component primarily in issue here. Sealy had three subsidiaries that manufactured spring units and that were at all pertinent times approved suppliers. 19 Evidence established without dispute that Universal Wire and approved spring manufacturers paid to Sealy a charge of from three to five percent of their sales to the licensees, unbeknownst to the licensees. The jury could have found that the charge was in the nature of a payment for the privilege of being a supplier to Sealy licensees, akin to a commission to Sealy for purchases it forced its licensees to make. 20 There was also evidence that prices for Posturegrid assemblies and spring units under this system were significantly higher than for comparable products available in the market. Sealy's chairman, indeed, admitted that something of a captive market existed for spring units for Sealy products. Ohio also introduced evidence that during the late 1960's, Sealy's original spring manufacturing subsidiary (in Rensselaer, Indiana) agreed with the only other manufacturer then approved to supply Sealy licensees that the two firms would set the same prices. 41 We agree with Ohio and the district court that it was proper to send Ohio's components claims to the jury. (A) tying arrangement may be defined as an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product . . . . Northern Pacific Railway Co. v. United States, supra, 356 U.S. at 5, 78 S.Ct. at 518. Because they deny competitive access to the tied product market on the basis of the seller's leverage in the tying product market, and force buyers to forego free choice between sellers, such arrangements 42 are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a not insubstantial amount of commerce is affected. 43 Id. at 6, 78 S.Ct. at 518 (citations omitted); Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 498-99, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969). 44 Sealy, as we have said, does not dispute that it conditions the license of its trademarks on the licensee's use of specified components from designated suppliers. Nor does it deny that its unique and legally protected trademarks, See United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 619, 621, 97 S.Ct. 861, 51 L.Ed.2d 80 (1977), which have achieved substantial consumer acceptance, create sufficient power to allow it to restrain competition in the market for the components, or that a substantial volume of commerce is affected. 21 Sealy does argue, nonetheless, that the challenged practices are not of the type properly condemned as tying arrangements. 45 With reference to the Posturegrid specification, Sealy points out that the Universal product was patented and argues that it was the legal patent monopoly that foreclosed competitors' access to Sealy licensees. This assertion unfortunately misses the thrust of Ohio's claim, that Sealy wrongfully mandated use of the Posturegrid and gained hidden rebates thereby, at the expense of the licensees. 22 We quite agree with Ohio that a patented product, like any other, may be illegally tied. The antitrust laws do not permit a compounding of the statutorily conferred monopoly. United States v. Loew's, Inc., 371 U.S. 38, 52, 83 S.Ct. 97, 105, 9 L.Ed.2d 11 (1962). 46 Sealy also insists that the vice condemned in the tying cases simply cannot be found where a trademark licensor specifies the patented products of a third company for use by its licensees, because the licensor, whatever the power conferred by his trademark's value, cannot be said to be using it to invade a second market. We agree that there is no illegal tying arrangement where a tying company has absolutely no financial interest in the sales of a third company whose products are favored by the tie-in. Crawford Transport Company v. Chrysler Corporation, 338 F.2d 934 (6th Cir. 1964), Cert. denied, 380 U.S. 954, 85 S.Ct. 1088, 13 L.Ed.2d 971 (1965); Keener v. Sizzler Family Steak Houses, 1977-2 Trade Cases P 61,682 at 72,800 (N.D.Tex.1977); Rodrigue v. Chrysler Corporation, 421 F.Supp. 903 (E.D.La.1976). Here, however, it is undisputed that Sealy received substantial rebates from Universal on sales to the licensees, and, moreover, that those rebates were concealed from the licensees. The concealment aspect alone might have justified a jury's decision to disbelieve Sealy's claim that the payments made to Sealy were not in return for the specification of Universal's product as mandatory Sealy components. In addition, the asserted justification for the payments was that they were compensation for Sealy's technical efforts in helping Universal adapt its torsion bar concept to the mattress industry. Yet Sealy's President admitted that Universal had prior to dealing with Sealy applied the concept to the mattress industry (though an improvement was still needed at the time), and, as was brought out at trial, the written agreement between Sealy and Universal made no reference to Sealy's provision of technical assistance, though it did state that Universal was to provide technical assistance to Sealy. Sealy's third argument on the Posturegrid units, that the specification was not shown to be other than a bona fide decision on the basis of product merit by a trademark owner to protect the essential characteristics of the trademarked product, may be disposed of briefly. The jury could have found from the evidence we have discussed that Sealy forced the use of the Posturegrid and was paid handsomely by Universal simply for creating a captive market in which it could and did charge a premium price. Even if the Posturegrid was a superior product, such an arrangement was unlawful. See Osborn v. Sinclair Refining Co., 286 F.2d 832 (4th Cir. 1960), Cert. denied, 366 U.S. 963, 81 S.Ct. 1924, 6 L.Ed.2d 1255 (1961), a case very similar to this one. 47 Regarding mattress spring units, Sealy takes the position that an essential element of a tying case is proof of actual foreclosure of competition. It cites Fortner Enterprises, Inc. v. United States Steel Corp., 523 F.2d 961, 967 (6th Cir. 1975), Rev'd, United States Steel Corp. v. Fortner Enterprises, Inc., supra; Coniglio v. Highwood Services, Inc., 495 F.2d 1286 (2d Cir.), Cert. denied, 419 U.S. 1022, 95 S.Ct. 498, 42 L.Ed.2d 296 (1974); and Driskill v. Dallas Cowboys Football Club, Inc., 498 F.2d 321 (5th Cir. 1974), to support this proposition, and says that Ohio has failed to introduce the requisite proof. Because the Supreme Court has repeatedly held that tying, if it fits within the Northern Pacific standard, is a Per se violation, we are not free to inquire whether such tying in any given case injures market competition. Sealy's argument, however, is somewhat more subtle than that, and we agree that if a given tying arrangement has no potential to foreclose access to the tied product market, it does not exemplify the vice that led the Court to declare tying a Per se Offense. Coniglio and Driskill amply illustrate the proper bounds of the actual foreclosure rule. 23 In these cases, the practices of two National Football League clubs of requiring season ticket buyers to purchase preseason exhibition game tickets in the same package were attacked as illegal tie-ins. Because both clubs had a complete monopoly, however, in the tied as well as the tying market, There could be no foreclosure of competitive access to the tied market resulting from the tie-in. If the same thing could be said here, Sealy would have been entitled to a directed verdict on mattress spring tying. 24 48 We think there was clearly a jury question on foreclosure during the pertinent period, however. Only approved manufacturers could supply Sealy licensees. Sealy's own subsidiaries were always approved. Prior to 1972 (when Sealy obtained patents on the then-specified spring units) only two other firms were approved, the Steadley Company from which Ohio purchased and a west coast firm referred to as Laisco. Both firms paid, as the jury could have found, a commission to Sealy for the privilege of supplying Sealy licensees. See Osborn, supra. The Steadley Company was induced to agree to base its prices for specified units on those charged by Sealy's manufacturing subsidiary. 25 The jury was entitled to infer that no firm which would not play the game by these rules would win Sealy's approval as a supplier. In this context, Sealy's statement that there was no evidence it ever denied supplier approval carries much less weight than might otherwise be the case. Moreover, the jury could have concluded Sealy attempted to force Steadley and Laisco out of the suppliers' market. In 1970, Sealy developed new specifications which it thought patentable, and applied for a patent thereon. Although Sealy now cites its licensing of a supplier under the patent, after it issued in 1972, as evidence of its magnanimity and of lack of foreclosure, Sealy advised both Steadley and Laisco in 1970 that if a patent issued no one would be licensed thereunder. Thus even if Steadley withdrew from supplying Sealy springs in late 1970 because of a lack of desire to incur tooling costs that would not be recoverable over a reasonable amortization period if the patent issued, the jury could have concluded that Sealy used the no-license threat to drive Steadley out of the market during the interim period. (When Steadley did withdraw, only Sealy's subsidiary was left in the captor selling market created by the specifications.) Furthermore, Steadley asked for the specifications for the new system so that it could tool up to produce the new springs, or at least consider doing so, and Sealy refused to provide them. Thus it is not even clear Steadley would not have been willing to be a supplier in the interim period. There was also evidence to support the conclusion that Sealy used its quality control inspection and approval powers to force Steadley out of the market. Sealy's President at one point in 1970 wrote to its Vice President suggesting that Sealy ought to consider continuing to allow Steadley to manufacture approved products (despite alleged quality control problems) as a bargaining tool to avoid problems from Steadley regarding the proposed change of specifications that would put Steadley out of the business of supplying Sealy licensees. 26