Opinion ID: 429625
Heading Depth: 2
Heading Rank: 2

Heading: The Refusal to Sell Repair Parts

Text: The Section 1 Claim 12 The district court held that Brandt and Hallett's concerted refusal to sell repair parts to Calculators violated section 1 of the Sherman Act. Applying the rule of reason, 2 the court found that the refusal was borne of an anticompetitive purpose and produced an anticompetitive effect. Brandt and Hallett argue that the judgment must be reversed for failure of proof, and we agree. 13 Hallett's dealings in repair parts rendered his service and repair operation sufficiently different from the sales operation to persuade the district court that Hallett was not Brandt's agent for purposes of repairing Brandt equipment. Hallett purchased the parts from Brandt and set his own prices for service and repair. He was not required to account to Brandt for his income. The court concluded that, as an independent contractor in the repair business, Hallett could combine with Brandt in violation of section 1 by refusing to sell parts. That finding is amply supported by the record. 14 Calculators has failed to prove either that the purpose of this vertical distribution scheme was to restrain trade or that the scheme actually injured competition, the two primary considerations in rule of reason analysis. Sherman v. British Leyland Motors, Ltd., 601 F.2d 429, 449 (9th Cir.1979). To prove either of these elements, Calculators had to prove more than the undisputed fact that when Hallett was designated district manager for Hawaii, Brandt began selling parts exclusively through Hallett. Yet the court grounded its findings of anticompetitive purpose and effect almost entirely on that fact and the concomitant fact that the new arrangement had the effect of cutting off Calculators' source of Brandt parts. 15 It may be true, as the district court found, that as a result of the arrangement between Hallett and Brandt, Calculators' business of servicing and repairing Brandt machines suffered, while Hallett obtained over one-half of the Brandt service and repair business. But these facts--that Brandt and Hallett refused to sell parts to Calculators and that Calculators thereby lost business--are simply insufficient standing alone to prove anticompetitive purpose or effect. The refusal to sell parts to Calculators is precisely the act we are analyzing; it is not per se illegal. And a showing of the damage Calculators suffered when its repair business declined is insufficient to demonstrate harm to competition. Klamath-Lake Pharmaceutical Association v. Klamath Medical Service Bureau, 701 F.2d 1276, 1292 (9th Cir.1983). If the law were otherwise, exclusive dealerships would be illegal per se. 16 In support of its finding of anticompetitive purpose, the most significant fact the district court cites is that Brandt attempted to keep the independent repairmen from obtaining parts in order to protect the service and repair business of Hallett. Brandt articulated such a policy in a sales manual, stating as its business purpose the enhancement of the income of its sales representatives. But Brandt's wish to enhance the business of its sales representatives by dealing exclusively with them does not alter our analysis. In Hawaiian Oke, supra, we reasoned: 17 There are many normal and usual agreements in aid of trade and commerce,    which involve the acceptance by the parties of limitations on their freedom individually to deal with others   . Requirements contracts, exclusive dealing contracts and contracts involving exclusive territories all involve limitations on the freedom of one or more of the parties to do business with the others   . Because all of these situations involve an agreement between two or more persons under which one or more of them agree not to deal with third persons and for that reason foreclose a part of the market to such third persons, they are all subject to scrutiny under the antitrust laws. But in the ordinary case these do not involve combining for the primary purpose of coercing or excluding; rather they involve combinations of two or more persons to further directly the business of the parties to the agreement, and the effect on third parties and on competition is indirect. 18 Id. at 77 (quoting Barber, Refusals to Deal Under the Federal Antitrust Laws, 103 U.Pa.L.Rev. 847, 876-77 (1955) (emphasis supplied here)). Here, as in Hawaiian Oke, 3 [Hallett's] desire to get the business is the same as exists in every case in which a distributor persuades a supplier to give it an exclusive distributorship .... Surely, this is the essence of competition. Id. at 78. We hold that Brandt's desire to protect Hallett's business by dealing exclusively with him adds nothing to Brandt's refusal to deal with Calculators. As a result, we hold that the district court erred in concluding that Calculators had proven anticompetitive purpose. 19 More fundamentally still, [p]roof that the defendant's activities had an impact upon competition in a relevant market is an absolutely essential element of the rule of reason case. Kaplan v. Burroughs Corp., 611 F.2d 286, 291 (9th Cir.1979), cert. denied, 447 U.S. 924, 100 S.Ct. 3016, 65 L.Ed.2d 1116 (1980). Once an adverse impact on competition is proven, a defendant may advance countervailing business justifications for a refusal to deal. But the refusal must first be established to be a restraint on competition and this involves a consideration of the impact of the restraint on the competitive conditions within the field of commerce in which the plaintiff was engaged and upon those commercially engaged in competition within it. Gough v. Rossmoor Corp., 585 F.2d 381, 389 (9th Cir.1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59 L.Ed.2d 494 (1979). In this case, the court addressed and discounted Brandt's business justification for the refusal--to insure the quality of repairs--without ever having assessed the impact upon competition. Even were we to assume that the district court was correct in finding that the relevant geographic market was Hawaii and that the relevant product market was Brandt parts rather than parts for all money-handling machines, the court failed to identify any evidence of harm to competition. Consequently, we reverse the district court's judgment in favor of Calculators with respect to the section 1 claim. The Section 2 Claim 20 Citing California Computer Products, Inc. v. IBM Corp., 613 F.2d 727 (9th Cir.1979), the district court found that Calculators had proved the four elements necessary to establish a section 2 offense. We need not address the third and fourth CalComp criteria, probable success in harming competition and injury to Calculators, because we hold that the court erred in holding that the remaining CalComp criteria were satisfied. 21 The court inferred the first criterion, specific intent to control prices or destroy competition, either from its erroneous finding of a section 1 violation or, once again, from the mere refusal to deal. The second criterion, predatory or anticompetitive conduct, consisted of nothing more than the refusal coupled with Calculators' inability to obtain other parts. While [t]he 'predatory or anticompetitive conduct' element of Sec. 2 attempt ... encompasses more than violations of Sec. 1, 613 F.2d at 737, section 2 simply measures individual conduct against the same 'reasonableness' standard governing concerted and contractual activity under Sec. 1, id. Hence, our analysis here partially tracks our evaluation of the section 1 claim. It was Calculators' burden to prove that Brandt's acts were predatory and not predominantly motivated by legitimate business purposes. Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 273 n. 20 (7th Cir.1981), cert. denied, 455 U.S. 921, 102 S.Ct. 1277, 71 L.Ed.2d 461 (1982). See also Cowley v. Braden Industries, Inc., 613 F.2d 751, 754-55 (9th Cir.) (plaintiff must prove unreasonableness even when defendant has substantial market power), cert. denied, 446 U.S. 965, 100 S.Ct. 2942, 64 L.Ed.2d 824 (1980). Not only did Calculators fail to carry its burden, it adduced no evidence that Brandt's behavior was unreasonable. Calculators proved nothing more than that Brandt refused to deal because it had entered into an exclusive arrangement with Hallett.