Opinion ID: 336567
Heading Depth: 3
Heading Rank: 2

Heading: Royalty Payments Theory

Text: 116 Since the case must be retried on damages, we think it appropriate to reach the complex issues with regard to the royalty payments theory at this time. As indicated above, this theory presumed that Cal-Florida suffered monetary injury in the precise amount of the BGA and GRA royalties charged on its cutting sales. Over Yoder's objection, the court submitted this theory to the jury, together with the question whether a passing on defense should be allowed as it was recognized in Hanover Shoe, Inc. v. United Shoe Mach. Corp., 1968, 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231. 117 The evidence showed that Cal-Florida of Florida had paid a total of $35,574.52 in BGA royalties from May 1969 to December 1971, when BGA ended, and it had paid a total of $6,731.95 in GRA royalties until that program ended, for a grand total of $42,306.47. Cal-Florida of California had paid $194,230.60 in BGA royalties and $21,209.23 in GRA royalties over the same time period, for a grand total of $215,439.83. Total BGA and GRA royalties paid by both companies equalled $257,746.30. The pretrial stipulation, which the court specifically ordered would govern at trial, provided that 118 (t)he parties stipulate that the amounts of BGA royalties paid by defendants (CFPC and CFPCF) to BGA were the same as the amounts collected by defendants from defendants' customers. 119 On the basis of the instructions and the evidence of royalties paid, the jury awarded $129,000 in damages, to be split evenly between CFPC and CFPCF. 120 Yoder's central point regarding the royalty payments made by Cal-Florida, a propagator-distributor, to BGA and Yoder is that the very structure of the BGA and GRA programs ensured that no propagator-distributor would be in fact injured. In this connection it argues that it was error to submit the theory to the jury in the absence of evidence showing that CFPC and CFPCF were actually injured by either program and that it was error to use the general rule precluding a passing on defense articulated in Hanover Shoe to circumvent the evidentiary problem. If the passing on concept was applicable at all, Yoder asserts that it was entitled to invoke the defense under the pre-existing cost plus contract exception of Hanover Shoe. 26 121 In Hanover Shoe, Inc. v. United Shoe Mach. Corp., 1968, 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231, Hanover Shoe, a manufacturer of shoes, charged that defendant United Shoe Machinery Corp. (United), a manufacturer and distributor of shoe machinery, had monopolized the shoe machinery industry through its practice of leasing and refusing to sell its more complicated machinery. As damages, Hanover asked for the difference between what it paid United in shoe machine rentals and what it would have paid if United had sold machines to it instead. Hanover had prevailed in the district court and had been awarded trebled damages; the Third Circuit affirmed. In the Supreme Court, United argued that Hanover had suffered no legally cognizable injury, since the illegal overcharge under the leasing system was reflected in the price at which Hanover sold shoes to its customers, and since Hanover would have charged less if its costs were less and thereby would have made no more profit. Rejecting that argument, the Court held that 122 when a buyer shows that the price paid by him for materials purchased for use in his business is illegally high and also shows the amount of the overcharge, he has made out a prima facie case of injury and damage within the meaning of § 4 (of the Clayton Act). 123 392 U.S. at 489, 88 S.Ct. at 2229, 20 L.Ed.2d at 1239. In the normal case, according to the Court, it was of no legal consequence that the buyer might have left his prices unchanged and absorbed the loss, made adjustments in volume or other costs, or raised his prices. Unwilling to adopt United's proposed analysis the Court explained itself as follows: 124 We are not impressed with the argument that sound laws of economics require recognizing this defense. A wide range of factors influence a company's pricing policies. Normally the impact of a single change in the relevant conditions cannot be measured after the fact; indeed a businessman may be unable to state whether, had one fact been different (a single supply less expensive, general economic conditions more buoyant, or the labor market tighter, for example), he would have chosen a different price. Equally difficult to determine, in the real economic world rather than an economist's hypothetical model, is what effect a change in a company's price will have on its total sales. Finally, costs per unit for a different volume of total sales are hard to estimate. Even if it could be shown that the buyer raised his price in response to, and in the amount of, the overcharge and that his margin of profit and total sales had not thereafter declined, there would remain the nearly insuperable difficulty of demonstrating that the particular plaintiff could not or would not have raised his prices absent the overcharge or maintained the higher price had the overcharge been discontinued. Since establishing the applicability of the passing-on defense would require a convincing showing of each of these virtually unascertainable figures, the task would normally prove insurmountable. On the other hand, it is not unlikely that if the existence of the defense is generally confirmed, antitrust defendants will frequently seek to establish its applicability. Treble-damage actions would often require additional long and complicated proceedings involving massive evidence and complicated theories. 125 In addition, if buyers are subjected to the passing-on defense, those who buy from them would also have to meet the challenge that they passed on the higher price to their customers. These ultimate consumers, in today's case the buyers of single pairs of shoes, would have only a tiny stake in a lawsuit and little interest in attempting a class action. In consequence, those who violate the antitrust laws by price fixing or monopolizing would retain the fruits of their illegality because no one was available who would bring suit against them. Treble-damage actions, the importance of which the Court has many times emphasized, would be substantially reduced in effectiveness. 126 392 U.S. at 492-94, 88 S.Ct. at 2231-32, 20 L.Ed.2d at 1241. (Footnotes omitted.) The Court did not sanction an iron rejection of the defense, however. On the contrary, it indicated that the above-quoted policy factors had impelled it to reject the defense for most cases, but that where those factors were absent, the defense would be allowed: 127 We recognize that there might be situations for instance, when an overcharged buyer has a pre-existing cost-plus contract, thus making it easy to prove that he has not been damaged where the considerations requiring that the passing-on defense not be permitted in this case would not be present. We also recognize that where no differential can be proved between the price unlawfully charged and some price that the seller was required by law to charge, establishing damages might require a showing of loss of profits to the buyer. 128 392 U.S. at 494, 88 S.Ct. at 2232, 20 L.Ed.2d at 1242. See generally Pollock, Automatic Treble Damages and the Passing-On Defense : the Hanover Shoe Decision, 13 Antitrust Bull. 1183 (1968). 129 Post-Hanover Shoe cases dealing with the passing on concept fall into two categories: so-called offensive use of passing on, and defensive use. Typical of the offensive use cases is In re Western Liquid Asphalt Cases, 9 Cir. 1973, 487 F.2d 191, cert. denied sub nom. Standard Oil Co. v. Alaska, 415 U.S. 919, 94 S.Ct. 1419, 39 L.Ed.2d 474. In that group of cases, the passing on issue arose in the context of the question whether the remote purchaser would have standing to sue. 27 Hanover Shoe itself exemplified defensive use of passing on, where the question is whether the defendant can avoid liability for damages because the plaintiff passed on the overcharge. Since Yoder is asserting that the burden of the BGA and GRA royalties passed from the propagator-distributors to the growers or self-propagators, to the extent that the passing on concept applies, it is defensive passing on. 130 Although none of the cases since Hanover Shoe have discussed defensive passing on in great detail, we have distilled some general guidelines from the Hanover Shoe decision itself and other cases that we believe should direct the inquiry. First, we believe that the ultimate question of availability of the defense vel non is a legal one for the court. See Obron v. Union Camp Corp., 6 Cir. 1973, 477 F.2d 542; State of Minnesota v. United States Steel Corp., 8 Cir. 1971, 438 F.2d 1380. But see Standard Industries, Inc. v. Mobil Oil Corp., 10 Cir., 475 F.2d 220, cert. denied, 1973, 414 U.S. 829, 94 S.Ct. 55, 61, 38 L.Ed.2d 63 (passing on issue submitted to jury, but no discussion of judge-jury allocation point). It was therefore error for the court here to submit the issue to the jury. 131 As the U.S. Steel court recognized, a number of evidentiary questions will often have to be answered before the final legal issue is resolved. Those questions, which might usefully be the subject of special interrogatories in an appropriate case, might inquire as to the evidence on the impact on the price and volume after the alleged overcharge is discontinued, the evidence on how easily ascertainable the amount of the overcharge is, the evidence on the extent of the pass-on, and the evidence as to the nature of the scheme if that is not clear from written documents. Nevertheless, once all those inquiries are resolved, the court must direct whether or not the defense will stand. 132 Secondly, we believe that a flexible, policy-oriented approach should be taken to the application of the limited defense still available. See Obron v. Union Camp Corp., supra ; State of West Virginia v. Chas. Pfizer & Co., 2 Cir., 440 F.2d 1079, cert. denied sub nom. Colter Drugs, Inc. v. Chas. Pfizer & Co., 1971, 404 U.S. 871, 92 S.Ct. 81, 30 L.Ed.2d 115; State of Minnesota v. United States Steel Corp., supra. Particularly, the overriding importance of the private treble damage action in the antitrust enforcement scheme should be kept in mind. 133 Because the critical facts for the passing-on defense were either stipulated or are contained within the BGA and GRA contracts, we can proceed immediately to an application of the law to this case. Cal-Florida, it seems clear, succeeded in the first instance in establishing a prima facie case of damage: it showed that the final price at which it sold chrysanthemum cuttings was illegally high, 28 and it showed that the amount of the overcharge was $.006 per cutting. On the basis of this showing, Cal-Florida was entitled to have the fact of damage presumed, unless Yoder could bring itself within the Hanover Shoe pre-existing cost plus contract exception or rebut the prima facie case in some other way. 134 Yoder's entitlement to the cost plus exception depends on its overcoming the almost insurmountable burden of showing that the factors that led the Supreme Court to reject the pass-on defense do not apply to the BGA and GRA programs. We have decided that it failed to meet that burden and thereby to qualify itself for the pre-existing cost plus contract exception. Even if we assume that Yoder had adequately demonstrated that (1) the impact of a single change in the conditions and factors influencing the pricing decision could be measured after the fact, (2) Cal-Florida would not have raised its price and did not maintain the higher price, and (3) persons to vindicate the antitrust laws would be readily available to do so, we think that it did not show the effect of a change in price on total sales and costs per unit for a different volume of total sales. 135 The impact of the higher illegal price on total sales is extremely difficult to measure. Yoder argues that since the only difference between sales pursuant to Cal-Florida's March 1971 price list and the list a year later was the elimination of the illegal royalty, a simple comparison of sales volume for the two years would suffice. However, other economic data, such as the general state of the economy at both times, the entry of a new competitor, or an unexpected external event such as the Arab oil boycott might skew this measurement. Yoder introduced no evidence attempting to adjust for these variables. 136 Yoder also argues that the fact that Cal-Florida suffered no sales decline during the BGA and GRA programs helps to negate this factor. Yet we have no way of knowing whether sales to growers would have increased even more if the cuttings had been available at a lower price. Simple economics suggests that sales would have increased at lower prices. The evidence indicated that growers looked to the total cost of a cutting in deciding what to buy; when that cost became prohibitively high, some growers turned to self-propagation. Each move to self-propagation removed one customer from Cal-Florida's universe of potential customers. The uncertainties surrounding this factor are simply too great, and we conclude that Yoder failed to meet its high burden of dispelling them. 137 The difficulty of estimating the cost per unit for a different volume of sales suffers from the same infirmity. Since the difference in total sales is an uncertain figure, the breakdown of that figure into cost per unit plus profit is equally uncertain. Administration of BGA may have affected cost per unit on those varieties. Because it was Yoder's burden to negate this factor, we attach no significance to Cal-Florida's failure to introduce evidence on administrative costs. Additionally, we know nothing about Cal-Florida's unused capacity. If volume of sales had increased at the lower price, it may have been able to cut down somewhat on marginal cost. 138 The long, complex proceedings feared by the Supreme Court would have been necessary in order adequately to deal with the two factors we have singled out. Until the policy considerations that led the Court to reject the passing on defense are rebutted, a litigant cannot take advantage of the pre-existing cost plus contract exception. Because Yoder did not show the inapplicability of those factors, we hold that the lower court should have ruled that Yoder was not entitled to assert a passing on defense. 139 We note that the BGA and GRA programs do not fit the model of a pre-existing cost plus contract in any case. Two characteristics are essential to such a contract, only one of which was met here: first, the buyer must have his contract with a particular customer for a particular sale before the illegal overcharge is imposed on the buyer, and second, the contractual arrangement must assure that whatever the cost of the product was to the buyer, it is the same to the customer. Unquestionably, the BGA and GRA systems satisfied the latter criterion. They were not pre-existing contracts, however, in the former sense. Volume was indefinite; identity of customer was indefinite. The uncertainty in those terms was exactly the flaw in Yoder's arguments purporting directly to meet the Hanover Shoe policy considerations. 140 Thus, whether the problem is approached by attempting to refute the Court's reasons for disallowing the defense or by trying to come within the exception, Yoder fails. On remand, the fact-finder must be permitted to consider the full amount of the overcharge i. e. the total amount of royalties paid as evidence of damages. 29 141 To summarize the antitrust part of this case, then, we have held that Cal-Florida did have standing to sue Yoder, that Cal-Florida was not entitled to the benefits of the tolling provision of the statute of limitations, that BGA and GRA were per se violations of section 1, that the relevant market was ornamental plants, that Yoder neither monopolized nor attempted to monopolize that market, and finally, that a remand is necessary on the damages issue.