Court Opinion

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Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

5-22-2000

Pace Electr. Inc. v. Canon Comp. Systems
Precedential or Non-Precedential:

Docket 99-5728

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Recommended Citation
"Pace Electr. Inc. v. Canon Comp. Systems" (2000). 2000 Decisions. Paper 106.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/106

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Filed May 22, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-5728

PACE ELECTRONICS, INC.

Appellant

v.

CANON COMPUTER SYSTEMS, INC. and
LAGUNA CORPORATION

On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civ. No. 98-cv-03132)
District Judge: Honorable John C. Lifland

Argued: March 14, 2000

Before: MCKEE, RENDELL and ROSENN,
Circuit Judges.

(Filed: May 22, 2000)

       Elliott Joffe (Argued)
       Steven Robert Lehr, P.C.
       33 Clinton Road
       Suite 100
       West Caldwell, NJ 07006
        Counsel for Appellant Pace
        Electronics, Inc.
       Richard H. Silberberg (Argued)
       Robert G. Manson
       Dorsey & Whitney LLP
       250 Park Avenue
       New York, New York 10177
        Counsel for Appellee Canon
        Computer Systems, Inc.

       Carl A. Rizzo
       Cole, Schotz, Meisel, Forman &
        Leonard
       25 Main Street
       Hackensack, NJ 07601
        Counsel for Appellee Laguna
        Corporation

OPINION OF THE COURT

ROSENN, Circuit Judge.

The issue in this appeal is whether the termination of a
wholesale dealer's contract for its refusal to acquiesce in an
alleged vertical minimum price fixing conspiracy constitutes
an antitrust injury that will support an action for damages
under section 4 of the Clayton Act. The United States
District Court for the District of New Jersey reasoned that
a dealer terminated under these circumstances does not
suffer an antitrust injury unless it can demonstrate that its
termination had an actual, adverse economic effect on a
relevant market. After concluding that the plaintiff's
complaint in the instant case failed to allege such an effect,
the District Court dismissed the complaint for failure to
state a claim upon which relief may be granted. Because we
believe the court misconstrued the antitrust injury
requirement, we will reverse.1
_________________________________________________________________

1. The District Court exercised jurisdiction under 28 U.S.C. S 1331. We
have appellate jurisdiction under 28 U.S.C. S 1291 and undertake
plenary review of the District Court's order dismissing the plaintiff's
complaint.

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I.

The plaintiff, Pace Electronics, Inc. ("Pace"), a New Jersey
corporation, is engaged in the business of distributing
various electronic products, including computer printers
and related accessories. Pace purchases these products
from manufacturers and wholesale distributors and then
resells them to smaller retailers, who operate in the New
Jersey and New York region.

In April of 1996, Pace entered into a nonexclusive dealer
agreement with defendant Canon Computer Systems, Inc.
("Canon"), a California corporation. Under this agreement,
Pace obtained the right to purchase Canon-brand ink-jet
printers and related accessories from Canon at "dealer
prices." In consideration for the right to purchase these
products at "dealer prices," Pace agreed to purchase certain
minimum quantities of the products.

The dealer agreement between Pace and Canon remained
in effect for approximately one year and three months.
Thereafter, on July 1, 1997, Canon terminated the
agreement with Pace on the stated ground that Pace failed
to purchase the minimum quantities of Canon-brand
products required of it under the dealer agreement.
Although Pace concedes that it did not purchase the
amount of Canon-brand products called for under the
dealer agreement, Pace contends that it was unable to do
so because Canon ignored its purchase orders. Pace further
contends that Canon ignored its purchase orders because
Pace refused to acquiesce in a vertical minimum price fixing
agreement designed and implemented by Canon and
defendant Laguna Corporation ("Laguna"), Pace's direct
competitor in the New Jersey and New York region.

In this connection, Pace alleges that, prior to the time it
entered its dealer agreement with Canon, Laguna had
entered into a similar dealer agreement with Canon.
Additionally, Pace alleges that the agreement between
Canon and Laguna contemplated the maintenance of a
minimum resale price below which Laguna would not sell
Canon-brand ink-jet printers. In support of its allegation,
Pace asserts that after it entered into its dealer agreement
with Canon, the president of Canon repeatedly instructed

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Pace's president not to sell to past or existing customers of
Laguna and not to sell Canon brand ink-jet printers at
prices less than those at which Laguna was selling its
products.

Pace alleges that it has suffered financial losses as a
result of its termination as an authorized Canon-brand
dealer. Specifically, Pace avers that "[a]s a direct and
proximate result of the actions of Defendants . . . Pace has
suffered significant financial detriment, consisting of, but
not necessarily limited to, lost profits. Pace's losses result
directly and proximately from the efforts of Canon and
Laguna to limit price competition in the market . . . for
which both Laguna and Pace were competing." Appellant's
App. at 77. Although these allegations of loss appear
somewhat vague and conclusory, we accept them as true,
as we must, for the purposes of this appeal.

Pace also alleges that its termination as an authorized
dealer of Canon-brand products has harmed competition in
two respects. First, it contends that its termination as a
dealer has reduced price competition in the wholesale
market for Canon-brand ink-jet printers (an intrabrand
market) because Laguna no longer faces price competition
from Pace in selling these products to smaller retailers.
Second, Pace asserts that its termination as a dealer has
reduced price competition in the wholesale market for all
brands of ink-jet printers (an interbrand market). In this
connection, Pace alleges that: (1) Canon-brand ink-jet
printers enjoy an inherent competitive price advantage over
the ink-jet printers of other manufacturers; (2) until Canon
permits its distributors to take advantage of this price
advantage, other manufacturers will not attempt to reduce
their production costs; and, (3) until an unrestrained free
competitive market requires other manufacturers to reduce
their production costs, the price of all brands of ink-jet
printers will remain at an artificially high level.

II.

To state a claim for damages under section 4 of the
Clayton Act, 15 U.S.C. S 15, a plaintiff must allege more
than that it has suffered an injury causally linked to a

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violation of the antitrust laws. See Brunswick Corp. v.
Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977). In
addition, it must allege antitrust injury, "which is to say
injury of the type the antitrust laws were intended to
prevent and that flows from that which makes defendants'
acts unlawful." Id. This is so even where, as in the instant
case, the alleged acts of the defendants constitute a per se
violation of the antitrust laws.2See also Atlantic Richfield
Co. v. USA Petroleum Co., 495 U.S. 328, 341 (1990). In
applying the antitrust injury requirement, the Supreme
Court has inquired whether the injury alleged by the
plaintiff "resembles any of the potential dangers" which led
the Court to label the defendants' alleged conduct violative
of the antitrust laws in the first instance. Id. at 336; see
also II AREEDA & HOVENKAMP, ANTITRUST LAW, AN ANALYSIS OF
ANTITRUST PRINCIPLES AND THEIR APPLICATION P 362a. (Revised ed.
1995) [hereinafter AREEDA & HOVENKAMP] ("The [antitrust
injury requirement] forces . . . courts to connect the alleged
injury to the purposes of the antitrust laws. Compensation
for that injury must be consistent with . . . the rationale for
condemning the particular defendant.").

For example, in Atlantic Richfield, the plaintiff, an
independent retail marketer of gasoline, brought suit
against ARCO, an integrated oil company which sold
gasoline to consumers through its own stations and
indirectly through ARCO-brand dealers, claiming that
ARCO violated section 1 of the Sherman Act by conspiring
with its dealers to fix the maximum resale price of gasoline
at an artificially low level. Id. at 331. Although the plaintiff
conceded that the fixed prices were not predatory, it
nevertheless maintained that it suffered antitrust injury, in
the form of lost profits, as a result of the vertical maximum
price fixing agreement between ARCO and its dealers. See
id. at 334-35. The Supreme Court disagreed, noting that
the plaintiff's alleged injury did not resemble any of the
dangers which caused the Court to label vertical maximum
_________________________________________________________________

2. Vertical minimum price fixing is, of course, per se unlawful under
section 1 of the Sherman Act, which outlaws "[e]very contract
combination . . . or conspiracy in restraint of trade or commerce among
the several states." 15 U.S.C. S 1; see also Dr. Miles Med. Co. v. John D.
Park. & Sons Co., 220 U.S. 373 (1911).

                               5
price fixing per se illegal in Albrecht v. Herald Co., 390 U.S.
145 (1968).3 See id. at 336.

In this connection, the Court identified four potential
adverse effects of vertical maximum price fixing agreements
which led it to label those agreements per se illegal in the
Albrecht decision. First, it noted that a vertical maximum
price fixing agreement might intrude on the ability of
dealers to compete and survive " `by substituting the
perhaps erroneous judgment of a [supplier] for the forces of
the competitive market.' " Id. at 335 (quoting Albrecht, 390
U.S. at 152). Additionally, the Court observed that
" `[m]aximum prices may be fixed too low for the dealer to
furnish services essential to the value which goods have for
the consumer or to furnish services and conveniences
which consumers desire and for which they are willing to
pay.' " Id. at 335-36. Next, the Court explained that "[b]y
limiting the ability of small dealers to engage in nonprice
competition, a maximum-price-fixing agreement might
`channel distribution through a few large or specifically
advantaged dealers.' " Id. at 336. Finally, the Court noted
that " `if the actual price charged under a maximum price
scheme is nearly always the fixed maximum price, which is
increasingly likely as the maximum price approaches the
actual cost of the dealer, the scheme tends to acquire all
the attributes of an arrangement fixing minimum prices.' "
Id.

Having identified the potential dangers which led it to
condemn categorically vertical maximum price fixing
agreements, the Supreme Court had little difficulty
determining that the plaintiff in Atlantic Richfield had not
suffered an antitrust injury. The Court noted that the
dangers identified in the Albrecht decision focused on the
potential adverse effects of vertical maximum pricefixing
_________________________________________________________________

3. Albrecht's specific holding -- that vertical maximum price fixing is
per
se illegal -- has since been overruled. See State Oil Co. v. Khan, 522
U.S.
3, 7 (1997). However, Atlantic Richfield's approach -- i.e. discerning the
reasons that led the Supreme Court to label certain conduct a per se
violation, and determining whether the harm suffered by the plaintiff is
consistent with the rationale for labeling the defendant's conduct per se
illegitimate -- remains valid and is clearly applicable to the case before
us.

                               6
agreements on dealers and consumers, not competitors of
dealers subject to such agreements. See id. The Court
explained: "[i]ndeed, the gravamen of [the plaintiff's]
complaint--that the price fixing scheme between[the
defendant] and its dealers enabled those dealers to increase
their sales--amounts to an assertion that the dangers with
which we were concerned in Albrecht have not materialized
in the instant case." Id. at 337. In sum, the Court
concluded that the plaintiff had not suffered antitrust
injury because its losses did not flow from those aspects of
vertical maximum pricing that rendered it illegal. Id. at 337.

Turning now to the instant case, we think it appropriate
to ask whether Pace's alleged injury resembles any of the
dangers which have led the Supreme Court to condemn
vertical minimum price fixing agreements under the
antitrust laws. Pace alleges that it has suffered antitrust
injury because it was terminated as a wholesale dealer after
it sold Canon-brand products at prices below the minimum
resale price allegedly fixed by Canon and Laguna. Pace
further alleges that its termination as a wholesale dealer
has caused it to suffer lost profits because it may no longer
obtain profits from selling Canon-brand products at "dealer
prices." Under the Supreme Court's jurisprudence, these
allegations suffice to establish antitrust injury.

On this point, Simpson v. Union Oil, 377 U.S. 13 (1964)
is instructive. In Simpson, the plaintiff entered into a year-
to-year "consignment" agreement with Union Oil. See id. at
14. Under the agreement, which was terminable by either
party at the end of any one-year term, Union Oil required
the plaintiff to charge a minimum retail price for gasoline.
See id. Contrary to the terms of the agreement with Union
Oil, the plaintiff sold gasoline below the minimum retail
price. See id. at 15. Because he did so, Union Oil
terminated its "consignment" agreement with the plaintiff at
the end of the first one-year term. See id.

Sometime thereafter, the plaintiff brought suit against
Union Oil seeking damages under section 4 of the Clayton
Act. See id. After two pretrial hearings, the District Court
granted summary judgment in favor of Union Oil, holding
that the plaintiff failed to establish a violation of section 1
of the Sherman Act and that, even assuming the plaintiff

                               7
had established a violation, the plaintiff suffered no
actionable damage. See id. at 15-16. The Court of Appeals
affirmed on the ground that the plaintiff suffered no
actionable wrong or damage. See id. at 16. The Supreme
Court granted certiorari and reversed.

In reversing, the Court placed primary focus on the
consignment agreement's restriction on the ability of
dealers such as the plaintiff to make independent,
competitive pricing decisions. For example, the Court
explained:

       We disagree with the Court of Appeals that there is
       no actionable wrong or damage if a Sherman Act
       violation is assumed. If the "consignment" agreement
       achieves resale price maintenance in violation of the
       Sherman Act, it and the lease are being used to injure
       interstate commerce by depriving independent dealers
       of the exercise of free judgment whether to become
       consignees at all, or remain consignees, and, in any
       event, to sell at competitive prices.

Id. (emphasis added).

The Court also stated:

       Dealers, like [the plaintiff], are independent
       businessmen; and they have all or most of the indicia
       of entrepreneurs, except for price fixing. . . . Their
       return is affected by the rise and fall in the market
       price, their commissions declining as retail prices drop.
       Practically the only power they have to be wholly
       independent businessmen, whose service depends on
       their own initiative and enterprise, is taken from them
       by the proviso that they must sell their gasoline at prices
       fixed by Union Oil. . . . The evil of the resale price
       maintenance program . . . is its inexorable potentiality
       for and even certainty in destroying competition in
       retail sales of gasoline by these nominal `consignees'
       who are in reality small struggling competitors seeking
       retail gas customers.

Id. at 21 (emphasis added) (footnote and citations omitted).

Thus, the Supreme Court considered a restriction on
dealer independence with respect to pricing decisions to be

                               8
an anticompetitive aspect of vertical minimum pricefixing
agreements, and one that the antitrust laws have an
interest in forestalling. See Richard A. Posner, Antitrust
Policy and the Supreme Court: An Analysis of the Restricted
Distribution, Horizontal Merger and Potential Competition
Decisions, 75 Colum. L. Rev. 281, 289-90 [hereinafter
Antitrust Policy] ("According to the Court in Simpson, resale
price maintenance is bad because it benefits the
manufacturer and oppresses the dealer by taking from the
latter the power to price competitively."). Accordingly, we
think that a maverick dealer, such as Pace, which is
terminated for charging prices less than those set under a
vertical minimum price fixing agreement, suffers the type of
injury which the antitrust laws are designed to prevent and
may recover damages, such as lost profits, whichflow from
that termination. See generally AREEDA & HOVENKAMP, supra,
PP 382a. and 382c. (discussing dealer standing to challenge
various vertical restraints and noting that a terminated
dealer which "can reasonably show that he would have
been able to profit in a market free of the illegal
arrangements has presumably suffered both injury-in-fact
and antitrust injury."); see also Simpson, 377 U.S. at 16
("There is an actionable wrong whenever the restraint of
trade has an impact on the market; and it matters not that
the complainant may be only one merchant.").

Naturally, the defendants argue that the above analysis
misses the mark. In essence, they contend that Simpson is
no longer good law in light of the Supreme Court's decision
in Atlantic Richfield. Furthermore, they urge, and the
district court agreed, that a terminated dealer seeking to
establish that it has suffered antitrust injury must allege
facts demonstrating that its termination as an authorized
dealer resulted in an actual, adverse economic effect on
competition in a relevant interbrand market. In support of
their position, the defendants primarily rely on the
Supreme Court's statement in Atlantic Richfield that a
plaintiff can recover damages under section 4 of the
Clayton Act "only if [its] loss[es] stem[ ] from a competition-
reducing aspect or effect of the defendant's behavior."
Atlantic Richfield, 495 U.S. at 344. On the basis of this brief
statement, the defendants then argue that to be
"competition-reducing" a defendant's challenged conduct

                               9
must have had an actual adverse   effect on a relevant
interbrand market. Although the   defendants' syllogism may
have some allure, we decline to   construe the antitrust
injury requirement as suggested   by the defendants for the
following reasons.

First, we believe that requiring a plaintiff to demonstrate
that an injury stemming from a per se violation of the
antitrust laws caused an actual, adverse effect on a
relevant market in order to satisfy the antitrust injury
requirement comes dangerously close to transforming a per
se violation into a case to be judged under the rule of
reason. The per se standard is reserved for certain
categories of conduct which experience has shown to be
"manifestly anticompetitive." Continental T.V., Inc. v. GTE
Sylvania Inc., 433 U.S. 36, 39 (1977). That standard, which
is based on considerations of "business certainty and
litigation efficiency," Arizona v. Maricopa County Med.
Society, 457 U.S. 332, 344 (1982), allows a court to
presume that certain limited classes of conduct have an
anticompetitive effect without engaging in the type of
involved, market-specific analysis ordinarily necessary to
reach such a conclusion. See Business Electronics Corp. v.
Sharp Electronics Corp., 485 U.S. 717, 723 (1988) ("Certain
categories of agreements, however, have been held to be per
se illegal, dispensing with the need for case-by-case
evaluation."). Were we to accept the defendants'
construction of the antitrust injury requirement, we would,
in substance, be removing the presumption of
anticompetitive effect implicit in the per se standard under
the guise of the antitrust injury requirement.4

Second, we do not believe that the Supreme Court's
statement in Altlantic Richfield that a plaintiff can recover
for losses only if they stem "from a competition-reducing
aspect or effect of the defendant's behavior," Atlantic
_________________________________________________________________

4. We recognize that various scholars have taken issue with the Supreme
Court's per se treatment of vertical minimum price fixing agreements
and argued that these agreements may have significant, procompetitive
attributes. See, e.g., Antitrust Policy, 75 Colum. L. Rev. at 283. But,
academic commentary, even if persuasive, does not permit us to expand
the antitrust injury requirement to a point which undermines the
Court's categorical disapproval of vertical minimum price fixing.

                                  10
Richfield, 495 U.S. at 344, when viewed in the context of
the Court's entire opinion, can be fairly read to require a
terminated dealer to prove that its termination caused an
actual, adverse economic effect on a relevant market. In
this connection, we note that in determining that the
plaintiff in Atlantic Richfield failed to satisfy the antitrust
injury requirement, the Supreme Court simply did not
focus on whether the challenged conduct of the defendant
had an actual, adverse economic effect on a relevant
market. Rather, as outlined above, the Court focused on
whether the plaintiff's injury stemmed from any of the
potential anticompetitive dangers which led the Court to
label vertical maximum price fixing unlawful in the first
instance. Implicit in the Court's approach is that a plaintiff
who had suffered loss as a result of an anticompetitive
aspect of a per se restraint of trade agreement would have
suffered antitrust injury, without demonstrating that the
challenged practice had an actual, adverse economic effect
on a relevant market. See generally Daniel C. Richman,
Note, Antitrust Standing, Antitrust Injury, and the Per Se
Standard, 93 Yale. L.J. 1309, 1312-14 (arguing that courts
should recognize that "each per se rule presumes a
particular practice harms particular markets" and that
courts should permit "only plaintiffs within those markets
to pursue per se claims"). The issue, thus, is not whether
the plaintiff's alleged injury produced an anticompetitive
result, but, rather, whether the injury claimed resulted
from the anticompetitive aspect of the challenged conduct.

Finally, we point out that our holding -- that a dealer
terminated for its refusal to abide by a vertical minimum
price fixing agreement suffers antitrust injury and may
recover losses flowing from that termination -- is consistent
with the decisions of those courts which have explored the
issue thus far. See, e.g., Sterling Interiors Group, Inc. v.
Haworth, Inc., No. 94-9216, 1996 WL 426379 at *18-*19
(S.D.N.Y. July 30, 1996) ("The anti-competitive dangers of
minimum price arrangements flow to both customers who
purchase at prices set higher than competitive levels, and
to dealers who are effectively foreclosed from competing in
the marketplace.").

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III.

For the reasons set forth above, the district court's order
dismissing Pace's complaint will be reversed and the case
remanded to the district court for further proceedings
consistent with this opinion. Costs taxed against the
appellees.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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