Rehearing and Rehearing En Banc Denied October 8, 1975.
LEWIS R. MORGAN, Circuit Judge:
Appellants Vebco, Inc., and International Air Industries, Inc.,
The facts in this case are heatedly contested. Since the trial below resulted in AMXCO's favor, we consider the facts in a light most favorable to it.
Vebco, Inc., is a New Mexico corporation with its principal place of business in El Paso, Texas. It was incorporated in 1959. Vebco is primarily a distributor of heating and air conditioning equipment, although it does manufacture some products, including handmade evaporative cooler pads. It sells its pads primarily in Arizona, New Mexico, and West Texas.
AMXCO, a subsidiary of Texstar Company, has its principal place of business in Arlington, Texas. It maintains a branch office in El Paso, Texas, and manufactures evaporative cooler pads which it sells throughout the southwestern and far western parts of the United States.
The source of the controversy in this case is the cooler pad, an object made of aspen wood shavings covered with crinoline cloth, used in evaporative air conditioners. Such pads have historically been made by hand, but around 1960 AMXCO achieved a breakthrough in the field and began to produce a machine-made pad. Hand- and machine-made pads are interchangeable in use, but the latter can be produced, transported, and stored more cheaply. Through its technological success and business expansion AMXCO became the world's largest producer of cooler pads.
Vebco and AMXCO have enjoyed a lengthy business relationship. The founder of Vebco, Vernon Britt, began to distribute pads for AMXCO in 1953. Until 1969, with only one short exception, the only pads Vebco distributed were manufactured by AMXCO. By selling AMXCO's pads, Vebco developed a highly successful business and gradually expanded its operations to include a complete line of heating and cooling implements.
Except for direct sales to "national accounts," AMXCO marketed all of its cooler pads through independent distributors such as Vebco. Vebco's primary customers in the El Paso-Las Cruces trade area were discount stores. The only large discount store in the area to which Vebco did not sell cooler pads was K-mart, serviced by Passage Supply, an independent distributor for AMXCO.
Prior to 1969, AMXCO favored its El Paso distributors over its Arizona distributors
When AMXCO learned that Vebco was manufacturing its own cooler pads, AMXCO terminated its distribution relationship with Vebco. Although it lost customers to Vebco in 1969, AMXCO took no action in regard to price.
In 1970, Vebco expressed considerable concern to AMXCO at the emergence of Southwest as a competitor, particularly since partners in the Vebco manufacturing operation were officers of Southwest. Vebco even tried to induce AMXCO to purchase Vebco or its manufacturing operation. AMXCO agreed to loan the Vebco owners $20,000 to buy out the Vebco principals then involved in Southwest and to pay off Vebco's outstanding indebtedness. The negotiations to purchase Vebco never reached fruition but an agreement was reached whereby AMXCO sold specially packaged pads to Vebco which were offered for sale under Vebco's label, and Vebco sold pumps and parts to AMXCO.
Because the 1970 agreement was profitable for both parties, they agreed to continue the operation in 1971. However, prior to the 1971 selling season, relations between the two companies deteriorated, resulting in the suit before us.
In late January, 1971, Vebco dropped its price to discount houses 5% below the price currently being quoted by both AMXCO and Vebco
On March 1, 1971, AMXCO requested Vebco's order for three carloads of pads which Vebco had indicated it would purchase from AMXCO. When Vebco failed to verify its order, AMXCO determined that customers which had previously used AMXCO pads distributed by Vebco would now be serviced by Vebco's own pads. In effect, Vebco was going to compete against AMXCO for its customers rather than distributing its pads. AMXCO then decided to compete directly for the discount trade in the El Paso area.
Based on previous public bids by Vebco and Southwest, and on information received from customers, AMXCO determined that a 25% discount would be competitive in the market. AMXCO then contacted its old customer, K-mart, and at least one other discount house, offering the 25% discount. However, AMXCO salesmen made no sales at the 25% discount, because, unknown to them, Vebco had verified their price and had notified its customers that it, too, would give the 25% discount. Because of the
During this intense period of competition, AMXCO delegated price-setting responsibility in the El Paso market to two of its local employees, Wendell Johnson and June Morris. Carl Gillespie, AMXCO's division manager, continued to make recommendations, and on March 16, 1971, he prepared a memorandum suggesting ways to compete with Vebco and Southwest, which included, as one possible alternative, the option of offering prices in El Paso low enough to insure that Vebco would not profit from competitive sales. On March 17, Gillespie also wrote Morris a letter which contained the statement:
Vebco had a great deal of difficulty sustaining a 32.5% discount and on March 29, 1971, Vebco announced to its customers that it would return to the 25% discount. AMXCO subsequently made one sale to K-mart, its prior customer at a 39% discount. After the 1971 season, AMXCO raised its prices, offering discounts from 19 to 25% for the 1972 season.
On May 28, 1971, Vebco initiated this suit, charging AMXCO with a violation of Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act (15 U.S.C. § 13(a)).
Vebco alleged damages totaling over $100,000 for the years prior to and including 1971 and $42,000 for 1972. It sought treble damages as provided under the antitrust laws, as well as an injunction against AMXCO's allegedly unlawful behavior.
The record indicates that the dollar value of Vebco's cooler pad sales has increased every year since 1968, with the exception of a slight decline in 1972.
With respect to the slight decrease in 1972 cooler pad sales, Vebco's president conceded at trial that the decline could easily have been caused by the firm's efforts to improve its manufacturing operation at the expense of its sales program. Likewise, the record reveals that 1972 was a poor season for all cooler pad manufacturers and distributors because of inclement weather.
All in all, the record before us reveals that since 1968, the cooler pad market in El Paso has been extremely competitive. The sales season for cooler pads is quite short and manufacturers must necessarily process orders early. On the other hand, the record indicates that customers intentionally quote lower prices to distributors and manufacturers than have actually been offered by a competitor in the hopes of securing a lucrative offer. Vebco, AMXCO, Southwest, and one other manufacturer continue to vigorously compete in the El Paso market
Vebco's primary argument on appeal is that the district court erred in refusing to direct a verdict in Vebco's favor on the Robinson-Patman charge.
Section 2(a) prohibits price discrimination between different purchasers of commodities of like grade and quality "where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce or to injure, destroy, or prevent competition."
Encouraging competition while at the same time forbidding anti-competitive behavior calls for considerable care in this case. The facts before us reveal a large entrenched firm with a dominant market share confronted by a fledgling company attempting to enter the same market. Such a situation necessitates the greatest scrutiny on our part, for anti-competitive price cuts by the monopolist could be directed toward driving the new competitor out of the market or disciplining it in order to force it to follow the monopolist's price leadership. On the other hand, we believe that neither the Act nor any social value compels the sheltering of an individual competitor, at the expense of the public interest, from the competitive process. See F. Rowe, supra, at 130.
Vebco claims that AMXCO violated the Act when it sold cooler pads to El Paso customers at prices lower than it sold its pads elsewhere. A price discrimination within the meaning of the Act, of course, is merely a price difference, FTC v. Anheuser-Busch, Inc., 363 U.S. 536, 549, 80 S.Ct. 1267, 4 L.Ed.2d 1385 (1960), but price discrimination is not illegal per se, Continental Baking Co. v. Old Homestead Bread Co., 476 F.2d 97, 103 (10th Cir. 1973). In order to meet the requirement of an adverse effect upon competition, Vebco claimed that there was considerable diversion of business from Vebco to AMXCO in 1971, and, additionally, that Vebco suffered a reduction in its profit margin because it had to compete with AMXCO.
It is settled law that a mere diversion of business from one competitor to another does not signify detriment to competition on the seller level.
Mere loss of profits shows no more than that Vebco was forced to charge a competitive price because it faced competition. Similarly, the large size of the discriminator and even the fact that its sales increased during the period of discrimination would not necessarily make out a case.
Coupled with its claims of lost profits and diversion of business, Vebco introduced evidence purporting to show AMXCO's "predatory intent" in order to satisfy the statutory requirements. Of the actions which Vebco alleges evinced AMXCO's predatory intent, the only one meriting extensive comment is the Gillespie memo of March 17, 1971, which Vebco claims was conclusive proof of AMXCO's predatory intent.
Judicial use of the term "predatory intent" is troublesome. Several cases hold that from a finding of certain actions, the trier of fact may infer predatory intent, and from this inference the proscribed inimical effects upon competition in turn may be inferred.
In this appeal Vebco seeks a ruling that no reasonable man could fail to believe that AMXCO violated the statute. Vebco's allegations of predatory intent were contested at trial by AMXCO. Therefore, even under the unwieldy "double inference test," Vebco cannot prevail on appeal; the record indicates that the jury would have been justified in finding an absence of "predatory intent," or, upon finding such intent, in failing to draw the permissible inference of damage to competition.
It is possible, of course, for a plaintiff to present evidence of predation sufficient to warrant a directed verdict, but quoting out of context segments of internal company memoranda is simply insufficient. Gillespie's memorandum reveals that AMXCO acted as any legitimately competitive and rational firm would; Gillespie considered Vebco's potential for growth and enumerated several alternatives which AMXCO officials could consider in meeting the new competitive challenge. In order to require a court to direct a verdict, Vebco must adduce evidence of what AMXCO did; at best, it showed only what AMXCO might have done. See Anheuser-Busch, Inc. v. FTC, 289 F.2d 835, 843 (7th Cir. 1961).
Since the allegedly harmful actions in this case involve pricing, we must examine the relationship between AMXCO's prices and costs in order to determine whether their price behavior was predatory.
When a firm sets its price equal to its average cost, its total revenues cover total costs, including normal returns on investment.
In the case before us, the entry of Vebco and Southwest created excess manufacturing capacity in the cooler pad market.
It is frequently quite difficult to calculate the incremental cost of making and selling the last unit (i. e., marginal cost) from a conventional business account. Id. at 716. Consequently, the firm's average variable cost
When price discrimination exists—as in the case before us—we see no reason to depart from the average variable cost test for predation unless it can be shown that there are significant barriers of entry into the relevant market. Thus, even if a monopolist is price discriminating, we will not infer damage to competition as a matter of law if the firm is charging a short-run, profit-maximizing price (above average variable cost) in the market in which it faces competition. And, even if its price is below this level, we will not infer damage to competition if the firm's price discrimination has beneficial effects or insignificant effects in the competitive market.
It is therefore important to look to the price discriminator's costs, rather than
Evidence of AMXCO's costs was not cogently presented at trial, apparently because neither side considered it important. However, upon exhaustively searching the record, we find that the judge had much of the relevant data before him and we conclude from this data that the court properly denied Vebco's motion. The record indicates that AMXCO's manufacturing division charged its sales division a price for cooler pads which covered total costs, freight charges, and a "slight profit." Its sales division then resold the goods to distributors at a price based upon the distributors' bargaining power and competition in the area. For example, the manufacturing division sold AMXCO's # 1 pad in bulk to its sales division for 29 cents in 1971. The sales division then listed this pad for sale in bulk to distributors at 71 cents. AMXCO's largest discount of 39.25% (at which only one sale was made) produced a profit to the sales division alone of nearly 15 cents a pad. Thus, not only was the manufacturing division operating at a profit, but the sales division had a gross margin of around 33%. It would appear that AMXCO was selling its cooler pad at a price far above even its average cost.
Moreover, the record indicates that barriers to entry in the cooler pad market were virtually non-existent.
Finally, we note that, in addition to believing the evidence rebutting Vebco's prima facie case, the jury could reasonably have found that AMXCO established one of the statute's affirmative defenses. The statute provides that even where price discrimination occurs, a discriminator may not be held liable for a violation of the Act if "his lower price . . . was made in good faith to meet an equally low price of a competitor . . .." 15 U.S.C. § 13(b) (1973). In order to avail itself of this defense, AMXCO need only have shown that its pricing system was a reasonable method
The facts of this case would enable a jury to believe that AMXCO set its price as a reasonable and prudent firm would, to meet Vebco's lower price. As the facts indicate, the cooler pad market was very competitive and buyers often misinformed a manufacturer of a competitor's price in order to induce a larger discont. When AMXCO learned that Vebco had lowered its price, it responded with a price cut which had no result. It then cut its price a second time in order to regain its lost business. Because of the uncertain and competitive nature of the market, the jury could find that AMXCO met its burden under the affirmative defense of meeting competition.
Vebco next argues that the lower court erroneously excluded evidence relating to AMXCO's "specific intent" to monopolize the cooler pad market. Vebco's principal contentions focus upon the trial judge's exclusion of a series of internal AMXCO memoranda and evidence of specific prices AMXCO charged outside the El Paso area.
Between September 24, 1971, and November 19, 1971, various employees and officers of AMXCO exchanged internal memoranda regarding a source of wood for cooler pad production. All of these memoranda were circulated subsequent to the 1971 cooler pad season and, hence, after most of the alleged injury Vebco complains of in this case. Indeed, the memoranda were written after this suit was filed. When Vebco attempted to introduce the memoranda as evidence of AMXCO's "predatory intent," the judge excluded the proffered evidence on grounds of materiality, saying:
Vebco now contends that this exclusion, standing alone, is reversible error.
A fair reading of the memoranda supports the district judge's conclusion. The second memorandum indicates that Vebco had ordered wood from a contractor but had refused to take shipment. The memorandum queried whether AMXCO could purchase the wood in order to relieve its own shortages. However, the memorandum noted that AMXCO should proceed carefully in view of the litigation then pending and that Vebco should be given every opportunity to purchase the wood before AMXCO made an offer. The third memorandum said that Vebco had clear title to the wood and that AMXCO would be unable to purchase it, in view of the contractor's business relationship with Vebco. The memorandum did note that AMXCO should inquire the following spring as to the possibility of purchasing the contractor's entire output for use in AMXCO's Fresno operation. The final memorandum contains the two sentences upon which Vebco bases its argument:
It would appear that the memoranda are of so little probative value that the district judge's exclusion was not an abuse of discretion. However, even assuming an error was committed, we do not believe it was of such magnitude as to require reversal. On appeal, errors during the course of a trial which do not affect the substantial rights of the parties are to be disregarded. Fed. R.Civ.P. 61; see Connolly v. Farmer, 484 F.2d 456 (5th Cir. 1973); United States v. Heyward-Robinson Co., 430 F.2d 1077, 1083 (2nd Cir. 1970); Bell v. Swift & Co., 283 F.2d 407 (5th Cir. 1960). In the context of the other evidence submitted in this lengthy and complex trial—and particularly when compared with the other admitted memoranda—the excluded memoranda would have been only a minor piece of evidence, highly unlikely to have changed the result. Therefore, any error committed in the exclusion of the memoranda was harmless. See United States v. Heyward-Robinson Co., 430 F.2d 1077, 1083 (2nd Cir. 1970).
The trial judge also excluded evidence of the specific prices charged by AMXCO in about two dozen cities over a three-year period. At trial, AMXCO stipulated that its prices in the El Paso area were different from those charged elsewhere during the relevant period. Likewise, both Vebco's and AMXCO's witnesses repeatedly informed the jury that AMXCO's prices were higher outside the El Paso area. Nevertheless, when the trial judge excluded the exact dollar and cent figures charged elsewhere, Vebco's counsel appeared to argue that the jury simply would not believe AMXCO's prices were higher elsewhere unless it saw the exact figures, and, that Vebco's Robinson-Patman Act claim would therefore be jeopardized. Vebco now assigns the trial court's decision as error, claiming that it affected both the Robinson-Patman Act and Sherman Act claims. In essence, Vebco argues that without the exact numerical data, it was impossible to show that AMXCO was engaged in predation by supporting its price cuts in El Paso with higher prices elsewhere.
We do not agree. Vebco certainly had the right to establish price differentials between AMXCO's prices in El Paso and those elsewhere, Cornwell Quality Tools Co. v. C. T. S. Co., 446 F.2d 825 (9th Cir. 1971), an opportunity of which it availed itself. But we see no merit in requiring a district court to permit the introduction
Vebco also contends that the district court erred in its instructions to the jury, some of which "effectively increased the plaintiffs' burden of proof." In evaluating the adequacy of a charge to the jury, we consider the charge as a whole, and if the instructions taken together properly express the law applicable to the case, "there is no just ground of complaint, even though an isolated and detached clause is in itself inaccurate, ambiguous, incomplete, or otherwise subject to criticism." Delancey v. Motichek Towing Service, Inc., 427 F.2d 897, 901 (5th Cir. 1970) quoting Nolan v. Greene, 383 F.2d 814, 816 (6th Cir. 1967).
Only two of the alleged errors in the jury charge merit extensive discussion.
While the Supreme Court has never specifically forbidden the "probability" construction, it has employed the "reasonable possibility" language. See FTC v. Morton Salt Co., 334 U.S. 37, 68 S.Ct. 822, 92 L.Ed. 1196 (1948). Since that time, a controversy has raged over the doctrinal formulation of the requisite inimical potential. In 1959 the Second Circuit opted in favor of "substantially probable," see Standard Motor Products, Inc. v. FTC, 265 F.2d 674, 676 (2nd Cir. 1959), cert. denied, 361 U.S. 826, 80 S.Ct. 73, 4 L.Ed.2d 69 (1959), but the Tenth Circuit has approved the "reasonable possibility" formulation, see Atlas Building Products Co. v. Diamond Block & Gravel Co., 269 F.2d 950, 952 (10th Cir. 1959), cert. denied, 363 U.S. 843, 80 S.Ct. 1608, 4 L.Ed.2d 1727 (1960). Indeed, courts have frequently employed "possibility" and "probability" together as the district court did here. See, e. g., Anheuser-Busch, Inc. v. FTC, 289 F.2d 835, 841 (7th Cir. 1961); Minneapolis-Honeywell Regulator Co. v. FTC, 191 F.2d 786, 792 (7th Cir. 1951), cert. dismissed, 344 U.S. 206, 73 S.Ct. 245, 97 L.Ed. 245 (1952). The vacillation between the standards has even prompted one commentator to conclude that the verbal distinction between the two phrases "has
We believe that any difference between the two formulations is trivial. At any rate, the use of the disjunctive by the district court ("reasonable probability or possibility") would give the plaintiff the benefit of the arguably lesser standard.
Finally, Vebco claims the district court inconsistently defined the relevant geographic market, thus materially misleading the jury. Vebco contended that the relevant market was an issue for the jury, while AMXCO claimed that the relevant market was only the El Paso area. In his charge, the district court first said that the market was a question of fact to be determined by the jury and repeatedly referred to the relevant market as the area in which the two parties competed. However, later in the charge when discussing the Sherman Act count, the court appeared to instruct the jury that the relevant market was the El Paso area as a matter of law. While such an apparent inconsistency could mislead the jury, we do not believe, under the facts of this case, that any error committed would "affect the substantial rights of the parties." Fed.R.Civ.P. 61. As we have indicated, the judge properly excluded, for various reasons, virtually all the evidence presented which dealt with AMXCO's actions outside the El Paso area. The only evidence relevant to this point which the judge admitted was the stipulation and testimony to the effect that AMXCO charged higher prices in other areas than in El Paso. In this context, then, it is difficult to ascertain any damage to Vebco caused by the charge. If Vebco could not even prove antitrust violation in the El Paso area to the satisfaction of the jury, it is highly dubious whether an allegation of monopolizing a greater area—in the absence of evidence of actions outside of El Paso—would have improved its position. We therefore believe any error committed was harmless.
We have carefully reviewed appellant's other assignments of error and we find them meritless.
The trial judge also excluded evidence of AMXCO's purchase negotiations with Southwest. Vebco claims that the evidence would have convinced the jury that AMXCO was attempting to monopolize when it later negotiated to purchase Vebco. The record reveals that AMXCO made only the most superficial inquiry into the acquisition of Southwest and, in addition, Vebco initiated its purchase negotiations with AMXCO and AMXCO refused to buy Vebco. In context, then, we do not believe that the district judge abused his discretion since the excluded evidence shows little, if anything, about AMXCO's "intent."
Vebco also takes issue with the district judge's exclusion of evidence that AMXCO penetrated the California market by selling to California manufacturers more cheaply than the manufacturers themselves could make cooler pads. We believe that this activity was socially and economically justifiable and deem it irrelevant to a showing of "intent."
Finally, Vebco claims that the trial judge abused his discretion in failing to admit a hearsay statement allegedly made by an AMXCO employee. Inasmuch as the witness through whom the statement was to be introduced could not identify the declarant, making it impossible for AMXCO to rebut the allegation, we believe the district court committed no error. Moreover, even if error was committed in the exclusion of this piece of evidence, we believe that when considered in light of the admitted evidence, that the substantial rights of Vebco were not affected and any error was therefore harmless. Fed.R. Civ.P. 61.
Lastly, Vebco argues that the district court erred in failing to instruct the jury on the proper consideration of the parties' stipulation. The court instructed the jury that "[s]tipulations are facts which are stipulated to and agreed to by counsel, that have been read to you and will be accepted by you as the evidence, and it is agreed to as being considered as facts by you. Of course, you determine, again, what weight should be given to it." We believe, in the context of the entire charge, that the court did not err in giving this instruction. See Worden v. Tri-State Ins. Co., 347 F.2d 336, 343 (10th Cir. 1965). Moreover, the stipulation as read to the jury said, "[t]he following facts . . . are to be taken as true by the Members of the Jury."