DYER, Circuit Judge:
This is an appeal from a judgment in favor of Leasco Response, Inc. (Leasco) in a suit brought by four of its former franchisees for alleged violations of the anti-trust laws. In a bifurcated trial, the district court directed a verdict for Leasco at the close of franchisees' case. The franchisees, Response of Carolina (Carolina), Florida Computer Response (Miami), Datatron Corporation (Datatron) and Response of Colorado (Denver) alleged that Leasco imposed territorial restrictions on their sale of computer time-sharing services and that Leasco tied the sale of the franchise to the lease of computer hardware from Leasco. The question presented here is whether, particularly in light of the bifurcated trial procedure, the district court erred in directing a verdict for Leasco, having found that there was no substantial evidence under the standard of Boeing Co. v. Shipman, 5 Cir. 1969, 411 F.2d 365 (en banc), to establish Leasco's antitrust liability. We affirm.
Leasco entered the computer time-sharing business in 1969. Using a modified Hewlett-Packard 2000A central processing unit as the core of its system, it opened service branches in several major cities in the United States. The computer system was called "Response I."
In 1970, Leasco decided to franchise the Response I system. Its first franchise was opened in September, 1970, in Phoenix, Arizona. Two of the plaintiffs, Carolina and Datatron, began operations in Charlotte, North Carolina, and Louisville, Kentucky, respectively in June, 1971. The Denver plaintiff opened its doors in September, 1971, and the Miami plaintiff started in March, 1972.
The franchise agreement was called the Data Network Contract (DNC). While each of the four contracts involved in this case contained slight differences, their pertinent provisions are the same for all plaintiffs.
According to the DNC, Leasco granted to its franchisee the exclusive right to market
The area of primary responsibility (APR) was described in an exhibit to each DNC, listing the counties within the area. Leasco agreed not to offer Response Service to any other person in the area except that Leasco was permitted to sell and solicit the sale of its time-sharing service to companies having offices both within and without franchisees' areas, so called "national accounts." Each franchisee agreed to "diligently promote the sale of Response Service" throughout the area of primary responsibility.
The DNC did not prohibit extra-territorial sales by franchisees. It provided for royalty payments to Leasco of 15 percent of monthly gross sales to customers within the area. However, the royalty was increased to 70 percent for sales to customers outside of the area.
"Response Service" provided under the DNC did not include computer hardware,
On June 21, 1973, Leasco filed suit against Carolina in a North Carolina state court to collect unpaid rentals, maintenance fees, and other amounts due under the lease and to recover possession of the leased equipment. One day later, Carolina filed suit in the United States District Court for the Southern District of Florida against Leasco alleging that Leasco violated the antitrust laws
Extensive discovery was had by all parties in 1973 and the first nine months of 1974. On October 15, 1974, the parties filed a pre-trial stipulation wherein they agreed on no issues of fact or law. However, in this document both franchisees and Leasco stated that a tying claim was an issue to be considered at trial.
On October 18, 1974, at a pre-trial conference the district court stated that it was its disposition "to try liability first and then go to damages," using the same jury.
On November 11, 1974, the trial commenced and plaintiffs concluded presentation of their evidence on February 20, 1975. On February 28, 1975, the district court heard arguments on Leasco's motion for a directed verdict on the antitrust and fraud counts of the complaints.
Franchisees' motions for a new trial asserting error in directing a verdict for Leasco on the antitrust claims were subsequently denied and they appealed. They address their appeal solely to the propriety of the district court's directed verdict for Leasco on the territorial restriction and tying claims.
The district court found that "firm and resolute" or, at least, some measure of enforcement of a vertical territorial restriction is necessary to render it actionable. Since it found no evidence of enforcement, it directed a verdict in Leasco's favor on
Section one of the Sherman Antitrust Act, 15 U.S.C.A. § 1, provides that "every contract, combination . . . or conspiracy in restraint of trade or commerce . . . is . . . illegal." "Every" is not meant literally; rather the standard of reasonableness has been adopted to judge the lawfulness of the restraint, Standard Oil Co. v. United States, 1911, 221 U.S. 1, 66, 31 S.Ct. 502, 55 L.Ed. 619; Chicago Board of Trade v. United States, 1918, 246 U.S. 231, 238, 38 S.Ct. 242, 62 L.Ed. 683.
Certain practices have such a "pernicious effect on competition," Northern Pacific Ry. Co. v. United States, 1958, 356 U.S. 1, 5, 78 S.Ct. 514, 2 L.Ed.2d 545, that they are considered to be per se violations of Section one.
In White Motor, the Supreme Court was faced for the first time with territorial and customer restrictions. White Motor's agreement with its distributors and dealers expressly limited the territory within which and the customers to whom they might sell trucks and parts. The Supreme Court held that the legality of these vertical restraints should be determined only after a trial since it did not know enough about the "economic or business stuff out of which these arrangements emerge" to be certain of their purpose or effect. "We need to know more than we do about the actual impact of these arrangements on competition to decide whether they have such a `pernicious effect on competition and lack . . . any redeeming virtue' . . . and therefore should be classified as per se violations of the Sherman Act." 372 U.S. at 263, 83 S.Ct. at 702.
Four years later in Schwinn, the legality of such restraints suffered the opposite fate. Schwinn had two principal methods of selling its bicycles. It sold to retailers by means of consignment or agency arrangements with 22 distributors under the so-called Schwinn Plan which involved direct shipment by Schwinn to the retailer with Schwinn invoicing the retailer, extending credit, and paying a commission to the distributor taking the order. And it sold bicycles to distributors who maintained an inventory to supply retailers with emergency and "fill-in" requirements.
The Court held that where a manufacturer sells products to his distributor subject to territorial or customer restrictions upon resale, a per se violation of the Sherman Act results. "Under the Sherman Act, it is unreasonable without more for a manufacturer to seek to restrict and confine areas or persons with whom an article may be traded after the manufacturer has parted with dominion over it." 388 U.S. at 379, 87 S.Ct. at 1865. Hence, Schwinn was enjoined from limiting the freedom of its distributors and retailers who buy products from Schwinn to dispose of the products "where and to whomever they choose." Id. at 378, 87 S.Ct. at 1865.
The critical element of a "contract, combination, or conspiracy," easily found in White Motor because of the express contractual territorial restriction, was not clearly identified by the Court in Schwinn. The Court did not quote the language of any of the agreements between Schwinn and its distributors and retailers so there does not appear to have been an express contractual restriction. Justice Stewart's dissenting opinion supports this view when it states that Schwinn's distribution policy was "implemented largely through request and persuasion by Schwinn." 388 U.S. at 385, 87 S.Ct. at 1868. And the majority opinion made clear that there were no horizontal overtones to the restrictions in issue:
With respect to transactions in which distributors purchased bicycles for resale, at least, the district court expressly found a conspiracy between the distributors and Schwinn to restrain trade. 388 U.S. at 371, 87 S.Ct. 1856. However, the district court's finding of a conspiracy did not embrace agency or consignment sales by distributors. And with respect to the restrictions on retailers, the district court stated that the Schwinn franchising program "`was conceived, hatched and born into life . . . in the minds of the Schwinn officials,' and agreed that `the action was unilateral in nature.'" 388 U.S. at 391, 87 S.Ct. at 1871, fn. 12 (Stewart, J., dissenting).
The Court does not tell us in Schwinn the source of the necessary contract, combination or conspiracy with respect to the territorial restrictions on distributors when acting as agents or consignees and the customer restrictions on retailers. According to Justice Stewart's dissent, the "firm and resolute enforcement" language of the majority opinion was intended to satisfy—in his view, unsatisfactorily—the Sherman Act jurisdictional requirement of an agreement for these two practices. 388 U.S. at 391, 87 S.Ct. 1856, fn. 12. The district court had rejected the government's contentions that Schwinn in fact cancelled the franchises of some retailers because of sales to unauthorized customers and that distributors had been cut off because of sales to unauthorized customers in violation of territorial limitations. The government argued to the Court that these findings were clearly erroneous. The Court stated:
Thus, despite the unilateral nature of the distribution policies of Schwinn, Schwinn's
Albrecht v. Herald Company, 1968, 390 U.S. 145, 88 S.Ct. 869, 19 L.Ed.2d 998, confirms this view. Albrecht was a newspaper carrier for respondent newspaper company. All carriers had exclusive territories subject to termination if prices exceeded respondent's advertised suggested maximum price. Albrecht adhered to the advertised price for some time but then raised his prices. Respondent objected to no avail and later wrote Albrecht to inform him that it was writing to subscribers on his route to offer them the newspaper at the lower price. Respondent also hired a circulation company to engage in a solicitation of customers along Albrecht's route. Respondent continued to sell newspapers to Albrecht but warned him it would stop doing so if he continued to overcharge. In addition, resident found a carrier, Kroner, to deliver papers to respondent's customers, most of whom were previously Albrecht's. Albrecht sued charging a combination between respondent and Albrecht's customers or the circulation company or Kroner. The jury found for respondent and a motion for a judgment notwithstanding the verdict was denied. The court of appeals affirmed the denial in part on the ground that respondent's action was unilateral.
Relying on United States v. Parke, Davis & Co., 362 U.S. at 45-47, 80 S.Ct. 503,
The post-Schwinn treatment of the "firm and resolute enforcement" language of the Court has followed an erratic course. We chart it to explain our holdings, infra, on the existence of a violation here.
Janel Sales Corp. v. Lanvin Parfums, Inc., 2 Cir. 1968, 396 F.2d 398, cert. denied, 393 U.S. 938, 89 S.Ct. 303, 21 L.Ed. 275, involved an express contractual customer restriction where the "retailer" agreed to sell certain "commodities" only to "consumers for use." Plaintiffs argued that this was a per se violation of the Sherman Act § 1. The jury found that there was no agreement on customer restrictions and the court upheld this finding saying that "firm and resolute" insistence on compliance with the restriction
Three years later, in Beverage Distributors, Inc. v. Olympia Brewing Company, 9 Cir. 1971, 440 F.2d 21, cert. denied, 403 U.S. 906, 91 S.Ct. 2209, 29 L.Ed.2d 682, plaintiff beer distributor argued that defendant brewing company had imposed territorial restrictions upon the resale of its beer. However, the distributorship agreement contained no reference to territorial restrictions. Hence, plaintiff was faced with the same dilemma as the government in Schwinn: the need to show a contract, combination or conspiracy. The jury found that there was none of these and the court held that there was sufficient evidence to support the verdict, concluding that "if there was any restraint on plaintiff it was self imposed." Id. at 30-31.
Next, in Colorado Pump & Supply Co. v. Febco, Inc., 10 Cir. 1973, 472 F.2d 637, cert. denied, 411 U.S. 987, 93 S.Ct. 2274, 36 L.Ed.2d 965, plaintiff and defendant Thompson were competing wholesale distributors of defendant Febco's products. Febco then entered into an exclusive distributorship with Thompson which authorized Thompson "to sell within the following territory (Colorado and some adjacent areas)." As a result of this arrangement, plaintiff could not buy directly from Febco and had to buy from Thompson at a lesser discount than it had been receiving from Febco. The court stated that the territorial limitation did not mention outside sales and the testimony was that outside sales could have been made, though none had been. It concluded that the limitation created no more than an area of primary responsibility,
About a year later, in Good Investment Promotions, Inc. v. Corning Glass Works, 6 Cir. 1974, 493 F.2d 891, alleged customer restrictions were in issue. The district court had granted a summary judgment to plaintiff relying on the per se rule of Schwinn. The court of appeals reversed saying, in part, that the record is "devoid of any information from which it may be determined that `. . . firm and resolute [insistence] upon observance of . . . customer limitations' was required by Corning, such as was the situation in Schwinn." Id. at 893. It is unclear from the opinion whether the court was treating the firm and resolute language as necessary to establish an agreement in the absence of a contractual restriction or whether it was treating it as a defense to the charge of violation.
In Copper Liquor, Inc. v. Adolph Coors Co., 5 Cir. 1975, 506 F.2d 934, we were faced with an express territorial restriction in which a beer distributor promised to conduct his distribution exclusively within a prescribed territory. Referring to the "firm and resolute" language as an "exception" we did not consider its significance because it was "apparent" that Coors had been firm and resolute in enforcing the territorial restrictions. Id. at 944.
The Reed court properly used the firm and resolute language to support a finding of an agreement. This was also done in World of Sleep v. Stearns & Foster Co., 10 Cir. 1975, 525 F.2d 40, but with the opposite result. Defendant sold bedding products to plaintiff in Denver. There was no contract or agreement of any kind involved. Plaintiff opened a store in Atlanta and requested that defendant sell to it there. Defendant refused, citing its loyalty to another department store in Atlanta. Hence, plaintiff began to ship defendant's products from its Denver store to its Atlanta store. After an unavailing protest, defendant stopped selling bedding products to plaintiff. The plaintiff sued and the jury found for defendant. The court interpreted the per se rule of Schwinn as follows: "where a manufacturer . . . sells his product to a distributor . . . and in connection with such sale `firmly and resolutely' subjects the distributor to territorial restrictions upon resale, whether by `explicit agreement or silent combination or understanding with his vendee', a per se violation of the Sherman Act results." Id. at 44. The court properly equated "firm and resolute enforcement" with the Section one requirement of an agreement despite the Tenth Circuit's earlier ambiguous decision in Colorado Pump & Supply Co., supra.
The Tenth Circuit decided Redd v. Shell Oil Co., 10 Cir. 1975, 524 F.2d 1054, cert. denied, 425 U.S. 912, 96 S.Ct. 1508, 47 L.Ed.2d 762, four days later which involved an agreement containing "clear restrictions
In our decision in Eastex Aviation, Inc. v. Sperry & Hutchison Co., 5 Cir. 1975, 522 F.2d 1299, which involved explicit contractual customer restrictions on resale of S & H green stamps, we characterized the "firm and resolute" cases as decisional exceptions to Schwinn but did not analyze their meaning because we found that the restrictions were enforced. Id. at 1307.
Finally, in Pitchford v. Pepi, Inc., 3 Cir. 1976, 531 F.2d 92, cert. denied ___ U.S. ___, 96 S.Ct. 2649, 49 L.Ed.2d 387, 44 L.W. 3714, a manufacturer of electronic equipment imposed explicit territorial restrictions by contract upon plaintiff distributor. The court upheld the jury's finding of a per se violation of the Sherman Act under Schwinn, once it found that there was enough evidence (1) to show that plaintiff purchased goods for resale and (2) to enable a jury to find that defendants enforced their territorial policy. The decision is complicated somewhat by an alternative holding that a horizontal division of markets existed "even if the Schwinn prohibition of vertical restraints were not dispositive." Id. at 104.
In our view, none of these cases have analytically dealt with the difference between Schwinn's territorial "restriction" and various post-Schwinn "limitations" and the importance of an express agreement containing either the restriction or limitation.
Schwinn's territorial "restriction" absolutely barred distributors from making extra-territorial sales. However, because this restriction was not contractually created, the Court determined that a contract, combination or conspiracy existed because of Schwinn's firm and resolute enforcement of the restrictions and the distributors' inferable acquiescence therein.
Where a territorial or customer "restriction" is created by contract, the Sherman Act's Section one jurisdictional requirement is met and a per se violation exists whether or not the restriction has been enforced, much less firmly and resolutely enforced, unless it is otherwise sheltered by a decisional exception to Schwinn.
We turn now to the correctness of the district court's directed verdict for Leasco on the existence of an antitrust violation. The district court held that "some measure of enforcement of a vertical territorial restriction, at least in a franchise context, must take place to render such a restriction actionable." Finding no evidence of enforcement, it directed a verdict for Leasco. As the foregoing discussion makes clear, this holding was error.
There was other evidence to support this inference. Leasco inter-office memoranda stated that the royalty payment of 70 percent served the purpose of deterring or dissuading outside sales. The former Leasco Director of Finance testified that Harris, one of the architects of the Leasco franchise system, told him that the purpose of the 70 percent royalty was to dissuade the franchisees from going out of their territory. And at least with respect to Datatron there was proffered testimony that it would take a loss on any sale it made outside of its
However, our holding that the district court erred in directing a verdict for Leasco on the existence of territorial restrictions does not end our inquiry, for the district court also held that the franchisees failed to show the fact of damage required to support an award of treble damages under the antitrust laws. It is this ruling to which we now turn our attention.
In order to recover treble damages under the antitrust laws, a plaintiff must show a violation of the antitrust laws, the fact of damage, and some indication of the amount of damage. Terrell v. Household Goods Carriers' Bureau, 5 Cir. 1974, 494 F.2d 16, 20, 15 U.S.C.A. § 15. To be "liable" under the antitrust laws, therefore, means that one has violated the antitrust laws and that violation has resulted in an injury to the business or property of the plaintiff, i. e., there was fact of damage.
Franchisees vigorously contest this conclusion. They argue that "liability" should be equated with "violation," generally, or, at least in a bifurcated trial. They say this Court held as much in Copper Liquid v. Adolph Coors, Inc., supra.
Next, they argue that they have shown sufficient evidence of fact of damage to avoid a directed verdict under Boeing Co. v. Shipman. Finally, franchisees contend that if they have not shown fact of damage, it is because they were prejudiced in the presentation of evidence of it by the district court's bifurcation order. We reject all of these contentions.
Terrell establishes that "liability" for antitrust purposes means a showing of both an antitrust violation and fact of damage. It involved a conspiracy by defendants to eliminate Terrell as a competitor in the preparation and dissemination of mileage guides. Terrell prevailed in a jury trial but this Court en banc reversed the judgment of the district court with respect to the award of damages. We deemed it unnecessary to require a retrial on the issue of defendant's liability because there was "ample evidence to support a finding by the jury that the Sherman Act has been violated." 5 Cir., 452 F.2d 152, 160. After a jury verdict for Terrell on remand, the defendants argued that evidence of fact of damage was required on retrial and was insufficient to support the verdict. We disagreed, recognizing that in a private antitrust action, "there is no neat dividing line between the issues of liability and damages," but holding that the en banc decision affirming the trial court on the issue of liability "necessarily encompassed the findings [of the jury] on the legal violation and causation or fact of damage." 494 F.2d at 21.
Nothing that we said in Coors is to the contrary. There we found sufficient evidence to support the jury's finding of an antitrust violation, but found insufficient evidence to show that the violation caused plaintiff the injury alleged. The trial was not bifurcated in the district court. There was no issued raised as to meaning of the word "liability." We simply recognized that two elements exist before damages may be awarded under the antitrust laws but we found only one of them present. The fact that we remanded the case for a new trial on the issue of fact of damage was not a holding that the "fact of damage" belongs in Phase II of a bifurcated trial on liability and damages. Franchisees' attempt to read Coors in this manner takes the holding of that case beyond its contours.
Nor does the meaning of "liability" for antitrust purposes change when a trial is bifurcated.
To show fact of damage, an antitrust plaintiff need not show that the violation was the sole cause of the alleged injury. He need only show that it was a material cause. Zenith Radio Corp. v. Hazeltine Research, 1969, 395 U.S. 100, 114, 89 S.Ct. 1562, 23 L.Ed.2d 129, fn. 9. However, this showing may not be based on speculation. The required causal link must be proved "as a matter of fact and with a fair degree of certainty." Terrell v. Household Goods Carriers' Bureau, supra, 494 F.2d at 20.
Each franchisee had the task, therefore, of demonstrating that the alleged territorial restriction materially contributed to some injury to its business as a matter of fact and with a fair degree of certainty. We hold that under Boeing the evidence fails to support a claim that any of the franchisees were damaged by virtue of the alleged territorial restriction.
The principals in the Carolina franchise were Crane, Robert Johnson, and Mummaw. Their testimony belies Carolina's claim that it was damaged in any way by the territorial restriction.
Crane testified that Harris, one of the organizers of the Leasco franchise system, told him that he didn't have to worry about the 70 percent clause if he found a customer outside of his territory. Carolina had customers outside of its territory, and it made sales efforts out of its territory. Carolina complains of Leasco's characterization of these sales and sales efforts as "persistent" and "repeated" but it doesn't matter, in our view, how they are characterized. The facts are that they were made, and that Leasco knew they were made. Despite this knowledge, Leasco never billed or collected the 70 percent royalty on outside sales. In addition, when Carolina defaulted on its obligations under the DNC, Leasco did not make a claim of default with respect to the 70 percent royalty clause.
Johnson's testimony suggested that the time and expense of outside solicitations rather than the territorial restrictions was the primary reason for not selling outside
Carolina emphasizes Mummaw's testimony that Harris on two occasions told him not to worry about the 70 percent royalty "for now." But the fact is that there was never a "later." In short, Carolina had outside customers, it solicited outside customers, it never paid 70 percent and Leasco never asked for it.
Aubrey was the founder of the Datatron franchise in Louisville, Kentucky. Datatron had outside customers, Leasco knew this, and it never paid Leasco 70 percent of any revenues derived from extraterritorial sales.
Shortly after Datatron began its operations, in June, 1971, Leasco told it to go ahead and sell an outside prospect. In December, 1972, Datatron secured another outside customer. Leasco "waived" the 70 percent royalty with respect to this and three other potential outside customers in February, 1973.
Datatron argues that requiring a waiver shows the fact that they were damaged by the territorial restriction. We disagree. Datatron had already sold the outside account before its request to Leasco. Moreover, Datatron expected Leasco to waive the 70 percent requirement. There is no evidence that the discussion with Leasco caused a delay in the servicing of other accounts. Finally, there was no showing that Datatron had refused to service outside customers during the remainder of 1973, or, at least, until they stopped payment to Leasco in the summer of 1973.
We are also unpersuaded that the consideration for the waiver (payments of amounts due Leasco for 1972 to the extent possible and of amounts currently due) was a showing of fact of damage. It was no more than money due under Datatron's contract with Leasco. In any event, Datatron did not remain current on its payments to Leasco. Nevertheless, Leasco did not seek the 70 percent royalty.
Datatron also argues that fact of damage is shown because sales increased after the retention of counsel and it started selling outside of its territory. But this does not establish any loss as a result of the territorial restriction. There is no time specified for the alleged increases. There was no showing or attempt to show the reason for the increase. Cf. Copper Liquid Inc. v. Adolph Coors Co., supra, 506 F.2d at 954. This was particularly necessary where the alleged "restriction" had not been shown to limit outside sales previously. The fact that sales increased after Datatron began to sell outside has no bearing on fact of damage where it admitted that it began selling outside during the "restricted" period. We do not hold that events after a restriction is lifted by litigation may not be probative of fact of damage during the life of the restriction, but we recognize the close analysis which must be given to such evidence, cf. Knutson v. Daily Review, Inc., supra, 383 F.Supp. at 1381-84, and under these circumstances we hold that such a comparison—especially one of this general testimonial nature— is of little or no value.
Finally, it is of some moment that Datatron concentrated on developing the Louisville market because there was enough business or potential business there to keep its salesman busy. And, when Datatron defaulted on the DNC, Leasco did not claim a default with respect to the 70 percent royalty clause.
Friedman was Denver's founder and his testimony negates the existence of any injury to his franchise as a result of a territorial restriction. He did not expect the unfavorable portions of the DNC to be enforced, and they were not. Denver made outside sales and did not pay the 70 percent royalty. Leasco did not claim a default with respect to the 70 percent royalty clause in the DNC. Finally, Friedman also
Miami did not make any outside sales so the opportunity to charge the 70 percent royalty never arose. But Miami did solicit customers who were outside of its territory and there is no evidence that any customer was turned away as a result of the 70 percent clause.
Wright, Miami's president, testified that the 70 percent clause was an inhibiting force in keeping Miami from going out of its territory. Such evidence would support a showing of a territorial restriction (as opposed to simply limitation). However, without more, cf. Kestenbaum v. Falstaff Brewing Corp., 5 Cir. 1975, 514 F.2d 690, 697, it does not prove legal injury "as a matter of fact and with a fair degree of certainty" especially in view of Miami's evidence of outside solicitations and the untapped nature of the Miami market, the potential for which had not been exhausted. Cf. Shumate & Co., Inc. v. National Association of Securities Dealers, Inc., 5 Cir. 1975, 509 F.2d 147, 153-55.
Recently in Pitchford v. Pepi Inc., supra, it was proven that defendants had an explicit territorial restriction that, if violated, would result in termination; plaintiff was denied three outside sales opportunities before the damage period because of the restriction; plaintiff was capable of making outside sales during the damage period; plaintiff unsuccessfully attempted to have his territory expanded over a period of several years and had plaintiff been permitted to compete in an expanded territory, it would have made additional sales.
Here, there is no pre-damage period evidence of conduct. All franchisees made outside solicitations without reprisal and, in some cases, because of Leasco "leads." All but Miami had outside customers. None paid the 70 percent royalty on outside sales. While permission to sell outside could not legally have been required under Schwinn, it was received when requested by Datatron and Miami, the "conditions" of its receipt were not met by either, and the delay in receiving it produced no delay in service. No franchisee was terminated for other than legitimate reasons. Upon termination, no claim of default on any franchisee was made with respect to the 70 percent royalty clause. And there was insufficient evidence to show that the 70 percent royalty, rather than long distance phone charges or emphasis on development of local markets, materially contributed to reducing the number of outside sales that were made by Carolina, Datatron and Denver or prevented outside sales that would have been made by Miami.
We conclude, therefore, that the district court properly directed a verdict for Leasco on the issue of liability because each franchisee failed to submit sufficient evidence under Boeing to create a jury question on the existence of any injury caused by the territorial restriction.
Franchisees' contention of prejudice—that they were not able to show fact of damage because of the district court's bifurcation order—is more troubling.
Federal Rule of Civil Procedure 42(b) provides that a district court may order a separate trial of any issue "in furtherance of convenience or to avoid prejudice, when separate trials will be conducive to expedition and economy." We have approved such a bifurcation procedure on several occasions. However, we have cautioned that separation of issues is not the usual course
Section 4 of the Clayton Act, 15 U.S.C.A. § 15, provides that "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor . . . ." As we have said, this section contemplates that not only must a violation be shown, but that the violation must result in or cause the legal injury alleged. "Liability" includes both violation and causation. But "damages" must be linked causally with "violation" before they are recoverable. This overlap is what prompted us to say in Terrell that "in a private antitrust suit there is no neat dividing line between the issues of liability and damages."
Because this "dividing line" is so difficult to draw, separate trials of "liability" and "damage" in antitrust cases
While the franchisees now claim prejudice resulting from the separation of the issues of liability and damages in the trial below they failed to object to the district court's bifurcation order. We will not take note of error raised for the first time on appeal, F.R.Civ.P. 46; Wright & Miller, Federal Practice and Procedure, § 2472, p. 455, except "where the interest of substantial justice is at stake." Edwards v. Sears, Roebuck and Co., 5 Cir. 1975, 512 F.2d 276, 286; see Hormel v. Helvering, 1941, 312 U.S. 552, 557, 61 S.Ct. 719, 85 L.Ed. 1037. For several reasons this is not such a case. Over three weeks intervened between the bifurcation of issues and the beginning of the trial. Franchisees had ample time to determine the boundaries of the bifurcation order, yet nothing was done.
Moreover, it appears that the franchisees, contrary to their present claim, understood the extent of their burden. For example, in an "Order of Proofs First Two
In addition, it was stated that this proffered evidence "goes directly" to Leasco's argument of whether plaintiffs "suffered any actual damage by reason of defendant's alleged antitrust violations." There was reference to an exhibit which franchisees stated went to the issue of "fact of damage." There was a lengthy discussion of the element of "fact of damage" during the cross examination of Friedman, founder of the Denver franchise, midway through the plaintiffs' case. Counsel for Leasco sought to challenge Friedman's claim that Leasco's actions had cost him a loss in business value. Franchisees' counsel argued that the bifurcation order precluded this testimony. Counsel for Leasco responded:
In permitting cross examination the court noted that it was not in violation of the bifurcation order because "an essential element of the right of recovery is damage in both the fraud and antitrust claims." If franchisees were at all surprised by this statement no mention was made of it. If they then felt that it was incumbent upon them to submit proof that had not been offered they had over a month of trial time remaining to bolster their case.
In addition to the absence of an objection to the bifurcation order when it was first announced, franchisees' argument to the district court on the element of fact of damage in connection with Leasco's motion for a directed verdict was two-fold: there was a substantial basis in the record for a finding of fact of damage and fact of damage is not an element of liability under Coors. They did not argue that they had been prejudiced by the Court's rulings on admissibility of evidence.
Finally, we conclude that the evidence excluded by the district court presumably because of the bifurcation order does not show any prejudice.
We now come to the tying claim raised by franchisees.
The franchisees assert that they were required to lease the Response I hardware configuration from Leasco as a condition to their purchase of a Leasco franchise, and that this requirement constituted a tie-in illegal under Sherman § 1. The district court found that the hardware and franchise constituted a single product, that there was no proof of coercion on the part of Leasco, and that there was no proof of economic power by Leasco in the time-sharing industry. A directed verdict was thus entered in favor of Leasco on this claim.
In order to comprehend the basis of the franchisees' claims, some understanding of a computer's operation is necessary. The time-sharing system described as Response I can be broken into three components: the computer hardware, the operating system (systems software) and the applications programs (application software). The computer hardware, the actual physical machinery, consists of discrete parts: a central processing unit, the electronic device which performs the basic logical and arithmetic operations; various devices for storing information, such as magnetic tape units, magnetic discs, and magnetic drums; and terminal devices, for the output and input of information. These parts, when physically interconnected, comprise a unique computer hardware configuration.
The physical devices, the hardware, are themselves capable of following only the most rudimentary logical and arithmetic instructions known as machine language. In order to enable the system to perform sophisticated tasks, these basic operations must be combined. This is accomplished by the operating system, a complex computer program written in the basic machine language. In one aspect, the operating system is an interpreter, accepting instructions written in a more sophisticated language, and translating those instructions into the basic machine language instructions comprehendible by the computer hardware. In another aspect, the operating system acts as a controller, coordinating the activities of the various pieces of hardware with each other. Because of this latter task, the operating system is unique to the specific hardware configuration.
The final component of the computer system is the application software. These are computer programs designed to perform a specific function, generally usable by an individual without knowledge of the internal operations of the computer system. These programs are usually written in a sophisticated computer language, and then translated by the operating system into machine language instructions. In the case of Response I, the application software was designed to meet the general needs of small to medium sized businesses, performing such functions as inventory control, payroll, and the like.
The franchise agreement only provided the franchisee with the use of the Response I operating system and the Response I application software. The components necessary for the Response I system were detailed in the franchise agreement, but those components were not supplied under that agreement. The agreement stated that Leasco would lease the hardware to the franchisee upon terms set out in the agreement, but the agreement also made clear that the franchisee was free to procure the hardware from any other source.
A tying agreement is "an agreement by a party to sell one product but only on the condition that the buyer also purchase a different (or tied) product." Northern Pacific Ry. v. United States, 1958, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545. Such an agreement violates the Sherman Act whenever the party imposing the tie 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 interstate commerce is affected. Id. at 6, 78 S.Ct. 514. As recognized by the Supreme Court, implicit in this formulation is the requirement that this requisite economic power actually be utilized to coerce the purchase of the tied product:
We thus agree with the Third Circuit that, in order to establish an illegal tie, it is not enough to show that the seller has sufficient economic power and that two products were purchased together. In addition, it must be shown that the purchaser was coerced into purchasing an unwanted product:
Ungar v. Dunkin' Donuts of America, Inc., 3 Cir. 1976, 531 F.2d 1211, 1218.
Our recognition of coercion as a necessary requirement in the proof of an illegal tie-in is in accord with similar holdings by other Courts of Appeal. Ungar v. Dunkin' Donuts of America, Inc., supra; Capital Temporaries, Inc. of Hartford v. Olsten Corp., 2 Cir. 1974, 506 F.2d 658; American Manufacturers Mutual Ins. Co. v. American Broadcasting-Paramount Mutual Theatres, Inc., 2 Cir. 1971, 446 F.2d 1131. Thus, in Capital Temporaries, the court found that although two services were sold as a package, there was no proof to suggest that the plaintiff ever objected to the package, that he was only interested in one of the two services, or that the second service was forced upon
446 F.2d at 1137.
Of course, in certain circumstances, the element of coercion can be established on the basis of a formal agreement. Thus, where one product is sold on the express contractual condition that the purchaser purchase supplies for that product in the future only from the seller, the purchaser's future course of action is limited by that contract, and coercion is found in the agreement itself. See, e. g., Advance Business Systems & Supply Co. v. SCM Corp., 4 Cir. 1969, 415 F.2d 55. But no such situation is before us. Here, the contractual arrangement left the franchisees free to procure the necessary hardware from any available source. Thus, in order to succeed on their claims, the franchisees must establish that their decision to lease the hardware from Leasco was not voluntary, but rather was coerced by Leasco.
The Response I system is an interactive time-sharing system. This means that users of the computer system, the customers of the franchisees, would not have to be located at the situs of the computer hardware in order to utilize its services. Rather, each customer would have its own computer terminal. In order to gain access to the computer, the customer would dial a telephone number assigned to a port, or input of the computer. The terminal would then be connected to the computer by use of the telephone line. Further, the operating system was designed so that it could process the input and output of more than one terminal simultaneously.
In a multiplexing scheme, the franchisee would not have his own hardware facility. Instead, the incoming telephone lines from the terminals would be input into a device known as a multiplexer, which would combine these lines into a single signal. This signal would then be sent out over a telephone line to a distant hardware facility, where it would then be broken down into the individual signals corresponding to each terminal, and processed by the computer hardware. Output from the computer to the terminals would be handled in the reverse manner. Under this scheme, the franchisees would only have to procure the multiplexing equipment, and access to another Response I computer system.
With respect to this argument, the coercion requirement demands that they establish that their failure to procure multiplexing was not voluntary on their part, but rather that the decision not to multiplex
Although the trial of plaintiff's case took four months and covers 6000 pages of transcript, the testimony relating to the multiplexing claim is so scanty that we set it out in full. Mummaw, a principal of the Carolina franchise, asked Harris, a Leasco Response officer, whether it could multiplex until it had enough revenue to justify the use of an in-house computer. Mummaw testified that Harris' response was:
The testimony of Wright, principal of the Miami franchise, is no stronger: Wright asked Schrager, a Leasco principal, whether he could multiplex. As stated by Wright,
The testimony of Aubrey, principal of Datatron, though perhaps somewhat stronger, is in substance no different. It is testimony of persuasion, not coercion:
Finally, plaintiffs concede that there was never any discussion of multiplexing with regard to the Denver franchise.
Although, in some instances, the line between coercion and persuasion might not be clear, in which circumstance the issue should be left for the finder of fact to resolve, the evidence before us does not provide such an instance. We conclude that, under the standard of Boeing, supra, there is no substantial evidence that any of the franchisees were prohibited from utilizing multiplexing through the coercive acts of Leasco.
Next, the franchisees claim that the two products involved, the franchise and the hardware, were coercively tied through the technology involved—since the systems software, the operating system, was only compatible with the hardware configuration designed by Leasco, the franchisees necessarily had to purchase the hardware along with the software. We fail to find any evidentiary support for this contention.
First, there is no evidence in the record that the individual components of the hardware configuration could not have been purchased from sources other than Leasco, and that when so purchased, they could not have been assembled into the same hardware configuration leased by Leasco.
Second, the franchisees did not obtain the computer hardware elsewhere not because it was impossible to do so, but rather, in their business judgment, it made more sense to procure it from Leasco. For example, Aubrey, principal of Datatron, testified that he could have purchased the hardware from Hewlett-Packard, manufacturer of some of the components, but he did not do so because, in his judgment, "it would not have made good business sense." We find no evidence contrary to this assertion.
These two points lead us to the conclusion that, as with the multiplexing claim, there is no proof that the franchisees were coerced into accepting the hardware lease along with the franchise. We can find no proof that any of the franchisees desired to purchase or lease the hardware from someone other than Leasco, or conversely, that any of them ever envisioned the purchase of the franchise without the lease of the hardware. As far as we can discern, the decision of the franchisees to sign the hardware lease was completely voluntary on their part, motivated by business reasons, not by coercion on the part of Leasco.
Even if we accept the argument of the franchisees that they could not obtain the hardware from others because duplication of the configuration was dependent upon knowledge of unique proprietary information available only from Leasco,
The basic hardware, as purchased from Hewlett-Packard by Leasco, was inadequate, mainly in memory capacity, to support a time-sharing environment. Changes were made, both in hardware, through the interface of the Control Data disks and other devices to the central processing unit for additional memory capacity, and in software,
Since we find no evidence of coercion on the part of Leasco, either with regard to the multiplexing claim or the hardware claim of the franchisees, we find it unnecessary to reach the other grounds set out by the district court as the basis for the directed verdict on this issue.
In summary, we hold:
1. Under Schwinn, the district court erred in directing a verdict for Leasco on the existence of an illegal vertical restraint.
2. However, the district court properly held that franchisees failed to introduce sufficient evidence that they were injured as a result of the alleged restraint. Therefore, the district court's judgment on the territorial restriction claim is affirmed.
3. The district court properly held that the franchisees failed to introduce sufficient evidence to establish that their decision either not to multiplex or to purchase computer hardware from Leasco was coerced by Leasco. Therefore, the directed verdict on the tying claim was proper.
We have recognized that this language may give rise to exceptions to the Schwinn per se rule. Eastex Aviation, Inc. v. Sperry & Hutchinson, supra, 522 F.2d at 1307, fn. 13; Copper Liquor, Inc. v. Adolph Coors Co., supra, 506 F.2d at 943; see also, GTE Sylvania, Inc. v. Continental T.V., Inc., 9 Cir. 1976, 537 F.2d 980, 1004, fn. 41. Cf. Brown Shoe Co. v. United States, 1962, 370 U.S. 294, 330, 82 S.Ct. 1502, 8 L.Ed.2d 510; United States v. Jerrold Electronics Corp., W.D.Pa.1960, 187 F.Supp. 545, 560-61, aff'd, 365 U.S. 567, 81 S.Ct. 755, 5 L.Ed.2d 806. Rather than outline exceptions (other than the "failing company" and "new entrant" ones) to Schwinn found by other courts, we simply note the literature on the subject. Comment, Territorial Restrictions under the Sherman Act: Confusion in the Aftermath of Schwinn, 47 Miss.L.R. 239, 250-57 (1976); Izard, Staton and Ross, Of Bicycles and Beer: Vertical Territorial and Customer Restraints from Schwinn to Coors, 26 Mercer L.R. 507, 512-24 (1975); Note, Vertical Territorial and Customer Restrictions in the Franchising Industry, 10 Col.J. of Law. and Soc.Probs. 497, 505-11 (1974); Note, Vertical Territorial and Customer Restrictions under the Sherman Act: Decisions since United States v. Arnold, Schwinn & Co., 22 J. of Pub.L. 483, 488-97 (1973).