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UNITED STATES v. ARNOLD

January 25, 1965

UNITED STATES OF AMERICA, PLAINTIFF,
v.
ARNOLD, SCHWINN & CO., SCHWINN CYCLE DISTRIBUTORS ASSOCIATION, AND THE B.F. GOODRICH COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Perry, District Judge.

This is a civil antitrust action, filed June 30, 1958, in the Eastern District of Missouri, Eastern Division. In March, 1959, on defendants' motion under 28 U.S.C. § 1404(a), this cause was transferred to this District.

The complaint herein was filed under Section 4 of the Sherman Act to prevent and restrain alleged continuing violations of Section I of the Act (15 U.S.C. § 1). It names three defendants: Arnold, Schwinn & Co., herein called "Schwinn"; The B.F. Goodrich Company, herein called "BFG"; and Schwinn Cycle Distributors Association, herein called "SCDA". It also alleges that corporations, associations and individuals not named as defendants participated as co-conspirators in the offenses charged.

The complaint alleges that, beginning with 1952 and continuing thereafter to the date of filing of the complaint, defendants and co-conspirators have engaged in an unlawful combination and conspiracy, the substantial terms of which

    "have been and are that: (a) A limited number of
  retailers in each market area will be franchised by
  defendant Schwinn, with concurrence of a wholesaler
  co-conspirator, for retailing Schwinn products; and
  each such wholesaler co-conspirator will confine his
  sales of Schwinn products to such franchised
  retailers only; (b) Defendant B.F.G. will confine its
  sales of Schwinn products to B.F.G. outlets only; (c)
  Franchised retailers and B.F.G. outlets in Missouri
  and in the other States of the United States will
  adhere to retail prices for Schwinn products fixed by
  defendant Schwinn; (d) Franchised retailers and
  B.F.G. outlets who fail to adhere to the prices fixed
  by Schwinn or who resell Schwinn products to
  non-authorized retail dealers will be reported to
  defendant Schwinn and will not be supplied by
  Schwinn, B.F.G., or wholesaler co-conspirators; (e)
  Each cycle wholesaler co-conspirator will be
  allocated a certain marketing territory, exclusive as
  to other cycle wholesaler co-conspirators, and will
  confine its Schwinn product sales to that territory;"
  and "(f) Each franchised retailer will purchase
  Schwinn products only from a wholesaler
  co-conspirator who is authorized to sell in his
  marketing area and will not sell Schwinn products
  from any location other than that for which he is
  specifically franchised."

The separate answers of each defendant denied each substantive allegation in the complaint, and at the trial the factual and legal bases of plaintiff's claims were sharply contested.

FINDINGS OF FACT

The Court finds the following facts:

Schwinn is engaged in the manufacture and sale of bicycles, and, to a lesser degree, bicycle parts and accessories. It is a small family-owned corporation, with its only plant in Chicago, and is one of the oldest bicycle manufacturers in this country. Schwinn produces a wide variety of kinds and models of bicycles, and is primarily an assembler of bicycles producing the basic parts and purchasing others from parts producers. Schwinn's share of the U.S. bicycle market fell from 22.5 per cent in 1951 to 12.8 per cent in 1961. In the latter year, the largest domestic bicycle producer had a 21.8 per cent market share.

SCDA is an unincorporated association of distributors handling Schwinn bicycles and other products. Its members include cycle distributors and BFG, though no hardware jobbers or other distributors are members. Schwinn is not a member, but its representatives regularly attend SCDA meetings and participate in its meeting programs. SCDA has no office or employees. It normally holds two meetings of members a year, which consist primarily of a presentation of the Schwinn line and its sales and advertising plans. By that means Schwinn informs its principal distributors about its products and sales plans and obtains the distributors' opinions on models, model changes, and products salability. Such meetings also include presentations by parts suppliers and outside speakers on subjects of interest to cycle distributors.

BFG is a large producer of rubber and plastic products. It is also a distributor and retailer of such products and other merchandise manufactured by others, including Schwinn bicycles, through 450 company-owned stores and over 1000 independently owned franchised "auto and home supply" stores.

Shortly before trial, plaintiff and BFG presented the Court with a consent decree which was entered and became final on October 2, 1962. As a result, BFG did not participate in the trial. Neither Schwinn nor SCDA took part in negotiating that decree, and they are not bound in any way thereby.

Both before and during the trial of this action, plaintiff took the position that the complaint charged a combination and conspiracy "all aspects of which are so completely interwoven and inter-involved as to constitute one, over-all, nationwide combination and conspiracy" that is vertical in nature, involving substantially everyone having anything to do with Schwinn's methods of distributing its bicycles during the pertinent period (1952-62). It contended that this alleged single over-all conspiracy included, in addition to the three named defendants, 17 Schwinn officers and employees; 89 wholesalers and jobbers of bicycles and 66 of their employees; the members of the Schwinn Bicycle Dealers Association of Greater St. Louis, Inc.; and all retailers of Schwinn bicycles in the United States who held a Schwinn franchise at any time during the pertinent period, or a total of about 12,700 co-conspirators. Its position was

  "* * * that, where a manufacturer enters into an
  agreement with its independently owned distributors
  and with retailer organizations whereby, with the
  objective of fixing prices for certain products in
  both fair trade and free trade States, all sales are
  to be limited only to those retailers designated by
  the manufacturer (which retailers are required to
  sign fair trade contracts in fair trade States) and
  whereby all other retailers are to be boycotted and
  whereby an espionage system is set up to enforce such
  boycotting and price fixing and to determine that the
  retailers receiving said products adhere to the
  prices fixed and refrain from selling to other
  retailers not designated by the manufacturer, else
  they too would be boycotted, such an agreement
  violates Section 1 of the Sherman Act" (Ans. to
  Interrogatory E9).

In short, plaintiff contends that Schwinn's methods of distribution during the pertinent period, including allegedly unlawful price fixing and boycotting, were part of one nationwide agreement, and that such agreement was unlawful per se.

According to plaintiff, the relevant product market should be narrowly confined to the sale of Schwinn bicycles, Schwinn-made bicycle parts and accessories, and parts and accessories made by others that bear a "Schwinn Approved" label. Such a market involves only the intrabrand competition in the sale of such products between Schwinn wholesalers and retailers of Schwinn bicycles. It argues that evidence concerning interbrand competition between Schwinn and the many other brands of bicycles and bicycle parts and accessories sold in markets across the United States, and evidence concerning the stimulus of that broader interbrand competition in bringing about Schwinn's methods of distribution, are irrelevant.

From the outset, defendants denied participation in any price fixing, territory allocation, or group refusal to deal of an illegal nature, or in any alleged over-all agreement involving such practices. They contend that any restraints involved in Schwinn's marketing program are reasonably ancillary to its main and broader objective of waging more effective interbrand competition, through the small businessman dealers and distributors associated with it, with the larger, integrated sellers of bicycles, of both domestic and foreign origin, who during the pertinent period enjoyed from 77.5 to 87.1 per cent of all bicycle sales. It is defendants' position that this cause is not concerned with the kind of restraints to which the per se exception to the rule of reason applies, and that defendants' conduct should be examined and analyzed against the background of the bicycle business generally in which they are engaged.

It is Schwinn's use of distributors in its marketing program that gives rise to the principal issues in this case. Therefore, the position and role of distributors in Schwinn's methods of distribution are of crucial importance.

Plaintiff's case is based on the premise that Schwinn's distributors are completely independent businesses; that Schwinn does not retain title to its products delivered to cycle distributors; and that Schwinn products are sold to the distributors and then resold by them to the retailers.

The facts are these: During the 1952-62 period and for many years prior thereto, well over half of the bicycles sold by Schwinn have been sold direct to the retail dealer (not to a cycle distributor) by means of Schwinn Plan sales and consignment and agency sales. Each of these methods of sale directly to the retailer by Schwinn was adopted for substantial business reasons.

In the 1930's cycle distributors began to develop a larger cycle volume than they could handle on their limited finances. When one became overextended, his business growing more rapidly than could be handled by his finances, Schwinn would suggest that he adopt the Schwinn Plan as a solution. This Plan worked well, freeing the bulk of that particular operator's operating capital for expansion of his parts and accessories business. It has been continually used by distributors since that time.

Under the Schwinn Plan, the jobber or distributor serving the area extends to the retailer the option of buying Schwinn bicycles either direct from the Schwinn factory under the Schwinn Plan or from the distributor's warehouse. When a dealer chooses to buy under the Schwinn Plan rather than from the cycle distributor's warehouse, the distributor forwards the order to the factory. Schwinn then ships the bicycle direct to the retailer, bills the retailer, extends him credit, and collects from him. Schwinn then pays a commission on such a sale to the cycle distributor equal to the difference between the distributor's cost and the Schwinn Plan price of the bicycle, both of which are established by Schwinn.

In such Schwinn Plan sales, Schwinn sells direct to the retail dealer. Thus, the cycle distributor and its salesmen serve in two capacities; as a Schwinn sales agent or representative in Schwinn Plan sales, and as a distributor's representative in other sales. The Schwinn Plan has been made available by Schwinn since the 1930's to its various dealer accounts, and that method of selling has been in wide use for years. Schwinn does not compel its distributors to use it, and a few have either not used it or have used it sparingly. Schwinn realizes the same price on a given bicycle whether sold to a retailer under the Schwinn Plan or to a distributor for resale from his warehouse. Schwinn Plan prices to dealers are invariably lower than out-of-warehouse prices. There is one less handling of the merchandise, i.e., the taking of the bicycles into the cycle distributor's warehouse and shipping them out, which costs from $1.50 to $3.00 per bicycle. The lower Schwinn Plan price on direct factory shipments has led most retailers to purchase their basic inventory on the Schwinn Plan from Schwinn, and fill-in orders from the local distributor's warehouse stock.

Since 1950, Schwinn has used consignment selling for varying periods with nine cycle distributors, three of whom have converted the consignment arrangement to that of an agency. Each of these consignment contracts was entered into because the particular distributor needed help in carrying adequate stocks of Schwinn bicycles.

Functionally, under the consignment method, Schwinn ships its bicycles to the distributor's warehouse, carries them on its books and balance sheet and insures them. When the jobber withdraws the bicycles for delivery to a retail dealer, he remits the jobber price of the bicycles to Schwinn. Schwinn places the insurance on the consigned stock, and the consignee pays for it. Title to and right to immediate possession of all consigned bicycles and accessories, by contract, is vested in and remains in Schwinn as consignor until the full purchase price, less an agreed discount, if any, is paid by the cycle distributor.

Schwinn's agency method of selling grew out of the consignment arrangement. Three of Schwinn's cycle distributors were not operating profitably, largely because they were poor credit managers and had excessive inventories in relation to their sales. At different times in 1959 and 1960, Schwinn entered into an agency agreement with each of them with the idea of helping them in their business practices.

Under the agency agreement, Schwinn leases space in the cycle distributor's warehouse, ships its bicycles to that space, and carries them on its books and balance sheet and insures them. The cycle distributor handles the sales and invoices the bicycles to the dealer on a Schwinn invoice at the out-of-warehouse price fixed by Schwinn. Schwinn carries the credit, collects from the dealer, and pays a commission to the cycle distributor for its services, based on the bicycles sold.

Cycle distributors and wholesalers also sell to retail dealers from their warehouse stocks, usually for fill-in purposes. In such sales, Schwinn has nothing to do with the selling price. The availability of Schwinn products from such regional warehouses is of interest to Schwinn in ensuring quick service to its dealer customers. To a small extent, some factory drop shipments are made where Schwinn ships and the distributor does the billing, usually when there are dealer credit problems.

In 1962, Schwinn Plan sales alone amounted to slightly over half of all sales of Schwinn products, i.e., $9,953,000 out of total sales of $19,034,000. During the entire period, from 50 to 58 per cent of all Schwinn bicycle sales were made by Schwinn directly to retailers or to consumers, without title ever being in any wholesaler or distributor, the eleven-year average being 54.5 per cent.

During the same period, sales of Schwinn products to cycle distributors for resale amounted to 29.5 per cent of Schwinn's total sales, as compared to Schwinn Plan sales amounting to 38 per cent of Schwinn's total sales. Sales to hardware jobbers amounted to 4.5 per cent, consignment sales 7.5 per cent, and agency sales 1 per cent of the total sales of Schwinn products during that period. BFG sales were 13 per cent of the total sales of Schwinn products, 60 per cent of which, or 8 per cent of total Schwinn sales, were resold by BFG's own retail stores. Combination retailer-wholesaler purchasers accounted for 6.5 per cent of the total sales of Schwinn products, some of whom resold over 50 per cent of their Schwinn purchases at retail.

THE PRICE FIXING ISSUE

Counsel for the Government urged this court to follow the lead of the District Court in the Southern District of Ohio, United States v. White Motor Co., 194 F. Supp. 562, which in a recent opinion had just taken that course. A cursory reading of that decision revealed that there was no dispute about price fixing before that court. Price fixing stood admitted. This court then overruled the objection of plaintiff and permitted a full hearing to the defendants upon the defense of reasonable restraint and on all relevant factual issues, both economic and legal.

Counsel for plaintiff presented its evidence on the price-fixing charge first based upon the activities of the defendant Schwinn in fair trade states. Plaintiff's own evidence showed clearly that defendant Schwinn, unilaterally took legal action to protect its fair trade program; that it conducted shopping and followed other courses to enforce the law of the respective states in which it did business. The plaintiff's evidence revealed no action whatsoever of the other defendants in aiding or cooperating with Schwinn in its efforts of fair trade price enforcement. That evidence, together with the evidence adduced by the defendants clearly convinced the court that defendants were not guilty of price fixing in any of the fair trade states.

The plaintiff introduced evidence of instances where warning letters and comments had been made about dealers who were cutting prices below those fixed by agreements under the fair trade acts of their respective states. The plaintiff introduced evidence of 44 out of a total of 7018 cancellations of dealer franchises by Schwinn as being examples of cancellation of franchises for violation of fair trade agreement. This court has examined the evidence and finds that not one of them was cancelled for that reason alone, but that in each and every case one or more good reasons appeared for the cancellation of the franchise of the dealer. Over and beyond that, this court finds cancellation of a franchise for violating lawful agreements under the law of the state in which the dealer did business is not a violation of the antitrust law nor of any other Federal or State statute.

Next, the plaintiff presented evidence of the activities of defendants in free-trade states. The evidence presented covered three states: Nebraska, Texas and Missouri. That presented for Nebraska and Texas is de minimis. That presented for Missouri was extensive. However, such evidence, when balanced against that presented by the defendants, leaves the court no alternative but to find and the court does find that plaintiff has failed to prove by the greater weight of the evidence that the defendants were guilty of a price-fixing scheme in any of the free trade states.

The plaintiff presented five witnesses from the St. Louis area. All of them were or had been retail dealers. Witness Scharringhausen merely testified that Mr. Don Rehm, president of distributor Guaranty Cycle, said "that we should go along with the suggested retail price of Schwinn bicycle." He said he never recalled anything about taking franchises away from dealers who did not go along with suggested prices.

Witness Florman remembered oral talks of 1953 very vividly and in detail. Yet he could remember nothing of 1961. He testified of being threatened if he did not maintain prices, threats by Nielsen, Burch, Smith and Forrest, representatives of the defendants. He made memoranda of some of these talks, but nowhere in them appeared any of the statements of threats and price cutting to which he testified. His testimony was contradicted by Burch, Nielsen and Smith, who was one of plaintiff's own witnesses. The court finds Florman is not a credible witness. No attempt was made by plaintiff to offer sales slips showing at what price he sold bicycles. He was still franchised as a Schwinn dealer at two locations, even though he is a distributor for Columbia bicycles and at the same time a retail dealer for Columbia bicycles.

Witness Brandon testified that Forrest, a Guaranty Cycle salesman, called upon him in 1952 and told him that if he did not stop cutting prices he would lose his Schwinn franchise. His own next door neighbor testified that Forrest was not even employed by Guaranty Cycle at that time. On cross examination Brandon admitted that he was still franchised by Schwinn and also that his sales slips showed that he sold 50.6 per cent of his Schwinn bicycles below suggested price between the years 1956 and 1959, inclusive. He testified that he complained about Major Auto Supply Co., a competitor, because of price cutting and that not long afterward its franchise was cancelled. Schwinn's record showed Major Auto Supply Co., did have its franchise cancelled, but because it went out of the bicycle business, and not because of price cutting. He gave other testimony about joint advertising at suggested price. The court finds his testimony unreliable, and even if true not relevant.

Witness Gusoskey testified about being refused a renewal as a franchise dealer. In a letter to Schwinn he made this statement: "The reason he (Mr. Stan Kozy) gave me was that by pushing other bicycle sales, I spoke very lowly of your product. That I undersold and ridiculed the quality of the Schwinn bicycle. This I admit is the truth * * * I am very sorry and do hope you will accept my humblest apology for the trouble I have caused your company."

This quotation from letters from his own files came out on cross examination and revealed the very good reason Schwinn had for refusing him another franchise after his first one had been moved from its original location and he had changed his business name, thereby losing the franchise automatically in accordance with its written terms and provisions.

Witness Cohen testified about pressure to adhere to Schwinn-controlled retail price. His franchise was cancelled in November 1953 and on the witness stand he frankly conceded that he did not give equal representation to Schwinn in his store, which testimony coincided ...


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