The opinion of the court was delivered by: Parsons, District Judge.
MEMORANDUM OPINION AND ORDER
Recalling (1) the demeanor and into nations of the witnesses
and (2) the persuasive impact of testimony and argument, the
Court as trier of fact in this cause, has fitted the stream of
conflicting statements of alleged facts into a pattern of
evaluation and judgment; and is now ready to rule.
Plaintiffs Sealy Mattress Company of Southern California
(Southern), a California corporation having its principal
place of business in that state, Sealy Mattress Company of
Northern California (Northern), a California partnership
having its principal place of business in that state, and
Seniel Ostrow, a California citizen, seek inter alia the
deletion of certain sales restriction provisions from their
present license contracts and the enforcement of the
non-deleted remaining provisions of their license contract
against Sealy, Inc. (Sealy), a Delaware corporation having its
principal place of business in Illinois. The crux of the
controversy is whether the Southern and Northern Sealy license
contracts survived a 1960 civil antitrust suit filed in this
District by the United States against Sealy, Inc., United
States v. Sealy, Inc., 60 C 844 (Sealy antitrust case).
Jurisdiction is premised upon 28 U.S.C. § 1332 and 2201.
Responding to a United States Supreme Court mandate, the
District Court (Austin, J.) entered a "Supplemental Final
Judgment" holding inter alia that Sealy and its licensees had
unlawfully agreed "to allocate territories for the sale of
Sealy products." Sealy took the position that the impact of
that holding was to render all of its then existing license
contracts wholly void. Accordingly, Sealy demanded on May 31,
1968, that Southern and Northern sign new and different
contracts within a sixty day time limitation or else their
right to manufacture and sell under the Sealy trademark would
be terminated. Plaintiffs
refused to sign the new license contract and this declaratory
judgment action followed.
In 1936 and 1937 the California manufacturers and Sealy
entered into written "Manufacturer's Contracts" which
obligated each manufacturer licensee to manufacture Sealy
products in its allocated territory according to Sealy
manufacturing specifications. The California manufacturers
were restricted in their use of Sealy patents and designs to
the manufacture and sale of Sealy products and to manufacture
such products in accordance with Sealy processes, methods and
directions. The contracts further provided for the use of the
Sealy name and labels by the manufacturers in their
advertising and promotion of Sealy products.
Reciprocal sales restriction provisions of the license
contracts obligating the California manufacturers to restrict
their sales of Sealy products to a specified area and
prohibiting Sealy from selling or licensing in the same area
were held invalid. The impact of that invalidity on the
remainder of the contracts constitutes the area of
disagreement between the parties.
Plaintiffs urge that the contracts survive with the invalid
portions severed. It is defendant's position that the
territorial sales restrictions contained in the 1936 Southern
license contract and the 1937 Northern license contract were
of such vital importance to those contracts, that to cut them
out would be to cut the very heart out of the agreements.
Alternatively, Sealy contends that the franchise system
created by the Sealy manufacturers is in the nature of a joint
venture relationship that has developed over a period of years
for the mutual advantage of all of the participants and that
this lawsuit involves more than merely a contract between two
persons. Involved is a contractual relationship evolved and
developed by the parties over the years — a contractual modus
operandi existing de hors the written 1936 and 1937 California
license contracts. A licensee's election to be a part of the
afore-described relationship imposes an obligation, enforceable
in equity, to be bound by the same rules and contractual
obligations as all other licensees; and that where the
overwhelming majority of licensees have fixed upon a uniform,
non-discriminating method of determining royalties, it is
Sealy's contention that it is the obligation of each
participant to contribute his fair share on the same basis as
all the others.
In limine it is to be noted that while Sealy now contends
that plaintiffs' pre-antitrust judgment contracts are "void and
of no further effect," Sealy's proposed new post-antitrust
judgment contracts preserve those very void and no longer
effective contractual rights to "any existing breach of said
prior Contract" and further provides that the new agreement
replaces the old only "from and after the date hereof."
The Sealy antitrust case judgment did not void the license
contracts in toto. If the District Court had determined to void
Sealy's license contracts, appropriate and simple language was
at hand. See, for example, the decree involved in United States
Gypsum Co. v. National Gypsum Co., 352 U.S. 457, 77 S.Ct. 490,
1 L.Ed.2d 465 (1957), where license agreements had been decreed
"illegal, null and void." All that the Supplemental Final
Judgment decree did was to order Sealy to require its licensees
as a condition to the continuation or the issuance of any
license to manufacture or sell products under any Sealy, Inc.
trade name or trademark, that they file with the Court their
consent to be bound by the terms of said judgment; and to
cancel the licenses of those licensees who refused to file
their consent to be bound. It is undisputed that the California
licensees did consent to be so bound.
". . . I have given consideration to the
possibility of retaining the case on the basis of
the retention of jurisdiction clause in the
judgment entered in 60 C 844. A reading of the
complaint in 68 C 1390 (the instant case) shows
that it is not brought for the purpose of
securing compliance with or clarification of that
"The alleged use by the defendant Sealy, Inc.
of the judgment in 60 C 844 as a means of
sanctioning its cancellation of all franchise
agreements and thus to engage in renegotiation of
an entirely new franchise evokes principles of
contract law and must be determined from the
provisions of the franchise agreement itself.
Admittedly reference to that judgment must be
made to determine what conduct and activity had
been proscribed, but such consideration must be
made in the light of what the franchise or
license agreement provide. Cf. Beloit Culligan
Soft Water Service, Inc. v. Culligan, Inc.,
274 F.2d 29 (C.A. 7, 1960).
"Insofar as the franchise agreements expressly
contain clauses interdicted by the judgment in 60
C 844, the issue of divisibility of the contract
must be governed by contract law; and whether
such franchise or license is intrinsically or in
toto illegal because of the judgment in 60 C 844
is also dependent upon the terms of the
agreement. No such element was involved in 60 C
844. The Supplemental Final Judgment in 60 C 844
(Part III, page 2) requires that a franchise or
`as a condition to the continuation . . . of
any franchise or license to manufacture or sell
. . . file with the court . . . consent to be
bound by the terms of the Final Judgment . . .'
and a failure to so file mandatorily requires the
defendant Sealy, Inc. to cancel such franchise or
license. The plaintiff here alleges it has filed
its consent to be bound by that Judgment."
Judge Austin's clear expression that the Supplemental Final
Judgment did not ipso facto void the license contracts
forecloses argument to the contrary.
It is to be remembered that the very terms of the decree
resulted from negotiations between the Government and Sealy.
There is not the slightest indication that during the
negotiations Sealy ever indicated to its licensees or anyone
else that in Sealy's judgment the decree required, or even
sanctioned, voiding the existing contracts and imposition of
new ones. Much less was there any indication that any new
contracts that might be offered would contain changes —
including changes in the royalty and ...