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SEALY MATTRESS CO. OF SO. CAL. v. SEALY

June 19, 1972

SEALY MATTRESS COMPANY OF SOUTHERN CALIFORNIA, A CALIFORNIA CORPORATION, ET AL., PLAINTIFFS, COUNTER-DEFENDANTS,
v.
SEALY, INC., A DELAWARE CORPORATION, DEFENDANT, COUNTER-PLAINTIFF.



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.

The District Court itself has in effect confirmed that the Supplemental Final Judgment did not automatically void the contracts and did not preclude severance. On October 10, 1968, Judge Austin advised the Executive Committee of this Court as follows (Letter dated October 10, 1968 from Hon. Richard B. Austin, United States District Judge, to the Executive Committee, on file in this case; see Tr. 110-16):

    ". . . 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
  judgment.
    "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
  licensee
    `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 ...


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