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Sargent-Welch Scientific Co. v. Ventron Corp.

decided: December 6, 1977; As Amended December 6, 1977.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 72-C-2330 - Thomas R. McMillen, Judge.

Swygert, Sprecher and Tone, Circuit Judges.

Author: Tone

TONE, Circuit Judge.

This is an action under the Sherman Act, 15 U.S.C. §§ 1 and 2, and § 3 of the Clayton Act, 15 U.S.C. § 14, for wrongful cancellation of a dealership. After a bench trial on the issue of liability, the District Court found in favor of the defendants. We affirm in part and vacate and remand in part.

The gravamen of the complaint, as amended, is, in the words of plaintiff's brief,

that defendants (through their Cahn division) unlawfully terminated plaintiff's "electromagnetic microbalance" dealership in furtherance of Cahn's resale price fixing and tie-in arrangements, and as part of a dealer reduction plan which was intended to diminish the competition faced by Cahn and its favored dealers so as to maintain or improve Cahn's dominance in the market for electromagnetic microbalances and to enhance Cahn's position in the market for a new line of products called "millibalances."

Cahn Instruments Company was formed in 1956 to develop and manufacture a device for precision weighing, the electromagnetic microbalance.*fn1 The company succeeded in making and selling a line of balances that could be used to weigh small samples to one microgram precision or even a fraction thereof.*fn2 In 1967 the company was acquired by Ventron Corporation, which operates Cahn as an unincorporated division.*fn3 In 1969 Cahn introduced a line of less expensive balances called "millibalances," which also operated electromagnetically but were less sensitive than the microbalances and therefore were used in different applications.*fn4

In 1971 Cahn sold a total of 500 balances in the United States for a total of $608,400. Its total sales in that year were $1,400,000.

From the beginning, Cahn balances were marketed through dealers who also sold a variety of other scientific and laboratory equipment. One of them was E. H. Sargent Company, which became a dealer in 1963 and continued as such after it merged with Welch Scientific Company in 1968 until it was terminated by Cahn in April 1971. At the time of termination, Sargent-Welch had twelve branches in the United States and Canada and represented approximately 3,000 manufacturers of various types of scientific and laboratory equipment. Its annual sales are approximately $60,000,000. Its annual sales of Cahn balances at the time of termination were less than $40,000.

In his letter terminating Sargent-Welch as a dealer, Cahn's Director of Marketing stated that Cahn was undertaking a careful evaluation of its "dealership coverage" for the purpose of "optimizing the number of dealers handling the Cahn product line." He then pointed out that Sargent-Welch's purchases from Cahn had been decreasing each year since 1968 and that first quarter sales indicated that 1971 would also be a disappointing year. He also noted Sargent-Welch's refusal to carry the new millibalance line. As a final reason for Sargent-Welch's termination, the letter referred to "a definite lack of exposure of Cahn products in Sargent-Welch advertising and in your booths at trade shows." In the next year Cahn gave similar explanations in terminating two other dealers.

Cahn's dealer reduction program for "optimizing the number" of its dealers was adopted primarily, the District Court found, "to consolidate sales among its [Cahn's] more effective dealers." The court also found that the Sargent-Welch termination was based on this plan as well as on that company's "sharp decline in . . . performance on behalf of Cahn" and the absence of any prospect of improvement of that performance. Further, the court found,

Cahn's termination of Sargent-Welch was not anticompetitive in either purpose or effect. Plaintiff's distributorship contract was terminated because of its poor performance. Neither an attempt at tying sales nor an attempt to enforce illegal resale price maintenance, nor a plan to monopolize, attempt to monopolize or eliminate competition was proved to be a factor in the termination.

Elsewhere in his findings, however, the judge said that "plaintiff's refusal to handle the millibalances may have been one reason why defendant terminated plaintiff's dealership . . . ."

Findings bearing specifically on the theory of a tie-in or full line forcing between microbalances and millibalances were that Sargent-Welch had "failed to prove that defendant attempted to coerce plaintiff into handling [its] new products by, for example, threatening termination"; that Cahn "did not require its dealers to handle the millibalance models as a condition to continuing to be a dealer"; and that Sargent-Welch had not proved that "Cahn refused to sell its microbalances to a dealer who would not handle the millibalances."

All Cahn dealership agreements contained fair trade clauses requiring dealers to adhere to fixed resale prices in fair trade jurisdictions. Sargent-Welch alleged that it had been terminated because of its price-cutting activities and also because the dealer reduction program was designed to eliminate price-cutting among Cahn dealers in general.

Approximately one month before Sargent-Welch was terminated, its branch in Anaheim, California, submitted a bid to the University of California offering Cahn balances at 6 percent below the list price. California at that time was a fair trade state. Cahn's Director of Marketing wrote a letter to the Sargent-Welch home office describing the University of California bid as "an obvious price cut and a clear violation of our Fair Trade Agreement" and asking for an explanation "before we take any action." Sargent-Welch replied by disclaiming knowledge of the situation and referring Cahn to the branch manager.

The District Court found that, because Cahn sold balances directly to end-users in California in competition with its dealers, it could not claim the protection of the fair-trade exemptions from Sherman Act coverage, the Miller-Tydings Amendment*fn5 and McGuire Act,*fn6 which were in effect at that time.*fn7 Cahn's fair trade program in California was therefore held to be horizontal price-fixing in violation of § 1 of the Sherman Act. The court continued,

However, since defendant did not terminate plaintiff for price-cutting, the point is unavailing. Furthermore, plaintiff has failed to prove that defendant's price maintenance agreements caused a loss of sales or profits or other injury to ...

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