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LEKTRO-VEND CORP. v. VENDO CORP.

July 22, 1980

LEKTRO-VEND CORP., A DELAWARE CORPORATION, ANN STONER, AS ADMINISTRATOR OF THE ESTATE OF HARRY B. STONER, DECEASED, AND STONER INVESTMENTS, INC., A DELAWARE CORPORATION,
v.
THE VENDO CORPORATION, A MISSOURI CORPORATION.



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

    FINDINGS OF FACT AND CONCLUSIONS OF LAW

This is an anti-trust action filed in 1965 by plaintiffs, Lektro-Vend Corporation ("Lektro-Vend"), Harry B. Stoner ("Stoner"), and Stoner Investments, Inc. ("Stoner Investments") against defendant, the Vendo Company ("Vendo"). Plaintiffs allege that defendant's acquisition of Stoner Manufacturing Corporation (the predecessor of Stoner Investments), in 1959, violated sections 1 and 2 of The Sherman Act, 15 U.S.C. § 1, 2 and Sections 4, 7, and 16 of The Clayton Act, 15 U.S.C. § 15, 18, and 26. For the reasons herein stated, this court awards a judgment in favor of defendant.

A bench trial was held in this case beginning in August, 1978 and concluding in September, 1978. The background findings of fact, conclusions of law, and an analysis and discussion supporting this decision are stated below.

FINDINGS OF FACT*fn1

THE PARTIES

Plaintiff, Stoner Investments, Inc. ("Stoner Investments"), is a corporation organized and existing under the laws of the State of Delaware. It is a successor to an Illinois Corporation of the same name, which prior to June 1, 1959, was named Stoner Manufacturing Company.

Stoner Manufacturing Company ("Stoner Manufacturing") was an Illinois corporation engaged primarily in the manufacturing of candy vending machines.

Plaintiff, Harry B. Stoner ("Stoner"), was president and controlling owner of Stoner Manufacturing, now Stoner Investments, prior to his death in March, 1976. On October 1, 1976, Stoner's wife, Ann Stoner, administrator of his estate, was substituted as a party plaintiff in this case.

Stoner was president of defendant, Vendo Corporation's, Aurora Division (previously Stoner Manufacturing) from June 1, 1959 through June 1, 1964 and a director of Vendo from May 28, 1959 to April 21, 1964.

Plaintiff, Lektro-Vend Corporation ("Lektro-Vend"), is a Delaware corporation with its principal place of business in Aurora, Illinois. Lektro-Vend was first organized in September, 1963 as a manufacturer of candy and snack pastry vending machines.

Stoner Investments currently owns approximately 78% of the stock of Lektro-Vend.

Defendant, Vendo Corporation, is a Missouri corporation with its principal place of business in Kansas City, Missouri. The principal business of Vendo is the manufacturing and selling of bottle and can soft drink vending machines, including premixed Coca-Cola, to franchised soft drink bottlers. In addition, Vendo manufactures and sells general merchandise vending machines, coffee vending machines, milk vending machines, ice cream vending machines, hot canned food vending machines, cold food vending machines, and soft drink vending machines to vending operators. At various times, Vendo also manufactured and sold candy, pastry and snack vending machines as well as cigarette vending machines to vending operators.

THE INDUSTRY

The parties agree that Stoner was a design genius in creating innovative vending machine products.

By 1959, Stoner Manufacturing's drop-shelf candy vending machine was the leading candy vending machine throughout the United States. As against other candy vending machine sales, its sales fluctuated between 71% of the market in 1955 and 31% in 1959.

By 1959, Stoner Manufacturing also manufactured and sold vending machines for instant coffee, hot canned food, hot sandwiches, and cigarettes. In addition, Stoner was at work on developing a console cigarette machine, a refrigerated sandwich machine, and a post-mix cold drink machine.

Stoner Manufacturing employed twelve to thirteen salesmen and sold vending machines throughout the United States. In early 1959, the company was also negotiating for the licensing of a company in England to sell its machines abroad, but the negotiations were unsuccessful.

From 1955 to 1959, Stoner Manufacturing's sales varied from a 6.8% share to a 4.2% share of the market of all U.S. vending machine sales. Within the "Vendo-served" market,*fn2 in that same time period, Stoner Manufacturing's share varied from 7.2% to 4.4%.

Prior to 1959, Vendo was primarily a manufacturer of beverage and ice cream vending machines. It had approximately 112 company salesmen who sold throughout the United States and it exported its machines to 58 countries.

Vendo's sales and income after taxes for the calendar year ending December 31, 1955 through 1977 are set out in the following table:

Calendar Year
   Ending
 December 31      Sales         Net Income (Loss)
   1955       $20,799,000      $842,000
   1956         42,076,000       1,660,000
   1957         37,056,000       1,075,000
   1958         29,410,000         973,000
   1959         45,046,000       2,484,000
   1960         61,244,000       3,153,000
   1961         53,696,000       2,297,000
   1962         55,343,000       2,898,000
   1963         51,958,000       1,990,000
   1964         63,538,000       3,503,000
   1965         77,425,000       5,101,000
   1966         90,577,000       6,460,000
   1967         88,361,000       5,016,000
   1968         99,931,000       4,605,000
   1969         99,353,000       2,408,000
   1970         90,748,000       2,110,000
   1971         91,868,000          92,000
   1972        110,794,000       2,573,000
   1973        113,346,000       2,857,000
   1974         88,374,000      (3,134,000)
   1975         69,164,000      (2,463,000)
   1976         83,370,000      (  857,000)
   1977         97,168,000      (3,650,000)

Vendo's share of all vending machine sales was 20.3% in 1955, 21.5% in 1956, 28.2% in 1957, and 28.4% in 1958. Its share of the "Vendo-served" market was 21.6% in 1955, 22.9% in 1956, 30% in 1957, and 24.3% in 1958.

Vendo researchers reported that Vendo commanded the following percentages of the markets in which it competed from 1959 through 1969; 35.6% (1959); 34.9% (1960); 26.6% (1961); 29.1% (1962); 26.4% (1963); 28.9% (1964); 32.4% (1965); 33.0% (1966); 31.4% (1967); 32.3% (1968); and 33.0% (1969).

As can be seen, during the time period most immediately relevant to this suit (1959-1966), Vendo controlled approximately 30% of the market in which it competed. In 1966, Vendo expected its share of market dollars to climb to 58% by 1971.

The vending machine industry experienced rapid growth and change in the years 1955 through 1966.

During that period there was a significant trend toward concentration within the industry with one-half the number of manufacturers existing in 1966 as existed in 1958. The 130 manufacturers in 1957 dwindled to 76 in 1963 and 66 in 1964. In 1964, 49 of the 66 manufacturers experienced sales over $100,000.

In 1964 only 16 manufacturers of vending machines for confections and food had sales in excess of $100,000; in 1964 only 8 of 12 companies manufacturing vending machines for candy bars had sales in excess of $100,000. This trend toward concentration throughout the vending machine manufacturing industry has continued through 1975. The 66 manufacturers of 1964 had dwindled to 44 by 1975. From 1963 to 1973, the number of manufacturers with sales of $100,000 fell from 54 to 31.

Also during the years 1955 through 1966, the number of locations available for the placement of machines increased and the number of operators in the business increased.

Additionally, development of new equipment was substantial.

The vending machine industry reached its peak in 1966 with sales of $216,518,000.

By 1966, the industry was approaching a point of saturation. Industrial construction declined, the number of locations available for the placement of machines decreased, and an increasing percentage of the new machines sold were for replacement of existing machines at existing locations rather than for new locations.

Customers for vending machines can be divided into two different classes: 1) franchised soft drink bottlers (e.g., the Coca-Cola Company), which purchase machines to vend soft drinks which they manufacture, and 2) vending service companies, known as "operators", which purchase vending machines for the sale of food, beverages, and other items typically manufactured by others, including vending machines for hot, cold, and frozen foods, dairy products, coffee, candy, pastry, snacks, ice, soft drinks, and cigarettes. Bottlers and operators conduct different types of businesses for different purposes.

Franchised soft drink bottlers are in the business of mixing, bottling, and selling, by whatever means, their brand-named soft drink. Bottlers purchase and operate bottle and can vending machines as only one means to sell their drink. Bottlers, in operating soft drink vending machines, are both seeking a profit and a means for creating a preference for their product by making their brand-name soft drink available in as many places as possible whether the location is profitable or unprofitable.

Operators, on the other hand, are companies solely in the business of purchasing vending machines, placing them on locations, loading them with products, and maintaining them in service. Vending operators operate machines solely for a profit, as they are not interested in establishing the brand name of any product they vend.

There are several types of operators that can be distinguished according to the type of institution served. "Street operators" serve small, public establishments such as gas stations, bowling alleys, bars, and restaurants. "Industrial operators", or "full-line operators", place their machines in locations such as factories, schools, and hospitals where virtually the same patrons are served every day.

Street operators, ordinarily operate the "4 C's" in vending machines-candy, coffee, cold drinks, and cigarettes and usually have two to four machines at one location.

Industrial operators will often times locate a bank of equipment at one location providing a full line of products. The machines placed within banks of equipment are generally larger in capacity and size and have less styling and more uniformity in appearance.

Street operators ordinarily have "console" machines which are smaller in size and capacity and are highly stylized and more distinctive in appearance.

Vending operator companies vary in size. There are national operating companies which are large publicly owned chains listed on the New York Stock Exchange with national or regional coverage. There are independent operators which do business in a smaller number of locations. Some independents are members of buying co-operatives, such as AVA. Additionally, there are some bottlers who are also vending operators. Those bottlers who are also operators generally conduct their vending operator business as a separate company or division with separate offices, books, personnel, and routes.

In 1958, almost all operators were entirely independent with Canteen Corporation being the only operator company with a national structure.

Beginning in the early 1960's, the industry experienced the growth of several national and large regional operators such as ARA, Servomotion, Macke, Interstate United, Automatique, and Autoviables. These operators engage in both the operation of vending machines and in manual food preparation and service on the location premises.

In the late 1950's and early 1960's, Vendo was interested in becoming a full-line manufacturer*fn3 of vending machine equipment. Vendo, in fact, successfully used the full-line marketing technique. Today, Vendo is not a full-line manufacturer.

Both full-line and non-full line manufacturers provide their customers with cosmetic devices for their equipment (such as grills, screens, panels, and headers) which permit their machines to be placed in banks with the machines of other companies.

The use of these cosmetic devices to provide uniform or matching appearances between the machines of different companies reduces somewhat the disadvantage of being a non-full line manufacturer.

Additionally, non-full line manufacturers often times join buying cooperatives in order to diminish the significance of being a non-full line manufacturer.

THE SALE AND ACQUISITION

In 1955, Clarence Adelberg, Executive Vice President of Stoner Manufacturing, suggested to Elmer Pierson, Chairman of the Board of Vendo, that Vendo acquire Stoner Manufacturing. Stoner and Adelberg subsequently met with various Vendo officers in Kansas City to discuss this possibility. However, no agreement was reached at this time. Plaintiffs contend, and Vendo denies, that, during these negotiations, Robert W. Wagstaff, Executive Vice President and General Counsel of Vendo, threatened that, if Stoner did not sell, Vendo would put Stoner out of business.

Nevertheless, both parties agree that Stoner's subsequent decision to sell in 1959 was not prompted by any threat or action by Vendo.

In July, 1956, Vendo acquired Vendorlator Manufacturing Co. ("Vendorlator"), a manufacturer of bottle vending machines from Fresno, California. As a result of this acquisition, the FTC commenced proceedings against Vendo in 1957 charging that the acquisition would tend to substantially lessen competition within the sub-market of bottle vending machines in violation of Section 7 of the Clayton Act. Before a decision was reached, Vendo and the FTC entered into a consent decree requiring Vendo to secure advance clearance from the FTC before acquiring any other manufacturers of bottle vending machines.

In October, 1958, Bip Glassgold, Stoner Manufacturing's Vice President in charge of sales, again approached Vendo to explore the possibility of Vendo acquiring Stoner Manufacturing. Robert Wagstaff, who had become Chief Executive officer for Vendo in 1958, Henry Gaddis, Vendo's Chief Financial officer, and Elmer Pierson participated in the negotiations for Vendo. Harry Stoner, Joseph Lazzara, Controller of Stoner Manufacturing, Jack Steward, Bip Glassgold, and Everett Johnson, a Senior partner at Arthur Anderson & Co., participated on behalf of Stoner Manufacturing.

From Stoner's viewpoint, the proposed sale to Vendo was advantageous due to Stoner's health problems, the death of Stoner's close associate and Executive Vice President Adelberg, the strain on Stoner from running the firm alone, and the fact that each of Stoner Manufacturing's shareholders had Stoner stock as one of their principal assets. According to Stoner's affidavit:

  Vendo seemed to be a logical purchaser because no
  other prospective purchaser had any management people
  capable of running the business without being
  educated in the vending machine field. Vendo being
  experienced in that field will be able to take over
  with less assistance from me. I am interested in
  having the business continued by people who have
  capable management and who will continue to employ
  and be compatible with our present officers and
  employees and with a minimum of dislocation of
  business practices and employment security. I do not
  want to let the business just drift and carry on of
  its own momentum, because this cannot continue
  indefinitely and there is great risk of loss involved
  in such a program. I attribute our poor showing in
  sales in 1958, and since, at least in part, to the
  management difficulties I have already described.

Vendo's purpose in acquiring Stoner Manufacturing was to expand its line of vending machines, principally through the acquisition of a proven candy machine. An internal Vendo memorandum of October 20, 1958 from Stevens to Wagstaff indicated that, although Stoner Manufacturing's 1958 sales had declined and although the company had certain weaknesses and a few unfavorable factors, Stoner was "the leading supplier" of candy and pastry machines as well as "a major factor in instant coffee equipment." Stevens concluded that the acquisition would be "a big step toward giving us a complete line of equipment." Additionally, Wagstaff reported to Pierson that two other vending machine manufacturers were negotiating with Stoner. Buckley from Vendo's marketing division had indicated that "if Stoner were to fall into the hands of a more aggressive competitor . . . the entrance of Vendo into this particular market would be still retarded. . . ."

On April 3, 1959, after extensive negotiations during which various proposals were discussed, Vendo and Stoner Manufacturing, both represented by counsel, entered into a contractual agreement whereby Vendo would purchase the assets of Stoner Manufacturing, including inventions, patents, drawings, designs, and research and development work.

Under the sale agreement, Vendo was to pay Stoner Manufacturing $3,400,000 in cash and deliver to it 60,000 shares of Vendo stock. The land and the property constituting the Stoner Manufacturing plant was leased to Vendo at a stipulated rental for ten years with an option of renewal for a like period.

The acquisition agreement contained the following restrictive covenant:

  Section 15. From and after the closing the Company
  [Stoner Mfg. Corp.] will not own, directly or
  indirectly, manage, operate, join, control or
  participate in the ownership, management, operation
  or control of, or be connected in any manner with,
  any business engaged in the manufacture and sale of
  vending machines under any name similar to the
  Company's present name, and, for a period of ten (10)
  years after the closing, the Company will not in any
  manner, directly or indirectly, enter into or engage
  in the United States or any foreign country in which
  Vendo or any affiliate or subsidiary is so engaged,
  in the manufacture and sale of vending machines or
  any business similar to that now being conducted by
  the Company. The Company also agrees that during its
  corporate existence it will, without incurring any
  financial obligation, co-operate with Vendo to
  prevent the use by others of the names "Stoner" and
  "Stoner Mfg. Corp." in connection with any business
  similar to that now carried on by the Company and
  also agrees not to disclose to others, or make use
  of, directly or indirectly any formulas or process
  now owned or used by the Company.

Vendo and Stoner voluntarily sought pre-merger clearance of the acquisition by the FTC, and on May 14, 1959 the FTC sent their clearance letter.

In addition to the sale agreement, the parties executed an employment agreement on June 1, 1959 whereby Stoner agreed to serve as an officer, or in such other executive or advisory capacity as Vendo requested, consistent with Stoner's physical abilities, for five years at an annual salary of $50,000.00. Stoner also agreed to serve as a director of Vendo without additional compensation. As to Stoner's service, the employment contract provided that:

  Stoner shall regulate his own hours of employment and
  shall determine the amount of time and effort which
  he shall devote . . ., it being understood that the
  value of Stoner's services to the Company [Vendo] are
  not measured by the amount of time or effort devoted
  to the business by Stoner but by the value of his
  advice and counsel in the operation of the Aurora,
  Illinois, facility, and his know-how, experience and
  reputation in the vending machine field.

The contract provided that Stoner's employment could be terminated in several ways: (a) Vendo "shall have the right to terminate . . . in the event of a substantial violation of the terms hereof by Stoner", (b) Stoner could terminate "in the event he shall feel that he is not physically able to perform his duties hereunder", or (c) if not terminated by either party, the employment would expire at the end of the five year term or on Stoner's death, whichever came first.

The employment agreement also contained a restrictive covenant which provided that:

The period of the non-competition covenants was the same period during which Vendo (a) had the option to purchase the Stoner Manufacturing plant, (b) was to pay out a specified share of profits from the use of the acquired assets, and (c) was to pay out a specified share of the income from the foreign production of the acquired machinery.*fn5 The term of the non-competition covenants was increased from 5 years to 10 years after Vendo received a proposal from Stoner that Vendo's then pending offer, which included a 5 year option and payout, be changed to include a 10 year option and payout. The increased term was proposed by Hillix, Vendo's outside counsel in response to Stoner's suggestion.

Vendo's press release announcing the Stoner acquisition to the trade stated that "[o]fficers of the Stoner firm will continue in their present capacities, . . . and there will be no change in the mode of operations."

Vendo prepared a letter, which Stoner signed, to be sent to Stoner's customers. That letter stated: "We do not anticipate any change in Stoner's basic operating policies. We will continue to serve you, our customers, with the same organization we had in the past. Officers of Stoner Manufacturing will remain unchanged with myself as President."

Another letter drafted by Vendo, and signed by Stoner, was sent to Stoner Manufacturing employees. That letter stated that an independent engineering department would be maintained in Aurora after the sale.

THE BREAKDOWN OF THE PARTIES' RELATIONSHIP

Almost immediately after the closing of the acquisition transaction, Stoner became unhappy because he began losing control of his company.

Shortly after the closing of the sale, Vendo announced that the engineering and research departments of Stoner Manufacturing would be moved to Kansas City. Subsequently, new product research and development was moved to Kansas City, and Vendo's research and development head, Bobby Andrews, reviewed Stoner Manufacturing's development work and recommended that part of it be dropped.

Stoner was not consulted about these developments and he believed he had been relegated to "senior citizen status."

Within approximately three weeks of the closing of the sale, executive control of operations, sales, and finance was also transferred to Kansas City. None of Stoner's division executives would report to Stoner as president.

Wagstaff set up a meeting in Aurora on June 24, 1959. Stoner maintains that Wagstaff "fired" Stoner at this meeting and that the office of president of the Stoner Division was made "strictly advisory." Wagstaff stated that he told Stoner his job as president was advisory only and ...


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