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CARL SANDBURG VILLAGE CONDO. v. 1ST CONDO. DEV. CO.

July 22, 1983

CARL SANDBURG VILLAGE CONDOMINIUM ASSOCIATION NO. 1, ET AL., PLAINTIFFS,
v.
FIRST CONDOMINIUM DEVELOPMENT CO., ET AL., DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Plaintiffs' complaint includes one count charging a violation of section 1 of the Sherman Act, 15 U.S.C. § 1, and eight counts brought under state-law theories. Presently before the court are defendants' motions to dismiss the complaint.*fn2 For the reasons stated below, the court grants defendants' motions. Count I is dismissed with prejudice for failure to state a claim. The remaining counts are dismissed without prejudice for want of subject-matter jurisdiction.

The allegations of Count I are taken as true for purposes of defendants' motions to dismiss under Rule 12(b)(6), Fed.R.Civ.P. Among plaintiffs' allegations are the following. Carl Sandburg Village was developed as a complex of rental apartments in 1965, by entities owned or controlled by Arthur Rubloff, who is not a party to this lawsuit. Defendant Arthur Rubloff & Co., then owned or controlled by Mr. Rubloff, managed Carl Sandburg Village from its original development through 1981. Defendant Goodsitt was and is an officer of Arthur Rubloff & Co. In 1979 and 1980, Carl Sandburg Village was converted into a condominium complex. Shortly before this conversion, defendant Eagle II purchased the complex. Defendant First Condominium Development Co. carried out the conversion as agent for Eagle II. (Eagle II and First Condominium will be referred to as "the developer defendants.")

Plaintiffs allege that the developer defendants and Arthur Rubloff & Co. had "significant economic power" with respect to the sale of Carl Sandburg Village, and that they "engaged in an unlawful contract, combination and conspiracy to restrain interstate trade in the provision of building management services and condominium sales in violation of Section 1 of the Sherman Act." (Complaint, ¶ 18.) Plaintiffs allege also that "[t]he aforesaid contract, combination and conspiracy to restrain trade has consisted of an agreement among the defendants, an essential term of which has been illegally to tie the sale of the distinct product of management services provided by defendant Arthur Rubloff & Co. to the sale of the distinct product of condominium units in the Buildings [of Carl Sandburg Village] and thereby to refuse to sell the condominium units without the corresponding sale of management services." (Complaint, ¶ 19.)

The complaint goes on to allege in great detail that Arthur Rubloff & Co. failed to expose many physical defects in Carl Sandburg Village, allowing the developer defendants to sell units quickly, at artificially inflated prices, without making necessary repairs. (Complaint, ¶ 20.) The complaint alleges also that plaintiffs were required to pay higher fees to Arthur Rubloff & Co. than they would have paid had the management service contract been awarded in a free and competitive market; similarly, it is alleged that the services provided by Arthur Rubloff & Co. were less competent than those plaintiffs would have received had the management service contract been awarded in a free and competitive market. (Complaint, ¶ 21(a).) It is alleged further that "[c]ompetition in the sale of building management services and condominium units has been restrained in a not insubstantial amount of commerce." (Complaint, ¶ 21(b).)

The parties' memoranda on these motions give a more complete picture of the alleged tying arrangement, but the court is limited to an examination of the complaint when determining the sufficiency of plaintiffs' claim. Defendants have challenged the complaint on several grounds, but the court will discuss only one argument, expressing no opinion as to the merit of defendants' other arguments.*fn3

Defendants advance the argument that no tying claim is stated, since the developer defendants, who sell the tying product (condominium units), are not alleged to have a sufficient economic interest in sales of the tied product (management services). Plaintiffs do not dispute that such allegations are essential to a tying claim. Instead, plaintiffs argue that their complaint does include the necessary allegations. Specifically, plaintiffs point to their allegations that Arthur Rubloff & Co., by not disclosing several defects in Carl Sandburg Village, allowed the developer defendants to sell condominium units quickly, at artificially inflated prices, without making necessary repairs. This economic benefit to the developer defendants, plaintiffs argue, constitutes an economic interest in the sale of management services sufficient to support a tying claim.

This question — whether the seller of the tying product has a sufficient interest in sales of the tied product — is not a genuine issue in most tying cases. In the classic tying situation the seller of the tying product also is the seller of the tied product. E.g., United States v. Loew's, Inc., 371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962). Frequently, the seller of one product is a subsidiary or affiliate of the seller of the other product. E.g., Fortner Enterprises, Inc. v. U.S. Steel Corp., 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969); Northern Pacific Ry. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958).*fn4

Apart from cases in which the two products are sold by one seller (or by affiliated sellers), illegal tying also has been found where the seller of the tying product receives a commission or rebate on sales of the tied product. E.g., Ohio-Sealy Mattress Mfg. v. Sealy, Inc., 585 F.2d 821 (7th Cir. 1978), cert. denied, 440 U.S. 930, 99 S.Ct. 1267, 59 L.Ed.2d 486 (1979); Moore v. Jas. H. Matthews & Co., 550 F.2d 1207, 1216 (9th Cir. 1977); Falls Church Bratwursthaus, Inc. v. Bratwursthaus Mgmt. Corp., 354 F. Supp. 1237 (E.D.Va. 1973). In the absence of such payments courts have rejected tying claims, even where — as generally is the case — the seller of the tying product receives some identifiable economic benefit from the challenged arrangement. Keener v. Sizzler Family Steak Houses, 597 F.2d 453 (5th Cir. 1979), aff'g in part [1977] 2 Trade Cas. (CCH) ¶ 61,682 (N.D.Tex. 1977); Venzie Corp. v. United States Mineral Products Co., 521 F.2d 1309 (3d Cir. 1975); Crawford Transport Co. v. Chrysler Corp., 338 F.2d 934 (6th Cir. 1964), cert. denied, 380 U.S. 954, 85 S.Ct. 1088, 13 L.Ed.2d 971 (1965); Robert's Waikiki U-Drive v. Budget Rent-A-Car, 491 F. Supp. 1199 (D.Haw. 1980); Rodrigue v. Chrysler Corp., 421 F. Supp. 903 (E.D.La. 1976).

In this case plaintiffs allege that Arthur Rubloff & Co. conferred an economic benefit upon the developer defendants by concealing defects in Carl Sandburg Village, thereby allowing the developer defendants to sell condominium units quickly and at inflated prices, without making necessary repairs. Plaintiffs analogize this alleged economic benefit to the payment of a kickback, rebate or commission, but the cases rejecting tying claims make it clear that other types of economic benefits are not automatically to be equated with commissions. After considering plaintiffs' allegations, the parties' arguments and the case law, the court concludes that plaintiffs do not allege the requisite interest, on the part of the developer defendants, in the sale of management services.

The court will address several points raised in plaintiffs' memoranda. First, plaintiffs rely on the statement by the Court of Appeals in the Sealy case, that "there is no illegal tying arrangement where a `tying' company has absolutely no financial interest in the sales of a third company whose products are favored by the tie-in." 585 F.2d at 835. (Plaintiffs' Memo in Opposition, p. 18.) Stressing the passage "absolutely no financial interest," plaintiffs apparently conclude that any financial interest — in the sense of an economic benefit from the arrangement, rather than in the sense of a contract or property right to some portion of the proceeds from sales of the tied product — is sufficient to support a claim of illegal tying. Plaintiffs assert that the requirement of a "financial interest in the sales of a third company" is satisfied where the developer defendants are alleged to have a "financial interest in tying Rubloff in as a management company." (Plaintiffs' Memo in Opposition, p. 18.) That plaintiffs misread the Court of Appeals is clear when one considers that the Court supports the quoted passage by citing Crawford, Rodrigue, and the District Court opinion in Keener, supra, all of which cases rejected claims of illegal tying despite significant economic benefit to the seller of the tying product. In Crawford the Court observed that the challenged arrangement saved Chrysler "millions of dollars in the cost of transportation." 338 F.2d at 939. In Keener a franchisor required franchisees to hire a designated contractor to build new restaurants. This arrangement was part of a "new image" program which the franchisor had developed, with the aid of the designated contractor, at a cost of more than $100,000; the franchisor certainly expected an economic benefit from ensuring that new buildings would fit the "new image." [1977] 2 Trade Cas. ¶ 61,682 at 72,801-02. In Rodrigue Chrysler required its auto dealers to purchase certain equipment from several companies unrelated to Chrysler. Chrysler acknowledged that it might benefit to the extent that the products in question would stimulate sales or promote efficiency among Chrysler dealers. 421 F. Supp. at 904. In all these cases the seller of the tying product was held not to have a sufficient interest in sales of the tied product. Given the Sealy Court's citation to these cases, plaintiffs' reading of the phrase "absolutely no financial interest" cannot be accepted.

Robert's Waikiki U-Drive, decided after Sealy, recognizes the distinction drawn here. Certain airlines were alleged to have tied car rentals to discounted airfares. This was a promotional device, intended to increase the airlines' volume of business, but the court rejected the tying claim, holding that the airlines did not have the required interest in the tied car rentals. The court stated:

    Plaintiffs' allegation that "substantial
  revenue" flowed to the airlines does not meet the
  economic interest test. Any time two products are
  sold as a package, there is presumably some
  benefit to both parties. There was an economic
  interest in the transaction — more particularly
  the part of the transaction that involved the
  payment for airfare — but that is not an economic
  ...

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