Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Ohio-Sealy Mattress Manufacturing Co. v. Kaplan

September 21, 1984

OHIO-SEALY MATTRESS MANUFACTURING COMPANY, SEALY MATTRESS COMPANY OF HOUSTON, SEALY MATTRESS COMPANY OF FORT WORTH, SEALY MATTRESS COMPANY OF PUERTO RICO, INC., SEALY OF THE NORTHEAST, AND SEALY MATTRESS COMPANY OF GEORGIA, PLAINTIFFS-APPELLANTS,
v.
MORRIS A. KAPLAN, SEALY MATTRESS COMPANY OF ILLINOIS, WILLIAM H. WALZER, SEALY CONNECTICUT, INC., SEALY GREATER NEW YORK, INC., WATERBURY MATTRESS COMPANY, MORTON H. YULMAN, SEALY OF EASTERN NEW YORK, INC., SEALY OF MINNESOTA, INC., PETER D. BROWN, SEALY MATTRESS COMPANY OF MICHIGAN, INC., T. C. ENGLEHARDT, JR., FRED G. HODGES BEDDING COMPANY (A/K/A SEALY MATTRESS COMPANY OF READING, PA), SEALY OF DES MOINES, INC., WALTER HERTZ, SEALY MATTRESS COMPANY OF NEW JERSEY, INC., JOSEPH V. MOFFITT, SEALY OF THE CAROLINAS, PEERLESS MATTRESS COMPANY, LLOYD B. ROSENFELD, SEALY MATTRESS COMPANY OF OREGON, JOSEPH R. RUDICK, MARYLAND BEDDING COMPANY, JAMES THOMPSON, HOWARD G. HAAS, SEALY, INCORPORATED, SEALY SPRING CORPORATION, SEALY MATTRESS COMPANY OF COLORADO, INC., SEALY MATTRESS COMPANY OF NORTHERN CALIFORNIA, INC., SEALY MATTRESS COMPANY OF SOUTHERN CALIFORNIA, INC., SEALY MATTRESS COMPANY OF ARIZONA, INC., SEALY MATTRESS COMPANY OF FLORIDA, INC., SEALY MATTRESS COMPANY OF PITTSBURGH, INC., AND SEALY MATTRESS COMPANY OF PHILADELPHIA, INC., DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 76 C 810 -- William T. Hart, Judge.

Author: Pell

Before PELL and WOOD, Circuit Judges, and WEIGEL, Senior District Judge.*fn*

PELL Circuit Judge. This case which, for purposes of clarity, we shall label Ohio II, is the second of six civil suits brought by the Ohio-Sealy Mattress Manufacturing Company (Ohio) against its licensor, Sealy, Incorporated (Sealy), and other defendants. The first civil suit, which we shall label Ohio I, was filed in 1971, and, following two appeals to this court, ultimately resulted in Ohio's obtaining a substantial damages award as well as an order of equitable relief.*fn1 The present appeal in Ohio II is taken from two orders of the district court entered on August 1, 1980, and June 16, 1983. The appeal, involving two challenging questions regarding the doctrine of res judicata, requires us to determine the preclusive effects of the Ohio I litigation on the Ohio II case.

I. FACTS

Both Ohio I and Ohio II are antitrust suits brought by Ohio, one of the most successful and aggressive licensees of appellee Sealy, which owns numerous trademarks to a popular brand of mattresses and other bedding products. The resolution of this appeal makes necessary our examination of the procedural history of each suit.

A. The Ohio I litigation*fn2

Ohio I, a marathon case which, from the filing of the complaint to its final disposition on appeal, lasted over one decade, had its origins in a 1967 Supreme Court case United States v. Sealy, Inc., 388 U.S. 350, 87 S. Ct. 1847, 18 L. Ed. 2d 1238 (1967). In United States v. Sealy, Inc., the Supreme Court invalidated Sealy's system of allocating mutually exclusive manufacturing and sales territories to its manufacturer-licensees. The Court found that Sealy was a joint venture of its stockholder-licensees and that the licensees were "themselves directly, without even the semblance of insulation, in charge of Sealy's operations." Id. at 353. Sealy's system of assigning each manufacturer an enclave free of intrabrand competition, the Court held, was therefore a horizontal market allocation per se violative of Section 1 of the Sherman Act.*fn3 Approximately four weeks after the Court handed down its decision, the licensee-directors of Sealy met to discuss the ramifications of the Court's ruling. Concern was expressed over the competition that could be expected from "renegade," "out of control," and "predatory" licensees no longer constrained by the exclusive territory system. Sealy thereafter developed a new Uniform License Agreement that all its licensees signed in 1968, save one whose license was reacquired by Sealy some years later. The new agreement preserved the same territories (designated Areas of Primary Responsibility or "APRs") as had been used before, and Sealy agreed not to permit any other manufacturer to produce Sealy products in a licensee's territory. The Agreement was thus exclusive as to manufacture, but it was not on its face exclusive as to sales. A licensee was permitted to sell Sealy products in another licensee's APR. Any licensee who would be inclined to sell outside his own APR, however, faced several disincentives. First, each licensee was held accountable for adequate sales in his APR. As an incentive to sell only within his APR, each licensee, once he achieved a quota of sales in his APR, had to pay only one-half the standard royalty to Sealy for all subsequent sales of Sealy products made that year inside or outside his APR. Second, there was a surcharge placed on sales outside a licensee's APR. The surcharge was termed a "passover payment," and the seller had to remit it to Sealy, which in turn paid it over to the licensee in whose territory the seller had successfully marketed his product. Although Sealy characterized the payment as one designed to prevent an out-of-APR licensee from taking a "free ride" on a fellow licensee's advertising efforts, Sealy itself conducted the great bulk of the advertising for the Sealy brand. The passover charge could run as high as eleven percent. Third, a licensee making an out-of-APR sale had to pay a one percent "product service repair" charge to Sealy. As originally conceived, Sealy was to hold these payments in a fund from which it would reimburse licensees who actually made repairs on products they had not sold, but in practice Sealy paid the charges over to "invaded licensees" whether or not they in fact made any repairs. Fourth and finally, the 1968 Uniform License Agreement limited a licensee to manufacture Sealy products at specified plant locations and prohibited the adding of plant locations without Sealy's written approval. A licensee contemplating an out-of-APR sale faced high transportation costs because of the bulk and weight of the product, and the plant location clause exacerbated this impediment to competition. A licensee who wanted to locate a plant at the periphery of his ARP in order to compete more effectively against his neighboring licensees was prevented from so doing. Ohio twice sought permission to construct a plant in Toledo, Ohio, in order to compete more effectively against the Detroit licensee. On both occasions, Sealy denied Ohio's request.

Sealy also inserted into the Uniform License Agreement a clause giving Sealy the "right of first refusal" should a licensee desire to sell his business. Sealy exercised this clause against Ohio on three occasions between 1970 and 1972, thereby blocking Ohio's efforts to obtain the Philadelphia, Florida, and Pittsburgh licensees. In 1970, Ohio contracted to buy the Philadelphia licensee, but upon a complaint from the neighboring Baltimore licensee, Sealy exercised the right of first refusal and the Philadelphia licensee retracted its offer to sell. In 1972, the same sequence of events took place, but this time Sealy acquired the Philadelphia licensee. In 1970, the principal of the Florida licensee reached an agreement to transfer his business to Ohio, but he withdrew his business from sale after Sealy exercised its right of first refusal. In 1972, Ohio for a second time contracted to buy the Florida licensee but Sealy exercised its right of first refusal and acquired the Florida concern. A similar scenario was played out with respect to the Pittsburgh licensee in 1972 and 1973.

In 1971, Ohio and four wholly owned subsidiaries brought suit against Sealy and other defendants seeking both damages and injunctive relief. The claims in the complaint fell largely into two categories. First, there were claims related to the post-1967 market allocation we have just described. Second, there were claims based upon Sealy's use of tying arrangements with respect to bedding components. The latter category of claims need not concern us further. With respect to the former category of claims, Ohio sought the following: First, it requested recover of the passover payments and product service repair charges it had remitted to Sealy, plus an injunction against future imposition of those charges. Second, Ohio sought damages based upon Sealy's refusal to allow it to relocate a plant in Toledo, plus an injunction against future enforcement of the plant location clause. Third, it requested lost profits and preparatory expenses with respect to the failed acquisitions of the Philadelphia, Florida, and Pittsburgh licensees, plus divestiture by Sealy of those licensees. Finally, Ohio sought an injunction against future enforcement of the exclusive manufacturing territories provision. Following extensive pre-trial discovery, the damages claim was tried to a jury, and in April 1975 the jury returned a general verdict in excess of six million dollars in favor of Ohio.

Approximately, one year after the general verdict of April 1975, district court Judge Parsons denied Sealy's motion for a new trial upon the condition that Ohio accept a fifty percent remittitur. Ohio acceded to the remittitur and thus, after trebling, received damages in excess of ten million dollars. Eight months later, Judge Parsons denied Ohio equitable relief.

Ohio I came to this Court for the first time on appeal in 1978. See Ohio-Sealy Manufacturing Co. v. Sealy, Inc., 585 F.2d 821 (7th Cir. 1978), cert. denied, 440 U.S. 930, 59 L. Ed. 2d 486, 99 S. Ct. 1267, 201 U.S.P.Q. (BNA) 256 (1979). Sealy argued on appeal that there was insufficient evidence upon which the jury could have found a system of market allocation. We agreed with Sealy that the enormity of the damages award necessarily implied the jury had found that Sealy had allocated the market and had thereby perpetuated the horizontal constraints the Supreme Court in 1967 found per se violative of the Sherman Act. We disagreed, however, with Sealy's assertion that the evidence adduced at trial was insufficient to support such a finding. Although any one of the license provisions Sealy used may not have effected a horizontal market allocation, the evidence of all of the provisions taken together, combined with the fact that most directors of Sealy were licensees, entitled the district court to let the jury decide whether Sealy had illegally divided the market. We reversed the district court, however, with respect to the denial of injunctive relief. We reasoned that the district court had failed to apprehend the jury's necessary finding that Sealy had effected a market allocation: "We think the court erred, thus, in premising its equitable relief decision on the assumption that the only fact established by the jury verdict was that at least one acquisition somehow violated the antitrust laws. Under the evidence and the instructions, and as the case was argued, the jury verdict must also be read to include a finding that Sealy was engaged in the scheme of market allocation in which one or more acquisitions were at least a part." Id. at 844. We thus remanded the case to Judge Parsons with instructions to reconsider the denial of equitable relief. We directed Judge Parsons to consider what "total mix of equitable relief, if any, might be just in the circumstances." Id. at 845 & n. 34. We also directed Judge Parsons to "consider the evidence adduced both at the jury trial and at the equitable relief hearing," and we permitted him to "take any additional evidence . . . [he] might find helpful." Id. at 845.

On remand, the district court took additional evidence from the parties and concluded those evidentiary proceedings in 1979. In March of 1981, Judge Parsons entered a final decree, in which he stated at the outset that Sealy had voluntarily agreed to cease collecting passover payments, enforcing the plant location clause, or collecting product service repair charges. Judge Parsons then stated that he had decided not to enjoin Sealy from future enforcement of the exclusive manufacturing territories provision. Judge Parsons reasoned that permitting any licensee to open a plant anywhere in the nation would amount to appropriation of the licensor's property. He also stated that his enjoining enforcement of the plant location clause and collection of the surcharges on out-of-APR sales was a measure sufficient to end market allocation. Judge Parsons declined to enjoin the exercise of the right of first refusal unless Sealy's exercise were linked to an anti-competitive purpose. Judge Parsons reasoned that Sealy had a protectible interest in maintaining the quality of products bearing the Sealy label, and that the right of first refusal, if not used for anti-competitive purposes, effected legitimate control over the identity of those who manufacture under the Sealy name. Next, Judge Parsons concluded that divestiture of the Pittsburgh, Florida, and Philadelphia licensees was not required. Finally, Judge Parsons denied Ohio's supplemental motion to recover damages that had accrued since the jury verdict. Judge Parsons reasoned that Ohio had pending at that time two lawsuits in which it sought to recover those supplemental damages.

Ohio appealed from the final decree, arguing that Judge Parsons erred when he failed to (1) enjoin the exercise of the exclusive manufacturing clause, (2) order divestiture, and (3) award supplemental damages. Ohio-Sealy Manufacturing Co. v. Sealy, Inc., 669 F.2d 490 (7th Cir. 1982), cert. denied, 459 U.S. 943, 103 S. Ct. 257, 74 L. Ed. 2d 201 (1983). This court affirmed Judge Parsons on each point. We began our opinion by noting that an equitable decree in a private antitrust suit should fashion "injunctive relief only to the extent necessary to protect [the plaintiff] from future damages likely to occur if the defendant continues the unlawful antitrust conduct." Id. at 495. We then considered the denial of injunctive relief with respect to the exclusive manufacturing territories provision and concluded that the district court's other injunctive relief was sufficient to restore "significant intrabrand competition among neighboring licensees." Id. at 496. Although the exclusive manufacturing territories provision might prevent Ohio from competing effectively in every APR, we stated that Ohio was not entitled to secure by injunctive relief every conceivable competitive goal. Id. On the issue of divestiture, we noted that Ohio had acquired two licensees near the APRs of the Philadelphia and Florida licensees. We also stated that Ohio's Medina, Ohio, plant was near the Pittsburgh licensee's APR. We therefore concluded that Ohio Sealy could engage in significant intrabrand competition at those locations and that divestiture was accordingly unnecessary. Finally, we agreed with the district court that Ohio was not entitled to supplemental damages. With respect to supplemental damages resulting from Sealy's pre-verdict conduct, we divided the damages into two types, namely those that were provable at trial and those that were not. We ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.