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Will v. Comprehensive Accounting Corp.

October 28, 1985

ROBERT J. WILL, ET AL., PLAINTIFFS-APPELLANTS, CROSS-APPELLEES,
v.
COMPREHENSIVE ACCOUNTING CORPORATION, ET AL., DEFENDANTS-APPELLEES, CROSS-APPELLANTS



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 83 C 4035--Paul E. Plunkett, District Judge.

Author: Easterbrook

Before CUMMINGS, Chief Judge, EASTERBROOK, Circuit Judge, and GRANT, Senior District Judge.*fn*

EASTERBROOK, Circuit Judge.

Franchising spread from hamburgers to the preparation of tax returns and then to the provision of regular accounting services. The Comprehensive Accounting Corporation authorizes accounting to provide service in Comprehensive's name. The franchisees agree to to live up to Comprehensive's standards and to supply reports to clients in Comprehensive's style and bearing its trademarks. This appears to be useful to clients--perhaps because of the standardized method of doing business, perhaps because of Comprehensive's policing of its franchises. Comprehensive is profitable, and so are the franchisees. The business of a franchisee apparently may be sold for more than two times annual gross revenues, while businesses of accountants in solo practice usually fetch much less.

Comprehensive's services to its franchisees include data processing. The accountants send data from clients' businesses to Comprehensive, which returns reports generated by its large computer. The contract between Comprehensive and its franchisees permits the franchisees to have data processed elsewhere, provided "the Comprehensive E.D.P. [electronic data processing] is not competitive for like services of the same quality, with the same turnabout time." In recent years small computers have become less expensive, and independent firms have written programs for these small computers that enable them to generate accounting reports and otherwise manage clients' data. Comprehensive's franchisees became interested in these small computers, which potentially could cut their costs of computation below the prices offered by Comprehensive.

Comprehensive did not take this gracefully. It had a large computer in place; the cost of this was sunk, so payments from franchisees for computation were mostly profit. Comprehensive's revenues from data processing reached $3.5 million yearly; these revenues were the firm's principal source of profit. The franchisees' savings from buying their own small computers would translate into losses for Comprehensive. It therefore insisted that franchisees use only small computers that would produce reports that looked exactly like those Comprehensive produced itself. Comprehensive says that it insisted on duplication in order to protect the reputation of its service mark and maintains that it was entitled by contract to be finicky; the franchisees say that Comprehensive was just postponing the inevitable, in breach of contract.

Duplication was hard. The commercially available programs were not designed to ape Comprehensive's reports, and the output of Comprehensive's printers also looked different from the output of the low-price printers some franchisees wanted to use. Comprehensive promised to find and approve a small computer system that would meet its quality standards. It settled on a system that would be restricted to franchisees with 200 or more clients; most had fewer. Even the approval of this system moved slowly, with several changes of configuration that led some franchisees to conclude that Comprehensive would never be satisfied. In 1982 it announced that it would approve a system with programs Comprehensive had designed itself; it apparently planned to charge enough for these to make up for lost revenues from its larger computer.

Several franchisees decided to strike out on their own. Comprehensive threatened them with termination when it found out about this, so some franchisees installed small computers without informing Comprehensive. Comprehensive terminated five franchises in August 1981, sued three of them for substantial sums, and tried to persuade their clients to migrate to other accountants. As other franchisees began to use different systems, Comprehensive terminated them too.

Ten of the terminated franchisees and two others brought this suit against Comprehensive, one of its subsidiaries, the chairman of its board, and its president. They maintained that Comprehensive broke its contract by insisting that they purchase computation from Comprehensive even though it was "not competitive for like services of same quality, with the same turnabout time." Comprehensive replied that the small computers did not supply the "same quality" service, and that at all events each of the franchisees had violated other provisions of the contract. The franchisees also argued that Comprehensive had violated § 1 of the Sherman Act, 15 U.S.C. § 1, by "tying" data processing (the tied product) to the franchise (the tying product).

The district court conducted a jury trial. The jury returned a general verdict for the defendants on the antitrust theory. Six plaintiffs prevailed on the contract theory and six lost. The largest award was $37,678 to plaintiff Cahill; plaintiffs Rudd and Miller received $1; the others came out in between. Everybody appeals. Comprehensive and the other defendants say that the damages were excessive (they do not challenge the finding of liability); the six franchisees who lost on their contract claims say the verdicts are irrational because there is no significant difference between the winning and losing plaintiffs. All 12 franchisees challenge several of the instructions to the jury on both antitrust and contract claims; they also dispute some of the district court's decisions to admit evidence.

I

Section 1 of the Sherman Act prohibits any "contract, combination . . ., or conspiracy, in restraint of trade . . . ." The plaintiffs therefore needed to prove some cooperative undertaking. Establishing the necessary combination in a tying case requires exceeding subtlety, because the substantive theory of tying law depends on coercion to take two products as a package. The joint sale of two products is a "tie" only if the seller exploits its control of the tying product "to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms." Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 104 S. Ct. 1551, 1558, 80 L. Ed. 2d 2 (1984). See also Jack Walters & Sons Corp. v. Morton Building, Inc., 737 F.2d 698, 703-05 (7th Cir.), cert. denied, 469 U.S. 1018, 105 S. Ct. 432, 83 L. Ed. 2d 359 (1984). A tie within the meaning of antitrust depends on showing that the buyer did not want to take both products from the same vendor. "[T]here is nothing inherently anticompetitive about packaged sales. Only if [buyers] are forced to purchase [the tied] services as a result of the [seller's] market power would the arrangement have anticompetitive consequences." Hyde, supra, 104 S. Ct. at 1565. If the buyer wants both products together--as, for example, the buyer of an automobile wants both chassis and engine together, even though they could be sold separately--there is no forcing, and so there is no tie-in.

As a linguistic matter, proof that the buyer took both products in a package against his will negates the existence of a "contract, combination, or conspiracy." The plaintiffs' position here is complicated by their contract, which they insist establishes that they did not agree to buy their computing services from Comprehensive. Tying is not cooperation among competitors, the focus of § 1, it is aggressive conduct akin to monopolization under § 2 of the Sherman Act. Tying usually is challenged under § 3 of the Clayton Act, 15 U.S.C. § 14, which addresses the practice explicitly. Joint action becomes an issue only when the plaintiff tries to take advantage of per se rules under § 1.

Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 20 L. Ed. 2d 982, 88 S. Ct. 1981 (1968), overruled in part on other grounds by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S. Ct. 2731, 81 L. Ed. 2d 628 (1984), provides plaintiffs with an escape hatch. The Court stated that a franchisee "can clearly charge a combination between [the franchisor] and himself, as of the day he unwillingly complied with the restrictive franchise agreements, . . . or between [the franchisor] and other franchise dealers, whose acquiescence in [the] firmly enforced restraints was induced by 'the communicated danger of termination' . . ." 392 U.S. at 142. Although the franchise contract in Perma Life established the tie-in of which the franchisees complained, the essential principle--that "unwilling compliance" satisfies the joint action requirement of § 1--applies to our case too.

This portion of Perma Life survived both Copperweld and Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 104 S. Ct. 1464, 79 L. Ed. 2d 775 (1984). Copperweld rejected an alternative holding in Perma Life that an agreement among jointly owned corporations satisfied the combination requirement of § 1, but it expressly refrained from disturbing the holding we quoted above (see 104 S. Ct. at 2739). Monsanto made it harder to show joint action concerning price within a system of distributing products that is concededly full of joint action; Monsanto helps to separate the legitimate and illegitimate components of a generally cooperative system of distribution and has nothing to say about the meaning of the joint ...


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