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Parts and Electric Motors Inc. v. Sterling Electric Inc.

decided: August 18, 1987; As Amended August 19, 1987.

PARTS AND ELECTRIC MOTORS, INC., AN ILLINOIS CORPORATION, PLAINTIFF-APPELLANT,
v.
STERLING ELECTRIC, INC., A DELAWARE CORPORATION, DEFENDANT-APPELLEE



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 83 C 2349-James F. Holderman, Judge.

Bauer, Chief Judge, Cudahy and Ripple, Circuit Judges.

Author: Cudahy

CUDAHY, Circuit Judge.

This is an antitrust case brought by Parts and Electric Motors, Inc. ("P & E") against Sterling Electric, Inc. ("Sterling"). P & E is a terminated distributor of Sterling brand electric motors and parts. P & E charges that Sterling violated Section 1 of the Sherman Act, 15 U.S.C. § 1, and Section III of the Clayton Act, 15 U.S.C. § 14, by tying sales of its electric motors (the tied product) to sales of its replacement parts (the tying product). The jury delivered a verdict for P & E on its tying claim. The verdict was set aside in a post-trial order entering judgment n.o.v. and granting a new trial contingent on reversal of the judgment n.o.v. We reverse the judgment n.o.v. and remand the new trial order.

I.

Sterling, which is a wholly-owned subsidiary of A.O. Smith Corp., manufactures various types of electric motors (also called "finished products") as well as replacement parts for them. Sterling concedes that its parts are unique and that it has 100% dominance in the market for Sterling replacement parts, which are usable only on Sterling finished products. No one else makes parts usable on Sterling finished products. From 1980 to 1984, Sterling sales ranged between $9 million and $12 million annually. Sterling accounts for less than 1% of the market in which its finished products are sold.

P & E has been a Sterling distributor for a number of years but has always carried and continues to carry a number of other brands of electric motors and/or parts. In 1981 and 1982 P & E was the largest national distributor of Sterling parts. In terms of total purchases of Sterling electric motors P & E was third nationally in 1981 and seventeenth of seventy-seven in 1982, a year shortened by Sterling's termination of P & E's distributorship. P & E purchased $90,778 of Sterling electric motors in 1981 and $43,418 in 1982. Its corresponding purchases of parts were larger: $160,593 and $293,262, respectively.

When Sterling was acquired by A.O. Smith, there were over four hundred non-exclusive wholesale distributors of its products. Under its new management, Sterling instituted new distribution programs. Sterling contracted with ten "stocking" parts distributors. All of Sterling's distributors were non-exclusive. Stocking distributors were able to purchase at lower prices than referral distributors. In turn, Sterling required that each of its stocking parts distributors buy from it and aggressively promote minimum quantities of Sterling electric motors. Under its contractual arrangements with stocking distributors Sterling had the right to terminate the distributors for failure to take the agreed minimum quantities of finished products. Sterling thus conditioned its stocking distributors' rights to purchase Sterling parts upon their purchase of Sterling motors.

In June and July of 1982, Sterling warned that if P & E did not purchase more Sterling finished products, P & E would risk termination of its relationship with Sterling, including the right to continue to buy parts. In response to these admonitions, P & E began steering customers toward Sterling electric motors even though P & E would have recommended other brands if its access to Sterling parts were not in jeopardy. P & E increased its purchases of Sterling motors in June and August 1982; nevertheless, on October 1, 1982, Sterling terminated P & E as a distributor of its electric motors and replacement parts because it regarded P & E's level of Sterling electric motor purchases as insufficient.

P & E then brought this lawsuit. It charges that Sterling's linking of mandatory finished product purchases, the tied product, to continued availability of Sterling parts, the tying product, constituted an illegal tying arrangement. At the jury trial P & E presented evidence with respect to the elements of a per se tying case as well as evidence in accord with an alternative rule of reason analysis. Sterling made three motions for directed verdict: one at the end of P & E's case, one at the end of its own case and one at the end of all the evidence. Sterling's first two directed verdict motions were substantially identical to the one it presented at the close of all the evidence, which stated in pertinent part:

D. . . . Plaintiff has introduced no evidence to show that there was any effect in the tied market. There is no evidence in the record that plaintiff purchased any motors it did not desire to purchase or did not purchase any motors which it wished to have purchased.

E. . . . In this case, D. . . . activity in restructuring its distribution network was pro-competitive and caused no antitrust injury.

F. . . . The evidence produced by Plaintiff shows only a manufacturer with a miniscule market share seeking to improve the competitive position of its product in the market place which is economically beneficial to customers.

Defendant's Motion for Directed Verdict At the Conclusion of All the Evidence, R. 78 at 3.

As further discussion will disclose, none of Sterling's motions appears to have asserted that P & E was required to prove the likelihood or danger of Sterling's obtaining market power in the market for the tied product (Sterling electric motors or finished products) as an element of the tying violation.

At the instruction conference, the district court adopted an Instruction 28a which stated in part:

Market power with respect to the tied product, which is electric motors, is not relevant.

Tr. at 955. The remainder of the instruction described the criteria the jury should apply to determine the existence of market power in the tying product market. Sterling's only objection to Instruction 28a was as follows:

Defendant objects to Court's 28a in that it's an improper definition of market power since it contains no consideration of profit.

Tr. at 925.

The district court relied on this objection as preserving Sterling's point that a threat of market power in the tied product was an essential ingredient of a tying violation. The district court asserted that the reference to "profit" meant power over price and that this in turn ...


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