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CHRISTIANSON v. COLT INDUSTRIES OPERATING CORP.

March 28, 1991

CHARLES R. CHRISTIANSON AND INTERNATIONAL TRADE SERVICES, INC., PLAINTIFFS,
v.
COLT INDUSTRIES OPERATING CORP., A DELAWARE CORPORATION, DEFENDANT.



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

ORDER

Before the Court is the Motion (# 92) by the Defendant Colt Industries for summary judgment on Counts I and II of the Plaintiff's Amended Complaint. The Court grants Colt's Motion for Summary Judgment in part and denies it in part.

BACKGROUND

In 1971, the United States Army adopted Colt's version of the AR-15 rifle as its standard infantry rifle. It renamed the rifle the "M16" and obtained a manufacturing license from Colt. This license enables the government to buy M16 rifles and spare parts from sources other than Colt on a competitive bid basis. In addition to the United States Government, Colt sells the M16 rifle to a number of foreign governments and to non-military customers, such as law enforcement agencies. Colt has also licensed several foreign governments to manufacture M16 rifles for their own use. Three out of four of these foreign licenses have expired.

Colt manufactures the M16 rifle and several variations, including a shortened carbine version and a non-automatic version that still carries the designation AR-15. The rifle has gone through a number of modifications, from the original M16 to the M16A1 and the current M16A2 (the term "M16" will be used to refer to all of these models). The M16A2, brought out in 1984, contains significant improvements over previous models, including an adjustable front sight, heavier barrel, round hand guard, three shot burst control, and a new buttstock. Colt asserts that it has continued to refine and change the rifle's engineering specifications.

Colt asserts that the results of Colt's engineering work relating to the M16 rifle are contained in tens of thousands of pages of detailed engineering drawings, specification sheets, studies, and tests. Colt maintains the secrecy of this material by a variety of measures. For one, Colt places proprietary legends on its drawings stating that all information therein is owned by Colt and shall not be disclosed to third parties. The drawings are kept in areas of limited access which are monitored by security personnel, and access to the drawings is restricted to authorized personnel. Colt restricts its employees by written agreements, even after their employment ends, from using or disclosing any of the confidential information which they had access to while in Colt's employ.

Colt also restricts its suppliers' use of its technical data. Like most manufacturers, Colt contracts with outside suppliers for the manufacture of component parts for the M16 rifle. Colt then assembles the finished product using these parts, along with parts Colt manufactures itself. Colt must of course provide drawings to these suppliers, but Colt has contractually obligated the suppliers not to use this information except in the manufacture of parts and accessories pursuant to their contracts with Colt. Similar restrictions on the use of Colt's technical data are placed on suppliers of parts to the United States Government, which has the right under its license from Colt to buy spare parts from outside suppliers. The contracts forbid outside suppliers from using Colt's technical data to make parts for anyone except Colt or the United States Government.

From 1970 through mid-1975, Charles Christianson was employed by Colt as an engineer. Christianson worked as a tool designer and project administrator in Colt's Singapore licensing program, and he acted as supervisor of project planning in Colt's Philippine program. As a condition of his employment, Christianson signed a confidentiality agreement prohibiting him from using or disclosing Colt proprietary information during and after the termination of his employment.

Colt claims that when it questioned the right of Christianson, Casting Engineers, Martin Marietta and the government of the Philippines to engage in this project, Christianson sought Colt's approval for the particular project (Christianson dep. 87-88, and Defendant's Exhibit 9 Radice affidavit). Colt asserts that it then gave Christianson a letter in March 1986 which waived Colt's objections to these contracts but preserved its rights for the future. Colt contends that later, without advising Colt, Christianson entered into new contracts to supply parts to Colt's licensee in the Philippines, to Colt's licensee in Singapore, and to customers in the United States.

HISTORY OF THE LAWSUIT

In about July of 1983, Colt learned that Springfield Armory, Inc. (Springfield), an Illinois corporation, was attempting to supply purported M16 rifles to the government of El Salvador. On September 2, 1983, Colt commenced an action in this Court against Springfield and a related corporation, Rock Island Armory, Inc. See, Colt v. Springfield, 83-4072 (C.D.Ill. 1984) (Exhibits 1 and 2 attached to Radice affidavit). Although Springfield claimed that it had reverse engineered the entire rifle, Senior U.S. District Judge Robert Morgan found that the evidence indicated that Springfield had engaged in a scheme to misuse Colt's proprietary M16 parts drawings and had induced Colt's vendors and licensees to produce M16 parts in violation of their contractual restrictions. Id. (see, Exhibit 2 attached to Radice affidavit). On this basis, Judge Morgan entered a preliminary injunction against Springfield and Rock Island Armory, Inc. enjoining them from proceeding with their planned production of M16 rifles. The entry of the preliminary injunction against Springfield was upheld by the Federal Circuit. Colt Industries Operating Corp. v. Springfield Armory, Inc., 732 F.2d 168 (Fed.Cir. 1984).

Colt asserts that during discovery before the preliminary injunction hearing in the Springfield case, it found that Christianson's company had supplied many of the parts Springfield used in its M16 rifles. (Gubbins dep. 50-51, Exhibit 10 attached to Radice affidavit, and Reese dep. 178-179, 359-364, Exhibit 12 attached to Radice affidavit). In the fall of 1983 Colt joined Christianson and ITS as additional defendants in the Springfield lawsuit and moved to include them in a similar preliminary injunction. At the same time, Colt directed its attorneys to send a number of letters to Colt suppliers and third parties to put them on notice that Colt considered dealing in unauthorized parts to be improper. (Gubbins dep. 51, Exhibit 10 attached to Radice affidavit).

Judge Morgan denied Colt's motion for a preliminary injunction against Christianson and ITS on April 19, 1984. Colt then decided to dismiss Christianson and ITS from the case, based on Christianson's testimony that his company had gone out of business. (Exhibit 10 attached to Radice affidavit at 52).

On May 14, 1984, Christianson commenced this lawsuit against Colt alleging that Colt had violated the antitrust laws by commencing litigation against him and by threatening his customers and suppliers that it would stop doing business with them if they did business with Christianson. Colt reasserted its breach of contract and other claims against Christianson as counterclaims in the new lawsuit. The case was consolidated with the Springfield case, so that the parties were then essentially in the same posture as they had been before Colt had voluntarily dismissed its claims against Christianson.

On September 5, 1984, the Springfield defendants entered into a consent judgment and permanent injunction with Colt. However, in the Christianson case, Christianson moved for partial summary judgment based on the fact that Colt's specifications for M16 rifle parts could not be maintained as valid trade secrets because they should have been disclosed in certain patent applications. Also, Christianson added a second count to his complaint alleging tortious interference with contractual relations. Colt then made a motion for partial summary judgment on both the patent law and tortious interference claims.

In May 1985, Judge Morgan granted Christianson's Motion for Summary Judgment on liability on the entire antitrust and tortious interference complaint. Christianson v. Colt Industries Operating Corp., 613 F. Supp. 330 (C.D.Ill. 1985). The Court stayed its decision pending Colt's appeal. See, Christianson v. Colt Industries, 613 F. Supp. 330 (C.D.Ill. 1985) (Exhibit 6 attached to Radice affidavit).

The history of the appeal delineates the issues which remain in this case. Three of the five appellate decisions are concerned with the respective jurisdictions of the Federal Circuit as opposed to the regional Circuit Courts of Appeal. See, Christianson v. Colt Industries Operating Corp., slip op. 85-2644 (Fed.Cir. Dec. 4, 1985); Christianson v. Colt Industries Operating Corp., 798 F.2d 1051 (7th Cir. 1986); and Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988). The other two appellate decisions, which were on the merits, included a Federal Circuit opinion which was vacated on jurisdictional grounds by the Supreme Court, and a subsequent decision by the Seventh Circuit which upheld Colt's position on the patent/trade secret issue raised by Christianson. Christianson v. Colt Industries Operating Corp., 822 F.2d 1544 (Fed.Cir. 1987); Christianson v. Colt Industries Operating Corp., 870 F.2d 1292 (7th Cir. 1989). Both Courts concluded that Colt's patents need not have included the proprietary technical data Christianson claimed was necessary under 35 U.S.C. § 112.

In Christianson, 870 F.2d at 1295, the Seventh Circuit found that summary judgment should be entered for Colt on the issue of the adequacy of Colt's patent disclosures under 35 U.S.C. § 112. The Seventh Circuit then remanded the case for further proceedings on the other issues. Id.

Colt maintains that the only issues which remain in the case after the Seventh Circuit decision are related to Christianson's claim that the manner in which Colt enforced its trade secrets and other intellectual property rights was illegal.

As Christianson argues, however, the Seventh Circuit made no determination on the enforceability of Colt's trade secrets. Id. at 1303. Further, the Court of Appeals expressly left open the question of the liability of Colt under federal antitrust law. Id. at 1302-1303, n. 8. Thus, the Seventh Circuit left open all of Christianson's claims except his claim that Colt's patent was invalid.

Counts I and II are left in Christianson's complaint. In Count I, Christianson alleges that Colt illegally monopolized the market in M16 parts and successfully organized a group boycott of Christianson in violation of §§ 1 and 2 of the Sherman Act and §§ 4 and 16 of the Clayton Act. Christianson alleges in Count II that, under Illinois law, Colt tortiously interfered with Christianson's business opportunities.

I. CHRISTIANSON'S CLAIM ANTITRUST

  A. Does the Alleged Group Boycott in this Case Justify Classifying this
     Conduct as a Per se Violation of the Antitrust Laws?

Colt has conceded that it insisted on its suppliers nondisclosure of Colt's trade secrets as a condition of its suppliers continuing business relationships with Colt. (See p. 47 of Defendant's brief). It is disputed whether or not Colt had the right to insist that its suppliers could not use the alleged trade secrets.

Christianson's claims under § 1 of the Sherman Act are essentially based on the allegation that the suppliers of ITS (Christianson's company) and the customers of ITS unlawfully agreed with Colt to refrain from supplying and purchasing M16 parts and accessories to or from ITS. (See ¶ 23 of the Complaint, Exhibit 3 attached to the Radice affidavit). Christianson contends that this alleged agreement constitutes a group boycott which is a per se violation of § 1 of the Sherman Act.

Colt contends that the per se rule is completely inapplicable because the evidence shows no horizontal agreement among competitors at any level and no vertical agreements as to price. Colt maintains that the evidence only shows agreements between Colt and its suppliers restricting the use of trade secrets and Colt's trade secrets enforcement efforts.

Colt argues that boycotts are illegal per se only if they are used to enforce agreements that are themselves illegal per se— for example, price fixing agreements. Collins v. Associated Pathologists, Ltd., 676 F. Supp. 1388, 1398-1399 (C.D.Ill. 1987) (quoting Marrese v. American Academy of Orthopaedic Surgeons, 706 F.2d 1488, 1495 (7th Cir. 1983), vacated on other grounds, 726 F.2d 1150 (7th Cir. 1984), rev'd, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985)), aff'd, 844 F.2d 473 (7th Cir.), cert. denied, 488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 110 (1988).

In the Collins case, Id. at 1398, this Court noted that the Seventh Circuit explained its own understanding of illegal boycotts in cases such as US. Trotting Ass'n v. Chicago Downs Ass'n, Inc., 665 F.2d 781 (7th Cir. 1981). In US. Trotting, the court began its discussion of the plaintiff's antitrust claims by stating that the Rule of Reason is the standard traditionally applied for the majority of alleged anticompetitive practices challenged under § 1 of the Sherman Act; however, a particular course of conduct will be termed a per se violation after courts have had considerable experience with the type of conduct challenged and application of the Rule of Reason has inevitably resulted in a finding of anticompetitive effects. Id. at 787-788. The court in US. Trotting further explained that the Supreme Court has found certain group boycotts illegal per se, but that a per se rule had never been applied by the Supreme Court to concerted refusals to deal which were not designed to drive out competitors. Id.

Christianson cites two Supreme Court cases in which group boycotts were found to be per se illegal. See, Fashion Originators Guild of America, Inc. v. FTC, 312 U.S. 457, 61 S.Ct. 703, 85 L.Ed. 949 (1941) and Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959).

In response, Colt cites Kling v. St. Paul Fire and Marine Insurance Co., 626 F. Supp. 1285 (C.D.Ill. 1986), another case decided by this Court. In the Kling case, the plaintiffs alleged an agreement between the defendant hospital and the defendant St. Paul Fire and Marine Insurance Co. which required all doctors and dentists with staff privileges at the hospital to carry a minimum of $1 million in medical malpractice insurance coverage. Id. at 1288-1289. This Court found that application of the per se rule was inappropriate in that case because the Supreme Court has found group boycotts per se illegal only in cases involving either price fixing or agreements among competitors. Id. at 1291. In the Kling case it was clear that there was no price agreement and that the insurance company was not in competition with the hospital. Id. Colt asserts that in this case, as in Kling, there is no evidence of a price fixing agreement or an agreement among competitors.

Colt also cites Business Electronics v. Sharp Electronics, 485 U.S. 717, 108 S.Ct. 1515, 99 L.Ed.2d 808 (1988). In Business Electronics, Id. at 730, 108 S.Ct. at 1522, the court stated that:

  Restraints imposed by agreement between competitors
  have traditionally been nominated as horizontal
  restraints, and those imposed by agreement between
  firms at different levels of distribution as vertical
  restraints.

Id. at 730, 108 S.Ct. at 1522. In this case, if there were any restraints, the evidence shows that the restraints were vertical restraints because the restraints were imposed by Colt, which is at a different level of the distribution chain than the suppliers of component parts for the M16.

The Business Electronics Court concluded that a vertical restraint is not illegal per se unless it includes some agreement on price or price levels. Id. at 735-736, 108 S.Ct. at 1525-1526. Since this case involves vertical restraints and there is no allegation that there was an agreement on Price or price levels, there is no per se violation, Christianson cannot rely on United States v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966) or Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959), because the Supreme Court stated in Business Electronics that these cases involved horizontal combinations. Id. 485 U.S. at 734, 108 S.Ct. at 1525. Even further, Christianson cannot rely on United States v. Parke, Davis & Co., 362 U.S. 29, 80 S.Ct. 503, 4 L.Ed.2d 505 (1960) because the Court determined in Business Electronics that Parke, Davis did not support a rule that an agreement on price or price levels is not required for a vertical restraint to be per se illegal. Id. 485 U.S. at 735, 108 S.Ct. at 1525. Christianson asserts that there is a horizontal conspiracy in this case. He asserts that at least Casting Engineers and Aerospace Nylok agreed with Colt to cease doing business with Christianson after receiving Colt's letters, which made it obvious that they, along with other Colt suppliers, were being solicited in a common purpose. (See, Stillwell affidavit at ¶ 7, Exhibits D, E, and F and Plaintiff's Exhibit 8, ¶ 11). This Court disagrees. Although there is evidence that Colt attempted to force all of its component suppliers to cease doing business with Christianson, there is no evidence that the component suppliers themselves had any agreement at the component supplier level, and there is no evidence that Colt had agreed with anyone else at its level of production and distribution. Thus, the only agreement asserted in this case is on the vertical level.

Christianson then contends that Business Electronics is distinguishable because it involved a concerted refusal to deal rather than a classic boycott such as the present case. Christianson quotes from the case of Northwest Stationers v. Pacific Stationery, 472 U.S. 284, 105 S.Ct. 2613, 86 L.Ed.2d 202 (1985), which explained when a per se approach was applied to a group boycott. The Court stated:

  Cases to which this Court has applied the per se
  approach have generally involved joint efforts by a
  firm or firms to disadvantage competitors by "either
  directly denying or persuading or coercing suppliers
  or customers to deny relationships the competitors
  need in the competitive struggle." (Citations
  omitted). In these cases, the boycott often cuts off
  access to a supply, facility, or market necessary to
  enable the boycotted firm to compete (citations
  omitted), and frequently the boycotting firms
  possessed a dominant position in the relevant market.
  (Citations omitted). In addition, the practices were
  generally not justified by plausible arguments that
  they were intended to enhance overall efficiency and
  make markets more competitive. Under such
  circumstances, the likelihood of anticompetitive
  effects is clear and the possibility of countervailing
  pro-competitive effects is remote.

Id. at 294, 105 S.Ct. at 2619.

Certainly, in this case, Colt may have engaged in conduct which denied Christianson the relationships he needed to survive. However, this does not automatically mean that this is a proper case in which to apply a per se rule. The Business Electronics case has in effect modified the rule in Northwest Stationers. In Business Electronics, the court stated:

  Second, petitioner contends that per se illegality
  here followed from our two cases holding per se
  illegal a group boycott of a dealer because of its
  price cutting. See, United States v. General Motors
  Corp., 384 U.S. 127, [86 S.Ct. 1321, 16 L.Ed.2d 415]
  (1966); Klor's, Inc. v. Broadway-Hale Stores, Inc.,
  359 U.S. 207 [79 S.Ct. 705, 3 L.Ed.2d 741] (1959).
  This second contention is merely a restatement of the
  first, since both cases involve horizontal
  combinations—General Motors, supra [384 US.], at
  140, 143-145 [86 S.Ct. at 1327, 1329-1330], at the

  Klor's, supra [359 U.S.] at 213 [79 S.Ct. at 710], at
  the manufacturer and wholesaler levels.

Business Electronics, 485 U.S. at 734, 108 S.Ct. at 1525. Based upon this quotation and the rest of the Business Electronics opinion, it seems clear to this Court that the Business Electronics majority felt that a per se rule would be appropriate in a group boycott which involved horizontal combinations but inappropriate in a case involving vertical combinations. The Court in Business Electronics obviously believed that horizontal restraints involved dangers which justify application of a per se rule, but the Court did not believe that the dangers involved in vertical arrangements justified the application of a per se rule. The Court even noted that some vertical arrangements have economic benefits and are pro-competitive. Id. at 723-731, 108 S.Ct. at 1518-1523. Thus, this Court believes that it would be inappropriate in this case to apply a per se rule.

In addition, this Court believes that it would be improper to apply a per se rule under the analysis given in Northwest Stationers. After making the statements which were previously quoted, the Supreme Court in Northwest Stationers stated:

  Although a concerted refusal to deal need not
  necessarily possess all of these traits to merit per
  se treatment, not every cooperative activity involving
  a restraint or exclusion will share with the per se
  forbidden boycotts the likelihood of predominantly
  anti-competitive consequences.

Northwest Stationers, 472 U.S. at 295, 105 S.Ct. at 2620. The Supreme Court then discussed several examples of cases in which it would have been improper to apply a per se rule. Id. at 295-297, 105 S.Ct. at 2620-2621. The Court noted the following:

  The district court appears to have followed the
  correct path of analysis— recognizing that not
  all concerted refusals to deal should be accorded per
  se treatment and deciding this one should not.
  (Footnote omitted). The foregoing discussion
  suggests, however, that a satisfactory threshold
  determination whether anticompetitive effects would be
  likely might require a more detailed factual picture
  of market structure than the district court had before
  it. Nonetheless, in our judgment the district court's
  rejection of a per se analysis in this case was
  correct. A plaintiff seeking application of the per se
  rule must present a threshold case that the challenged
  activity falls into a category likely to have
  predominantly anti-competitive effects. The mere
  allegation of a concerted refusal to deal does not
  suffice because not all concerted refusals to deal are
  predominantly anticompetitive.

Id. at 297-298, 105 S.Ct. at 2621 (emphasis added).

In this case, Colt has made several very plausible economic arguments that the protection of trade secrets through contractual obligations as they used in this case enhances overall efficiency. First, protection of trade secrets can foster innovation because, if a firm knows that it can develop a better product and keep it secret, it has the incentive to invest the resources on the innovation. In other words, the protection of trade secrets internalizes the cost of innovation. Second, allowing a firm to protect its trade secrets separates innovation from production; therefore, an innovator will not have to do all the production itself (which is often economically inefficient) but will have an incentive to contract the technology out to the ...


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