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TERRIFIC PROMOTIONS, INC. v. DOLLAR TREE STORES

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION


December 10, 1996

Terrific Promotions, Inc., Pamela J. Alper, and Michael N. Alper, Plaintiffs,
v.
Dollar Tree Stores, Inc., and Timothy J. Avers, Defendants.

The opinion of the court was delivered by: LINDBERG

MEMORANDUM OPINION AND ORDER

 Plaintiffs Terrific Promotions, Inc., a Delaware corporation ("TPI-DE"), Michael N. Alper, and Pamela J. Alper ("the Alpers") have filed a Rule 59(e) motion for reconsideration of the court's order of November 26, 1996, dismissing with prejudice their federal antitrust and securities fraud claims against defendants Dollar Tree Stores, Inc. ("DTS") and Timothy J. Avers ("Avers"), and declining to exercise jurisdiction over their supplemental state law claims. For the reasons set forth below, their motion for reconsideration is denied.

 FACTUAL SUMMARY1

 This litigation relates to a corporate acquisition in which defendant DTS purchased one hundred percent of the stock of Terrific Promotions, Inc., an Illinois corporation ("TPI-IL"), from the Alpers for a sum of more than $ 53 million. The Alpers claim that they did not intend to convey any proprietary business information relating to TPI-IL's wholesale merchandising operations, even though the Stock Purchase Agreement contained no provisions excluding that portion of the company from the sale. Plaintiffs now seek to recover the exclusive use of that business information by claiming that the transaction violated federal antitrust and securities laws.

 DISCUSSION

 A motion for reconsideration pursuant to Fed. R. Civ. P. 59(e) enables the court to correct its own "manifest error[s] of law or fact" and thus "avoid unnecessary appellate procedures." Moro v. Shell Oil Co., 91 F.3d 872, 876 (7th Cir. 1996). It does not provide a vehicle for a party "to introduce new evidence or advance arguments that could and should have been presented to the district court prior to the judgment." Id. As set forth below, plaintiffs argue that the court committed errors of law and fact in dismissing their antitrust and securities fraud claims. After reviewing these suggestions of error, however, the court remains persuaded that these claims were properly dismissed.

 A.

 Plaintiffs allege that defendants DTS and Avers conspired to harm competition in the national wholesale merchandising market *fn2" in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. The substance of this claim may be stated as follows: (1) the Stock Purchase Agreement did not convey to DTS any business information concerning TPI-IL's wholesale merchandising business, and thus the current use of such information by DTS is a misappropriation, (2) the misappropriation resulted in the entry of DTS into the wholesale merchandising market by "unlawful means" and the "destruction" of TPI-DE, an "existing competitor" and the successor to TPI-IL's wholesale merchandising operations (Pls.' Mot. for Recons. at 5), and (3) the misappropriation harmed competition in the national wholesale merchandising market because, without it, "there would be more competitors in [that] market today" (Pls.' Mem. in Opp'n to Def. DTS's Mot. to Dismiss at 16).

 The court dismissed the antitrust claim because plaintiffs could prove no set of facts to support their allegation that the misappropriation or anything else about the transaction harmed competition in the national wholesale merchandising market. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488, 50 L. Ed. 2d 701, 97 S. Ct. 690 (1977) (Section 1 of the Sherman Act requires harm to the market and not merely harm to competitors). In order to demonstrate that the transaction had any effect on the market whatsoever, plaintiffs would need to show either (1) that it reduced the number of competitors in the market, or (2) that it hindered the number of competitors from increasing. Because DTS was not present in the wholesale merchandising market prior to the stock sale, its alleged misappropriation of the Alper's wholesale merchandising business could not have reduced the overall number of market competitors.

 Plaintiffs would therefore need to show that the transaction hindered the number of competitors from increasing. To do this, plaintiffs would need to show that the misappropriation or some other facet of the transaction imposed a burden on the Alpers' reentry into the market that was greater than the burden that DTS would have realized in entering the market for the first time. This cannot be done. The redundant development costs imposed on the Alpers by virtue of the misappropriation could be no greater than those incurred by DTS in entering the market for the first time, and for this reason the alleged misappropriation could not have hindered the number of market competitors from increasing. The court further determined that the Alpers were not subject to any non-competition agreements that restricted their reentry into the national wholesale merchandising market in competition with DTS. For these reasons, the court held that plaintiffs could prove no set of facts to support their claim that the transaction suppressed competition.

  Plaintiffs suggest that this reasoning contained three errors of law or fact. First, they argue that the court should not have dismissed their antitrust claim under Fed. R. Civ. P. 12(b)(6) because they clearly "alleged" injury to the market in their complaint. Indeed, plaintiffs alleged that defendants DTS and Avers engaged in "unlawful conspiracy to harm competition in the wholesale merchandising business." (2d Am. Compl. at PP 53-54.) While plaintiffs may have "alleged" injury to the market, a bare allegation is insufficient to overcome a motion to dismiss under Rule 12(b)(6) where plaintiffs "can plead no facts that would support [their] claim for relief." Palda v. General Dynamics Corp., 47 F.3d 872, 874 (7th Cir. 1995), citing Conley v. Gibson, 355 U.S. 41, 47-48, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Because plaintiffs can prove no facts to show that the transaction harmed competition in the national wholesale merchandising market, their antitrust claim was properly dismissed.

 Second, plaintiffs assert that the court erroneously relied on a finding that the Alpers were not barred from reentering the national wholesale merchandising market, a fact which they contend is not "dispositive" in a claim under Section 1 of the Sherman Act. (Pls.' Mot. for Recons. at 5.) Rather, plaintiffs suggest that they need only show that defendant DTS "suppressed" competition by "destroying" TPI-DE. (Id. at 5-6.) It would seem, however, that plaintiffs misperceive the manner in which the court "relied" on such a finding. The fact that the Alpers were not barred from reentering the market by virtue of non-competition agreements is but one reason why the transaction did not "suppress" competition. As has been shown, the alleged destruction of TPI-DE by DTS can provide no further evidence of the suppression of competition in the national wholesale merchandising market.

 Third, plaintiffs suggest that the court misconstrued paragraph 54 of their second amended complaint, which alleges that unspecified "restrictive covenants solidified the adverse market consequences" of the antitrust conspiracy. The court interpreted this statement as an assertion that the Alpers were subject to restrictive covenants that barred them from reentering the wholesale merchandising market directly; it then observed that no such covenants exist. Plaintiffs have clarified that paragraph 54 refers to the Non-Competition Agreement appended to the Stock Purchase Agreement, the effect of which was to prevent the Alpers from engaging in certain retail (but not wholesale) operations in competition with DTS for a period of four years after the stock sale. Plaintiffs now argue that their limited exclusion from the retail market tangentially encumbers their wholesale operations "by arguably limiting certain proof of performance sales." (Pls.' Mot. for Recons. at 6 n.17).

 The legality of a non-competition agreement under Section 1 of the Sherman Act is properly governed by the "rule of reason" analysis. Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 265 (7th Cir. 1981), cert. denied, 455 U.S. 921, 71 L. Ed. 2d 461, 102 S. Ct. 1277 (1982). Under this rule, covenants are valid if they are "(1) ancillary to the main purpose of a lawful contract, and (2) necessary to protect the covenantee's legitimate property interests, which require that the covenants be as limited as is reasonable to protect the covenantee's interests." 660 F.2d at 265. Moreover, a plaintiff must be able to show that the non-competition agreement produces an anticompetitive market effect. Id. at 268-269.

 Without reaching the factual question of market effects, the court may safely conclude as a matter of law that the Non-Competition Agreement does not violate Section 1 of the Sherman Act under the rule set forth in Lektro-Vend. Inasmuch as the agreement was ancillary to the legitimate business transaction consummated by the Stock Purchase Agreement, it clearly satisfies the first prong of the test. While plaintiffs assert that there is a "justiciable controversy" as to the enforceability of the Non-Competition Agreement "in light of the fraud perpetrated by DTS" (2d Am. Compl. at P 131), the possibility of fraudulent inducement does not touch upon the substantive reasonableness of the restrictions contained in the contract for purposes of antitrust liability. Inasmuch as plaintiffs have not alleged that the Non-Competition Agreement is unreasonable on its own terms, the court must now conclude that the contract does not violate Section 1 of the Sherman Act.

 B.

 Plaintiffs further allege that they were fraudulently induced to enter into the Stock Purchase Agreement in violation of the Securities and Exchange Act of 1934, 15 U.S.C. § 78(j)(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1996). They claim that they signed the agreement in reliance on numerous misrepresentations by DTS that it would not "interfere with or acquire [the wholesale merchandising] business or hire its employees." (Pls.' Mot. for Recons. at 9.) The court dismissed this claim for the reason that plaintiffs were not, as a matter of law, justified in relying on such misrepresentations because the actual effect of the transaction was spelled out in plain terms in the Stock Purchase Agreement.

 Plaintiffs suggest that the court reached this conclusion in error. They argue that they were justified in relying on DTS's misrepresentations because the Stock Purchase Agreement did not "explicitly" and "completely" contradict these representations. (Id. at 8.) Plaintiffs assert that the Stock Purchase Agreement did not provide that DTS would acquire "both the retail and wholesale merchandising businesses of TPI-IL." (Id. at 9.) Once again, the court disagrees. As a matter of law, a written agreement to sell one hundred percent of the stock in a corporation conveys ownership of the entire corporate entity (in this case both the wholesale merchandising and retail operations of TPI-IL) unless the agreement explicitly excludes some portion of the company from the transaction. See Brodsky v. Frank, 342 Ill. 110, 173 N.E. 775, 777 (Ill. 1930). Inasmuch as the parties did not exclude the wholesale merchandising operations of TPI-IL from the sale, the plain terms of the Stock Purchase Agreement explicitly and completely contradicted DTS's prior assertions that it would not acquire that portion of the company. See H Enterprises Int'l v. General Electric Capital, 833 F. Supp. 1405, 1423 (D. Minn. 1993) (reliance on representations unjustified when written contract explicitly and completely contradicts prior representations).

 C.

 In summary, plaintiffs can prove no facts to support their allegations that defendants DTS and Avers committed violations of the federal antitrust or securities laws in conjunction with the purchase of TPI-IL. For this reason, the court must now deny plaintiffs' motion for reconsideration of the court's order of dismissal of November 26, 1996.

 ORDERED: Plaintiffs' motion for reconsideration of the court's order of dismissal of November 26, 1996, is denied.

 Entered:

 George W. Lindberg

 United States District Judge

 Date: DEC 10 1996


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