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Herman Schwabe Inc. v. United Shoe Machinery Corporation.

decided: January 4, 1962.


Author: Friendly

Before SWAN, WATERMAN and FRIENDLY, Circuit Judges.

FRIENDLY, Circuit Judge: Plaintiff, a New York corporation having its principal place of business in Brooklyn, was organized in 1939 to manufacture shoe machinery, and to distribute in interstate commerce shoe machinery made by itself or by others, primarily European manufacturers. By its complaint, filed in the District Court for the Eastern District of New York on May 27, 1957, it sought to recover from defendant United Shoe Machinery Corporation, a New Jersey corporation having its principal place of business in Boston, threefold damages for the entire period since plaintiff's organization, for injury to its "business or property by reason of anything forbidden in the antitrust laws," as provided in § 4 of the Clayton Act, 15 U.S.C. § 15. The complaint charged that defendant had monopolized trade or commerce in a manner forbidden by § 2 of the Sherman Act, 15 U.S.C. § 2, as found by the District Court for Massachusetts in a suit in equity, United States v. United Shoe Machinery Corporation, brought by the Government in 1947, and decided by that court in 1953 and by the Supreme Court in 1954. We have previously affirmed an order granting defendant's motion, under the statute of limitations added to the Clayton Act by the Act of July 7, 1955, 69 Stat. 283, 15 U.S.C. § 15b, for summary judgment as to all damages accrued before May 27, 1953, Herman Schwabe, Inc. v. United Shoe Machinery Corp., 274 F.2d 608 (2 Cir.), cert. denied, 363 U.S. 811 (1960).

At the end of a trial lasting some nine court days, Chief Judge Bruchhausen directed a verdict for defendant and entered judgment dismissing the complaint. Appellant complains not only of the direction of the verdict but of a number of other rulings. Among these are what is claimed to have been an undue restriction of plaintiff's right, under § 5 of the Clayton Act, 15 U.S.C. § 16, to rely on the decree in the Government's suit as prima facie evidence; the treatment of a provision of the decree providing for United's sales of machines previously leased as if this granted antitrust immunity; the exclusion of evidence of alleged acts of monopolization which antedated May 27, 1953, but which, appellant claims, continued to have an effect thereafter; failure to require United to produce certain documents which, appellant urges, would have aided its endeavor to explain away testimony by Mr. Schwabe, its president and sole stockholder, before a grand jury that had been investigating United's business practices in 1947 just prior to the filing of the Government's equity suit,*fn1 and to mitigate the effect of its answer to a Government questionnaire in 1948;*fn2 the exclusion, as hearsay, of written and oral statements from potential customers; and the exclusion of expert testimony as to damages and various exhibits tendered in connection therewith. Counsel indicated that decision by us as to all these rulings would be welcome since the same issues have arisen, or are likely to arise, in a treble damage suit by a different plaintiff in the District of Massachusetts in which the same attorneys are currently engaged, although any decision by us could have no binding effect on that court. We do not find it appropriate to rule expressly on any of these points save the two last mentioned, since, in our view, plaintiff failed to present evidence of damage sufficient to warrant submission to the jury, and any errors with respect to other elements of the case were therefore not prejudicial.

The economic background is so fully yet (considering its complexity) succinctly set out in Judge Wyzanski's admirable and much admired opinion, United States v. United Shoe Machinery Corp., 110 F.Supp. 295 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521 (1954), as to relieve us of need for any but the most summary statement. The court there found that United had acquired control of the shoe machinery market, in which it had attained a "75 plus percentage," by three principal means, the first two of which were innocent and the third not. These were "the original constitution of the company," approved in United States v. United Shoe Machinery Co., 247 U.S. 32 (1918); "the superiority of United's products and services"; and "the leasing system," as to which the court particularly mentioned "the 10-year term, the full capacity clause, the return charges, and the failure to segregate service charges from machine charges," as well as the aid the leasing device gave "United in maintaining a pricing system which discriminates between machine types." 110 F.Supp. at 343-344. The Court's decree, dated February 18, 1953, found generally that United had violated § 2 of the Sherman Act "by monopolizing the shoe machinery trade and commerce among the several States" and specifically that "All leases made by defendant which include either a ten-year term, or a full capacity clause, or deferred payment charges, and all leases under which during the life of the leases defendant has rendered repair and other service without making them subject to separate, segregated charges, are declared to have been means whereby defendant monopolized the shoe machinery market." The decree provided that "after A Day" defendant should not offer any machine type for lease unless it also offered the same for sale and should not make any leases save on meeting certain conditions therein defined*fn3 and that "before B Day" defendant should present plans for terminating all outstanding leases and for disposing of certain parts of its business other than the manufacture of shoe machinery. Ultimately "A Day" was fixed as January 1, 1955, and "B Day" as April 1, 1955.

As the statutory language suggests, recovery under section 4 of the Clayton Acer its predecessor, § 7 of the Sherman Act, 26 Stat. 209, 210 (1890), "cannot be had unless it is shown, that, as a result of defendants' acts, damages in some amount susceptible of expression in figures resulted," Keogh v. Chicago & N.W. Ry. Co., 260 U.S. 156, 165 (1922).*fn4 Although later Supreme Court decisions have made it plain that "a defendant whose wrongful conduct has rendered difficult the ascertainment of the precise damages suffered by the plaintiff, is not entitled to complain that they cannot be measured with the same exactness and precision as would otherwise be possible," Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359, 379 (1927); Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 563 (1931), and that "the jury may make a just and reasonable estimate of the damage based on relevant data, and render its verdict accordingly," Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264 (1946), none has detracted from Mr. Justice Brandeis' statement in Keogh or held that mere proof that a defendant has injured its competitors generally warrants recovery in the absence of evidence that would justify a finding of injury to the particular plaintiff and would supply a rational basis for approximating its amount. To the contrary, "the jury may not render a yerdict based on speculation or guesswork," Bigelow v. RKO Radio Pictures, Inc., 327 U.S. at 264.

The gist of appellant's case on liability was that until "A Day," i.e., January 1, 1955, United continued to make the "Form A" lease the decree had found unlawful and that the effects of United's previous monopolization persisted thereafter, not only because many of the Form A leases continueders who had leased United machines under the old form would retain them under new leases or purchases. We need not question the validity of this as a legal theory; as said in William H. Rankin Co. v. Associated Bill Posters, 42 F.2d 152, 155 (2 Cir.), cert. denied, 282 U.S. 864 (1930), "The decree could not as a matter of law, and especially not in the face of evidence showing the contrary, be held to have done away with all continuing damage directly traceable to the defendants' former unlawful interference." However, evidence that defendant had unlawfully placed obstacles in the way of competition generally, and that these continued in some measure during the damage period, would not meet plaintiff's burden of proving "damages in some amount susceptible of expression in figures," as the two plaintiffs in Rankin had done by showing that profitable licenses had been unlawfully terminated and offering, in one instance, a history of previous profits and, in the other, such a history supplemented by an estimate, derived therefrom, of profits that would have been likely but for the termination. See Baush Machine Tool Co. v. Aluminum Co. of America, 79 F.2d 217, 227 (2 Cir. 1935).

Plaintiff's theory here was not that acts by defendant had unlawfully deprived it of something previously possessed. It could not well have been so, since there was nothing to indicate that defendant's conduct had changed for the worse during the damage period or, indeed, since plaintiff was organized, and plaintiff's original investment of $10,000 had produced an earned surplus of over $300,000 by 1961, after substantial salary payments to Mr. Schwabe, its sole stockholder, and dividends. Plaintiff's evidence, therefore, was necessarily directed to attempting to show how defendant had unlawfully deprived it of business it might otherwise have secured. It was entirely competent for plaintiff to seek to show this, William Goldman Theatres, Inc. v. Loew's Inc., 69 F.Supp. 103, 107 (E.D. Pa. 1946), aff'd, 164 F.2d 1021 (3 Cir.), cert. denied, 334 U.S. 811 (1948); the trouble was that, unlike the plaintiff in the cited case, it failed to present evidence from which a jury might approximate its loss.

Although, because of defendant's long domination of the market, plaintiff could not show how sales and profits once realized in a free market had diminished, no reason is seen why it could not have proceeded in the opposite direction, by showing how its sales and profits had waxed as United's unlawful practices had waned. Compare Twentieth Century-Fox Film Corp. v. Brookside Theatre Corp., 194 F.2d 846, 854-856 (8 Cir.), cert. denied, 343 U.S. 942 (1952). Granting that the relief in the Government's suit, decreed in the main to be effective January 1, 1955, would only "gradually diminish the magnetic hold" of United, 110 F.Supp. at 350, the influence of the practices found unlawful ought surely to have lessened by the time of the instant trial in 1961; we cannot assume that such an elaborate decree, fashioned by an able District Judge after exceptionally thorough study of the industry, and approved by the Supreme Court, would have totally failed to accomplish its objectives in six years. However, plaintiff did not elect to follow any such method of proof - which, obviously enough, ought to have led to a gradual tapering off of damages during the period - but instead chose a very different one we shall now summarize.

Plaintiff's damage evidence was offered through an economist, Peter Max. His first step was to determine the number of United clicking machines outstanding both in the shoe industry and in the non-shoe industry for each fiscal year ending in February, 1939-1959.*fn5 He next determined Schwabe's share of the clicking machines in the non-shoe field for each year 1939-1960 on the assumption that the total number of such machines outstanding in each year was 10,000. Two further tabulations showed the average number of each of 24 types of United machines outstanding in each year 1954-1959, and the average annual revenue from each; these enabled Max to estimate United's machine revenues for each type of machine for each year. He then applied to these revenue figures a percentage, 15.54%, which was Schwabe's cumulative share of the assumed 10,000 non-shoe clicking machines in 1956; the sum of the products was alleged to be the shoe machine revenues Schwabe would have realized during the six years but for United's illegal acts. This sum was then multiplied by 19.81%, Schwabe's ratio of pre-tax earnings to sales in 1946; the product, $2,777,956, was alleged to represent what shoe machine pre-tax earnings Schwabe would have realized during the six years but for United's illegal acts. Deduction of Schwabe's pre-tax earnings of $195,475, left a balance of $2,582,481; this was claimed to be Schwabe's damages, to be trebled. Max' conclusions were further presented in a series of charts and graphs.

The judge properly excluded this evidence. No basis had been established for the assumption that but for United's unlawful acts Schwabe's proportion, not only of clicking machines in the shoe market, but of each and every type of shoe machinery marketed by United, would have approximated in the six years, 1954-1959, the 15.54% asserted to represent Schwabe's 1956 share of the clicking machines in the non-shoe market. Even as to clicking machines, there was no evidence that United had made the same effort or had the same ability to penetrate the non-shoe market as had created the lawful extent of its power in the shoe market, or that, but for United's unlawful efforts in the latter, Schwabe would have made the same efforts, or would have had the same ability, to penetrate the shoe market that it had in the non-shoe market. The lack of evidence was the more serious because it is undisputed that among the factors accounting for United's large share of the shoe machinery market, both past and present, many were entirely lawful: United's offer of "a long line of machine types, while no competitor offers more than a short line," and "its understanding of the techniques of shoemaking and the need of shoe manufacturers, its efficient design and improvement of machines, and its prompt and knowledgeable service," 110 F.Supp. at 343-344. There was no showing that these factors existed in the non-shoe clicking machine field to anything like the same degree; indeed, plaintiff's own figures that in the year ended Feb. 28, 1959, the fourth year in which the decree was effective, Schwabe's share of the combined United-Schwabe clickers was only 3% in the shoe industry as against 41% in the non-shoe rather indicated that some factors other than illegal monopolization were at work, even as to clickers. All these defects were compounded when Schwabe's alleged non-shoe clicking percentage was applied to other machines. There was no showing either that Schwabe ever had competed, or even that but for United's unlawful acts it would have competed, as to all the 24 types; further, the evidence made it plain that as to some types with respect to which it had competed the Schwabe product was higher in cost or lower in quality or delivery terms.

Beyond this basic defect there were others; we shall mention two. If any basis was provided for Max' assumption that the outstanding non-shoe clicker machines numbered approximately 10,000, we have not found it. The use of the 19.81% of sales carried down to pre-tax profits by Schwabe in 1946, was quite indefensible; this was by all odds the highest ratio of profits to sales ever experienced by Schwabe, the next highest being 11.14% in 1950, and nearly six times the average, 3.3%, during the years 1954-1959 for which damages were being computed.*fn6

There is no bright line that divides evidence worthy of consideration by a jury, although subject to heavy counterattack, from evidence that is not. Especially because of the guaranty of the Seventh Amendment, a federal court must be exceedingly careful not to set the threshold to the jury room too high. Yet it is the jury system itself that requires the common law "judge, in his efforts to prevent the jury from being satisfied by matters of slight value, capable of being exaggerated by prejudice and hasty reasoning * * * to exclude matter which does not rise to a clearly sufficient degree of value"; "something more than a minimum of probative value" is required. 1 Wigmore, Evidence (3d ed. 1940), pp. 409-410. These comments are especially pertinent to an array of figures conveying a delusive impression of exactness in an area where a jury's common sense is less available than usual to protect it. It might indeed have been possible for a judge, with days in which to study the exhibits of plaintiff's expert, to come up with some rational computation of damages, on a theory wholly different from what the expert advocated, that would satisfy the Supreme Court's modest requirements in this area;*fn7 it would be foolhardy to expect a jury to do so. "When the risk of confusion is so great as to upset the balance of advantage, the evidence goes out," Shepard v. United States, 290 U.S. 96, 104 (1933).

These principles required exclusion; the leap required to derive any rational conclusion from the expert's data was too great to allow a jury to take. Many decisions have rejected evidence of injury and damages comparable in weight with that submitted here. Baush Machine Tool Co. v. Aluminum Co. of America, supra; Momand v. Universal Film Exchanges, Inc., 172 F.2d 37, 43-44 (1 Cir. 1948), cert. denied, 336 U.S. 967 (1949); Emich Motors Corp. v. General Motors Corp., 181 F.2d 70, 83-84 (7 Cir. 1950), rev'd on other grounds, 340 U.S. 558 (1951); Wolfe v. National Lead Co., 225 F.2d 427, 433-434 (9 Cir.), cert. denied, 350 U.S. 915 (1955); Flintkote Co. v. Lysfjord, 246 F.2d 368, 392-394 (9 Cir.), cert. denied, 355 U.S. 835 (1957); Clapper v. Original Tractor Cab Co., 270 F.2d 616, 630-634 (7 Cir. 1959), cert. denied, 361 U.S. 967 (1960); Sunkist Growers, Inc. v. Winckler & Smith Citrus Products Co., 284 F.2d 1, 32-34 (9 Cir. 1960); Siegfried v. Kansas City Star Co., 193 F.Supp. 427, 436-437 (W.D. Mo. 1961). In the Supreme Court cases earlier cited, the plaintiffs not only had shown defendants' wrongful acts but had presented "evidence of the decline in prices, profits and values, not shown to be attributable to other causes," which warranted the jury's concluding "that defendants' wrongful acts had caused damage to the plaintiffs," Bigelow v. RKO Radio Pictures, Inc., 327 U.S. at 264. In Richfield Oil Corp. v. Karseal Corp., 271 F.2d 709 (9 Cir. 1959), cert. denied, 361 U.S. 961 (1960), relied on by appellant, the plaintiff offered evidence that its product, which had been denied access to defendant's service stations, had outsold a competing product in other service stations of the same sort; the similarity of the markets was there proved, as in many of the motion picture theatre cases, and the opinion distinguished the Wolfe and Flintkote cases in the same circuit, which we have previously cited.

Even though plaintiff's general proof of damage was thus properly excluded, a verdict should not have been directed against it if it had proved that defendant's unlawful acts had caused the loss of specific sales and had ...

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