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Oreck Corp. v. Whirlpool Corp.

decided: September 20, 1977.

ORECK CORPORATION, PLAINTIFF-APPELLEE,
v.
WHIRLPOOL CORPORATION AND SEARS, ROEBUCK AND CO., DEFENDANTS-APPELLANTS



Appeal by the defendants, a manufacturer and retailer of a make of vacuum cleaner, from a judgment entered on a jury verdict against them and in favor of a distributor in the United States District Court for the Southern District of New York, Richard Owen, Judge, holding the defendants liable for a conspiracy to exclude the distributor from the market and for restraint of trade in violation of § 1 of the Sherman Act, 15 U.S.C. § 1, and awarding damages. Reversed and remanded.

Anderson and Mansfield, Circuit Judges, and Brieant, District Judge.*fn* Mansfield, Circuit Judge, dissenting.

Author: Anderson

ANDERSON, Circuit Judge:

This is an appeal from a judgment entered on July 13, 1976 in favor of Oreck Corporation (Oreck) against defendants Whirlpool Corporation (Whirlpool) and Sears, Roebuck & Co. (Sears) on two counts of a seven count complaint charging violations of § 1 of the Sherman Act, 15 U.S.C. § 1. Oreck was awarded $2,250,000 (after trebling) in monetary damages. For the reasons set forth below, we reverse.

The factual basis of this controversy is fairly straightforward. Whirlpool is a manufacturer of vacuum cleaners (as well as other household appliances not relevant here) and has been in that business since 1957, when it acquired the Birtman Electric Co. Birtman had previously manufactured vacuum cleaners for Sears, under the Kenmore label. Whirlpool continued this business, and also sought to sell vacuum cleaners under its own "RCA-Whirlpool" label. It discontinued the line of sales under this label for approximately two years after which it re-entered the field through a designated exclusive distributor, Oreck, which was appointed in 1963 for an initial term of five years, with automatic extensions for one year periods thereafter, absent six months prior notice of termination by either party. Whirlpool gave Oreck formal notice of termination of the agreement on June 27, 1968, but instead, a new agreement, dated August 1, 1968, was drawn up extending Oreck's distributorship until December 31, 1971, with no provision for extension. At the expiration of this extension, however, Oreck's relationship with Whirlpool, as its exclusive distributor, was not renewed or extended, and it terminated completely. The instant action followed in September of 1972.

This lawsuit and the underlying controversy, are based on the claimed reasons why Oreck was not afforded an additional term as Whirlpool's exclusive distributor of vacuum cleaners. Oreck's successful contention below was that its agreement was not renewed by Whirlpool at the behest and insistence of Sears, a much larger purchaser of Whirlpool vacuum cleaners than Oreck. Sears' association with Whirlpool extended back to 1925, when Sears acquired 750 shares of Whirlpool's forerunner corporation, the Upton Machine Co.*fn1 By January of 1960, Sears owned approximately 4% of Whirlpool's outstanding stock. Oreck also contended that Sears did not want Oreck to compete with its own line of Kenmore vacuum cleaners, also manufactured by Whirlpool, and that it used its influence with Whirlpool to have Oreck's exclusive distributorship terminated.

Accordingly, Oreck's complaint charged both Whirlpool and Sears with engaging in a contract, combination or conspiracy in unreasonable restraint of trade to exclude Oreck from the vacuum cleaner market in the United States and Canada (counts one and two of the complaint) and with forcing or persuading potential customers of Oreck from refusing to deal with Oreck (count three). Additionally, count four of the complaint charged Whirlpool with selling vacuum cleaners, attachments and parts to Sears at unlawfully discriminatory prices, contrary to 15 U.S.C. § 13(a) and count five with Sears' knowing inducement or receipt of those same discriminatory prices, prohibited by 15 U.S.C. § 13(f). Finally, count six alleged irreparable damage to Oreck as a result of Sears' and Whirlpool's violations of the antitrust laws and Oreck's absence of an adequate remedy at law, and count seven pleaded damage to Oreck in the amount of $6,500,000 as a result of Sears' alleged status as a "control person" over Whirlpool (because of Sears' stockholdings in Whirlpool) and the close relationship between the two defendants over a period of 50 years. Counts three, four and seven were voluntarily dismissed on Oreck's motion; and the court directed a verdict for defendants on counts three and four, the alleged Robinson-Patman Act violations.

The trial testimony therefore centered on counts one and two, the alleged Sherman Act violations. Plaintiff's case for liability rests largely upon the testimony of Marshall Oreck, its General Manager, and upon the testimony of its President and founder, David Oreck, who told of his relationship with Whirlpool over the years and of his belief, derived primarily from communications with one John Payne, a salesman for Whirlpool, that the reason for the cancellation was Sears' desire to end competition from Oreck. Plaintiff also presented the deposition of Payne, who did not appear at the trial. Hyman B. Ritchin, an economic consultant, and Ernest L. Sommer, a certified public accountant, gave testimony for the plaintiff on the issue of damages.

By way of defense and explanation of Oreck's cancellation, Whirlpool presented the testimony of its officers who dealt with Oreck, showing that the reason for the cancellation was Oreck's failure to follow an assigned marketing strategy. Jack D. Sparks, a Vice President and Director of Whirlpool, who made the decision to terminate Oreck, testified that the exclusive distributor had failed to market Whirlpool vacuum cleaners through "major accounts" (department store chains and the like) and had instead resorted to "commercial-type distribution" (janitorial supply houses and mail order sales), a strategy which did not agree with Whirlpool's desires. Sparks explained that he accepted a subordinate's recommendation to terminate Oreck "because Oreck corporation had failed to reach the original objective when we first conceived the program in 1963 which was to set up a one-step distribution system nationally to major accounts on vacuum cleaners with the hopes that ultimately we would have a system that other specialty-type products could go through." Sparks denied being concerned with competing against Sears, pointing out that "the system we . . . talked about [distribution to "major accounts" such as department stores] would be in direct competition with Sears."*fn2

Significantly, however, plaintiff presented no evidence or testimony that the net economic effect of Oreck's cancellation was unreasonably to restrain trade in the vacuum cleaner industry in the United States and/or Canada. In fact, as to this critical inquiry, David Oreck testified on direct examination that "the vacuum cleaner industry is, indeed, a very large one" and that during 1971, when Oreck sold 78,203 vacuum cleaners, "the vacuum cleaner industry in 1971 was about 7.8 million purchases." Basic arithmetic reveals, therefore, that Oreck had a 1% market share at the time of the completion of his exclusive distributorship for Whirlpool. Moreover, David Oreck admitted on cross-examination that, following this event, the plaintiff obtained an alternative source of supply and was, at the time of trial, the world's largest supplier of "top fill upright vacuum cleaners."

The above testimony and the other evidence adduced at the trial by the plaintiff show nothing more than the refusal by Whirlpool to renew Oreck's exclusive distributorship of Whirlpool vacuum cleaners under the "Whirlpool" label and the replacement of Oreck, in effect, by Sears, the other existing distributor, who sold the same manufacturer's vacuum cleaner but under the label, "Kenmore." It is well-settled that

"when an exclusive dealership 'is not part and parcel of a scheme to monopolize and effective competition exists at both the seller and buyer levels, the arrangement has invariably been upheld as a reasonable restraint of trade. In short, the rule was virtually one of per se legality' until the District Court decided the present case [which was reversed]." (Cases cited in footnote omitted.) Packard Motor Car Co. v. Webster Motor Car Co., 100 U.S. App. D.C. 161, 243 F.2d 418, 420, cert. denied, 355 U.S. 822, 2 L. Ed. 2d 38, 78 S. Ct. 29 (1957).*fn3

The Supreme Court expressed much the same rationale in United States v. Arnold, Schwinn & Co., 388 U.S. 365, 18 L. Ed. 2d 1249, 87 S. Ct. 1856 (1967), overruled on other grounds, Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 97 S. Ct. 2549, 53 L. Ed. 2d 568, 45 U.S.L.W. 4828 (June 23, 1977), where it held that a manufacturer may choose his own customers and franchise certain exclusive dealers:

"If the restraint stops at that point - if nothing more is involved than vertical 'confinement' of the manufacturer's own sales of the merchandise to selected dealers, and if competitive products are readily available to others, the restriction, on these facts alone, would not violate the Sherman Act." 388 U.S. at 376.

See also, Joseph E. Seagram & Sons, Inc. v. Hawaiian Oke & Liquors, Ltd., 416 F.2d 71, 76 (9th Cir. 1969), cert. denied, 396 U.S. 1062, 24 L. Ed. 2d 755, 90 S. Ct. 752 (1970) ("it is well settled that it is not a per se violation of the antitrust laws for a manufacturer or supplier to agree with a distributor to give him an exclusive franchise, even if this means cutting off another distributor [citing cases].");*fn4 Bay City-Abrahams Bros. Inc. v. Estee Lauder Inc., 375 F. Supp. 1206, 1214-16 (S.D.N.Y. 1974); Top-All Varieties, Inc. v. Hallmark Cards, Inc., 301 F. Supp. 703, 704-5 (S.D.N.Y. 1969).

Under these standards, given additional weight by the Supreme Court's recent overruling of the per se approach to vertical location restrictions of United States v. Arnold, Schwinn & Co., supra, in Continental T.V., Inc. v. GTE Sylvania, Inc., supra, Oreck was required to show not only conspiratorial conduct by Sears and Whirlpool in order to recover under § 1 of the Sherman Act, but also credible proof that the net result and effect of the allegedly conspiratorial conduct of the defendants was anticompetitive in the vacuum cleaner industry as a whole or that the conspiracy was designed to drive Oreck out of the vacuum cleaner business.

In instructing the jury, the trial court quoted the language of § 1 of the Sherman Act and then further defined the meaning of the terms within that statute as follows:

"As to the meaning of the term 'restraint of trade,' you are instructed that this general term applies only to unreasonable restraints and not to all possible restraints of trade. Not all restraints of trade ...


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