The opinion of the court was delivered by: DUSEN
I. Jurisdiction and Venue.
The jurisdiction and venue of this court with respect to this matter are not, and cannot be, in dispute. They are based on the following findings of fact:
1. The individual defendant, Milton Jerrold Shapp, resides within the Eastern District of Pennsylvania.
2. Jerrold Electronics Corporation was incorporated under the laws of Pennsylvania in 1948 and was the parent corporation of the other corporate defendants, National Jerrold Systems, Inc., Jerrold Northwest, Inc., Jerrold Southwest, Inc., Jerrold- Ohio, Inc., and Jerrold Mid-Atlantic Corporation.
3. The defendant, Jerrold Electronics Corporation, was incorporated under the laws of Delaware on April 15, 1955, and succeeded to the assets and business of the Pennsylvania corporation of the same name, which is now dissolved.
4. The defendant, Jerrold Electronics Corporation, is continuing the same business with the same corporate name and under the same management and control as the Pennsylvania corporation.
5. At the end of February 1958, all of the defendant subsidiaries went through corporate procedures to merge into Jerrold Electronics Corporation except Jerrold Northwest, which transferred all of its assets to Jerrold Electronics Corporation and went through dissolution proceedings.
6. The defendant, Jerrold Electronics Corporation, transacts business and has its principal office within the Eastern District of Pennsylvania.
Jerrold Electronics Corporation (hereinafter 'Jerrold') was incorporated under the laws of Pennsylvania in March 1948 by Milton Shapp to engage in the sale of a television booster developed by one of his friends. This device was designed to improve television reception in fringe areas by amplifying the weak signals available there. At Shapp's request, his friend began working on the development of master antenna equipment. The purpose of this equipment was to enable a single antenna to serve a number of television receivers. It was inspired by the numerous antennas rapidly rising on the roofs of television set dealers' business establishments and apartment houses.
Jerrold installed the first operational master antenna system for Montgomery Ward in Baltimore during the summer of 1949. The success of this system resulted in a number of orders from other dealers. At first, this master antenna equipment was sold through the distributors who were handling Jerrold's booster. This proved unsatisfactory, however, because these distributors and their customers lacked the technical training and experience with respect to master antenna systems which was necessary to install and maintain them properly. Consequently, the Jerrold people were constantly called upon to put improperly installed, mal-functioning systems in working order. Jerrold felt compelled to render this time-consuming service in order to protect the reputation of its product. In an effort to solve this problem, it was decided in late 1949 that the master antenna equipment would only be marketed through distributors who had men specially trained in the sale, installation and maintenance of master antenna systems. Distributors who satisfied these requirements were designated 'M' distributors. Jerrold also set up its own sales organization, Mul-T-V Sales Company, in Philadelphia to handle directly all sales of Jerrold equipment in this area. This method proved more satisfactory than the independent 'M' distributors in Shapp's estimation, but financial limitations prevented its use on a larger scale.
In October 1950, Shapp was approached by a group of men from Lansford, Pennsylvania, who were interested in bringing television into their community. The people of Lansford were unable to receive any television signals through the use of conventional equipment because of the town's location. It was possible to receive a signal on a hilltop approximately a mile outside of town, however. They wanted to set up an antenna at this site and hook it up with receivers in the town. Subscribers to their service would pay a connection fee and monthly service charge. Basically, the envisioned system involved the same concept used for dealers and apartment houses of a single antenna for a number of receivers, but on a much larger scale. The difference in size was important, however. Shapp had already discovered that the equipment designed for dealers was inadequate for use in the larger apartment houses and had recently started developing new equipment for this purpose designated 'CL.' In addition, there usually was no problem with the quality of the signal at the antenna in a single building master system, since the dealers' establishments and apartment houses were generally located in strong signal areas. It was, therefore, readily apparent to Shapp that modifications would be necessary in order to install a working master antenna system in a community. It was equally apparent to him that this was a natural and promising area for Jerrold to enter, since there were many communities which, because of distance or topographical features, were in the same predicament as Lansford and had no immediate hope of obtaining television from any other source because of the freeze on the licensing of new television stations in effect at that time.
Shapp and the Lansford group finally worked out a mutually satisfactory arrangement. Jerrold was to install a system using its standard equipment, which the Lansford people would purchase. Jerrold was to use the system as an on-the-spot laboratory to work on the problems it anticipated, discover new problems, and develop the equipment necessary to eliminate them. As it was developed, the new equipment was to be exchanged for the original equipment in the system without additional cost to the Lansford group. A few days later, a similar arrangement was made with a group from Mahanoy City, Pennsylvania. Other groups interested in the same program were turned down because Shapp felt he had taken on all that he could handle in view of the expected difficulties.
The Lansford system was 'turned on' in mid-December 1950 and the Mahanoy City system went into operation in January 1951. Both systems at that time were built with Jerrold's standard equipment designed for showrooms and small apartments. The initial results were deemed successful and the systems received considerable publicity, including articles in the Wall Street Journal and Newsweek magazine, since they were the first significant operational systems of this kind. As a result of the publicity, Shapp was approached by people from hundreds of communities interested in community antenna systems, both as a means of bringing television into their homes and as a profitable investment. These people came from all walks of life. Many of them had little or no technical background or knowledge. Furthermore, the system that went into operation in Lansford in December 1950 was only connected to a few showrooms. With the extension and continual operation of the system, the anticipated problems began to arise. They were of such a magnitude that Shapp's organization was completely tied up analyzing them and designing new equipment to cope with them. Also, there were several instances in which aspiring community system operators had obtained Jerrold's standard equipment through its distributors and attempted to install systems with unsatisfactory results. Under these circumstances, it was decided that no Jerrold equipment would be sold for community purposes until gear adequate to the task had been developed.
Some acquaintance with the technical aspects of a community television antenna system is essential to a full understanding of the contentions of both parties in this matter. This seems to be the most appropriate point to digress from the narrative to describe the nature of such a system and some of the particular problems which faced Jerrold and other companies which entered this field.
There are four parts to a community television antenna system. The first is the antenna site, referred to in the trade as the 'head end.' The second is the apparatus which carries the signal from the antenna into the community, known as the 'run to town.' The third is the 'skeleton system' that is constructed through the town to carry the television signals to the extremities of the area to be covered. Finally, there is the 'tap-off' from the skeleton system which carries the signal to the home of each subscriber to the service.
In addition to the antenna itself, the head end equipment usually includes preamplifiers to increase the signal strength, filters and traps to eliminate unwanted signals, automatic gain control (AGC) to make a signal of fluctuating strength constant, converters (explained below), and amplifiers to send the processed signal on its way to town.
The run to town in most systems consists of cable. As the signal is transmitted through the cable, it diminishes in strength. Therefore, it becomes necessary to insert amplifiers at various points along the way in order to restore the signal to the required level. This feature of signal loss also dictates the use of converters at the head end. The higher the frequency of the signal, the greater the amount of signal loss sustained. This makes it desirable to convert high frequency channels to a lower frequency in order to reduce the amount of loss and, consequently, the number of amplifiers necessary in the system. Converters are also used to change the frequency of a channel when another channel received by the system is of a relatively similar frequency, since it was discovered that otherwise the two channels caused interference with each other during transmission. In later years, microwave has been used instead of cable in locations where the distance from the antenna site to the town was so great that the cost of installing and maintaining cable was prohibitive.
The skeleton system consists of a series of main cables which branch off from the run to town, feeder lines which, in turn, branch off from the main cables, electronic distribution units or non-electronic splitters at each of these junctions which draw off the signal, and such amplifiers as are necessary to keep the signal at a sufficient strength. One of the main problems which primarily concerns the skeleton system, but also affects the run to town, is that of radiation. Unless proper precautions are taken, the signal will escape from the cable. This creates both the danger of interference with the reception of individuals who are able to receive television signals without subscribing to the system's services and the danger of people picking up the escaped signal from the air without paying for the service. Radiation, therefore, imposes limitations on the type of cable that can be used and the strength at which the signal can be carried.
The tap-off consists of a 'T' inserted in the feeder line or a device which pierces it to draw off the signal, which is then delivered to the home by a cable. The television set receives the signal upon connection with a terminal unit at the end of this cable.
The installation of a successful community television antenna system involves more than simply purchasing certain items of equipment and hooking them together. Each system presents different problems giving rise to different equipment needs because of variations in the frequency, quantity and quality of the signals available at the antenna site, the length of the run to town, and the layout of the town itself. Proper planning is necessary to keep equipment costs at a minimum and, at the same time, produce a saleable picture in town. In the first place, the best antenna site must be determined considering the signals present and the distance from town. The run to town must be set up keeping in mind future maintenance problems. Similarly, the most efficient routing of the lines in town must be determined. In this connection, there arises a special problem of negotiating with the utility companies for the use of their polis. This aspect is important, both in terms of costs and acceptability to the community, since there may be an adverse reaction to the erection of additional poles and wires. Then there is the problem of selecting equipment of the proper specifications, including antennas and cable, as well as electronic gear. Finally, it is essential that the equipment be properly spaced along the line so that the input signal is at a proper level.
By the spring of 1951, the Jerrold people felt they were prepared to start selling equipment for community television antenna purposes. As a result of their work in Lansford and Mahanoy City, they had developed a new line of equipment for community antenna systems designated 'W' equipment. After consulting with his engineers and several of Jerrold's commission salesmen who dealt with the distributors, Shapp decided that the W equipment should only be sold with engineering services to insure that the system would function properly. A general policy, therefore, was established of selling electronic equipment to community antenna companies only on a full system basis and in conjunction with a service contract which provided for technical services with respect to the layout, installation and operation of the system.
The first of the service contracts employed by Jerrold in executing this policy was designated Form 103 (Exhibit 35). Under this agreement, Jerrold undertook, among other things, to supply the antenna company with engineering plans and a bill of materials indicating the equipment necessary for the system; to assign an engineer to supervise the installation, test and balance out the system, and instruct the antenna company's personnel in these matters; to repair and replace obsolete, as well as defective and worn out, equipment; and to realign or replace equipment if a change occurred in the frequency of the channels received and distributed by the system (the antenna company was to purchase a converter from Jerrold if the frequency change required one). The antenna company agreed, among other things, to pay a flat fee for the engineering plans and, if it then decided to go on with the project, to pay $ 5 for each connection when made and 25 cents a month for each receiver that remained connected to the system, with a minimum fee of $ 75 a month. The antenna company also agreed to have in its employ a person trained by a Jerrold engineer or at its school in Philadelphia who would be responsible for 'on the premise' maintenance and operation of the system. Paragraph 8 of Form 103 provided:
'8. That in the event Antenna Company desires to receive and distribute the signals of any television stations other than those being received and distributed at the time of the initial installation of the System, Antenna Company agrees to purchase, at the then prevailing prices, whatever additional Jerrold Equipment may be necessary to receive and distribute the desired signals throughout the System, and it is understood that a maximum of three (3) television channels can be so received and distributed in the presently designed System.' Paragraph 12 of the contract provided:
'12. That Antenna Company agrees that it will not install, as part of the System, and Equipment or attachments which in the opinion of Jerrold will impair the operation of the System or impair the quality of television reception and signal distribution capabilities of the System, or that might cause damage to or impair the efficiency of any of the Equipment comprising the System.'
The contract was to remain in effect for five years. According to the testimony in this case, the first sales under this contract were made in late May 1951.
In August 1952, this contract was superseded by Form 103A (Exhibit P-47) and Form 103B (Exhibit P-48). They were basically the same as their predecessor, the principal difference being in the payment provisions. Paragraphs 8 and 12 quoted above remained unchanged.
In October 1953, the Form 103A and 103B service contracts were replaced by the WK-1 Form (Exhibit P-79). The new contract was generally the same as its predecessors. A few changes were made in some of the provisions relevant to the case at bar. The provision contained in paragraph 8 of the earlier contracts
was eliminated. Also, the language formerly appearing in paragraph 12
now appeared in paragraph 8 and was revised to read as follows:
'VIII. Since the parties acknowledge that Jerrold cannot reasonably be required to perform its obligations hereunder if the System comprises electronic equipment other than that manufactured by Jerrold Electronics Corporation, Antenna Company agrees that it will not install, as a part of the System any equipment or attachments which, in the opinion of Jerrold, will impair the quality of television reception and signal distribution capabilities of the System, or which might cause damage to, or impair the efficiency of, any of the Equipment comprising the System.'
Finally, the duration of the contract was reduced from five to two and one-half years.
On March 16, 1954, Jerrold offered its customers two more service contracts designated SP-1 (Exhibit P-99) and SP-2 (Exhibit P-100). The period of their use overlapped that of the WK-1 contract. The SP-1 contract was designed to accompany the sale of new systems and was of six months' duration. The SP-2 contract was designed to make Jerrold service available to existing systems and was of one year's duration. Each of these contracts contained the following provision, similar to those in the earlier contracts:
'Since we cannot reasonably be required to perform our obligations as enumerated in this letter if the system contains electronic equipment other than that manufactured by Jerrold Electronics Corporation, you agree not to install, as part of the system, any equipment or attachments which, in our opinion, will impair the quality of television reception and signal distribution capabilities of the system, or which might cause damage to, or impair the efficiency of, any of the equipment comprising the System.'
III-A. Service Contracts.
Jerrold freely admits that it was its policy from May 1951 to March 1954 not to sell its equipment designed for community antenna systems except in conjunction with a service contract which would assure Jerrold supervision over its installation and maintenance.
It also acknowledges that this policy was generally followed except where sales resistance induced authorized and unauthorized deviations. The Government contends that this policy and practice constitutes an unlawful tie-in under the anti-trust laws because Jerrold is using its market power over its equipment to induce operators to buy its service. Consequently, their freedom of choice is curtailed and competition on the merits with respect to the services is restrained.
The Government concedes that § 3 of the Clayton Act does not apply to this situation because that section, by its terms, only concerns 'goods, wares, merchandise, machinery, supplies, or other commodities.' 15 U.S.C.A. § 14.
It does not apply to tie-ins involving services. The Government asserts, however, that sales upon the condition that the purchaser subscribe to the services of the vendor constitute an unreasonable restraint of trade in violation of § 1 of the Sherman Act.
The defendants claim that this requirement was reasonable and offered evidence on this point, which was received over the objection of the Government which maintained that the contracts were unreasonable per se under the decision in Northern Pacific Railway Co. v. United States, 1958, 356 U.S. 1, 78 S. Ct. 514, 2 L. Ed. 2d 545.
In the Northern Pacific case, supra, the defendant sold and leased land on the condition that the grantee or lessee use its facilities for shipping all commodities produced or manufactured on the land, provided that its rates and services were equal to those of competing carriers. The Supreme Court sustained a summary judgment against the railroad on the grounds that the condition violated § 1 of the Sherman Act. It stated at page 6 of 356 U.S., at page 518 of 78 S. Ct. that 'They (tying agreements) are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a 'not insubstantial' amount of interstate commerce is affected.'
It is clear from the amount of service rendered by Jerrold under its compulsory service contracts that a 'not insubstantial' amount of interstate commerce was affected, particularly in view of the relatively limited market. Jerrold has stated, in response to the Government's interrogatories, that it executed over 120 of these contracts from May 1951 to March 1954. It is also noted that Jerrold reported to the Small Business Administration in August 1954 that it had installed more than 250, or 80%, of the community systems in the United States. Jerrold's income from the 103 series contracts and the WK-1 contracts between the years 1952 and 1957 was approximately proximately $ 870,000. Because of Jerrold's deferred payment policy and the fact that most of these services were performed during the planning and installation stages, it is fair to assume that most of this income represents payment for services rendered between 1951 and 1954, when these contracts were being signed. Furthermore, Jerrold admittedly failed to collect all that was due under these contracts. Therefore, it is apparent that these income figures do not completely reflect the amount of commerce involved.
A more difficult question is presented by the second requirement that Jerrold be shown to have sufficient economic power with respect to its equipment to appreciably restrain free competition in the market for the services it rendered. The minimum amount of economic power required is by no means clear.
Fortunately, the facts of this case obviate the necessity of ascertaining that standard. In resolving this matter, the first task is to determine the relevant market in which to measure Jerrold's power. Since in this aspect of the case we are only concerned with power which will appreciably restrain competition in the market for the services of installing, maintaining and operating community antenna systems, we are necessarily only interested in power over equipment used in community systems. Jerrold admits that, as to the sale of complete community television antenna systems, it was an undoubted leader up until mid-1954, and more than a majority of the new systems from 1950 to mid-1954 were purchased from it.
Indeed, Jerrold consistently advertised throughout this period that at least 75% Of the community systems in the United States were 'Jerrold systems.' Economic power over a product can be inferred from sales leadership. Northern Pacific Railway Co. v. United States, supra, 356 U.S. at page 19, 78 S. Ct. at page 525 (dissent). The Supreme Court also stated in the Northern Pacific case that the requisite economic power can be inferred from the very existence of the tying clauses where no other explanation for their use is offered. The majority of the court appears to feel that this explanation must include a showing of some benefit conferred upon the purchasers in return for their sacrifice of a free choice of alternatives, but also considered the seller's motive.
This is an extremely difficult burden to meet and, in the opinion of this court, it has not been satisfied by the evidence offered by the defendants in the case at bar. Another fact from which economic power can be inferred is the desirability of the tying product to the purchaser. Northern Pacific Railway Co. v. United States, supra, 356 U.S. at page 19, 78 S. Ct. at page 525 (dissent).
Mr. Shapp has stated that Jerrold's highly specialized head end equipment was the only equipment available which was designed to meet all of the varying problems arising at the antenna site. It was thus in great demand by system operators. This placed Jerrold in a strategic position and gave it the leverage necessary to persuade customers to agree to its service contracts. This leverage constitutes 'economic power' sufficient to invoke the doctrine of per se unreasonableness.
While the trial judge is of the opinion that the Government has established both of the prerequisites necessary for treating Jerrold's policy and practice of selling its community equipment only in conjunction with a service contract as unreasonable, per se, under the Northern Pacific decision, he does not believe that the inquiry must end there in view of the rather unique circumstances involved in this particular case. Any judicially, as opposed to legislatively, declared per se rule is not conclusively binding on this court as to any set of facts not basically the same as those in the cases in which the rule was applied. In laying down such a rule, a court would be, in effect, stating that in all the possible situations it can think of, it is unable to see any redeeming virtue in tying arrangements which would make them reasonable. The Supreme Court of the United States did not purport in the Northern Pacific case to anticipate all of the possible circumstances under which a tying arrangement might be used. Therefore, while the per se rule should be followed in almost all cases, the court must always be conscious of the fact that a case might arise in which the facts indicate that an injustice would be done by blindly accepting the per se rule. In this case, the court felt that the facts asserted by the defendants in their pre-trial statement and trial brief warranted hearing their testimony and argument on the issue of reasonableness. It was partly influenced in this decision by the fact that the history of the industry was brief, and the position of the defendants did not seem to require a prolonged economic investigation -- factors which the Supreme Court felt justified the per se rule.
When Jerrold was ready to place its W equipment on the market in May 1950, it was confronted with a rather unique situation. In the first place, while it was convinced that its equipment would work, Jerrold recognized that it was sensitive and unstable. Consequently, modifications were still being made. Jerrold had further misgivings because its experience was limited to two locations. New situations were bound to arise in other communities which would require further adjustments in the equipment. Secondly, as has already been noted, there were hundreds of people anxious to set up community antenna systems. Most of these people had no technical background at all. None of them had any experience with community systems since, at that time, there was only one other operating system in the country besides the Jerrold systems in Lansford and Mahanoy City.
In addition, many of these people did not have solid or extensive financing to back their proposed venture. Finally, Jerrold had directed most of its resources towards the development of its community equipment. It was of utmost importance to it that its investment prove successful.
Shapp, his engineers and salesmen, envisioned widespread chaos if Jerrold simply sold its community equipment to anyone who wanted it. This fear was based on more than mere speculation. Experience with the less complicated dealer and apartment systems bolstered their view, as did the history of community systems installed by operators on their own with Jerrold's standard equipment obtained from its M distributors. A rash of systems with unsatisfactory pictures could not be tolerated. The amount of capital necessary to start a system was substantial. Interest would wane rapidly if the systems installed did not consistently produce satisfactory results. Not only Jerrold's reputation but the growth of the entire industry was at stake during the development period. In addition to its reputation, Jerrold was also dependent upon successful system operation for payment. Many operators were not in a position to pay cash for the necessary equipment and the risks were such that outside financing could not be obtained. Therefore, payment was often contingent on the success of the system. It appeared that it was cheaper and more practical to insure that a system was properly installed in the first place than to attempt to get it operating once it was strung up. Furthermore, as has already been noted, use of existing utility poles was an important cost and public relations factor. The utility companies were reluctant to have men of unknown ability working on their poles. Therefore, it was desirable that the system be installed under the supervision of men whose ability was known to the utility companies through other dealings. For these reasons, it was decided that community equipment should be sold with engineering services in order to foster the orderly growth of the industry on which the future of Jerrold depended.
The Government does not dispute the reasonableness of the contracts for services but objects to the fact that they were compulsory. The crucial question, therefore, is whether Jerrold could have accomplished the ends it sought without requiring the contracts. It has been suggested that Jerrold could have accomplished the same results by addressing the persuasive argument it made to this court to its customers and leaving use of the contracts on a voluntary basis. See United States v. International Business Machines Corp., D.C.S.D.N.Y.1935, 13 F.Supp. 11, 19-20, affirmed 1936, 298 U.S. 131, 56 S. Ct. 701, 80 L. Ed. 1085. This argument assumes that Jerrold and the industry could survive the 'transitory disloyalties' this approach would entail. Jerrold's service was costly and many operators, because of their limited finances, preferred to do-it-themselves and save the expense. Furthermore, Jerrold's limited facilities required that they only commit themselves to a certain amount of work. If Jerrold's equipment was available without a contract, many impatient operators probably would have attempted to install their systems without assistance. Consequently, unless Jerrold instituted a policy of compulsory service, it could expect many operators to buy its equipment without a contract, despite the strong reasons for having one, and the effort spent to present them. Jerrold's supply of equipment was limited. Unrestricted sales would have resulted in much of this equipment going into systems where prospects of success were at best extremely doubtful. Jerrold's short and long-term well-being depended on the success of these first systems. It could not afford to permit some of its limited equipment to be used in such a way that it would work against its interests. A wave of system failures at the start would have greatly retarded, if not destroyed, this new industry and would have been disastrous for Jerrold, who, unlike others experimenting in this field such as R.C.A. and Philco, did not have a diversified business to fall back on but had put most of its eggs in one precarious basket in an all out effort to open up this new field. Compare the facts in Northern Pacific Railway Co. v. United States, supra, and United States v. General Motors Corporation, 7 Cir., 1941, 121 F.2d 376, certiorari denied 1941, 314 U.S. 618, 62 S. Ct. 105, 86 L. Ed. 497, relied on by the Government. For these reasons, this court concludes that Jerrold's policy and practice of selling its community equipment only in conjunction with a service contract was reasonable and not in violation of § 1 of the Sherman Act at the time of its inception. Compare General Talking Pictures Corporation v. American Telephone & Telegraph Co., D.C.D.Del.1937, 18 F.Supp. 650.
The court's conclusion is based primarily on the fact that the tie-in was instituted in the launching of a new business with a highly uncertain future. As the industry took root and grew, the reasons for the blanket insistence on a service contract dissappeared. The development of the community antenna industry throughout the country was not uniform. It advanced and became established most rapidly in the East, particularly in Pennsylvania. Progress was slower in the Northwest and Southwest. Thus, when the reasons for this policy ceased to exist in the East, there were still good reasons for its continuance in other areas. Oral reports of successful systems 3,000 miles away are not as convincing as a number of failures nearby. Jerrold recognized this fact and abandoned its policy gradually. In March 1954, it dropped the policy as a general rule and thereafter applied it on an area-by-area and case-by-case basis.
Mr. Shapp candidly admits that he can 'not make the assertion that in each stage of this evolution our timing has been exactly correct.'
It seems clear that there is bound to be some lag in a situation such as this. On the present record, it would be a matter of speculation to determine when Jerrold's policy was no longer justified in various areas of the country. In view of the Northern Pacific case, it would seem that Jerrold has the burden on this point. Since it is not necessary for purposes of granting the relief requested to find more than that at some time during its use, Jerrold's tie-in of services to equipment became unreasonable,
this court makes no finding as to when this occurred. It is content to say that, while Jerrold has satisfied this court that its policy was reasonable at its inception, it has failed to satisfy us that it remained reasonable throughout the period of its ...