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MORTON v. NATIONAL DAIRY PRODS. CORP.

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


July 17, 1968

Eleanor G. Morton, et al.
v.
National Dairy Products Corp.

John W. Lord, Jr., J.

The opinion of the court was delivered by: LORD, JR.

JOHN W. LORD JR., J.:

This suit involves an alleged violation of the Clayton Antitrust Act, as amended by § 2(a) of the Robinson-Patman Act. 38 Stat. 730 (1914); 49 Stat. 1526 (1936), 15 U.S.C. § 13(a). Specifically, plaintiffs contend that the defendant violated these antitrust statutes through its out-of-state sales of milk to Pennsylvania chain store purchasers at prices in variance with those prices the defendant charged on Pennsylvania into-the-store sales made pursuant to the Pennsylvania Milk Control Act. The case was tried by the Court, without a jury, during the course of a fifteen day trial, whereupon the Court makes the following Findings of Fact and Conclusions of Law:

 Findings of Fact

 The Parties

 1. The plaintiffs (hereafter "Pennbrook") are a partnership operating the Pennbrook Milk Company, a milk processing concern with its single plant located in Philadelphia, Pennsylvania. Pennbrook Milk Company is a family owned and operated business. The owners also operate Pennbrook Vending Company and Pennbrook Ice Cream Company. The Milk Company owns the Vending Company. The Ice Cream Company is owned by Mrs. David M. Gwinn, the wife of the managing partner of the Milk Company.

 2. The three Pennbrook enterprises are conducted on a combined basis, in a single building, with the same processing, office, sales and distribution personnel.

 3. The defendant National Dairy Products Corporation (hereafter "Sealtest") is a major national dairy corporation and operates the division of Sealtest Foods which conducts a milk processing and sales business in southeastern Pennsylvania, southern New Jersey and Delaware.

 Relevant Geographic Market

 4. The relevant geographic market, in which Pennbrook, Sealtest, and other milk companies compete in the sale of milk and dairy products, as demonstrated by the evidence produced during the course of the trial, is the distinct geographic market encompassing southeastern Pennsylvania, southern New Jersey and Delaware, termed the lower Delaware Valley.

 Relevant Functional Market

 5. Functionally, the above geographic market breaks down into two categories: (1) retail, consisting of home delivered or home service sales, and (2) wholesale, consisting of sales to hotels, restaurants, hospitals, industrial plants, vending customers, food service customers and stores.

 6. The usual industry practice of milk companies dealing in the relevant geographic market is not to divide the wholesale market into classes or types of customers, but to treat all wholesale customers as one functional market.

  7. Pennbrook does not compete with Sealtest in the retail market because Pennbrook does not make any retail sales, although both compete in the wholesale market for a variety of customers.

 8. Milk companies such as Pennbrook and Sealtest are subject to stringent price regulation in both Pennsylvania and New Jersey. These companies are regulated in Pennsylvania by the Pennsylvania Milk Control Commission (hereafter "PMCC") and by the Office of Milk Industry (hereafter "OMI") in New Jersey.

 Market Conditions

 9. Milk companies do compete within the relevant market, although free price competition is hampered in the intrastate New Jersey and Pennsylvania markets as each seller must conform to the price floors established under the aegis of the local milk control laws.

 10. From Pennbrook's inception in 1941, its largest single customer was Penn Fruit, a Pennsylvania corporation, which operates a chain of supermarkets in Pennsylvania, New York, New Jersey, Delaware and Maryland.

 11. Wholesale customers of milk companies demonstrate market mobility in changing their sources of supply from one milk company to another within the relevant market.

 12. Although Pennbrook, Sealtest and several other milk companies agreed in writing, in July 1961, to eliminate advertising payments to wholesale customers, Pennbrook subsequently made substantial advertising payments in breach of this agreement.

 13. In addition, Pennbrook made loans of capital and refrigeration equipment in attempts to side-step the impact of the uniform price floors imposed by the PMCC.

 14. Pennbrook acquired the business of the Quaker City Wholesale Grocers Association (Penn Treaty Stores) through advertising payments and in 1962 Pennbrook's volume of business with these stores increased three-fold to $343,000.00 per year. By 1964 Pennbrook was paying in excess of $100,000.00 to its customers per year.

 15. A significant factor in the relevant wholesale market in recent years has been a rapid increase in the volume of milk sold in vending machines. Pennbrook gives large discounts to its vending customers and this practice has enabled Pennbrook's share of the wholesale vending business to increase at a faster rate than the increase in the volume of the overall vending business sales. Pennbrook now handles approximately 60 to 70% of the vending business in the relevant wholesale market.

 16. Clearly, the two major market factors in the lower Delaware Valley milk market in the past ten years have been the trend toward the vertical integration of wholesale marketing facilities and the attempts to avoid local milk price floors through devices involving interstate sales of milk.

 17. Since the Food Fair Stores vertical integration by acquiring the Hernig Milk Company in 1957, there has been a clear trend in the lower Delaware Valley wholesale market toward vertical integration and consolidation. Chain stores have acquired milk companies, milk companies have opened stores, milk companies have used facilities in other states to serve regional or national chains of stores, farmer cooperatives have acquired milk companies, milk companies have acquired other milk companies and chain stores have constructed their own milk plants.

 18. When Food Fair acquired Hernig Milk Company and then worked out its arrangement with Abbott's in New Jersey, first Pennbrook and then Sealtest lost the Food Fair business.

 19. When Frankford-Unity Stores acquired Quaker Dairy in 1963 or 1964, Pennbrook lost that wholesale business. When Southland Corporation acquired Harbison's Dairy, Sealtest lost that wholesale business. When A & P built its own milk plant, Sylvan Seal "practically lost" its milk producing business.

 20. The data compiled in Exhibit D-27 is correct and Sealtest's percentage of the relevant milk market (total) was 18.13% in 1963 and 17.25% in 1965.

 21. In view of the continuing changes in the market and the loss by Sealtest of Food Fair, 7-11 Stores, Molish, Martel and others, there is no basis to conclude that Sealtest dominates the wholesale market.

 22. Changes in transportation and refrigeration of milk have led to less dependence on local milk supplies and milk is sold and distributed on a multi-state basis.

 23. It is not unusual for a large chain of supermarkets to buy all of its milk and dairy products from one milk company.

 24. When the supermarket chains in the lower Delaware Valley, such as Penn Fruit, faced the competition from Food Fair's acquisition of Hernig Milk Company in the late 1950's they recognized the advantages of acquiring milk in states not subject to the price and other regulations which existed in Pennsylvania.

 State Regulation

 25. Price floors and methods of distribution vary between southeastern Pennsylvania, southern New Jersey and Delaware either because of variations in the scheme of state milk regulation or the absence of state regulation, as in Delaware.

 26. Because of such variations both Pennbrook and Sealtest have been able to charge customers in different states different prices.

 27. During the period from 1960 to date the wholesale prices in Pennsylvania have been the highest of the three states and Delaware the lowest.

 28. At time of trial a half-gallon of milk was selling out-of-the-store in Pennsylvania at 57 cents and in New Jersey at 45 cents - a price difference of over 26%.

 29. In addition, New Jersey had a platform price which permitted a milk company to sell at a lower price at its plant in New Jersey than it could sell in Pennsylvania.

 30. Since 1957 Sealtest has operated a milk plant in Camden, New Jersey, from which Sealtest distributes milk to the three-state Delaware Valley area.

 31. Sealtest's Camden plant was designed and built to handle distributors' vehicles in an economic fashion.

 32. Since 1958 some of Sealtest's Pennsylvania distributors have been picking up milk at its Camden platform.

 33. These Pennsylvania distributors purchased milk at the New Jersey OMI distributor (or subdealer) price, which was lower than the Pennsylvania price.

 34. The OMI order (Exhibit D-22) established quantity pricing for the distributors - the greater the quantity purchased, the lower the per unit price.

 35. Also, under the OMI order the distributor was granted a hauling allowance which varied with the distance it transported the milk.

 36. To meet the competition from Pennbrook and others, in August 1961 Sealtest began to sell milk at its Camden platform to Penn Fruit.

 37. Under the OMI order Sealtest charged Penn Fruit 18 3/4 cents per quart less a hauling allowance of 3/4 cents per quart, or a net price of 18 cents per quart.

 38. Pennsylvania did not have a platform price comparable to the price in New Jersey - the Pennsylvania price established by PMCC was 24 cents per quart.

 39. In 1960 and 1961 milk companies, including Pennbrook and Sealtest, believed that the Pennsylvania wholesale prices were too high.

 40. These milk companies supported price relief to the chain stores in Pennsylvania in the form of quantity discounts and platform pricing.

  41. Quantity discounts were adopted by PMCC in 1964, but they did not provide sufficient price relief for the chain stores.

 42. In 1962 Pennbrook petitioned PMCC to establish a platform price in Pennsylvania equal to that in New Jersey, because the PMCC order prevented Pennbrook from selling milk at the New Jersey price.

 43. Platform pricing for chain stores permits the chains to transport the milk from the milk company's plant to their stores at a lower cost.

 44. However, PMCC did not permit platform pricing to chain stores until 1967.

 45. In the meantime, New Jersey recognized that chains of supermarkets have the economic resources to go into the milk business themselves and, therefore, granted milk dealer's licenses to the chains and permitted milk companies to lease processing facilities to the chains.

 46. Pennbrook has a plant in Pennsylvania and none in New Jersey.

 47. Sealtest has plants in both Pennsylvania and New Jersey.

 Meeting Competition

 48. By the late 1950's the supermarket chains in the Delaware Valley were looking for methods by which they could improve their milk margins, because Food Fair had acquired Hernig Milk Company and was thereby obtaining milk at less than PMCC prices.

 49. In June and July 1960 Penn Fruit and Martin Century met to work out a joint venture between the two companies by which Martin Century would supply all Penn Fruit's milk and ice cream requirements. Martin Century offered Penn Fruit a cost saving or price reduction of 26% to 28%.

 50. After Penn Fruit took the option on the Bucks County milk plant, Penn Fruit negotiated with Martin Century for most of 1961.

 51. Sealtest was told by Penn Fruit that if Penn Fruit accepted the Martin Century proposal, Sealtest would lose all of the Penn Fruit business.

 52. In 1960 Penn Fruit was Sealtest's largest wholesale customer in the Delaware Valley.

 53. Sealtest was the sole supplier of milk and ice cream to 27 of Penn Fruit's 45 Pennsylvania stores, and served ice cream in the remaining 18 stores.

 54. Pennbrook supplied Penn Fruit with only milk in the remaining 18 stores in Pennsylvania.

 55. Although both Sealtest and Pennbrook paid advertising to Penn Fruit prior to 1960, as early as 1958 Pennbrook began to offer increased rebates to Penn Fruit in exchange for some of Sealtest's business with Penn Fruit; Pennbrook offered to increase its advertising payments to Penn Fruit in exchange for five Penn Fruit stores with an annual milk volume of $110,000.00.

 56. Faced with the competition of the Food Fair-Hernig arrangement, in 1960-1961 Penn Fruit sought to improve its margins on milk.

 57. Penn Fruit contacted Sealtest in August 1960, and advised Sealtest that it was pursuing ways to improve its purchase of dairy products.

 58. Penn Fruit told Sealtest that Penn Fruit had taken an option on a milk plant in Doylestown, and that Martin Century Farms was going to manage it and process milk for the Penn Fruit stores. Pennbrook was also asked to consider processing milk for Penn Fruit on a joint venture basis.

 59. Pennbrook also was told that Penn Fruit was considering having its own processing facilities or entering into a joint venture with another dairy, and that it had a milk plant under option in Doylestown.

 60. Pennbrook contacted its milk consultant to formulate an offer to Penn Fruit.

 61. On August 17, 1960 Pennbrook and its consultant reviewed the basic cost figures, and tentatively concluded that it could offer milk to Penn Fruit at its platform for 16 cents per quart or deliver it to the Penn Fruit stores for 19 cents per quart.

 62. Pennbrook concluded that Penn Fruit could deliver the milk more economically than Pennbrook because the Penn Fruit drivers were not paid commissions, which the Pennbrook drivers received.

 63. A delivery cost savings of more than 3 cents per quart would be realized.

 64. In any event, whether milk was sold at the platform for 16 cents or delivered to the stores for 19 cents, a very good profit would be realized by Pennbrook.

 65. Thereafter, there were a series of meetings among the Pennbrook personnel and between Pennbrook and Penn Fruit to discuss "how we might facilitate a joint operation".

 66. By the end of August 1960 Pennbrook produced a format for a joint venture with Penn Fruit.

 67. On August 30, 1960 Pennbrook met with Penn Fruit and the next day forwarded its operating statement to Penn Fruit.

 68. By September 15, 1960 Pennbrook's consultant produced his written analysis, in which he discussed certain methods of furnishing milk to Penn Fruit, including the incorporation of Pennbrook and the sale of stock to Penn Fruit.

 69. Again, both Pennbrook and the consultant recognized that Pennbrook could provide Penn Fruit with milk at the platform for 16 cents per quart or deliver to the stores for 19 cents per quart.

 70. Later in September Penn Fruit requested Pennbrook to submit a written proposal, and Pennbrook and its consultant began its preparation, with the guidance of David M. Gwinn.

 71. Pennbrook met with Penn Fruit in October 1960 and submitted its written proposal dated October 14, 1960.

 72. In its written proposal Pennbrook offered to deliver milk to all the stores of Penn Fruit for 19 1/2 cents per quart, a price substantially less than the PMCC minimum price of 23 to 25 cents.

 73. Pennbrook's offer, which was equivalent to a platform price of 16 1/2 cents, was predicated on certain cost savings which Pennbrook felt justified the lower price.

 74. Penn Fruit advised Sealtest that it had received a written proposal from Pennbrook. Sealtest made some attempts to determine the details of Pennbrook's offer, and Penn Fruit described some of its negotiations with Pennbrook.

 75. Although Sealtest was unable to determine the exact price of Pennbrook's offer, Sealtest was able to learn from Penn Fruit that Pennbrook's price was somewhat lower than the price which Sealtest proposed and Penn Fruit accepted.

 76. Pennbrook's proposal to Penn Fruit was also predicated on obtaining the business which Sealtest had with Penn Fruit in the Delaware Valley.

 77. Sealtest understood from Penn Fruit that, if Pennbrook's proposal were accepted by Penn Fruit, Sealtest would lose its Delaware Valley area business with Penn Fruit.

 78. In an effort to retain its business with Penn Fruit, Sealtest proposed by letter of April 10, 1961 to deliver milk to Penn Fruit at Sealtest's Camden plant.

 79. Sealtest's proposal was not predicated in any way on its obtaining any milk business from Pennbrook or on obtaining additional business in other products or other states; rather, Sealtest made its proposal to retain the milk business it already had with Penn Fruit in the three-state area.

  80. Sealtest's proposal was accepted in the spring of 1961, and Penn Fruit began to pick up milk in Camden in August 1961 and to transport the milk in Penn Fruit trucks to Pennsylvania for resale in its stores.

 81. Pennbrook's proposal to Penn Fruit of October 14, 1960 was still open and under consideration by Penn Fruit when Penn Fruit accepted Sealtest's proposal.

 82. Moreover, when Sealtest began to deliver milk to Penn Fruit in Camden in August 1961, Pennbrook was still negotiating with Penn Fruit.

 83. Pennbrook's managing partner and its general manager both admitted that Pennbrook offered to sell its facilities to Penn Fruit, and offered to operate the plant for Penn Fruit under a management contract for a term of years.

  84. This separate offer of Pennbrook was discussed between Penn Fruit and Pennbrook during 1961 and into 1962.

  85. Penn Fruit advised Sealtest of this separate Pennbrook offer in the fall of 1961, and Sealtest believed that it was an additional threat to its business with Penn Fruit.

  86. Also, Penn Fruit received an offer from Country Maid Dairy in the summer or fall of 1961.

  87. Sealtest began to deliver to Penn Fruit at Camden because it believed that such an arrangement was the only practical and legal method by which it could retain the milk business it then had with Penn Fruit.

  88. The prices which Sealtest charged Penn Fruit in Camden were the OMI distributor prices.

  89. Sealtest's price to Penn Fruit was 18 cents per quart at Sealtest's platform in Camden; Pennbrook's price to Penn Fruit was 19 1/2 cents per quart delivered, or 16 1/2 cents per quart at Pennbrook's Philadelphia platform.

  90. Sealtest's proposal was designed to meet the competition of Pennbrook and other milk companies for Penn Fruit's Pennsylvania stores.

  91. The prices which Sealtest charged Penn Fruit in Camden were available to other wholesale customers of Sealtest.

  92. Two other customers of Sealtest - Molish and Martel - also bought milk at Sealtest's Camden platform. The prices charged Molish and Martel were somewhat higher than the prices to Penn Fruit because (1) those customers purchased fewer products and the costs varied, and (2) the OMI quantity pricing did not permit Sealtest to charge prices as low as the Penn Fruit prices.

  93. At a later date Sealtest lost both Molish and Martel to Martin Century and other competitors.

  94. During a period between 1963 and 1967 Sealtest delivered milk to Penn Fruit, and during a part of that period to Molish and Martel, at Sealtest's distribution depot in Claymont, Delaware because the New Jersey Supreme Court held that these wholesale customers were not entitled to distributor prices in New Jersey.

  95. The leased Claymont depot was similar to Sealtest's depots in Washington and Baltimore.

  96. In 1966 OMI in New Jersey issued Penn Fruit a milk dealer's license and Sealtest began to process milk for Penn Fruit in Camden under a lease of facilities arrangement.

  97. Sealtest began processing milk for Acme at Camden in July 1966, which milk Acme delivers to its stores throughout the Delaware Valley.

  98. Prior to July 1966 Sealtest sold some products to Acme, and Sealtest entered into the processing arrangement to retain this business because Acme was going to build its own processing plant.

  99. Pennbrook recently contacted Penn Fruit and discussed Pennbrook's attack on the constitutionality of the Pennsylvania Milk Control Law to see if Pennbrook can obtain the Penn Fruit business.

  100. Pennbrook has also discussed with Penn Fruit obtaining Penn Fruit's business if some part of the wholesale market in Pennsylvania can be removed from price control.

  Cost Justification

  101. It costs a milk company less to deliver milk to its wholesale customers at the platform of the milk company's plant or distribution depot than to deliver it to the store of the customer.

  102. When Penn Fruit began purchasing milk from Sealtest in Camden, Penn Fruit employees began transporting the milk in Penn Fruit trucks to its stores, whereas previously Sealtest employees had been transporting the milk in Sealtest trucks.

  103. Penn Fruit was and is able to perform the delivery function at a lower cost than either Pennbrook or Sealtest.

  104. Before Sealtest submitted its proposal to Penn Fruit it analyzed the cost savings involved to determine that the prices proposed were justified by cost savings.

  105. All Sealtest's wholesale customers, whether store customers or others, are served by the same routes and vehicles and are part of the same pool of costs.

  106. Therefore, in comparing costs all Sealtest's wholesale customers must be treated as a unit.

  107. In its cost study (Exhibit D-23) Sealtest (1) computed its costs under its "full service" system of delivering to stores with its own trucks and drivers and performing in-store services of rotating product, etc. and (2) its costs under a "limited service" system of turning over the milk to the customer at the platform of Sealtest's plant. 108. The computation revealed the following savings, expressed as a percentage of the sales dollar or selling price: delivery expense 14.4% selling expense 5.0 general and administrative expense 2.4 21.8%

19680717

© 1992-2004 VersusLaw Inc.



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