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EVANS v. S. S. KRESGE CO.

May 13, 1975

John Evans, Trustee in Bankruptcy for Hempfield Stores, Inc., a Bankrupt, Plaintiff
v.
S. S. Kresge Co., Defendant


McCune, D.J.


The opinion of the court was delivered by: MCCUNE

McCUNE, D.J.:

 Plaintiff, trustee in bankruptcy for Hempfield Stores, Inc., formerly Skat-Zap, Inc. (Hempfield) initiated this antitrust action in 1971 complaining that defendant, S. S. Kresge Company (Kresge), violated Section 1 of the Sherman Act, 15 U.S.C.A. § 1 which provides, inter alia, that "every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade . . . among the several States . . . is declared to be illegal." Plaintiff claims injury and seeks damages under § 4 of the Clayton Act, 15 U.S.C.A. § 15.

 Plaintiff has filed a cross motion for partial summary judgment in which it asks the court to determine that certain of the practices complained of are violative of § 1 as a matter of law (per se violations). Plaintiff's brief in opposition to defendant's motion for summary judgment addresses each of the alternative arguments advanced by defendant in support of its motion. First, plaintiff contends that the jurisdiction of the court over the subject matter of this complaint has been established. In the alternative, plaintiff contends that the jurisdictional issue is inextricably intertwined with determination of the merits thereby precluding entry of summary judgment. Plaintiff also argues that the issue of subject matter jurisdiction must be determined by the trier of fact, a jury in this case, since defendant has demanded a jury trial. Second, as we have already mentioned, plaintiff claims that the activities complained of are per se violative of § 1 of the Sherman Act. Finally, plaintiff denies that Hempfield's participation in the alleged price-fixing scheme and various other alleged restraints is a bar to its recovery.

 Also before the court are a counterclaim by defendant seeking monies allegedly owed to it for unpaid rent and other itemized expenses and plaintiff's counterclaim in which plaintiff alleges that rent already paid for two months constitutes a preference under § 60 of the Bankruptcy Act, 11 U.S.C.A. § 96.

 The court has heard oral argument on the respective motions for summary judgment and has considered the briefs of both parties.

 We turn now to the facts which give rise to the present controversy.

 Facts

 Defendant Kresge is incorporated under the laws of Michigan. It operates department stores in 48 states, the District of Columbia and several foreign countries. Some of those stores use the Kresge name while others operate under the name "K-Mart" which is defendant's registered exclusive service trade name.

 Defendant has used the "K-Mart" trade name in an effort to develop a reputation as a low mark-up, highly competitive merchandiser selling quality merchandise at discount prices. From its inception the plan was designed and its success was dependent on high volume sales with a low per item profit margin. Kresge felt that the best way to achieve high volume sales was to draw on the potential buying power of those who made frequent food purchases. However, since Kresge had no prior experience in food merchandising and did not have any source of distribution, it elected to license its registered trade name to independent food store operators who would conduct a K-Mart Food Store operation as part of or adjacent to a K-Mart department store. This arrangement, it was felt, would provide "one-stop shopping" and enhance customer acceptance of the K-Mart program. This action is a direct result of two such license agreements entered into between Hempfield (Skat-Zap) and Kresge.

 Prior to August 12, 1963, two of the incorporators of Hempfield, Frank Zapalla, Jr., and Frank Nascone were the owners of a real estate development firm known as Maret Corporation which solicited and obtained long term lease commitments from Kresge for department stores in two shopping centers, one located in Westmoreland County, the other in Allegheny County. However, the commitments were contingent upon Kresge's ability to obtain a licensee who would operate a grocery store at each location. Hempfield was incorporated to operate the grocery stores.

 Hempfield was incorporated on August 12, 1963, under the name of Skat-Zap, Inc. The incorporators and initial shareholders were Zapalla, Nascone, and Herman Skatell. Shortly thereafter on September 23, 1963, Hempfield and Kresge entered into a license agreement which authorized Hempfield to use the name "K-Mart Foods" for a period of twelve years at a retail supermarket located next door to the Kresge department store in the Westmoreland County shopping center. The store was designated K-Mart Food Store No. 4032. Approximately eight months later, the same parties concluded a second agreement which authorized Hempfield's use of the name "K-Mart" for a ten-year period at a store located in the Allegheny County shopping center. Kresge designated this K-Mart Food Store No. 4064.

 Pursuant to these agreements, Hempfield opened Food Stores 4032 and 4064 in 1964 and continued to operate both until July, 1969, at which time the leases were terminated. Shortly thereafter, Hempfield filed a petition in bankruptcy. *fn3"

 During the years of its operation Hempfield went through a succession of ownerships. In 1967, a joint venture entity of which Gerald Loevner was the partner-in-charge assumed control of all outstanding shares until January, 1969, when Anthony Polito, who had been associated with the supermarkets in various capacities since 1965, purchased all Hempfield stock.

 While the grocery supermarket and the department store at each K-Mart location were designed to appear to the public as a single entity providing "one-stop shopping," in fact, the stores were independently operated. None of the goods sold by Hempfield was permitted to carry the K-Mart or any other Kresge brand name. Nor was Hempfield permitted to use the name "K-Mart" on its checks, its business stationery or even its pricing labels. Neither sold any goods or services to the other and Kresge did not dictate Hempfield's source of supply.

 The record reveals the major supplier of Hempfield's groceries was a Pennsylvania wholesaler, Fox Grocery Company, a large local grocery outlet, which was located in the area of both Hempfield stores. Plaintiff alleges that it also received a substantial quantity of goods via direct shipment from out of state suppliers which amounted to in excess of $400,000.00 per year at cost. However, it appears that the bankrupt's records are incomplete in many respects. The parties have been unable to determine exactly what volume of purchases Hempfield made from out of state sources, from whom such purchases were made and whether the goods were actually shipped in from out of state or merely billed from out of state addresses.

 It appears that the total retail volume of both Hempfield stores was in the vicinity of four million dollars per year, *fn4" almost all of which came from the sale of groceries although both stores sold the usual non-food items customarily found in grocery stores, e.g., health and beauty aids. *fn5"

 It is undisputed that Hempfield's sales all occurred in the communities where its two stores were located.

 The essence of the complaint is that defendant, through various provisions of the license agreements and the rules and regulations which supplemented those agreements, unlawfully sought to regulate certain aspects of Hempfield's business in violation of Section 1 of the Sherman Act. It is not necessary to set forth the various provisions of the license agreements in detail. In substance, they require, inter alia, that Hempfield (1) charge prices identical to those charged by Kresge on "like items," i.e., items sold by both the food stores and the department stores which prices were established by defendant in the event the parties were unable to arrive at a mutually agreeable price; (2) maintain merchandise "competitive" *fn6" in price with the same or similar goods offered for sale in the trading area; (3) limit non-food merchandise offered for sale to specific categories of goods; (4) refrain from entering into fair trade agreements; (5) refrain from issuing trading stamps without express permission from Kresge; and (6) use certain equipment furnished by defendant at Food Store 4064 (Count II).

 Plaintiff alleges that the above listed restraints "contributed to Hempfield's business failure." In plaintiff's view, the first of the above mentioned restraints resulted in a horizontal price-fixing arrangement which is a per se violation of § 1; alleged restraints 2 through 5 interfered with Hempfield's ability to exercise its independent business judgment; and alleged restraint 6 was an unlawful tying agreement.

 Defendant denies that any or all of the practices complained of violated the Sherman Act. Furthermore, it denies that any of the alleged restraints contributed to Hempfield's business failure which it attributes to bad management, insufficient capitalization and excessive debt structure.

 From time to time, Kresge sent employees to inspect both stores for compliance with the terms of the license agreements and the rules and regulations. Plaintiff refers to these periodic check-ups as "policing" since, if violations of the license agreements were found to exist, defendant, in effect, issued citations. It appears that as a result of such inspections, Hempfield was directed on several occasions to remove certain unauthorized merchandise or to discontinue its sale when the stock on hand was exhausted. *fn7" The record also indicates that comparative price checks were made on grocery items to see if they were competitive with other supermarkets in the area. *fn8" Defendant also prepared and issued Identical Pricing Books which were designed to insure that "like items" were sold at identical prices.

 In response to defendant's interrogatories, plaintiff has indicated that Hempfield priced its merchandise using the following guidelines as to like items:

 
Merchandise sold in common by both defendant and the Bankrupt was sold at prices dictated by defendant, except during the approximate periods from March, 1965 to October, 1965 and from October, 1968 to March, 1969. During those periods, such merchandise was sold at prices determined in accordance with the Fox Grocery Company gross profit pricing structure designed to produce an overall budgeted gross profit figure of approximately 17.9% to 18.5%. *fn9"

 For merchandise not sold in common:

 
The Bankrupt attempted to sell merchandise not sold in common at prices determined in accordance with the Fox Grocery Company gross profit pricing structure designed to produce an overall budgeted gross profit figure of approximately 17.9% to 18.5% as follows:
 
1965 and 1966: 17.9% at both stores
 
1967: 18.5% at both stores
 
1968, Jan. to Oct.: 18.5% at both stores
 
Oct. 1968 to Mar. 1969: 18.1% at Food Store 4064 and 18.5% at Food Store 4032.
 
At various times throughout the entire period, however, the Bankrupt was required to sell merchandise at prices lower than the prices determined as above. *fn10"

 From the inception of this law suit, Kresge has accepted as true most of plaintiff's allegations regarding pricing requirements, purchasing restrictions and the other requirements contained in the license agreements. However, defendant differs drastically with plaintiff on what legal conclusions are to be drawn from the facts.

 With this background, we will proceed to examine the issues presented by the motions before us.

 I

 Discussion of the Jurisdictional Issue

 Although substantive and jurisdictional issues are sometimes confusingly described in terms of the "effect" of particular conduct upon commerce as if a common question were presented, see e.g., Las Vegas Merchant Plumbers Ass'n v. United States, 210 F.2d 732, 739-740, n. 3. (9th Cir. 1954), cert. denied, 348 U.S. 817, 75 S. Ct. 29, 99 L. Ed. 645, the substance of the two inquiries is not properly the same. Ford Wholesale Co. v. Fibreboard Paper Products Co., 344 F. Supp. 1323 (N.D. Calif. 1972), aff'd, 493 F.2d 1204 (9th Cir. 1974), cert. denied, 419 U.S. 876, 95 S. Ct. 138, 42 L. Ed. 2d 115. Whether a defendant's conduct constitutes a substantive violation of the Sherman Act is entirely a matter of congressional definition: Is the defendant's conduct of the type which Congress sought to prohibit, i.e., is that conduct a "restraint of trade" within section 1? The jurisdictional question on the other hand concerns the power of Congress to reach the defendant's conduct: Does the defendant's conduct have a sufficient relationship with interstate commerce so as to be a proper subject of federal regulation? See Rasmussen v. American Dairy Ass'n, 472 F.2d 517 (9th Cir. 1973), cert. denied, 412 U.S. 950, 37 L. Ed. 2d 1003, 93 S. Ct. 3014; Gough v. Rossmoor Corp., 487 F.2d 373, 375-376 (9th Cir. 1973).

 The Shreveport holding has gradually been extended to general application, thereby obviating the need to search for some sharp point or line where interstate commerce ends and intrastate commerce begins in order to determine whether the Sherman Act applies. For the essence of the affectation doctrine was that the exact location of the line made no difference if the forbidden effects flowed across it to the injury of interstate commerce or to the hindrance or defect of Congressional policy regarding it. Mandeville Island Farms v. American Crystal Sugar Co., 334 U.S. 219, 232, 92 L. Ed. 1328, 68 S. Ct. 996 (1948).

 It is now clear that the federal commerce power is as broad as the need that evokes it and encompasses not only the regulation of interstate commerce itself, but all measures necessary and proper to that end including purely intrastate activities, if necessary, to protect and foster interstate commerce. Rasmussen v. American Dairy Ass'n, supra, at 522. As stated by the Supreme Court in United States v. Women's Sportswear Manufacturing Ass'n, 336 U.S. 460, 464, 93 L. Ed. 805, 69 S. Ct. 714 (1949):

 
". . . The source of the restraint may be intrastate, as the making of a contract or combination usually is; the application of the restraint may be intrastate, as it often is; but neither matters if the necessary effect is to stifle or restrain commerce among the states. If it is interstate commerce that feels the pinch, it does not matter how local the operation which applies the squeeze."

 However, realizing that every enterprise, however localized, has some effect, however remote, on the flow of commerce among the states, the courts have recognized that some "localness," "remoteness" or "de minimus" factor must intervene or federal commerce power under the Sherman Act is boundless. Rasmussen v. American Dairy Ass'n, supra, at 526. Thus, in order for the interstate commerce allegations of a Sherman Act complaint to be jurisdictionally sound, they must allege either activities that are in the flow of interstate commerce or activities which though occurring on a purely local level, substantially affect interstate commerce. Doctors, Inc. v. Blue Cross of Greater Philadelphia, 490 F.2d 48, 50 (3rd Cir. 1973). See also Page v. Work, 290 F.2d 323 (9th Cir. 1961), cert. denied, 368 U.S. 875, 7 L. Ed. 2d 76, 82 S. Ct. 121. Thus, restraints which only affect interstate commerce in some insignificant degree or attenuated sense are not within the federal commerce power.

 In similar fashion the courts in dealing with the substantive allegations of Sherman Act complaints have recognized that were § 1 to be read in the narrowest possible way, any commercial contract would be deemed to violate it. Chicago Board of Trade v. United States, 246 U.S. 231, 238, 62 L. Ed. 683, 38 S. Ct. 242 (1918). Therefore, the courts have adopted the so-called "rule of reason" to determine whether most business combinations or contracts violate the provisions of the Act. See Standard Oil Co. v. United States, 221 U.S. 1, 55 L. Ed. 619, 31 S. Ct. 502 (1911). An analysis of the reasonableness of a particular restraint includes consideration of the facts peculiar to the business in which the restraint is applied, the nature of the restraint, its effects, its history and the reason for its adoption. Chicago Board of Trade v. United States, supra, at 238.

 However, there are certain agreements or practices which, because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm which they have caused or the business excuse for their use. Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 15, 2 L. Ed. 2d 545, 78 S. Ct. 514 (1958). Cf. Klor's v. Broadway-Hale Stores, 359 U.S. 207, 3 L. Ed. 2d 741, 79 S. Ct. 705 (1959). These are referred to as per se violations. If a practice is held to be a per se violation the motives of the participants, the means of establishing the per se violation, the extent of the participants' market control, the effect of the agreement on prices and the amount of commerce affected are not relevant. United States v. McKesson & Robbins, 351 U.S. 305, 309-310, 100 L. Ed. 1209, 76 S. Ct. 937 (1956).

 It is important to distinguish between the substantive requirements of the Sherman Act and its jurisdictional requirements. The per se doctrine only establishes the unreasonable nature of the restraint; it does not establish that the restraint has substantial interstate impact. See Uniform Oil Co. v. Phillips Petroleum Co., 400 F.2d 267 (9th Cir. 1968). We believe that the jurisdictional question requires independent examination since it is only when we find that interstate commerce is involved or affected that we reach the question of whether a substantive violation has occurred. The reasonableness vel non of the restraint is not relevant for jurisdictional purposes since even a per se violation may have no impact on interstate commerce or an impact so insignificant as to be beyond the federal commerce power. Cf. Page v. Work, supra, at 331-332. Therefore, in considering our jurisdiction we assume, but expressly do not decide, that the conduct complained of constitutes a substantive violation of the Sherman Act. Our sole inquiry is whether the prohibition of that conduct falls within the utmost extent of Congress' constitutional power.

 Inherent in any attempt to formulate a general test of Sherman Act jurisdiction is the danger that the test will only further muddy the already murky waters. The formulations are, of necessity, so broad and generalized that instead of providing a guide to the solution of the problem they do no more than restate the issue. Doctors, Inc. v. Blue Cross of Greater Philadelphia, supra, at 51.

 In laying the groundwork for a workable approach to the problem of Sherman Act jurisdiction one must distinguish between the two theories of jurisdiction, commonly referred to as the "in commerce" theory and the "affecting commerce" theory. If an alleged restraint occurs within the flow of interstate commerce, that is "in commerce," substantial effect on that commerce is presumed as a matter of law and no showing need be made that any particular amount of commerce has been affected. On the other hand, when dealing with restraints which are alleged merely to have affected interstate commerce, that effect must be substantial in order to justify federal regulation.

 While there is language in many cases which indicates that a restraint must have a greater effect upon interstate commerce if it is applied "indirectly" rather than "directly," *fn11" see e.g., Page v. Work, supra, at 332; Bailey's Bakery, Ltd. v. Continental Baking Co., 235 F. Supp. 705 (D. Hawaii 1964); Spears Free Clinic and Hospital v. Cleere, 197 F.2d 125 (10th Cir. 1952), that distinction has been abandoned. In Wickard v. Filburn, 317 U.S. 111, 87 L. Ed. 122, 63 S. Ct. 82 (1942) the Supreme Court said:

 
". . . [even] if . . . [the] activity be local and though it may not be regarded as commerce, it may still, whatever its nature, be reached by Congress if it exerts a substantial economic effect on interstate commerce, and this irrespective of whether such effect is what might at some earlier time have been defined as 'direct' or 'indirect.'" 317 U.S. at 125.

 See Doctors, Inc. v. Blue Cross of Greater Philadelphia, supra, at 51.

 Nor is the traditional inquiry by many courts into the time of the imposition of the restraint any longer necessary since if commerce is found to have been affected, the fact that the restraint was imposed before, after or during the flow of interstate commerce, is immaterial. As stated by the Court in Doctors:

 
". . . the Court in each case ends its inquiry when it has satisfied itself that the logical and therefore probable affect of the alleged act is to reduce the flow of goods in interstate commerce." 490 F.2d, at 53.

 While Congress has determined its own criteria of substantive violations, it has left to the courts the task of deciding whether particular activities affect interstate commerce. Cf. U.S. v. Darby, 312 U.S. 100, 120, 85 L. Ed. 609, 61 S. Ct. 451 (1941). The concept of interstate commerce is an intensely practical concept drawn from the normal and accepted course of business. Therefore, the courts have eschewed the use of abstract mechanistic formulae in determining whether a particular course of conduct substantially affects interstate commerce. See, e.g., Doctors, Inc. v. Blue Cross of Greater Philadelphia, supra, at 51, and Rasmussen v. American Dairy Ass'n, supra, at 526, where the Court said:

 
" There is no bright line dividing cases in which the effect upon interstate commerce is sufficient to permit Congress to prohibit particular anticompetitive activity under the commerce clause from those cases in which it is not sufficient. In this area perhaps more than in most, each case must turn on its own facts . . . ."

 Since we are dealing with matters of degree and the real world business nature of the Sherman Act's purposes permits of no easy solution, we are instructed to make a particularized judicial determination. See U.S. v. Yellow Cab Co., 332 U.S. 218, 231, 91 L. Ed. 2010, 67 S. Ct. 1560 (1947). Precedent in this area is unlikely to dictate the outcome in any given case. Rather, it is more likely to communicate a general sense as to how much of an impact local activities must have before the court will assume jurisdiction. Doctors, Inc. v. Blue Cross of Greater Philadelphia, supra, at 51.

 In summary, we agree completely with the directive in Rasmussen v. American Dairy Ass'n, supra, where the Court said:

 
"[9] In essence the test is whether '[the] facts of the particular situation . . . determine . . . [that the] relationship to interstate commerce is too tenuous in a practical sense to warrant federal control.'" 472 F.2d, at 524.

 II

 Can the Court Decide Jurisdiction on a Motion for Summary Judgment?

 Before turning to jurisdiction, we are confronted at the outset by two contentions raised by plaintiff which concern the power of the court to decide the jurisdictional issue on a motion for summary judgment. First, plaintiff contends that the "jurisdictional" issue and certain issues on the merits are so closely related that the court should reserve determination of the jurisdictional issue until trial on the merits. Secondly, plaintiff submits that the jurisdictional issue must be left for determination by a jury.

 In a memorandum opinion deciding discovery disputes, dated February 27, 1974, in denying defendant's motion for an evidentiary hearing on the issue of subject matter jurisdiction, we said:

 
"The motion for an evidentiary hearing filed by defendant is also denied. When discovery is complete and the facts are available, defendant may, if he desires to do so, file a motion for summary judgment. We agree that the court may dispose of the question of jurisdiction as well as other questions on a motion for summary judgment . . . ."

 We now reaffirm our earlier decision and hold that the court may decide the jurisdictional issue on a motion for summary judgment.

 In support of his past argument, plaintiff relies on McBeath v. Inter-American Citizens for Decency Committee, 374 F.2d 359 (5th Cir. 1967), cert. denied, 389 U.S. 896, 19 L. Ed. 2d 214, 88 S. Ct. 216 (1967). The district court in McBeath dismissed a Sherman Act claim holding that plaintiff had failed to show that the conduct complained of had the requisite impact on interstate commerce. In reversing, the Appeals Court, explicitly relying on Land v. Dollar, 330 U.S. 731, 91 L. Ed. 1209, 67 S. Ct. 1009 (1947), *fn12" held that the issue of the effects of the conduct complained of on interstate commerce was so intertwined with the merits of the case that it was error for the district court to dismiss the suit without giving plaintiff a full chance to prove his case on the merits. *fn13"

 We do not believe that the case before us falls within the holding of Land v. Dollar, n. 12, supra, since even if the provisions of the license agreements complained of were held to constitute Sherman Act violations, per se or otherwise, plaintiff must still show that the violations either occurred in the flow of commerce or affected it. Furthermore, we believe that unlike the McBeath situation, we have abundant evidence before us on which to base our determination.

 We also hold that the jurisdictional question is best suited to trial by the court and, therefore, need not be submitted to the jury.


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