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September 5, 1973

American Motor Inns, Inc.
Holiday Inns, Inc., Appellant, and International Association of Holiday Inns, Intervenor-Defendant

Garth, Circuit Judge. (sitting by designation as United States District Judge pursuant to 28 U.S.C. § 291(c)).

The opinion of the court was delivered by: GARTH

 The complaint alleges more particularly that HI conspired with its franchisee at the Newark Airport, Newark, New Jersey (hereinafter "Fleck") and with unnamed others to restrain and monopolize trade in the hotel-motel lodging industry in the Greater Newark Area. It is undisputed that AMI had purchased certain property in Elizabeth, New Jersey, near the Newark Airport's new passenger terminals then under construction, for the purpose of constructing a hotel-motel facility (F 59-60). *fn1" The alleged antitrust violations arise, first, from HI's refusal to approve various AMI applications to build Holiday Inns, including one at the Elizabeth site, and, second, from HI's threat to enforce a clause in AMI's franchise agreement with HI which prohibits AMI from owning, operating or otherwise being associated with a non-Holiday Inn (hereinafter the "non-Holiday Inn clause"). Thus, it is alleged that AMI has been precluded from expanding by building Holiday Inns or non-Holiday Inns in the Greater Newark Area and in other areas.

 Upon plaintiff's motion, this court on October 27, 1972 ordered that discovery proceed on an expedited basis, because of a continuing threat that the City of Elizabeth would revoke plaintiff's deed as a result of a failure to abide the deed's restriction that construction commence by December 30, 1972, a deadline subsequently extended for varying periods by the City. *fn2" On April 9, 1973, the International Association of Holiday Inns ("IAHI") was permitted to intervene as a party defendant, Fed. R. Civ. P. 24(b) (2), on the condition that the IAHI would in no way delay commencement of the trial. Also on April 9, I denied without prejudice plaintiff's motion for partial summary judgment under Section 1 of the Sherman Act, rejecting plaintiff's contention, at that point in the case, that the non-Holiday Inn clause was illegal. Cf. Poller v. Columbia Broadcasting System, 368 U.S. 464, 473, 7 L. Ed. 2d 458, 82 S. Ct. 486 (1962).

 At a pre-trial conference held May 2, 1973, the plaintiff voluntarily withdrew in its entirety its Sherman Act Section 2 claim of monopolization, leaving for determination only the Section 1 claim. In addition, the case was bifurcated; the damage issue was to be tried, if necessary, after decision on the question of liability and the propriety of injunctive and declaratory relief. Trial without jury commenced on May 9. At the close of plaintiff's case, the court denied HI's motion to dismiss the action, but in view of the evidence and plaintiff's consent, granted the intervenor-defendant IAHI's motion to dismiss as against it. *fn3"

 On AMI's motion for summary judgment and at trial, the parties injected other issues into the case. AMI challenged HI's policy of soliciting (by what shall be termed "radius letters") objections to proposed franchise sites from existing franchisees who own Holiday Inns near the proposed sites. AMI also challenged HI's ownership of company inns and HI's policy of discouraging or refusing applications for franchises in towns having company-owned Holiday Inns (hereinafter "parent company towns"). Finally, AMI alleged that the radius letter, parent company town and non-Holiday Inn policies cumulatively result in a horizontal allocation of territories, in that they insulate any given existing Holiday Inn from unwanted competition from any other Holiday Inn or from any non-Holiday Inn owned by a Holiday Inns franchisee.

 HI and the IAHI, for their part, have sought to characterize the non-Holiday Inn clause as a legal exclusive dealing arrangement, and have also sought to present business justifications for the clause.

 Findings of Fact

 I. The Parties

 1. Defendant Holiday Inns, Inc. ("HI") is a publicly-held Tennessee corporation engaged primarily in the business of owning, operating and franchising inns, hotels and motels in interstate commerce (JX-1, para. 5),*and together with its subsidiaries and licensees, constitutes the largest hotel-motel business in the United States (JX-1, para. 10). As of December 31, 1972, there were 1,470 Holiday Inns, 1,380 located in the United States (JX-1 para. 8). The defendant and its subsidiaries directly owned or operated 297 of these inns, 281 in 152 United States cities (JX-1, para. 9). The other 1099 Holiday Inns in the United States are independently owned or operated pursuant to license agreements with defendant (JX-1, para. 9). Defendant's revenue from the franchising and operation of inns, hotels and motels totaled approximately $419,000,000 in its fiscal year 1972 (JX-1, para. 7).

 2. Plaintiff American Motors Inns, Inc. ("AMI") is a publicly-held Virginia corporation engaged primarily in the business of owning and operating inns, hotels and motels in interstate commerce under license agreements from defendant Holiday Inns (JX-1, para. 1). AMI is defendant's largest franchise, owning or operating 48 Holiday Inns. It has franchises from defendant to build another eight, and has commitments from defendant for five additional franchises (JX-1, para. 3; Tr. 137). Plaintiff's inns are located in Tennessee, North Carolina, Virginia, Maryland, Pennsylvania, Connecticut, Maine, Massachusetts and Puerto Rico (Tr. 31). AMI's revenue from operation of hotels and motels totaled approximately $44-million during its fiscal year 1972. (JX-1, para. 7).

 3. International Association of Holiday Inns ("IAHI") is a non-profit unincorporated association of licensed owners or operators of Holiday Inns, including company owned or operated Inns, in which each Inn has one vote. (JX-1, para. 6) (Tr. 808-10, 864-65). The Holiday Inns License Agreement provides, and has always provided, for the existence of the IAHI. (DX-1, 2, 3, PX-8, PX-21 para. Twelfth, Tr. 806).

 II. The Holiday Inn System

 4. The Holiday Inns System is an organization of hotels and motels, based upon registered service marks, and established to furnish the traveling public with a standardized system of food, lodging accommodations and services. (Tr. 774, 784). The Holiday Inn System has total revenues of nearly $1 billion a year. (DX-452).

 5. Since 1968 HI has not granted any licenses for exclusive territories; Holiday Inns licenses are now issued only for specific locations, though approximately 50 territorial licenses remain. (JX-1, para. 4).

 6. Except for licenses issued in 1957 and 1969, respectively, relating to Roanoke, Virginia and Baltimore, Maryland, AMI's franchises are for specific locations. With regard to Roanoke, AMI has the exclusive right to obtain Holiday Inn franchises in a territory including Roanoke and a 50 mile radius of the city. As to Baltimore, the exclusive right covers the City of Baltimore and a two mile radius beyond the city limits. (JX-1, para. 4).

 7. Holiday Inns, Inc. has always offered free advance reservations to the traveling public. (Tr. 1535).

 8. Prior to 1965, one Holiday Inn made reservations at other Inns for guests by means of the telephone, teletype, Western Union and letters. (Tr. 1535). In 1962 HI determined to develop a more effective method of referrals because demand for reservations was exceeding the capabilities of the teletype method then in use, and because the teletype method was uneconomical in terms of personnel time and cost of operation. (Tr. 964-965).

 9. The resulting Holidex System of computerized reservations and referrals among Holiday Inns was put into effect in 1965. That system links every Holiday Inn on the North American continent to central computers located in Memphis, Tennessee. It enables reservations to be made and confirmed quickly from one Holiday Inn to another and from a number of reservation (sales) offices to Holiday Inns. In addition, when the computer cannot confirm a reservation, it reflects any space available at the Holiday Inns nearest the desired location. (JX-1, para. 39-42). Each Holiday Inn must have a Holidex terminal in operation 24-hours a day, and may have no other reservation terminal or system. (PX-110, I-28).

 10. The costs of operating the Holidex System are borne by the Holiday Inn franchisees through installation charges for their Holidex reservation terminals, and through charges of $2.50-$3.00 per room per month. In return for these charges, Holiday Inn franchises have the right to an unlimited number of messages through the Holidex computer and may receive reservations referred through the computer from other Holiday Inns, from Holidex reservation (sales) centers in six North American cities and from Holidex terminals at a number of major corporations. (JX-1, para. 44).

 11. The national reservation-referral concept has been very important to the growth and success of the Holiday Inn System and has resulted in increased referrals within the System. (Tr. 948, 1057, 1160-1161, 1433, 1473-1474, 1477, 1538, 1575, 1597, 1823, 1878-1879).

 12. For the years 1970, 1971 and 1972, about 30-38 percent of the total occupancy of all Holiday Inns originated from reservations made through Holidex. (Tr. 949-950, 1060-1064; DX-21, 24). However, inn-to-inn reservations made through Holidex -- as opposed to reservation center-to-inn or corporation-to-inn reservations -- account for only 21.4 percent of the total occupancy. (DX-355, 359, 365, 365(a) (b), 366, 367, 368, 370).

 B. Franchising Policies

 13. The Executive Committee of HI has delegated certain responsibilities to the Franchise Application Committee, which considers franchise applications and may make final decisions on all applications which the Franchise Committee decides to deny. (Tr. 795-97, 913-1369).

 14. When a prospective franchisee (either with or without previous Holiday Inn franchises) applies for a franchise, a site inspection is performed by HI in order to obtain relevant market data, including information as to existing inns of any type in the area. (Tr. 974, 1339).

 (1) Radius Letters to Existing Franchisees

 15. It is the standard practice of the Franchise Sales Department of HI to send written notices (hereinafter referred to as "radius letters") of a franchise application to at least the three Holiday Inns nearest the proposed site, irrespective of whether or not such Holiday Inns are open (JX-1, para. 14).

 16. Franchisees who receive notice of an application have fifteen days from the date of such notice to send the Franchise Sales Department of HI written comments regarding the desirability of establishing a Holiday Inn at the proposed location. (JX-1, para. 14). However, no franchisee is under any obligation to respond to the radius letters. (Tr. 118).

 17. All responses to radius letters are reported to the Franchise Committee of HI by the Franchise Sales Department when an application for a new franchise is submitted to that committee. (Tr. 991).

 18. The overriding importance HI attaches to objections by franchisees is apparent from HI's procedures when objections are received. When the Franchise Committee concludes that a franchise application should be granted but has received an objection to the application from an existing franchisee, the decision to grant the franchise application may be made only by the Executive Committee. The fact that an objected-to application is considered by the ...

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