On May 21, 1970 the New Jersey Antitrust Act became effective. N.J.S.A. 56:9-1 et seq. Its stated purpose is "to promote the unhampered growth of commerce and industry throughout the State by prohibiting restraints of trade which are secured through monopolistic practices and which act or tend to act to decrease competition between and among persons engaged in commerce and trade."
The statute contemplates both criminal and civil actions to attain its purposes. This is the first criminal case thereunder. Defendants waived a trial by jury. The trial consumed five weeks.
The problem of restraints of trade is not of recent vintage; it has roots in our common law. But it was in 1890, when the federal Antitrust Act, known as the Sherman Act, 15 U.S.C.A. § 1 et seq. was adopted, that restraints were assaulted in earnest. Prior to 1890 at least 13 states legislated their own statutes. Thorelli, The Federal Antitrust Policy:
Origin of an American Tradition , 155, n. 195. The list has expanded considerably and at the present time fewer than eight states are without comparable statutes. 26 Fla. L. Rev. 653, 658 (1974).
The significant language of the federal and New Jersey statutes are essentially alike:
Every contract, combination in Every contract, combination in
the form of trust or otherwise, the form of trust or otherwise,
or conspiracy, in restraint of or conspiracy in restraint of
trade or commerce among the trade or commerce, in this State,
several States, or with foreign shall be unlawful. N.J.S.A.
nations, is declared to be il- 56:9-3.
To provide uniformity with the Sherman Act and to supply our courts with a reservoir of experience, the Legislature wisely provided that our statute "shall be construed in harmony with ruling judicial interpretations of comparable Federal antitrust statutes * * *" N.J.S.A. 56:9-18. Thus, while one would initially presume this case novel and innovating, the converse is true. For an analysis of pre-1970 New Jersey precedent, see Grillo v. Bd. of Realtors of Plainfield Area , 91 N.J. Super. 202 (Ch. Div. 1966).
Our history books are full of tales of the robber barons of yesteryear, who devised many illicit schemes to make money. One of the more nefarious schemes was the combination or trust whose purpose was to compel the retail merchant to do business in a certain fashion. He was directed what to sell, where to sell, what price to charge, where to buy his products, and a myriad of other dictates. The evil was twofold: first, the retailer was precluded from following his occupation according to his skill, industry and ingenuity, and, second, the public suffered because, by the loss of competition amongst retailers, it did not receive the benefits of price reductions, quality enhancements, quantity discounts, and the like.
To curb such restraints Congress enacted the Sherman Antitrust Act, which has remained with little change to this date. The act did not create any substantive rights but rather specified methods by which business may not be conducted. The Sherman Act has been described as the Magna Carta of free enterprise and was
What the Sherman Act sought was to sweep away all obstacles to open and unfettered trade, to create a system where businessmen may trade freely to negotiate whatever contracts with both suppliers and the public as they deemed best, and to preserve, and perhaps promote, the normal competitive forces that subsist within a free and independent society. To the end that this can be accomplished, the businessman will prosper and the public will benefit.
It is axiomatic that the law does not seek to hinder or punish the successful businessman, but rather to guarantee that such success is built upon an economic order patterned upon our cherished philosophy of freedom of enterprise.
Each case must be viewed in light of its own set of facts. Rarely are any two cases precisely alike. What do we have here?
This is a three-tiered system. At the apex is Lawn King, the defendant corporation. One step below, and in the middle, is the distributor, who operates on a county-wide basis. At the lowest tier is the dealer, who generally operates in one or more municipalities and deals directly with the public.
At the outset I should note that if all three tiers were part of a single corporate structure there would not be any antitrust problem. But that is not the situation here.
Joseph Sandler, the individual defendant, was and still is president of Lawn King and controlled 95% of its common stock. After a long association with a competitor, Lawn-O-Mat, he resigned to form his own company in 1970. A detailed explanation of the Lawn-O-Mat method of operation (followed in many respects by Sandler) and of the litigation which ensued may be found In Sandler v. Lawn-O-Mat , 141 N.J. Super. 437 (App. Div. 1976).
For all intents and purposes, Lawn King and Joseph Sandler are one and the same. The distributors and dealers are separate and distinct business entities, some doing business through corporations, others as partnerships, and many as individual proprietors.
Beginning in 1970 Lawn King advertised extensively for the sale of distributorships and dealerships. When the indictment was returned on June 15, 1973 a total of 158 dealerships existed -- 58 in New Jersey and 100 in nine other states. There were substantially fewer distributorships in at least four states.
As its name implies, Lawn King is in the business of providing lawn care. Several programs are offered, each providing for the application of seed and chemicals to lawns with special equipment. Designated amounts and types of seed and chemicals are applied to lawns through the use of a tractor-drawn combine, which punctures the lawn, deposits the chemicals and seed, and finally rolls the lawn -- all in a single operation.
The distributor oversees the dealers in this county, sells seeds and chemicals to the dealers, calls county-wide meetings to coordinate advertising, and resolves day-to-day problems of dealers. In return, he receives a mark-up of 20% of all sales of seed and chemicals to dealers and a commission of 2-1/2% of gross sales made by dealers within his territory. Most distributors purchased their franchise from Lawn King.
Since they did not sell to the general public, many operate from their homes. Distributors ascertain the chemicals and seed needs of dealers within their area and submit orders to Lawn King, which orders in bulk from manufacturers. Deliveries would usually be made directly to the distributors, but on occasion directly to a dealer. Responsibility for spoilage or loss rested exclusively with the distributor.
The dealer is at the retail level and deals directly with the public. Dealers, too, generally purchased their franchise directly from Lawn King, which usually covered an area of one or more municipalities and included at least 6,000 single-family homes, but some have as few as 2,000 homes and others in growth areas now have 12,000. In addition to the initial franchise fee, which was $7,500 in 1970 and increased in subsequent years, the dealer paid a commission to Lawn King of 10% of gross sales (divided 7-1/2% to Lawn King and 2-1/2% to distributors). Like distributors, dealers are responsible for all loss or damage to their equipment and products, with the sole exception of the combine, title to which remained with Lawn King.
Lawn King derived its income from the net profit on the sales of franchises, the 7-1/2% commission on gross sales by dealers, and the 20% commission from distributors on all sales of chemicals and seed to dealers. Some indication of its cash flow can be derived from the fact that in the first six months of 1973 there were chemical and seed purchases of over $456,000 and dealer sales in excess of $2.3 million.
Lawn King widely advertised the sale of distributor and dealer franchises through newspapers and television. A distributor purchased only an area. On the other hand, a dealer bought not only an area but the accoutrements of doing business, e.g. , tractor, trailer, hand equipment, etc. The dealer acquired actual title to these items, with the single exception of the combine. The combine was loaned to the dealer without cost. The trailer was to be attached to
a truck and used to transport the tractor, combine and other equipment.
While each franchisee was part of a large multi-state operation, he presumably operated independently. There is no pooling of income or losses with either Lawn King or other franchises. Financially, each dealer was strictly on his own. This is a franchise operation, which is a form of doing business that has seen explosive growth in the past decade, and of which more is said hereafter.
Lawn King educated the dealers not only as to how to service lawns but also how to sell to the public. The keystone of the business was advertising; it was done locally by the dealer, county-wide under the direction of the distributor, and over a larger area, such as the metropolitan New York area, via newspapers and television under the auspices of Lawn King.
A loose-leaf bound Dealer Manual was distributed to each dealer. When a prospective customer was located he was referred to the dealer in his area. The Manual explains in minute detail how to generate leads, the proper method of making an appointment, the equipment to take to a meeting with a customer, and recites the proper way to make a sales presentation to a customer. Little is left to imagination.
There were three different sales programs -- the important one being the 3 cents program. A customer was charged an annual fee of 3 cents per square foot, except there was a minimum charge of $120 a year (to cover a minimum area of 4,000 square feet). If the area was in excess of one acre or a charitable organization was involved, adjustments were made. This charge entitled the customer to four applications throughout the year.
Many of the chemicals were purchased from Lebanon Chemical Co., which had plants in both New Jersey and Pennsylvania.
The indictment is in seven counts, six charging illegal restraints of trade and the seventh count conspiracy with Lebanon to boycott franchisees.
Preemption and Interstate Commerce
At the outset this court was confronted with defendants' dual argument that the Sherman Act has preempted the field, or, if not, the business activities of defendant substantially affect interstate commerce, thereby precluding state regulation or interference, pursuant to the Commerce Clause of the United States Constitution.
This court rejected those arguments prior to trial but reserved to defendants the right to raise the latter argument at the conclusion of the trial, because it was only then that we would know the precise extent of defendants' interstate activities.
To review briefly -- although the Sherman Act was enacted 87 years ago, no state antitrust statute has ever been declared unconstitutional for being in conflict with it, Cf. Kosuga v. Kelly , 257 F.2d 48 (7 Cir. 1958). This in spite of the fact that with the broad expansion of business and commerce in America since 1890, the federal courts have expansively redefined the interstate Commerce Clause to include activities formerly considered solely intrastate in nature. Further, the Supremacy Clause of the United States Constitution has been employed to strike down conflicting state action. For instance, see Perez v. Campbell , 402 U.S. 637, 91 S. Ct. 1074, 29 L. Ed. 2d 233 (1971), where an Arizona Motor Vehicle Safety Act barring issuance of a driver's license for failure to satisfy an automobile accident judgment was invalidated as being in conflict with the United States Bankruptcy Act; and Campbell v. Hussey , 368 U.S. 297, 82 S. Ct. 327, 7 L. Ed. 2d 299 (1961), reh. den. 368 U.S. 1005, 82 S. Ct. 596, 7 L. Ed. 2d 547 (1961), where the Georgia Tobacco Inspection Act was struck down because the Federal Tobacco Inspection Act had preempted the field.
The cases appear to hold that to ascertain if the field has been preempted, we must follow a three-step process. First, inquire into the purpose of the two statutes;
second, determine if they are similar with one another, and third, determine whether Congress intended to make its jurisdiction exclusive. The first test is answered by the enabling clauses. The answer to the second is affirmative on these facts. But it is the third prong of this question which points to the answer here.
The intent of Congress in passing the federal statute was lucidly explained by Senator Sherman, a sponsor of the act:
This bill as I would have it has for its single object to invoke the aid of the courts of the United States to deal with the combinations described in the first section when they affect injuriously our foreign and interstate commerce and in this way to supplement the enforcement of the established rules of the common and statute law by the courts of the several states. It is to arm the Federal courts within the limits of their constitutional power that they may cooperate with the state courts in checking, curbing and controlling the most dangerous combinations that now threaten the business property and trade of the people of the United States." [21 Cong. Record 2457 (1890); emphasis supplied]
This language patently does not bespeak preemption, but the very opposite. The perils that would confront each state if the preemption argument prevails was stated in Commonwealth v. McHugh , 326 Mass. 249, 93 N.E. 2d 751 (Sup. Jud. Ct. 1950):
If State [antitrust] laws have no force as soon as interstate commerce begins to be affected, a very large area will be fenced off in which the States will be practically helpless to protect their citizens without, so far as we can perceive, any corresponding contribution to the national welfare . . . Especially is this true in view of the immense broadening in the conception of interstate commerce in recent years. [326 Mass. at 265; 93 N.E. 2d at 762]
There are many areas of activity where an overall national policy compels preemption and Congress or the United States Supreme Court have so ordained. But where neither has in 87 years commanded such a national policy in antitrust matters, it would be absurd for this court to do so.
Defendants complain that this would compel them to be subjected to a hodgepodge of conflicting laws among the several states, as well as between federal and state laws within a single state. Perhaps so, but this is not unique. When General Motors manufactures a car it must comply not only with federal law but the laws of each state within which it sells cars; so, too, the manufacture of children's garments regarding flame-retardant specifications. And many others.
In Zook v. California , 336 U.S. 725, 69 S. Ct. 841, 93 L. Ed. 1005 (1949), a California statute and the Federal Motor Carrier Act contained virtually identical language concerning the sale of transportation services on the roads of California. Defendants complained of multiple prosecutions. This concern was met squarely and the state statute sustained:
[T]he same act might, as to its character and tendencies, and the consequences it involved, constitute an offense against both the State and Federal Governments, and might draw to its commission the penalties denounced by either. [336 U.S. at 731, 69 S. Ct. at 844, 93 L. Ed. at 1010]
I reassert, Congress did not preempt the antitrust field with the Sherman Act.
Defendants urges in the alternative that the New Jersey statute cannot apply if their business activities in any way affect interstate commerce. Preliminarily, it would certainly be anomalous if the sphere of state regulation was to decrease (and substantially so) as the number of state regulatory agencies increased. If this court accepted defendants' argument -- that state jurisdiction must cease when any guise of interstate activity appears -- every state statute would be struck down since it is now recognized that every enterprise, however localized, has some effect, however remote, on interstate commerce. Rasmussen v. American Dairy Ass'n , 472 F.2d 517 (9 Cir. 1973). That is why the federal courts have held that the Sherman Act applies
only where the business activities "substantially affect interstate commerce." Doctors Inc. v. Blue Cross of Greater Philadelphia , 490 F.2d 48, 50 (3 Cir. 1973). To put it another way, restraints which only affect interstate commerce in some insignificant sense are not within the federal Commerce Clause.
This court must examine and weigh the facts of this case to ascertain whether defendants' activities have a "substantial effect" on interstate commerce.
1. Lawn King was incorporated and maintained its offices in New Jersey.
2. All distributor and dealer franchise agreements were signed in New Jersey.
3. The equipment sold by Lawn King to its dealers was always picked up in New Jersey.
4. The seeds sold to distributors and/or dealers were purchased from manufacturers with plants in New Jersey.
5. The chemicals sold to distributors and/or dealers were purchased from manufacturers with plants in both New Jersey and Pennsylvania.
6. As of June 15, 1973 (date of the indictment) there were 58 dealers in New Jersey and 100 without.
7. Dealer net sales to the public in 1971 were $427,243 in New Jersey and $327,873 without, but reversed in the first six months of 1973 and were $845,571 in New Jersey and $1,531,040 without.
There are no precise guidelines to follow. We are dealing with matters of degree and emphasis, and precedent cannot divine the outcome. We are directed to apply "a practical, case-by-case economic judgment," Rasmussen v. American Dairy Ass'n, supra at 527, to fashion a ruling for each set of facts. U.S. v. Yellow Cab Co. , 332 U.S. 218, 231, 67 S. Ct. 1560, 91 L. Ed. 2010, 2019 (1947).
We are dealing with the lawn care business. Its roots are local. Each distributor and dealer is independent and does business within an area that is solely intrastate. Defendants' association ...