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State v. Lawn King Inc.

Decided: July 31, 1980.


On certification to the Superior Court, Appellate Division, whose opinion is reported at 169 N.J. Super. 346 (1979).

For affirmance -- Chief Justice Wilentz and Justices Sullivan, Pashman, Schreiber, Handler and Pollock. For reversal -- None. The opinion of the Court was delivered by Handler, J. Pashman, J., concurring. Pashman, J., concurring in the result.


This appeal raises important issues of first impression for this Court. Involved are allegations of illegal restraints of trade in the operation of a franchise business in violation of the New Jersey Antitrust Act, N.J.S.A. 56:9-1 et seq. (L. 1970, c. 73). The trial court convicted and sentenced both the corporate defendant and the individual defendant on several counts of the indictment thereunder. The Appellate Division reversed all convictions and entered judgments of acquittal. We now affirm these judgments of acquittal.


Defendants are Lawn King, Inc. (Lawn King), a New Jersey corporation organized in August 1970, and Joseph Sandler, the president and chief operating officer of Lawn King and owner of ninety-five percent of the corporation's common stock. The corporation presently operates as a business structured under the Franchise Practices Act, N.J.S.A. 56:10-1 et seq. (L. 1971, c. 356). See Finlay & Associates, Inc. v. Borg-Warner Corp., 146 N.J. Super. 210, 215-221 (Law Div. 1976), aff'd o.b. 155 N.J. Super. 331 (App.Div.1978), certif. den. 77 N.J. 467 (1978). It functions at the apex of a pyramidal, three-tier distribution system which provides lawn care to individual customers through Lawn King dealers. The intermediaries between Lawn King and its dealers are the Lawn King distributors. Each Lawn King dealer and distributor holds a franchise from the franchisor corporation. These franchises sold by Lawn King to

the distributors and the dealers are territorial, with the distributorship franchises being county-wide and the dealership franchises covering part or all of one of more municipalities. Thus, each distributor serves several dealers.

The provisions of the franchise contracts form the basis of most of the antitrust charges here involved. Under the Dealer Franchise Agreement in use at the times relevant hereto,*fn1 each dealer was granted for a renewable period of five years the exclusive rights to sell Lawn King services and products to individual customers within specified geographic boundaries (each area contained a minimum of 6,000 "operable" lawns). Lawn King, the dealers' franchisor, agreed pursuant to these agreements (1) to lend to each dealer a Lawn King combine, a tractor-drawn machine which in a single operation aerates the lawn, deposits designated amounts and types of chemicals and seed, and rolls the lawn; (2) either to sell to the dealer the seeds, chemicals, and fertilizers necessary to the business or to provide the dealer with "approved sources" from which to purchase such items; (3) to sell or lease to the dealer a modified farm-type tractor and any other equipment, excluding the combine, for use in the business; (4) to permit the dealer to use the registered Lawn King trade name and service mark or logo;*fn2 (5) to supply the dealer with one copy of the Lawn King Operating Manual; (6) to arrange advertising and promotional programs for the dealers' benefit; (7) to furnish newsletters, bulletins, and advertising materials as well as an initial supply of stationery and business forms; (8) to train the dealer and assist him or her in both selecting a location and setting up the dealership; (9) to arrange for national and regional sales meetings; (10) to maintain

a dealer advisory service in its home office, and (11) to appoint a distributor to operate as an intermediary between the corporation and several dealers and thus to assist in the performance of many of these enumerated items.

In return, under the Dealer Franchise Agreements, the franchise dealer agreed (1) to pay Lawn King $12,500 plus a weekly franchise fee of ten percent of the dealer's gross revenues for that week; (2) to provide Lawn King with a weekly revenue report; (3) to participate with other dealers in a particular region in cooperative advertising ventures, paying in proportion to the circulation of the particular advertising medium within the dealership area; (4) to purchase from Lawn King a carry-all trailer and a modified farm-type tractor for use in the business and to use only that equipment or company-approved substitutes; (5) to borrow from the corporation a lawn service combine and to use only that combine in servicing the lawns; (6) to confine sales and services to the limited geographic area for which the franchise was granted; (7) to purchase all seeds, chemicals, fertilizers, and other supplies only from a Lawn King distributor or from an "approved source"; (8) to meet quality standards and maintain a uniform image; (9) to use and display the Lawn King trademark and service mark or logo in accordance with company instruction; (10) to maintain specified amounts of liability insurance; (11) to employ only corporation-approved advertising formats, concepts, and systems, and (12) to abide by the general operating procedures of the corporation. Each Dealer Franchise Agreement also contained a fixed series of "additional terms" attached thereto; these included (1) a restrictive covenant as to the dealer's subsequent employment upon termination of the franchise; (2) a right of first refusal by the corporation if the dealer should decide to transfer the franchise; (3) provisions regarding franchise termination procedures, and (4) a reaffirmation that the nature of the relationship between Lawn King and the dealer is that of franchisor-franchisee. At the time of the indictment, there were 154 such dealer franchises in operation, 58 in New Jersey and 96 in other states.

The Distributor Franchise Agreement was similar in format. Thus, a distributorship franchise was assigned a renewable five-year exclusive franchise to conduct a business under the Lawn King name within a specified territory, usually a county, in consideration for payment of an "Activity Guarantee Fee" of $10,000. The functions of a distributorship consisted, according to the agreements, of (1) advertising for, negotiating and consummating sales of franchises to prospective dealers; (2) assisting dealers with selecting locations and with initially establishing the dealerships; (3) planning dealers' initial advertising; (4) purchasing seeds and chemicals from Lawn King or from approved sources for resale to dealers; (5) performing quality control inspections of dealerships; (6) enforcing the provisions of the Dealer Franchise Agreements; (7) organizing the cooperative media advertising within the distributorship territory; (8) maintaining a "Showcase" dealership,*fn3 and (9) meeting a quota for dealer franchises established within the distributorship territory. For these efforts, each distributor received as remuneration 25% of Lawn King's 10% weekly franchise fee collected from each dealer within the distributor's territory, $750 for each franchise established within the distributor's territory, and a mark-up of 20% on the distributor's sales of chemicals and seeds to dealers. A list of additional terms similar to those contained in the Dealer Franchise Agreements was also appended to each Distributor Franchise Agreement.

On June 15, 1973, a State Grand Jury returned a multiple-count indictment charging Lawn King and Joseph Sandler with several restraints of trade in violation of Section 3 of the State Antitrust Act (N.J.S.A. 56:9-3).*fn4 Count I alleged various vertical restraints; Count II essentially tracked Count I but alleged that these practices constituted illegal horizontal trade restraints; Counts III through VI alleged various illegal tying

arrangements, and Count VII alleged an illegal conspiracy among Lawn King, its distributors, and a supplier to restrict access of Lawn King dealers to chemicals and seeds.

The trial court, in a reported opinion, 150 N.J. Super. 204 (Law Div. 1977), after initially finding that the State Antitrust Act, N.J.S.A. 56:9-1 et seq., was not preempted by the federal Sherman Antitrust Act, 15 U.S.C.A. §§ 1-7, 150 N.J. Super. at 217-220, determined that the proper test or standard to apply in determining the illegality of the alleged restraints of trade was the per se rule, relying inter alia on United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S. Ct. 1856, 18 L. Ed. 2d 1249 (1967). 150 N.J. Super. at 224. The court then proceeded to find both defendants guilty of the following restraints of trade in violation of the State Antitrust Act: (1) price-fixing or resale price maintenance, i.e., requiring Lawn King dealers to offer their services at a fixed or designated price (Counts I and II), id. at 227; (2) territorial restrictions, i.e., prohibiting the dealers from selling Lawn King goods or services outside of their franchise areas (Counts I and II), id. at 230; (3) an illegal tying arrangement by which dealers were required to purchase necessary seeds and chemicals either from Lawn King (distributors) or from "approved sources" (Count VI), id. at 238; (4) compelling the dealers to engage in cooperative advertising (Count I), id. at 241, and (5) imposing a right of first refusal upon the dealers' power to sell their franchises (Count I), ibid. The court found defendants not guilty of all other charges. Defendants' motions (1) to set aside the verdict, (2) for a directed verdict of acquittal n.o.v., and (3) for a new trial were denied by the trial court at this point. In a second reported opinion, 152 N.J. Super. 333 (Law Div. 1977), the trial court fined defendant Lawn King a total of $120,000 ($40,000 for each conviction or set of convictions under Counts I, II, and VI), id. at 343 and sentenced defendant Sandler to two concurrent six-month terms in the Mercer County Correctional Center on the convictions under Counts I and II and a fine of $43,120, Sandler's average annual salary at the time, for the conviction under Count VI, id. at 341. As a result of this conviction, Sandler, under the State Antitrust

Act, was also thereafter prohibited "from managing or owning any business organization within this State, and from serving as an officer, director, trustee, member of any executive board or similar governing body, principal, manager, [or] stockholder owning 10% or more of the aggregate outstanding capital stock of all classes of any corporation doing business in this State . . .." N.J.S.A. 56:9-11(b).

On appeal, the Appellate Division, relying on the then-recent case of Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S. Ct. 2549, 53 L. Ed. 2d 568 (1977), determined that the trial court had applied the wrong rule, and that the correct standard to apply to the vertical restraints, except for price-fixing or resale price maintenance, was "the rule of reason" rather than the per se rule. 169 N.J. Super. 346, 352-354 (App.Div.1979). This rule, in contrast to the per se rule, requires proof as to the reasonableness of the challenged restraints. Id. at 353-354. Furthermore, on the record before it, the Appellate Division determined that the evidence did not justify a finding of price-fixing here, id. at 358, nor were there any tie-in requirements in the franchise contracts, id. at 357. Therefore, there was no evident basis upon which to rest verdicts of guilty beyond a reasonable doubt in the allegations of vertical price-fixing. Id. at 359. The appellate court thus did not apply either test to these particular restraints. As to the right of first refusal and the cooperative advertising requirements, the appellate court applied the rule of reason test and found these alleged restraints to be reasonable. Id. at 357. The court noted that while the per se rule would still apply to instances of horizontal restraints, no such horizontal restraints existed in the case sub judice, id. at 352, the court summarily rejected in a footnote the contention that any of the alleged trade restraints here were in fact horizontal, id. at 354-355 n. 1. The Appellate Division then proceeded to reverse all convictions and entered judgments of acquittal on all counts for which defendants had been convicted. Id. at 359. This Court subsequently granted the State's petition for certification. 81 N.J. 400 (1979).

The crux of this appeal focuses upon the sharp and fundamental differences that divided the trial court and the Appellate Division as to the proper standard to be applied in determining the legality of these several trade practices. Hence, the framework for resolution of the issues on this appeal is provided by an explanation and a comparison of the decisions below, followed by a treatment of the specific questions raised.

Since one basic difference in the respective approaches of the lower courts involves the standard to be applied to the vertical restraints charged in Count I, we deal first with the nonpricing vertical restraints as to which the Appellate Division concluded that the rule of reason, rather than the per se rule, applies. We agree with that conclusion. Next addressed is vertical price-fixing, as to which both courts agreed that the per se rule was the proper standard. We concur in this reasoning, but affirm the Appellate Division's finding that here there were no illegal price restraints. Finally, with respect to all of the Count I vertical restraints, we deal with, and reject, the State's contention that these vertical restraints in the aggregate are to be adjudged under the stricter per se standard applicable to the vertical price restraints.

The next significant question discussed involves the presence and legality of alleged horizontal restraints. On this point we also agree with the Appellate Division and reach the conclusion that there has been no showing of any such horizontal restrictions. We then turn to the somewhat special problems posed by the restraints consisting of so-called tying arrangements or approved-source restrictions. On that issue we rule that, in light of the special characteristics and unusual complexities impinging upon franchise operations, the rule of reason must be applied to those restrictions.

In concluding our opinion, we express concerns as to some of the serious implications of the criminal prosecution involved in this appeal -- the possible risks of double jeopardy and potential unfairness in a retrial arising from a reversal of defendants' convictions, and the general desirability and feasibility of civil rather than criminal prosecutions under the State Antitrust Act.


As noted, the indictment in this case charged in multiple counts that several features of the Lawn King franchise operation constituted unlawful restraints of trade in violation of the provisions of the New Jersey Antitrust Act, N.J.S.A. 56:9-1 et seq. The particular business practices allegedly in restraint of trade related to (1) price-fixing, (2) exclusive franchise or territorial restrictions, (3) mandatory cooperative advertising, (4) the corporation's right of first refusal or other restrictions upon franchise transfers, and (5) various tying arrangements. It was charged in Count I of the indictment that several of these restraints were imposed "vertically," that is, imposed by Lawn King upon its distributors and its dealers. In addition, Count II of the indictment alleged that certain of these same practices also constituted "horizontal" restraints in that they were essentially enforced at the same level by the dealers and the distributors. Still other practices and relationships were asserted to be restraints imposed both vertically and horizontally.

Both courts below here agreed that the State Antitrust Act, N.J.S.A., 56:9-1 et seq., is not preempted under the Commerce Clause (U.S.Const., Art. I, § 8) by federal antitrust enactments. 169 N.J. Super. at 349; 150 N.J. Super. at 216-218; see Flood v. Kuhn, 407 U.S. 258, 284, 92 S. Ct. 2099, 2112, 32 L. Ed. 2d 728, 745 (1972); 1 P. Areeda & D. Turner, Antitrust Law, para. 209 (1978). We agree and further note that many states have, in fact, enacted comparable laws designed to regulate unlawful restraints and business practices, e.g., Cal.Bus. & Prof.Code §§ 16700 to 16760 (West 1964 & Supp.1978); Ill.Rev.Stat. ch. 38, §§ 60-1 to 60-11 (1977); N.Y.Gen.Bus.Law §§ 340-347 (McKinney 1968 & Cum.Supp.1978-1979), and that such state statutes have been found not to have been displaced by federal law, see e.g., Marin County Board of Realtors, Inc. v. Palsson, 16 Cal. 3d 920, 549 P. 2d 833, 130 Cal.Rptr. 1 (1976). See Empirical Research Project, "Reviving State Antitrust Enforcement: The Problems with Putting New Wine in Old Wine Skins," 4 J.Corp.L. 547, 566-567 (1979).

In fact, consonance between the federal and state enactments is required. See Wood, "Resurgence of State Antitrust Action: Prices and Public Awareness," 9 Antitrust Law & Econ.Rev. 41, 41 (1977). Courts in addressing state antitrust acts patterned after the federal Sherman Act, as is the New Jersey act, have concluded that federal court interpretations of federal law constitute persuasive authority as to the meaning of the particular state enactments. See, e.g., Optivision, Inc. v. Syracuse Shopping Center Associates, 472 F. Supp. 665, 680-681 (N.D.N.Y.1979) (New York antitrust act); General Communications Engineering, Inc. v. Motorola Communications & Electronics, Inc., 421 F. Supp. 274, 294 (N.D.Cal.1976) (California antitrust act); Marin County Board of Realtors, Inc. v. Palsson, supra, 16 Cal. 3d at 925, 549 P. 2d at 835, 130 Cal.Rptr. at 3; Corwin v. Los Angeles Newspaper Service Bureau, Inc., 4 Cal. 3d 842, 852, 484 P. 2d 953, 959, 94 Cal.Rptr. 785, 791 (1971) (Corwin I); Guild Wineries & Distilleries v. J. Sosnick & Son, 102 Cal.App. 3d 627, 633, 162 Cal.Rptr. 87, 90 (1980); Goldman v. Loubella Extendables, 91 Mich.App. 212, 219, 283 N.W. 2d 695, 699 (Ct.App.1979) (Michigan antitrust act). Moreover, the New Jersey act is to be construed "in harmony with ruling judicial interpretations of comparable Federal antitrust statutes and to effectuate, insofar as practicable, a uniformity in the laws of those states which enact it." N.J.S.A. 56:9-18. See Exxon Corp. v. Wagner, 154 N.J. Super. 538, 544 (App.Div.1977); see generally Rubin, "Rethinking State Antitrust Enforcement," 26 U.Fla.L.Rev. 653 (1974).

The trial court endeavored to apply federal decisional law in this case. It rejected as inapplicable to any of the alleged restraints the "rule of reason" test of Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 66, 31 S. Ct. 502, 518, 55 L. Ed. 619, 647 (1911), which test would require a detailed analysis of the actual reasonableness of the challenged restraints. 150 N.J. Super. at 222. The court followed instead the alternative approach that some business practices constitute per se violations of the Sherman Act and thus do not merit an inquiry into their reasonableness. Ibid.; see Northern Pacific Ry. v. United States, 356 U.S. 1, 5, 78 S. Ct. 514, 518, 2 L. Ed. 2d 545, 549 (1958);

United States v. Topco Associates, Inc., 405 U.S. 596, 606-607, 92 S. Ct. 1126, 1132-1133, 31 L. Ed. 2d 515, 525 (1972). In so doing, the trial court specifically relied upon the then-viable, but now overruled, case of United States v. Arnold, Schwinn & Co., supra, 150 N.J. Super. at 224. The trial court went on to hold that the per se rule should be applied under the New Jersey Antitrust Act whether the suit is of a civil or a criminal nature and that, therefore, an illegal restraint of trade will be presumed if a per se violation is found. Ibid.

The Appellate Division, however, held essentially that the per se rule was not applicable to nonpricing vertical business restrictions. The Appellate Division pointed out that Schwinn had since been overruled by the Supreme Court in Continental T.V., Inc. v. GTE Sylvania, Inc., supra, and that the rule of reason standards earlier articulated in White Motor Co. v. United States, 372 U.S. 253, 261, 83 S. Ct. 696, 700, 9 L. Ed. 2d 738, 745 (1963), and Northern Pacific Ry. v. United States, supra, were applicable to such practices. 169 N.J. Super. at 352. See generally Bohling, "A Simplified Rule of Reason for Vertical Restraints: Integrating Social Goals, Economic Analysis, and Sylvania," 64 Iowa L.Rev. 461 (1979); Robinson, "Recent Antitrust Developments -- 1979," 80 Colum.L.Rev. 1, 13 et seq. (1980); Casenote, "Vertical Restraints -- Legality of Nonprice Vertical Restraints Determined Under Rule of Reason," 9 Seton Hall L.Rev. 496 (1978). Furthermore, the appellate court acknowledged that it was obligated to apply the law as it existed at the time of its decision. 169 N.J. Super. at 353. See Eastern Scientific Co. v. Wild Heerbrugg Instruments, Inc., 572 F.2d 883, 885 (1 Cir. 1978), cert. den. 439 U.S. 833, 99 S. Ct. 112, 58 L. Ed. 2d 128 (1978); Busik v. Levine, 63 N.J. 351, 361 (1973), app.dism. 414 U.S. 1106, 94 S. Ct. 831, 38 L. Ed. 2d 733 (1973).


We concur in the reasoning of the Appellate Division that, in the context of this case, the rule of reason, not the per se rule, is the correct standard to apply to the vertical restraints of trade alleged in Count I of the indictment except those relating to retail price-fixing.

Although the State's petition for certification fails to take direct issue with the Appellate Division's holding that, apart from those restraints involving price-fixing, other vertical restraints were lawful under the rule of reason, the issue is before us nonetheless. The State contends that Count I charged an aggregation of vertical trade restraints and that if one element of that aggregate is subject to the per se rule, then the validity of all such restrictions must be determined under the same per se rule; in such event, all the alleged restraints would be similarly invalid. We therefore initially address as a major issue in this appeal the question of whether the vertically-imposed, nonprice restraints are illegal under the rule of reason as determined by the appellate court.


One of the allegations in Count I of the indictment in the case before us relates to vertical territorial restraints. That type of restriction was actually present in the Sylvania decision and its validity was specifically determined according to the rule of reason. As explained in Sylvania, under the rule of reason approach, established in Standard Oil Co. of New Jersey v. United States, supra, 221 U.S. at 66, 31 S. Ct. at 518, 55 L. Ed. at 647, the factfinder "weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Sylvania, supra, 433 U.S. at 49, 97 S. Ct. at 2557, 53 L. Ed. 2d at 580 (footnote omitted); see generally Comment, "A Proposed Rule of Reason Analysis for Restrictions on Distribution," 47 Fordham L.Rev. 527 (1979). The exclusive territorial areas of franchises of the retail dealers involved in Sylvania, as well as in Schwinn, differed markedly from the "franchises" involved in this case; as a result, the franchise relationships here possibly present an even stronger situation for the application of the rule of reason.

A major purpose of the rule of reason is to foster interbrand competition, i.e., competition among similar products, in contrast to intrabrand competition, which is competition

confined to sellers of the same product. See Sullivan, The Law of Antitrust, § 172 at 399-401 (1977). The retailers in Sylvania and Schwinn were independent retailers selling several different products and were not obliged to operate exclusively under the trademark of the particular manufacturer or to derive their store or business name from the particular products or named brands of the products that they sold. Hence, the restraints there imposed by the manufacturers, particularly the various territorial restrictions, would have an obvious deleterious impact upon interbrand competition. Lawn King retailers, on the other hand, sell only the products and services of the franchisor and only under the name of the franchisor. The restrictions that the franchisor imposes, including the exclusive territorial franchise, are intended to encourage a new franchise to compete on the interbrand level without the harassment of competition on the intrabrand level. This ...

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