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BASCOM FOOD PRODS. CORP. v. REESE FINER FOODS

June 1, 1989

Re Bascom Food Products Corporation and John A. Fressie
v.
Reese Finer Foods, Inc., John Beers, Gary Greenhouse, Jerry Kehe, Jerry Dorf, Carl McCraw and Norm Wine



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

 ORIGINAL FILED WITH the CLERK of the COURT

 ALFRED J. LECHNER, JR., UNITED STATES DISTRICT JUDGE

 Counsel:

 This matter is currently before the court on the application of John A. Fressie ("Fressie") and Bascom Food Products ("Bascom Food") (collectively the "plaintiffs"), for preliminary injunctive relief requiring certain affirmative action on the part of defendant Reese Finer Foods, Inc. ("Reese Foods") and several individual defendants (collectively the "defendants"). For the reasons that follow, plaintiffs' application for injunctive relief is granted.

 Facts1

 Fressie is the president and sole shareholder of Bascom Food. In addition, Fressie is a shareholder of defendant Reese Foods. From 1971 until June 23, 1988, Fressie served as president, chief executive officer and director of Reese Foods. From 1971 until January 31, 1989, Bascom Food performed various general management functions for Reese Foods. According to the Complaint, Bascom Food did virtually everything for Reese Foods including sourcing, purchasing, product development, financing of Reese Foods' working capital through lines of credit and pursuant to Fressie's personal guarantees, order entry, billing, bookkeeping and all other administrative functions. In addition, Bascom Food performed other functions for Reese Foods such as warehousing and manufacturing. Complaint, paras. 17, 18.

 As discussed below, Fressie's and Bascom Food's positions at Reese Foods have been terminated. *fn2" Certain of the individual defendants now control Reese Foods. These defendants have entered into a voting trust agreement, pursuant to which plaintiffs claim the defendants have garnered a controlling interest in Reese Foods for the purpose of enforcing anticompetitive restraints. *fn3"

 In many respects, Reese Foods appears to be more of conduit for, and of, the members of the purchasing cooperative than a stand alone entity. Reese Foods appears to have generated no actual profits for itself. Instead, it has sold specialty food products (mostly under its own private Reese Foods or Reese Foods-owned labels) to its shareholder/distributors at market discounts and with substantial cash rebates. Reese Foods has no plant and equipment, no hard assets, and no employees to speak of. According to the Complaint, Reese Foods is, in many respects, a "paper corporation" *fn4" consisting essentially of a distribution network of competing individuals (or their companies) with the right to sell Reese Foods products. Complaint, para. 14. Historically, Reese Foods has had retained earnings of approximately $ 30,000 to $ 50,000 annually. In addition to the market discounts on goods sold, Reese Foods has distributed over $ 7 million in cash rebates to its shareholder/distributors since 1972. Id.

 The original concept of Reese Foods was to give each distributor the exclusive right to sell Reese Food products in his own geographic territory. Fressie Aff., p. 4. It is alleged the Reese Foods shareholders and distributors operate separate and independent companies at the same horizontal level of the specialty foods market, selling specialty foods to individual retail distributors.

 Reese Foods currently sells private label brands of spices, seasonings, gourmet food items and other high-quality food products ("specialty food products") to approximately thirty distributors throughout the United States. Twenty of the distributors are presently shareholders of Reese Foods. At one time all distributors were shareholder/members of Reese Foods; today certain distributors have been selected who are not shareholders. The majority of distributors, however, continue to be shareholder/members of Reese Foods.

 Reese Foods' distributors are, generally speaking, independently operated and are under no contractual obligation to purchase any products from Reese Foods. As indicated below, however, the original shareholders have had an affirmative obligation to sell Reese Foods products. Over the years, the number of individual products in the Reese Foods specialty food product line has grown substantially. On August 20, 1971 (when Fressie and three other specialty food distributors, Norm Wine, Sr., Harry Mains, and Jack Heffner, each invested a few hundred dollars in exchange for one share of stock in V.I.P.) each shareholder agreed he would purchase two hundred cases of popcorn salt which Bascom Food would manufacture and sell to V.I.P. and which V.I.P., in turn, would sell to each of the three individual shareholder/distributors. Since that time, Reese Foods has grown into a diverse specialty foods distributor, with revenues in 1988 of approximately $ 43 million.

 Fressie has played a significant role in the growth of Reese Foods. He has allegedly created distinctive Reese Foods brand names and labels (including El Rio, Da Vinci, Ty Ling), as well as its art, advertising and packaging. He allegedly provided all of the financing for Reese Foods through lines of credit guaranteed by Bascom Food and Fressie personally. Since 1971, with the popcorn salt and "cheezy-buttery" popcorn seasoning, Fressie developed new specialty food items and generated marketing interest among the shareholders. Reese Foods now has a product line of over five hundred items. Complaint, para. 22.

 According to Fressie, "in many other products such as smoked oysters, artichokes and capers, Reese is the dominant market factor." Fressie Reply Aff., para. 13. As a general matter, it is alleged that trade in specialty food products is a significant element of interstate commerce. Complaint, para. 9. The defendants, on the other hand, maintain that Reese Foods has neither monopoly position nor dominant market share in any of its markets. It is asserted that Reese Foods is price-competitive.

 Da Vinci pasta, for example, allegedly competes with DiCecco and other pastas manufactured by Borden Co. which, according to trade reports, sells approximately eight hundred million pounds of pasta per year. Reese Foods sells seventeen million pounds of pasta per year. Defendants claim there are at least a dozen brands of pasta with which they compete. In addition, there are approximately thirty-five companies that belong to the National Pasta Association, a national association of pasta suppliers to the grocery market. *fn5" Beers Aff., para. 4.

 Reese Foods' line of El Rio Mexican food products, according to the defendants, competes with many manufacturers including the Old El Paso brand, marketed by a division of Pet, Inc., and Oretega, La Preferida and Tio Sanchez brands. Defendants similarly argue that Reese Foods' Ty Line Oriental food line competes with Kikkoman, the China Bowl brand of Estee, as well as Ka-Me brand, a division of Shafer Clarke, Inc. Market share figures for these Mexican and Chinese food products were not supplied.

 Fressie claims that Reese Foods, with $ 43 million in annual sales, is the largest specialty food company in the United States. Defendants dispute this, arguing that The Specialty Food/Knorr Division of CPC International and The Specialty Food Division of Heinz International are believed to be larger. Defendants further argue that the size of Reese Foods is not particularly relevant in light of the intensive product competition in the retail grocery store business. According to defendants, "although Reese Foods has products in one or two categories that are especially popular," Reese Foods products generally are not the major brand in the particular product category. Beers Aff., para. 6.

 There has not been adequate evidence offered to determine, on a product-by-product basis, whether Reese Foods dominates -- or is a significant factor -- in any particular submarket for specialty food products. Attached as Appendix A to this opinion is a listing of revenues earned by Reese Foods in a number of product lines. *fn6" While many of the revenue figures would not tend to suggest Reese Foods enjoys a dominant market position in various markets (although there appears to be at least some economic impact), it is not possible to assess the market position without determining the scope of the product market. Furthermore, it is not possible to determine whether the "product market" definitions (discussed infra) for many of the individual products are especially narrow because of uniqueness in the Reese Foods products.

 Another food distributor has stated that: "There are no adequate substitutes available to me for some of the Reese product line, particularly Reese artichoke hearts and its cooking wines." Michael Cert., para. 3. As to the Da Vinci pasta, a third specialty food distributor stated: "The packaging of their Da Vinci pasta, for example, has been particularly good and that product has obtained a significant foothold in the specialty foods market." Dick Cert., para. 5. Importantly, even certain of the defendants (Dorf, Kehe, Greenhouse and Wine) stated in affidavits in the state court action that: "As a distributor, I depend upon the timely and orderly supply of Reese products. Reese is my largest line of specialty food products." Id. at para. 11.

 As indicated, Fressie was recently terminated from his management position at Reese Foods; the individual members of Reese Foods have elected defendant John Beers ("Beers") to be CEO, *fn7" apparently because Fressie was less responsive to the membership's will. According to the Complaint, Fressie was removed from Reese Foods because he refused to enforce unlawful restraints of trade, to the dissatisfaction of the defendants and other shareholders. It is alleged, for example, that from 1971 until the time of his termination as Reese Foods' president in 1988, Fressie received several complaints from Reese Foods shareholders and distributors of "unauthorized" sales of Reese Foods products by competing distributors in claimed territories. Fressie refused to prohibit these sales. Complaint, para. 29.

 According to the defendants, Beers has unilaterally decided not to deal with Fressie as a distributor because he presented a variety of problems. *fn8" In an effort to undercut plaintiffs' argument that they were terminated for failure to enforce a particular distribution policy, defendants attempt to argue there never was an actual policy, but instead mere "brainstorming" about the possibility of enacting a policy. This suggestion, however, is belied by the fact that Reese Foods had been soliciting antitrust advice for a decade on the legality of the policy and also by a December 19, 1988 memorandum from Beers to the shareholders. That memorandum indicates that a formal policy is, and has been, in existence:

 
The fact remains that Reese, under the anti-trust laws, has a legal right to put into place reasonable policies designed to promote the orderly marketing and distribution of its products. The original policy of Reese was to forbid the diversion of merchandise to non Reese distributors. Unfortunately, prior management never enforced the policy, however, the policy is still in effect and we're going to start enforcing it. *fn9"

 Fressie, now removed from the management of Reese Foods, seeks to be a regular full line distributor of Reese Foods products and to compete in regions already covered by Reese Foods distributors. It is the refusal of Reese Foods (and the individual defendants) to deal with Fressie which gives rise to this lawsuit. *fn10" Fressie claims the refusal of the defendants to deal with him stems from a fear of competition from a distributor who intends to sell Reese Foods products to centralized retail warehouses, other distributors, and wholesale grocers at a lower price, rather than on the established "store to door" basis, as described below.

 Fressie claims the defendants, in refusing to deal with him, are eliminating the competition he could bring to existing territories by selling Reese Food products through different channels. Defendants are allegedly enforcing a "store to door" sales policy which prohibits a distributor from selling directly to centralized warehouses of wholesale grocers or to the warehouses of large supermarket chains, except within the distributor's established territory. This excludes potential distributors like Bascom Food and Fressie, which for historical reasons do not have an agreed-upon territory, from competing in the specialty foods market. Fressie Aff., paras. 19-21.

 According to the defendants, Reese Foods depends on the success of its distributors and their promotion and marketing of Reese Foods products. To ensure distributors market Reese Foods products vigorously in their respective areas of distribution, each distributor is expected to concentrate its marketing efforts in a particular geographic area. To encourage such effort, the individual Reese Foods distributors are typically granted exclusive distributorships in their areas. Defendants claim that to prevent potential free-rider problems *fn11" and to ensure distributors achieve economies of scale and other efficiencies in their respective markets, Reese has actively discouraged transhipping to other distributors.

 Fressie asserts that while the Bascom Food management contract with Reese Foods was in place, he "voluntarily refrained from exercising [his] equal rights as a Reese shareholder to distribute Reese products to the retail trade for [his] own account and looked instead to the management contract as [his] primary source of income from the Bascom-Reese relationship." Fressie Reply Cert., para. 1. With the termination of the management contract, however, he now seeks to exercise a right which he claims always existed under the shareholders agreement -- the right of all Reese Foods shareholders to buy Reese Foods products and to sell them as active distributors. Id.

 Defendants argue that, contrary to plaintiffs' assertions, shareholder status carries with it no vested right to purchase and resell Reese Foods products. They note that shareholders have been denied the opportunity to purchase Reese Foods products in the past. *fn12" It is further explained by defendants that, although Reese Foods was formed by distributors who received stock in return for their contributions of capital, "the informal connection between stock ownership and distributorship rights has broken down over the years." Beers Aff. para. 7. Since the 1980 decision not to require newly appointed distributors to become Reese Foods shareholders, new distributors of Reese Foods products have not been purchasers of Reese Foods stock. Id. Defendants argue that ownership of stock cannot imply a right to sell Reese Foods products, otherwise a distributor owning Reese Foods stock would be immune from being terminated. Id.

 This argument, however, ignores the fact that the shareholder's agreement provides an affirmative obligation on the part of every shareholder to sell Reese Foods products. The unjustified refusal to sell Reese Foods products is a specific basis for Reese Foods to repurchase a member's stock. Fressie Reply Aff., para. 4. Moreover, Beers testified at a deposition that Reese Foods stock is "really more of a membership card to the Reese buying co-op as opposed to representing a stock that someone would buy for an investment." Beers Deposition at 69, 1. 15-19.

 Plaintiffs argue that Reese Foods has never refused to sell products to a shareholder other than pursuant to a justification contained in the shareholders' agreement. It has never merely taken the position that shareholders have no right to distribute. Fressie Reply, para. 7. From the evidence which has been submitted, it appears stock ownership in the Reese Foods cooperative carried with it an expectation that the stockholder would be a Reese Foods distributor, absent a violation of the shareholders' agreement or some unique reason such as stockholder management duties to the cooperative. There appears to be no other reason why an entity or person would hold stock in the cooperative.

 Discussion

 Preliminary injunctive relief will not issue unless the applicant can establish: "(1) a reasonable probability of eventual success in the litigation and (2) that the movant will be irreparably injured pendente lite if relief is not granted." In re Arthur Treacher's Franchisee Litigation, 689 F.2d 1137, 1143 (3d Cir. 1982). *fn13" The defendants have argued that, where the plaintiff is seeking a mandatory injunction, as opposed to a prohibitory injunction, the burden is greater because mandatory injunctions are generally disfavored. (Citing Punnett v. Carter, 621 F.2d 578 (3d Cir. 1980)).

 In Oburn v. Shapp, 521 F.2d 142 (3d Cir. 1975), the Third Circuit clarified the meaning of "reasonable probability of success:"

 
"[it] is not necessary that the moving party's right to a final decision after trial be wholly without doubt; rather, the burden is on the party seeking relief to make a prima facie case showing a reasonable probability that it will prevail on the merits."

 Id. at 148. See also Delaware Valley Transplant Program v. Coye, 678 F. Supp. 479, 481-82 (D.N.J. 1988) (discussion of plaintiff's probability of success with regard to the Commerce Clause of the United States Constitution, Art. 1, Sect. 8, cl. 3, and the threshold inquiry concerning the Commerce Clause claim); Zeller Plastik v. Koehn, Grabner v. Joyce Molding, 698 F. Supp. 1204, 1226-27 (D.N.J. 1988) (patent case where plaintiff demonstrated likelihood of success on the merits in proving by a preponderance of the evidence that defendant infringed the patent). *fn14" In this case, for the reasons set forth below, plaintiffs have (at this stage) made their prima facie case.

 In considering the irreparable nature of the injury which may result from denial of preliminary relief, consideration can be given to whether the plaintiff will get an early trial on the merits. See N.W. Controls, Inc. v. Outboard Marine Corporation, 317 F. Supp. 698 (D. Del. 1970). In this case, although the parties have been engaging in discovery in a related state court action, there is some discovery yet to be conducted and preparation to be completed prior to going to trial in this matter. It is currently anticipated this matter will go to trial in October, 1989.

 In the Complaint plaintiffs allege various violations of section one the Sherman Act, *fn15" 15 U.S.C. ยง 1. Although section one of the Sherman Act literally bars any combination of persons or entities "in restraint of trade," Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332, 344, 73 L. Ed. 2d 48, 102 S. Ct. 2466 (1982); United States v. Topco Associates Inc., 405 U.S. 596, 606, 31 L. Ed. 2d 515, 92 S. Ct. 1126 (1972), courts have interpreted the word "every" liberally and construed section one as precluding only those contracts or combinations which "unreasonably restrain competition." Northern Pacific Railway v. United States, 356 U.S. 1, 3-5, 2 L. Ed. 2d 545, 78 S. Ct. 514 (1958); United States v. Joint Traffic Ass'n, 171 U.S. 505, 43 L. Ed. 259, 19 S. Ct. 25 (1898). Accordingly, since Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 55 L. Ed. 619, 31 S. Ct. 502 (1911), the Supreme Court has analyzed most restraints under the so-called "rule of reason," which requires a determination as to whether, under all the circumstances of the case, the restrictive practice imposes an unreasonable restraint on competition. See Maricopa County Medical Soc'y, 457 U.S. at 343.

 On the issue of plaintiffs' likelihood of success on the merits, three primary issues are presented. First, a threshold issue exists concerning the existence of standing on the part of plaintiffs to bring this lawsuit. Second, an issue exists concerning the structure of Reese Foods and its relationship with the other defendants as well as with Fressie. Plaintiffs have relied on the fact that the relationship among the parties is horizontal in nature. The third issue is whether any of the types of practices conducted by the defendants should be considered an unreasonable restraint of trade under the per se rules of antitrust. The Supreme Court in Northern Pacific, supra, 356 U.S. 1, 78 S. Ct. 514, 2 L. Ed. 2d 545 (1958), explained the appropriateness of, and the need for, per se rules:

 
"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 they have caused or the business excuse for their use. This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable -- an inquiry so often wholly fruitless when undertaken."

 Id. at 5.

 A "rule of reason" analysis is employed when the restraint in question is not so obviously anticompetitive as to be deemed per se unreasonable. This approach includes consideration of the facts peculiar to the business in which the restraint is applied, the purpose of the restraint and its effects, and the history of the restraint and the reason for its adoption. Chicago Board of Trade v. U.S., 246 U.S. 231, 238, 62 L. Ed. 683, 38 S. Ct. 242 (1918).

 Apart from the antitrust merits in this matter, an issue also exists concerning the irreparability of the harm plaintiffs will suffer if an injunction is not issued.

 I. Standing

 Defendants argue that, even if plaintiffs can prove the elements of their claims and prove irreparable injury, the application for injunctive relief must be denied because plaintiffs lack standing to bring their present antitrust claims. Defendants' Brief, p. 13. This argument is rejected.

 Generally speaking, a private plaintiff seeking injunctive relief must show a threat of "injury of the type the antitrust laws were intended to prevent and that flows from that which makes the [practice] . . . unlawful." Cargill v. Monfort of Colorado, Inc., 479 U.S. 104, 109, 93 L. Ed. 2d 427, 107 S. Ct. 484 (1986); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 50 L. Ed. 2d 701, 97 S. Ct. 690 (1977). In this case, plaintiffs assert they have suffered the loss of business opportunities flowing from conduct of the defendants aimed at eliminating competition. Defendants have argued broadly that plaintiffs must be the proper party to seek relief. Cargill, 479 U.S. at 110, n. 5 (citing Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 74 L. Ed. 2d 723, 103 S. Ct. 897 ...


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