84 / Journal of Marketing, Winter 1980


84 / Journal of Marketing, Winter 1980
companies had violated the Magnuson-Moss Warranty Act
which established minimum federal standards for consumerproduct warranties. One firm, marketing mobile homes
primarily in Louisiana, designated its warranty as a "Full
One-Year Limited Warranty." The FTC complaint charged
that such working could mislead consumers about the limited
What is a "full" warranty? Under a "full" warranty,
a consumer-product manufacturer must repair the product
free, within a reasonable time, and must not require the
buyer to do anything unreasonable in getting the repairs.
Also, the manufacturer must give the buyer a new product,
or offer a refund, if the original item has not been repaired
after a fair number of attempts. A warranty which specifies
any less protection must be designated a "limited" warranty.
According to the complaint, Madison based in California,
provided a warranty which misrepresented that buyers have
no implied warranty rights under state law. In fact, as seen
in the Renault case buyers automatically have such rights
under state law.
The seller firm has agreed to inform buyers about their
rights under implied warranties. The letter which the company must send explains that buyers have a warranty of
"merchantability," which means that the home must be
fit to live in and also a warranty of "fitness for a special
purpose." The second warranty means that the homes must
live up to specific claims, if made by the seller, and relied
on by the buyer in making the purchase.
Another complaint cites Madison for improperly stating
that the buyers had to return a registration card to the
company in order to be entitled to warranty protection.
This is not a requirement. Therefore, the Madison letter
must state that warranty service will be provided if the
buyer can show "any reasonable proof of purchase or
delivery date." The two firms have pledged that their
warranties will be correct in the future.
3.1 Price Discrimination
Purdy Mobile Homes, Inc. v. Champion Home Builders Co.
and Tamarack Homes, CCH H 62,620 (CA-9, April 1979);
BNA ATRR No. 913 (May 10. 1979), A-20. [Tower]
Does a mobile home manufacturer's refusal to make
all of its mobile home lines available to a dealer amount
to "delivery discrimination" in violation of Section 2{e)
of the Robinson-Patman Act? The Court of Appeals for
the Ninth Circuit ruled negatively in this case involving
a unique attempt on the part of the plaintiffs lawyer to
win a judgment under the Robinson-Patman Act.
Purdy Mobile Homes brought this action against
Champion Home Builders and its subsidiary alleging violations of both state and federal statutes. The district court
ruled in Champion's favor on all charges. The only issue
involved in this appellate case related to alleged discriminatory behavior on the part of Champion.
Purdy's lawyers brought the action under Section 2(e)
of the Robinson-Patman Act which deals with discriminatory
offerings of promotional services and facilities. Purdy asserted that Champion engaged in "multiple branding" by
placing different brand names on three nearly identical lines
of mobile homes, and that Champion's refusal to sell two
of the brands to Purdy while selling them to other franchisees
constituted "delivery discrimination."
84 / Journal of Marketing, Winter 1980
In making its case. Purdy relied on the Contex-Winston
Co. case (477 F. 2d 585 [1971]) to support its contention
of "delivery discrimination." In Contex-Winston, the Court
of Appeals for the Seventh Circuit ruled that a supplier
violated Section 2(e) by delivering "a product in a consistently late fashion to one purchaser while making timely
deliveries to other purchasers." Delivery was deemed to
be a "service or facility" within the meaning of Section
2(e) "because timely deliveries would obviously promote
and facihtate the resale of a product."
The Court of Appeals for the Ninth Circuit refused
Purdy's contentions. The court noted that the Contex-Winston ruling had often been criticized for expanding the scope
of Section 2(e) beyond reasonable bounds. Further, the court
stated that "even assuming that delivery is a 'service' as
that term is used in Section 2(e). the actions of Champion
do not violate that section." The court stressed that
Champion did not dehver a promised product in a discriminatory marmer; but rather, refused to sell certain product
lilies to Purdy. The court concluded by stating that the
Robinson-Patman Act does not require a seller to supply
all prospective customers.
One should note the case of the unique line of argument
used by the plaintiff and the reminder the case provides
of the Contex-Winston decision. The Purdy-Champion case
indicates the extreme to which arguments may be developed
in Robinson-Patman cases, and the Contex-Winston case
indicates that going to such extremes may be successful
in Robinson-Patman cases.
4.2 Relations between Buyers and Sellers: Exclusive
Dealing Arrangements, etc.
1. Fuchs Sugars and Syrups, Inc.. and Francis J. Prael
V. Amstar Corp., CCH 1| 62,700 (CA-2, June 1979); BNA
ATRR No. 920 (June 28, 1979), A-1. [Knapp]
When the nation's largest sugar refiner terminated one
type of distributor and substituted another type, two of
the terminated distributors sued the refiner for a conspiracy
in violation of Section 1 of the Sherman Act, As a result,
they won an almost one-half million dollar treble damage
award by the lower court.
Marketers should understand the conditions under which
such a switch in distributors can be legal or illegal, and
how these conditions can be variously interpreted by different courts as reflected in this court of appeal's reasons
for reversing the lower court's decision.
Up to 1974, Amstar marketed its product through three
types of distributors—general sugar brokers, direct sugar
brokers, and its own sales force. General brokers served
as agents for more than one refiner and direct brokers for
only one refiner.
All the terminated distributors were general brokers.
Amstar switched from them presumably because the general
brokers, even though principal agents of Amstar, acted with
such "customer orientation" toward their buyers that "they
at times acted more neariy as purchasing agents for Amstar's
The effects of the general brokers' action on behalf of
their customers were often a reduction of price and profit
for Amstar. The refiner, therefore, terminated all its general
brokers, offering positions as direct brokers to some and
termination payments to the others. Two terminated dis-
tributors refused the payment and sued Amstar.
The dealers argued that the intent and effect of Amstar's
switch was to deprive sugar customers of market information, raise prices, and limit competition. The district court
agreed that there was a conspiracy in restraint of trade.
However, this court of appeals found no conspiracy.
Reaffirming the right of a manufacturer to change from
one distributor to another, or from one entire distribution
system to another, the court said such changes do not
constitute conspiracy where the manufacturer does not also
try "to exact some collateral anticompetitive advantage."
Amstar simply substituted one distribution system for another.
The antitrust innocence of the switch was particularly
evident in that Amstar acted unilaterally and kept its termination plan a closely guarded secret. The court noted the
"elaborate security precautions" with which Amstar acted,
and that the dealers, even those who later converted to
direct brokers, took no part in the termination decision.
Because Amstar acted unilaterally, it could not be faulted
when it negotiated the conversion of some general brokers
to direct brokers.
The court said: "Indeed, if it is not an antitrust violation
for a manufacturer to change his distribution system, then
it can hardly be evidence of an illegal conspiracy that the
manufacturer seeks merely to secure the personnel to man
this new system."
2. Merlin R. Miller, Robert Meek, and Regal Services, Inc.,
V. International Dairy Queen, Inc., CCH f 62,593 (D.C.
Minn., April 1979). [Knapp]
This case reaffirmed some standard conditions under
which a franchisor may refuse to approve or deal with
distributors and franchisees. One special feature warrants
marketers' attention: the request by the plaintiff that sought
to become a party to a rather unusual distribution arrangement. That arrangement involved the presence between the
franchisor and the franchisees of two organizations and
marketing arrangements—a distribution division of the
franchisor and that division's exclusive manufacturing agent.
The defendant was the franchisor. International Dairy
Queen, which develops, licenses, and franchises retail Dairy
Queen stores. Dairy Queen prescribes the formula that
franchised stores must use to make softserve ice milk, and
requires that retail outlets purchase the base ice milk mix
only from manufacturers approved by Dairy Queen. Dairy
Queen has approved over 100 authorized mix manufacturers
and was willing to approve additional manufacturers able
to perform according to its standards.
The uniqueness of the Dairy Queen marketing arrangement was that Dairy Queen had formed its own distribution
arm called the Food Services Division, which purchased
ice milk on an exclusive basis from a manufacturer—Kohler.
Food Services was the only authorized mix manufacturer
that could practically serve most of 250 Dairy Queen stores
in a three-state area.
Regal Services, the plaintiff, sought Dairy Queen authorization: (1) to become a distributor like Dairy Queen's Food
Services Division and compete with it; and (2) to purchase
mix from the manufacturer, Kohler. Dairy Queen refused.
Regal Services brought this suit in order to enjoin Dairy
Queen either to authorize Regal Services as a mix manufacturer or to prohibit Dairy Queen's refusal to permit Kohler
sale of mix to Regal Services.
Dairy Queen objected that it was not simply requested
to approve a new manufacturer of mix, but to allow the
appropriation of its Food Services source and distribution
system. It further argued that it authorized mix manufacturers, not distributors; and that it could refuse to allow
Kohler sales to Regal Services because of Kohler's exclusive
contract with its own Food Services Division.
Instead, Dairy Queen offered to approve an additional
mix manufacturer and Regal Services' association with it,
if the manufacturer met Dairy Queen's standards and entered
into its mix manufacturing agreement. It also offered to
permit Regal Services to purchase mix from previously
authorized manufacturers.
Regal Services charged that Dairy Queen was guilty of
a group boycott with Kohler that was part of a system
to limit access to the marketplace. The court ruled that
there was no illegal combination or group boycott.
The court added that Dairy Queen's exclusive agency
agreement with Kohler was not an illegal combination or
boycott because: (I) it was done as a unilateral action by
Dairy Queen; (2) there was absence of several parties
combining against another; (3) as an exclusive agency
relationship there was one legal entity and therefore no
possibility of combination between separate parties.
The court also rejected Regal Services' second charge
that Dairy Queen illegally tied the supply of mix to the
granting of franchise outlets.
Finally, the court rejected Regal's third claim of monopolization. The court said the relevant market was not
Dairy Queen's authorized mix in the three-state area but
instead the broader frozen dessert market. Dairy Queen
did not monopolize this market because it had only 2%
of it, because there were at least 36 dairies in the three-state
area capable of producing the mix, and because of sufficient
interchangeability of products.
In conclusion, the court found that Regal Services was
not restricted to operate in any way except one. It had
access to both mix and to retail outlets. Its only limitation
was its inabihty to purchase mix from Kohler and this was
not illegal because of the exclusive agency agreement between Kohler and Dairy Queen.
3. Copy-Data Systems, Inc. et al. v. Toshiba America, Inc.,
CCH ij 62,696 (D.C. S. N.Y., June 1979). [Knapp]
A major manufacturer of copying machines was guilty
of per se violation of Section 1 of the Sherman Act when
it first encouraged a private distributor to market its machines, then aggressively competed with the distributor and
took over the markets that the distributor had developed.
In 1970, Copy-Data became an exclusive distributor of
Toshiba copying machines in various eastern states. The
Toshiba name was little known, so the distributor established
the company name, found and trained new dealers, and
penetrated new markets for the equipment. The distributor
next became exclusive distributor for Toshiba in the Middle
Atlantic states, and was asked by the manufacturer to
develop the Chicago market which it did.
Toshiba then pressured, coerced, and threatened CopyData, in Toshiba's drive to sell its own machines in competition with the distributor. The list of Toshiba's actions against
its own dealer was long, including informing Copy-Data
of its intention to sell directly in Chicago and ordering the
distributor to turn over all its dealer information. Toshiba
next told Copy-Data to give up the Middle Atlantic states
and threatened the loss of Copy-Data's eastern states exclu-
Legal Developments in Marketing / 85
sive distributorship if it refused. Retreat to the eastern
seaboard was a short-term haven for Copy-Data, when
Toshiba informed Copy-Data that it wanted to remove
Copy-Data from the northeast area. Toshiba worked its will
by limiting the number of machines it provided to Copy-Data
to only those that would satisfy the demand in Copy-Data's
home state of New Jersey.
Toshiba further pressured Copy-Data by reducing its
credit line to the distributor (eventually to zero) and by
refusing to accept and credit the return of defective machines. At the same time, Toshiba was expanding its own
direct selling in markets and through dealers developed
earlier by Copy-Data.
Its markets lost, its credit line cancelled, its cash flow
stanched, Copy-Data had involuntary bankruptcy filed
against it.
For these actions, Toshiba was found guilty of per se
violations and will have to pay treble damages, attorney's
fees, and court costs, with the total amount to be determined
at later proceedings.
5.1 Advertising
1. In re AMF Inc., CCH H 21,589, FTC File No. 782 3025
(July 1979). [Cohen]
For the first time, a proposed FTC consent order agreement has required a company to produce informational
messages to be used as public service announcements. The
consent order required the company to produce two or more
bicycle safety messages, 30 seconds to five minutes in length.
The messages are to be aimed at children and prepared
with the assistance of experts in bicycle safety, children's
television programming, and children's advertising. This
order represents parts of the FTC's current concern with
advertising directed toward children.
In a complaint against AMF, one of the largest manufacturers of bicycles and tricycles in America, the FTC charged
that two AMF TV commercials depicted unsafe bicycle and
tricycle riding and that such behavior could be imitated
by children viewing the ads. A commercial for AMF's bicycle
showed a young boy riding from a one-way street onto
a sidewalk, then onto a dirt lot, and finally into an alley—eacb
time without slowing down or looking right or left. Another
commercial depicted one young boy riding an "Evel Knievel
MX" bicycle and another very young boy riding an "Evel
Knievel Hot Seat" tricycle. Both boys rode rapidly down
separate, parallel driveways and into a street without looking
out for cars or other dangers. On reaching the street, the
two boys nearly collided with each other.
The proposed order requires the company to prepare
the messages and send them to 109 television stations, chosen
because they carry a substantial amount of children's programming and because they broadcast to almost all of the
markets in whicb the commercials were aired. The safety
messages are to be public service announcements which
the stations may air at their discretion. No air time will
be purchased for the messages. AMF, however, would be
required to monitor for four months the dissemination of
the safety messages and report results to the Commission.
A target number of "impressions" has been set for the
two messages. If the target is not reached during the
four-month period, AMF would be required to submit the
messages to a second list of 140 stations, monitor their
86 / Journal of Marketing, Winter 1980
use for an additional four months, and provide the Commission with a second report.
The proposed order also contains specific restrictions
in advertising of bicycles and tricycles.
2. Jay Norris. Inc., Joel Jacobs, and Mortimer Williams
V FTC, CCH H 62,623 (CA-2, May 1979); In re J. Walter
Thompson Co., CCH ^ 21,555, FTC Dkt. 9104 (April 1979).
[Cohen] ^
The FTC is continuing enforcement of its advertising
substantiation program which requires an advertiser to bave
a reasonable basis to substantiate a product's safety, performance, efficacy, quality, and comparative price claims, as
reflected in the following cases.
Jay Norris, a mail-order firm, is required to bave a
"reasonable basis" for representing the safety or performance characteristic of any product before making any of
these claims. This order is significant since it declares that
substantiation materials should be available prior to the
dissemination of a claim, and is the first litigated FTC order
which requires substantiation of safety and performance
claims for all of a finn's products.
The court of appeals rejected defenses made by Norris
that the FTC exceeded its powers and illegally shifted the
burden of proof, but rephrased the order in tbe interest
of clarity. In the rephrased order, Norris is prohibited from
"representing the safety or performance characteristic(s)
of any product unless . . . they . . . have a reasonable
basis for the representations consisting of competent and
objective material available in written form that fully and
completely substantiates such characteristic{s)."
The court declared tbe Commission did not go beyond
its statutory powers in requiring prior substantiation. In
fact, previous FTC orders containing such a requirement
have been upheld in situations where a seller or manufacturer
has misrepresented safety or performance.
The order was not held to be too broad as it only dealt
with safety and performance representations. Its application
to all of Norris' products is acceptable due to the firm's
past history of deception.
A joint complaint was filed by the Commission against
J. Walter Thompson and Sears, Roebuck & Co. in 1977
charging that advertisements for Sears' dishwashers were
false and unsubstantiated.
Under a recent consent-order agreement, J. Walter
Thompson is required to have a reasonable basis for performance claims of a dishwasher before it placed ads. A
"reasonable basis" in this context consists of competent
and reliable scientific tests or opinions of experts qualified
to render judgments in such matters. Under the agreement,
the agency may rely on the substantiation furnished by the
client, but it must evaluate such substantiation as to its
reasonable basis.
3. In re The Kroger Co., CCH \ 21,585, FTC Dkt. 9102
(June 1979). [Cohen]
A grocery chain's "Price Patrol" advertising campaign
designed to compare prices with those of competitors was
ruled by the FTC to be unfair and deceptive. According
to administrative law Judge Hyun, upholding a 1977 FTC
complaint, the advertising claims were misleading since they
were based on surveys that were not methodologically sound,
and did not disclose that meat, produce, and house brands
were excluded from the survey.
The Kroger Company, which operates 1,200 food stores