GARY R. BALLO, ET AL, Respondents, v. JAMES S. BLACK CO., INC., ET AL, Appellants.
No. 5581-7-III
Division Three
November 29, 1984
21-37
The judgment and sentence is affirmed.
CALLOW and COLEMAN, JJ., concur.
John P. Giesa, Reed & Giesa, and Richard B. Price, for respondents.
Kenneth O. Eikenberry, Attorney General, John R. Ellis, Deputy, and Jon P. Ferguson, Assistant; Michael J. Myers on behalf of Mountain States Legal Foundation; and John C. Guadnola and Thomas L. Fishburne on behalf of National Association of Realtors, Washington Association of Realtors, and Spokane Board of Realtors, amici curiae.
GREEN, A.C.J.—James S. Black and James S. Black, Inc., appeal a decision in a civil antitrust action involving an alleged conspiracy in restraint of trade and unfair competition in the development of a residential area in Spokane. Initially, this was a class action, but the class was decertified leaving only the Ballos as plaintiffs.
The issue which we find dispositive of this appeal is whether, after entering findings of fact, the court erred in concluding there were per se violations of
CDC‘s sole function has been the development and sale of residential building lots. CDC carefully controlled the numbers, sizes, styles and prices of homes built in the area. In 1976 and thereafter, the shareholders of CDC who were also builders selected the lots in rotation among themselves. No other builders were involved after 1976 except Dave Mark and Paul Rodeen, close relatives of two officer shareholders. Shortly after the lots were selected, earnest money agreements were executed between CDC and the builder. “It was agreed that the builders would pay [CDC] a nominal down payment of $25.00 to hold the lot until it was ‘sold’ by the builder.” When a customer desired to purchase a lot and have a custom home built, the builder to whom the lot had been allocated would execute an earnest money agreement with his customer for the sale of the lot before construction of the home commenced. At the time of closing, CDC deeded the lot directly to the builder‘s customer.
In 1977, Gary and Kristin Ballo, working with Glenmar
In October 1978 the Ballos filed a class action complaint against James S. Black, Inc., Sullivan Realty, Inc., CDC and Messrs. Black, Stack and Mark. Count 1 alleged a price fixing and tying arrangement in violation of the Consumer Protection Act (CPA) and count 2 alleged breach of fiduciary duty and constructive fraud. The Ballos sought certification of the class of all purchasers of speculative and custom homes in the Comstock subdivision. The court determined
Mr. Black and James S. Black, Inc., appeal claiming the court blindly applied the per se rule, failed to analyze the relationship of the alleged conspirators, and erroneously condemned legitimate restraints established by a joint venture development corporation. The Ballos cross-appeal challenging the court‘s decertification of the class.
The Consumer Protection Act was enacted in 1961 to promote free competition in the marketplace for the ultimate benefit of the consumer. State v. Black, 100 Wn.2d 793, 799, 676 P.2d 963 (1984).
In evaluating conduct allegedly in violation of the Sherman Antitrust Act, federal courts have applied two tests. The “rule of reason” test requires the fact finder to decide whether under all the circumstances of the case, the restricted practice imposes a reasonable restraint on competition. Arizona v. Maricopa Cy. Med. Soc‘y, 457 U.S. 332, 344, 73 L. Ed. 2d 48, 102 S. Ct. 2466 (1982). The second approach, the “per se” test, is premised upon the principle that certain agreements or practices are so plainly anticompetitive and so often lacking any redeeming virtue that they are conclusively presumed illegal without further examination under the rule of reason test generally applied in the Sherman Act cases. Broadcast Music, Inc. v. Columbia Broadcasting Sys., Inc., 441 U.S. 1, 9, 60 L. Ed. 2d 1, 99 S. Ct. 1551 (1979); National Soc‘y of Professional Eng‘rs v. United States, 435 U.S. 679, 55 L. Ed. 2d 637, 98 S. Ct. 1355 (1978); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 53 L. Ed. 2d 568, 97 S. Ct. 2549 (1977). Traditionally, practices which are deemed to be unlawful per se are price fixing, division of markets, group boycotts and tying arrangements. Arizona v. Maricopa Cy. Med. Soc‘y, supra; Northern Pac. Ry. v. United States, 356 U.S. 1, 2 L. Ed. 2d 545, 78 S. Ct. 514 (1958). When conduct is found to fall within one of these categories, any explanation of why the act was done or what its effect might be in a particular case is of no consequence or materiality. Plymouth Dealers’ Ass‘n v. United States, 279 F.2d 128, 131 (9th Cir. 1960).
However, not all arrangements among actual or potential competitors that impact prices are per se viola-
[Price fixing] is not a question simply of determining whether two or more potential competitors have literally “fixed” a “price.” . . . Literalness is overly simplistic and often overbroad. When two partners set the price of their goods or services they are literally “price fixing,” but they are not per se in violation of the Sherman Act. Thus, it is necessary to characterize the challenged conduct as falling within or without that category of behavior to which we apply the label “per se price fixing.”
(Citation omitted.) And, at page 23: “Joint ventures and other cooperative arrangements are . . . not usually unlawful, at least not as price-fixing schemes, where the agreement on price is necessary to market the product at all.” Thus, agreements between members of a joint venture are subject to scrutiny under the rule of reason, Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 81 L. Ed. 2d 628, 104 S. Ct. 2731, 2740-41 (1984), and are upheld if there are legitimate business reasons for the activity. North Am. Soccer League v. National Football League, 670 F.2d 1249, 1259 (2d Cir. 1982) (citing Standard Oil Co. v. United States, 221 U.S. 1, 55 L. Ed. 619, 31 S. Ct. 502 (1911)); McElhinney v. Medical Protective Co., 549 F. Supp. 121, 132 n.7 (E.D. Ky. 1982); 70 Cal. L. Rev. 595, 657 (1982). Furthermore,
It is, however, the intent of the legislature that this act shall not be construed to prohibit acts or practices which are reasonable in relation to the development and preservation of business or which are not injurious to the public interest . . .
supports the conclusion this case should be evaluated pursuant to the rule of reason. We proceed to do so based on the findings of fact entered by the trial court.
The essential elements of a joint venture are: (1) a contract, express or implied; (2) a common purpose; (3) a community of interest; and (4) an equal right to control. Paulson v. Pierce Cy., 99 Wn.2d 645, 654, 664 P.2d 1202
Here, Black, Mark, the Wilcoxes and the Stacks agreed to enter into a venture to purchase, develop and sell residential lots in the Comstock Addition to Spokane. All the elements of a joint venture are present. To implement the venture, they formed CDC, a closely held corporation. If the corporation were dissolved, the joint venturers would have owned the land. These joint venturers anticipated CDC would supply them with either building, excavation or real estate marketing work. To market the lots in the subdivision these joint venturers, who in reality owned undivided interests in the lots, of necessity had to agree upon the sale price of each lot, which they did. As noted in Broadcast Music, Inc., supra, this is not the type of price determination that is forbidden by antitrust laws.
Further, there were legitimate business reasons for what occurred and what the Ballos complain was injurious to them. The trial court found (1) through the hard work and imaginative foresight of the shareholders, CDC achieved a high degree of success in its effort to sell the subdivided property; (2) there were sound reasons for limiting the annual number of lots sold; (3) the services of James S. Black, Inc., were necessary for the ultimate success of Comstock and therefore it was entitled to be paid for its services; (4) the 6 percent real estate commission was paid to CDC which in turn paid James S. Black the 6 percent commission; and (5) the lot the Ballos purchased was deeded directly to them from CDC. These findings establish that CDC‘s activities were legitimate and necessary to accomplish the purposes of the joint venture.
The rule of reason analysis also requires consideration of the impact of the activity upon competition in the relevant geographic market. Gough v. Rossmoor Corp., 585 F.2d 381 (9th Cir. 1978), cert. denied, 440 U.S. 936, 59 L.
Here, while the court found the “[l]ots and new homes offered for sale in the Comstock area are a separate, unique, identifiable, exclusive portion of the Spokane real estate market“, it also found “[t]here were some homes in other real estate developments in the Spokane County area which were comparable in quality, size and price range to some homes in the Comstock area“; and that “[p]rior to deciding to purchase in Comstock, [the Ballos] considered new and used homes throughout Spokane County . . .” and “with the assistance of Glenmar Freeman of Sullivan Realty, they examined various properties.” No error was assigned to these findings; therefore, they are verities. Since the Ballos examined properties in the Spokane area, it was the relevant market. The Comstock area comprised only about 240 lots and any price fixing impact on the relevant market was minimal, if not nonexistent.
Thus, we hold that because (1) the land in the Comstock area was actually owned by Black, Stack, Mark, and the other two minor shareholders in the name of CDC as a joint venture, and (2) the Comstock area occupied a minuscule portion of the geographic market, Spokane County, the setting of the price for the sale of lots and the 6 percent real estate commission paid to CDC were reasonable and did not violate
Further, we find no abuse of discretion in the court‘s decertifying the class action or requiring defendants to pay for the services of a special master.
In summary, the Ballos were not damaged. After searching for and considering other comparable properties in Spokane, they selected a lot and house plan in the Comstock area. Having made that choice, it is apparent the Comstock area was competitive with other comparable areas in Spokane County. The Ballos obtained what they bargained for at a price they agreed to pay. There was no unreasonable restraint involved.
In light of our holding, we need not consider the parties’ other contentions.
Reversed.
EDGERTON, J. Pro Tem., concurs.
MCINTURFF, J. (dissenting)—I respectfully dissent because I disagree with the majority‘s characterization of
The following additional facts are pertinent to my analysis: The sole function of Comstock Development Co. (CDC) was the development and sale of residential building lots. CDC never owned, built or sold any houses. In its early years, CDC was faced with low market demand and substantial mortgage payments. In order to meet its financial obligations from 1967 to the mid-1970‘s, CDC sold lots to the general public in competition with the builders who had purchased lots from it. These builders included the Stacks and Orville Mark, shareholders in CDC, and other, private builders.
Sometime during 1973 or 1974, the shareholders agreed CDC would no longer offer lots for sale to builders in general or to the public. From that time on, lot sales were restricted to the two shareholder builders and four nonshareholder builders.2 These builders met at least annually and allocated the lots then available on a rotation basis. Black, Stack and Mark met periodically to establish minimum prices at which the lots would be offered for sale, through the builders, to the general public. Simultaneously, a second price was established for each lot which reflected a 15 percent discount from the minimum offering price. It was understood and agreed that the minimum prices were the starting point for builder-consumer sales and were 15 percent higher than the amount CDC was willing to sell and the builders were willing to pay for the lots.
In the early years of CDC, if a consumer wanted to build a custom home, the only real estate commission involved would be a 6 percent commission paid by CDC to James S. Black, Inc. (Black, Inc.), based on the sale price of the lot. During these years, no commissions were paid on the value
The Comstock lot which the Ballos selected in 1977 was a lot that had been allocated to Stack, a shareholder builder. Previously, CDC had agreed to sell and Stack had agreed to pay $9,350 for the lot. The lot was offered to the Ballos for $11,000, the minimum price set by Black, Stack and Mark. The closing agent paid CDC $9,350 and paid Stack the $1,650 difference. The Ballos did not see the deed at closing and did not learn until later that CDC had previously agreed to sell the lot for $9,350.
The Ballos contracted with Stack to build them a custom home on their lot. To the contracted price, a commission of $5,500 was added which was split 50-50 between Black, Inc., and Sullivan Realty. Neither Black, Inc., nor Sullivan Realty, Inc., performed any services other than those connected with the sale of the lot.
Traditionally, the practices which the federal courts have deemed to be per se unlawful are price fixing, division of markets, group boycott, and tying arrangements. Arizona v. Maricopa Cy. Med. Soc‘y, 457 U.S. 332, 73 L. Ed. 2d 48, 102 S. Ct. 2466 (1982). When conduct is found to fall within one of these categories, any explanation of why the act was done or what its effect might be in a particular case is of no consequence or materiality. Plymouth Dealers’ Ass‘n v. United States, 279 F.2d 128, 131 (9th Cir. 1960).
Categorically, restraints of trade are either horizontal, an agreement between competitors at the same level of the market structure, or vertical, agreements between competitors at different levels of the market structure, e.g., manufacturers and distributors, United States v. Topco Assocs., 405 U.S. 596, 31 L. Ed. 2d 515, 92 S. Ct. 1126, 1136 (1972). In price fixing cases, both horizontal and vertical agreements are per se antitrust violations. White Motor Co. v. United States, 372 U.S. 253, 9 L. Ed. 2d 738, 83 S. Ct. 696 (1963); United States v. Parke, Davis & Co., 362 U.S. 29, 4
The agreement between Black, Stack and Mark and the other builders, that the price they fixed for the lot would be the price at which all of the builders (horizontal competitors) would offer the lots for sale, shifted the defendants’ activity from the arena of legitimate corporate decision-making into the realm of antitrust violations. In other words, Black, Stack and Mark set the prices at which Stack and Mark, as well as their horizontal competitors, the other builders, would charge a consumer for a lot in Comstock. It must be remembered that while setting these prices Stack and Mark retained their competitor identity and were competing with one another in Comstock.
There are no antitrust problems with the defendants forming CDC to market Comstock lots and setting the price at which CDC would sell its product. In fact, that is what was done when the defendants agreed that CDC would charge $9,350 to the builder who was allocated the Ballos’ lot. The antitrust problems arose when the defendants and the other builders mutually agreed that the $11,000 price would be the agreed minimum price for builder-consumer sales. Thus, I would hold the agreement between Black, Mark and Stack and the other builders to set the price at which a builder would sell a lot purchased from CDC was an agreement between competitors and a per se violation of
The second agreement which directly affected the Ballos was the agreement between Black, Stack and Mark and the other builders to charge all custom home purchasers a 6 percent commission on the combined value of the lot and house. The admitted purpose of this agreement was to “equalize the prices of custom and speculative homes so custom home buyers did not enjoy any advantage over the speculative home buyer.” This agreement clearly falls within the classical definition of price fixing:
[A] combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.
United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223, 84 L. Ed. 1129, 60 S. Ct. 811 (1940). I would hold the agreement between Black, Stack and Mark and the other builders to equalize prices, by imposing a 6 percent commission on custom home buyers, is an agreement between horizontal competitors in restraint of trade and a per se violation of
I also agree with the trial court‘s conclusion that the agreements which constituted price fixing in per se violation of
Our State‘s unfair competition statute is
I have already opined that the defendants’ actions constituted price fixing in per se violation of
The majority takes the position that CDC was a corporate joint venture and the actions condemned by the trial court were merely actions necessary to market the joint venture‘s product. I recognize that persons who would otherwise be competitors may legitimately pool their capi-
The remaining issues raised by Black concern the Superior Court‘s (1) issuance of a permanent injunction which prohibited Black from participating in horizontal price fixing, (2) award of treble damages and (3) attorney fees, and (4) denial of Black‘s motion for an independent appraisal of the Ballo home and lot. Because I am in a dissenting position, I will not treat these issues at length. Suffice it to say that the facts and the pertinent law support a holding that the trial court did not abuse its discretion with regard to these items.
Finally, I turn to the Ballos’ cross appeal which assigns error to rulings made by the Superior Court on the questions of certification and decertification of their class action.4 Again, these questions are ones left to the discre-
In summary, I would affirm the judgment of the Superior Court that Black, Stack and Mark engaged in illegal price fixing in violation of
Notes
It is vitally important to this marketing program and to the builders involved that any custom houses built in the area carry the same costs of this marketing program as the speculative houses with which it competes. If this were not true, the builder would find that his speculative houses were being used as models to build custom houses. Thus, the speculative house would stand on the market while the customer saved the sales commission by going across the street to build a custom house.