E Z Sockets, Inc. v. Brighton-Best Socket Screw Mfg., Inc.

307 N.J. Super. 546, 704 A.2d 1364 (Ch. Div. 1998)
  • Opinion Date: June 21, 1998

CONTRACTS; ANTI-TRUST—An agreement between a distributor and manufacturer requiring the manufacturer to discontinue selling products to a distributor’s competitor need not constitute an unlawful vertical restraint of trade or tortious interference with economic relations.

A manufacturer located in India entered into an exclusive agreement with a distributor to be its sole North American distributor. The distributor also lent the manufacturer money to acquire machinery necessary to expand its operations and become an efficient supplier. When the distributor learned that the manufacturer had supplied products to one of its competitors, it quickly negotiated an agreement under which the manufacturer would discontinue selling its products to the other distributor. The jilted distributor filed suit under the New Jersey Antitrust Act and also claimed tortious interference with economic relations.

The Court stated that there were two standards of proof in anti-trust cases, the “rule of reason” and the “per se” rule. The jilted distributor conceded, and the Court found, that it could not establish a violation if the “rule of reason” were to be applied. Therefore, it could prevail only if the Court found actions which were illegal per se. The Court ruled that vertical price restraints are not illegal per se; illegality requires a finding of agreement on price or price levels. Citing the United States Supreme Court, the Chancery Division noted that there must be evidence that a manufacturer and a distributor made a “conscious commitment to a common scheme designed to achieve an unlawful objective.” Monsanto Company v. Spray-Rite Service Corporation, 465 U.S. 752, 753 (1984). In this case, the jilted distributor attempted to meet this standard by presenting numerous letters between the exclusive distributor and the manufacturer. The Court held that it was clear that the exclusive distributor intended to drive out the competition by ensuring that the manufacturer sold to it at prices lower than those charged to other distributors. However, the Court concluded that the facts did not add up to a violation of the law because there was insufficient evidence that the exclusive distributor and the manufacturer engaged in vertical price restraint. Relying on a recent 11th Circuit opinion, the Court stated that fixing the wholesale price posed no antitrust problems in the absence of evidence of an intent to inflate the resale price to an end user. Thus, although the exclusive distributor intended to control the prices quoted by the manufacturer to other customers, this control was not equivalent to price fixing and did not harm the competitive market.

A successful claim for tortious interference with economic advantage, must show that: (1) plaintiff had a reasonable expectation of economic advantage; (2) defendant interfered intentionally and with malice; (3) defendant’s interference caused the loss of that economic gain; and (4) the injury caused damage. To successfully defend such a claim, a defendant must show that: (a) it did not employ wrongful means, such as fraud or intimidation; (b) its action did not create or continue an unlawful restraint of trade; and (c) its interest is at least in part to advance its own interest in competing with the plaintiff. The Court found that the exclusive distributor employed no unlawful means, did not unlawfully restrain trade and acted legally in advancing its competitive interest. The Chancery Division granted summary judgment in favor of the exclusive distributor.

In affirming the Chancery Court’s decision, the Appellate Division held that a vertical restraint is not illegal per se unless it includes some agreement on price or price levels, which was lacking in this case. The Appellate Division also agreed that the distributor failed to sufficiently prove a claim for tortious interference.