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The Lionel Corp. v. Klein

Court of Chancery of Delaware, New Castle County

June 9, 1955

The LIONEL CORPORATION, a corporation of the State of New York, plaintiff,
v.
Phil KLEIN, trading as Phil's Distributors, Defendant.

Manufacturer's action to permanently enjoin merchant from violation of Fair Trade Act in sale of manufacturer's products. The Court of Chancery, New Castle County, Seitz, Chancellor, held that merchant failed to show that there was a deterioration of manufacturer's retail price maintenance structure in his area, that manufacturer proceeded against him arbitrarily and failed to take action against other known violators, and that manufacturer improperly discriminated in price between different purchasers in area.

Permanent injunction granted.

Page 653

[35 Del.Ch. 219] Thomas Cooch (of Connolly, Cooch & Bove), Wilmington, for plaintiff.

David Snellenburg, II (of Killoran & VanBrunt), Wilmington, for defendant.

SEITZ, Chancellor.

This is the decision after final hearing on plaintiff-corporation's complaint charging defendant with violation of the Delaware Fair Trade Act[1] in the sale of plaintiff's products. At the close of the trial, the Court ruled from the bench that the defendant was clearly guilty of violating the Act and that the only question for decision was whether the defendant had sustained one or more of his other defenses to the action. The three defenses relied on by defendant are:

1. That there was such a deterioration of the Lionel resale price maintenance structure in the Wilmington area that the defendant cannot be equitably enjoined from selling plaintiff's products below the minimum resale price stipulated by plaintiff.

2. Plaintiff forfeited its right to enjoin the defendant from selling below the Fair Trade price by arbitrarily proceeding against the defendant and failing to take action against other known violators in the Wilmington area.

3. That plaintiff improperly discriminated in price between different purchasers in the Wilmington area and therefore forfeited its right to enforce its Fair Trade contract against defendant, an object of such discrimination.

Plaintiff-corporation manufactures and sells toy electric trains and parts. Defendant is a Wilmington merchant. In December 1953, on the basis of plaintiff's suit, the defendant was preliminarily enjoined from selling below the Fair Trade prices. Later, defendant [35 Del.Ch. 220] moved to have the preliminary injunction vacated on the basis of the charge, now reasserted, of a general deterioration in Wilmington of plaintiff's resale price maintenance structure. Defendant's motion was denied by the then Vice Chancellor primarily because of the stage of proceedings at which it was raised. See Lionel Corp. v. Klein, Del.Ch., 106 A.2d 525.

Page 654

While the Fair Trade Act does not make provision therefor, the Courts have engrafted equitable defenses on the right of manufacturers to enforce the Fair Trade Act. See Calvert Distillers Corp. v. Nussbaum Liquor Store, 166 Misc. 342, 2 N.Y.S.2d 320. Thus, the Courts have recognized that where there is a general breakdown in a particular manufacturer's retail price structure in a particular area, the Court will not permit the manufacturer to pick out one retailer and attempt to enforce it against him. This, of course, is only fair where a party seeks to invoke equitable processes. The first question then is whether there has been such a ‘ deterioration’ in plaintiff's resale price maintenance structure in the Wilmington area as to preclude plaintiff's right to a permanent injunction. I assume that the burden of demonstrating this fact is upon the defendant.

Plaintiff insists that it has a firm price structure in Delaware. Defendant claims that this is not so because he alleges that seven different stores in the Wilmington area violated the Fair Trade Act with respect to the sale of plaintiff's products during the period in question.

Plaintiff concedes a violation by Sears Roebuck by a sale on December 23, 1953. There was also a sign offering a discount. Plaintiff admits a violation by a sale by Jarome's on December 24, 1953. Finally plaintiff concedes a violation by Claymont Hardware by a sale on November 9, 1954 (the second day of this trial). While there is some dispute, I believe that defendant proved a sale in violation of the Act by Knowles on January 18, 1954.

I conclude that defendant failed to sustain his burden of proving a violation by Rosenbaum's. The evidence is too equivocal. Defendant also relies upon discount sale ads by Wanamaker and Jack and Jill as the basis for the last two violations charged. Wanamaker's [35 Del.Ch. 221] did advertise a clearance sale at a discount on November 22, 1953. Jack and Jill's advertised a discount sale on March 6, 1954. Plaintiff denies that either company was advertising for sale a then fair traded item. It explains the discount on the ground that these companies were not offering current models but rather were selling discontinued models which were not then covered by the Fair Trade Act. I conclude that ...


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