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COCA-COLA BOTTLING CO. OF SHREVEPORT v. COCA-COLA

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE


April 29, 1983

COCA-COLA BOTTLING COMPANY OF SHREVEPORT, INC., et al., Plaintiffs,
v.
THE COCA-COLA COMPANY, A Delaware Corporation, Defendant; ALEXANDRIA COCA-COLA BOTTLING COMPANY, LTD., et al., Plaintiffs, v. THE COCA-COLA COMPANY, A Delaware Corporation, Defendant

Schwartz, District Judge.

The opinion of the court was delivered by: SCHWARTZ

SCHWARTZ, District Judge.

Multimedia advertising proclaims "Coke is it," but what is "it"? Is diet Coke "it"? These are some of the questions currently before the Court. The plaintiffs *fn1" in these two unconsolidated lawsuits seek declaratory, injunctive and monetary relief against the Coca-Cola Company (the "Company") based upon allegations of breach of contract, violation of two 1921 Consent Decrees, *fn2" trademark infringement, dilution of trademark value, and federal antitrust violations, all of which concern the Company's introduction of diet Coke. Jurisdiction is based upon 28 U.S.C. §§ 1332, 1338, 2201; 15 U.S.C. §§ 1114, 1121, 1125; and 15 U.S.C. §§ 15, 16. Pending before the Court is plaintiffs' motion for a preliminary injunction pursuant to Fed. R. Civ. P. 65. Upon consideration of the voluminous briefs and affidavits submitted by the parties and the argument heard on April 7, 1983, the Court, for the reasons that follow, will deny the motion for a preliminary injunction.

 I. Background

 While the genealogy of the Coca-Cola family has been examined judicially many times, including this Court's recent opinion in Coca-Cola Bottling Co. of Elizabethtown, Inc. v. The Coca-Cola Co., 98 F.R.D. 254 (D. Del. 1983), it is virtually impossible to consider the substance of the lawsuit without a basic understanding of the family tree.

 A. The Coca-Cola Family

 In 1886, an Atlanta pharmacist, Dr. J. S. Pemberton, created the syrup for a soda fountain beverage and named it Coca-Cola. *fn3" In 1887, the name was registered as a trademark in the United States Patent Office. In exchange for $2,300, Asa Chandler acquired the Coca-Cola trademark and formula in 1888 and in 1892 formed The Coca-Cola Company as a Georgia corporation.

 Prior to 1899, Coca-Cola was sold primarily as a fountain drink but in that year the Company entered into a contract with two Chattanooga, Tennessee, lawyers, B. F. Thomas and J. B. Whitehead, granting them the exclusive right to purchase Coca-Cola syrup ("Bottler's Syrup") at a fixed price, use the Coca-Cola trademarks, and sell Coca-Cola throughout the United States in bottles or other receptacles. *fn4" The Company retained the right to manufacture and sell syrup, and to market fountain Coca-Cola. *fn5" In December 1899, Whitehead and Thomas formed a Tennessee corporation known as Coca-Cola Bottling Company. Bottling plants were established in Chattanooga and Atlanta.

 In 1900, due to a disagreement over the best method to develop the bottling business, Coca-Cola Bottling Company divided its territory into two parts. Thomas retained ownership of Coca-Cola Bottling Company which conveyed to Whitehead and his new business associate, J. T. Lupton, all of the rights that Coca-Cola Bottling Company had under the 1899 contract to certain states in the newly divided territory. Whitehead and Lupton formed a Tennessee corporation originally named Dixie Coca-Cola Bottling Company, which later changed its name to The Coca-Cola Bottling Company. *fn6"

 In 1902, the Company granted the right to bottle Coca-Cola in Texas to Whitehead-Lupton, who in turn granted one-third of its interest in Texas and Oklahoma to E. D. Twinam. This right to Texas and Oklahoma held by Whitehead-Lupton and Twinam was then transferred to a new corporation which became known as The Coca-Cola Bottling Company (1903) ("1903 Company"). In 1916, the Company granted the exclusive right to bottle Coca-Cola in the six New England states to Monroe Bickart who formed the New England Coca-Cola Bottling Company ("New England").

 These four companies -- Thomas, Whitehead-Lupton, 1903 Company, and New England -- became known as "parent bottlers." *fn7" The parent bottlers did not actually bottle Coca-Cola themselves; rather, they contracted with other individuals and entities to bottle and sell Coca-Cola in exclusive specifically designated geographic territories. These bottlers became known as "actual" or "first-line" bottlers. The first-line bottlers often further divided their exclusive geographic territories amongst "sub-bottlers." The system that developed functioned as follows: The Company manufactured Bottler's Syrup which in turn was sold to the parent bottlers. The parents or sub-parents then resold the syrup to the actual bottlers at a higher price. *fn8"

 Between 1899 and 1915 the contracts between the parent bottlers and the Company, which gave the parents the right to purchase Bottler's Syrup at a fixed price per gallon, may have been amended to adjust the price of Bottler's Syrup. In 1915, the contracts were amended to conform with changes of the Clayton Act. Dkt. 63, para. 26 Exh. F-1, F-2 (Second Affidavit of Emmet J. Bondurant). The parent bottlers modified their contracts with their first-line bottlers to reflect these changes. Id. at P 28. These modifications were carried out through the use of standardized printed contracts. ("Bottler's Contracts"). *fn9"

 In 1918, the Company was purchased by a banking syndicate and became a Delaware corporation, assuming the obligations to the parent bottlers. The new corporation entered into an agreement with the principal parent bottlers in December of 1919 to permit the Company to pass on cost increases of sugar in excess of nine cents per pound to the parent bottlers. Due to the high cost of sugar after World War I, the Company sought to enter into new contracts with the parents which would allow the Company to raise Bottler's Syrup prices at will. The parent bottlers rejected this proposal and the Company informed the parents that their contracts were terminable at will and gave notice of termination. In response, Whitehead-Lupton and Thomas instituted suits against the Company in this Court. *fn10"

 In Coca-Cola Bottling Co. v. The Coca-Cola Co., the Court granted the parents' motion for a preliminary injunction holding that their contracts were perpetual. 269 Fed. at 816. While an appeal was pending, the parties executed settlement agreements which were incorporated by the Court as final judgments on October 4, 1921. These constituted the 1921 Consent Decrees.

 The Consent Decrees also amended the 1899 contracts, as amended in 1915, between the Company and the parents. The Consent Decrees provided, inter alia: first, that the parents' contracts with the Company were perpetual; second, that Coca-Cola Bottler's Syrup contain no less than 5.32 pounds of sugar per gallon; third, that the cost of Bottler's Syrup to the parents would be no less than $1.17-1/2 per gallon and that the first-line bottlers would pay a maximum of $1.30 per gallon; fourth, that the price of Bottler's Syrup could increase based upon the increase in the market price of sugar as quoted quarterly by the ten largest refineries in the United States; and fifth, that the parents would have the exclusive right to use the trade name and trademark Coca-Cola in their exclusive territories.

 The settlement with Whitehead-Lupton was temporarily conditioned on Whitehead-Lupton's attempt to obtain acceptance of the modification of its first-line Bottler's Contracts to conform with the Consent Decrees. *fn11" Dkt. 1, Exh. 5, paras. 15, 16. The Thomas bottlers had two-year term contracts, most of which had expired during the litigation. Thomas executed perpetual new form Bottler's Contracts which conformed to the Consent Decrees.

 Between 1923 and 1975, the Company acquired and dissolved all of the parent and sub-parent bottlers. Dkt. 55, Exh. 7, para. 17 (Affidavit of Charles L. Wallace). The Company, therefore, has succeeded to the rights and obligations of all the parent bottlers, and today sales of Bottler's Syrup are made directly from the Company to the actual bottlers. *fn12" The price of Bottler's Syrup during this period was governed by the price formula established by the 1921 Consent Decrees.

 Beginning in 1978, the Company sought amendments to its contracts with all first-line bottlers to permit a new formula for pricing Bottler's Syrup which would utilize a "sugar element," a "base element," and the Consumer Price Index. The sugar element expands the period for adjustments from the prior quarterly system and provides for adjustments based on the quoted market price of any sweetening ingredient used in Bottler's Syrup. As of this date, approximately 339 first-line bottlers, representing approximately 90 percent of the domestic volume of Coca-Cola sales, have signed the 1978 Amendment. These bottlers are generally known as "amended bottlers." Approximately 83 first-line bottlers are "unamended bottlers" who continue to operate under Bottler's Contracts which basically conform to the 1921 Bottler's Contracts entered after the 1921 Consent Decrees. *fn13"

 Beginning in 1980, the Company began substituting high fructose corn syrup ("HFCS-55") for approximately 50 percent of the granulated sugar in the Bottler's Syrup sold to amended and unamended bottlers. Due to the 1978 Amendment's formula, the amended bottlers receive a pass-through of the savings realized by the Company by the substitution of HFCS-55 which costs less than granulated sugar. *fn14" The substitution of HFCS-55 has spawned litigation in this Court by a group of unamended bottlers who claim that their Bottler's Contracts entitle them to Bottler's Syrup made only with granulated sugar, which they assert does not include HFCS-55, and that the price paid by the bottlers should reflect the actual price paid by the Company for granulated sugar rather than the list price. The unamended bottlers also allege that if the Company utilizes lower cost HFCS-55, they should be entitled to a pass-through of the realized savings. See Coca-Cola Bottling Co. of Elizabethtown, Inc. v. The Coca-Cola Co., 98 F.R.D. 254, slip op. at 9 (D.Del. 1983).

 The Company has introduced soft drink beverages other than Coke. For example, TAB, a low calorie cola sweetened with saccharin, was introduced in 1963. Other beverages include Sprite, Fanta, Mr. Pibb, Fresca and Ramblin' Root Beer. These beverages are not sold pursuant to the Bottler's Contracts for Coca-Cola Bottler's Syrup; rather the syrup and beverage base *fn15" are sold under a separate term contract between the Company and the bottler and are priced according to a Company schedule without regard to the market price of any sweetener.

 B. Introducing diet Coke

 As noted, the Company introduced TAB in 1963. Since that time, TAB has become the largest selling diet soft drink. Lawrence R. Cowart, a senior vice president of the Company, testified that TAB's two leading diet cola competitors, Diet Pepsi and Pepsi Light, however, have a greater combined market share than TAB. Transcript of April 4, 1983 Hearing ("Tr.") at 35-36. In addition, the diet soft drink market currently constitutes approximately 20 percent of the total soft drink market, and some projections call for it to reach 30 to 40 percent by 1990. Id. at 40. In this, the most rapidly growing segment of the beverage market, competition is intense and the financial stakes are high. For example, a 10 percent growth in market share translates to retail revenues of approximately $5 billion. Id. at 36-37.

 Given this growth potential, the Company reviewed its market offerings and determined that TAB, while a market leader, suffered from a relatively narrow market appeal. *fn16" In order to meet their anticipated market expansion, the Company developed a "three cola strategy" comprising Coke, TAB, and another diet cola with broader market appeal. Id. at 37. In 1980, the Company began a two-year market and technical research project aimed at developing the new diet cola. On July 8, 1982, diet Coke was introduced with great fanfare. *fn17" The name was chosen carefully and focused on the descriptive nature of the word "diet" and the tremendous market recognition of "Coke." Id. at 41. The advertising emphasized the taste of the new cola and its relationship to Coke, rather than its low-calorie nature. *fn18" The advertising campaign has been intense and effective. The Company spent some $50 million in research and marketing, has budgeted $31 million for 1983 advertising, and has expended approximately $20 million to date. Id. at 48. The response has been tremendous and diet Coke may surpass even TAB's market share.

 The Company sold diet Coke syrup to bottlers at the same price as TAB syrup -- $3.02 per gallon during the first quarter of 1983. *fn19" As noted, the price of Coke syrup to amended bottlers was $3.049 per gallon and $2.69 per gallon to the unamended bottlers during the same time period. The sweetening agent in diet Coke is saccharin which costs approximately $1.59 per gallon less than the granulated sugar/HFCS-55 mixture used in Coke syrup. *fn20" The bottlers want to benefit from this cost savings while the Company insists the higher profit margin is necessary to cover the large research, development, marketing, and advertising costs relating to diet Coke. All agree that the bottlers sell diet Coke at a profit even without the pass-through of savings; therefore, the dispute centers upon who should receive the incremental profit -- the Company or the bottlers.

 The situation is complicated by the manner in which diet Coke was introduced. The bottlers were not consulted before the introduction and no price terms were discussed. Cowart testified that this failure to consult the bottlers occurred because of competitive pressure. Tr. at 40. The Company's fear of the imminent introduction of Pepsico's caffeine free colas necessitated the accelerated introduction of the Company's new entrant in the cola market. In fact, these caffeine free colas, Pepsi-Free and Sugar-free Pepsi-Free, were introduced two days before diet Coke. Id. This series of events had several unfortunate effects from the bottler's viewpoint: first, the lavish advertising campaign precipitated immediate demand for a product to which the bottlers did not have immediate access; second, this demand strengthened the negotiating position of the Company and weakened that of the bottlers regarding the marketing terms for diet Coke; and third, the failure to consult resulted in somewhat bruised egos. *fn21"

 Naturally, bottlers began requesting, if not demanding, diet Coke syrup and beverage base. Many felt that the Company was obligated to provide diet Coke under the terms of their existing Bottler's Contracts for Coke, whether they be amended or unamended bottlers. The Company, however, took the position that diet Coke was not within the scope of the existing contracts and a new term contract with flexible pricing would have to be developed.

 On October 7, 1982 the Company formally presented a proposed Phase I/Phase II negotiating procedure to the chairman of an Ad Hoc Committee *fn22" which was followed by a formal presentation to the Board of Governors of The Coca-Cola Bottlers' Association. *fn23" Phase I of the process constitutes the execution of a Temporary Amendment to the Bottler's Contract which governs the pricing of diet Coke pending a final agreement on a permanent contractual arrangement. *fn24" Phase II represents negotiations towards the permanent pricing and marketing of diet Coke and other new cola beverages. *fn25" Phase II negotiations are in progress at this time. *fn26"

 The Temporary Amendment is intended to be an interim measure which permits the sale of diet Coke pending permanent resolution of the Bottler's Contract issues. Approximately 191 first-line bottlers have signed the Temporary Amendment and approximately 181 first-line bottlers, while having not signed, have agreed to the terms of the Temporary Amendment. *fn27" These 372 first-line bottlers are receiving diet Coke syrup or beverage base and are marketing diet Coke within their exclusive territories. The plaintiffs in this case, who represent approximately 3 percent of the Company's domestic sales of Bottler's Syrup, could have access to diet Coke but have refused to either sign or accept the terms of the Temporary Amendment. Consequently, the Company has refused to provide diet Coke syrup or beverage base to these bottlers unless and until they either sign or accept the terms of the Temporary Amendment. Plaintiffs basically object to one clause of the Temporary Amendment which states:

 

9. It being the intent and purpose of the Bottler and the Company that this Temporary Amendment shall in no way prejudice or otherwise affect their respective rights and obligations under the Bottler's Contract or from any other source, or their respective legal or equitable claims, the Bottler and the Company expressly stipulate that this Temporary Amendment shall have no such effect. It is possible that other bottlers may seek through judicial interpretation or otherwise to require the Company to supply Coca-Cola syrup or beverage base for diet Coca-Cola under their existing Bottler's Contracts at the price then in effect for Bottlers' Coca-Cola syrup absent this Temporary Amendment. It is further agreed, however, that during the period this Temporary Amendment is in effect, the price of Coca-Cola syrup and beverage base for diet Coca-Cola as between the parties hereto shall be determined solely under this Temporary Amendment.

 Dkt. 1, Exh. W, para. 9 of Temporary Amendment. *fn28" This clause erects an irrevocable waiver of the right to receive reimbursement of overcharges should this Court ultimately decide that the bottlers are entitled to diet Coke syrup or beverage base pursuant to their existing contracts or that the bottlers are entitled to any pass-through of savings from the utilization of saccharin.

 This then sets the stage for the current controversy. The bottlers assert that they are faced with a Hobson's choice: accede to the demands of the Company and accept diet Coke pursuant to the Temporary Amendment thereby waiving any right to recover any overcharges during the time the Temporary Amendment is operative; or reject the terms of the Temporary Amendment and thereby lose the opportunity to market diet Coke, incur the wrath of frustrated customers, and risk potential loss of shelf-space and destruction of their businesses. *fn29"

 II. The Relief Sought and the Applicable Standard

 The bottlers desire the Court to issue a preliminary injunction which would allow them to purchase diet Coke syrup without waiving their interim rights. In other words, the bottlers request that the Court reform paragraph nine of the Temporary Amendment to strike the irrevocable waiver. The bottlers seek this relief pendente lite and have offered to pay the current Temporary Amendment price for diet Coke syrup to the Company subject to refund should they prevail in this litigation. *fn30"

 The parties do not dispute the relevant standard governing the grant of a preliminary injunction. In this Circuit, it is well established that this Court must consider four factors in the grant of preliminary injunctive relief: first, the moving party must show a reasonable probability of success in the litigation; second, the moving party must show that the failure to grant the relief will result in irreparable injury; third, the Court should consider, if relevant, the possibility of harm to other interested persons from the grant or denial; and fourth, the Court should consider the public interest. Eli Lilly & Co. v. Premo Pharmaceutical Laboratories, Inc., 630 F.2d 120, 136 (3d Cir.), cert. denied, 449 U.S. 1014, 66 L. Ed. 2d 473, 101 S. Ct. 573 (1980); Constructors Association of Western Pennsylvania v. Kreps, 573 F.2d 811, 814-15 (3d Cir. 1978); Cities Service Co. v. Mesa Petroleum Co., 541 F. Supp. 1220, 1222 (D. Del. 1982). Upon consideration of the applicable factors, the Court will not grant the requested preliminary relief.

 III. Probability of Success on the Merits

 In a discussion of the merits, the first question which the Court must address is the nature of the two products -- Coke and diet Coke -- for if no identity exists between them, the bottlers are not entitled to diet Coke under their Bottler's Contracts and the inquiry must stop. Only if the products share common attributes, in light of several indicia, can the Court turn to the specific questions of the rights of the two classes of bottlers under their Bottler's Contracts.

 A. Is diet Coke the real thing?

 At the early stages of this litigation, the bottlers argued that diet Coke was simply Coke with saccharin as its sweetener. As such, the bottlers contended that they were entitled to diet Coke syrup under their existing Bottler's Contracts. This theory has evolved to encompass two positions: first, that diet Coke is simply a version of a product which has undergone evolutionary change but which retains its identity as Coke; and second, that any differences between Coke and diet Coke Bottler's Syrup are either insignificant or reflect attempts to achieve taste identity.

 The aura of secretiveness surrounding the Coke formula has reached legendary status. Nonetheless, some of the ingredients have found their way into the public realm. For example, in 1916 the Supreme Court wrote:

 

It [the syrup] was originally called "Coca-Cola Syrup and Extract". It is produced by melting sugar, -- the analysis showing that 52.64 per cent. of the product is sugar and 42.63 percent is water. Into the syrup thus formed by boiling the sugar, there are introduced coloring, flavoring, and other ingredients, in order to give the syrup a distinctive character. The caffeine, as has been said, is introduced in the second or third "melting."

 United States v. Coca Cola Co. of Atlanta, 241 U.S. 265, 284, 60 L. Ed. 995, 36 S. Ct. 573 (1916). Similarly, a Thomas pamphlet included in the record in the 1920 litigation in this Court states that:

 

A bottle of Coca-Cola contains carbonated water and Coca-Cola Syrup. This syrup is composed of: Pure water, sterilized by boiling; Sugar, granulated, best quality; Flavoring Extracts and Carmel; Caffeine, the active principle of tea; Citric and Phosphoric acids.

 

The sugar, the choice extracts of ripe fruits, the Carmel are blended to give Coca-Cola its color and inimitable flavor. The Citric Acid, derived from lemon, and the Phosphoric Acid combined with the carbonated water to produce the pleasant piquancy which affects the sweetness of the sugar. The refreshing caffeine of tea, freed from its unwholesome associate tannic acid, is employed in approximately one-half the quantity that is contained in a cup of tea or coffee.

 Record in The Coca-Cola Bottling Co. v. The Coca-Cola Co., No. 2651 (3d Cir.1921), Second Affidavit of George T. Hunter, Exh. 56, at 1341-43 [hereinafter cited as Rec.] (cited in Dkt. 63, para. 6, Second Affidavit of Emmet J. Bondurant).

 Dr. Pemberton's formula changed over the years yet the product retained its identity as Coke. The parties have stipulated for purposes of this preliminary injunction proceeding that throughout its history the secret blend of flavor oils and ingredients -- known as Merchandise 7X -- has remained constant in composition and quantity. Nonetheless, many known alterations of the formula have occurred since the July 21, 1899 contract. *fn31"

 For purposes of this litigation, the most important historical change was the inclusion and subsequent elimination of saccharin in 1907. Until 1907 the Company manufactured a single Coke syrup for use in bottling and fountains. According to Charles Howard Chandler, this syrup contained both sugar and saccharin. Rec. supra, page 15, at 1714. The Pure Food and Drug Act of 1906 prohibited the use of saccharin in food products and it was removed and replaced with a larger quantity of granulated sugar. This change resulted in an alteration in the taste of Coke. *fn32" The bottlers now argue that diet Coke is simply a resurrection of the pre-1907 version. This, of course, is incorrect because diet Coke contains no sugar and the pre-1907 version contained both sugar and saccharin. *fn33" The bottlers' position is weakened further in that at all times until the introduction of diet Coke, only one form of Bottler's Syrup bore the name Coca-Cola. *fn34" Now, however, two forms of Bottler's Syrup bear the name -- Coca-Cola and diet Coca-Cola. It is now undisputed that the chemical compositions of the two Bottler's Syrups differ. Other than Merchandise 7X, which, as the parties have stipulated for the purpose of this motion, is common to both syrups, the contents are as follows: Quantity per gallon Quantity per gallon Ingredient of Coca-Cola Syrup of diet Coca-Cola Syrup Caramel 91.99 g 85.48 g Water 4.4927 lbs. 8.0195 lbs. Nutritive Sweetener n35 Sucrose 2.8267 lbs. 0 HFCS-55 2.9816 lbs. 0 Non-Nutritive Sweetener Saccharin 0 8.944 g Caffeine 2.36 g 3.15 g Phosphoric Acid 12.20 g 5.96 g (Phosporous) (4.170) g (1.88 g) Citric Acid 0 4.76 g Extract of Cola nut 2.18 g 0 Sodium Benzoate 0 4.79 g Sodium .94 g 2.29 g Potassium Trace Trace Vanilla Extract 1.86 g 1.13 g

19830429

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