United States of America, Appellant, v. Itt Continental Baking Company, Appellee, 485 F.2d 16 (10th Cir. 1973)

This is an appeal from the judgment of the District Court for the District of Colorado in a suit brought by the United States under the Clayton Act [15 U.S.C. § 21 (l)], and the Federal Trade Commission Act [15 U.S.C. § 45(l)] against ITT Continental Baking Company. The Government sued to recover civil penalties and for injunctive relief for three asserted violations of a Federal Trade Commission consent cease and desist order relating to the acquisition of bakeries.

The case was tried on a stipulation of facts. The court ruled that two of the three challenged acquisitions were prohibited by the FTC's order, and the third was not. The court ruled also that each prohibited acquisition was a single violation of the order and did not commence a continuing violation. The maximum single penalty of $5,000.00 for each of the two violations was imposed. The court further held that the FTC's order, which had initially been applied to Continental Baking Company was also applicable to ITT Continental Baking Company and that ITT Continental was liable for the penalties. The court did not order ITT Continental to divest itself of the assets acquired in violation of the order, but did order ITT Continental to comply with the terms of the FTC order until that order expired.

The Government appeals from the court's judgment insofar as it held that the third transaction was not an "acquisition" in violation of the FTC order, that each violation was not a continuing one subject to penalties for daily violation, and insofar as the court did not order ITT Continental to divest itself of the three acquisitions. ITT Continental cross-appeals from the judgment, in its entirety, of the district court.

In May 1960, the FTC issued a complaint against Continental Baking Company, charging that Continental's acquisition of several baking companies engaged in the production and sale of bread from 1952 through 1958 violated section 7 of the Clayton Act [15 U.S.C. § 18], and section 5 of the Federal Trade Commission Act [15 U.S.C. § 45]. While the administrative proceedings were still in the hearing stage on this complaint, the parties negotiated a consent cease and desist order. The relevant part of the order provided:

"IT IS FURTHER ORDERED that for a period of ten (10) years from the date of issuance of this order by the Federal Trade Commission respondent shall cease and desist from acquiring, directly or indirectly, through subsidiaries or otherwise, the whole or any part of the stock, share capital, or assets of any concern, corporate or non-corporate, engaged in any state of the United States in the production and sale of bread and bread-type rolls unless the Commission, on petition for modification of this Section III of this order, permits such an acquisition by respondent, said modification to be within the sole and final discretion of the Federal Trade Commission."

This consent order is the basis for this action, and must be construed as to the nature of several transactions asserted by the Government to be in violation of its provisions, and as to the imposition of penalties if a violation has taken place. This should be done in accordance with the standards laid down in United States v. Armour & Co., 402 U.S. 673, 91 S. Ct. 1752, 29 L. Ed. 2d 256, and in Hughes v. United States, 342 U.S. 353, 72 S. Ct. 306, 96 L. Ed. 394. In the Armour case the Court said, after mentioning the negotiation and reasons for a consent decree:

"For these reasons, the scope of a consent decree must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it. . . . the instrument must be construed as it is written, and not as it might have been written had the plaintiff established his factual claims and legal theories in litigation."The consent order here concerned originated in a situation similar to a consent decree, and the reasons exist for application of the method of construction used in Armour. The order here is somewhat different in that it expressly permits or suggests reference to the complaint as an aid in construction. The result reached by the trial court in construing the order is not too restrictive nor unreasonable. It is one which may be arrived at by reference to the complaint, and by use of the method indicated in the Armour case. We will follow such a construction under these circumstances.

To consider the consent order "within its four corners," the wording is directed to the acquisition of businesses engaged in bread making, directly or indirectly. The only reference in the order is to the "acquiring" of such businesses. The complaint refers to the acquisition of bakeries as a course of conduct by Continental Bakeries. The order prohibits acquisition for a ten-year period. It is apparent from the record that it is upon the event of acquisition by the defendant that the local bakery is out of the bread making business. The acquisition itself, and not the method of operation thereafter, is the critical factor, and this is the event or incident to which the complaint and the order were directed.

This consideration of the order leads us to agree with the trial court as to whether the violations found were continuing or not, and also to agree as to the two particular acquisitions found by the trial court to be violations of the order.

As to the violations the record shows that in 1965 Continental and Bon Ton, Inc., of Missoula, Montana, entered into a sales agreement. Bon Ton, Inc. was engaged in the production of bakery products, including bread. These were sold at wholesale over thirteen routes in western Montana. Under the agreement, Bon Ton became an exclusive distributor of bread produced by Continental. Also, in the language of the parties' stipulation of fact, the ". . . understanding was that Bon Ton would cease production of bread . . . before it became a distributor of Continental's bread." On July 10, 1965, Bon Ton stopped producing bread and on the following Monday, began to distribute bread produced by Continental over the same routes and to the same customers as theretofore. On July 12, 1965, Bon Ton's president and owner of the vast majority of its stock deposited in the Bon Ton bakery account a Continental check drawn in his favor in the amount of $37,500.00. ITT Continental has described this amount as a "loan" to enable Bon Ton to meet Continental's credit requirements. However, Bon Ton gave to Continental an option to purchase the distributorship for the same amount. Continental acquired Bon Ton's accounts receivable, route books, customer lists, trademarks, trucks, and all but approximately $1,800.00 of its bank account. At this time, Bon Ton's "president" and its drivers became employees, on a salaried basis, of Continental. In consideration of the transfer Continental cancelled all outstanding invoices for products sold to Bon Ton and also cancelled the $37,500.00 "loan."

In April 1966 Continental and the Wyoming Baking Company entered into a "sales agreement," which was, in all relevant aspects, the same as the agreement entered into between Continental and Bon Ton. The same "understanding" existed as to Wyoming Baking's discontinuance of its own production of bread. In accordance with this "understanding," Wyoming Baking had ceased its own production of bread and began distributing Continental's products over the same routes and to the same customers. The sales agreement also provided that Continental would have an option to purchase the distributorship under certain circumstances. Some disagreement arose and the distributorship was sold, through the assistance of Continental, to another distributor from Idaho. This new ownership lasted about a year, at which time Continental itself acquired the ownership for a cancellation of its debts and $15,000.00.

What is herein considered the third incident concerned the Sheppard Baking Company. This arrangement was not considered by the trial court to be a violation of the order while the above two were held to be in violation.

In August 1966 Continental and Sheppard Baking Company, of Durango, Colorado, entered into a "sales agreement" which was, in all relevant aspects, virtually identical to the agreements entered into between Continental, and Bon Ton and Wyoming Baking. Prior to this time Sheppard Baking had been engaged in the production and sale of bakery products, including bread and bread-type rolls, which were sold over routes in southwestern Colorado. As with Bon Ton and Wyoming Baking, the "understanding" between Continental and Sheppard Baking was that Sheppard would cease production of bread upon becoming a Continental distributor. In mid-October 1966, Sheppard stopped producing its own bread and began distributing that of Continental over the same routes, to the same customers, and in substantially the same quantities as it had formerly sold and distributed similar products produced at its own plant prior to that date. However, unlike the transactions concerning Bon Ton and Wyoming Baking, the sales agreement between Continental and Sheppard Baking did not involve any "loan," nor option agreement, nor an outright payment. The following specific covenant appears in the "sales agreement" between Continental and Sheppard Baking:

"Dealer covenants and agrees as follows: