Unpublished Disposition, 862 F.2d 875 (9th Cir. 1984)

MEMORANDUM^** 

Plaintiff Bernice Kravetz and her counsel appeal an order imposing sanctions under Fed. R. Civ. P. 11, after the district court granted summary judgment for defendant Park La Brea on two of Kravetz's antitrust causes of action. We reverse.

FACTS

Park La Brea owns and manages an apartment complex in Los Angeles. The apartments in the complex could not safely accommodate existing commercially-available air conditioners, due to peculiarities in the buildings' structure. The standard lease agreement therefore flatly prohibits the use of air conditioners in the apartments. However, due to the sometimes hot climate, air conditioners were desired by many tenants.

Kravetz is a tenant in the complex. She commissioned a contractor to design an air conditioner which would be compatible with the peculiar electrical and structural requirements of the complex. Park La Brea's managers studied the resulting prototype and determined that it could be used safely in the complex. Park La Brea then waived enforcement of the provision in Kravetz's lease that prohibited air conditioners.

Kravetz meanwhile entered into an agreement with the contractor under which she would act as exclusive sales representative for the sale of air conditioning units at the complex. She advertised the units by handbill and in a local newspaper. Defendant then declared it would no longer grant the necessary lease provision waivers, and requested the contractor to submit a bid to it for the manufacture of air conditioners. Tenants who inquired about the availability of air conditioners were told that Park La Brea would soon be selling units itself.

Kravetz filed a complaint against Park La Brea alleging, among other claims, violations of Sections One and Two of the Sherman Act, 15 U.S.C. §§ 1, 2. She ultimately prevailed at trial on her Section Two claim of attempted monopolization. Her Section One claim alleged a "conspiracy to restrain plaintiff's trade in interstate commerce ... to preclude plaintiff from marketing and distributing ... air conditioning unit [s]" to residents of the complex. (Complaint, p 20). This claim was based on the theory that Park La Brea engaged in an unlawful tying arrangement by conditioning the waiver of the lease provision upon the tenants' purchasing air conditioners only from itself. (Complaint, p 21). In other words, Park La Brea was using its power over lease waivers (the "tying" product) to force purchases of air conditioners (the "tied" product) only from itself, even though its legitimate safety concerns would have been equally well satisfied if tenants purchased the units from Kravetz.

Park La Brea moved for summary judgment on the Section One claim. The district court granted the motion, on the ground that Park La Brea would not be guilty of tying unless it conditioned the actual rental of an apartment on the buying of an air conditioner from the defendant. Since tenants could lease an apartment without buying an air conditioner, the arrangement was held, as a matter of law, not to constitute tying.

Park La Brea then sought Rule 11 sanctions, which the district court granted, on the grounds that Kravetz's tying theory was not based on reasonable inquiry into the facts, and was not warranted by existing law or by a good faith argument for the extension, modification or reversal of existing law. The district court did not elaborate on the application of this standard to the specific facts in this case.

ISSUE

The sole issue presented on appeal is whether sanctions were properly imposed under Rule 11. No appeal was taken from the district court's grant of summary judgment, and we express no opinion as to the merits of Kravetz's underlying Section One claim.

STANDARD OF REVIEW

The propriety of Rule 11 sanctions presents a legal question to be reviewed de novo. Golden Eagle Distributing Corp. v. Burroughs Corp., 801 F.2d 1531, 1538 (9th Cir. 1986).

DISCUSSION

I. The Standard for Imposing Rule 11 Sanctions

Under Rule 11, an attorney warrants that pleadings, motions and other papers signed by him are "well grounded in fact and ... warranted by existing law or a good faith argument for the extension, modification or reversal of existing law." The standard is "objective reasonableness under the circumstances." Hudson v. Moore Business Forms, Inc., 827 F.2d 450, 453 (9th Cir. 1987).

The key question when a legal argument is challenged as frivolous is whether the complaint states an arguable claim--not whether the claim is legally "correct." Zaldivar v. City of Los Angeles, 780 F.2d 823, 830-33 (9th Cir. 1986). Therefore, "ultimate failure on the merits is irrelevant." Hudson, 827 F.2d at 453.

The central distinction required by Rule 11, then, is between "arguable" and "legally unreasonable" claims. Cf. Zaldivar, 780 F.2d at 831. The threshold of unreasonableness has consistently been held to be rather high. See, e.g., Golden Eagle Distributing Corp. v. Burroughs Corp., 801 F.2d 1531 (9th Cir. 1986) (requiring that the argument have "no basis in the law" and ignore binding contrary authority); Eastway Construction Corp. v. City of New York, 762 F.2d 243, 254 (2nd Cir. 1985) ("patently clear that a claim has absolutely no chance of success under the existing precedents, and ... no reasonable argument can be advanced to extend, modify or reverse the law as it stands.")

The problematic terrain has been that involving the boundary between permissible and impermissible arguments for extensions of the law. Hudson, 827 F.2d at 453. Rule 11 must not be used so as to chill zealous advocacy; creativity in legal thinking is to be encouraged, especially in unsettled areas of the law. Id. at 453; see also Rule 11 Advisory Committee note, 97 F.R.D. 198 (1983). It is the legal theory as a whole, not just one particular argument supporting it, which must be unjustified before sanctions may be imposed. Golden Eagle, 801 F.2d at 1540-41.

Rule 11 does not require an attorney to differentiate between a position which is supported by existing law and one which would extend it, although in some cases failure to bring this distinction to the attention of the court would be an ethical violation. Golden Eagle, 801 F.2d at 1539. However, the ethical rules generally require knowing omissions; in contrast, Rule 11 must not be used to punish "the earnest advocate exaggerating the state of the current law without knowingly misrepresenting it." Golden Eagle, 801 F.2d at 1540.

The basic question in this case is thus whether Kravetz had an arguable claim under Section One of the Sherman Act. Section One proscribes contracts and combinations "in restraint of trade." 15 U.S.C. § 1. Nowhere does Section One specifically refer to "tying." However, tying arrangements are one type of contract often found to violate this section. A potentially illegal tie exists when a seller conditions the sale of one product which buyers want on the purchase of another product. L. Sullivan, Handbook on the Law of Antitrust 431 (1977). In their brief, appellants state their Section One theory as follows:

The essence of plaintiff's Section One theory is that defendant, in refusing to grant the tenants in its 12,000-person apartment complex waivers from the lease provision barring air conditioners, coerced and prevented the tenants from purchasing air conditioners from any party other than defendant, while taking steps to enter the market itself, and planning to grant lease waivers when its air conditioner was available to tenants.

Thus, defendant forced tenants, through enforcement of the lease provision, to refrain from purchasing air conditioners from suppliers other than defendant.

Appellant's Brief, page 10 (emphasis in original).

The district court rejected this theory, and since no appeal from the judgment has been taken, this court will not reach the merits of plaintiff's claim. The only question for this court is whether the theory was so lacking in support, or so unreasonable an extension of existing law, that plaintiff's counsel should be sanctioned for arguing it.

At the time plaintiff's complaint was filed (July 17, 1984), the most recent "tying" decision of the Supreme Court was Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). Jefferson Parish involved a contract providing that anesthesiology services at a particular hospital would be provided exclusively by one group of anesthesiologists. The Court defined invalid tying arrangements:

Our cases have concluded that the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms. When such "forcing" is present, competition on the merits in the market for the tied item is restrained and the Sherman Act is violated.

466 U.S. at 12.

The district court read Jefferson Parish as clearly contrary authority, under which defendant would not be guilty of an illegal tying arrangement unless it used its power over rental apartments to force tenants to buy air conditioners.

However, this is not the only reasonable reading of Jefferson Parish. The Court there repeatedly emphasized that the underlying concern was the idea that a seller's use of its market power over one product to force a purchaser to buy a second product effectively restrains competition on the merits of the second, tied product. Id. at 13 & n. 19, 14 & n. 20. Additionally, the Court pointed out that "the sale ... of a patented item on condition that the buyer make all his purchases of a separate tied product from the patentee is unlawful." Id. at 16. By analogy, "functionally linked products at least one of which is useless without the other" may often be the subjects of prohibited tying devices. Id. at 19 n. 30. In this case, because of the lease provision prohibiting air conditioners, an air conditioner is useless to a Park La Brea tenant without a lease provision waiver. It does not seem unreasonable for counsel to analogize defendant's linkage of its lease provision waivers with purchases of air conditioners only from itself to a patent holder's linkage of a license with purchases of an unpatented product. See International Salt Co. v. United States, 332 U.S. 392 (1947).

Finally, the Court in Jefferson Parish emphasized that a Section One violation depends on competitive consequences, not on whether a given arrangement can be labeled "tying." In other words, the rule prescribes an outcome, not a means. 466 U.S. at 21 n. 34. Jefferson Parish leaves open the possibility that other types of arrangements which do not fit within the stricter definition of "tying" may also be found illegal. Thus, even if plaintiff's per se arguments were found to be clearly without merit, Jefferson Parish provides sufficient basis for a reasonable rule of reason argument, in view of the fact that plaintiff was indeed being shut out of the Park La Brea air conditioner market.¹ 

Plaintiff's counsel also framed an alternative argument, based on dicta in Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5-6 (1958):

[A] tying arrangement may be defined as an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier. (Emphasis added).

Counsel used this language to fashion a theory of "negative" tying under which Park La Brea "tied" apartments with promises not to buy air conditioners from any other supplier, and enforced those promises while taking steps to facilitate its own entrance into the air conditioner market. Although plaintiff's counsel perhaps has accorded undue precedential weight to this dicta, he nevertheless made it clear to the district court that the "continuing viability" of the Northern Pacific dicta would be "the central question" on defendant's summary judgment motion.

Counsel relied on Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534 (9th Cir. 1983) as support for his theory.²  Foremost merely reiterates the Northern Pacific dicta in a passage that is itself dicta (id. at 541-42). The thrust of the opinion tends to cut into plaintiff's negative tying theory:

In the absence of an allegation that the purchase of the alleged tied products was required as a condition of sale of the alleged tying products, rather than as a prerequisite to practical and effective use of the tying products, [plaintiff's] complaint failed to plead the coercion essential to a per se unlawful tying arrangement.

Id. at 542.

However, Foremost involved a per se complaint. Although Foremost undercuts plaintiff's per se theory, its coercion analysis does not apply to a rule of reason inquiry, which plaintiff also pleaded. Id. at 541.

Whatever the merits of plaintiff's negative tying theory, it is not patently unreasonable or frivolous. It is not directly contradicted by any Ninth Circuit or Supreme Court authority. Plaintiff urged the district court to take an expansive view of tying doctrine; the defendant successfully urged a narrower view. The fact that the plaintiff's argument was based solely on dicta is not sufficient cause to impose sanctions.³ 

Park La Brea, in moving for sanctions, argued that plaintiff's counsel failed to make a reasonable inquiry into the facts, or ignored such facts if known. The district court did not state whether it was imposing sanctions on this ground.

Under Park La Brea's tying theory, accepted by the district court, there could be no tie unless Park La Brea actually sold air conditioners. Park La Brea thus argued that plaintiff's counsel violated Rule 11 by ignoring the fact that Park La Brea did not sell air conditioners. However, plaintiff's counsel at all times in this proceeding openly conceded that Park La Brea had not yet begun to sell air conditioners.

It is unclear what other pleaded facts, if any, Park La Brea could have been objecting to. Plaintiff's counsel relied on the same facts to establish his Section One theory and his Section Two theory, and prevailed on the latter theory at trial. Thus, only the application of these facts to a Section One claim could actually be at issue in determining the propriety of Rule 11 sanctions, not the pleading of the facts themselves.

CONCLUSION

Plaintiff's counsel presented the district court with a creative theory of Section One liability. Although we do not reach the ultimate merits of the Section One claim, it is clear that counsel's theory is not so frivolous or unreasonable that Rule 11 sanctions could properly be imposed. The judgment imposing sanctions is REVERSED.