author: EUGENE A. WRIGHT, Circuit Judge:

text:
    Rose Ann COATES TRUST et al., Appellants-Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Appellee-Respondent.
    Nos. 71-1968 to 71-1973.
    United States Court of Appeals, Ninth Circuit.
    June 5, 1973.

      Gerald R. Hergert (argued), Joseph H. Trethewey, Trethewey & Brink, Seattle, Wash., for appellants-petitioners.
    Charles E. Anderson (argued), Scott P. Crampton, Asst. Atty. Gen., Tax Div., Dept. of Justice, K. Martin Worthy, Chief Counsel, IRS, Meyer Rothwacks, Ernest J. Brown, Tax Div., Dept. of Justice, Washington, D. C., for appellee-respondent.
    Before CHAMBERS, WRIGHT and KILKENNY, Circuit Judges.
   EUGENE A. WRIGHT, Circuit Judge:

Sydney and Rose Ann Coates, together with their children, children’s spouses, and grandchildren, owned all of the shares of two corporations, CAM Industries, Inc. (hereinafter called CAM) and Washington Industrial Products, Inc. (hereinafter called WIP). After the death of Sydney Coates, the family group agreed to combine the two corporations by having CAM “purchase” the shares of WIP.

When the transaction was complete, CAM and WIP shares were held by members of the family as follows:

CAM

Class A Class B

WIP Voting Nonvoting

Estate of Sydney Coates 75 664

Robert N. Coates 51 1,640 2,250

Peter Coates 6 205

Cathy Coates 6 205

Pamela Coates 6 205

Charles N. Coates 6 205

Marjorie Coates (Mrs. Robt.) 290

R. Morgan Boyd 63 10 422

Robert M. Boyd, Jr. 6 391

James Boyd 6 391

Ruby Boyd (Mrs. R. M.) 390 372

A. C. Helnen 57 10 375

Barbara Helnen 6 340

Gary Helnen 6 340

Richard Helnen 6 340

Molly Heinen (Mrs. A. C.) 390 325

Totals 300 2,440 7,320

The “purchase” was effected on May 20, 1965 when CAM and the shareholders of WIP entered into agreements in this form:

AGREEMENT FOR SALE OF STOCK

Agreement made this 20th day of May, 1965, by and between the undersigned “Seller” and CAM INDUSTRIES, INC., a corporation, hereinafter called the “Buyer”.

Seller hereby sells to Buyer, and Buyer hereby purchases from Seller, ....... shares of the common stock of Washington Industrial Products, Inc., a Washington corporation, at the price and on the terms and conditions herein set forth.

1. Purchase Price. The price to be paid by Buyer to Seller for said shares of common stock shall be $1,000.00 per share or an aggregate purchase price of........

2. Delivery of Stock and Payment of Purchase Price.

(a) The certificate or certificates for the shares of common stock sold hereunder by Seller are herewith delivered to Buyer, duly endorsed for transfer to Buyer, and Buyer hereby acknowledges receipt of said certificate or certificates.

(b) The purchase price shall be paid ......., or more at Buyer’s option, on or before May 31, 1966, and a like sum, or more at Buyer’s option, on the 31st day of May of each year thereafter until the 31st day of May, 1975, at which time the entire unpaid balance of the purchase price shall be due and payable. Buyer shall pay interest on the diminishing balance of said purchase price at the rate of four percent per annum from the 1st day of June, 1965, which interest shall be deducted from each installment payment and the balance of each payment applied in reduction of principal.

3. Successors and Assigns. The provisions of this agreement shall inure to the benefit of and bind the successors and assigns of Buyer and the executors, administrators, heirs, successors and assigns of Seller.

Subsequently, by order of the Superi- or Court of Washington for King County on September 23, 1965, Robert N. Coates as Trustee of the Trust Under Will of Sydney Coates received an undivided one-third interest in the May 20 contract for the sale of 75 shares of WIP held by the Sydney Coates Estate. By the same order Robert N. Coates as Trustee for the Rose Ann Coates Trust received an undivided two-thirds interest in the May 20 contract for the sale of the 75 shares held by the Estate.

In their 1965 income tax returns, all parties reported the 1965 transaction as a sale of their WIP stock entitling them to capital gain treatment. In his notice of deficiencies the Commissioner treated the “sale” as a redemption by a related corporation under § 304(a)(1) of the Internal Revenue Code of 1954, taxable as a dividend at the face value ($1,000) of the agreements. The Tax Court upheld the Commissioner’s § 304(a)(1) and dividend treatment, but found the fair market value of the agreements to be 60% of their face value rather than 100% as determined by the Commissioner. It is from this decision that the taxpayers appeal.

I.

Initially, petitioners contend that since the two trusts were not in existence at the time of the transfer of the WIP shares to CAM they are not taxpayers within the meaning of § 7701(a) (14), and that, accordingly, the Commissioner determined deficiencies against the wrong parties. They would have us hold that since the WIP shares were community property, the proper parties for taxation are the Estate of Sydney Coates and Rose Ann Coates. We decline to do so and affirm the Tax Court.

The Trust Under Will of Sydney Coates, under §§661 and 662, was a proper party to the proceedings below. While the question raised as to the Rose Ann Coates Trust is more difficult, we have concluded it also was a proper party below. Upon the death of her husband, Mrs. Coates held her community property interest in the WIP shares subject to a restriction on their use, by virtue of the mutual wills (see footnote 1 supra). Under Washington law, her agreement to transfer her half of the community property into trust was specifically enforceable by the beneficiaries thereof. In re Young’s Estate, 40 Wash.2d 582, 244 P.2d 1165 (1952).

Thus on May 20, 1965 when the WIP shares held by the Estate were “sold,” Mrs. Coates held her half of the community property in constructive trust for the beneficiaries of her agreement. Cf. Healy v. Commissioner, 345 U.S. 278, 73 S.Ct. 671, 97 L.Ed. 1007 (1953). We conclude, therefore, that the beneficial and equitable owner of the 50 WIP shares on May 20 was the Rose Ann Coates Trust, and as such it was subject to the tax on the transfer thereof. 2 Mertens, Law of Federal Income Taxation, § 17.08 (1967 Revision).

II.

Petitioners next contend that the agreements entered into on May 20 between CAM and the WIP shareholders are “securities” as that term is used in § 351 and that, since after the May 20 transaction the WIP shareholders controlled over 80% of the stock of CAM, § 351 operates to grant them either no tax liability or capital gain treatment. The Tax Court concluded that the agreements were not securities, citing Warren H. Brown, 27 T.C. 27 (1956).

Petitioners argue that the Brown decision creates an invalid distinction between an installment sales contract and other long term corporate obligations. See Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders 3-55 (3d Ed. 1971); Comment, Section 351 Transfers to Controlled Corporations: The Forgotten Term — “Securities,” 114 U.Pa.L.Rev. 314 (1965). We do not reach that issue, however, for even assuming arguendo that these agreements are “securities” under § 351, we are convinced that the provisions of § 351 are overridden by those of § 304 and that, accordingly, § 304 and not § 351 applies to this transaction. See Henry McK. Haserot, 46 T.C. 864, 872 (1966) (Tannenwald, J.) (separate opinion).

In Commissioner v. Stickney, 399 F.2d 828 (6th Cir. 1968), aff’g, Henry McK. Haserot, supra, the reached a contrary result. While the statutory language and legislative history reveal that Congress did not provide for or contemplate the possible conflict between the permissive policy of § 351 and the preventive policy of § 304, we' are convinced that our decision “best achieves the underlying legislative intent and policy and . . . more nearly reflects the manner in which Congress would have ‘straightened this ruck out if they had come across it.’ ” Haserot, supra, 46 T.C. at 878 (Tannenwald, J.). Accordingly, we decline to follow the Sixth Circuit for the reasons so cogently set forth by Judge Tannenwald. Sixth Circuit

III.

Petitioners next argue that the Tax Court erred in holding that the transaction was a redemption through the use of a related corporation under § 304(a)(1). They would have us hold that the “one or more persons” of § 304(a)(1)(A) refers to one person plus those persons whose shares are attributed to him under § 318, and that the coneept of aggregate control as prescribed by Reg. § 1.304-2(b) and applied by the Tax Court departs from the specific language and intent of the statute.

Petitioners misconceive the operation and effect of § 304. That section was not designed to be so narrowly confined as to relate only to “family” transactions. To the contrary, it was designed to apply to any closely held corporations whether or not the parties were related by blood. The phrase “or more persons” is not superfluous, as petitioners ultimately must contend, but rather indicates an attempt to expand the scope of § 304(a)(1) beyond the family relationship to include unrelated persons who act in concert. See Radnitz v. United States, 187 F.Supp. 952 (S.D.N.Y.1960), aff’d per curiam, 294 F.2d 577 (2d Cir. 1961).

Since in the instant case the same group of persons controlled both WIP and CAM, § 304(a)(1) applies to this transaction, and the property received by the WIP shareholders must be treated as a distribution in redemption of the stock of CAM.

IV.

To determine the tax consequences of a § 304(a)(1) redemption, it is necessary to refer to § 302. Unless the redemption qualifies as an exchange under one of the categories of § 302(b), it is to be treated under § 301. The only portion of § 302(b) relevant here is § 302(b)(1), which provides that a redemption shall be treated as an exchange if it is “not essentially equivalent to a dividend.” To so qualify, the redemption “must result in a meaningful reduction of the shareholder’s proportionate interest.” United States v. Davis, 397 U.S. 301, 313, 90 S.Ct. 1041, 1046, 25 L. Ed.2d. 323 (1970).

The instant transaction resulted in no reduction in any of the taxpayers’ proportionate interests in WIP. That being the case, the Tax Court correctly concluded that the distribution did not qualify for the preferred treatment under § 302(b)(1).

Taxpayers attempt to distinguish Davis on the grounds that that opinion applies only to 100% shareholders. The rationale of Davis does not support such a distinction, and we reject it without further discussion.

V.

Petitioners finally contend that the Tax Court erred in determining the fair market value of the agreements to be $600 per $1,000 face value. We have carefully examined the record and conclude that there was ample support for the court’s finding. It certainly was not clearly erroneous.

The decision of the Tax Court is affirmed.

      . Sydney and Rose Ann Coates had executed mutual wills. His will gave the house, auto, bank accounts and personal effects to Rose Ann Coates, with the residue of his estate going to the Trust Under Will of Sydney Coates. Her will provided that, in the event Sydney Coates predeceased her, she would convey by separate instrument her interest in any community property “to the Trustee or Trustees as named under the terms of the Trust created by the Will of Sydney N. Coates.” Pursuant to this agreement, the Rose Ann Coates Trust was created by instrument dated August 21, 1965, executed by Rose Ann Coates, trustor, and Robert N. Coates, trustee.

      . The court below determined that the WIP stock was held by Sydney and Rose Ann Coates as community property. 37% shares belonging to each spouse. The odd apportionment is explained by the Order Approving Pinal Account, Report and Decree of Distribution of the Superior Court, which provided that in dividing the community property “any disproportionate allocation necessary shall be made in the respective ownership of the contract receivable for the sale of the Washington Industrial Products stock.”

      . All section references hereafter are to the Internal Revenue Code of 1954, as amended.

      . On October 24, 1969, the Tax Court tered decisions of no deficiency in the following listed cases on the basis that the redemption of their stock in WIP by CAM was substantially disproportionate pursuant to § 302(b) (2) : Arthur C. Heinen and Molly M. Heinen; Estate of Ruby M. Boyd, deceased, R. Morgan Boyd, executor; R. Morgan Boyd; Robert W. Boyd and Judith K. Boyd; Gary A. Heinen; Richard G. Heinen; Barbara Gaye Heinen; James E. Boyd. Robert and Marjorie are not parties in this case because of other matters with respect to their 1965 return which had not been resolved by the Service at the time this suit was instituted.

      . The decision of the Tax Court is reported at 55 T.C. 501 (1970).

      . It is noteworthy that at no time after the death of her husband did Mrs. Coates obtain control over the WIP shares or the purchase agreements. Also, the agreements did not pass through Mrs. Coates, but rather were transferred directly from the Estate of Sydney Coates to the Rose Ann Coates Trust.

      . Section 351(a) provides that:
      Mo gain or loss shall be recognized if property is transferred to a corporation ... by one or more persons in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control ... of the corporation.

      . The taxpayers argue two alternative positions: (1) that all of the agreements are securities, that § 351 is applicable and, no “other property” having been received, that the taxpayers did not incur any tax liability on the transfer; or (2) that certain of these agreements are “securities” but that some of them could be treated as “other property” under § 351, thus making the transaction taxable at capital gains rates to the extent of the value of this other property.

      . Our case reveals the ultimate inconsistency that would result if we followed Sticlcney and held that the “except as otherwise provided” provisos of §§ 302(d) and 301(a) precluded § 304 applicability to these taxpayers. Other parties to this ‘ transaction were taxed at the capital gains rate by virtue of §§ 304(a) and 302(b) (2). (See footnote 4, supra,). That result would not be altered were we to follow Stiokney’s interpretation of the provisos. Thus Stiokney’s rationale would lead us to hold that those specifically excluded by Congress from dividend treatment (by virtue of § 302(b)(2)) would be taxed at the capital gains rate, while those Congress intended to be taxed at ordinary income rates (by virtue of §§ 304(a), 302(d), and 301(a) would escape taxation altogether by § 351. Such a result does not comport with our reading of the legislative intent behind §§ 304 and 351.

      . Reg. § 1.304-2(b) : In any case in which two or more persons, in the aggregate, control two corporations, section 304(a) (1) will apply to sale by such persons of stock in either corporation to the other (whether or not made simultaneously) provided the sales by each of such persons are related to each other. The determination of whether the sales are related to each other shall be dependent upon the facts and circumstances surrounding ail of the sales. For this purpose, the fact that the sales may occur during a period of one or more years (such as in the case of a series of sales by persons who together control each of such corporations immediately prior to . the first of such sales and immediately subsequent to the last of such sales) shall be disregarded, provided the other facts and circumstances indicate related transactions.

      . Section 304(a)(1)(B).

      . It is undisputed that § 301 treatment results in the distribution being taxed to each of the taxpayers as a dividend under §§ 316 and 301(e)(1).

      . The relevant inquiry concerns the taxpayers’ respective interests in WIP. Section 304(b)(1).

      . The amount of the distribution is the fair market value of the property received. Section 301(b)(1).


source: Caselaw Access Project

author: HEANEY, Circuit Judge.

license: Public Domain

text:
    McGINNIS PIANO AND ORGAN COMPANY, Appellee, v. YAMAHA INTERNATIONAL CORPORATION, Appellant.
    No. 71-1205.
    United States Court of Appeals, Eighth Circuit.
    Submitted March 13, 1972.
    Decided March 6, 1973.

      Richard D. Allen, Minneapolis, Minn., for appellant.
    Craig A. Beck, Minneapolis, Minn., for appellee.
    Before GIBSON, HEANEY and ROSS, Circuit Judges.
   HEANEY, Circuit Judge.

The Yamaha International Corporation appeals from a judgment for $67,224.50 in favor of the McGinnis Piano and Organ Company. The award was based on a jury verdict that Yamaha had breached an implied franchise agreement with McGinnis by terminating the franchise. Yamaha contends on appeal that:

(1) the trial court erroneously instructed the jury on the issues of liability and damages;

(2) the trial court erred in denying Yamaha’s motion for a directed verdict and its alternative motions for a judgment notwithstanding the verdict or a new trial;

(3) the evidence was insufficient to support the verdict;

(4) the trial court erred in the admission and exclusion of evidence; and

(5) the verdict was excessive and contrary to law.

Appropriate motions were made by Yamaha at and after trial to preserve these issues for appeal.

We hold that the trial court erroneously instructed the jury as to liability and damages, that it did not err in denying Yamaha’s motion for a directed verdict or for a judgment notwithstanding the verdict. We do not decide the remaining issues.

A brief outline of the largely undisputed facts will assist in understanding the issues.

McGinnis and its predecessor have been in the business of selling pianos and organs in Minneapolis since 1916. In 1963, it was approached by a Yamaha representative and asked to become the Yamaha dealer for the Twin Cities. McGinnis agreed to place an initial order. That order was followed by others. McGinnis was given a certificate as a Yamaha dealer soon after the first order arrived. McGinnis followed Yamaha’s advice to concentrate on quality sales to schools, churches and other institutions, and participated in promotional efforts to increase such sales. It also participated in the Yamaha Service Bond Program, an after-sale warranty service. McGinnis participated in Yamaha dealer meetings, restricted sales to the trade territory assigned to it and undertook, at some expense, to develop the Yamaha music course for children. McGinnis also floor-planned its inventory through Yamaha, and reached a point where it handled Yamaha pianos exclusively.

Millard McGinnis, the president of McGinnis, devoted all his time and energies to the business. The company paid Millard McGinnis $150.00 per week in salary. Earnings were left in the company.

Yamaha piano sales, during the time McGinnis served as a dealer, were as follows:

1964— 4

1965— 31

1966— 47

1967— 58

1968— 71

1969— 74 (Partial)

No written franchise agreement was ever signed by the parties.

On July 16, 1969, Yamaha told Mc-Ginnis that it was being terminated as a dealer, and that a new dealer — a competitor — had been appointed to take its place. Yamaha offered to repurchase from McGinnis the Yamaha inventory. McGinnis declined to sell. Yamaha then agreed to sell pianos to McGinnis until September 1, 1969. Yamaha kept that commitment, but refused to make additional shipments after the specified date. McGinnis then commenced this action.

THE COURT’S INSTRUCTIONS AS TO LIABILITY

We think it clear that Mc-Ginnis presented sufficient evidence to justify an instruction permitting the jury to find that McGinnis and Yamaha had entered into a valid implied agreement under which McGinnis was recognized as a franchised dealer of Yamaha pianos. Moreover, the instructions given by the court, with respect to the elements necessary to establish such an agreement, were proper. No question with respect to their propriety is raised on this appeal.

We also think it is clear that Mc-Ginnis presented sufficient evidence to justify the jury in finding, under proper instructions, that McGinnis had made substantial investments in reliance on the franchise agreement, that a reasonable duration of the agreement could be implied, and that a reasonable notice to terminate the agreement was necessary.

What is questioned is the propriety of the rather long and complex instructions in regard to the duration of the implied agreement, and the closely related instructions with respect to notice required to terminate the agreement. We understand the instructions to have permitted the jury to make one of two alternative findings with respect to the duration.

(1) It could find that the agreement was terminable by either party at will upon reasonable notice to the other. Reasonableness was defined as that notice which, under all of the circumstances of the case, would be regarded as a fair and reasonable advance period of notice to sever the relationship between the parties or, alternatively, the time needed by McGinnis to put its house in order to take steps to protect itself as it transferred its business from one line to another — the time necessary for McGinnis to recoup its investment. The jury was further instructed that in determining reasonableness, it could consider the profits which might be projected in the future, the availability of other lines of instruments, and the time and effort necessary to acquire a new line of pianos and organs.

(2) It could find that the agreement was for a longer period — “an unspecified period of time in the foreseeable future,” “for some reasonable time into the future,” or for as long as McGinnis satisfactorily performed as a Yamaha dealer.

The jury was instructed that under either alternative, the agreement could be terminated for good cause at any time by Yamaha without notice.

In our view, the instructions were contrary to Minnesota law. We understand the rule in Minnesota to be that franchise agreements which do not contain provisions for duration or termination are ordinarily terminable by either party at will upon reasonable notice to the other. Reasonable notice is that period of time necessary to close out the franchise and minimize losses.

We further understand Minnesota law to permit a reasonable duration to be implied in franchise agreements where a dealer has made substantial investments in reliance on the agreement. Reasonableness in such situations is measured by the length of time reasonably necessary for a dealer to recoup its investment. A reasonable notice period prior to termination is also required. As we stated in Clausen & Sons, Inc. v. Theo. Hamm Brewing Co., 395 F.-2d 388, 391 (8th Cir. 1968) :

“ * * * [Ujnder Minnesota law where an exclusive franchise dealer under an implied contract, terminable on notice, has at the instance of a manufacturer or supplier invested his resources and credit in establishment of a costly distribution facility for the supplier’s product, and the supplier thereafter unreasonably terminates the contract and dealership without giving the dealer an opportunity to recoup his investment, a claim may be stated. See also 6 Corbin on Contracts, § 1266 1. c. 57-59; Gellhorn, Limitations on Contract Termination Rights — Franchise Cancellations, 57 DukeL.J. 465 (1967). * *

In our view, the instructions given by the trial court did not follow Minnesota law in that:

(1) They did not permit the jury to find that the franchise agreement was terminable at will, subject only to reasonable notice — i. e., notice sufficient to permit McGinnis to close out the franchise and minimize his losses.

(2) They permitted the jury to find that the agreement could continue for as long as McGinnis performed satisfactorily.

We are convinced there was no oral understanding between the parties that McGinnis could continue to serve as a Yamaha dealer as long as it performed satisfactorily. Compare, Benson Coop. Creamery Ass’n v! First District Ass’n, 276 Minn. 520, 151 N.W.2d 422, 426 (1967). The president of McGinnis conceded that such was the case on cross-examination. We are also convinced that no such agreement can be implied from the circumstances. Mc-Ginnis apparently concedes this to be the case by arguing in its appellate brief that the court’s instructions, when read as a whole, limited the duration of the agreement to “a reasonable period, sufficient to allow the dealer a fair opportunity to recoup its investment.” We cannot agree. Our reading of the instructions leaves us with the clear impression that the jury could properly find that the agreement was intended by the parties to continue for as long as McGinnis performed satisfactorily. This was error.

(3) They permitted the jury to find that the agreement could continue for a period sufficient to permit McGinnis to recoup its investment, plus an additional period to realize reasonable future profits. This, too, was error. Had this portion of the instruction been silent as to the future profits, it would have been proper. But, we find no Minnesota law which extends the period of reasonable duration beyond that period necessary to permit the dealer to recoup its investment, plus a period of reasonable notice.

We agree with the trial court that the jury should have been given alternatives with respect to the duration of the agreement, but the alternatives should have been limited to: (1) an agreement terminable at will upon reasonable notice, with reasonableness being defined as that period of time necessary to close out the dealership, and (2) an agreement for that period of time reasonably necessary for McGinnis to recoup its investment, plus a reasonable notice prior to termination.

Yamaha argues that the Uniform Commercial Code adopted by the Minnesota Legislature in 1965 is applicable to the transaction, and that the termination is governed by the provisions of Minn.Stat.Ann. § 336.2-309. We agree and point out that the results reached by us are consistent with the Code.

“Section 2-309(2) codifies the widely held view that a distributorship agreement which has an indefinite duration is terminable at will, but subsection (3) requires reasonable notification of termination, and ‘an agreement dispensing with notification is invalid if its operation would be unconscionable!’ Section 2-309(2) direct that a contract of indefinite duration which provides for successive performances is ‘valid for a reasonable time.’
“When the sale of goods is the primary facet of the franchise relationship, 2-309(2) and (3) would seem to apply directly to the agreement, and concurrently may apply to franchise rights, because they will often be coterminous with the right to buy the franchisor’s goods. Where the franchisor only licenses a trademark or provides a system of business, these provisions should be employed analogically because they are rational rules especially adaptable to the realities of franchising.” (Footnotes omitted.)

Note, Article Two of the Uniform Commercial Code and Franchise Distribution Agreements, 1969 Duke L.J. 959, 996-997.

We disagree, however, with Yamaha’s contention that six years constituted a reasonable time, as a matter of law, for McGinnis to have recouped its investment. The evidence with respect to the difficulty in building sales in early years, the losses during those early years, and the investment by McGinnis in time and money in building the franchise was sufficient to require that the question of reasonable duration be submitted to the jury. See, E. Gellhorn, Limitations on Contract Termination Rights — Franchise Cancellations, 1967 Duke L.J. 465, 478-483.

McGinnis argues that even if the instructions were erroneous, Yamaha was not prejudiced.. We cannot agree. Under the court’s instructions, once the jury found that there was an implied agreement, it had to find that the duration of the agreement was at least for a period sufficient to permit McGinnis to recoup its investment and reasonable future profits or, alternatively, for as long as McGinnis performed satisfactorily. And, neither alternative was proper under Minnesota law for the reasons previously given.

The jury might have awarded a comparable verdict under proper instructions, but it is not for us to speculate that such would have been the case.

THE COURT’S INSTRUCTIONS AS TO DAMAGES

The trial court’s instructions as to damages were interspersed with its instructions as to liability and were consistent with those instructions. Thus, what we have said with respect to errors in the instructions as to liability is applicable with respect to the instructions as to damages and need not be repeated. There is one phase of the instructions, however, that deserve additional comment.

The Court instructed the jury as follows:

“If the defendant breached and violated the contracts with the plaintiffs, then the plaintiff is entitled to recover those damages from such breach and violation of the contract which are the direct and natural and the word ‘proximate,’ or probable expected consequence of such breach, or which may reasonably be supposed to have been contemplated by the parties or reasonable men in the position of the parties as a result of the breach. * * * [F]uture profits, if proven to a reasonable certainty, may be included as part of the damages,
* * -X*
“To summarize, in determining damages * * * you may consider generally the extent to which Mr. Mc-Ginnis and his company focused its business activities on building up Yamaha products in reliance on the contract with Yamaha, if there was one; you may consider the extent to which the plaintiff was damaged by the cancelation without cause if you have found it to be a contract to run into the foreseeable future, or by the failure to give reasonable notice if it is found to be a contract terminable at will. If those elements do not exist, of course, you find for the defendant, Yamaha Corporation.
“Now, evidence has been offered that tends to establish the amount of the investment in the McGinnis Company, which the plaintiff contends is a measure of its damages. This evidence may be considered by you. You should, however, consider whether or not the total of this investment is to be lost or whether the plaintiff could have or should have taken reasonable steps to salvage its investment such as taking a new line of pianos and organs or selling what is left of its business.” (Emphasis added.)

We read these instructions as permitting the jury to add McGinnis’ unreeouped investment and future profits in computing damages, and this is clearly error. McGinnis now argues, however, that the court intended and the jury understood the instructions to require that the jury award either for unrecouped investment or loss of profits. We do not agree. Moreover, this argument is inconsistent with the one its counsel made to the jury.

“* * * [T]he Court will instruct you that the damages are to be measured by what you think the future profits would have been for a reasonable period of time and the lost investment.
-X- -X- -X- * * *
“First of all, we have got the lost investment here as shows by Mr. Diracles’ total investment of $97,000. Then if the complete liquidation was possible — and he wasn’t sure if it was, and this is difficult to determine— there would be $56,087 lost investment, actual investment lost. Let’s round that out to $50,000. Let’s say the profits for these five years would have averaged $20,000 a year. Five times that is a hundred thousand dollars. (Writing on paper mounted on an easel.) Add that to the lost investment and that is $150,000.” (Emphasis added.)

ERRORS IN THE ADMISSION AND EXCLUSION OF EVIDENCE

Yamaha contends that the trial court erred in admitting certain evidence and excluding other evidence. We do not feel that it is necessary for us to decide whether the trial court erred in cited instances. We have confidence that it will exercise its discretion in a proper manner on retrial. But we do emphasize that under the recoupment theory, recovery is limited to the unrecouped investment. Thus, care must be exercised in receiving evidence as to past expenses so that the jury does not get the impression that recovery can be had for normal operating expenses. See, Ag-Chem Equipment Co., Inc. v. Hahn, Inc., etc., et al., 480 F.2d 482 (8th Cir., 1973).

We reverse and remand for a new trial.

      . The rule in Minnesota is that contracts will be construed, wherever possible, so as not to permit their termination at will. Miller v. O. B. McClintock Co., 210 Minn. 152, 297 N.W. 724 (1941).

      . The court’s instructions stated:
      “It is the position of the plaintiff that the contract was to continue for a period of time to an unspecified date in the foreseeable future for so long as Mc-Ginnis satisfactorily performed its part of the contract, and, thus, if that is the case, I advise you that the contract could be cancelled only for good cause.
      ‘.‘If you find there was a contract between the plaintiff and the defendant, if you find that the provisions of said contract provided that the contract was terminable by either party at any time upon reasonable notice to the other, and that the contract was terminated and that the termination was done with reasonable notice, then in that event you are hereby instructed by the Court that you must find that the plaintiff did not suffer * * * any damage at all.
      “On the other hand [if the contract was terminated] without reasonable notice then the damages which the plaintiff may recover are those damages which represent his losses during the time which you find would have been a reasonable time of notice. * * *
      “What is reasonable notice? Reasonable notice is that notice which under all the circumstances of the case you, as jurors, would regard as a fair and reasonable advance period of notice to sever the kind of relationship which these parties had. You must determine what was the reasonable period of time that the plaintiff should have been given, if any, in order for the plaintiff not to have suffered substantial damage as a result of severing this relationship. * * * In determining the period of time which constitutes reasonable notice, you may further consider all of the circumstances such as the investment made in this business, focused in or zeroed in on Yamaha pianos, if you find that to be the case. Was this investment put in reliance on the arrangement with Yamaha? You may consider the loss which resulted to that investment because of the cancellation. I am now talking about the unrecoupable loss. You may also take into account the profits or the lack of profits in the past and the profits that might be projected in the future as relates to his activities ; that is, profits which to a reasonable certainty you could project. * * *
      “You may consider the availability of other lines of instruments, the options open to the McGinnis Company after termination, the time and effort required to establish a new line of pianos and organs in its store. * * * [Then followed an explanation of unrecouped investment.]
      * í¡! if! * * *
      “Your answer to the question of whether or not reasonable notice was given will be reflected ultimately in the dollar amount of your verdict, if your verdict is for the plaintiff.
      “Now, if on the other hand, you find there was a contract between the plaintiff and the defendant for an unspecified period of time into the foreseeable future, unless terminated for good cause —this is the longer contract now ; within the evidence you have the option of finding either a contract at will, which requires reasonable notice, or a longer one — I use this language — for an unspecified period of time into the foreseeable future unless terminated for good cause — that means, that based on evidence, depending on what you decide, you may decide there was something more than a contract terminable at will and that it runs for some reasonable time into the future. And again ‘reasonable’ is the catchword.
      “There is a certain similarity between the two approaches. Where there is no definite time for the contract to run and it is terminable at will, a reasonable time in the future for cancellation is implied. Many of the exact same considerations which apply to that theory apply to the theory that it is running for some indefinite time in the foreseeable future. Some of the same principles apply. What is reasonable? How much reliance was on it? What was the consideration? What would be the damage on termination? But assume you find that the contract was to run for an unspecified period of time into the foreseeable future unless terminated for good cause, and you find it was terminated without good cause, then you may award damages for breach of contract to Mr. McGinnis’ Company as I shall hereinafter instruct you.
      “Again, I repeat, if you find there was a contract that was to run into the foreseeable future but that Yamaha had good cause for terminating it, then your verdict will be for the defendant.
      “What is good cause? Good cause may mean a breach by the plaintiff of their agreement. * * * Good cause generally would mean that the plaintiff was acting or refusing to act in such a manner that Yamaha would not get the benefit of its bargain. How much benefit Yamaha could expect and whether Yamaha was being deprived of it is for you to determine. Whether the defendant had good cause for terminating the contract is for you to determine in the light of all of the circumstances of this case. * * *"

      . Benson Coop. Creamery Ass’n v. First District Ass’n, 276 Minn. 520, 151 N.W.2d 422 (1967) ; Victor Talking Mach. Co. v. Lucker, 128 Minn. 171, 150 N.W. 790 (1915) ; Hoover v. Perkins Windmill & Axe Co., 41 Minn. 143, 42 N.W. 866 (1889).

      . See, 53 Minn.L.Rev. 1146, 1148 (1969). See also, Allied Equipment Co. v. Weber Engineered Products, 237 F.2d 879 (4th Cir. 1956) ; J. C. Millett Co. v. Park & Tilford Distillers Corp., 123 F.Supp. 484 (N.D.Cal.1954) ; San Francisco Brewing Corp. v. Bowman, 52 Cal.2d 607, 613-614, 343 P.2d 1, 4 (1959) ; 9 Williston on Contracts § 1017A at 150-151 (3rd ed. 1967).

      . In Benson, the trial court granted a summary judgment for the defendant on the ground that an agreement to pick up milk from plaintiff was not for any particular length of time and could be terminated by either party without cause at any time. The Minnesota Supreme Court reversed on the ground that depositions of members of the defendant’s board of directors created a fact issue with respect to the duration of the agreement. The directors had stated, in substance, that the defendant was obligated to pick up the plaintiff’s milk as long as the plaintiff remained a member of the defendant Association. The court stated:
      “ * * * [I]f the evidence sustains a binding agreement that the Association would continue to pick up [plaintiff’s] milk, of the required quality, so long as it remained a member of the Association, then [plaintiff] would be entitled to recover its damages, whatever they might be, for breach of that contract.”
      Benson Coop. Creamery Ass’n v. First Distrist Ass’n, supra at 427.


author: MATTHES, Chief Judge.

text:
    AG-CHEM EQUIPMENT CO., INC., a Minnesota corporation, Appellee, v. HAHN, INC., an Indiana corporation, and Kearney-National, Inc., a Delaware corporation, Appellants. AG-CHEM EQUIPMENT CO., INC., a Minnesota corporation, Appellant, v. HAHN, INC., an Indiana corporation, and Kearney-National, Inc., a Delaware corporation, and Hahn, Inc., a Delaware corporation, Appellees.
    Nos. 72-1152, 72-1199.
    United States Court of Appeals, Eighth Circuit.
    Submitted Jan. 8, 1973.
    Decided March 6, 1973.
    As Modified on Rehearing March 30, 1973.

      Veryl L. Riddle, Thomas C. Walsh, Daniel R. O’Neill, Bryan, Cave, McPheeters & McRoberts, St. Louis, Mo., for Hahn, Inc. of Indiana and Kearney National, Inc.
    James P. Larkin, Robert J. Hennessey, and Larkin, Hoffman, Daly & Lindgren, Minneapolis, Minn., for Ag-Chem Equipment Co., Inc.
    Martin Weinstein, Minneapolis, Minn., for Hahn, Inc. of Delaware.
    Before MATTHES, Chief Judge, BRIGHT, Circuit Judge and TALBOT SMITH, Senior District Judge.

       Eastern District of Michigan, sitting by designation.

   MATTHES, Chief Judge.

The main controversy in this litigation is between Ag-Chem Equipment Co., Inc. (hereinafter referred to as Ag-Chem), a Minnesota corporation and plaintiff below, and Hahn, Inc., and Kearney-National, Inc., Indiana and Delaware corporations, respectively (hereinafter referred to collectively as Hahn), the original defendants in the trial court.

A protracted jury trial involving numerous complex issues resulted in jury verdicts in favor of Ag-Chem against all defendants as follows:

$ 91,192.00 Violation of RobinsonPatman Act (illegal price and service discrimination) (before trebling)
98,740.00 Breach of exclusive distributorship contract
104,086.00 Recoupment
3,500.00 Malicious defamation of credit.

In response to Hahn’s timely motion for judgment n. o. v., or in the alternative, for a new trial, the district court, 350 F.Supp. 1044, granted judgment n. o. v. on the exclusivity claim, ordered Ag-Chem to remit 80 percent of the Robinson-Patman damages, and vacated the judgment against Hahn of Delaware, leaving undisturbed the defamation and recoupment verdicts. The court also awarded Ag-Chem $18,000 reasonable attorney fees allocable to the RobinsonPatman claim.

Neither Hahn nor Ag-Chem was satisfied with the final judgment as evidenced by their respective appeals. In No. 72-1152 Hahn has appealed the judgment in favor of Ag-Chem on the claims of defamation of credit, recoupment, and violation of the Robinson-Patman Act. In No. 72-1199 Ag-Chem has appealed the trial court’s reduction of the Robinson-Patman verdict, the directed verdict in favor of Hahn on the Sherman Act price-fixing claim, the judgment n. o. v. in favor of Hahn on the exclusivity claim, and the dismissal of Hahn of Delaware.

Ag-Chem was organized in 1963, and is the corporate successor in interest to the sole proprietorship of Alvin E. McQuinn, president of Ag-Chem. Hahn, a manufacturer of specialty machinery for the application of all types of agricultural chemicals, entered into a written distribution sales agreement with McQuinn on November 1, 1962, granting McQuinn an exclusive one-year franchise to sell Hahn chemical spraying equipment in Minnesota. A second written agreement which expanded Ag-Chem’s territory to include the northern part of Iowa was executed for fiscal year 1964. Subsequently, the franchise was extended to cover all of Iowa. After expiration of the 1964 written agreement, the parties continued their relationship on an oral basis until Hahn terminated the distributorship in 1968. Ag-Chem and Hahn differ as to the actual date of termination, and we review the facts in this respect as a means of portraying the relationship between the parties prior to termination. The record shows that on July 8, 1968, an authorized representative of Hahn by letter informed Ag-Chem:

“ . . .1 would . . . like to at this time serve notice of contract cancellation. We intend to cancel all previous contracts with Spray Centers and negotiate new agreements for the coming season.
We will make every effort . to show you that manufacturing as you are doing will only increase your overhead and decrease your profits in the long run. We feel it would be far more profitable for Ag-Chem and Hahn to have you as a sales organization only.”

This letter provoked a lengthy response from Ag-Chem protesting the recent decision made by Hahn to sell its equipment to Allis-Chalmers Manufacturing Co., a nationwide distributor of agricultural equipment with dealers situated in the Ag-Chem territory.

Finally, by letter of December 18, 1968, Hahn informed Ag-Chem:

“You have been critical of our trailer sprayer and, as a result, built your own. You are now in the process of building and merchandising your own self propelled sprayer. You are no longer promoting and selling our full line of equipment as was originally agreed.
On July 8, 1968, Jim Niemeier wrote a letter cancelling Hahn’s sales agreement with Ag-Chem Equipment Company. The letter also mentioned re-negotiations of a new contract. Our negotiations have been in vain; so, we have decided to establish new distribution for the territory.
We realize that you may still have some sales prospects and commitments; therefore, as a convenience to you, we will continue to take orders from you for agricultural product equipment which we are now manufacturing . . up to March 1, 1969.”

From the foregoing we conclude the franchise agreement was cancelled on July 8, 1968, subject to further negotiations; that negotiations were not productive, and on December 18, 1968, the arrangement was formally terminated, effective March 1, 1969.

This lawsuit was instituted by the filing of the original complaint on September 11, 1969. The complaint was amended several times before and during course of trial. Hahn stood on its motion for directed verdict made at close of Ag-Chem’s case, offered no evidence, and the jury returned the verdicts set forth above.

I. APPEAL NO. 72-1152

A. Recoupment

The doctrine of recoupment is designed to remedy the inequity which arises when a manufacturer, after having required a distributor to make a size-able investment in the furtherance of a distributorship, terminates the working relationship without just cause, leaving the distributor with substantial unrecovered expenditures.

Recoupment appears to have evolved from the principle that, if an agent or employee of the principal or employer furnishes a consideration in addition to his mere services, he will be deemed to have purchased the employment for at least a reasonable period of time where the duration of the employment is not otherwise defined. Gellhorn, Limitations on Contract Termination Rights — Franchise Cancellations, 1967 Duke L.J. 465, 479; 9 Williston, Contracts § 1017A (3rd ed. 1967); Restatement (Second) of Agency § 442, comment c (1957). Employing this rationale, a number of courts have declared that a manufacturer would be in breach and liable for damages should he terminate the distributorship contract without just cause before a reasonable period of time had lapsed. Allied Equipment Co. v. Weber Engineered Products, Inc., 237 F.2d 879 (4th Cir. 1956); Jack’s Cookie Co. v. Brooks, 227 F.2d 935 (4th Cir. 1955), cert. denied, 351 U.S. 908, 76 S.Ct. 697, 100 L.Ed. 1443 (1956). See cases collected in Annot., 19 A.L.R.3d 196, 319 (1968). The purpose of allowing a reasonable time for the contract is to provide the distributor with a reasonable opportunity to recoup his expenditures. Allied Equipment Co. v. Weber Engineered Products, Inc., supra, 237 F.2d at 882. What period of time is, in fact, “reasonable” varies with the circumstances of each case. General Tire and Rubber Co. v. Distributors, Inc., 253 N.C. 459, 117 S.E.2d 479, 489 (1960).

Other courts have reached the same or a similar result, while still holding that the contract remains terminable at will, by requiring the manufacturer to reimburse the distributor in quantum meruit for unrecouped expenses. Gibbs v. Bardahl Oil Co., 331 S.W.2d 614 (Mo. 1960); Beebe v. Columbia Axle Co., 233 Mo.App. 212, 117 S.W.2d 624 (1938). See cases collected in Annot., 19 A.L.R. 3d 196, 312 (1968).

This court in Clausen & Sons Inc. v. Theo. Hamm Brewing Co., 395 F.2d 388, 391 (8th Cir. 1968), construing Minnesota law, adopted the former of these approaches as follows:

“Thus we feel that under Minnesota law where an exclusive franchise dealer under an implied contract, terminable on notice, has at the instance of a manufacturer or supplier invested his resources and credit in establishment of a costly distribution facility for the supplier’s product, and the supplier thereafter unreasonably terminates the contract and dealership without giving the dealer an opportunity to recoup his investment, a claim [for breach of contract] may be stated.”

A review of the authorities on recoupment makes it clear that a threshold requirement to the right is the existence of an agreement which is terminable at will. Under Minnesota law, as is generally true elsewhere, a contract having no definite duration is terminable at will by either party upon reasonable notice to the other. McGinnis Piano & Organ Co. v. Yamaha Int’l Corp., 480 F.2d 474 (8th Cir. 1973); Benson Coop. Creamery Ass’n v. First District Ass’n, 276 Minn. 520, 151 N.W.2d 422, 426 (1967); Victor Talking Machine Co. v. Lucker, 128 Minn. 171, 150 N.W. 790, 792 (1915).

As we understand Hahn’s position on this appeal, it does not dispute the right of one whose distributorship has been cancelled without cause to recoup his investment. Instead, Hahn argues that, on the record before us, no evidentiary basis exists for the award of such damages to Ag-Chem. Hahn premises its argument on three grounds: (1) the evidence failed to establish the amount of Ag-Chem’s investment and that such investment had been made at the insistence of Hahn; (2) the evidence showed conclusively that Ag-Chem had been afforded a reasonable time in which to recoup; and (3) the termination of the distributorship was, as a matter of law, justified and not unreasonable.

Recoupment has traditionally been confined to the recovery of preliminary expenses incurred in setting up a distributorship system, such as sums expended for initial promotion and renting a facility. Thus the doctrine has envisioned a distributorship requiring one, large, initial investment. Bushwick-Decatur Motors, Inc. v. Ford Motor Co., 116 F.2d 675, 676 (2d Cir. 1940).

Prof. Gellhorn, in a discussion of the doctrine of recoupment, has observed:

“The rules of reasonableness, in other words, protect a dealer only against sudden terminations (that is, against losses which might be averted upon reasonable advance notice) and, if the contract is silent, against terminations shortly after the agreement was executed. As a practical matter the protection provided by these implied conditions is minimal. ... In addition, no court appears to have extended the doctrine of reasonableness to give the dealer an opportunity to recoup any new investment, regardless of when made.”

Gellhorn, supra at 482.

Prof. Gellhorn concluded his discussion by suggesting inter alia that recoupment be extended to the recovery of new investments. Id. at 513 n. 179.

We find that the evidence viewed in the light most favorable to Ag-Chem provides sufficient proof of a continual investment made in the establishment and development of the Hahn distributorship. In addition, the evidence warrants the inference that Hahn not only countenanced but actively encouraged the expenditures made by Ag-Chem. We are of the view,, however, that the trial court erroneously admitted evidence as to the amount of the investment. We discuss that matter more fully in consideration of Hahn’s alternative motion for a new trial.

Hahn’s second argument in support of the alleged insufficiency of the evidence, that Ag-Chem had had more than a reasonable opportunity to recover its investment prior to termination, presents a troublesome question as Ag-Chem had enjoyed the franchise and emoluments flowing therefrom from 1962 through 1968. Nonetheless, in view of the fact that the distributorship required a continual investment, we are not persuaded to rule as a matter of law that it had endured for a reasonable time. See McGinnis Piano & Organ Co. v. Yamaha Int’l Corp., supra.

Hahn’s last argument in support of the insufficiency of the evidence is that the distributorship was terminated for just cause. Again, we disagree. As we read this record, whether or not the distributorship was terminated for just cause was a dominant and highly controversial issue in the trial. Hahn claimed that it terminated the relationship because Ag-Chem had entered into competition with Hahn by manufacturing and marketing its own sprayer equipment. Ag-Chem, on the other hand, contended that the termination resulted from a personal animosity between the parties over Hahn’s designation of Allis-Chalmers as a distributor in the same geographical area served by Ag-Chem. Certainly there was evidence which would have warranted the jury in finding that the contract was terminated for good cause. However, the issue was clearly disputed, the jury resolved the conflict in favor of Ag-Chem, and we are not authorized to upset that finding.

Alternatively, Hahn contends that it is entitled to a new trial on the recoupment claim because of the erroneous and prejudicial admission of evidence of the “future value of current expenses” and the highly conjectural nature of the proof of damages.

Ag-Chem premised its claim for recoupment on the theory that it was entitled to recover that unamortized portion of operating expenses incurred in the fiscal years 1964-1968 which was attributable to future development. This theory was explained by a professor of economics who testified for Ag-Chem as follows:

“To the degree that any expenditure has an effect on reducing costs in subsequent years, it is an asset of the firm in the year in which that expenditure was made. If, as is the [sic] ease, advertising expenditures made this year have an effect not just on this year’s sales, but also on sales in subsequent years, a portion of this year’s advertising expense ... is a capital asset of the firm, not an expense of the current year’s operations. This despite the fact that accountants invariably write off advertising as an expense rather than capitalizing it.”

Mr. McQuinn determined through some indefinable process the future value of fifteen categories of operating expenses. Plaintiff’s exhibit 71 represented his allocation of operating expenses to future development for the years 1964-1968. Based upon the information contained in exhibit 71, Ag-Chem’s accountant prepared exhibit 63 showing the capitalization and amortization of those operating expenses allocated to future development. The unamortized portion remaining as of September 30, 1968, alleged to be Ag-Chem’s unrecouped investment, was $104,086, the exact amount of the jury verdict on the recoupment claim.

We agree with Hahn that Ag-Chem’s proof of damages failed to take into account several vital considerations, and for that reason we remand to the trial court for a new trial.

In the Allied Equipment case, supra, 237 F.2d at 882, the recoupment doctrine was stated as follows:

“[I]f [the manufacturer], without sufficient cause, terminated the arrangement prior to the expiration of such a reasonable time, [the distributor] was entitled to damages in the amount of its unreeouped expenditures, taking into account, of course, the value of any benefits it may have derived from the arrangement during its existence or may derive thereafter.”

In its proof of damages Ag-Chem ignored the fact that it had realized net profits after taxes over the 1964-1968 period of $98,240. The existence of substantial profits may very well indicate that the expenditures made by Ag-Chem were substantially amortized through the production of realized profits during the operation of the distributorship. See C. C. Hauff Hardware, Inc. v. Long Manufacturing Co., 260 Iowa 30, 148 N.W.2d 425, 428 (1967); cf. Smith v. Onyx Oil & Chemical Co., 218 F.2d 104, 112 (3d Cir. 1955). See also Note, Measure of Damages Resulting from Breach of Distributorship Agreements, 2 Ind.Legal F. 316 (1969). Accordingly, on retrial the court should frame its instructions to authorize the jury to award Ag-Chem its unamortized capital investments, if any, in accordance with the guidelines herein delineated.

Secondly, insofar as we are able to determine from this record, the percentages of operating expenses charged to future development in exhibit 71 were attributed wholly to the development of the Hahn distributorship. Yet, during the latter part of that period, particularly 1967 and 1968, Ag-Chem was actively engaged in manufacturing, promoting, and distributing its own sprayer equipment. According to plaintiff’s exhibit 35, Ag-Chem’s net sales in 1967 of equipment manufactured by itself or some company other than Hahn totaled $67,-327. In 1968, these sales rose to $176,-785. According to plaintiff’s exhibit 61, in the years 1969 and 1970, after termination of the Hahn distributorship, Ag-Chem realized gross sales of its own equipment and parts of $813,471 and $872,444, respectively.

Thus it appears irrefutable that Ag-Chem itself derived substantial benefits both in the years prior to and after termination of the Hahn distributorship from those operating expenses attributable to future development. Therefore, in the event of another trial, evidence of unamortized capital expenses should be confined to that portion which served to promote and develop the Hahn distributorship alone.

We add a cautionary note as to proof of operating expenses attributable to future development. Although we are inclined to agree with Ag-Chem’s Professor Mohring that certain everyday expenditures, such as advertising or salesmen’s salaries, may under certain circumstances be in the nature of a capital investment, regardless of treatment for tax purposes, more proof is required than the mere assertion of a company official that this is the case. We visualize particular difficulty in adequately proving the investment value of several of Mr. McQuinn’s categories of operating expenses, for example, “office supplies,” “postage,” “legal and audit,” and “telephone.”

B. The Robinson-Patman Claim

Hahn sold its equipment to Allis-Chalmers at a 55 percent discount off list price. Allis-Chalmers resold exclusively to its dealers at an approximate discount of 25 percent. In contrast, from September, 1967, until the effective date of termination, Ag Chem purchased Hahn products at an approximate discount of 45 percent. Ag-Chem resold largely to fertilizer, chemical and feed dealers who purchased Hahn sprayers for their own use in custom spraying. An undetermined percentage of these customers —one witness testified to 20 percent or less — acted as stocking dealers for Ag-Chem. Ag-Chem granted to stocking dealers a 15. percent discount between September 1967 and March of 1969.

Ag-Chem contended in the trial court that the more favorable discount granted to Allis-Chalmers constituted a price discrimination prohibited by § 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(a).

Section 2(a) reads in part:
“It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale within the United States or any Territory thereof or the District of Columbia or any insular possession or other place under the jurisdiction of the United States, and where the effect of such discrimination may be substantially to lessen competition 'or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them. ...”

As readily appears from a reading of the statute, evidence of the existence of competition is essential for a violation of the Robinson-Patman Act. 1 R. Callman, The Law of Unfair Competition § 28.1(b)(7) (3rd ed. 1967). The existence of this competition is essentially a fact question which can only be determined by making a realistic appraisal of all the relevant competitive facts. FTC v. Sun Oil Co., 371 U.S. 505, 527, 83 S.Ct. 358, 9 L.Ed.2d 466 (1963). Ag-Chem urged that the requisite competition existed either at the secondary level, between Ag-Chem and Allis-Chalmers, or at the tertiary level, between dealers of each. .

The Robinson-Patman claim was submitted to the jury along with the following instruction concerning measure of damages:

“The measure of damages for such unlawful price discrimination is the product of the dollar amount of units and parts purchased by Ag-Chem times the amount of the price discrimination.”

The jury arrived at a verdict of $91,-192, which sum was in accordance with the court’s instruction on damages and plaintiff’s exhibit 81.

As the trial court recognized in its post-verdict memorandum opinion, the instruction on damages failed to take into account the degree of actual competition between Ag-Chem and Allis-Chalmers or their dealers, stating:

“When examined, it is apparent that Allis-Chalmers sold to customers which were completely unavailable to plaintiff. Allis-Chalmers never received a penny from a customer to which Ag-Chem could have sold, nor did it even deliver title to such a customer. Indeed, on the contrary, it sold to a closed class of purchasers, its own dealers, to whom Ag-Chem had no access whatsoever. . . .
Finding that, as a matter of law, Allis-Chalmers and Ag-Chem did not compete with each other necessarily makes the instructions to the jury improper.”

Instead of granting a new trial, however, the court “in light of the time and expense already expended,” remitted 80 percent of the jury’s verdict on the ground that “the evidence was such that the jury could have concluded that up to 20 percent of plaintiff’s business was with dealers who were in direct competition with Allis-Chalmers dealers.”

We appreciate the trial court’s reasons for granting remittitur. However, as we are remanding this case for a new trial on the issue of recoupment, we believe it to be in the best interests of the parties to allow the Robinson-Patman claim to be relitigated also. The question of the existence of competition, much less the extent, was vigorously disputed in the trial court. We cannot determine what effect the erroneous instruction may have had on the jury’s verdict. Moreover, there is scant evidence in this record to show what percentage of Ag-Chem’s customers in fact acted as stocking dealers.

By our foregoing discussion, we also dispose of Ag-Chem’s contention on its cross-appeal that the trial court erred in reducing the Robinson-Patman verdict on the ground that, as a matter of law, Allis-Chalmers and Ag-Chem did not compete directly with one another.

C. Defamation of Credit

We affirm the judgment of the trial court entered in favor of Ag-Chem on the claim of malicious defamation of credit.

Ag-Chem claimed that Hahn had maliciously, willfully and falsely reported to Dun & Bradstreet that Ag-Chem was delinquent in the payment of a Hahn account, knowing that Dun & Bradstreet would publish such information. The evidence disclosed that an agent of Hahn had made the report to Dun & Bradstreet and that it was indeed published.

The trial court fully considered Hahn’s post-trial attack against the jury verdict and held that the evidence considered in the light most favorable to Ag-Chem was sufficient for the jury to conclude that Hahn had knowingly made the false statement with the intent that it be published. Accordingly, the court was not inclined to disturb the jury’s verdict awarding Ag-Chem $3,500 as punitive damages. Neither are we convinced that the judgment for that amount should be set aside or a new trial granted on that issue. Minnesota law recognizes that a false statement of an overdue account, as alleged here, may be defamatory per se, thereby justifying punitive damages in the absence of proof of actual damages. Northwestern Detective Agency v. Winona Hotel Co., 147 Minn. 203, 179 N.W. 1001 (1920).

II. APPEAL NO. 72-1199

A. Exclusivity

As noted at the outset, Ag-Chem has appealed from the judgment n. o. v. entered in favor of Hahn on the exclusivity claim.

Ag-Chem argued in the trial court that the oral agreement with Hahn provided that Ag-Chem would be the exclusive distributor of Hahn equipment in the Minnesota and Iowa territory so long as Ag-Chem continued to promote the Hahn line. Ag-Chem further argued that the exclusive distributorship term of their agreement was breached by Hahn’s sale to Allis-Chalmers and the subsequent distribution by Allis-Chalmers in the territory of Minnesota and Iowa. As a means of proving damages, Ag-Chem introduced into evidence an exhibit prepared by its accountant which reflected the average annual earnings of Ag-Chem for the fiscal years 1964-1968. Average annual earnings multiplied by five, the minimum number of years Ag-Chem contemplated the distributorship would have remained in existence, resulted in an alleged loss of future profits in the sum of $98,740, the exact amount of the jury verdict.

The trial court, in its post-trial memorandum and judgment, concluded that the contract was one terminable at will and that Minnesota law does not prohibit termination by one who has already breached the contract. As a consequence, damages incurred after termination, including lost profits, were not recoverable. On these grounds, the court set aside the exclusivity verdict and granted judgment n. o. v. in favor of Hahn.

We agree with the trial court’s conclusion. See Western Oil & Fuel Co. v. Kemp, 245 F.2d 633 (8th Cir. 1957); Benson Coop. Creamery Ass’n v. First District Ass’n, supra, 151 N.W.2d at 427; Annot., 19 A.L.R.3d 196 (1968); 17 Am. Jur., Contracts, § 486 (1964). If, indeed, the contract was not terminable at will, we entertain serious misgivings as to the applicability of the doctrine of recoupment. See Clausen & Sons v. Theo. Hamm Brewing Co., supra, 395 F.2d at 391.

B. Sherman Act Claim

In passing upon the several motions for directed verdict filed by Hahn at the close of Ag-Chem’s presentation of evidence, the trial court, without any statement of reasons, granted Hahn’s motion “[w]ith respect to the Section 1 Sherman Act claim.”

On March 9, 1972, the final judgment was entered. Neither that judgment nor any other entered previously thereto adjudicated the Sherman Act claim. And we note in passing that the notice of appeal was “[f]rom the court’s order directing a verdict against plaintiff on the Sherman Act price-fixing claims.”

We recognize that the order granting the motion for a directed verdict is effective - without the assent of the jury. Rule 50(a), Fed.R.Civ.P. However, proper judicial procedure dietates that whenever the trial court grants a motion for a directed verdict, a formal judgment disposing of the issue should be entered, and the appeal taken from that judgment. See Goecke v. Schoel, 257 Iowa 504, 132 N.W.2d 481 (1965); 4 Am.Jur.2d, Appeal and Error § 110 (1962).

The hiatus in the record notwithstanding, we have examined the merits of Ag-Chem’s claim of error, and find no basis for interfering with the action of the trial court.

Ag-Chem’s Sherman Act claim was based upon the theory that Hahn and Allis-Chalmers conspired to reduce the discount previously awarded to Hahn distributors in order that Allis-Chalmers dealers could better compete.

The weakness of Ag-Chem’s position appears to be the insufficiency of the evidence to prove the fact of injury and the amount of injury. See Bigelow v. RKO Radio Pictures, 327 U.S. 251, 263, 66 S.Ct. 574, 90 L.Ed. 652 (1946); Household Goods Carriers’ Bureau v. Terrell, 452 F.2d 152 (5th Cir. 1971); Dean Foods Co. v. Albrecht Dairy Co., 396 F.2d 652 (8th Cir. 1968); McCleneghan v. Union Stock Yards of Omaha, 349 F.2d 53 (8th Cir. 1965). Of course, the amount of damage need not be proven by specific or exact evidence, once the fact of injury has been clearly established. Here Ag-Chem failed to prove either, and the trial court correctly directed a verdict in favor of Hahn.

C. Dismissal of Hahn of Delaware

Hahn of Delaware, the transferee of the Kearney-National interest in the Hahn line of sprayer equipment, did not come into existence until after commencement of this action. It was joined as a party defendant on February 19, 1971, shortly before the trial commenced.

The trial court vacated the judgment as to Hahn of Delaware on the ground that "Kearney-National is a financially responsible corporation, able to respond to the judgment obtained in this action. "

Ag-Chem does not object to the dismissal of Hahn of Delaware if KearneyNational is in fact a financially responsible corporation. However, Ag-Chem takes the position that the trial court should have reserved to Ag-Chem the right to reopen in the event Kearney-National proves unable to respond to the judgment.

A corporate annual report filed with the court shows that as of December 31, 1969, Kearney-National had a net worth of $15,091,465. Nothing appears in Ag-Chem’s brief or in the record which would cause us to interfere with the judge’s dismissal of Hahn of Delaware.

III. SUMMARY

To summarize, we vacate the judgment in favor of Ag-Chem on the recoupment and Robinson-Patman Act claims and remand the case to the district court for a new trial. All issues shall be retried on the Robinson-Patman Act claim, but the trial on the recoupment claim shall be limited to the amount of damages, if any, sustained by Ag-Chem.

We also vacate the judgment of $18,-000 attorney fees awarded for services rendered in connection with the Robinson-Patman claim. The vacation of the allowance for attorney fees is without prejudice to the district court’s awarding of such fees in an appropriate amount in the event Ag-Chem succeeds on the Robinson-Patman claim in another trial.

In all other respects, the judgment of the district court is affirmed. The costs incurred in these appeals shall be borne equally by Ag-Chem and Hahn of Indiana. No costs shall be taxed against Hahn of Delaware.

APPENDIX A

PLAINTIFF’S EXHIBIT 71

AG-CHEM EQUIPMENT CO., INC. ALLOCATION OE OPERATING EXPENSES TO FUTURE DEVELOPMENT YEAR ENDING SEPT. 30, 1964

Total Operating Expenses per Audited Statement % Attributable Net Charged to Future to Future Development Development

Officer’s Salary-$18,000.00 30% $ 5,400.00

Salesmen’s salary 6.500.00 20% 1,300.00

Office salary 2.378.00 20% 475.60

Commissions 18,396.00 20% 3,679.20

Business Promotion 1.131.00 20% 226.20

Travel 2.320.00 20% 464.00

Telephone 2.927.00 20% 585.40

Auto 2.307.00 20% 461.40

Advertising 2.331.00 70% 1,631.70

Office Supplies 972.00 20% 194.40

Postage 135.00 10% 13.50

Legal & Audit 1.509.00 50% 754.50

Dues & Contributions 170.00 25% 42.50

Amort, of Org. Exp. 91.00 20% 18.20

Meeting Expense 476.00 30% 142.80

Total ........................................................#15,389.40

APPENDIX B

PLAINTIFF’S EXHIBIT 63

AG-CHEM EQUIPMENT CO., INC. CAPITALIZATION AND AMORTIZATION OE EXPENSES .CAPITALIZED

Unamortized Total Portion at Capitalized 9-30-68 1968 Amortization Year Ended September 30 1967 1966 1965 1964

Expenses Capitalized Year Ended 9-30-04 $ 15,389 3,077 3,07! $ 3,078 $3,078 $3,078

Expenses Capitalized Year Ended 9-30-65 25,851 10,341 5,171 5,170 5,170

Expenses Capitalized Year Ended 9-30-66 33,939 20,363 6,78! 6,788

Expenses Capitalized Year Ended 9-30-67 45,402 36,322 9,081

Expenses Capitalized Year Ended 9-30-68 33,983 33,983

$154,564 $104,086 $24,116 $15,036 $8,248 $3,078, $..

      . Allis Chalmers Manufacturing Co., a Delaware Corporation, was also named as a defendant in the first and second amended complaints. However, before trial, Allis-Chalmers entered into a settlement agreement with Ag-Chem for $13,500 and was dismissed from the case. The trial court ordered the subsequent Robinson-Patman verdict against Hahn reduced by the amount received in the Allis-Chalmers settlement.
      Hahn of Indiana was merged with Kearney-National in February of 1969, the latter corporation assuming all of the debts and liabilities of the former. Thereafter, the Hahn business was conducted as a division of Kearney. In December of 1970, after commencement of this action, Kearney disposed of the assets of the Hahn division to a new corporation, Hahn of Delaware. On February 19, 1971, the trial court granted Ag-Ohem’s motion to join Hahn of Delaware as a party defendant in order to insure the necessary equitable relief requested in the complaint.

      . The trial court initially gave Ag-Chem a choice between a new trial and acceptance of the remittitur. Subsequently, the court acceded to Ag-Chem’s request that the order for judgment be amended to allow Ag-Chem to file acceptance of the remittitur under protest and without prejudice to its right to appeal.

      . During all times relevant, both Ag-Ohem’s and Hahn’s fiscal year began on October 1 and ended on September 30.

      . Aside from the claims submitted to the jury, Ag-Chem had also asserted: (1) a violation of § 2 of the Sherman Act (attempt to monopolize and control a substantial portion of interstate commerce in agricultural spraying equipment in the states of Minnesota and Iowa) ; (2) wrongful inducement of an Ag-Chem employee to leave Ag-Chem’s employ and enter the employ of Hahn; and (3) breach of an agreement that the distributorship would not be terminated so long as Ag-Chem continued to promote the Hahn line. Ag-Chem apparently abandoned the first two claims prior to trial. The trial court directed a verdict in favor of Hahn on the third claim, and Ag-Chem has not appealed that determination.
      Hahn filed a counterclaim for patent infringement which was dismissed by stipulation of the parties prior to filing of the final judgment.

      . Whether the contract is determined to be terminable at will or for a reasonable duration, the distributor is usually entitled to reasonable police of termination. See C. G. Hauff Hardware v. Long Manufacturing Co., 257 Iowa 1127, 136 N.W.2d 276 (1965) ; 19 A.L.R.3d 196, 292, 345 (1968). In the present case, Ag-Chem did not dispute in the trial court, and does not dispute here, the sufficiency of the notice of termination.

       Opinion filed simultaneously with this opinion.

      . In order to facilitate understanding of the method used to arrive at an estimation of Ag-Ohem’s unrecouped investment, we reproduce in Appendix A to this opinion that part of exhibit 71 devoted to fiscal year 1964. The itemization made for 1964 is identical to the itemizations made for subsequent years except as to the amounts of the operating expenses and a fortiori the net charged to future development.

      . Exhibit 63 is reproduced in Appendix B to this opinion. The exhibit was prepared by Ag-Chem’s accountant approximately six weeks before trial solely for the purpose of proving damages. None of the figures appearing in exhibits 71 and 63, apart from the total operating expenses per audited statement, were recorded on the company books or included in annual financial statements. Total operating expenses were deducted on the corporate tax return as business expenses.

      . Mr. McQuinn had drawn an officer’s salary during the same five-year period aggregating $122,500.

      . Although gross sales in 1969 and 1970 of its own equipment rivaled its gross sales of Hahn equipment in the previous years, Ag-Chem suffered relatively heavy losses in 1969 and 1970 due to greatly increased manufacturing costs.

      . Ag-Chem also alleged that Hahn had violated § 2(e) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(e), by discriminating in services between Ag-Chem and Allis-Chalmers. That issue was submitted to the jury along with the question of price discrimination and the jury rendered a general verdict on both claims.

      . Ag-Chem in its brief appears to acknowledge the inconsistency of its exclusivity and recoupment claims:
      “Ag-Chem raised the exclusivity verdict on this appeal only because it felt that if for any reason this court found the recoupment verdict could not be sustained, this court should then deal with the question of whether the law provides any remedy for plaintiffs such as Ag-Chem. .
      Our position is simply, that either this wrong must be remedied under the theory of recoupment or that this court should review the traditional rule that indefinite contracts are terminable at will.”

      . Hahn does not dispute the appealability of the order directing a verdict on the Sherman Act claim.


author: RONEY, Circuit Judge:

text:
    Inez D. BANKSTON, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
    No. 72-2755.
    United States Court of Appeals, Fifth Circuit.
    June 25, 1973.
    Benjamin B. Saunders, New Orleans, La., for plaintiff-appellant.
    Gerald J. Gallinghouse, U. S. Atty., New Orleans, La., Morton Hollander, Stanton R. Koppel, Dept, of Justice, Washington, D. C., for defendant-appellee.
    Before COLEMAN, MORGAN and RONEY, Circuit Judges.
   RONEY, Circuit Judge:

Plaintiff seeks recovery under the Federal Tort Claims Act, 28 U.S.C.A. § 1346(b) et seq., for the wrongful death of her son as the result of alleged medical malpractice by the staff of a United States Public Health Service Hospital. The District Court granted the Government’s motion for summary judgment on the ground that the Government is not liable under the Tort Claims Act for injuries to servicemen when the injuries arise out of or are in the course of activity incident to military service, on the authority of Feres v. United States, 340 U.S. 135, 71 S.Ct. 153, 95 L.Ed. 152 (1950) and Shults v. United States, 421 F.2d 170 (5th Cir. 1969). Because the factual issue whether the serviceman had been discharged from military service at the time of the claimed negligence is unresolved, we reverse and remand for further proceedings consistent with this opinion.

On August 24, 1968, decedent, Jared Y. Bankston, awaiting discharge from the Army while on terminal leave at his home, was injured in an automobile accident. The accident occurred on the very day that his terminal leave was to end and he was to be separated from the service. He was admitted for treatment to the United States Public Health Service Hospital in New Orleans, where he died from hepatitis on November 14, 1968. Plaintiff alleges that her son contracted this disease as a result of the hospital staff’s negligent transfusion of contaminated blood.

The Tort Claims Act does not deny its coverage to servicemen and veterans by its terms, but a military exception to the Government’s liability under the Act has been judicially created. This case falls between two lines of authority regarding this exception.

In the two cases relied on by the District Court, the injured servicemen were members of the Armed Forces and were subject to all military regulations and discipline when they sustained the injuries as a result of the Government’s negligence. Feres v. United States, supra, and Shults v. United States, supra.

When it handed down its decision in Feres, the Supreme Court reviewed three cases. In each instance, the alleged negligent act — quartering a soldier in unsafe barracks, failing to remove from a soldier’s stomach a thirty-inch Army towel placed there during an abdominal operation performed by Army surgeons, and unskillful medical treatment by Army surgeons — occurred during each serviceman’s regular active duty. The Court concluded that, under the Tort Claims Act, the Government was not liable for the injuries in any of these cases because the Act’s coverage is not extended to “servicemen where the injuries arise out of or are in the course of activity incident to service.” 340 U. S. at 146, 71 S.Ct. at 159.

In Shults, decided by this Court, the serviceman’s death was also allegedly caused by malpractice at a military hospital. Shults, a sailor on forty-eight hour “liberty” from duty, was struck by an automobile and admitted to a Naval hospital, where he died. The administrator of his estate, alleging malpractice by the Naval hospital staff, sued the Government under the Federal Tort Claims Act. Summary judgment for the Government was granted on the ground that Shults’ death arose “out of and in the course of activity incident to his military service and, thus, was not actionable under the Tort Claims Act.” 421 F.2d at 171. This Court, affirming, admitted that the serviceman “was injured while on leave and that the leave was never formally cancelled prior to his death.

Nevertheless, it is obvious that the injured man could not have been admitted, and would not have been admitted, to the Naval Hospital except for his military status. He was there treated by Naval medical personnel solely because of that status. It inescapably follows that whatever happened to him in that hospital and during the course of that treatment had to be ‘in the course of activity incident to service.’ ”

421 F.2d at 171-172. With active military status, Shults would have remained in the service had he recovered.

Prior to Feres, the Supreme Court had sustained a serviceman’s claim against the Government under the Tort Claims Act in Brooks v. United States, 337 U.S. 49, 69 S.Ct. 918, 93 L.Ed. 1200 (1949). In Brooks, two servicemen, brothers who were riding in an automobile with their father on a public highway, were negligently injured by a Government employee driving a Government truck. The Court reasoned that

we are dealing with an accident which had nothing to do with the Brooks’ army careers, injuries not caused by their service except in the sense that all human events depend upon what has already transpired. Were the accident incident to the Brooks’ service, a wholly different case would be presented.

337 U.S. at 52, 69 S.Ct. at 920.

Thereafter, in United States v. Brown, 348 U.S. 110, 75 S.Ct. 141, 99 L.Ed. 139 (1954), the Supreme Court interpreted its two earlier decisions on this issue for the purpose of determining which case controlled the right of a member of the Armed Forces to recover against the Government:

The ease is here on a petition for certiorari which we granted because of doubts as to whether Brooks v. United States, ... or Feres v. United States, . . . controlled this case.

348 U.S. at 110, 75 S.Ct. at 142. Peter Brown, a discharged veteran, had injured his knee while on active duty in the Armed Services during the 1940’s. This injury led to his discharge in 1944. In 1951, Brown entered the Veterans Administration Hospital for a knee operation, and the application of a defective tourniquet caused permanent nerve damage to his leg. He sued the United States for damages under the Tort Claims Act.

In its reasoning, the Supreme Court differentiated its earlier decisions of Brooks and Feres:

The Brooks case held that servicemen were covered by the Tort Claims Act where the injury was not incident to or caused by their military service. . In that case, servicemen on leave were negligently injured on a public highway by a government employee driving a truck of the United States. .
The Feres decision involved three cases, in each of which the injury, for which compensation was sought under the Tort Claims Act, occurred while the serviceman was on active duty and not on furlough; and the negligence alleged in each case was on the part of other members of the Armed Forces. The Feres decision did not disapprove of the Brooks case. It merely distinguished it, holding that the Tort Claims Act does not cover “injuries to servicemen where the injuries arise out of or are in the course of activity incident to service.”

348 U.S. at 111-112, 75 S.Ct. at 142-143. The Brown Court then recounted the reasons behind the Feres decision:

The peculiar and special relationship of the soldier to his superiors, the effects of the maintenance of such suits on discipline, and the extreme results that might obtain if suits under the Tort Claims Act were allowed for negligent orders given or negligent acts committed in the course of military duty, led the Court to read that Act as excluding claims of that character.

348 U.S. at 112, 75 S.Ct. at 143.

The Supreme Court in Brown held, consequently, that the serviceman’s claim should be sustained:

The present case is, in our view, governed by Brooks, not by Feres. The injury for which suit was brought was not incurred while respondent was on active duty or subject to military discipline. The injury occurred after his discharge, while he enjoyed a civilian status. The damages resulted from a defective tourniquet applied in a veterans’ hospital. Respondent was there, of course, because he had been in the service and because he had received an injury in the service. And the causal relation of the injury to the service was sufficient to bring the claim under the Veterans Act. But, unlike the claims in the Feres case, this one is not foreign to the broad pattern of liability which the United States undertook by the Tort Claims Act.

348 U.S. at 112, 75 S.Ct. at 143.

Thus, we conclude that the controlling fact in the case at bar is whether Bankston had been discharged from the service at the time of the alleged negligence or that his status was tantamount to being discharged for the purpose of asserting this claim. The Government would have us hold that, since Bankston was admitted to the United States Public Health Service Hospital solely on the authority of his valid military ID card, any malpractice at the hospital was directly incident to Bankston’s military service. That conclusion is not only contrary to the Supreme Court’s holding in Brown, but would overlook the foundation of Feres, that the Government’s liability turns not on the reasons for the treatment from which the claim arises, but on the effect of a suit for damages on the military system.

Plaintiff asserts that Bankston was no longer a “member” of the United States Army after August 24, 1968, that no further orders were issued to him after his scheduled date of separation, that he received no additional salary or other compensation after that date, and that neither he nor any member of his family received any disability allowance. Resolution of these factual issues is necessary to the determination of whether Feres or Brown is to control this case.

Reversed and remanded.