Full opinion text
MEMORANDUM AND ORDER PLATT, Chief Judge. I. DECISION AND PRELIMINARY COMMENT A. Decision This is an antitrust action brought by the New York State Attorney General’s Office against Anheuser-Busch seeking injunctive relief under 15 U.S.C. § 1 and New York General Business Law §§ 340-47. The State challenges Anheuser-Busch’s vertical non-price territorial restriction agreements, known as its 1982 Equity Agreement with its authorized wholesalers, charging that they unreasonably restrained trade, thus violating the above mentioned antitrust laws. For the reasons set forth below, we hold that the 1982 Equity Agreement is not an unreasonable restraint of trade and thus the State’s complaint is hereby dismissed. B. Comment Were it not for the Second Circuit Court of Appeals decision in Eiberger v. Sony Corp. of America, 622 F.2d 1068 (2d Cir.1980), we would have granted defendant’s motions heretofore made herein for summary judgment on the grounds that the State has been unable to show at any time in this proceeding a relevant geographic market or possession by the defendant of market power as is apparently necessary under Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977) (hereinafter “Sylvania”), and its progeny hereinafter discussed. Eiberger, however, arguably holds that a vertical restraint may be unreasonable without a finding that a plaintiff has shown a relevant geographic market or possession of market power and that there must be a trial to weigh the interbrand benefits against the intrabrand effects of any restraint caused by a restrictive agreement. It is for that reason, even though in the case at bar the defendant clearly articulated and showed on its summary judgment motion some material procompetitive effects of its agreements, that we felt the protracted trial which we held herein to be necessary. There are authorities and suggestions in other cases and articles that a showing of some material procompetitive effects under such circumstances should be sufficient to satisfy the rule of reason and that the balancing otherwise necessarily required herein is not necessary. A clarification on this point would not only be helpful but would also save future litigants and the district courts inordinate amounts of time and effort and money. II. PROCEDURAL BACKGROUND This case concerns an action commenced by the State of New York on July 15, 1986, against four brewers, Anheuser-Busch, Inc. (hereinafter “A-B”); Miller Brewing Company; Stroh Brewery Company; and G. Heileman Brewing Company; four named and an unspecified number of authorized wholesalers; and a beer wholesalers’ trade association. The action challenged the brewers’ use of wholesaler-assigned exclusive territories to distribute their products. In July 1989, by stipulation and order, the Court dismissed all claims with prejudice against G. Heileman and Stroh and the wholesalers’ association. A-B, Miller and various wholesalers moved for summary judgment against the State and the State similarly cross-moved. In an Order filed September 19, 1990, the Court denied each summary judgment motion. In September 1991, a stipulation and order dismissing with prejudice all claims against Miller was signed by the Court. Through these stipulations brewers Stroh, Heileman and Miller were permitted to continue utilizing their vertical restraints without alteration and without fear of future State action. Subsequent to the commencement of the trial, all claims against the defendant wholesalers were also dismissed with prejudice by stipulation and order. As a result of these settlements, the present matter concerns only the State’s claim against AnheuserBusch. At the close of the State’s case, AB filed a motion for involuntary dismissal pursuant to Fed.R.Civ.Pro. 41(b). This motion was denied on January 2, 1992. III. FACTUAL FINDINGS A. The National Beer Market Anheuser-Busch brews and distributes for sale in New York State (and indeed throughout the country) a number of brands of beer including Budweiser, Bud Light, Bud Dry, Michelob, Michelob Light, Michelob Dry, Michelob Dark, Busch, Busch Light, Natural Light, O’Douls, and King Cobra. Although a major participant in the national beer market for years, (in 1971 A-B accounted for 18.6% of all national beer sales), A-B has developed into the nations’s leading producer of beer products and by 1989 it held a 42% share of the national market and a 39% share of the New York State market. (Def.Ex. AB-WB; AB-WC). B. Beer Sales in New York State In the early 1970s, much of the beer sold in New York State was brewed in this State, under brand names such as Schaefer, Ballantine, Rheingold, and Genesee. By the 1980s, with the exception of Gene-see, none of those brands accounted for a significant share of sales. Instead, A-B and Miller, both lesser producers in the early 1970s, together with Genesee, had become the leading brewers, combining for approximately 58% of the sales in New York State in 1982. (Def.Ex. AB-WC). As defendant’s expert Myslinski and State’s expert Bradburd testified at trial, A-B’s rising popularity and the demise of some of its competitors can be, in part, attributed to divergent attitudes towards producing a quality product. (Tr. 3180-3182, 3189; Def.Ex. AB-EN at 125278; Tr. 3402; PI. Ex. 378, Busch Dep. at 63; Tr. 1747-49, 2834; Def.Ex. AB-MK; Tr. 3781-3783). By 1989, the landscape of the beer market had continued to transform, with each brewer’s share of the total beer sales in New York State split as follows: A-B: 39% share; Miller: 14.6% share; Genesee: 7.5% share; Coors: 7.1% share; Heileman: 6.9% Stroh/Schlitz: 5.5% Pabst: 4.0% Imports: 12.9% All Other Domestics: 2.6%. (Def.Ex. AB-WC). In addition to the changing fortunes of existing brands, the New York market has witnessed the entry of numerous new brands, most notably Coors, which began selling in the State in 1987 and obtained 7.1% of the State’s total beer sales by 1989. During the 1980s, some 10 to 15 new brands of beer were introduced in the State of New York each year. Some of the successful new entrants include: Corona and Amstel Light, as well as micro-brewery products Samuel Adams, New Amsterdam and Brooklyn Lager. (Tr. 2797-2802, 3377-2278). In addition to the new products from other brewers, in the past 15. years A-B has introduced numerous new brands, such- as Busch, Busch Light Draft, King Cobra, Michelob Dry, Bud Light, Bud Dry, and O’Douls, while Miller has introduced Miller Lite, Milwaukee’s Best, Meister Brau and Miller Genuine Draft. A-B’s share of the total beer sales in New York State is not, nor has it ever been, consistent throughout different regions of the State. (Uncontested Facts ¶ 132-134). Sales in the New York Metropolitan Area account for over 50% of the A-B’s total State sales and comprise a higher market share than do A-B’s total sales in the rest of the State. For instance, A-B’s most popular products, Budweiser and Bud Light, accounted for 30.85% of the total share in the New York Metro area from 1987-1991, but only 18.-98% of the total beer sales in Albany, and 10.20% of the sales in Buffalo. (Def.Ex. AB-VE). C. Distribution of A-B Beer Beer is a perishable product with a shelf-life of up to 105 days. Like the vast majority of brewers, A-B utilizes a date coded system to track the freshness of their product. Each container is marked in a manner unintelligible to the consumer, leaving the consumer unable to learn the freshness of the product before purchase. This serves to prevent customers from shuffling through stock searching for the freshest product, leaving the older, yet still fresh, beer to sit past its expiration date. (Tr. 2443-2446, 3845-3846). Only one brewer, Samuel Adams, was shown to utilize a consumer-intelligible dating system. (Tr. 2179-2180; Pl.Ex. 474). The demand for A-B products varies throughout the year, reaching peaks during the summer months and the holiday season at the end of the year. A-B's brewing capacity is not sufficient to produce the quantity of beer demanded during peak periods of the year. Combined with the perishable nature of the product, this fluctuating demand and limited production capacity makes production and inventory planning and control necessary to insure sufficient product supply during the peak periods. (Tr. 2012-2017). Beer is generally distributed through a three-tiered system — brewer to wholesaler to retailer. In New York, however, due to its unique licensing laws, a layer of sub-distributors (known as “home distributors”) exists in certain areas, adding extra tiers to the system. Depending on the type of license obtained, these home distributors may sell beer either at wholesale only or at wholesale and/or retail. Home distributors exist independently of any specific producer and are not contractually obligated to distribute A-B’s or any other brewer’s product. They are not permitted to purchase beer directly from the brewery and must rely on the brewer’s authorized wholesalers or other home distributors for their supply. By 1983, with the addition of a new brewing facility in Baldwinsville, New York, A-B had twelve breweries in the United States. As stated above, these breweries do not sell beer directly to retail customers, rather they sell only to A-B authorized wholesalers. Each authorized wholesaler is assigned to a source brewery, from which it obtains the vast majority of its supply. For New York State authorized wholesalers there are two possible source breweries; the A-B brewery in Baldwins-ville, New York, services most of A-B’s upstate wholesalers and some of the Metro wholesalers and its facility in Newark, New Jersey, services many of the downstate authorized wholesalers. (Uncontested Facts ¶ 11; Tr. 2019, 2022). Of their 900 nationwide authorized wholesalers, A-B has 34 located in New York State and six within the New York Metropolitan Area. Each wholesaler is assigned an area in which to focus its sales. Upon purchasing beer from the brewery the wholesalers sell the beer to retailers and/or home distributors who are located in their assigned areas. In areas with numerous home distributors, it is not unusual for beer to be transferred between two or more home distributors before it reaches the retailer. With home distributors transferring products among themselves, in regions like the New York metropolitan area where home distributors are particularly concentrated, beer is often distributed through a four-, five or more tier system before it reaches the consumer. In areas such as upstate New York, which are without home distributors, A-B beer is distributed directly from the wholesaler to the retailer. (Tr. 2339-2340). Retailers, in turn, sell to consumers for consumption on-premise (bars, restaurants, stadiums) or off-premise (supermarkets, delis, convenience stores). The activities of the authorized wholesaler do not cease upon completion of a sale. Wholesalers must service each account to which they sell A-B beer. “Servicing” an account involves monitoring the stock rotation and freshness of the A-B beer possessed by the retailer (Tr. 2095-2099); destroying and replacing any overage beer (Tr. 1758; Pl.Ex. 377, Britt Deposition at 28, 187); installing and maintaining “point-of-sale” materials; and regularly checking on the account by delivery salesmen and sales supervisors (Tr. 2107-2108). The importance of properly servicing an account is exemplified by the battle among producers to gain optimum shelf space and tap placement in retail establishments. (Tr. 3404-3405, 3334-3335, 3348-3350). Although the amount of a certain brand of beer purchased by the retailer will depend largely on the demand by consumers for that product, through attractive offers of packages and services a wholesaler can make certain beer more desirable for retail purchasers. (Tr. 3404-3405). By inducing its wholesalers to make its product more appealing to retailers, a producer can help increase consumer sales of the product. The unique existence in New York of home distributors has also invigorated the practice of “transshipping". In the beer industry, “transshipping” refers to the sale of beer out of the geographic area or territory assigned to an authorized wholesaler. In New York State, this practice arises when an authorized wholesaler sells to an in-territory home distributor which, in turn, sells (transships) the beer to an account located outside the wholesaler’s territory. Transshipped beer is attractive to retailers because it is often offered at a lower price and transshippers, unlike authorized wholesalers, can deliver brands produced by more than one brewer. (Tr. 139-143, 585-586). However, due to the scarcity of home distributors in much of the State, no appreciable amount of transshipping occurs outside the Metro New York Area. (Tr. 2063-2064, 2422-2423). As of 1982, the only A-B products which were being transshipped were Budweiser, Michelob, Michelob Light and Natural Light, with Budweiser accounting for 90% of the transshipping transactions. D. The Equity Agreement In 1967, A-B became the first national brewer to enter into a uniform written agreement not just in New York but with all its authorized wholesalers nationwide, replacing a terminable at-will arrangement under which beer was purchased on an order-to-order basis. The stated purpose of this “Equity Agreement” was to promote investment and long-term commitment from the wholesaler by giving them an equity in their business. The agreement was imposed uniformly nationwide and signed by each of A-B’s 900 authorized wholesalers. Since 1967, the Equity Agreement has been amended twice, once in 1974 and again in 1982. It is the terms of the 1982 amendments and their imposition of exclusive territories on A-B’s wholesalers that New York State contests as an unreasonable restraint of trade. (Complaint H 42). A-B amended the 1967 Equity Agreement in 1974. The 1974 amendments assigned each authorized wholesaler a territory of primary responsibility in which to concentrate its selling, servicing and promotional efforts. Certain provisions provided sales and merchandizing objectives, and directed the wholesalers to work towards achieving maximum market representation of A-B products in their area. Eight years later, in 1982, A-B decided to amend again the Agreement by including, among other new provisions, an exclusive territory provision. A-B was the first brewer in New York to implement exclusive territories. However, presently most other major brewers and numerous state legislatures require such a system. New York is one of only nine states without any statute or regulation addressing exclusive territories for beer distribution. The alcoholic beverage control laws of 30 states (i.e., 60% of the states) mandate (i.e., require) exclusive territories and prohibit wholesaler sales outside the brewer-assigned territories. Ten more states expressly permit (i.e., a total of 80% of the states) brewer assigned territories for beer distribution. Only one State, Indiana, expressly prohibits exclusive territories for beer distribution. As with the previous revisions, the 1982 amendments were uniform for all of A-B’s authorized wholesalers nationwide. The amendments were unilaterally imposed by A-B, as A-B executives informed the wholesalers of the new policy, explained their reasons for the amendments, and required each authorized wholesaler to sign the new agreement. On its face, the Agreement seemed to prescribe that any wholesaler who violated the terms of the Agreement by selling outside of its assigned territory was subject to termination, although there was no evidence that any wholesaler has been terminated for failure to abide by the terms of the Equity Agreement. The exclusive territory clause of the 1982 Agreement provided: “Anheuser-Busch hereby appoints Wholesaler as the wholesale distributor of, and grants to Wholesaler the right to sell, the Products in the territory described in Exhibit 2 (‘Territory’) and agrees that it will not appoint another wholesaler for the Products sold by Wholesaler in the Territory____ Wholesaler hereby accepts said appointment and agrees to exercise its best efforts to promote, sell and service the Products in the Territory. Wholesaler agrees that it will not sell Products directly or indirectly to customers located outside the Territory; provided, however, that Wholesaler may, subject to the approval of Anheuser-Busch, sell Products to customers located in another wholesaler’s territory if that wholesaler is unable for any reason to service its territory____” (Def.Ex. A-A) (emphasis added). In addition to the exclusive territory provision, the 1982 Agreement also (1) required wholesalers to have controlled environment warehouses (“CEW”); (2) required beer to “come-to-rest” within the authorized wholesaler’s CEW to ensure proper storage and stock rotation; (3) required beer to be shipped out of wholesalers warehouse on a “first in, first out” basis; (4) instituted a successor management procedure to ensure orderly transition in management; (5) revised the procedures followed in event of a contemplated sale of an ownership interest in a wholesalership; and (6) revised the deficiency termination provisions. E. The Purpose of the 1982 Amendments A-B’s purported motive in imposing the 1982 amendments was to foster further wholesaler investment, increase distribution efficiency, enable wholesalers to compete more efficiently with rival brands, and to reduce free-riding by transshippers. The amendments also sought to limit the amount of overage beer reaching the consumer. Although the defendant concedes that its wholesalers provided some services and made some investments called for in the previous Equity Agreements, the 1982 amendments mandated wholesaler investment. By entitling each wholesaler to an exclusive territory, A-B not only gave wholesalers the incentive to make the desired investments, but made them better able to afford such investments. (Tr. 2101, 2515, 2856-2857, 3122-3123). Not illogically, like any other business would, A-B says it hoped to increase their profitability by instituting methods to make them more competitive. A-B, while conceding its opposition to the transshipping practice, does not concede that a desire to reduce transshipping motivated the implementation of the 1982 amendments. As was shown at trial, its opposition to transshipping stems from the negative effects transshipping had on both A-B’s and A-B wholesalers’ ability to provide the desired enhanced quality, services and promotions to consumers and retailers. (Tr. 2823-2824, 3407-3408; Pl.Ex. 38, at 168073-168076). Transshippers, having no allegiance to A-B, do not engage in the substantial investments and many of the quality control, product promotion and services that A-B asks of its wholesalers. (Def.Ex. AB-AFT, Myslinski Report at 16; Pl.Ex. 38 at 168074). Some of the proven detrimental effects of transshipping include: 1. Free-riding: Wholesaler efforts to increase demand for A-B products were undermined by transshippers who could reap the benefits of these efforts by selling A-B products in the wholesaler’s territory. (Tr. 3406-3408; 3216; Pl.Ex. 38 at 168076; Def.Ex. AB-K, at 107182; Def.Ex. AB-D, Hausman Report at 5). 2. Diminution of Wholesaler Efforts: Transshipping put financial strains on wholesalers, diminishing their willingness to engage in advertizing and promotions or community affairs. (Def.Ex. AB-K at 107182; PL Ex. 38 at 168076; Pl.Ex. 265 at 12094). 3. Diminution of Wholesaler Abilities: Wholesalers became less able to afford the cost of inventory or forecast demand, often causing wholesalers to have too little or too much stock warehoused. (Tr. 2824; Pl.Ex. 265 at 129092, 129094). 4. Quality Control: Transshippers do not service the accounts they sell to, causing large quantities of A-B products to sit with retailers without a wholesaler to monitor the stock rotation and check freshness codes. (Tr. 2836-2837, 3216). 5. Development of Existing and New Products: Transshippers are not concerned with insuring shelf space for A-B products, or installing new “point-of-sale” materials, developing markets for lower volume brands or introducing new A-B brands. This injures A-B’s ability to compete with producers whose products are not transshipped to those accounts. (Tr. 3405; 3216; Pl.Ex. 38 at 1168073, 168076; Def.Ex. AB-D, Hausman Report at 12-14). It is indisputable that transshipping was hampering A-B’s ability to compete effectively in the interbrand market by reducing its ability to offer consumers and retailers the intended quality product and services. It was due to the above mentioned effects that A-B wholesalers became less effective in carrying out the duties A-B had assigned. It was A-B’s stated intention through imposition of the 1982 amendments to improve further the performance of their wholesalers, and, in the process, some of the negative effects of transshipping would be reduced. The State offered its own characterization of the motives behind the 1982 amendments. The State ásserts that transshipping had a downward pull on A-B prices. (Plaintiff’s Proposed Findings of Fact, at 16). This pull was “squeezing” the authorized wholesaler’s profit margins. (Pl.Ex. 397, at 29-30; Pl.Ex. 265, at 129092). With the wholesalers forced to keep prices down, A-B’s ability to raise the F.O.B. prices was limited. The State views the 1982 amendments merely as mechanisms to reduce drastically transshipping’s prominence and downward pull on prices, thereby enabling A-B and its wholesalers to raise prices and increase profits, while injuring both transshippers and the consumers. Exemplifying the alleged insincerity of A-B’s stated purpose, the State vigorously disputed the defendant’s portrayal of the amendments as a mechanism to eliminate the sale of any overage A-B beer. The indisputable fact, however, is that beer is a perishable product and like all perishable products it remains “fresh” for a limited period of time. (Uncontested Facts ¶ 10). Although consumption of overage beer is not a health risk, the taste does vary from that of “fresh” beer and the older it gets the greater the variance. (Tr. 2077, 2448). Obviously, a producer, like A-B, has a distinct interest in offering the best tasting product possible by eliminating the (or at least ensuring a minimum) amount of overage beer that reaches the consumer. While its rebuttal expert, Prof. Bradburd, begrudgingly admitted the validity of this interest, (Tr. 3783), the State asserted that relatively few overage A-B products ever reach the consumer and, therefore, any act by A-B allegedly aimed towards remedying this “problem” is disingenuous. This assertion by the State is unconvincing for a number of reasons. First, the data and testimony upon which the State bases this assertion does not accurately reflect the amount of overage beer reaching the consumer. Professor Bradburd’s estimate that consumers had a 1 in 200 chance of purchasing overage A-B beer is clearly inaccurate. Another basis for the State’s assertion is the relatively low number of consumers who complained to distributors about purchasing overage beer. Here, too, the State makes an unsound assumption. Unlike a product such as milk, consumers can drink overage beer and not know that the product is overage but simply not enjoy the taste as they would a “fresh” beer. Even if the Court were to accept the 1 in 200 statistic offered by the State rebuttal witness Bradburd (which it does not), that data shows that thousands of cases of overage A-B beer were reaching the consumer each year. (Pl.Ex. 173). Every time a consumer, like Professor Bradburd, drinks an overage product, A-B risks losing that customer. (Tr. 3448, 3780-3781). The provisions of the 1982 amendments were clearly aimed at ensuring that only the highest quality product reached the consumer. (Def.Ex. AB-A ¶ 1, Tr. 2346, 3402). The risk of losing thousands of customers is certainly a bona fide interbrand justification for A-B’s interest in undertaking some remedial action. Secondly, and most significantly, the 1982 amendments were designed to remedy this overage problem through provisions specifically aimed at the overage problem. These provisions, namely the “first-in, first-out”, “come-to-rest” and the “CEW” requirement, were implemented not only in New York State, but all across the nation regardless of the existence of transshipping. (Tr. 2099). Had these provisions been aimed solely at transshipping it is highly unlikely they would have been implemented nationwide. The “first-in, first-out” clause required wholesalers to ship out the oldest beer in the warehouse first. Proper stock rotation by the wholesaler was essential for compliance. (Tr. 3402-3403, 2098, 2287). The “come-to-rest” requirement prohibited wholesalers from shipping beer directly from the brewery to a customer. Prior to the 1982 amendment, an A-B wholesaler was able to order beer and pick it up at the brewery and deliver it directly to a customer, many of whom were home distributors. This practice was eliminated by requiring the beer to “come to rest” at the wholesaler’s warehouse before delivery. The practical effect of the “first-in, first-out” and “come-to-rest” clauses was to insure that beer was properly rotated in the warehouse and systematically diminished the likelihood that beer would be warehoused past, or close to, its freshness-expiration date. (Tr. 2095, 2098; Pl.Ex. 384, Farrell Dep. 324, 354). The 1982 Agreement also required wholesalers to warehouse beer in controlled environment warehouses, or “CEWs”. CEWs are temperature controlled and through elimination of temperature variances the shelf-life of beer is extended. Although it was A-B’s “objective” that wholesalers make substantial investment in building CEWs, it was not until 1982 that they were required. (Tr. 2105). In addition to the terms of the Agreement, A-B also implemented a wholesaler identification coding system by which it could be determined from which wholesaler a product originated. This system allowed A-B to monitor wholesaler compliance with stock rotation responsibility and the come-to-rest provision and additionally determine responsibility for any recovered overage beers. (Pl.Ex. 64 at 575158). In sum, even assuming, arguendo, A-B may have indirectly been motivated by an intention to reduce transshipping stemming from transshipping’s harmful effects, the Court finds that its primary intention in imposing the 1982 amendments was to increase its interbrand competitive edge in the beer market by causing its wholesalers to distribute more effectively and efficiently and to reduce the likelihood of overage beer reaching the consumer. F. The Effects of the 1982 Amendments The 1982 amendments had two substantial effects on wholesalers; (1) areas of “primary responsibility” became exclusive territories, and (2) many earlier wholesaler “objectives” became required practices. In conducting a rule of reason analysis, the Court must ascertain not only the purpose underlying the restrictions, but inquire into their actual effects. Only then can the Court balance the harms and the benefits of the restraint. 1. Benefits of Exclusive Territories Exclusive territories, although prominent in beer distribution, are not unique to the beer industry. Other industries, like soft drinks, telecommunications, magazines, newspapers, automobiles, clothes, and consumer electronics have implemented exclusive territories for distributing their product. (Uncontested Facts ¶ 77). Additionally) beer, owing to its perishable nature, requires proper handling and exclusive territories to promote efficient and effective handling of the product. Other perishable goods commonly utilize exclusive territories, such as soft drinks, ice cream and orange juice. (Uncontested Facts ¶ 77). Focusing on A-B’s territorial restrictions, one obvious benefit is the elimination of overlapping and redundant sales efforts by different authorized wholesalers. As defendant’s expert Hausman testified, it is inefficient for a producer to have various sellers of its product competing for the same customers. (Tr. 3398-3399). Through imposition of the exclusive territories A-B wholesalers were and are able to compete more effectively in the inter-brand market. (Def.Ex. AB-D, Hausman Report at 6). Both Mr. Vukelic, Mr. Hunter and even the State’s witness Mr. Enzien offered testimony that the exclusive territory provisions enabled A-B wholesalers to compete more effectively with other brands of beer. (Tr. 2346, 2388-2389). In fact, Mr. Enzien, an A-B wholesaler for over 20 years, testified that exclusive territories were the best way to enable wholesalers to compete against other brewers, ensure the quality and integrity of A-B products, induce and enable wholesalers to invest, engage in marketing, advertising, promotions and community relations, provide customer services, and achieve maximum distribution of A-B products. (Tr. 1774-1777). The State rebuttal expert was unable to assert that wholesaler procompetitive activities did not increase due to the 1982 amendments. (Tr. 3756). The defendant’s position is reinforced by the increased market share achieved by AB after implementation of the 1982 amendments. As Professor Hausman testified, increase in demand following imposition of a vertical restraint is evidence of the pro-competitive effects of the restraint and the resulting increase in consumer preference for the product. (Tr. 3409-3410). From 1977 to 1982, A-B’s market share increased an average of 1.65 percentage points annually. But in the two years subsequent to the 1982 amendments, A-B’s market share increased, 1.8 and 2.1 percentage points, in 1983 and 1984, respectively. From 1984 to 1990, A-B’s market share continued to increase, although at a slower pace. (Def.Ex. AB-WC). As a State witness Mr. Enzien testified, the increase in sales was caused by firm adherence to the standards set forth in the 1982 amendments. (Tr. 1760- 1772). In short and in the vernacular, “the proof is in the pudding.” The amendments also were shown to succeed in their attempt to protect product quality. Since 1982, thirteen (13) CEW warehouses have been built in New York State. The “come-to-rest” and “first-in, first-out” provisions have been strictly adhered to. Mr. Parker testified that the amount of overage beer in his territory has been reduced as a result of the amendments. (Tr. 2839-2843). Professor Hausman also testified that CEWs, stock rotation and removal of overage beer from stock all contributed to further A-B’s desire to increase quality. (Tr. 3402-3403). The defendant also provided powerful evidence that the desired monetary investments have, in fact, been made by the wholesalers. All three of the authorized wholesaler witnesses made substantial investments in their facilities, spending hundreds of thousands of dollars on improvements that would not have been undertaken without the 1982 amendments. (Tr. 1761- 1777, 2515, 2857-2875). Two of the wholesalers also made substantial investments in manpower, promotion, services and merchandizing activities. (Tr. 2863-2867, 2876-2882). It was clear from this testimony that the investment A-B hoped to induce was taking place. Adherence to the standards of the 1982 agreement brought about higher wholesaler performanee. There is no question but that the 1982 amendments resulted in numerous procompetitive actions by A-B’s authorized wholesalers. 2. Anticompetitive Effects The State alleged that the 1982 Equity Agreement had anticompetitive effects on both transshippers and consumers. Specifically, the State asserts that the provisions discussed above, when taken together resulted in injury to transshippers, which, in turn, injured the consumer by eliminating transshipping price reducing impact on the beer industry and resulted in higher beer prices. (i). Effect on Transshipping (1). Level of transshipping in 1982. The State has alleged that in 1982, before the implementation of the Equity Agreement, 12 million cases of A-B beer were transshipped in the New York Metro region. (Pl.Ex. 102, at 295514). Regardless of the accuracy of this figure, it is clear that transshipping was increasing in the years leading up to 1982. By A-B’s own estimates, the percentage of A-B beer that had been transshipped in 1981 had increased to 30.1% from 5.4% in 1971. (2). Level of transshipping immediately after 1982. Immediately after the implementation of the 1982 amendments the level of transshipped beer decreased. Vigorously contested was whether this reduction stemmed from one or more acts by A-B or from a general misinterpretation of the “indirect” sale prohibition clause. The evidence has shown that although A-B did not support transshipping, the 1982 amendments, as interpreted by A-B, did not prohibit sales to transshipping distributors. The amendments permitted authorized wholesalers to sell to home distributors located in their territory whom they knew sold outside the territory. The State protested that by prohibiting “indirect” sales outside an authorized wholesaler’s territory, A-B was prohibiting transactions to home distributors who would, in turn, sell outside the authorized wholesaler’s territory. This assertion is contradicted by testimony of James Hunter, A-B Vice President of Sales, (Tr. 2037-2041), August A. Busch, III, Chairman and CEO of A-B (Pl.Ex. 378, Busch Dep. at 172-173), and numerous wholesalers. In fact, A-B counsel, Royce Estes, confirmed in writing in October 1983 that legitimate sales to transshipping distributors were not grounds for termination. (Def.Ex. AB-R). Both that letter and repeated testimony state that it is, and always has been, A-B’s interpretation of the “indirect” out of territory sales prohibition to encompass only those sales solicited by the wholesaler to out of territory customers, whose transaction is consummated through a “sham” third party. Legitimate sales to in-territory home distributors who ship out of territory were not shown to violate the terms of the amendments. The State offered no evidence showing that A-B ever told a wholesaler that they were prohibited from selling to a known transshipper or that any wholesaler was-terminated for selling to a known trans-shipper. Instead, the State offered evidence that A-B opposed transshipping and that certain wholesalers independent interpretation was that the 1982 amendments proscribed sales to these transshippers and ceased such sales. In light of this evidence, or lack of evidence, the immediate drop in transshipping following the implementation of the amendments appears to be a direct result of distributor confusion. Although, considering A-B’s distaste for transshipping, A-B may be faulted for not having exerted itself to assure proper interpretation by the distributors, A-B convincingly showed their willingness to explain their interpretation of the “indirect sales” clause to inquiring wholesalers. The evidence showed that for the years immediately after the amendments, transshipping of A-B products was reduced. This was not predominantly a result of AB policy, but rather confusion in the marketplace. Had the reduction been due to A-B policy, it is unlikely that by 1986 transshipping’s prominent role in the distribution of A-B beer would have been so forcefully re-established as it has been presently. (3). The present level of transshipping. It was uncontested at trial that, in 1990, 14,150,000 cases of A-B beer were transshipped in the New York Metro region. Rather than eliminate transshipping, as the State claims was intended, under the 1982 Equity Agreement millions of cases of beer continue to be transshipped every year. Using the State’s proposed figure of 12 million cases transshipped in 1982, the Metro region transshipment volume increased by a total of 2,150,000 cases by 1990. In spite of exclusive territories, the total amount of transshipped beer was higher in 1990 than it had been before the 1982 amendments, although the percentage of beer that was of transshipped beer had fallen. Also evidencing the continued presence of transshipping has been the ability of distributors to obtain A-B beer from more than one wholesaler. If exclusive territories were “airtight”, a home distributor would receive all A-B beer from one wholesaler. However, the State’s own witnesses, owners of home distributorships, testified that they have continued purchasing A-B products from numerous transshipped sources. (Tr. 386-395, 971). The numbers and testimony only serve to disintegrate further the State’s suggestion that transshipping was “eliminated” or even “significantly reduced”. (Tr. 36). The State called four home distributortransshippers as witnesses. Three of the four of these witnesses have continued to transship since 1982. These witnesses testified that they engaged in many practices to achieve a competitive advantage over the authorized wholesalers. These practices included: carrying brands from numerous brewers; offering prompt deliveries; remaining open on weekends; mixing and matching quantity discounts; and picking-up all brands of empty containers. (Tr. 139, 142-143, 756-758, 1160-1161). None of these methods of competition were restrained by the 1982 Agreement, as is evidenced by these distributors’ continued profitability. Mr. Misciagna has continued transshipping at approximately the same pre-1982 amendment level, with 99% of his stock transshipped. He also testified that while competition in transshipping AB products was “extremely competitive” in 1980-1982, the competition was still “intense” in 1986-1990. (Tr. 1125-1126). Clearly, under this system territories were not airtight; products originally sold by an authorized wholesaler could end up outside that wholesaler territory through transshipping. If A-B’s sole intention behind the exclusive territories was to eliminate transshipping, it very easily could have effected such a result, as have other brewers (e.g., Miller, Coors), by imposing airtight exclusive territories. A-B’s decision not to create airtight territories further supports its assertion that harming transshippers was not the motive behind the amendments. In sum, the State successfully showed that transshipping was reduced in the years immediately following their implementation of the 1982 Equity Agreement. The State, however, failed to prove that this reduction was a direct result of A-B’s actions and did not stem from a general misunderstanding or misinterpretation of the terms of the Equity Agreement by a number of wholesalers. However, A-B may be faulted for not affirmatively acting to clear up any misunderstanding over its exclusive territory policy. As a result, those involved in transshipping may have been briefly injured, although this injury may have been the result of their own inaction. (ii). Effect on Price Central to the State’s case is the notion that transshipping exerted downward pressure on A-B beer prices which resulted in savings to the consumer and that the 1982 amendments by diminishing transshipping reduced the effectiveness of this downward pressure. By limiting transshipping and its effect on prices, the State claims A-B was able to increase the F.O.B. price and require costly distribution methods and wholesalers were able to increase their profit margins. The alleged result was injury to transshippers and consumers through increased beer prices. Although proof of this price increase theory was essential to its case, the State offered no evidence of actual increased prices paid by consumers. (Tr. 3684-3688). The State attempted to prove increased consumer prices by relying on disjointed evidence of A-B’s F.O.B. prices, frontline prices and testimony of home distributors. Yet, there was no direct proof of how the consumers were effected by these increases of the early 1980s. It is clear that presently consumer prices are falling in the New York Metro area. (Tr. 1496). Between 1987 and the end of 1990, the actual prices paid by consumers of A-B products actually decreased by 12% relative to the Consumer Price Index. (Def.Ex. AB-AGD; Tr. 3423-3427). In sum, while the Court can accept the assertion that consumers felt some impact of the price increases in the early 1980s, the lack of direct evidence makes a finding on the extent of that impact impossible. Instead of proof of consumer prices, the State insisted throughout the trial and based its claim of increased prices on data pertaining to frontline prices, the “sticker” price of beer when sold from wholesaler to retailer. However, the evidence showed, including the testimony of State’s own witnesses, that A-B beer was rarely sold to retailers at the frontline price, and subsequently, the price to retailers was rarely reflective of the frontline price. Most sales, anywhere from 90% to 100%, to retailers were discounted. Consequently, for frontline prices to be reliable tools for analyzing actual transaction prices the State had to show that increases in the price after discount to retailers corresponded to increases in the frontline price. The State offered no credible evidence to support such a finding, (one witness, Mr. Enzien, testified as such, but later contradicted that very statement.) (Tr. 1724-1727, 1738-1741). Without such a showing, the Court fails to see how frontline prices can be a relevant tool for analysis. (Tr. 3221-3222). Regardless of this serious flaw in the State’s case, the State has shown that the F.O.B. price charged by A-B and paid by home distributors for A-B products has increased since 1982 and the implementation of the amendments. A-B has never disputed that the price of their products has risen since 1982 when the Equity Agreement became effective. A-B increased its F.O.B. prices in September 1983 by 45 cents. (Uncontested Facts ¶ 117, Def.Ex. AB-L). Corresponding to these increases, the State showed that the front-line price to home distributors of 12 ounce cans of Budweiser increased substantially from November 1982 to September 1983. Data from five home distributors shows an average increase of $1.66 over those 10 months. (Tr. 314-316, 854-855, 1191-1194). However, over the next three years, prices dropped. For instance, Rutgers Distributors, whose price per case increased from $7.20 per case to $8.75 per case in ten months, had decreased to $7.80 per case by July 1986. (Def.Ex. AB-ADT). The State proved a substantial increase in the A-B frontline prices from 1982 to 1983, but also showed a subsequent decrease in price leading into 1986. After 1986, the F.O.B. price of A-B beer rose at an insubstantial pace. While the State has shown some increase in price after 1986, that increase has been at a rate lower than the Producer Price Index (an index the State’s rebuttal witness Bradburd admitted is most pertinent to beer pricing). In fact, since 1982 A-B price increases have been lower than the rate of inflation. (Tr. 3420-3422). In sum, the State has proven a substantial rise in the price for A-B products from 1982 through 1983. Since that period, while prices have continued to increase, it has been at a much slower pace. The State failed to establish a clear causal relationship between any increases in price and the reduction in transhipping caused by the 1982 Equity Agreement. The State adequately proved that transshipping exerted a downward pressure on the price of A-B beer to the retailers. The State failed to show, however, that these savings were passed on to the consumer. Indeed, in many cases, any price reduction caused by transshipping benefitted only the retailer and not the consumer: the lower price paid by the retailer went into increasing his profit margin without any net advantage to the consumer. (Pl.Ex. 38, at 168072). The State also claims that the reduction in transshipping allowed A-B to increase excessively its F.O.B. prices. Had a reduction in transshipping caused such an increase, it is unlikely that A-B’s F.O.B. prices in New Jersey, a State without transshipping, would have increased at a same rate as those in Metropolitan New York. (Def.Ex. AB-WI; AB-AFT, Myslinski Report at 53-55). Thus, the State has failed to prove that a reduction in transshipping caused F.O.B. price increases or caused increases in consumer prices. Further, the State alleges that both wholesalers and home distributors were able to increase excessively their profit margins due to the decreases in transshipping. To support this contention the State showed that certain authorized wholesalers and home distributors increased their profits in the years after the 1982 amendments. (Pl.Ex. 25; Tr. 1185-1187, 1482-1486, 1495-1496). While profit margins increased through 1983, the evidence produced by the State failed to show a pattern of increasing profit margins after 1983 and tended to show a decrease in the margins in most recent years. (Tr. 1492-1496, 2384, 2418, 2792). The State asserts these periodic increases in wholesaler profit margins are a result of anticompetitive effects of the 1982 Equity Agreement and not due to an increasingly efficient and effective business. Merely increasing profits does not violate the antitrust laws, and, in light of the intensely competitive state of the beer market, the Court finds it unlikely that wholesalers and home distributors could have “excessively” increased their profit margins. The State also claims that a number of costly practices required by the 1982 Equity Agreement directly effected the cost of A-B beer. Two of these practices are the “come-to-rest” and “first-in, first-out” provisions, which the State claims increased the handling costs of A-B beer. Mr. Enzien, an A-B authorized wholesaler, testified that the “come-to-rest” requirement added eight to twelve cents to the per-case freight charge. (Tr. 1535). While it is not unlikely that such cost would increase the price a distributor pays, there was no other evidence submitted to support this figure. Indeed, even if we accept the validity of the 8-12 cents added cost, the State did not prove that such a cost was passed onto the consumer. While the effect of the “come-to-rest” and “first-in, first-out” provisions on prices is uncertain, it is clear that prices were influenced by the three factors unrelated to the Equity Agreement: (1) the so-called “Deposit Law”; (2) inflation and increased costs; and (3) increased capital and promotional expenditures. The role played by these factors further weaken the State’s assertion that the Equity Agreement caused unreasonable increases in prices. The New York State Returnable Beverage Container Law, better known as the “bottle bill” or “Deposit Law”, became effective on September 12, 1983. See Envtl.Conserv.Law §§ 27-1001-1017. It is uncontested that the law added $1.56 per-case to the price paid by the consumer. (Uncontested Facts ¶ 136). The parties contest what the cost of compliance was for the wholesalers and distributors, and if the wholesalers and distributors profited from the law. The Deposit Law caused authorized wholesalers to incur considerable expenses in construction of recycling facilities, and in additional personnel, storage area, and transport vehicles. This was an expensive undertaking, adding substantial costs on both authorized wholesalers and home distributors. In some cases, the cost of compliance was as high as $1 million. (Tr. 1016, 2774, 2912-2913; Pl.Ex. 381, DeMarco Dep. 268-269; Def.Ex. AB-ZL, Phillips Dep. 27, 35-36). The parties offered conflicting evidence of whether these substantial costs outweighed the additional income the Deposit Law provided. Most persuasive was evidence that the price to retailers of A-B beer in both Massachusetts and Delaware, States whose own deposit law was implemented in January 1983 and November 1982, respectively, increased more than in New York upon implementation of the Equity Agreement. Neither Massachusetts nor Delaware had transshipping as part of its distribution system. As Professor Hausman testified, considering that the price increases in Delaware and Massachusetts were greater than in New York, it is likely that price increase felt in New York was a result of the Deposit Law and not the Equity Agreement. (Tr. 3428-3434). Other elements which augmented the increase in prices were increases in costs, and investments. The State alleges that F.O.B. price increases are not justified by the increased costs of doing business. The State asserts that, especially with the addition of the Baldwinsville brewery, A-B beer production costs should have fallen along with F.O.B. prices. Instead, F.O.B. prices rose to what the State considers an excessively high level. It is natural that inflationary pressure was responsible for some increase in A-B’s direct costs, such as salaries, energy and transportation. (Pl.Ex. 378, Busch Dep. 204-210). As a result, the cost of operating a wholesalership has increased since 1982. (Def.Ex. AB-YE; Tr. 889-890,1259-1260). Adding to that increase are the numerous capital expenditures made by AB in the early 1980s, totalling $278 million, (Tr. 2331-2332, 2350; Def.Ex. AB-EN), as well as the expenditures related to an increased focus on advertising. These factors certainly added to the price of A-B beer. The cumulative effect of these factors diminish the portion of any price increase that could be attributed to the 1982 Equity Agreement. Thus, in spite of the State’s allegations, the bulk of the evidence shows that A-B’s F.O.B. prices increases were reasonable and at a rate lower than inflation since the 1982 amendments. (Tr. 3420-3422). Had the price of beer increased unreasonably, A-B’s sales should have gone down. Instead, sales increased during the post-amendment period. The State argues that due to A-B’s price leadership, stemming from alleged market power, A-B was able to raise prices and other brewers followed, resulting in no loss of market share. But the State may not merely repeat the words “price leadership” and expect the Court to accept that characterization. There was no expert testimony that A-B was a price leader. In fact, the nature of the beer market makes that assertion highly unlikely. Testimony, some from the States own witnesses, conclusively established the price sensitivity of the beer market, making it unlikely that AB could have unreasonably caused prices to rise and simultaneously increased their market share. At best, the State has shown an increase in F.O.B. prices from November 1982 to the end of 1983. To some extent these increases were the result of the 1982 amendments. For a substantial portion of those increases, however, the State has not carried its burden of showing that the price increases were causally related to the Equity Agreement. G. Relevant Market In an antitrust action the court shall discern of what the relevant product and geographic markets are comprised. The parties stipulated that relevant product market for this case is all beer: alcoholic and non-alcoholic; premium and super premium; imports and domestics. (Uncontested Facts 11131). Not only have the parties stipulated to this fact, but the evidence clearly reinforced this designation. Numerous witness testified concerning the price sensitivity of beer and consumer willingness to alter their purchasing patterns for lower priced beer, creating an atmosphere of intense competition between producers. (Tr. 1611-1613, 2129-2130, 2327, 2378-2379, 3363-3364). One State’s witness testified that Budweiser is more price sensitive today than before the 1982 Equity Agreement. (Tr. 1613). Professor Hausman testified that if A-B raised its prices 10 percent, it would lose from 40% to 60% of its sales. (Tr. 3366-3374). This price competition exists among all brands of beer. For instance, one retailer testified that when an imported beer, Molson, dropped its price its increased sales cut into both Budweiser’s and Michelob’s sales. (Tr. 1611-1612). Price competition is so keen, the State’s own witnesses testified, that competition is presently more vigorous than it had been 10 or 15 years ago. (Tr. 2129, 2377, 2428, 2129, 2813). Aside from price, display of the product is another important factor in propagating beer sales. (Tr. 2379-2380). Display of point of sale materials can generate up to a 250 percent increase in sales at a particular retail operation. (Tr. 2379-2380). When taken together, these factors exhibit a willingness of consumers to substitute one beer product for another. Consistent with this highly sensitive market, the parties concurred that the relevant product market in this case is all brands of beer. The parties are not in agreement as to what the boundaries of the relevant geographic market are. While the State presently claims that the appropriate market boundary is the State of New York, it is apparent that the State has not proven this market boundary. Indeed, the State has found it unexplainably difficult to promote consistently a single theory concerning the applicable relevant boundary, repeatedly straying from its original conception of a state-wide beer market. The contradictory theories have made the Court’s job of defining the market more burdensome than usual. But, notwithstanding the shifting market theories of the State, the evidence has clearly proven that the New York State is not a relevant market unto itself, and that there are at least three, possibly four or more distinct relevant geographic markets. Distinct markets may exist in the Metropolitan area, the Buffalo area, the northeast region, and a central region encompassing Rochester, Syracuse and Oswego. A number of factors conclusively proved the existence of these markets. First, home distributors are concentrated in Metropolitan New York City; about 70% of the 500 in the State are in Metro New York. In many regions of the State, Plattsburgh and Rochester, for example, home distributors have an insignificant (if any) presence. As one of the defense’s expert witnesses, Professor Hausman, testified, the presence of a competitive factor, such as home distributors in one region contrasted with the absence of that competitive factor in other regions, evidences separate markets. (Tr. 3359-3360). Likewise, home distributors in the Metropolitan area do not directly compete with the few home distributors located in the northern and western portions of the State, areas like Albany, Buffalo, Syracuse, Rochester or Plattsburgh. (Tr. 2819-2820). Although evidence was introduced at trial showing that some transshipping occurs between the Metropolitan area and the rest of the State, such minimal product interaction is insufficient to synthesize the regions into a single marketplace. Even if some business between the different regions takes place, the relevant market is determined by the area where the vast bulk of business occurs not the by the area containing fringe or possible customers. Secondly, it is uncontested that there is a stark discrepancy in the operating costs between businesses in Metropolitan New York and other areas within the State. As Professor Hausman pointed out at trial, these cost differentials in necessities, such as transportation and storage, tend to exhibit the existence of separate markets. (Tr. 3357-3358). Finally, as was discussed, supra, consumer demand for different brands and types of beers varies widely within the State, as do the shares of sales for brewers and brands differ significantly across the State. For example, Genesee, Old Milwaukee and some Canadian imports are powerful market participants in the Buffalo area, but have a minimal presence in Metropolitan New York and Long Island. While in the Metropolitan area Coors and imports such as Heineken, Becks and St. Pauli Girl have a substantially larger presence than they do in Buffalo. The Court does not make a specific finding as to how many separate markets exist in New York State, but it is clear that there is more than one and the State has not proven the existence of any distinct geographic market. This failure is attributable, in part, to the State’s “shifting sands” approach to proving a relevant market. Since the vast majority of State’s witnesses and evidence emanate from the Metropolitan region, at best the State alternatively showed the Court that the Metropolitan region is a distinct market. It is clear that the State did not prove the geographic market it promoted initially and again at the end of the trial most often, i.e. New York State. IV. DISCUSSION Section 1 of the Sherman Act prohibits “every contract, combination ..., or conspiracy, in restraint of trade or commerce.” 15 U.S.C. § 1. To prevail in a section 1 cause of action, the plaintiff has the burden of proving: (1) a concerted activity; (2) which unreasonably restrains trade. See, e.g., Oreck Corp. v. Whirlpool Corp., 639 F.2d 75, 78 (2d Cir.1980); Disenos Artisticos E Industriales, S.A. v. Work, 676 F.Supp. 1254, 1275 (E.D.N.Y.1987). A. Hearsay TesC .iiony During the trial, certain hearsay testimony concerning statements made by A-B wholesalers was conditionally admitted, subject to proof by the State that such statements fell within the coeonspirator hearsay exception of the Federal Rules of Evidence 801(d)(2)(E). To fall within the 801(d)(2)(E) exception, the proponent of the hearsay testimony must show that (1) there was a conspiracy; (2) the declarant and the party against whom the statement is offered were members of the conspiracy; and (3) the statements were made in furtherance of the conspiracy. Bourjaily v. United States, 483 U.S. 171, 175, 107 S.Ct. 2775, 2778, 97 L.Ed.2d 144 (1987); United States v. Maldonado-Rivera, 922 F.2d 934, 958 (2d Cir.1990). To satisfy the first element of the exception the State must prove a conspiracy or agreement by which the wholesalers and A-B were “knowingly d[oing] an act which the law forbids, purposely intending to violate the law.” United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181, 1196 (2d Cir.1989). “Knowingly” acting requires specific intent, while knowledge of unlawful objectives can be satisfied by specific intent or conscious avoidance. Id. Although the wholesalers and A-B knowingly entered into an agreement, the State never offered proof showing that the wholesalers and A-B entered into such agreement with an intent to violate the law, or “consciously avoided” such knowledge. Thus, the existence of a conspiracy was never proven. Without such a conspiracy, the statements offered could not be “in furtherance of a conspiracy.” Therefore, testimony offered concerning hearsay statements by A-B wholesalers is inadmissible hearsay. B. Bradburd Report A-B moved to exclude both the testimony and rebuttal expert report of State’s rebuttal witness Professor Bradburd due to certain statements made by the Professor evidencing that portions of the Professor’s report were actually written and edited by State’s attorney, Timothy Cone. In spite of these statements tending to show a collaborative effort, we will not exclude any of the report (Pl.Ex. 628) or testimony offered by the Professor. Nevertheless, that testimony, along with the Professor’s lack of previous experience with the beer industry, occasional inconsistencies, failure to consider certain important factors in his analysis, such as the Deposit Law, and Coors entry into the market and his use of,frontline prices for his analysis instead of consumer prices, seriously damaged his credibility and further diminished the weight the Court gave his testimony. C. Concerted Activity In a civil action, in order to sustain a claim under section 1 of the Sherman Act, the plaintiff must establish that the defendant entered into a contract, combination or conspiracy. International Distribution Cente