The opinion of the court was delivered by: CANNELLA
The court finds that the plaintiff, United States of America, has proven by the fair preponderance of the credible evidence, that the defendant, General Dynamics Corporation, has violated the provisions of Section 7 of the Clayton Act, 38 Stat. 731 (1914), as amended, 15 U.S.C. § 18 (1958).
Moreover, the government has proven that the merger agreement is violative of Section 1 of the Sherman Act, 26 Stat. 209 (1890), as amended, 15 U.S.C. § 1 (1958).
It has failed to prove the Section 1 charge with reference to alleged contracts on condition made with certain of the defendant's vendors. General Dynamics is ordered, as indicated infra, to divest itself of its Liquid Carbonic Division, thereby restoring that enterprise to its previous independent corporate status.
By complaint filed on November 8, 1962, the government commenced a civil anti-trust action against the defendant charging that the merger of the defendant with Liquid Carbonic Corporation on September 30, 1957 may have the effect of substantially lessening competition or tending to create a monopoly in the manufacture, distribution and sale of carbon dioxide, in violation of Section 7 of the Clayton Act. In addition, the government asserts that the effect of a special sales program, established and implemented by the defendant, was to produce certain contracts on condition in violation of Section 1 of the Sherman Act. To this latter charge was added, by way of the government's granted motion to conform the pleadings to the proof, the allegation that the merger itself violated Section 1. See memorandum of this court, August 4, 1965.
To establish a violation of Section 7 of the Clayton Act, the government must prove the three elements delineated in the Section, viz., a "line of commerce" in a given "section of the country" which may be adversely affected by the merger. The parties have stipulated that "the manufacture, distribution and sale of carbon dioxide in the United States (excluding Alaska and Hawaii) is a 'line of commerce' in a 'section of the country', as those terms are used in Section 7 of the Clayton Act."
Thus the function of the court as to this charge is narrowed to a determination of whether or not the acquisition in question "may . . . substantially . . . lessen competition, or tend to create a monopoly."
Similarly with reference to the charged violations of Section 1 of the Sherman Act, the parties, via stipulation, have reduced the area of the court's inquiry. The statute's requirement that an alleged restraint effect "commerce or trade among the several states" is satisfied by the stipulation that: "General Dynamics, through its Liquid Carbonic Division . . . has shipped carbon dioxide and other industrial gases in interstate commerce from some of its plants or warehouse locations to various other States of the United States, including the Southern District of New York."
There remains the question of whether the defendant has made contracts in restraint of trade involving a not insubstantial amount of commerce.
General Dynamics, at the conclusion of the government's case, moved pursuant to Rule 41(b) of the Federal Rules of Civil Procedure, to dismiss the complaint. Since the action was tried without a jury, the evidence was viewed by the court at that time, not with the favorable inferences which necessarily must be afforded to the plaintiff's proof in a jury case (see O'Brien v. Westinghouse Electric Corp., 293 F.2d 1 [3rd Cir. 1961]), but rather as an unbiased trier of fact. Huber v. American President Lines, 240 F.2d 778 (2d Cir. 1957). The court, in denying the defendant's motion, concluded that the government, on the record as it then stood, was entitled to the requested relief.
Parenthetically, it should be noted that the function of that earlier opinion was confined to indicating the legal reasoning and evidence upon which the court's denial of the motion to dismiss was predicated. No attempt was made to detail the elements of the government's case, with the exception of the most pregnant items of proof. The present opinion sets forth the findings of fact in toto, insofar as they have influenced the court's decision, singularly or cumulatively.
Findings of Fact Background
General Dynamics Corporation is a corporation organized and existing under the laws of the State of Delaware, with its principal executive offices in New York, New York.
It was incorporated on February 21, 1952 for the purpose of acquiring Electric Boat Company, a private producer of submarines, and its subsidiary, Canadair, Limited, a leading Canadian aircraft manufacturer. This merger was accomplished on April 25, 1952.
Thereafter followed a chain of acquisitions by the defendant bringing within their corporate entity such companies as Consolidated Vultee Aircraft Corporation (Convair) (1954), Stromberg-Carlson Company (1955), Liquid Carbonic Corporation (1957) and Material Service Corporation (1959).
At the time of the merger with Liquid Carbonic in 1957, General Dynamics had developed into one of the nation's twenty largest industrial enterprises, with net sales exceeding 1.5 billion dollars.
Its asset value as of that date was $480,000,000.
By 1961 the net sales figure had risen to over 2 billion dollars.
Approximately between 75% and 85% of General Dynamics' sales are to agencies of the United States Government, principally the armed services, AEC and NASA.
In 1957, General Dynamics' purchases from its 80,000 suppliers
totalled approximately $500,000,000.
While no precise figure is to be found in the record, an officer of the defendant stated in an intra-corporate memorandum, dated May 27, 1958, that: "It is estimated that at least 75% of our suppliers purchase, to some extent, the types of products or equipment offered for sale by the Liquid Carbonic Division."
This estimate is of minimum evidentiary value since, inter alia, the 75% figure is not confined to the lines of commerce in issue. Nonetheless it does suggest the potential for reciprocity which resulted in the defendant's establishment of the Special Sales Program, the details of which will be discussed subsequently.
The other party to the merger, Liquid Carbonic Corporation, had assets valued at $59,000,000 in 1957.
While this figure is small compared to the asset valuation for General Dynamics, Liquid Carbonic is a substantial enterprise in its particular industry. The evidence indicates that it enjoyed somewhere between 35% and 40% of the carbon dioxide market at the time it was acquired, and as such constituted the largest domestic producer and distributor of gaseous, liquid and solid carbon dioxide.
Its total net sales for the year 1956 exceeded $35,000,000,
more than $18,000,000 of which was attributable to the sale of carbon dioxide.
As of course would be expected, the Liquid Carbonic Division supplies all but a negligible amount of the carbon dioxide needs of General Dynamics. Thus in 1959, the Liquid Division supplied 96.5% of the defendant's requirements, which amounted to over $200,000 in that year, as compared to a 12.4% share of the business immediately prior to the merger.
It is important to note, for reasons that will be developed in the subsequent discussion of the charged violation of Section 7 of the Clayton Act, that the manufacture and distribution of carbon dioxide occurs in an oligopolistic setting. The four principal firms at the time of the merger controlled approximately 75% of the market, with Liquid Carbonic and Air Reduction Company accounting for an estimated 60% of the total.
The merger accomplished the amalgamation of General Dynamics, a corporation of mammoth proportions, with Liquid Carbonic, an entity, which although smaller in absolute terms, was the leader in the carbon dioxide industry.
Pre-Merger Intent of General Dynamics Corporation
General Dynamics' primary purpose in effectuating the merger in question was to diversify its activities, thereby partially protecting itself from the cyclical sales picture which typically confronts defense-oriented companies. Immediately prior to the merger, General Dynamics sold approximately 75% of its products to the government; the then president of General Dynamics, Frank Pace, testified that the corporation sought, as a long run objective, to reduce this figure to 50%.
Internal expansion of present facilities to develop commercial lines had proven unprofitable.
Therefore the most appropriate avenue for diversification appeared to be via the acquisition of existing commercial enterprises.
The management of General Dynamics decided that expansion into the chemical field would permit the corporation to capitalize on its specialized knowledge in the fields of solid-state physics, metallurgy, nuclear development and thermodynamics.
The possibility of acquiring the Liquid Carbonic Corporation came to the attention of a senior vice-president of General Dynamics in 1956. After an extensive investigation of the various aspects of Liquid Carbonic's operations and financial condition, a special committee of the Board of Directors recommended the merger.
The Board adopted the recommendation and the merger was consummated.
While the primary purpose of General Dynamics was to diversify, the evidence indicates that the defendant was aware of, and in at least passive agreement with Liquid Carbonic's intent of merging for reciprocity purposes.
While the defendant's 1957 purchases from its vendors totalled approximately one-half billion dollars,
it was not in a position to convert this huge purchasing power into market power, for the bulk of the corporation's products were sold to the government.
In making Liquid Carbonic a division, this situation was altered in that General Dynamics then marketed a product which many of its suppliers used.
The defendant maintains that the record is devoid of any evidence which even suggests that the management of General Dynamics considered the question of reciprocity prior to merger. It is clear, as will be discussed subsequently, that Liquid Carbonic considered the opportunity for increasing its sales by the use of reciprocity as the most attractive feature of becoming a division of General Dynamics. Moreover, the defendant admits that in May, 1958, eight months after the date of merger, the Board formally adopted the Special Sales Program, a vehicle which the court finds was intended to effectuate the pre-merger reciprocity objectives of the Liquid Carbonic management. From these facts alone, viewed in conjunction with the thorough pre-merger investigation conducted by General Dynamics, it is highly improbable that the defendant was wholly without knowledge of the objectives harbored by Liquid Carbonic. This improbability is reinforced by other evidence in the record.
A letter dated August 14, 1957, signed by a vice-president of Liquid Carbonic, J. A. Edwards, was included in the final report submitted to the Board of General Dynamics, in which Edwards states that the plants of Liquid Carbonic were operating at 65% of capacity and production thus could be readily increased for the "additional sales that will be generated with the assistance of General Dynamics". Similarly, the submitted income forecast covering the five fiscal years ending March 31, 1962 was compiled "particularly taking into consideration anticipated results from the assistance we expect to receive from General Dynamics."
Any claim that this anticipated increase in sales and profits was expected solely as a result of an upgraded research and development program and improvements in the sales force runs into difficulty with the phraseology employed by Edwards. While an increase in sales from the foregoing factors generally takes time to materialize, Edwards speaks of production facilities capable of accommodating an "immediate" increase in production, a result which reasonably could be expected from the use of reciprocity.
The court also considers a letter dated March 6, 1958, from Kenneth Stiles, General Dynamics' Vice-President for Plans and Programs, to C. R. MacBride, a corporate Vice-President, as significant.
In March 1958, Pace appointed C. R. MacBride to assist the Liquid Division in matters pertaining to reciprocity.
The letter from Stiles, noting that reciprocity was now MacBride's department, reported that "up until the present time", his office had endeavored to take the first steps in instituting a program of sales reciprocity. Since no particular date was indicated for the commencement of Stiles' efforts, the most reasonable conclusion, and the one drawn by the court, is that starting date was the time of the merger.
It should be further noted that almost immediately after the merger, Nicholson, then a Senior Vice-President of General Dynamics, addressed a meeting of the Regional General Managers of the Liquid Carbonic Division and discussed reciprocity procedures.
This immediate post-acquisition activity in laying the ground work for the establishment of the Special Sales Program, when considered with the other evidence in the case, indicates that as of the date of merger, General Dynamics was not ignorant of the reciprocity considerations entertained by Liquid Carbonic.
The court finds that when Johnson, a Vice-President of General Dynamics, who was a chief intermediary between the two corporations prior to merger, assured Nicholson that he would remain the chief executive officer of the Liquid Carbonic Division, presumably with power to implement his policies,
there was a meeting of the minds as to the use of reciprocity.
Pre-Merger Intent of Liquid Carbonic Corporation
Unlike the determination of General Dynamics' pre-merger intent, which is predicated on circumstantial evidence, thus requiring the designation of the important facts from which the inference of knowledge was drawn, the question of Liquid Carbonic's intent lends itself to a simpler resolution.
Liquid Carbonic, through its then President, Nicholson, stated that via the merger the unexploited purchasing power of General Dynamics would be made available for reciprocity purchases.
Nicholson further explained that "the advantage of this reciprocity would be of unlimited value in getting a load on our plants both old and new - If, through reciprocity, we could put a load on all our plants on a year-round basis, our earnings could rise very rapidly."
"This opportunity is available to us now. If we reject it, General Dynamics will deal with one of our competitors . . . . Based on the experience I have had . . . I would hate to face one of our major competitors if he were to have at his disposal the tremendous purchasing power of General Dynamics to be used as a reciprocal instrument of sales".
To reiterate, Liquid Carbonic considered the opportunities for reciprocity as its most significant advantage to be derived from the merger. General Dynamics, on the other hand, although aware of the market power created by the merger and at least passively assenting to aid the implementation of Nicholson's scheme, was primarily motivated to merge by a desire for diversification.
Special Sales Program Creation
As previously noted, following the preliminary efforts of Stiles, C. R. MacBride was appointed by Pace to assist the Liquid Carbonic Division in reciprocity matters. This appointment of MacBride marked the beginning, at least insofar as is apparent from the record, of the systematic development of the Special Sales Program.
Following a meeting of the senior operating executives in Chicago, C. R. MacBride sent a memorandum, dated April 8, 1958, to all division managers asking them to prepare a list, to be furnished to Morgan MacBride of Liquid Carbonic, of each division's use of Coca Cola, Seven-Up and Pepsi Cola.
On May 14, 1958, C. R. MacBride presented a document entitled "Trade Relations Policy and Procedure"
for the consideration of Pace, Johnson, Nicholson and Morgan MacBride.
Incorporated therein are the suggestions of C. R. MacBride concerning the prerequisites to the effective implementation of the reciprocity program. Among the more significant suggestions are points 1, 9, and 13. Point 1 is: "Each President or General Manager of a Division should understand the value of the reciprocity program and how it can be used to load Liquid Carbonic Division plants to materially increase profits in the Liquid Carbonic Division."
Point 9 explains: "The development of advantageous trade relations with outside suppliers who enjoy substantial amounts of General Dynamics business will be conducted by Liquid Carbonic headquarters in collaboration with General Dynamics headquarters."
Point 13 provides that the "Liquid Carbonic Division will be responsible for developing adequate procedures for the compilation of significant data, the preparation of reports and the designing of a follow-up system to assure continued effort."
No evidence was introduced into the record which indicates precisely how and when the senior management of General Dynamics formally adopted the contents of the C. R. MacBride report. Nonetheless it is obvious to the court that such adoption occurred. Indeed the Special Sales Program, as it in fact operated, in all essential respects exactly parallels the MacBride format.
The purpose of the program was succinctly stated by Senior Vice-President C. R. MacBride to be "to aid the Liquid Carbonic sales picture via General Dynamics' reciprocity leverage."
It was felt that profits could be "greatly [increased]" by "capitalizing on the tremendous value of our purchasing power - by soliciting reciprocal trade."
Along the same lines is the following statement in a speech given by Jung, Presidential assistant in charge of reciprocity: "Let's not kid ourselves, the ultimate reason for establishing a trade relations department is to increase sales through the proper application of your purchasing power."
At the time of the merger, few legal guidelines existed concerning the legality of reciprocity practices. Programs such as the Special Sales Program were by no means unusual in the business community.
Nonetheless, although the commonness of the practice and its then arguable legality might suggest a different result, General Dynamics attempted to keep tangible evidence of their reciprocity procedures to a minimum.
Thus it is not surprising that no document in evidence presents the precise details of the program. However, documentary proof, consisting primarily of intra-corporate memoranda, indicates the essential procedures involved.
Reduced to its two essential features, the operation of the program was predicated upon the preparation of information indicating which major vendors of General Dynamics were also purchasers of the products manufactured and sold by Liquid Carbonic. The companies listed, represented the targets for the Special Sales Program approach. The second aspect of the program called for contacts between General Dynamics and these "targets" to occur only at the higher levels of management.
Considering first the compilation of vendor information, the first instance of this is found in the previously mentioned chart, dated May 12, 1958, listing the divisional consumptions of various soft drinks.
Two memoranda dated in July of 1958, indicate that Liquid Carbonic was receiving information from its sister divisions reflecting the volume of their purchases from principal vendors. In the case of the Electric Boat Division, separate statements on payments made to airlines, trucking companies, railroad and insurance companies, were included.
By the late summer of 1958, a concerted effort was made to systematize the operation and to begin in earnest, making the necessary contacts.
The vendor information from the divisions had been obtained and "prospect cards" and "sales report" forms were prepared. The "prospect cards" contained the names and addresses of potential reciprocity accounts, and other relevant information. The "sales report" forms were for reporting the results of the contacts with prospects. Both the "prospect card" and "sales report" forms were to be executed in triplicate, with a blue copy for a central file in Chicago, a yellow copy for the person to whom the particular prospect had been assigned, and a pink copy for Regional files.
Apparently to supplement or cross-check the information regarding results furnished by the "sales reports", Liquid Carbonic sent the following telegram to its regional managers on April 7, 1959: "Please submit by April 15th amount of business secured by Special Sales Program segregating industrial-medical and CO2 and listing the names of the accounts and total dollar volume. These figures needed for General Dynamics main office. Please be accurate and on time."
The figures contained in the responses to the telegrams were compiled in a chart which indicates a combined total of business secured by the Special Sales Program, as of April 1959 at $1,085,066.
In May 1959, the reciprocity program was further systematized by the introduction of a regional card index system to record all relevant information about each Special Sales Program account on individual cards. Each of these cards indicated, among other things, the purchases by each General Dynamics' division from the particular regional account. The information from the cards was further condensed into the form of "vendor books", which listed 4,000 suppliers and subcontractors whose 1958 sales to General Dynamics exceeded $10,000. It was felt that only those companies whose sales were in excess of that amount would realistically "qualify for S.S.P. treatment". Each regional sales manager was provided with a vendor book.
The final major refinement in the program was made in the Spring of 1961. The vendor information as it then existed was limited to regional reports. This fragmentation of information created problems. As noted by Jung, an assistant to the President of Liquid Carbonic in charge of reciprocity, "one obvious weakness in this program to date has been our lack of complete information on a given company. For example, I made a call on Food Machinery & Chemical Company in New York City on behalf of Tom Isaacson's ice interests at their plant in Modesto, California. Beyond this Pacific Region ice interest, there was no information in Chicago to reveal their requirements for our products at their many plants around the United States".
This deficiency precluded the General Dynamics' representative from fully appreciating the extent of reciprocity power involved, thereby weakening his bargaining position. To provide what Jung calls the "full picture" on important accounts, the National Account System was established. This group of accounts consisted of approximately 350 companies each of which sold a minimum of $250,000.00 of goods in 1960 to General Dynamics. Each of these companies had multi-plant locations which transcended the boundaries of the Liquid Carbonic sales regions.
Consistent with the requirement that all inter-corporate reciprocity conferences occur at high levels, the group was "further limited to those accounts operating under a headquarters-controlled purchasing mandate, not those whose final purchasing authority for our products rests at the individual locations."
Considering now the second aspect of the program, i.e., that reciprocity contacts must occur at high levels of management,
the reasons for this mandate is clearly indicated in the record. Purchasing agents who are charged with purchasing materials on the basis of price, quality and service, respond poorly to the interjection of reciprocity considerations into sales negotiations.
As explained by one officer of General Dynamics, a diplomatic approach is required in contacting prospective customers since "we are, in effect, coming into conflict with a basic urge possessed by all people-namely, their right to exercise Freedom of Choice."
It was feared that pressure applied directly to purchasing agents, whose jobs are too limited to appreciate the "mutual benefits" of reciprocity, could lead to complaints to the Anti-trust Division of the Justice Department. Jung, in addressing himself to this problem, said: "All that is needed to place this program in dire jeopardy and bring strong corporate pressure for its demise is to have one irate letter written to federal authorities by a company resenting what was felt to be undue pressure."
Even prescinding from considerations of a purchasing agent's probable resistance to, and possible complaints of, reciprocity suggestions, rudimentary logic suggests that he would be an inappropriate person to contact. In essence, reciprocity is a sales generating device which, when viewed broadly, will benefit both participants. The harm produced by the practice accrues to the competitors of the participants and ultimately to the public. Considerations of "mutual benefit" being foreign to a purchasing agent's job, higher management must be contacted. The insertion of this alien factor into purchasing procedures must be mandated by upper management.
Not surprisingly in view of this policy, the numerous exhibits in evidence concerning reciprocity contacts, all identify higher management on both sides of the bargaining table.
The defendant's representatives invariably mentioned the amount of business the prospective customer was deriving from its sales to General Dynamics.
This of course, was the reason for the elaborate compilation of vendor data. The reception to the "sales pitch" was generally favorable. Not atypical is the reaction of the Straza Corporation when contacted by the defendant: "When given the community of interest pitch, Russell became very receptive and said he certainly saw the importance of doing business with friends, though he was not inclined to break his contract with Victor since they had treated him so well. He stated that a closer relationship with General Dynamics certainly couldn't harm his situation at Convair. We feel Straza will definitely come around."
Along the same lines, the response of Mr. Haney, President of Kirkhill Rubber Company, was described as follows: "Haney saw the picture immediately, called in the P.A., Mr. Atkinson and instructed him that if Liquid Carbonic could provide them with prices equal to those they are presently paying, future business should be given to Liquid."
The usual arrangement was that if Liquid Carbonic could match the terms of its competitors, Liquid would automatically obtain the business.
Sometimes such equality apparently was not even required. A case in point is the contact made with M. W. Kellogg. That company's representative "admitted" that reciprocity had not been considered in the placement of its purchase orders, and that the firm had given its business to a competitor of Liquid Carbonic on a "price only basis". Assurances were thereupon received that the matter would be reconsidered in the light of the defendant's Special Sales Program.
Similarly when contact was made with Purolator Products, Inc., the defendant was promised that future purchases by Purolator would not be based on price and quality alone, thereby causing Jung to conclude that Liquid Carbonic could secure a share of the ...