The opinion of the court was delivered by: METZNER
This is a derivative action brought by minority stockholders of General Motors Corporation (General Motors) against E.I. du Pont de Nemours & Company (du Pont) claiming damages flowing from alleged violations of §§ 1 and 2 of the Sherman Act
(15 U.S.C. §§ 1, 2) and breach of common law fiduciary duty.
It is alleged that, by reason of du Pont's stock interest in General Motors, it dominated and controlled the latter in the purchase of du Pont products. The court has jurisdiction of the subject matter of the action and of the parties.
The case at bar, by stipulation of counsel, has dealt only with the question of liability on the claims pertaining to automotive fabrics and finishes used in the manufacture of passenger cars.
Some 10,000 pages of testimony have been taken and 1,000 exhibits admitted into evidence.
The primary issues here are whether du Pont after May 4, 1950 controlled General Motors to the extent that it entrenched itself as the primary supplier to the latter of automotive fabrics and finishes, that it insulated the General Motors market from free competition in these products, and that as the result of such activity it caused injury to General Motors.
An essential part of the background of this lawsuit is the first Supreme Court opinion in an antitrust action brought by the United States against du Pont, General Motors et al. See United States v. E. I. Du Pont de Nemours & Co. 353 U.S. 586, 77 S. Ct. 872, 1 L. Ed. 2d 1057 (1957).
The Government, in that action, alleged violations of § 7 of the Clayton Act
(15 U.S.C. § 18) and §§ 1 and 2 of the Sherman Act. The Court found that § 7 of the Clayton Act had been violated; it did not pass upon the claimed violations of Sherman 1 and 2,
and the district court judgment dismissing those claims was vacated.
The Court found that at the time of the suit, June 30, 1949, the stock ownership acquired in 1917 had a "reasonable probability to contain a threat that it may lead to a restraint of commerce or tend to create a monopoly of a line of commerce."
353 U.S. at 597. In arriving at this conclusion, the Court noted that
"du Pont purposely employed its stock to pry open the General Motors market to entrench itself as the primary supplier of General Motors' requirements for automotive finishes and fabrics." 353 U.S. at 606.
Both the majority and dissenting opinions agreed that to find a violation of § 7 it need not be shown that restraint or monopoly was intended, nor that actual anticompetitive effects flowed from the acquisition. The Court stated that:
"[The] fact that all concerned in high executive posts in both companies acted honorably and fairly, each in the honest conviction that his actions were in the best interests of his own company and without any design to overreach anyone, including du Pont's competitors, does not defeat the Government's right to relief. It is not requisite to the proof of a violation of § 7 to show that restraint or monopoly was intended." 353 U.S. at 607.
There was no finding of private injury either to the competitors of du Pont or to General Motors itself. The thrust of the opinion was directed to show the probability of public injury based on events quite far removed from the time period with which we are concerned herein. Recently the Court indicated that a finding of control was not necessary for its decision in the du Pont case. Denver & R.G.W.R.R. v. United States, 387 U.S. 485, 501, 18 L. Ed. 2d 905, 87 S. Ct. 1754 (1967). All of this leads to the conclusion that the Court's language about entrenchment is not entitled to great weight as prima facie evidence in this case.
Liability on both the antitrust claims and common law claims is limited to the period commencing with May 4, 1950 (28 F.R.D. 325). As indicated, the Government suit speaks as of June 30, 1949. The time period encompassed in the Government suit has been deemed relevant in this trial, however, to place the facts in dispute here in historical perspective.
The Relationship Between the Corporations
The history of the relationship between du Pont and General Motors covers a period of 45 years, going back to 1914 when Pierre S. du Pont, Irenee du Pont and John J. Raskob individually purchased shares in General Motors. In 1917, on Raskob's recommendation (he was treasurer of du Pont), the du Pont Company decided to acquire $25,000,000 worth of the common stock of General Motors, which amounted to approximately 23% of the outstanding issue. Subsequently transactions first increased and then decreased the percentage of stock owned by du Pont. By 1939 it was back to 23% and remained at that figure through the period covered by this lawsuit.
Raskob's report to the Finance Committee of du Pont in 1917, which was the basis for the decision to purchase General Motors stock, gave several reasons, in addition to the investment potential, to justify the purchase. They were:
"1. With Mr. Durant we will have joint control of the companies.
"5. Our interest in the General Motors Company will undoubtedly secure for us the entire Fabrikoid, Pyralin, paint and varnish business of those companies, which is a substantial factor."
William C. Durant at the time controlled just over 50% of General Motors stock.
By 1917 du Pont had already acquired the Fabrikoid Company (1910), the largest manufacturer of artificial leather in the country; the Arlington Company (1915), one of the two largest manufacturers of celluloid in the country; the Fairfield Rubber Company (1916), a manufacturer of rubber-coated fabrics for automobiles, whose principal customer was the Ford Motor Company; the Harrison Brothers & Company, Inc. (1917), the Beckton Chemical Company (1917), and the Bridgeport Wood Finishing Company (1917). The three latter companies manufactured paints and varnishes.
In 1918, after the acquisition of the General Motors stock, du Pont purchased the controlling interest in Flint Varnish & Chemical Works, which had been supplying almost all the paint requirements of Buick, Oakland, Olds and Chevrolet, components of General Motors. Flint also sold to other automobile manufacturers. By 1920 the Flint company could not meet the demand of General Motors and its other customers, and business was being lost to competitors of du Pont. In order to enlarge its paint product capacity, du Pont purchased the majority interest in the Chicago Varnish Company.
By reason of du Pont's purchase of the original 23% stock interest in General Motors, it nominated six members of the 20-member Board of Directors of General Motors. During the period 1920 to 1923 the number of directors was increased to 31, but the number of du Pont nominees remained at six. During the same period the committees of the board of General Motors consisted of the Finance Committee and the Executive Committee, both of which were controlled by du Pont nominees.
In 1920, because of personal financial difficulties, Durant was forced to liquidate his interest in General Motors. As a result du Pont increased its holdings in General Motors to 38% of the common stock. Pierre du Pont became president of General Motors in order to more closely supervise its financial operations. He resigned in 1923 when he felt this objective had been achieved. During his tenure as president of General Motors he was also chairman of the Board of Directors of both General Motors and du Pont.
In 1921 Raskob indicated that point one of his 1917 memorandum was more than achieved with Durant's departure. In a report to the directors of du Pont on its investment in General Motors, he stated: "As the Directors know we are now in control of the company and are completely responsible for its politics and management . . . ." I find that, up to the time in 1923 when Pierre du Pont resigned as president of General Motors, du Pont had active control of General Motors.
With the election of Alfred P. Sloan as president of General Motors in 1923, a distinct change took place. He had been a member of the Board of Directors of General Motors since 1918, when a corporation of which he was president was purchased by General Motors. Sloan proved to be an outstanding executive. He developed the top management of the corporation into two distinct groups, financial and operational. The Board of Directors maintained its over-all jurisdiction of management, but the basic work was done by two of its committees -- Executive and Finance. The Executive Committee concerned itself with operations and management of the business. The Finance Committee dealt with the availability and allocation of capital for operating the business, review of earnings for the purposes of recommending dividend policy, and administration of the bonus plan.
Sloan was elected a member of the Board of Directors of du Pont, but he attended meetings infrequently and was not active in the operations of the company. His membership on the du Pont board did not make him a captive of du Pont, and it did not affect the decisions he made in connection with his responsibilities to General Motors. On the other hand, it was natural for him to consult with persons in control of such a large block of stock in his company. He conferred with du Pont regarding potential members of the Board of Directors and the committees of General Motors which dealt with financial policy.
Over the years, du Pont's designees for membership on the General Motors board were chosen, with one exception, from members of du Pont's Finance Committee. Sloan suggested the names of persons to fill management positions on the board. When it came to selecting members from outside these two groups, Sloan would consult with various members of the board, and when he received the acquiescence of a large number of members, the formal nomination and election would follow.
Aside from the designation of the six persons (later reduced to five) to represent du Pont on the Board of Directors, no person was placed on the board because of insistence by du Pont. In fact, many of the suggestions made by du Pont for non-management directors of General Motors were rejected. It is clear that du Pont's reactions to suggested changes or elevation of General Motors personnel to top level management were based solely on what was best for the successful operation of General Motors.
The correspondence contains evaluations and reactions in depth when discussing these matters. There is no reference in this correspondence to business dealings between the two corporations as a factor in the advice given or the comments made. There is no evidence that the men chosen were in any way beholden to du Pont or were influenced by du Pont in the exercise of their duties.
There is no evidence in the record that after 1948 either Sloan or even his successors engaged in consultations with du Pont of the kind to which reference has been made.
Neither William S. Knudsen, Charles E. Wilson, Harlow H. Curtice nor Frederic G. Donner, who succeeded Sloan as either president or chairman of the board of General Motors, had ever been associated with du Pont. They had all come up through the ranks of General Motors and their advancement to the top was not as the result of the exercise of influence by du Pont.
The record shows the following composition of the Board of Directors during the period 1923-1958:
Total du Pont Management Others
1923 31 6 15 10
1942 26 6 1 7 3
1949 30 5 22 3
1953 34 5 23 6
1958 34 5 22 7
The Finance and Executive Committees functioned until 1937. During the period 1923-1937 du Pont's nominees on the board composed half of the membership of the Finance Committee, and less than a third of the membership of the Executive Committee.
In 1937 Sloan, over the objection of the du Pont nominees on the General Motors board, abolished these committees and created a single Policy Committee. It dealt with policy matters in both the financial and operational fields. At most, du Pont nominated three members of the nine-member Policy Committee, whose membership changed only once until the committee was abolished in 1946, when Sloan retired as chief executive officer. An Administration Committee was created, consisting of General Motors operating personnel, which acted in an advisory capacity to the Policy Committee. No du Pont designee on the board was a member of this committee.
In 1946 the functions of the Policy Committee were divided between two newly created committees -- Operations Policy and Financial Policy -- each of which continued until 1958. The functions of these committees were similar to the former Executive and Finance Committees except that the responsibilities of the latter regarding the operation of the bonus plan were lodged in a new Bonus and Salary Committee. Du Pont was represented by three nominees on the ten-member Financial Policy Committee. No du Pont nominee served on the Operations Policy Committee, which consisted of the heads of the operating divisions of General Motors.
There were no discussions at meetings of the board or any of its committees of the purchasing policies of the operating divisions, either as to source of supplies or allocations of purchases. Nor did they discuss engineering practices in the selection of materials to be used in building the automobiles. There is no proof that any du Pont nominee on the board ever used his position to influence decisions in either of these areas in the last 30 years.
Control of General Motors by du Pont
In 1949 there were 44,104,340 shares of General Motors stock outstanding in the hands of 403,352 shareholders. Du Pont owned 23% or 10,143,998 shares. 92% of the stockholders owned no more than 100 shares each. During the period 1950-1959 du Pont's percentage of the total votes cast at the annual meetings ranged from 27.1% to 29.9%.
Corporate control is an inexact concept.
Certainly it carries with it power to direct corporate policy and considerable patronage.
According to a noted corporate scholar, "'control' may be defined as the capacity to choose directors. As a corollary, it carries capacity to influence the board of directors and possibly to dominate it." Berle, "Control" in Corporate Law, 58 Colum. L. Rev. 1212 (1958).
Power to control through the election of directors may exist where a large block of shares, even though a minority, is owned by one group and the remaining shares are widely scattered. This is called practical or working control. In Insuranshares Corp. of Delaware v. Northern Fiscal Corp., 35 F. Supp. 22 (E.D. Pa. 1940), the defendant was found to have practical control based on 27% ownership of stock. The court found that the majority of stockholders "bought for investment, [and] could be counted on to remain inert." 35 F. Supp. at 24.
In Perlman v. Feldmann, 219 F.2d 173 (2d Cir.), cert denied, 349 U.S. 952, 99 L. Ed. 1277, 75 S. Ct. 880 (1955), Annot., 50 A.L.R.2d 1146 (1956), 68 Harv. L. Rev. 1274 (1955), the principal defendant owned 33% of the stock. The majority and minority opinions assumed this to be practical control.
In Essex Universal Corp. v. Yates, 305 F.2d 572 (2d Cir. 1962), two members of the panel agreed that 28.3% ownership of the stock of the corporation amounted to practical control. Judge Lumbard stated that it was "commonly known that equivalent power usually accrues to the owner of 28.3% of the stock." 305 F.2d at 575. He stated that it was also
"commonly known that a person or group owning so large a percentage of the voting stock of a corporation which, like Republic, has at least the 1,500 shareholders . . . is almost certain to have share control as a practical matter." 305 F.2d at 579.
He placed the burden on the defendant to show otherwise.
It has been observed that the minority block interest has the power to control an election through the use of proxy machinery. Berle, supra, at 1213.
The quantum of proof necessary to determine the existence or rebut the inference of control varies with the particular purpose of the law involved. Compare Acampora v. Birkland, 220 F. Supp. 527, 543 (D. Colo. 1963) (under Investment Company Act, actual domination), with Pacific Gas & Elec. Co., 10 S.E.C. 39, 55 (1941), aff'd, 127 F.2d 378 (9th Cir. 1942), aff'd on rehearing by an equally divided court, 139 F.2d 298 (1943), aff'd by an equally divided Court, 324 U.S. 826, 65 S. Ct. 855, 89 L. Ed. 1394 (1945) (under the Public Utility Holding Company Act, "control" includes power to control, and "controlling influence" includes susceptibility to domination), and SEC v. R. A. Holman & Co., 377 F.2d 665 (2d Cir. 1967) (under SEC rule 10b-6). Even if a holder of a large block of stock in a corporation whose shares are widely held does not exert full control, it may be inferred that management consults such an outside group. See Hill, The Sale of Controlling Shares, 70 Harv.L.Rev. 986, 996 & n. 28 (1957).
I have come to the conclusion that du Pont, by reason of its 23% stock interest in General Motors, had the power to control that corporation because of the unrelated ownership of the balance of the shares.
"It is difficult to see how du Pont could have had this unquestioned power over General Motors' finances without at the same time exercising, or having the power to exercise, what is broadly understood as control over other phases of the business. But there is also present in the correspondence reproduced in the briefs evidence of a division of responsibility between du Pont and the General Motors management. Control of finances is not the same thing as control of operations or purchasing." Dirlam & Stelzer, The Du Pont-General Motors Decision: In the Antitrust Grain, 58 Colum.L.Rev. 24, 33 (1958).
The foregoing analysis suggests the problems that must be determined in this case. Did du Pont, which had the power to control, exercise that power, in violation of §§ 1 and 2 of the Sherman Act, in the purchases by General Motors of automotive fabrics and automotive finishes, and if it did, was General Motors injured thereby?
In discussing the antitrust features of this case, "commerce," "relevant market" and "substantiality" must be determined. The Supreme Court found that "automotive finishes and fabrics have sufficient peculiar characteristics and uses to constitute them . . . a 'line of commerce' within the meaning of the Clayton Act." 353 U.S. at 593-94. It is evident that automotive fabrics and finishes are not reasonably interchangeable for use for the same purpose. Cf. United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 395 & n. 23, 100 L. Ed. 1264, 76 S. Ct. 994 (1956); Brown Shoe Co. v. United States, 370 U.S. 294, 325-28, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). Each must be a separate line of commerce, since fabrics are used in the interior of cars for trim, upholstery and seat covers, while finishes are used on the exterior of the cars. Each is part of commerce for purposes of the Sherman Act.
The relevant market is the automotive industry, which is a substantial market. The range of annual production of cars was between 4,258,000 and 7,920,000 during the years in question. General Motors' share of that market was substantial, varying between 41% and 52.7%. Du Pont's share of General Motors' purchases of automotive fabrics and finishes was substantial.
It averaged 21% for fabrics and 74% for finishes.
In order to establish a restraint of trade in violation of § 1 or a monopolization in violation of § 2 plaintiffs must at least show that du Pont, by virtue of its stock ownership, entrenched itself as a supplier to General Motors of automotive fabrics and finishes, so that a competitor of du Pont could not have captured any of the business by offering equal price, quality and service. Cf. International Salt Co. v. United States, 332 U.S. 392, 396-97, 92 L. Ed. 20, 68 S. Ct. 12 (1947).
Plaintiffs' right to succeed on the issue of liability does not ripen solely on proving the public injury of restraint or monopolization. This is a private suit and plaintiffs must also prove injury to General Motors flowing from antitrust violations. § 4 of the Clayton Act (15 U.S.C. § 15).
Alleged Historical Patterns of Control
Plaintiffs contend they proved that general patterns of control by du Pont of the purchasing practices of General Motors were established in the 1920s and continued during the years involved in this litigation. This proof, with few exceptions, ...