The opinion of the court was delivered by: JUDD
Before HON. ORRIN G. JUDD U.S. District Judge.
This case requires a decision, after a non-jury trial, on the government's right to a civil penalty for delay in complying with a Federal Trade Commission (FTC) divestiture order, and a determination of the amount of any penalty.
Proceedings were begun in the Federal Trade Commission by the issuance of a complaint against Swingline, Inc. on April 1, 1968 charging violation of Section 7 of the Clayton Act. 15 U.S.C. § 18. The alleged violation resulted from its acquisition in 1965 of Spotnails, Inc. and Speedfast Corporation, both of which had been engaged in manufacture and sale of heavy duty industrial staplers and fasteners and had been in competition with each other.
Swingline paid approximately $3,100,000 for Spotnails and $2,500,000 for Speedfast. The evidence did not disclose how much of the prices was attributable to plants, inventory and physical assets, and how much to good will or other factors.
Swingline manufactures personal and commercial stapling devices, fasteners, and other office equipment, and sells its products throughout the United States. In 1965, Spotnails and Speedfast were two of about seven domestic producers of heavy-duty portable industrial staples and nailers. This is a field in which Swingline had not been engaged before its acquisition of Spotnails and Speedfast.
After the acquisition of Spotnails and Speedfast, Swingline made many changes in the supervisory personnel of the two corporations; Swingline took over the performance of many important corporate functions, and closed some of the plants which the two companies had operated; there was virtually a complete integration of the assets, operating personnel, and sales facilities of the two corporations, and the Speedfast name was dropped. Thus competition between Speedfast and Spotnails was effectively eliminated.
Swingline filed an answer to the FTC complaint, admitting certain allegations, but denying that it had violated the Clayton Act. After proceedings before a hearing examiner, and lengthy negotiations, the parties agreed on a stipulation of facts, a proposed consent order, and a joint memorandum in support of the order.
Since it would have been extremely difficult to restore competition between Speedfast and Spotnails by requiring Swingline to divest itself of one of the corporations, the FTC directed, in the consent order, that Swingline divest itself of a portion of its business, by disposing of some of the assets it had acquired, and providing knowhow and some assured orders to the company acquiring the divested assets.
The Initial Decision of the Hearing Examiner, dated July 30, 1969, recommended entry of an order that would require Swingline to present to the FTC as soon as practicable, but in no event later than one year after the date the order became final, "a financially sound and eligible company" and a contract with such company. The recommended order required Swingline to assure by such contract that "the eligible company" have adequate manufacturing space, machinery, and working capital, that it have royalty free licenses on Spotnails' knowhow and patent rights, and that Swingline would assign specified amounts of customers' orders to "the eligible company" for a three-year period, and furnish technical assistance and other aid to assure that "the eligible company" would be a viable concern.
The order of the FTC adopting the initial decision of the hearing examiner was issued on October 9, 1969 and served on Swingline on October 17, 1969. In a letter addressed to Swingline on November 7, 1969, the Chief of the Compliance Division described this as a final order and directed that detailed compliance reports be filed within sixty days from the effective date of the order (October 17, 1969) and every ninety days thereafter, and described the detailed information which should be included.
When compliance efforts lagged, counsel for Swingline wrote the Commission, on September 15, 1970, that he regarded the effective date of the order as being December 15, 1969 instead of October 17, 1969, on the theory that a sixty day appeal period was allowed after the service of the order, even though the order was uncontested. The Secretary of the Commission responded on October 15, 1970 that no action would be taken to enforce compliance, provided that an eligible company was presented to the Commission for approval on or before December 15, 1970, but warned that
This letter is not to be construed as acceptance of Swingline's compliance efforts to date. . . .
In the event that compliance with the applicable order requirements is not effected on or before December 15, 1970, the Commission specifically preserves its right to seek civil penalties. . . .
The complaint in this court, filed September 20, 1971, recites the FTC order and defendant's failure to comply with its requirements before September 1, 1971, and asks for a penalty of $5,000 per day until compliance and a mandatory injunction for the accomplishment of compliance.
Defendant's answer asserts that it made good faith efforts to comply, but was defeated by circumstances beyond its control. Specifically, it asserts that Swingline's business in heavy duty industrial staplers became unprofitable because of changed economic conditions, that it suffered operating losses during 1970, and the first three months of 1971, and that it was therefore impossible to sell the Speedfast assets and impracticable to establish a viable independent business. The answer also asserts that the FTC's denial of an extension of time to comply was arbitrary and capricious, and that the suit was improperly brought because Swingline was given no opportunity to be heard by the FTC before the case was certified to the Attorney General for prosecution.
Swingline did not utilize the time between July 30, and October 17, 1969 to assemble the data necessary to permit divestiture in compliance with the FTC order, and it proceeded after October 17th in a routine manner. Benjamin Hampton, the Executive Vice President of Swingline, asked Sandor Schweiger, the corporate counsel, in October 1969 to prepare a selling document. This was not completed until March 1970. Jack Linsky, President of Swingline, had become seriously ill in September 1969, taking away leadership at an important time.
The Commission wrote to Swingline's counsel on January 13, 1970 requesting additional details concerning compliance, to be submitted not later than January 26, 1970, and asking for a copy of the selling brochure.
Preparation of the selling document involved determining the type of presentation, getting a number of persons to work on various aspects, updating a 1965 report compiled by Booz, Allen and Hamilton, management consultants, and making an inventory of the materials on hand. Many portions of the ultimate brochure were substantially identical with the Booz, Allen and Hamilton report. The Booz, Allen and Hamilton report had been prepared to justify the purchase price of Speedfast, because Jack Linsky, the major stockholder of Swingline, also owned all the stock of Speedfast.
The court finds that there was substantial work required in preparing the selling document, but that the work was done with no sense of urgency on the part of the Swingline staff.
The government criticizes the selling brochure for not listing the right to licenses under the Spotnails patents as part of the assets to be sold. Swingline counters by saying that the Spotnails patents were to be available only if the new company requested them, and that they were mentioned in an annexed copy of the FTC order. The court regards the omission as significant, in view of the fact that the Spotnails licenses and Spotnails customer list were separately listed in an earlier memorandum from counsel to the officers of Swingline and Spotnails summarizing the FTC order. The "Memorandum in Support of Agreed Upon Order," signed by both parties in the FTC proceeding, had mentioned the existence of patent protection as "The paramount obstacle to new entry in this industry . . ." Sales of Speedfast products having been abandoned, and Spotnails having developed new patents after the Speedfast acquisition, the court regards the omission of reference to Spotnails in the brochure as an effort to get by with the minimum measure of compliance with the FTC order, at risk of not being able to dispose of the assets "as soon as practicable." This omission cannot be attributed solely to Swingline's lackadaisical attitude toward the divestiture.
Negotiations with Prospective Buyers
There were news articles about the FTC proceedings in August and October 1969 in the Wall Street Journal and other publications. Inquiries about the acquisition of the Spotnails-Speedfast assets began to come to Swingline shortly after the announcement of the consent decree, and even before it became final.
Swingline responded to each inquiry, but not with any degree of diligence.
DESA Industries Inc. wrote to Swingline on September 9, 1969, even before the FTC order became final, but the brochure outlining the items that it might acquire was not forwarded until March 5, 1970. Negotiations with DESA continued until August 6, 1970, when Swingline was informed that the corporation had no further interest in the matter.
Omark Industries, Inc. wrote on October 27, 1969 about its interest in acquiring the Speedfast assets. Again Swingline delayed until March 5, 1970 before sending a brochure and was slow in its response to inquiries after that date. Negotiations with Omark terminated on September 29, 1970. Omark learned enough from its negotiations to enter the fastener industry itself in 1972.
Discussions with Waldman Corporation were begun in about October 1969. Representatives visited Swingline's Long Island City plant in ...