The opinion of the court was delivered by: SOFAER
The United States brought this civil action in September 1978 for monetary penalties and injunctive relief, pursuant to section 5(1) of the Federal Trade Commission Act, 15 U.S.C. § 45(1), against defendants Phelps Dodge Industries, Inc., a successor to Phelps Dodge Copper Products Corporation; General Cable Corporation, now known as GK Technologies, Inc. ("GK"); the Okonite Company; and the Anaconda Company. The complaint charges that the defendants violated a 1936 Federal Trade Commission cease-and-desist order ("the Order"), which prohibited price fixing and coordination in the paper cable industry. In November 1979 a final judgment providing for a civil penalty of $300,000 and injunctive relief was entered against Okonite by consent. In January 1980 the remaining defendants unsuccessfully moved to dismiss the complaint on the ground that it failed to state a claim upon which relief could be granted, and extensive discovery ensued. In January 1982 a final judgment providing for a civil penalty of $100,000 and injunctive relief was entered by consent against Anaconda. In January 1983 the remaining parties agreed to submit the entire cause for final judgment on an agreed record.
The Order which the government argues the companies' conduct violated originated in an administrative proceeding instituted by the FTC on September 26, 1935, against defendants or their predecessors, and other companies no longer in the industry. The Order has remained in force since it became final in May 1938. The government charges that Phelps Dodge, GK, Okonite, and Anaconda violated the first, second, and fourth decretal paragraphs of that Order, which prohibit competitors from conspiring to fix or maintain prices, to adhere to prices in price sheets circulated among them, or to conduct investigations to ferret out and discourage deviations from such prices. The findings and conclusions that follow establish that the defendants violated the 1936 Order by conspiring to fix and maintain prices in the paper cable industry. Civil penalties are asessed against Phelps Dodge and GK in the amounts of $517,000 and $552,000, respectively.
A. The Paper Cable Industry, Market, and Price Book.
Impregnated paper cable is electrical cable used for the transmission of high voltage electricity from a generation point to a distribution point. Order P2. It is generally made to specifications set by the purchaser from strands of copper or aluminum sheathed with a paper insulation. During the period between 1970 and 1975, the four defendants originally named in this action made over ninety percent of the paper cable sold in this country. Their products were essentially fungible, and their customers primarily public and private utilities.
For some time paper cable pricing has been based on data in a price book, an "historical formula which people have used in the industry as a basis for pricing their products." Priesing at 98. The price book formula in the 1970s reflected costs of labor, materials, and manufacturing, as well as a margin of contribution, for given industry specifications of paper cable. Priesing at 98-103. Book pricing was simply a shorthand method of determining the cost of a product generally manufactured to customer specification. Cowles at 40, 165-67. The price book contained a base price for specifications of paper cable, as well as a series of price sheets listing the adjustments to that price because of such factors as the cost of metal and other product components.
Three paper cable price sheets are most important in this litigation: the quantity discount sheet, which specified percentage discounts for various quantities of cable; the freight adder sheet, by which shipping charges were calculated; and the jacket adders, which listed the prices of the coverings, or jackets, for the paper cable, and which varied according to the type and thickness of paper insulation used. The price book served to simplify paper cable pricing by providing a means of separately pricing product components. The 1936 Order described the price sheets then in circulation, however, as "exceedingly complex and detailed." In re National Electrical Manufacturers Assn., Findings of Fact P4(a) (No. 2565 Dec. 29, 1936). Generally, no more than a handful of people in any given paper cable company were capable of calculating the book price for a given order. Cowles at 206, 209.
Occasionally, one of the four major domestic producers would issue a revised price sheet and sent it to its three major competitors, who typically would revise their own price sheets to conform to the new standard. This practice caused the companies' price books to remain identical: the list price for any given order generally would not vary from company to company. But the companies did not always charge the book price. When market conditions demanded, the companies would bid "off-book," either by discounting the book price by some percentage, Jackson at 111; by utilizing cost-plus pricing from individual component costs, Penhale at 25-26; Jackson at 25-26, 128-32; or by employing some combination of book and cost-plus pricing, Jackson at 129-30; Penhale at 28; Kedzierski at 107. Each of these methods was responsive to competitive pressures; manufacturers could at any time reduce or increase the discount from book, or adjust their profit above (or loss below) cost. Employed in this manner, the price book enabled manufacturers to base their prices on identical data, but still engage in competitive pricing.
Until around 1970, "the book was pretty much the golden rule" from which paper cable companies derived quotations "without exception." Jackson at 110. After 1970 the fortunes of the paper cable industry fluctuated widely, and so did the industry's adherence to the book. For most of 1973 pricing went off-book, but during the first half of 1974 demand was so strong that at times quotes went above book.Penhale at 29-30; Schell at 39. Beginning in 1975, while quotes remained on-book, considerable discounting took place. By late 1975 the industry was in a serious downturn. Pricing went entirely off-book, Penhale at 29-30; Schell at 38; Viggiano at 60; Cowles at 92-93, and occasionally even went below cost, Kedzierski at 107; see Brooks at 70. Costs escalated so rapidly that historical data on which the price book was premised no longer accurately reflected the market, and low demand made book-price increases untenable. Phelps Dodge explored the possibility of a total overhaul of the pricing system, Cowles at 94; Priesing at 103, but the price book proved superior to any other method contemplated, Cowles at 183; Priesing at 156. GK also considered alternative pricing strategies to increase the profitability of paper cable, but none was implemented because the market was believed incapable of supporting higher prices. Brooks at 73, 76, 78-79. Against this gloomy background in the paper cable industry, certain contacts occurred between officials of the defendant companies named Trotter, Kedzierski, and Penhale.
B. Contacts Between Trotter, Kedzierski, and Penhale.
In April 1976, when demand for paper cable had been falling for some eighteen months, James Trotter was Product Manager for paper cable at Phelps Dodge and Leo Kedzierski held an identical position with GK. Robert Flood, then of Phelps Dodge but formerly of GK, phoned Kedzierski to arrange a meeting between him and Trotter at the Hilton Hotel in Tarrytown, New York. Flood claims he arranged the meeting solely because he knew that Trotter's job at Phelps Dodge was in jeopardy and wished to introduce Trotter to someone at GK in case he might want to seek employment there. Flood at 70, 132, 137-38. He admitted, however, that he did not mention this purpose to Kedzierski during their phone conversation or during his brief appearance to introduce them when they met. Instead, amidst "general comments about the state of the industry," Flood indicated to Kedzierski only that the two men should meet because "Jim Trotter was involved in paper cable pricing." Flood at 75. Kedzierski testified, moreover, that Flood, relating a discussion at Phelps Dodge at which the participants were lamenting the plight of paper cable, suggested that "it didn't have to be like that." Kedzierski at 102-03. Flood termed Kedzierski's account of the conversation "a little dramatic," but he conceded that he had spoken of the poor state of the paper cable product line and that Kedzierski might reasonably have construed the discussion as an invitation to cooperate. Flood at 72. At their initial meeting, Trotter and Kedzierski discussed Trotter's insecurity about his job with Phelps Dodge, which he thought hard times in the paper cable industry had put in jeopardy. Trotter at 352; Kedzierski at 262. But they also discussed the ailing state of the market for paper cable, book pricing, and ways to shore up the price. Kedzierski at 31; Trotter at 74-77.
Later in April, Kedzierski and Harry Penhale, then Vice-President for Quotations for paper cable at Okonite, arranged to meet at the Marriott Hotel in Saddlebrook, New Jersey. According to Trotter and Kedzierski, Trotter was not present at the meeting. Trotter at 83, 387-88; Kedzierski at 38-39. Discussion focused primarily on the poor economic conditions then prevailing in the paper cable industry. Kedzierski testified that at this meeting Penhale supplied him with a copy of a new Okonite price sheet of "freight adders." Penhale recalled that he and Kedzierski had discussed the updated freight rates over the phone around this time, but that he had not actually provided Kedzierski with the sheet until a subsequent meeting attended also by Trotter, to whom he also gave a copy. Penhale at 80-83.
Penhale also recalled that at the April meeting Kedzierski had given him and Trotter each "a copy of some work he had done with respect to revisions in discounts on . . . the cable coverings," or jacket adders. Penhale at 83. Kedzierski testified that at this initial meeting he had merely mentioned to Penhale that he was doing some work on jacket adders, that Penhale requested that he send them to him, and that at a later time he did so. Kedzierski at 41-42; 237; see Trotter at 74. Trotter did not think he had received the jacket adders at all, recalling that Kedzierski had indicated to him that he had abandoned the work. Trotter at 334. But his superior Richard Cowles, Vice-President of Sales and Marketing for the Phelps Dodge Cable and Wire Company, testified that about this time Trotter had showed him a tentative price sheet for jacket adders from another company, an incident of which he apprised Schell. Cowles at 22-25. The evidence makes it likely, therefore, that Kedzierski provided Penhale and Trotter with copies of General Cable's proposed jacket adders.
Trotter also testified that during this period he received a copy of the Okonite freight rates and a quantity discount sheet. Trotter at 320-29. Penhale recalled that an exchange of freight rates occurred at the first three-way meeting. Penhale at 83. Trotter, however, testified that he received both documents through the mail sometime before the three companies issued new price sheets in late May. Thus, the men agree that Penhale gave Trotter a copy of Okonite freight rates; and Trotter recalled receiving quantity discount sheets as well. Though Trotter's recollection of his receipt of these materials seems less than precise, see Trotter at 326-27, the testimony of Cowles and Schell confirms that Trotter received some type of price sheet from a competitor. Schell at 156-59; Cowles at 15-25. In sum, notwithstanding the divergence in details of the participants' testimony, the evidence establishes that the men exchanged internal pricing information in the hope of gathering support for imminent price increases.
Penhale, Kedzierski, and Trotter did not simply exchange price information, but by phone call and meeting developed an understanding that their respective companies would bid "on the book" and thus attempt in concert to hold the marketplace price to the levels established by the new pricing sheets. Initially, Trotter advised his cohorts that Phelps Dodge was considering issuing a new price sheet incorporating higher prices. Trotter at 79, 163, 328, 83. Penhale assured Trotter that, if Phelps Dodge took the lead in issuing new price sheets, Okonite would support and follow them. Trotter had similar conversations with Kedzierski, who admitted suggesting to Trotter early in their discussions that General Cable would support higher prices for paper cable, and would adhere to the price sheets soon to be issued. On May 24, 1976, Phelps Dodge issued new price sheets, covering quantity discounts, jacket adders, and freight adders, which raised the price of most if not all types of paper cable. Phelps Dodge distributed the new price sheets to its competitors by mail, as was its custom, and they made their way to Penhale's and Kedzierski's desks. Quickly following Phelps Dodge's lead, General Cable simply copied the new prices and issued them as its own effective May 26. Okonite, too, adopted the Phelps Dodge pricing factors, issuing new price sheets for discounts and jacket and freight adders on June 1, 1976.
The issuance of identical price sheets in the highly oligopolistic paper cable industry is not alone sufficient to establish collusive behavior. "Rigid list prices do not prove collusion if transaction prices depart substantially from list." Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562, 1581-82 (1969). But an agreement to stick to newly established price lists does constitute collusive conduct. Traditionally, defendants had used the price sheets only as guides while freely discounting from them to bid competitively. By the time the May 1976 price sheets were issued, however, Trotter, Penhale, and Kedzierski had a clear understanding that their respective companies would cooperate by stabilizing the market price at book. Though wary of each others' true intentions, and concerned that the companies' simultaneous increase not just in book prices but in actual bids would appear concerted, Kedzierski, Penhale, and Trotter nevertheless agreed to adhere to book prices so long as their competitors did. As Penhale put it, Phelps Dodge should "run it up the flag pole and see who salutes." Penhale at 71-72.
Initially, at least, the three fell in line.In June 1976, GK, Phelps Dodge, and Okonite each began quoting book prices from the newly issued price sheets and sticking to them, a drastic change from the rampant discounting that had prevailed for the preceding eighteen months. Because each company bid on book and their price sheets were identical, their bids too were identical. In Penhale's view the identical bids submitted by the three producers during June and July resulted from the discussion held by the three men. Penhale at 103. Furthermore, Roger Brooks, Kedzierski's immediate superior at GK, testified that, based on several conversations with Kedzierski, Brooks understood that Penhale, Kedzierski, and Trotter had agreed that their respective companies would bid at the list prices established in the new price sheets; and Brooks believed that actual bidding during this period manifested this agreement. Brooks at 89-90, 96-97, 102-03, 110-11, 129-33.
Within a few weeks after the price sheets were issued, Kedzierski, Penhale, and Trotter met at the Saddlebrook Marriott to congratulate themselves that the book prices were holding and, in Penhale's words, to "pledge allegiance" to the agreement. In July, Trotter and Penhale met once again at the Saddlebrook Marriott. The three men were also in constant phone contact throughtout the summer, discussing general industry conditions as well as specific bids, current pricing, and book price calculations. On several occasions, Kedzierski received an inquiry from pricing officials in corporate headquarters seeking information that would assist in formulating base prices for lead that the corporation would set for its divisions. Though prevailing lead prices were generally announced in the industry journal, Kedzierski contacted Penhale and Trotter to obtain prices actually being quoted in order to maintain a competitive position. Kedzierski passed on the information he received to corporate headquarters, where it formed the basis for lead pricing. Trotter also requested his competitors' lead factors. While lead was a relatively insignificant component of paper cable pricing, these discussions indicate the extent of the three men's efforts to ensure uniformity. Kedzierski at 225-35; Trotter at 380-83.
The agreement had a direct bearing on at least two major bids during the summer of 1976. In preparing a bid to Consolidated Edison involving several million dollars, Penhale and Kedzierski consulted by phone to ensure that each had arrived at identical calculations from the book for the five elements comprising the bid, and then agreed to bid those figures. Kedzierski at 73-76.Subsequently, Penhale informed Kedzierski that he would likely cut the price on one of the five items in order to remain competitive with Phelps Dodge and GK, each of which had a higher performance rating with Con Ed than did Okonite. Trotter and Kedzierski also discussed this bid, Trotter deriving from the conversation a "general feeling" that GK would bid on book. A third round of bilateral discussions on this bid took place between Penhale and Trotter, after which Trotter predicted that all three companies would bid on book but for Okonite's partial adjustment. His prediction was accurate -- the Okonite, Phelps Dodge, and General Cable bids were identical on four of the five items, and Okonite cut on the fifth. Because the bids on four of the items were identical, Con Ed rejected these four and requested rebidding on them. Cowles at 98-99, 134-35, 150; Priesing at 131; Brooks at 99.
The men also cooperated in a pending bid to Commonwealth Edison of Chicago worth more than a million dollars, which each company had bid on book. Commonwealth approached General Cable, suggesting that if it reduced its bid on some minor related items it would receive a major portion of the paper cable business. Sensing that, contrary to Commonwealth's suggestion, the price of these relatively insignificant items would not affect Commonwealth's decision on the paper cable, Trotter and Kedzierski agreed not to cut their companies' bids, despite considerable pressure from GK's field salespeople. Kedzierski at 80-82. Kedzierski also discussed the matter with Penhale, who held a similar view of Commonwealth's strategy and indicated that he too would endeavor to maintain his company's bid prices. Penhale at 163-64. Commonwealth eventually split the order among the three companies, paying the book price to which the three men had agreed to adhere. Penhale at 164.
The existence of an agreement is also demonstrated by the conduct of the three men in confronting one another upon the receipt of field information indicating that a competitor had deviated. At the outset of their arrangement, Penhale and Kedzierski had several phone conversations in which they discussed charges of discounting.Kedzierski at 74. Kedzierski recalled that even at their first meeting there had been some "good-natured kidding" about discounting off the book. Kedzierski at 88. Penhale testified and Kedzierski confirmed that on several occasions Penhale called Kedzierski to "chide" him about having bid off-book, and that Kedzierski routinely pleaded a mistake in the calculations. Penhale at 154-55. Kedzierski also called Penhale when he received suspicious information from his salespeople.Kedzierski at 59-61. Trotter pointed out variations from book pricing in Okonite bids to Penhale during the same conversations in which the men discussed upcoming orders. Trotter at 104. At some point between late July and early September, but probably during August when it had become apparent that the agreement was breaking down, the three men met again at the Saddlebrook Marriott. The major portion of the meeting was taken up by various charges of cheating on one bid or another, Kedzierski and Trotter "berating" Penhale with particular harshness for having cut a price on a significant piece of business with Boston Edison. Kedzierski at 92-93; Penhale at 100-02. When they refused to believe Penhale's initial excuse that a clerk in the district office had made a typographical error, Penhale claimed he was simply retaliating. Penhale at 101, 222-24. The meeting, which proved to be among the last contacts before the market reverted to massive discounting, concluded with extensive discussion of a major bid to the Long Island Lighting Company. Kedzierski at 97-98; Penhale at 102-03, 168.
Phelps Dodge executives characterized Trotter's role in developing the May 1976 price sheets as ministerial. Cowles at 59-61; Priesing at 36-37; see Trotter at 95, 152. He was not included in the discussions as to whether or not Phelps Dodge would go back on book, nor asked for recommendations as to appropriate price levels, nor requested to forecast the effect of a price increase on the Phelps Dodge market share. Trotter at 361, 77, 152-53. With respect to the discount schedules, Cowles insisted that upper management determined various marginal income levels, for which Trotter would work up corresponding price schedules. Trotter's superiors would then decide which to adopt without any input from him. Cowles at 205-08. In the case of the freight and jacket adders, Cowles said that Trotter simply prepared price sheets which reflected the costs supplied him by other departments. Cowles at 208-09, 211-12; see id. at 58-59.
Trotter performed a significant, corporate staff function, however, in generating the price sheets, as well as compiling and analyzing the pricing, cost, and competitive bidding information which constituted the essential basis for managerial decisionmaking. Cowles at 57-59. He was the only person in the organization capable of doing the mathematical calculations necessary to develop new price sheets. Cowles at 206-12; see Priesing at 67. He obtained bid inquiries from field salespeople and relayed prices to them. He testified that his job responsibilities in each of his paper cable positions were "very similar," though the last, that of paper cable product manager, involved "more forecasting." Trotter at 13. With respect to pricing, his responsibility was "to see that [an inquiry] got priced and that the quotes went out on time, to see that bid due dates were met." Trotter at 13-14. If pricing was off-book, Trotter had authority to approve bids up to $25,000; anything higher had to be approved by Cavanaugh, his immediate superior. During the periods when quotations were from the book, however, Trotter testified that no approval was necessary, though higher management cursorily reviewed the bids. Decisions whether to quote book were made by those in the upper level of management, but Trotter was the source of the competitive data that informed those decisions, and he regularly made pricing recommendations. Trotter at 39-40; 434. When Phelps Dodge began to consider raising prices in early 1976, Trotter was assigned the task of evaluating the continued efficacy of the price book and developing alternative pricing mechanisms. Cowles at 93-94. Phelps Dodge followed his recommendation in retaining the price book, relied on data he generated in making its decisions on new volume discounts, and allowed him to "[use] his own judgment on the freight factors and the jacket adders." Cowles at 96.
Kedzierski also had a major role in paper cable pricing. He joined General Cable as a quotation clerk in 1954, when he learned to use the price book. In 1976 he became paper cable product manager, with autonomous pricing authority for bids up to between $50,000 and $100,000. Kedzierski at 14-16; Brooks at 27. On higher bids he had to consult with his marketing manager, Roger Brooks, and on exceptionally large bids with the general manager, William Garretson. Kedzierski described his pricing responsibilities as "to execute the tactics or strategies or objectives as set by the division, to review the day-to-day work performed by quotation and/or pricing people, and to recommend to management a change in objectives or a change in strategy." Kedzierski at 12-13. "Product managers were responsible for all the pricing strategies development and the day-to-day execution of pricing to include specific quotations and published price sheets." Brooks at 30; see id. at 34-35; Jackson at 96-97. The initiative to adjust prices to market conditions was expected to come from the product manager, who would in the first instance develop figures and make a recommendation. Jackson at 75-76. In sum, "the product managers . . . really would be the points where the decisions and recommendations would come with respect to pricing," for they were "closest to the marketplace." Brooks at 41.
In addition, Kedzierski kept his immediate superior Brooks apprised of his continuing contacts with Trotter and Penhale and their import, and Brooks did little if anything to discourage them. Trotter and Penhale understood that Kedzierski had signed on to the agreement only after checking with "his management." Trotter at 93; Penhale at 78-79, 142, 166. As marketing manager, Brooks had significant influence in establishing and implementing corporate pricing policy for the products within his market areas. Jackson at 74-75. The position of marketing manager for the Power and Control Division "involved all marketing related responsibilities to include the responsibilities of planning, market analysis, sales analysis . . . and also included management of the product managers' functions within the division." Brooks at 22-23. Brooks viewed his responsibilities with respect to paper cable pricing to entail "managing the entire function and ensuring that basically the pricing that was executed on a day-to-day basis was within what is called acceptable or market competitive pricing ranges." Brooks at 27-28. Brooks and Kedzierski worked together closely, sometimes meeting as often as ten to fifteen times a day. Upon first hearing from Penhale, Brooks testified, Kedzierski called him in Miami to consult. Brooks at 89. Thereafter, he kept him aware that the contacts were continuing, made it "clear" that Kedzierski was talking on the phone with Penhale, ...