The opinion of the court was delivered by: BRIEANT
By a motion dated October 18, 1984, and heard November 13, 1984 and fully submitted on November 21, 1984, defendant American Cyanamid seeks, for the second time in less than two years, to terminate a Consent Judgment (sometimes hereinafter referred to as the "Decree" or "Consent Decree"), made August 4, 1964, by the late Hon. Richard H. Levet of this Court in the above antitrust action. The United States and intervenor, Melamine Chemicals Co., Inc. ("MCI"), have made submissions in connection with the application. The intervenor opposes the relief rquested and also tenders to the Court for resolution issues presented by the unfulfilled 1984 purchase requirements pursuant to the Decree, discussed in greater detail below.
The prior unsuccessful effort of Cyanamid to terminate the Final Consent Judgment in this action, is reported in United States v. American Cyanamid Co., 556 F. Supp. 361 (S.D.N.Y.), aff'd in part, rev'd in part and remanded, 719 F.2d 558 (2d Cir. 1983), cert. denied, 465 U.S. 1101, 104 S. Ct. 1596, 80 L. Ed. 2d 127 (1984), and familiarity therewith is assumed. Since the prior attempt, Cyanamid has altered the factual predicate by entering into a contract to divest its Formica Division, discussed below, and now seeks to have the Court consider its request de novo, based on the current circumstances. The Government, as it did before, has consented to the relief sought here, providing that the Court adopt certain procedural safeguards to assure that the divestiture of the Formica profit center by Cyanamid does take place substantially in compliance with the terms proposed.
Melamine is a fine white crystalline powder which is used in the manufacture of resins, which in turn are used for high pressure laminates, such as "Formica" a well-known trademarked product, manufactured by a division of Cyanamid, as well as artificial chinaware, plastic parts for the automobile industry, and coatings for textile and paper products. In this Court's prior opinion in the last round of the litigation, dated January 10, 1983, and reported at 556 F. Supp. 361, the use of this intermediate plastic product is fully discussed, presented with statistics for industry usage in 1982. These facts found by the Court and essentially not disturbed by the Court of Appeals in its partial reversal and remand, are believed to be sufficiently current at this time and substantially unchanged since 1982.
As this Court observed before, shortly following the entry of the Consent Judgment, there were four domestic producers of melamine, including Cyanamid and Fisher Chemical Co., a predecessor of MCI. Since 1979, there have been only two domestic producers, MCI and Cyanamid. Of the total world production capacity of melamine, as estimated in 1982 by the United States Department of Commerce, only 12% existed in the United States. Melamine is essentially a fungible intermediate chemical. There is no distinctive difference in quality or chemical content according to plant or country of origin. Its production is capital intensive, increased put-through in an operating plant does not increase the fixed costs, and the chemical reaction by which melamine is made proceeds on a continuous flow process, much the same as that of an oil refinery. Urea derived from natural gas is the principal raw material.
It was represented to this Court, without contradiction, that MIC's parent continues to enjoy a favorable, low-cost source of natural gas for its production capacity, while the fix-price contracts of Cyanamid have expired. Because of the nature of the product melamine, it should be expected to sell at a competitive price, having a long term relation to the marginal costs of the least efficient producer.
The complaint in this civil antitrust action was filed October 5, 1960, and alleged violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, and § 7 of the Clayton Act, 15 U.S.C. § 18. The complaint alleged that Cyanamid unlawfully allocated and monopolized the foreign and domestic melamine and melamine-contained markets through its leadership of an international cartel of melamine producers, its exclusive control and manipulation of melamine technology and the chemical pre-curser product known as "Dicy," then, but no longer, used to produce melamine, and by its acquisition in 1956 of Formica, Inc., the principal domestic user of melamine crystals for the production of high-pressure laminates. As a result of these alleged violations the Government contended in 1960 that the price of melamine and melamine-contained products was unreasonably high, the available supply of melamine unreasonably low, and actual competition in the melamine and melamine-related industries lessened, also that the potential emergence of new competitors in those industries was effectively foreclosed. The litigation was settled by entry of the Consent Judgment, which, of course, did not admit any violation.
Various proceedings during the years in 1969, 1973 and 1974 resulted in modification of the Decree at the request of Cyanamid and with the consent of the Government. In 1975 the Government initiated criminal contempt proceedings against Cyanamid, alleging that Cyanamid in 1972 had wilfully violated the Consent Judgment's maximum melamine production level. This Court, after a trial, found Cyanamid not guilty of criminal contempt. See United States v. American Cyanamid Co., 1978-1 Trade Cas. P61,843 (S.D.N.Y. 1977); see also Stamicarbon N.V. v. American Cyanamid Co., 506 F.2d 532 (2d Cir. 1974). In 1983, after a hearing, this Court terminated the Decree because of changed circumstances, but that determination was reversed and remanded for further proceedings, as will be described in greater detail below.
The purpose of the Consent Judgment was to dissolve Cyanamid's monopoly of the United States melamine industry and encourage the entrance of new producers into the domestic melamine market. To the extent it is possible to do so, this has already been achieved. MCI has entered the market, and it and Cyanamid are the sole domestic producers.
Following the prior proceedings in this Court in 1983, and following modification thereof by the Court of Appeals, the only surviving provision of significance which is still in effect, and imposes legal burdens on Cyanamid in excess of those already existing under the statutes and case law, is found in provision XI of the Judgment. This provision, by its terms, appears to operate in perpetuity, subject only to defeasance after ten years, upon application to the Court as therein contemplated, and subject also to modification by the Court under its inherent powers as defined by the Court of Appeals in United States v. American Cyanamid Co., 719 F.2d 558 (2d Cir. 1984) (hereinafter "Cyanamid I ").
The relevant portions of provision XI are quoted in full at page 365 of 556 F. Supp. In essence, they require Cyanamid to purchase annually from other producers of melamine, with the preference to United States producers, an amount of melamine equivalent to the requirements of its Formica Division. Neither this provision nor anything else in the Consent Judgment prevented Cyanamid from manufacturing and selling in a lawful fashion in the merchant market for melamine in its crystal or powdered form. This market consists of Formica's competitors, as well as other users of melamine for other purposes, and they are and have for some time been purchasing directly from either Cyanamid or MCI. Furthermore, Cyanamid uses melamine in its paper surfacecoating and textile treating activities, and for other purposes unrelated to its Formica Division.
The Court of Appeals, in Cyanamid I held:
"We therefore reverse the decision of the district court insofar as it holds that "the conditions which the decree was designed to remedy no longer exist [and] the decree should be terminated," and we remand for the district court to apply the factors for analyzing the legality of a vertical merger set forth by Brown Shoe [370 U.S. 294, 82 S. Ct. 1502, 8 L. Ed. 2d 510 (1962)], Fruehauf [Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979], and other applicable cases, and to make findings of fact as to the current state of the melamine market and the market for products that contain melamine." 719 F.2d at 567.
In so holding, the Court of Appeals concluded that:
"While Brown Shoe and its progeny have been the subject of considerable criticism by academicians who believe these cases apply overly harsh standards in assessing the legality of vertical mergers, these cases nonetheless continue to constitute the current state of the law. . . ." [Footnote omitted]; Id. at 567.
Following the denial of certiorari by the Supreme Court, no proceedings were conducted on remand by Cyanamid. The Court takes this as a concession that while Cyanamid continued to own the Formica Division it would not be able to demonstrate that an analysis of the current facts would show that a vertical merger at this time between itself and Formica would not violate § 7 of the Clayton Act when tested by the obsolete factors enumerated in Brown Shoe and Fruehauf, supra.
Instead, bearing out this Court's prior findings to that effect, rejected by the Court of Appeals, but held by Professor Yale Brozen, Professor (now Judge) Richard A. Posner, Professor Paul A. Samuelson, Judge Robert Bork and other scholars, to the effect that vertical mergers product no anti-competitive effects,
and apparently having despaired of convincing the Court of Appeals or the Supreme Court that this particular Emperor (vertical integration as an anti-competitive effect) has no clothes, Cyanamid concluded, with the aid of an investment banking house, to sell its Formica profit center to a management group as part of a leveraged buyout.
On October 12, 1984 Cyanamid made a public statement, printed in the Wall Street Journal, which advised ...