UNITED STATES v. PENN-OLIN CHEMICAL CO. ET AL.
No. 503
Supreme Court of the United States
Argued April 30, 1964. - Decided June 22, 1964.
378 U.S. 158
H. Francis DeLone and Albert R. Connelly argued the cause for appellees. With them on the brief were William S. Potter, John W. Barnum and John T. Subak.
MR. JUSTICE CLARK delivered the opinion of the Court.
Pennsalt Chemicals Corporation and Olin Mathieson Chemical Corporation jointly formed Penn-Olin Chemical Company to produce and sell sodium chlorate in the southeastern United States. The Government seeks to dissolve this joint venture as violative of both § 7 of the Clayton Act1 and § 1 of the Sherman Act.2 This direct appeal, 32 Stat. 823,
1. LINE OF COMMERCE, RELEVANT MARKET, ETC.
At the outset it is well to note that some of the troublesome questions ordinarily found in antitrust cases have been eliminated by the parties. First, the line of commerce is a chemical known as sodium chlorate. It is produced commercially by electrolysis of an acidified solution of sodium chloride. All sodium chlorate of like purity is usable interchangeably and is used primarily in the pulp and paper industry to bleach the pulр, making for a brighter and higher quality paper. This is done by using the sodium chlorate as a principal raw material to generate chlorine dioxide, a gaseous material which bleaches cellulose fibers to a maximum whiteness with minimum loss of strength. The pulp and paper industry consumes about 64% of total production of sodium chlorate. The chemical is also employed in the production of herbicides, agricultural chemicals and in certain derivatives, such as ammonium perchlorate. Next, the relevant market is not disputed. It is the southeastern part of the United States. Nor is the fact that Olin has never engaged in the commercial production of sodium chlorate contested. It has purchased and does purchase
In addition, the record shows that while Olin and Pennsalt are in competition in the production and sale of non-chlorate chemicals, only one was selected as a “guinea pig” in the District Court to determine if the alleged violations extended to those chemicals. This was calcium hypochlorite, used in the production of pulp and paper. The trial court found that the joint venture was limited to sodium chlorate and that the joint venture plant which was built at Calvert City was constructed to produce sodium chlorate only. In the jurisdictional statement the Government indicatеd that it might argue that the joint venture also had an illegal impact on the calcium hypochlorite line of commerce, but this was not raised in the brief or at argument on the merits.
2. THE COMPANIES INVOLVED.
Pennsalt is engaged solely in the production and sale of chemicals and chemical products throughout the United States. Its assets are around a hundred million dollars and its sales are about the same amount. Its sodium chlorate production is located at Portland, Oregon, with a capacity of some 15,000 tons as of 1959. It occupied 57.8% of the market west of the Rocky Mountains. It has marketed sodium chlorate in the southeastern United States to some extent since 1957. Its shipments into that territory in 1960 were 4,186 tons of which Olin sold 3,202 tons on its sales agency contract.
Olin is a large diversified corporation, the result of a merger of Olin Industries, Inc., and Mathieson Chemical
Penn-Olin was organized in 1960 as a joint venture of Olin and Pennsalt. Each owns 50% of its stock and the officers and directors are divided equally between the parents. Its plant at Calvert City, Kentucky, was built by equal contribution of the two parents and cost $6,500,000. It has a capacity to produce 26,500 tons of sodium chlorate annually and began operations in 1961. Pennsalt operates the plant and Olin handles the sales. Penn-Olin deals in no other chemicals.
3. BACKGROUND AND STATISTICS OF THE INDUSTRY.
Prior to 1961 the sodium chlorate industry in the United States was made up of three producing companies. The largest producer, Hooker Chemical Corporation, entered the industry in 1956 when it acquired Oldbury Electro Chemical Company, which had been producing sodium chlorate for over half a century. Hooker now has two plants, one in the relevant marketing area at Columbus, Mississippi, which originally had a capacity of 16,000 tons but which was doubled in 1962. The other plant is at Niagara Falls, New York, with a capacity of 18,000 tons. Hooker has assets of almost $200,000,000. American Potash & Chemical Corporation entered the industry in 1955 by the acquisition of Western Electro Chemical Company. American Potash also has two plants, one located at Henderson, Nevada, with a 27,000-ton capacity and the other at Aberdeen, Mississippi (built in 1957), the capacity of which was 15,000 tons. Its assets are almost $100,000,000. The trial court found that these two corporations “had a virtual monopoly” in the relevant southeast market, holding over 90% of the market.
During the previous decade no new firms had entered the sodium chlorate industry, and little effort had been made by existing companies to expand their facilities prior to 1957. In 1953 Olin had made available to Pennsalt its Mathieson patented proсess for bleaching pulp with chlorine dioxide and the latter had installed it 100% in all of the western paper mills. This process uses sodium chlorate. At about the same time the process was likewise made available, royalty free, to the entire pulp and paper industry. By 1960 most of the chlorine dioxide generated by paper manufacturers was being produced under the Olin controlled process. This created an expanding demand for sodium chlorate and by 1960 the heaviest concentration of purchasers was located in the relevant southeastern territory. By 1957 Hooker began increasing the capacity of its Columbus plant and by 1960 it had been almost doubled. American Potash sensed the need of a plant in Mississippi to compete with Hooker and began its Aberdeen plant in 1957. It was completed to a 15,000-ton capacity in 1959, and this сapacity was expanded 50% by 1961.
The sales arrangement between Pennsalt and Olin, previously mentioned, was superseded by the joint ven-
As a result of these expansions and new entries into the southeastern market, the projected production of sodium chlorate there more than doubled. By 1962 Hooker had 32,000 tons; American Potash, 22,500 tons; Penn-Olin, 26,500 tons; and Pittsburgh Glass, 15,000 tons—a total of 96,000 tons as contrasted to 41,150 in 1959. Penn-Olin‘s share of the expanded relevant market was about 27.6%. Outside the relevant southeastern market Pacific Engineering and Production Company announсed in July 1961 that it would construct a 5,000-ton sodium chlorate plant at Henderson, Nevada, in a joint venture with American Cyanamid Company. Pacific would put up the “know-how” and American Cyanamid the loan of the necessary money with 50% stock options.
4. THE SETTING FROM WHICH THE JOINT VENTURE EMERGED.
As early as 1951 Pennsalt had considered building a plant at Calvert City and starting in 1955 it initiated several cost and market studies for a sodium chlorate plant in the southeast. Three different proposals from within its own organization were rejected prior to 1957, apparently because the rate of return was so unattractive that “the expense of refining these figures further would be unwarranted.” When Hooker announced in December 1956 that it was going to increase the capacity of its Columbus plant, the interest of Pennsalt management was reactivated. It appointed a “task force” to evaluate the company‘s future in the eastern market; it retained
During this same period—beginning slightly earlier—Olin began investigating the possibility of entering the sodium chlorate industry. It had never produced sodium chlorate commercially, although its predecessor had done so years before. However, the electrolytic process used in making sodium chlorate is intimately related to other operations of Olin and required the same general knowledge. Olin also possessed extensive experience in the technical aspects of bleaching pulp and paper and was intimate with the pulp and paper mills of the southeast. In April 1958 Olin‘s chemical division wrote and circulated to the management a “Whither Report” which stated in part:
“We have an unparalleled opportunity to move sodium chlorate into the paper industry as the result
of our work on the installation of chlorine dioxide generators. We have a captive consumption for sodium chlorate.”
And Olin‘s engineering supervisor concluded that entry into sodium chlorate production was “an attractive venture” since it “represents a logical expansion of the product line of the Industrial Chemicals Division . . .” with respect to “one of the major markets, pulp and paper bleaching, [with which] we have a favorable marketing position, particularly in the southeast.”
The staff, however, did not agree with the engineering supervisor or the “Whither Report” and concluded “that they didn‘t feel that this particular project showed any merit worthy of serious consideration by the corporation at that time.” They wеre dubious of the cost estimates and felt the need to temper their scientists’ enthusiasm for new products with the uncertainties of plant construction and operation. But, as the trial court found, the testimony indicated that Olin‘s decision to enter the joint venture was made without determining that Olin could not or would not be an independent competitor. That question, the president of Penn-Olin testified, “never reached the point of final decision.”
This led the District Court to find that “[t]he possibility of individual entry into the southeastern market had not been completely rejected by either Pennsalt or Olin before they decided upon the joint venture.” 217 F. Supp. 110, 128-129.
5. SECTION 7 OF THE CLAYTON ACT APPLIES TO “JOINT VENTURES.”
Appellees argue that § 7 applies only where the acquired company is “engaged” in commerce and that it would not apply to a newly formed corporation, such as Penn-Olin. The test, they say, is whether the enterрrise
6. THE APPLICATION OF THE MERGER DOCTRINE.
This is the first case reaching this Court and on which we have written that directly involves the validity under § 7 of the joint participation of two corporations in the
It is said that joint ventures were utilized in ancient times, according to Taubman, who traces them to Babylonian “commenda” and Roman “societas.” Taubman, The Joint Venture and Tax Classification, 27-81 (1957). Their economic significance has grown tremendously in the last score of years, having been spurred on by the need for speed and size in fashioning a war machine during the early forties. Postwar use of joint subsidiaries and joint projects led to the spawning of thousands of such ventures in an effort to perform the commercial tasks confronting an expanding economy.
The joint venture, like the “merger” and the “conglomeration,” often creates anticompetitive dangers. It is the chosen competitive instrument of two or more corporations previously acting independently and usually competitively with one another. The result is “a triumvirate of associated corporations.”4 If the parent companies are in competition, or might compete absent the joint venture, it may be assumed that neither will compete with the progeny in its line of commerce. Inevitably, the operations of the joint venture will be frozen to those lines of commerce which will not bring it into competition with the parents, and the latter, by the same token will be foreclosed from the joint venture‘s market.
Overall, the same considerations apply to joint ventures as to mergers, for in each instance we are but expounding a national policy enunciated by the Congress to preserve and promote a freе competitive economy. In furtherance of that policy, now entering upon its 75th year, this Court has formulated appropriate criteria, first under the Sherman Act and now, also, under the Clayton Act and other antitrust legislation. The Celler-Kefauver Amendment to § 7, with which we now deal, was the answer of the Congress to a loophole found to exist in the original enactment. See Brown Shoe Co. v. United States, supra, and United States v. Philadelphia National Bank, supra. However, in an earlier case, this Court, while considering the effect of a stock acquisition under the original § 7, declared in United States v. E. I. du Pont de Nemours & Co., supra, at 592: “We hold that any acquisition by one corporation of all or any part of the stock of another corporation, competitor or not, is within the reach of the section whenever the reasonable likelihood appears that the acquisition will result in a restraint of commerce . . . .” The grand design of the original § 7, as to stock аcquisitions, as well as the Celler-Kefauver Amendment, as to the acquisition of assets, was
“Clearly, this is not the kind of question which is susceptible of a ready and precise answer in most cases. It requires not merely an appraisal of the immediate impact of the merger upon cоmpetition, but a prediction of its impact upon competitive conditions in the future; this is what is meant when it is said that the amended § 7 was intended to arrest anticompetitive tendencies in their ‘incipiency.’ See Brown Shoe Co., supra, at 317, 322. Such a prediction is sound only if it is based upon a firm understanding of the structure of the relevant market; yet the relevant economic data are both complex and elusive.”
And in the most recent merger case before the Court, United States v. Aluminum Co. of America, supra, the appellee had acquired a small competitor, Rome Cable Corporation. The Court noted that the acquisition gave appellee only 1.3% additional control of the aluminum conductor market. “But in this setting,” the Court said,
“that seems to us reasonably likely to produce a substantial lessening of competition within the mean-
ing of § 7. . . . It would seem that the situation in the aluminum industry may be oligopolistic. As that condition develops, the greater is the likelihood thаt parallel policies of mutual advantage, not competition, will emerge. That tendency may well be thwarted by the presence of small but significant competitors.” At 280.
7. THE CRITERIA GOVERNING § 7 CASES.
We apply the light of these considerations in the merger cases to the problem confronting us here. The District Court found that “Pennsalt and Olin each possessed the resources and general capability needed to build its own plant in the southeast and to compete with Hooker and [American Potash] in that market. Each could have done so if it had wished.” 217 F. Supp. 110, 129.5 In addition, the District Court found that, contrary to the position of the management of Olin and Pennsalt, “the forecasts of each company indicated that a plant could be operated with profit.” Ibid.
The District Court held, however, that these considerations had no controlling significance, except “as a fаctor in determining whether as a matter of probability
We believe that the court erred in this regard. Certainly the sole test would not be the probability that both companies would have entered the market. Nor would the consideration be limited to the probability that one entered alone. There still remained for consideration the fact that Penn-Olin eliminated the potential competition of the corporation that might have remained at the edge of the market, continually threatening to enter. Just as a merger eliminates actual competition, this joint venture may well foreclose any prospect of competition between Olin and Pennsalt in the relevant sodium chlorate market. The difference, of course, is that the merger‘s foreclosure is present while the joint ven-
8. THE PROBLEM OF PROOF.
Here the evidence shows beyond question that the industry was rapidly expanding; the relevant southeast market was requiring about one-half of the national
However, despite these strong circumstances, we are not disposed to disturb the court‘s finding that there was not a reasonable probability that both Pennsalt and Olin would have built a plant in the relevant market area. But we have concluded that a finding should have been made as to the reasonable probability that either one of the corporations would have entered the market by building
“The basic characteristic of effective competition in the economic sense is that no one seller, and no group of sellers acting in concert, has the power to choose its level of profits by giving less and charging more. Where there is workable competition, rival sellers, whether existing competitors or new or potential entrants into the field, would keep this power in check by offering or threatening to offer effective inducements . . . .” At 320.
There being no proof of specific intent to use Penn-Olin as a vehicle to eliminate competition, nor evidence of collateral restrictive agreements between the joint venturers, we put those situations to one side. We notе generally the following criteria which the trial court might
The judgment is therefore vacated and the case is remanded for further proceedings in conformity with this opinion.
Vacated and remanded.
MR. JUSTICE WHITE dissents.
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE BLACK agrees, dissenting.
Agreements among competitors1 to divide markets are per se violations of the Sherman Act.2 The most de-
In United States v. National Lead Co., 332 U. S. 319,3 a Sherman Act violation resulted from a division of world markets for titanium pigments, the key being allocation of territories through patent license agreements. A similar arrangement was struck down in Timken Co. v. United States, 341 U. S. 593, where world trade territories were allocated among an American, a British, and a French company through intercorporate arrangements called a “joint venture.” Nationwide Trailer Rental System, Inc. v. United States, 355 U. S. 10 (affirming 156 F. Supp. 800), held violative of the antitrust laws an agreement establishing exclusive territories for each member of an organization set uр to regulate the one-way trailer rental industry and empowering a member to prevent any other operator from becoming a member in his area.
In the late 1950‘s the only producers of sodium chlorate in the United States were Pennsalt, one of the appellees
Pennsalt, whose only sodium chlorate plant was at Portland, Oregon, became interested in establishing a plant in the rapidly growing southeast sodium chlorate market. It made cost studies as early as 1951 for such a project; and from 1955 on it gave the matter almost continuous consideration. In 1957 it decided to explore the possibility either of going it alone or doing it jointly with Olin. Pennsalt received from its staff and experts various studies in this regard and continued to have negotiations with Olin for a joint venture, and postponed its unilateral project from time to time pending receipt of word from Olin. Its final decision was in fact made when Penn-Olin was organized February 25, 1960, pursuant to a joint venture agreement between Olin and Pennsalt, dated two weeks earlier.
In the early 1950‘s Olin too was investigating the possibilities of entering the southeast industry. It took various steps looking toward establishment of a production plant in the southeastern United States. It received numerous reports from its staff and its experts and it went
During the years when Pennsalt and Olin were considering independent entry into the southeast market, they were also discussing joint entry. In order to test the southeast market the two agreed in December of 1957 that Pennsalt would make available to Olin, as exclusive seller, 2,000 tons of sodium chlorate per year for two or three years, Olin agreeing to sell the chemical only to pulp and paper companies in the southeast, except for one company which Pennsalt reserved the right to serve directly. Another agreement entered into in February 1958 provided that neither of the two companies would “move in the chlorate or perchlorate field without keeping the other party informed.” And each by the agreement bound itself “to bring to the attention of the other any unusual aspects of this business which might make it desirable to proceed further with production plans.” The purpose of this latter agreement, it was found, was to assure that each party would advise the other of any plans independently to enter the market before it would take any definite action on its own.
So what we have in substance is two major companies who on the eve of competitive projects in the southeastern market join forces. In principle the case is no different from one where Pennsalt and Olin decide to divide the southeastern market as was done in Addyston Pipe and in the other division-of-markets cases already summarized. Through the “joint venture” they do indeed divide it fifty-fifty. That division through the device of the “joint venture” is as plain and precise as though made in more formal agreements. As we saw in the Timken case,
An actual division of the market through the device of “joint venture” has, I think, the effect “substantially to lessen competition” within the meaning of § 7 of the Clayton Act.4 The District Court found that neither Pennsalt nor Olin had completely rejected the idea of independent entry into the southeast. But the court also found that it is “impossible to conclude that as a matter of reasonable probability both Pennsalt and Olin would have built plants in the southeast if Penn-Olin had not been created.” The only hypothesis acceptable to it was that either Pennsalt or Olin—but not both—would have entered the southeastern market as an independent competitor had the “joint venture” not materialized. On that assumption the only effect of the “joint venture” was
We do not, of course, know for certain what would have happened if the “joint venture” had not materialized. But we do know that § 7 deals only with probabilities, not certainties. We know that the interest of each company in the project was lively, that one if not both of them would probably have entered that market, and that even if only one had entered at the beginning the presence of the other on the periphery would in all likelihood have been a potent competitive factor. Cf. United States v. El Paso Natural Gas Co., 376 U. S. 651, 661. We also know that as between Pennsalt and Olin the “joint venture” foreclosed all future competition by dividing the market fifty-fifty. That could not have been done consistently with our decisions had the “joint venture” been created after Pennsalt and Olin had entered the market or after either had done so. To allow the joint venture to obtain antitrust immunity because it was launched at the very threshold of the entry of two potential competitors into a territory is to let § 7 be avoided by sophisticated devices.
There is no need to remand this case for a finding “as to the reasonable probability that either one of the corporations would have entered the market by building a plant, while the other would have remained a significant potential competitor.” Ante, pp. 175-176. This case—now almost three years in litigation—has already produced a trial extending over a 23-day period, the introduction of approximately 450 exhibits, and a 1,600-page record. We should not require the investment of additional time, money, and effort where, as here, a case turns on one cru-
MR. JUSTICE HARLAN, dissenting.
I can see no purpose to be served by this remand except to give the Government an opportunity to retrieve an antitrust case which it has lost, and properly so. Believing that this Court should not lend itself to such a course, I would affirm the judgment of the District Court.