Michigan Citizens for Independent Press v. Thornburgh

PETITIONER:Michigan Citizens for Independent Press
RESPONDENT:Thornburgh
LOCATION:Cumberland County Central Booking

DOCKET NO.: 88-1640
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: United States Court of Appeals for the District of Columbia Circuit

CITATION: 493 US 38 (1989)
ARGUED: Oct 30, 1989
DECIDED: Nov 28, 1989

ADVOCATES:
Thomas W. Merrill – on behalf of the Respondents
William B. Schultz – on behalf of the Petitioners

Facts of the case

Question

Audio Transcription for Oral Argument – October 30, 1989 in Michigan Citizens for Independent Press v. Thornburgh

William H. Rehnquist:

We’ll hear argument next in Number 88-1640, Michigan Citizens for an Independent Press v. Dick Thornburgh, Attorney General of the United States.

Mr. Schultz, you may proceed.

William B. Schultz:

Mr. Chief Justice, and may it please the Court:

This case seeks review of a decision former Attorney General Edwin Meese to grant a joint operating arrangement, or JOA, to the seventh and eighth largest newspapers in the country, the Detroit News and the Detroit Free Press.

The JOA would allow the papers to jointly set circulation and advertising prices.

It would also allow them to divide the Detroit market so that the Free Press would be the morning paper and the News would be the afternoon paper and they would publish a joint weekend edition.

Such an agreement would ordinarily violate the antitrust laws, but in 1970 Congress adopted the Newspaper Preservation Act which gave the Attorney General the authority to grant an antitrust exemption to newspapers in limited circumstances.

Petitioners’ challenge is based on three arguments, each of which I will address.

The first is that the joint operating agreement here is not consistent with the purposes, structure and policies of the Newspaper Preservation Act.

Second, the record here does not support the Attorney General’s finding that the Free Press was in probable danger of financial failure.

And third, the court of appeals erred in not applying the rule that antitrust exemptions must be narrowly construed.

Before I get to those legal issues, there are three critical facts that I would like to highlight that distinguish this case from every other JOA application.

Each of these facts was either adopted by the Attorney General or by the administrative law judge whose fact-findings the Attorney General accepted, and, therefore, they are established facts for purposes of the legal issues here.

William H. Rehnquist:

Mr. Schultz, we review this under an arbitrary and capricious standard?

William B. Schultz:

Your Honor, the factual issues would be reviewed under an arbitrary and capricious standard.

The legal–

William H. Rehnquist:

So when we’re talking about facts are established by record, we’re not quite in the same ball park as if you’re appealing from a jury verdict or findings of a court.

William B. Schultz:

–Well, and these are facts about which I don’t believe there is dispute.

They’re facts that were–

William H. Rehnquist:

Well, but the overall standard of review is arbitrary and capricious, not supported by substantial record… evidence considered on the record as a whole.

William B. Schultz:

–That’s correct.

It’s arbitrary and capricious or otherwise–

William H. Rehnquist:

So you… you have a much greater burden to… to upset a determination here where you’re just under the arbitrary and capricious standard.

William B. Schultz:

–Or otherwise not in violation of law.

Yeah.

William B. Schultz:

So on the factual issues it would be arbitrary and capricious.

On the legal issues it would be whether there’s a violation of law.

The first of these critical facts is that the newspapers fought the competitive battle in Detroit to a virtual draw.

Those are their words as they described the competitive situation at the time they announced the JOA.

And this assessment establishes that the papers considered themselves to be competitive equals.

William B. Schultz:

The… Free… the record shows that the Free Press had been losing money and that the News… the News had been losing almost as much.

It shows that the daily circulation of the two papers was roughly equal, and in other areas each had advantages.

The News was ahead in advertising, but on the other hand, this was offset by the fact that the Free Press had the morning franchise, had clear dominance in the morning franchise, which was considered a major advantage.

And also important is the fact for at least ten years there had been no movement in the relative market position of these two papers.

This situation, this whole set of facts, distinguishes the JOA here from every one… other one previously considered and approved by the Attorney General.

In each of those other situations, there was one paper that was dominant and profitable and a second paper that was junior, losing money and had been losing both circulation and advertising.

Antonin Scalia:

Well, the only difference here from that fact that if… you just recited is that it wasn’t losing circulation but it was losing money year after year, was it not?

William B. Schultz:

The Free Press was losing money, but the News here was also losing almost as much, whereas in the other situations the paper not designated failing was profitable.

Antonin Scalia:

So you consider that a stable situation, in which both newspapers are losing money every year?

William B. Schultz:

Well, I didn’t say–

Antonin Scalia:

That is stability?

William B. Schultz:

–I didn’t say… I didn’t mean to say it was stable, but I’m saying that they are… they are equals.

They are at the same level, and that it hadn’t changed, that the circulation and advertising had not changed over ten years.

They’d been fighting for that, and… and that’s very different from what we see–

Antonin Scalia:

It’s different, but maybe I was jumping ahead of you.

I thought the reason you thought it was different is that it indicates in this situation a stable, you know, a stable competitive arrangement, whereas in the other situations there was not a stable arrangement.

It… it seemed to be deteriorating.

William B. Schultz:

–Well, let me say in the–

Antonin Scalia:

Don’t you think it’s deteriorating if… if one paper’s losing a lot of money every year, year after year, despite the fact that there’s no difference in circulation?

William B. Schultz:

–Well, the papers obviously don’t want to lose money.

That’s not a good thing.

But the question is, is the Detroit Free Press in probable danger of failing financially?

Is it in probable danger of… of closing?

And I am simply saying that the fact that they’re competitive equals suggests that… that that’s not the case, particularly when you consider the reason that the Free Press and the News are losing money.

They’re not losing money because of any problem with the market in Detroit.

The Attorney General found that the market in Detroit could support two healthy newspapers.

Instead, everyone has agreed that they are losing money because their prices are too low.

The… the newsstand price for the Detroit News is 15 cents.

The newsstand price for the Free Press is 20 cents.

Similarly, advertising prices are the lowest in the country.

William B. Schultz:

And so this is not a… a situation as we’ve seen in other cities where, again, where one’s making money and one’s losing.

They’re losing money because the prices are too low.

And just to highlight this, the fact that they regarded each other as competitive equals, when they drew up the joint operating arrangement they made a decision to split profits 50-50.

This, in our view, is further and very strong evidence that the papers regarded themselves as competitively equal.

It’s strong evidence that the News did not think that the Free Press was likely to go out of business anytime soon because, after all, if it viewed the Free Press as being likely to close down in the near future, it would have made no sense for it to have split these enormous possible monopoly profits evenly.

Again, the profit split here contrasts dramatically with the profit split that was evident in other JOAs approved by the Attorney General.

Each one of those involved a lopsided profit split, where the dominant profitable paper took most of the profits and the junior paper took a much smaller percentage, under 30 percent in every case.

Antonin Scalia:

On that kind of reasoning, you would automatically invalidate any… any JOA that’s approved by the Justice Department which ends up in a… in a 50-50 split, I suppose?

William B. Schultz:

I don’t know that I would automatically invalidate it, but I would be very skeptical of it.

There is one situation I can think of where it might be appropriate, and that would be the situation where there was a finding that the market could support only one paper, and also if there was a… there might be some other facts that were different here, but if there was kind of finding it would be a stronger place.

But I… I do regard–

Antonin Scalia:

What is the usual split?

I don’t… I don’t know what these… how these things… I mean, is it… is it unusual to have a 50-50 split like that?

William B. Schultz:

–In terms of the JOAs after 1970, which is… those are the only ones that have been approved by the Attorney General, the profit splits have been between 80/20 and, I think, 68/32.

That’s the range of the other JOA.

So this is very unusual.

Now there were some 50-50 profit splits in the old JOAs, but, of course, those are evaluated under a much different standard, and they were entered at a time when there was no requirement that there be a showing that one of the newspapers be in probable danger of… of financial failure.

So, in the circumstances of a market that can support two newspapers, we would argue that where there’s a 50-50 profit split and other evidence that the papers are competitively equal, that the newspapers cannot qualify for approval of a joint operating agreement.

Anthony M. Kennedy:

If we’re intending to ensure some competition before a JOA agreement, it’s hard for me to understand how you criticize the fact that the Knight-Ridder operation fought the other newspaper to a draw.

I think that’s exactly what you want to encourage.

William B. Schultz:

Your Honor, I don’t think, Justice Kennedy–

Anthony M. Kennedy:

I mean, what’s wrong with each newspaper fighting hard?

I thought that’s exactly what you’re supposed to do before a JOA agreement?

William B. Schultz:

–You want the papers to fight hard, but Congress also required that there be: (a) a finding that one of the papers is in probable danger of financial failure, and in that view that does not envision fighting to a draw; and secondly, that it be consistent with the purposes of the statute.

And one of the troubling… one of the most troubling aspects of the JOA here is that its approval, the approval of the JOA in Detroit, the one at issue in this case, will result in a loss of competition in other healthy competitive markets in the United States, which would be contrary to the purpose of the Newspaper Preservation Act.

After the statute, there are three possibilities that can occur in competitive newspaper markets.

They can end up with full competition.

They could end up with a JOA, or they could end up with a monopoly, single monopoly paper and no competition.

And Congress clearly set an order for those priorities.

The statute expresses the view that the most desirable result would be a situation of competition where the papers are competing in terms of price and news and so on.

William B. Schultz:

The second choice is a JOA which retains two newspapers but eliminates commercial competition, and the least desirable outcome is a single monopoly paper where competition is eliminated altogether.

John Paul Stevens:

May I interrupt you, Mr. Schultz?

You said you had three critical facts.

One of them was that two papers were relative equals.

What were the other two that you–

William B. Schultz:

The other two, when I got to them, in answer to Justice Scalia’s question, are the 50-50 profit split–

–Right.

William B. Schultz:

–Which is the newspaper’s own recognition that they’re competitive equals, and the third one is the fact that the Attorney General found that the Detroit market can support two profitable newspapers.

Okay.

William B. Schultz:

And so the losses here are not caused by a depression or problem in the market.

Rather, they’re caused by their prices being so low.

John Paul Stevens:

You don’t attach any special significance to the fact that the production costs of the News are higher than those of the Free Press?

William B. Schultz:

We have not.

If anything, I guess they… they cut somewhat in our favor, but the… I believe that was noted by the administrative law judge.

It’s not something we’ve highlighted, because he didn’t either.

The Newspaper Preservation Act expresses a strong policy preference for full competition over a JOA in several respects.

First of all, Congress adopted a very narrow definition for the term “failing paper”.

Secondly, in the purpose section of the statute it refers to the interest in newspapers that are competitive in all parts of the United States, and then it explicitly required the Attorney General to find that any JOA he approve was consistent with those purposes.

And, finally, the antitrust rule that exemptions from the antitrust laws be narrowly construed has the effect of retaining the full force of the antitrust laws as much as possible where the exemptions don’t apply.

Therefore, one of the underlying policies of the Newspaper Preservation Act is that it cannot be interpreted.

It may not be interpreted in a way that will give incentives in other markets and result in healthy competitive markets being converted into markets where newspapers operate under JOAs approved by the Attorney General.

Here the Attorney General’s decision violates that policy because essentially it creates a road map under which newspapers in healthy competitive markets can obtain a JOA, and all they have to do under that decision is the following.

The first step is for one of the papers to cut prices as happened in Detroit.

That presumably will be followed by a price cut by the other paper, by the second paper, which would be necessary in order not to lose circulation in advertising, and those price cuts would be followed by several years of losses.

That was precisely the situation in Detroit when the application was made.

Then the papers filed their application for a joint operating agreement.

They have to identify one newspaper as failing.

Presumably they would identify the paper that was behind in circulation or advertising or if one newspaper had substantially more losses, they would find a junior paper.

But if the papers are equal, they can identify either one under the Attorney General’s decision because that was the situation here.

Accompanying the application would have to be the testimony from officials of the paper not designated as failing that they will not raise their prices even if the exemption is not granted.

William B. Schultz:

Well, that testimony should not be hard to get, given the interest that those officials have, and for good measure they can add the testimony from officials of the failing paper that that paper will close if the JOA isn’t granted.

That testimony also was presented in the case of the Detroit application.

And, thus, the risk of the decision is that it will result in the artificial generation of joint operating agreements in other markets around the country.

Newspapers have… the problem is… is enhanced by the fact that newspapers have a terrific incentive to try and obtain approval of joint operating arrangements, and this can also be seen from the facts of Detroit.

In Detroit neither of these newspapers has ever made more than $15 million a year, and of course there are many years during which each has made far less.

Yet Gannett predicts that if the JOA is approved, by the fifth year the newspapers jointly will be making $100 million a year.

So, you can see that the profit possibilities are enormous and thus, if newspapers in… in other markets are given a way that they can obtain a JOA through something as simple as price cuts–

Antonin Scalia:

All… all they have to do is lose money for… how many years were these papers losing money?

William B. Schultz:

–They both lost money for five years.

The–

Antonin Scalia:

All they have to do is lose money for five years and gamble on the fact that having lost that many million, some attorney general will approve the JOA?

William B. Schultz:

–Well–

Antonin Scalia:

Would you invest in that paper?

You know–

William B. Schultz:

–Well–

Antonin Scalia:

–that seems to be a pretty risky gamble.

I… I think–

William B. Schultz:

–But… yeah, except… except what happened here is Knight-Ridder… and this would typically be the situation… Knight-Ridder’s first choice wasn’t a JOA.

Their first choice was to drive the News out of business, and that’s what they hoped to do.

But when you know that as a fall-back you can get a joint operating agreement or that you have a good chance of getting one, it makes it… it makes it much more likely and… and… and… and much more possible.

I… I realize that it’s a gamble–

Anthony M. Kennedy:

–So… so… so it would have… so, it would have been better in your view if Knight-Ridder hadn’t entered the market at all?

William B. Schultz:

–Well, if… if Knight-Ridder hadn’t–

Anthony M. Kennedy:

Under your view, there’s no chance of getting into a joint operating agreement, so you just don’t compete at all.

William B. Schultz:

–If Knight-Ridder had not kept prices so low in the ’80s that they were losing money–

Anthony M. Kennedy:

Well, but that’s not the… that’s not the logical extension of the principle you’re just arguing.

That’s another point altogether.

They lost $81 million in five years, and you say that it would have… since they can’t get a joint operating agreement, that all other newspapers should be warned not to do this.

William B. Schultz:

–Well, what we say is that they should not be given a joint operating agreement here because… that’s right, because to do so under this argument is going to jeopardize the situation in other healthy markets.

I don’t believe that there’s likely to ever be a stronger case than… than the case in Detroit, both because the papers were competitive equals and because of the enormous evidence… enormous amount of evidence in the record in the form of memos generated by the papers that the prospect of a JOA was an important factor in the losses the papers had… had taken.

William B. Schultz:

The papers met in 1981 and in a memo wrote that… that the officials from Knight-Ridder said a few more years with such losses, and the prospects of a JOA will be ironclad.

Moreover, the… the administrative law judge found that in the mid-’80s when Gannett tried to increase prices so that both papers could make money, Knight-Ridder rebuffed those attempts.

Knight-Ridder was uninterested in doing anything but losing money because it hoped that either it would drive the News out of the market or force the News into entering a JOA.

The purpose of the statute was not to foster this kind of competition.

The purpose of the statute was to save papers that were failing due to normal market sources.

William H. Rehnquist:

Well, when you… when you say, Mr. Schultz, that one paper rebuffed the effort of another paper to raise prices, I mean, that isn’t… the… had it not rebuffed it, that wouldn’t have been entirely consistent with the antitrust laws, would it?

William B. Schultz:

Well, given that the only way either of these papers was… it… when I say rebuffed, I’m not saying that there were discussions, but given that the only way either of these papers is going to make money is by raising prices.

They can’t make money as long as they charge 15 and 20 cents for the weekday paper, and have the lowest advertising prices in the country.

Given that, the fact that Knight-Ridder… and I’m saying Knight-Ridder had opportunities to become profitable.

It had those opportunities because Gannett tried to edge the prices up.

It didn’t take those opportunities, so given that it’s refused to… refused the opportunities given it to become profitable in the past, it shouldn’t qualify for a JOA under the standards of the statute.

There is also evidence in the record that the administrative law judge relied on and quoted–

John Paul Stevens:

Mr. Schultz, I may be wrong, but I thought it was Knight-Ridder that took the initiative in raising the prices and Gannett that didn’t follow.

Am I wrong on that?

William B. Schultz:

–I… I believe you are, Justice Stevens.

It was–

William B. Schultz:

It was Gannett… it wasn’t Gannett, but it was Gannett’s predecessor, the Evening News Association.

–The News?

William B. Schultz:

It was the News that tried to raise prices.

I’m talking about ’83 and ’84.

John Paul Stevens:

What is the most recent price increase on the daily paper?

William B. Schultz:

Well, in terms of the weekday paper in Detroit, Knight-Ridder hasn’t… I don’t believe either of them–

John Paul Stevens:

Didn’t one of the papers go from 15 cents to 20 cents?

William B. Schultz:

–Yes, for the out-of-state papers.

John Paul Stevens:

And it was not followed?

William B. Schultz:

And that may have been Knight-Ridder in that case.

And it… and… well, there have been a number of price rises.

In terms of the weekday, I believe it was followed.

There was a weekend… a Sunday price rise that was not followed immediately.

It was followed–

John Paul Stevens:

And which one took the initiative on the Sunday paper?

William B. Schultz:

–I believe that was Knight-Ridder.

That was Knight-Ridder on the Sunday paper.

But this is now later in the ’80s.

In addition, when Gannett bought the News Association in 1986, it… the administrative law judge found that it had considered a price rise, but decided not to raise its prices because that might make the Free Press profitable and jeopardize the prospects of the JOA.

I only say this to say this is a… this is a very strong case for this kind of argument, and if it doesn’t work here, it’s not likely to work in another case.

In addition, on this record, the Free Press is not in probable danger of financial failure.

The Attorney General’s theory that it is goes as follows: the Free Press has been losing millions of dollars a year.

This is due to low prices.

But the Free Press cannot raise its prices unless the News follows, because to do so would risk losing circulation and advertising.

And therefore, the critical question before the Attorney General was, will the News raise its prices of the JOA was denied?

He found that the answer to that question was no, even though a price rise for the News was its only route to profitability.

And he made this finding even though the papers, under the Justice Department’s regulations, have the… have the burden of proof of proving that the News won’t raise its prices.

John Paul Stevens:

Well, and even though the ALJ had not credited the testimony that they would maintain… that the News would maintain the low price.

William B. Schultz:

That’s correct.

Even though–

John Paul Stevens:

So–

William B. Schultz:

–As a matter of fact, the… in making this finding, the only evidence in the record that the Attorney General relied was the fact finding of the ALJ where he explained why the News officials’ testimony could not be relied on.

That was… that’s the… that’s the only evidence in the record cited.

John Paul Stevens:

–In your view, is it essential to sustain the Attorney General’s position that we accept the credibility of the News executives who said they would maintain the low price until the other paper was driven out of business?

William B. Schultz:

Yes.

Absolutely.

Because that’s the only evidence that the Attorney General referred to.

He… he simply referred to News officials and cited that portion of the administrative law judge’s opinion.

Another problem with his finding is that essentially what the Attorney General is… is saying is that the News… it’s rational, and that the News will engage in conduct that essentially amounts to predatory pricing.

The cases of this court take a very different view, which is that firms, in the long run, will not choose to lose money in order to drive a competitor out of business.

And the court has said that predatory pricing schemes are rarely tried, and even more rarely successful.

At a minimum, this places a heavy burden on the applicant to demonstrate why the situation in Detroit should be different from the situation everywhere else.

Antonin Scalia:

Well, you had a five-year track record that seemed to look just like that, though, didn’t it?

I mean, they’re both… both taking losses for five years.

William B. Schultz:

Yes, Justice Scalia, they… they were, but during those five years, there were continual discussions about the prospects of a JOA, and the question has to be, what would happen if they’re told they can’t get a JOA with this kind of conduct.

We agree that this conduct may be rational… it is rational if at the end of the road you can be assured or even have a good chance of getting a joint operating arrangement.

Again, the only evidence relied on by the Attorney General was the testimony of… of the News, and that simply cannot be sufficient under the applicable standards.

I’d like to say just a word about the Chevron issue since that was one of the questions presented.

The panel majority held that Chevron… the panel majority below held that Chevron requires so much deference to the Attorney General as to make a difference in the outcome of the case.

We regard that holding as wrong.

At its heart, Chevron is nothing more than a way of determining legislative intent.

And essentially it says that Congress, in a typical administrative statute, intends for the agencies to take the primary role in interpreting the statutes.

That presumption can obviously be overridden by explicit statutory language, for example, requiring de novo review.

Here it’s overridden by the long-standing rule of statutory construction, requiring narrow… narrow interpretation of antitrust laws; it’s overridden by the traditional role that the courts have taken in interpreting antitrust laws; and finally, it’s overridden by clear indications in the legislative history.

Antonin Scalia:

I’m not sure we’ve applied Chevron to factual determinations by agencies.

I mean, you got the APA and normal deference to that.

Have we applied Chevron to that?

We’re talking about a factual determination here, aren’t we?

Or are we talking about an issue of law?

William B. Schultz:

Well, I think we have both.

Antonin Scalia:

What’s the issue of law?

William B. Schultz:

The issue of law is whether granting the JOA in the… in the undisputed circumstances here, is going to be inconsistent with the policies of the statute because of the adverse impact on otherwise healthy competitive markets.

But the court of appeals–

Antonin Scalia:

If that’s a question of law, everything is a question of law.

William B. Schultz:

–Maybe… I can answer the question this way.

Because the court of appeals seemed to say that even as a factual issue, Chevron so narrowed its role that it wasn’t entitled to overrule the Attorney General.

If there are no further questions, I’ll reserve the remainder of my time.

William H. Rehnquist:

Very well, Mr. Schultz.

Mr. Merrill, we’ll hear now from you.

Thomas W. Merrill:

Mr. Chief Justice, and may it please the Court:

Mr. Schultz started by giving you three facts; I’m going to give you four facts.

The difference between my four facts and his three facts are that mine are the facts that the Attorney General relied upon in making his decision in this case to approve the joint operating agreement between the two newspapers.

Before I do that, though, let me make two general remarks about the nature of the argument that you’ve heard today and that Petitioners advance in their briefs.

First of all, the Newspaper Preservation Act makes it clear that Congress delegated authority to the Attorney General to approve or disapprove a joint operating agreement not to the antitrust division, nor to the administrative law judge.

Thomas W. Merrill:

Thus, the decisions… the decision of the Attorney General and not the ALJ, which is entitled to deference.

And it’s clear, as the Petitioners have conceded, that the applicable standard of review is a highly deferenti one, whether or not that decision was arbitrary, capricious, or an abuse of discretion.

John Paul Stevens:

Mr. Merrill, it is true, though, that the Attorney General did accept all the factual findings of the ALJ, did he not?

Thomas W. Merrill:

I… I think that that’s not a fair inference, Justice Stevens.

John Paul Stevens:

He said so in so many words, didn’t he?

Thomas W. Merrill:

He said that he… he said in the conclusion of his decision, there’s one sentence that says that he accepts the fact findings as accurate, but that he has differed with the conclusions reached by the ALJ.

He also said that he had based his decision on the review of the entire record.

He said that essentially twice.

And in the body–

John Paul Stevens:

I understand.

But supposing… supposing the ALJ says I don’t credit the testimony of witness X, would you say we should accept that testimony or not?

Thomas W. Merrill:

–I would think that if the Attorney General had adopted the findings of the ALJ, that then perhaps you should stop with the ALJ’s findings.

But the Attorney General here never said I adopt the findings of… the administrative law judge.

He said… he said that he accepted the fact findings as accurate, but differed with the conclusions.

And given that in the body of his opinion, in the analysis section, he specifically disagreed with the administrative law judge in a number of critical junctures, about the types of factual determinations that could be made on this record, I think that the most you can say is that the… what the Attorney General was saying… is that he accepts the findings of evidence, but not necessarily the inferences that are being drawn from the evidence.

I’ll admit that the sentence is not a model of–

John Paul Stevens:

When you say a witness is not telling… I don’t credit a witness, is that an inference or is that a fact?

Thomas W. Merrill:

–This was… are you referring specifically now to the question about the Gannett–

John Paul Stevens:

The testimony of the… the Gannett executive who says they will maintain the low prices until they drive the competitor out of business.

Thomas W. Merrill:

–Right.

Well, with respect to that point, the administrative law judge said that, you know, he did not give great credence to that testimony, not because he thought that the… the witness’s demeanor was improper or that he had sweaty palms–

John Paul Stevens:

He just thought it was highly improbable?

Thomas W. Merrill:

–whether for some reason he… he disagreed with it basically because he thought as a matter of economic theory that what the CEO of Gannett was testifying to was improbable.

And the Attorney General, in contrast, said that it was… did not reflect unsound business judgment for the Gannett chairman to testify as he did.

Because what he was testifying to was entirely consistent with what Congress had found to be the economic circumstances of the newspaper industry and what the record in the cases the Attorney General construed it, suggested to be the economic condition of the newspaper industry.

John Paul Stevens:

Is it your view we should accept that testimony?

Thomas W. Merrill:

I think that that testimony is simply one of several factors that the Attorney General was relying upon–

John Paul Stevens:

That’s not my question.

Do you think we should accept that testimony as true, that the chief executive of a large newspaper, which has been losing money for five years, millions and millions of dollars, would continue to lose money until he is successful in driving his competitor out of the market?

That’s the substance of what he testified to.

Thomas W. Merrill:

–I don’t… I do not think that the Court either needs to accept or not accept that testimony as true–

John Paul Stevens:

What is the position of the government as to the truth or falsity of that testimony?

Thomas W. Merrill:

–Our position is that the… the testimony is entirely consistent with what this record in this case and what Congress found about the economics of the newspaper industry.

John Paul Stevens:

And if that testimony is the truth and if that program were carried out after a JOA were turned down, would that be lawful or unlawful conduct in the opinion of the United States?

Thomas W. Merrill:

The claim has been made here that somehow it would constitute predatory pricing.

Let me… let me address that directly.

John Paul Stevens:

I’d like an answer to the question.

Thomas W. Merrill:

Hm?

John Paul Stevens:

I’d like an answer to the question.

Thomas W. Merrill:

I will try to answer the question.

Yeah.

Thomas W. Merrill:

There is absolutely no evidence in this record about predatory pricing.

Predatory pricing, I take it, would mean–

John Paul Stevens:

The testimony I’ve just described is strong evidence of an intent to engage in predatory pricing for the purpose of acquiring a monopoly.

Thomas W. Merrill:

–Well, the testimony is that… is that the Detroit News would not raise its prices–

John Paul Stevens:

And that it’s been consistently losing millions of dollars for several years.

Thomas W. Merrill:

–But… there is no suggestion–

John Paul Stevens:

And it would continue to lose them until it was successful in driving its competitor out of the market.

Thomas W. Merrill:

–There is no suggestion that the News is going to engage in… in pricing below marginal cost, pricing below average variable cost, or any other measure of predatory pricing.

There is nothing in the record about that.

You can’t… excuse me… draw any inferences from that, from what the Gannett chairman has testified.

They’re losing money, but that could simply mean that the newspaper industry has high fixed costs, and therefore, at the pricing that they’re… that they’re engaged in, they don’t recover the totality of their fixed costs.

I don’t think that would necessarily constitute predatory pricing.

If, in fact, any newspaper is engaged in… in what constitutes predatory pricing, yes, I think the Justice Department would look at that quite seriously.

But the record in this case does not suggest predatory pricing; the antitrust division, which looked at this very carefully, never once suggested predatory pricing–

Gannett–

Thomas W. Merrill:

–the administrative law judge acknowledged there was no predatory pricing.

The first time it came up was on the… in Judge Wald’s opinion, with respect to the denial of rehearing it back, and Judge Silberman pointed out in his separate opinion that that claim was simply barred by principles of exhaustion.

It had not been raised in either the administrative proceedings or in the district court or the court of appeals by the Petitioners, and it would be quite unfair to the parties in this case to consider at this point in time the… the prospect that some type of predatory behavior is being… is going on here, when the record basis for that had simply not been established.

The Petitioners did not take part in the administrative proceedings in this case.

Thomas W. Merrill:

And no one that did take part in the administrative proceedings raised any claim about predatory pricing.

Furthermore, I think there’s some inconsistencies here because on the one hand the Petitioners claim that maintaining low prices would be predatory and therefore unlawful, but on the other hand they say that of course predatory pricing almost never happens and so it would be wildly improbable to imagine that the News is not going raise prices if a JOA is denied.

I don’t think they can quite have it both ways.

Let me… let me try if I might just to go back again to what I think the Attorney General relied on, but to point out that the findings of the Attorney General, he made what I believe to be four critical factual determinations in this case, were… were reviewed by the district court… United States District Court… and by the court of appeals and were upheld by both of those courts, and it’s quite well established that this Court does not ordinarily undertake to review the factual determinations of two concurrent lower courts obvious… absent some very obvious or exceptional showing of error, and we don’t think that anything the Petitioners have presented in this case can constitute something of that magnitude.

Let me mention briefly the four facts that the Attorney General relied on.

First, which has already been mentioned, the Detroit Free Press, which was indicated to be the failing newspaper, had lost consistently over a seven-year period substantial sums of money amounting in total to some $83 million from 1979 to 1986.

The losses went up during that period every year except one, so they are steadily mounting.

That’s undisputed.

The ALJ found that… the Attorney General found that.

Petitioners don’t challenge that.

Second, the Attorney General agreed with the conclusion of both the antitrust division, which testified to this point, and the ALJ that the Free Press had no way unilaterally to extricate itself from this pattern of ever-deepening losses.

The Attorney General in fact specifically instructed the administrative law judge to look into the options that the Free Press had.

The administrative law judge devotes 18 pages of his opinion to an analysis of all the various courses of action that might be available to the Free Press in order to extricate itself from the situation.

He concludes that none of those options… raising prices of the newspaper, raising advertising rates, changes in management, anything else… none of it was realistic.

And that’s really undisputed, too.

Petitioners, despite their quibbling, have not directly challenged that finding.

Third, and we’ve already touched on this, the Attorney General disagreed with the ALJ with respect to the probability that the News would not raise its prices in the future.

He thought that given everything in the record, that it would hardly reflect unsound business judgment for the News not to raise its prices with so many indications that the Free Press had already abandoned any hope of… of maintaining market dominance–

John Paul Stevens:

–Mr. Merrill, isn’t it true that that finding depends on an assumption that the papers are not of equal strength, that the Free Press is already decided or predestined to fail if the two continue the struggle?

Thomas W. Merrill:

–I think the Attorney General… yes, the Attorney General’s opinion clearly indicates that he regards the News as the stronger paper, as the paper with the greater reserves and the greater ability to… to outlast the Free Press at this point in time.

There’s not a finding that the News was dominant in the sense in which you talk about a dominant paper versus a failing newspaper, nor is there any finding here of a downward spiral, but the Attorney General indicates that the News, in his opinion, is clearly in a superior position.

I think the record evidence amply supports that.

If you look beyond the total circulation numbers, total daily circulation throughout the state, and look at the various factors that go into… to revenue-raising ability, the–

John Paul Stevens:

Doesn’t it also mean that the reason the decision of the News to keep their prices low is a reasonable, rational business decision is that they can predict that they, by losing money for a determinate period of time they will drive the failing paper out of business?

Thomas W. Merrill:

–Well, I think the News was… would… would look at two things.

First of all, they would look at the fact that they have… earn 60 percent of the total advertising revenues in this market and the Free Press only 40 percent, that they have real strengths in the revenue… and that’s… 75 percent of the newspaper’s revenue, is advertising… and they have considerable strengths.

For example, the News has consistently maintained 70 percent of the classified advertising in this market.

But it’s not just the fact that they have those strengths, it’s also the fact, you must recall, that throughout this period, and I’m talking now from ’83-’84 to ’85-’86, when the Free Press has basically broken off JOA discussions with Evening News Association, the closely-held company that then ran the News, and has initiated this thing called Operation Tiger, where the Free Press is trying everything it possibly can to improve the quality of its newspaper in order to improve its position in the Detroit market.

The Free Press has throughout this period has… it brought in a new management team.

They brought in their team from Philadelphia that in fact had won the newspaper war there.

Thomas W. Merrill:

They invested $22 million in a new publishing plant in the Detroit riverfront, which is designed to go out and get papers out faster and with better quality.

They do many things to improve the quality of the papers.

They have more sports coverage, more international coverage, more color graphics and so forth.

They put a total… the Chairman testifies they put a total of $176 million of cash from 1977 through 1985 or ’86 into the Free Press.

What happens?

They don’t really put… they don’t really change the numbers at all.

If you look at the various tables in the ALJ’s opinions that… that talk about circulation, circulation in the primary market area, circulation on Sunday, the advertising revenue figures, they’re all quite constant throughout this period.

The relative percentages of the News and the Free Press basically don’t budge, and this is at a time when the Free Press is pulling out all the stops competitively to try to do everything it can to obtain a dominant position in this market, so the Free Press having done that and not succeeded and then all of a sudden having Gannett show up and purchase the Evening News Association with… with all of the resources that Gannett has and its reputation for aggressive marketing and so forth, it seems to me that it’s not illogical in that situation for both the News to assume that if it stays the course for a while longer the Free Press is going to exit the market.

And it’s not illogical for the Free Press, as its Chairman testified in this case, to decide that it’s going to close if the joint operating agreement is not approved.

The fourth fact that the Attorney General found, and I think this is also important to the discussion here, is that he found that the papers’ behavior was… reflected entirely proper marketing strategies and entirely responsible conduct.

He rejected the claim that poor management or… or some type of improper conduct was in any way responsible for the paper’s behavior.

As he put it, the papers had engaged in energetic but entirely responsible–

John Paul Stevens:

Mr. Merrill, isn’t it correct that that finding was basically saying that it was not improper for them to consider the option of a JOA as… as an alternative in the long run?

Did he consider the possibility that the pricing was predatory and therefore was not proper business behavior?

Thomas W. Merrill:

–No, the Attorney General did not consider that possibility because no one had raised it in the administrative proceeding.

John Paul Stevens:

But isn’t it obvious, on its face, that there’s a question there?

Thomas W. Merrill:

Not necessarily, because as I tried to explain before, it’s… it’s conceivable that the papers could be losing money and yet not being engaged… not engaged in anything that would be described as predatory in terms of pricing below marginal cost, pricing below average variable cost, or anything of that sort.

Predatory pricing is–

John Paul Stevens:

I appreciate that, but after it has been… been identified that one of the papers will go out of business if you don’t get a JOA, would it then be permissible to continue with that kind of pricing?

You see, this is… there are two different situations.

One, before you have the testimony that if we don’t get our JOA, Knight-Ridder will fold up the Free Press, and is it then permissible for the other paper to say well, in order to ensure that result, we will continue to lose money for whatever period of time it takes to achieve that result?

Do you think that raises a question that even warrants inquiry?

Thomas W. Merrill:

–That is a different question… I hadn’t thought about that, Justice Stevens.

I think that is a distinct question.

I mean, what we have here of course is… the newspapers negotiated JOA in 1985.

At that time they hadn’t exchanged complete financial data.

They really didn’t know what each other’s circumstances–

John Paul Stevens:

Also, there was then no statement that either one would go out of business if they didn’t have a JOA.

Thomas W. Merrill:

–That’s correct, and the reason why they agreed upon this 50-50 profit split… which, by the way, is not at all unusual.

Fully 50 percent of the JOAs that were negotiated–

John Paul Stevens:

It’s unusual in the post-Act?

Thomas W. Merrill:

–Of the four preceding applications prior to this one in the post-Act period, none of them had a 50-50 split, but if you–

John Paul Stevens:

And none of them had the dominant paper been losing money either, had they?

Thomas W. Merrill:

–I think that’s correct.

I’m not absolutely sure about that.

But anyway, in 1985, at the time the negotiations takes place, the News doesn’t know what the Free Press’ intentions are and vice versa; the Free Press doesn’t know what the News’ intentions are.

It makes sense under those circumstances, I think, to reach the type of agreement they had, and I don’t think that any conclusion could be drawn at all at that point in time about the intentions of… of the parties that… that you’re speaking of.

Now, now… whether the Attorney General sua sponte thought that something… some inquiry should have been made based on this… this later testimony or not, I just don’t think that that was presented to him, nor was it particularly relevant to the question of whether or not the JOA, given the circumstances under which it–

John Paul Stevens:

Well, you say it’s not relevant, but… assuming the fact were that the program… the post-JOA denial program would be unlawful… assume for the purpose of argument that it’s unlawful to drive your competitor out of business by selling your papers below cost for a prolonged period of time, would then… would it then be permissible to grant the JOA because you can predict that that’s exactly what’s going to happen?

I mean, in other words, if the… if the fail… the reason for the failure is unlawful conduct, is that something that should prevent the JOA from being granted?

Thomas W. Merrill:

–Yes, I will agree with that statement.

John Paul Stevens:

All right.

Thomas W. Merrill:

I think that… it’s quite consistent with what the Attorney General has said here.

I think that in terms of analyzing this… this rather illusive question about the mixed motives that the petitioners have presented, that it… it’s very important to distinguish between vigorous, energetic, lawful competitive activity and anticompetitive activity.

It seems to me that it’s safe to infer from the Attorney General’s decision and safe, based on everything I know about what the Justice Department has done in this area in the past, that if the parties have engaged in any kind of anticompetitive activity in order to try to secure a JOA, that that would be sufficient grounds under the policies and purposes inquiry to deny it.

For example, if there were any evidence that they had conspired or colluded in order to get a JOA, which is really what the road map suggestion amounts to, that somehow papers are going to see this decision and think that they can go out and enter into some kind of agreement to lose money for five or six years and then one of them will testify that he won’t raise prices and so forth and he’ll go get the JOA.

If there’s any suggestion of that, I think it’s quite clear that it would be proper to deny the application.

If there was a suggestion that predatory pricing had, in fact, been responsible for these losses or for driving one of the papers out of business, I think it would be proper to deny the JOA and–

John Paul Stevens:

I’m not suggesting predatory pricing in the past, but the point would be that the only way in which the predicted result would take place is if it’s depending on predatory pricing in the future when there’s already been a declaration by one paper that I’m not going to stick in the market if you keep pricing this way, and the other one says well, I’ll continue to lose money until I achieve my goal.

Thomas W. Merrill:

–If… if I–

John Paul Stevens:

If you consider that to be unlawful… and I accept your point that you don’t know enough about costs and so forth to draw that in–

Thomas W. Merrill:

–I want to be careful about what I say here.

–Yeah.

Thomas W. Merrill:

I will not concede that it would have been predatory, it was predatory or anything like that.

I think that that kind of claim is completely barred by principles of exhaustion of remedies.

It’s not in this case at all.

However, if you did have reason to believe that the only reason the paper was going to go out of business was because of post-agreement predatory activity, I would agree with you, yes.

That would be sufficient circumstance, but that’s not this case… at least that’s not the record that was made in this case.

And I think it would be quite unfair to these newspapers to send the case back because of some possibility that not what we know now after three rounds of appeals and so forth… maybe that little aspect of the case needs further exploration.

William H. Rehnquist:

Mr. Merrill, you don’t strictly speaking defend the reasoning of the court of appeals’ opinion… at least insofar as it relied on Chevron, do you?

Thomas W. Merrill:

Well, let me… let me try to clarify that, Justice Rehnquist.

It seems to me that before you get into–

William H. Rehnquist:

Could you answer the question perhaps and then clarify your answer.

[Laughter]

Thomas W. Merrill:

–I think we do agree with basic… the basic thrust–

John Paul Stevens:

Do–

Thomas W. Merrill:

–of what Judge Silberman said about the Chevron doctrine.

I think that was essentially correct.

Our position, however, is that we don’t… the court need not really get into this matter in this particular case.

It seems to me that the first thing you’d want to ask yourself before you plunge down some road examining the nuances of the Chevron doctrine is, is there a disputed question of law in this case wherein the administrative decision-maker decided that the statute meant one thing, and the petitioners are claiming it means something else.

And petitioners obviously disagree with this decision.

They think it’s arbitrary and capricious, but I’m having great difficulty… a great deal of difficulty… ascertaining exactly wherein they think the Attorney General adopted a construction of the Newspaper Preservation Act which is contrary to the intent of Congress.

Judge Silberman, interestingly enough, thought that the point of disagreement was that petitioners were maintaining that you couldn’t get a joint operating agreement unless you were in a downward spiral.

He though that they were advocating a kind of per se rule, that you construe the statute that way.

The fact the petitioners disavowed that construction in the court of appeals in their reply brief… and they don’t seem to press it in this particular… in this court, so that the issue that Judge Silberman used as his jumping off point for engaging in this Chevron discussion is based on what petitioners have said so far, really not presented in this particular case.

And so I think the court before it starts talking about Chevron… I think this is perhaps where Judge Silberman made his mistake… first ought to identify the legal issue, in fact, that requires that kind of treatment.

I would say the same thing about the canons of construction.

The exceptions to the antitrust laws should be narrowly construed.

Canons of construction are used for resolving legal issues, questions of legal interpretation.

They’re not sort of general standards of review that we apply in… in cases involving questions of the application of law to particular factual circumstances.

Just to go back very briefly to the Attorney General’s factual determinations, the four determinations that the papers are losing money, the Free Press has no unilateral way out, the News is unlikely to raise its prices, and the paper’s engaged in entirely proper activity.

It seems to me that if you accept those four factual determinations… and under the two court rule I think the court really has to accept those two factual determinations… there can’t be any really serious contention that this decision was arbitrary and capricious.

The first three findings, I think, establish really without any doubt, that the Free Press has to be regarded as a failing newspaper.

The act defines a failing newspaper as one which, regardless of its ownership and affiliations, is in probable danger of financial failure.

The only previous court to have considered what that language means, the Ninth Circuit decision in the Hearst case, said that that should be interested to mean that the newspaper is suffering losses which more than likely cannot be reversed.

The Attorney General specifically adopted that as his understanding of what the statute means.

Well, if the Free Press has lost money for seven years, if they have no way unilaterally to get out of the situation, and if their arch rival, the News, is not going to let them off the hook, it seems to me that you can’t draw any conclusion except that they are in a probable danger of financial failure.

And with respect to policies and purposes, I think the finding by the Attorney General that the newspapers had engaged in entirely lawful, responsible competition really defeats any claim that they… that the application should be denied on policies and purposes grounds.

Obviously if the Free Press is going to fail, the primary policy and purpose of the statute is to preserve independent editorial voices, and that policy is clearly fulfilled by granting the application in this case.

The Attorney General went beyond the… the one policy and purpose that the statute mentions.

Thomas W. Merrill:

He also said that it was… that the general considerations of competition policy should be taken into account also, and I think that also has been satisfied here by his finding because I think it should be taken to mean that no anticompetitive conduct was responsible for the losses that these newspapers incurred in this particular case.

John Paul Stevens:

–I think you missed… you overstated what the Attorney General said.

He didn’t say it was entirely lawful.

Thomas W. Merrill:

No, you’re correct.

John Paul Stevens:

They’re primarily the result of acceptable competitive strategies.

Thomas W. Merrill:

You’re right.

John Paul Stevens:

He expressed no opinion on the lawfulness.

Thomas W. Merrill:

You’re correct, Justice Stevens.

I overstated.

Let me… let me just try to bring up one final point here, which I don’t think has gotten enough emphasis in the argument this morning or this afternoon, excuse me.

The petitioners talk a lot about the importance of the policy of the antitrust laws, pro-competition policy, the economic efficiency objectives that are obviously reflected in those statutes.

But there’s another policy, I think, that Congress was concerned about in this case, and I think it’s one that Congress thought was more important than the policies of economic competition.

That, of course, is the policy of trying to preserve two or more editorial voices, independent editorial voices in communities that otherwise would be denied them.

Congress heard a lot of evidence about the decline of the newspaper industry, the decline of junior newspapers, which is really quite distressing in this case.

In 1910, 60 percent of American communities had two or more independent competing daily papers.

By 1968, shortly before this act was passed, that had fallen to below 5 percent.

And the record in this case indicates that if anything, the trend has simply continued.

We now in this country have about 1,500 cities with one newspaper owner and 25 cities with two or more newspapers that are independently owned and competing.

And so, I think when the Attorney General was making his decision, he was very cognizant of the fact that Congress’ primary concern here was to make sure that wherever possible… and there’s not very many places where it’s still possible… but wherever possible, that two or more editorial voices be maintained, even if that means giving up a little bit on the otherwise unalloyed economic competition that would exist.

Antonin Scalia:

Well, that’s precisely what troubles me about this decision.

I mean, apart from whether it’s right or wrong, you begin with the finding that this city will support two separate newspapers.

And it seems to me once you make that finding, why would you ever want to grant a joint operating agreement.

I mean, usually you’re dealing with a city that can’t.

Here you go in and say, this city can have two completely independent newspapers, but since it can’t have two independent newspapers, we’ll grant a joint operating agreement.

I don’t understand that.

Thomas W. Merrill:

Sad to say, Justice Scalia, but there are a lot of cities in this country that could support two newspapers, but that do not have two newspapers.

For example, since this Act was passed in 1970, its second newspaper, junior newspapers have gone out of business in Washington, D.C., Baltimore, Cleveland, Philadelphia, Buffalo… all fairly large cities… not that different from Detroit.

Antonin Scalia:

Well, what is “could” mean then.

I don’t understand what “could support” means.

I thought “could support” meant that in full and fair competition, more than one would survive.

Thomas W. Merrill:

No.

A “could support”, I think, in the petitioner’s use of it means that if there was some kind of pricing czar who was able to somehow intercede and determine what the prices of these newspapers ought to be.

There are circulation prices and advertising prices, then they could make money.

Unfortunately, there is no such thing in the competition situation, where the two newspapers are desperately trying to avoid the downward spiral; to avoid having their circulation begin to slip, and have their advertising revenue start to fall off and all of sudden, they are out of the picture.

In that sort of situation, the competitive reality is that the papers will not price at levels which are sufficient for the two of them to last.

That was true, for example… if Congress was aware that in New York City, which is the biggest newspaper market in the country, there had been quite a number of newspaper failures, notwithstanding the fact that clearly that’s not a situation where there’s not sufficient revenues to sustain at some level pricing, more than one newspaper.

John Paul Stevens:

Mr. Merrill, in any of these other markets, did the… when they got down to two and a then one survived, was it the afternoon paper that survived at the expense of the morning?

Isn’t this somewhat unusual?

Thomas W. Merrill:

It is unusual, Justice Stevens.

In Philadelphia, is the situation that both the news and the free press were looking at over their shoulders.

In Philadelphia you had, at one time, a dominant evening paper, The Bulletin, I think it was, and a struggling morning paper.

The morning paper, incidentally, was owned by Knight-Ridder.

Knight-Ridder was able to turn that situation around after six years of losses, and the Bulletin eventually went into a tailspin and went out of business.

So I think there were certain clear parallels between Philadelphia and Detroit, that both these papers were looking at throughout this period of time, and it explains, I think, largely why they were competing the way they were in order to try and maintain at all costs their market shares, and that led to the losses that made them unprofitable.

If there are no further questions, I thank the Court.

William H. Rehnquist:

Thank you, Mr. Merrill.

Mr. Schultz, do you have a reubuttal?

You have two minutes.

William B. Schultz:

Yes.

Just three points, Your Honor.

First of all, these various facts that the Attorney General and Mr. Merrill have picked out of the record are all rebutted by the 50-50 profit split.

They can’t get away from the fact that the newspapers themselves describe their equal competitive positions and how they divided profits.

Second, on the issue of whether Detroit can support two profitable newspapers, the Attorney General found this is not a situation where one of these papers is failing because it’s on a downward spiral or losing advertising and circulation.

He didn’t find any of the situations that typically accompany a failing newspaper.

He found that Detroit can support two profitable newspapers if prices are at market, so that focuses the whole case on the issue of price and nothing else.

And thirdly, the statute has an explicit requirement that the Attorney General find that the joint operating agreement is consistent with the policies of the Newspaper Preservation Act.

So this is not the situation of having so many cases where you’re arguing about the agency’s policies versus the Court’s policies.

Congress here identified what the policies are, and they identified the policy of competition in all parts of the United States, and the policy that they identified is consistent with the canon of anti-trust law that requires that exceptions being narrowly construed.

And if that canon is applied, as the court of appeals held, then the Attorney General’s decision must be overturned.

Thank you.

William H. Rehnquist:

Thank you, Mr. Schultz.

The case is submitted.