United States v. Penn-Olin Chemical Co.

PETITIONER:United States
RESPONDENT:Penn-Olin Chemical Co.
LOCATION:South Boston Court

DOCKET NO.: 26
DECIDED BY: Warren Court (1967-1969)
LOWER COURT:

CITATION: 389 US 308 (1967)
ARGUED: Dec 07, 1967
DECIDED: Dec 11, 1967

Facts of the case

Question

Audio Transcription for Oral Argument – December 07, 1967 in United States v. Penn-Olin Chemical Co.

Earl Warren:

Number 26, United States, Appellant, versus Penn-Olin Chemical Company.

Mr. Zimmerman.

Edwin M. Zimmerman:

Mr. Chief Justice, may it please the Court.

This case arises out of a joint venture entered into in 1960 by the Pennsalt Chemical Corporation and the Olin Mathieson Chemical Corporation.

The joint venture called the Penn-Olin Company was for the manufacture and sale of a chemical called sodium chlorate in the southeastern region of the United States where the chemical has several uses.

Its major use is to make chlorine dioxide, a bleach for the pulp and paper industry.

In January 1961 the Government filed a suit under the Clayton Act and the Sherman Act attacking the joint venture and the transactions relating to it.

A complaint was amended in August 1961 and trial began in October 1961.

At the first trial, the District Court believed that illegality under the Clayton Act required a showing that but for the joint venture both parents would have entered the market.

Since the District Court did not believe that a showing had been made, that both parents would have entered the market, it dismissed the case.

The appeal was taken to this Court, and in June 1964, this Court reversed and remanded.

This Court stressed the importance of potential competition, of the competition of the firm on the edge of the market whose presence might affect the pricing decisions of those in the market.

This Court therefore told the District Court to make a finding on the question whether one firm would have entered the market and the other firm remained as a potential entrant hovering on the edge of the market.

Further trial was had on this issue and the District Court this time concluded that neither company was a potential entrant.

Since it concluded that neither company was a potential entrant, it did not deem it necessary to find whether one would have hovered at the edge of the market.

We are here today because we believe that the standard use by the District Court for evaluating the question of probable entry is incorrect.

The District Court in effect held that for the United States to prevail in the case such as this, it must show that top management actually decided to enter independently as an alternative to the joint venture.

Let me illustrate what we feel to be the difficulty of the Court’s approach.

The District Court’s opinion focuses almost exclusively on the fate of internal corporate proposals to enter the market.

The District Court’s opinion reveals that both in the case of Olin and in the case of Pennsalt, even looking at this evidence alone we see a growing prospect of near commitment to internal entry.

Hence, in the case of Pennsalt, after more than five years of study, the president in November 1958 is authorized to press the button to make independent entry a reality if he so desires.

He discovers some overestimates of demand and in January 1959, the proposal is revised to take these overestimates into account.

But also in January 1959, the president of Pennsalt has indicated in the District Judges’ opinion, page 828 of the record, Mr. Drake accidentally met Mr. Logan of Olin Mathieson and the two discussed the possibility of a joint venture.

At that time the proposal for independent entry was put on ice, pending for the discussion of the joint venture.

Again, we are told by the District Judges’ opinion that as of November 1959, independent construction by Olin at page 816 appeared to be definitely more of a possibility that it had been.

But again, a curtain descends and the joint venture itself is shortly entered into.

In fact, neither of the proposals, the Pennsalt plan of January 1959, the Olin plan of November 1959 for independent entry, neither proposal was rejected.

In fact, both proposals represented the culmination of long sustained efforts.

In fact both appeared to make economic sense.

But the District Court states that neither proposal had in fact been presented to top management.

Edwin M. Zimmerman:

Moreover, we are told on page 823 of the record the following, even if the Olin proposal had been presented to top management, no intelligent forecast can be made as to the likelihood of its approval by the board of directors who had the final say.

Only two of the 15 members of the board were officers of Olin.

The names of some of the other members marked them as man of broad financial and business experience, whether these men were hypercritical or easily persuaded to accept management proposals is not disclosed.

They’re record in approving or disapproving such proposals is not revealed.

What their views would have been about a wholly owned chlorate facility cannot be conjectured.

We disagree that an intelligent forecast cannot be made without this detailed analysis of the preferences of each individual member of the board but we agree or we argue that an intelligent forecast cannot be made by a standard that focuses almost exclusively on evidence of managerial reaction to independent entry at a particular hour and date and ignores the economic circumstances in which the company finds it so.

(Inaudible)

Edwin M. Zimmerman:

Mr. Justice Harlan, it did not, the Government believe that the record that it had previously made and which this Court had previously reviewed had not been rebutted by the —

(Inaudible)

Edwin M. Zimmerman:

Yes, Mr. Justice Harlan.

I believe that this opinion reflects the District Court’s almost complete overlooking at this point of the circumstances in which the firms found themselves in their market.

It concentrates almost exclusively on what went on within particular divisions and within the boardroom.

We also argue that a intelligent evaluation cannot be made on the basis of evidence of managerial reaction to independent entry at the time when management is in fact evaluating the possibility of a joint venture.

And we note in this case that ever since 1958, the two companies had been consulting with one another on the possibility of a joint venture.

We also note that we cannot meet the Court’s requirement of having top management even consider the proposal when it is the very fact of the joint venture that leads top management to ignore the proposal.

Hence, we are here to argue that the standard for an evaluation of whether a company was a probable entrant cannot be the standard that the District Court applied.

Secondly, we shall argue that under an appropriate standard applied to this case, the Government has proved, at least, that either Pennsalt or Olin would have entered and that the other would remain a significant potential competitor.

(Inaudible)

Edwin M. Zimmerman:

Mr. Justice Harlan, I think that there are some findings which are clearly erroneous, we note in our jurisdictional statement — true, depending on how they are interpreted, but it’s very hard to get to the question of clearly erroneous when the standard by which the findings are made is erroneous.

(Inaudible)

Byron R. White:

(Inaudible)

Edwin M. Zimmerman:

It’s a —

What the (Inaudible)

Edwin M. Zimmerman:

Oh, located — after it launched is in our jurisdictional statement.

One is if the Court was assessed — asserting that the so-called investment minimum had not been met, that was clearly erroneous.

Now —

Byron R. White:

(Inaudible)

Edwin M. Zimmerman:

We —

Byron R. White:

(Inaudible)

Edwin M. Zimmerman:

If we persuade you that under a proper standard, there would have been actual entry and potential competition remaining at the edge of the market.

Edwin M. Zimmerman:

We believed that this Court can, if it so desires, dispose of the case at this time although we also recognized that ordinarily, you were to remand the case for a finding of violation on the basis of a proper standard of entry.

I should like to address myself first to the question of what should be a proper standard for determining entry.

I should like to start by referring to two cases which this Court has decided in order to demonstrate where our standard that we proposed comes from.

I refer you first to your decision in this case 378 U.S. at page 175.

After reviewing several factors concerning the market structure in which these two companies operated, concerning their capabilities, concerning their interest, this Court said, “Unless we are going to require subjective evidence, this array of probability certainly reaches the prima facie stage.”

As we have indicated, to require more would be to read the statutory requirement of reasonable probability into a requirement of certainty.

This we will not do.

Secondly, recently this Court had occasioned to address itself again to the question of probable entry in Procter & Gamble.

And at 386 U.S. and 580, referring to the finding of the Court of Appeals that there was no potential competition because there was no evidence of a management’s decision to enter independently and there was no evidence of an actual attempt to enter.

This Court reached the conclusion of Procter & Gamble was the most likely potential entrant from evidence as to Procter’s activity in the industry, activity is similar to the liquid bleach product, Procter’s program of diversifying the natural avenue of expansion represented by Procter’s ability to use similar distribution methods, and Procter’s capabilities, resources and special advantages.

This Court in fact, in effect I believe, looked at objective economic criteria not at the specifics of subjective managerial reactions at a particular time and place to make an overall evaluation.

Now from these two cases, we suggest that a useful rule and a rule which would lead to predictable accuracy would be as follows.

First, we would ask does the company have the capabilities of entering.

By that I mean does it have the technology, the know-how, the financial resources.

If it does, I believe it is at least a possible entry, but not necessarily a probable entrant.

The second question is designed to isolate those of the possible entrants, which are probable entrants, and there we have to ask ourselves why would this company at this time commit its resources in this direction rather than that direction.

There, there are a variety of considerations which some into play and bearing on the question of special incentive.

As in Procter & Gamble, it might be that the new market is in the area of the natural expansion of the company because of the interrelationship of the new market to the current market.

Or again as in Procter & Gamble, the company may enjoy some special advantages which would make the new market particularly attractive to it and would give a promise of the good profit margin.Or indications of special interest may be reflected by sustained and intense examination of this particular market by the company.

And in the case such as this where in fact you have independent entry, I don’t mean independent entry, you have new entry via a joint venture and the commitment of three and three quarter million dollars by each.

I think that is an indication that this is not just another possible area of interest that the companies had a special interest in this market.

Now, the virtues of the test that we proposed is combination of capabilities and special incentive or that it’s consonant with the economic forces that would lead to predictions which the economics of the situation would lead to.

It would not have any particular disincentive effect since if you are dealing with a joint venture where the two companies cannot individually go in, that would be taken cared of by the capabilities part of the test.

Thirdly, it avoids the vices of a rule such as used by the court below where there is virtually exclusive reliance on evidence of how management reacted at a time when it wasn’t focusing on independent entry without having before it the prospect of joint entry.

It would also avoid the problem of evaluating evidence which might be manufactured to avoid antitrust difficulties.

Now we believe that such a test was implicitly applied by this Court to this case the last time this case was here.

And I should like to advert again to this Court’s opinion previously.

And the opinion examined the evidence then before the Court and this Court stated, the evidence shows beyond question that the industry was rapidly expanding, the relevant southeast market was important, few corporations had the inclination, resources, and know-how.

Both parents of Penn-Olin had great resources, each had long been identified with the industry, one owned a valuable patent right while the other actually engaged in sodium chlorate production.

Each had other chemicals which used sodium chlorate.

Edwin M. Zimmerman:

Each had sustained a long interest in entering the relevant market right up to the creation of the joint venture.

Each enjoyed good reputation with the customers.

Each had the know-how and the capacity.

Each could have done so at a reasonable profit.

Each had compelling reasons.

Pennsalt needed to expand its sales.

Olin was motivated by the fact that it was already buying sodium chlorate, and that it was promoting a process for using it.

And at this point the Court reached the conclusion, unless we are going to require a subjective evidence, this array of probability certainly reaches the prima facie stage.

So at this point that the case was sent back for further evidence on the question whether one company would have entered and one company remained on the edge of the market.

While appellees on remand put in additional evidence on alleged changes in the market after the joint venture took place and cumulated previous testimony as to managerial thoughts and intentions, the basic facts reviewed by this Court making for a conclusion of probably entry are unrebutted.

These facts were found by the District Court in its first decision.

Penn and Olin each had the resources and the capabilities.

Penn was one of the very few actual producers of sodium chloride.

There were only three producers of this commodity in the country at that time.

Penn was — Pennsalt was one of them.

Olin, on the other hand, had developed a process of its own for the production of Pennsalt — of sodium chlorate in anticipation of entry and had also access to the Vickers-Krebs process.

Thank you.

Byron R. White:

(Inaudible)

Edwin M. Zimmerman:

The facts on the record in this case which I believe when tested by a proper standard compelled a conclusion that there would have been probable entry here.

These, as the District Court found in its first decision comprised the following.

Each parent had ample resources and capabilities for entering.

Pennsalt had the rare actual manufacturing experience.

Olin had a substantially developed process for production of sodium chlorate of its own and in addition had accessed to the Vickers-Krebs process.

Olin had been actually engaged in the business of selling sodium chlorate to the southeast market, to the pulp customers in that market.

Pennsalt had marketing experience in the sale of sodium chlorate elsewhere which was readily transferable.

Each possessed a plant site at which a factory could have been constructed.

Each had financing ability to construct the plant.

So far as incentive is concerned, the market itself was growing rapidly.

It was highly concentrated with two companies having over 90% of the business.

Pennsalt, a producer of sodium chlorate could develop a new market for its sodium chlorate and for other chemicals.

Edwin M. Zimmerman:

Olin, because of its work in installing the Mathieson process which was the most commonly used bleaching process by the pulp industry possessed ample goodwill and ample opportunity to sell to the pulp companies, the sodium chlorate they needed for the input to this Olin Mathieson process.

Finally, there has been a longstanding interest on the part of both companies in this market.

There had been indications of profitable activity possible.

And finally, we have indeed here the fact of an actual investment of $7 and a half million at a 10.1% rate of return.

It was facts such as these that I think this Court applied a standard similar to the one that we are here proposing at it — at the last decision and which led this Court to believe that at the least a prima facie showing had been made.

The prima facie showing has not rebutted by the evidence submitted by appellees.

The evidence submitted by appellees largely concerns itself with developments which appeared well after the joint venture was entered into.

And indeed, I believe it is significant that the District Judge in reaching his conclusion that there was no probability of entry does not rely on these after acquisition events for his conclusion.

The principle events that appellees point to, they urged that the growth and demand which this Court had noted as a significant factor in explaining the incentive for entry was declining.

The appellees note that the price of sodium chlorate was declining.

And the appellees note that there was a threat of new entry from the pulp and paper customers and the appellees would argue that these events had a bearing on the question of probable entry and therefore on a question of violation in this case.

Taking first the question of price, it is the case that in 1964, October 1964, over four years after the joint venture was established there was a price decline.

This is the only price decline.

There is no evidence that this price decline four years after the fact was anticipated at the time the joint venture was entered into.

It would therefore have no bearing on whether either party would have been deterred from independent entry.

As a matter of fact, if we look at page 551, an August 1960 document at the very time of the inception of the joint venture, where we have a request for appropriations for the joint venture to — I take at the Olin management, we see in paragraph three the following:

“In view of the stability of the market over the past few years, we anticipate no major price changes during the next five years”.

Now that was the state of mind of Pennsalt and Olin at the time they entered the market.

They were not anticipating a decline of price, and indeed there was no decline in price until four years later which they freely could not have anticipated.

As to demand, here we’d like to refer to the appellee’s brief where in appendix 2A, on page 2A, they have provided an indication of what happened subsequently.

And on page 2A we find that the production in the market in 1962 was 66,293 tons, in 1963, 77,771 tons, 1964, 88,967 tons.

My arithmetic tells me that this represents a rate of growth in 1962-1963, I believe of over 17% and on 1963-1964 of over 14%.

Now, I admit that there is a decline from 17% to 14%, but nonetheless the testimony indicated that the usual rate of growth was 10% at the time of the joint venture.

And the testimony also indicated that the ordinary rate of growth in the chemical industry as a whole is 5% or 6%.

I do not regard this as indicating any radical change in demand which could have been anticipated or which indeed had any effect on the question of entry at the time that entry occurred.

Moreover I would bring the Court’s attention to same table in 1964, the Hooker Chemical Company which was one of the established entrants, we note from Footnote 3 that in 1964 it has further capacity under construction.

So that we scarcely have the picture here of a market which has suddenly taken a radical change toward diminution and decline.

The third major factor that appellees point to as a development which in some way affected the question of entry was the rise of the threat of production of sodium chlorate by the pulp and paper industry itself.

And indeed, there is some evidence that the 1964 price drop was in part stimulated by threats of the consumers to build their own plants.

Now again, there is no indication in the record that this threat was a lively or obvious one at the time the joint venture was set up.

Edwin M. Zimmerman:

That it would have deterred either Pennsalt or Olin from going into the joint venture.

And indeed the best inference I can draw from this development is that it was the highly concentrated nature of the sodium chlorate market that forced the customers to seek a way of avoiding this high and stable price by seeking new technology.

I would also note that as of the date of remand, 1965, there had been no construction of plants by the captive producers — I’m sorry, by the captive producers I mean consumers who build their own supplies.

So that even if this began to emerged as a factor, it would have been emerging in the mid-60’s and could not have had any effect on Pennsalt or Olin at the time that they were making their decisions to enter and would not have seriously inhibited their continuing concern and continuing interest in the market.

Again, I point out that the District Court did not rely on these after the acquisition developments for its findings that there was no probability of entry.

It simply said that these subsequent developments after the venture make it even less likely that they would have gone in.

Now, I would also wish to argue that not only would one of the firms have entered under the test as we understand it as we think it should be and under the record as it exist.

But we also believe that the entry of the one firm would not have deterred the remaining firm from continuing its long existent interest in entering.

Here I would note that we have the phenomenon of both firms knowing for several years that each was considering independent entry or possible joint entry.

They had the relationships since 1958 where they would advice one another of new developments.

There is no indication in any of their thinking at that point that they said, “Well, if Olin beats me, I, Pennsalt will not go in”, or “If Pennsalt beats me, I, Olin would not go in.”

We don’t see any indication of that.

Secondly, as I’ve suggested, this market has continued to expand and even after the entry of a combined Penn-Olin, and a rather larger tonnage than was anticipated by either one, we find that the Pittsburg Plate Glass Company was not deterred from entry and it found room to build a 15,000-ton capacity.

And we find as I have just indicated that Hooker found it desirable to expand its capacity in 1964.

I think this suggests that there is no reason to suppose that the mere fact that actual entry by one would have upset or change this long-sustained rational interest that each company had in this market.

I would rather suspect that one would have followed the other in shortly thereafter, but that isn’t necessary for our case.

Byron R. White:

Was it the Government’s decision that the — that the decisions that were made not to go in really aren’t — weren’t real decisions that these objective market factors really impede those decisions?

Edwin M. Zimmerman:

Oh, Mr. Justice White, there were no decisions not to go in.

What happened here is you have some projects hang in fire and then nothing more is heard from them.

And all the focus on attention moves on to the joint venture.

We have in fact —

Byron R. White:

Yes, of course the District Court found they’re just doing that.

Edwin M. Zimmerman:

I don’t believe the District Court found that there was a decision not to go in.

Byron R. White:

Alone?

Edwin M. Zimmerman:

No, there was — certainly not at the January 1959 —

Byron R. White:

But what did — that’s what the District Court found, that neither one of these companies would have entered the market?

Edwin M. Zimmerman:

Oh, yes, but that was the District Court’s ultimate conclusion.

But the District Court did not find decisions not to go in.

In other words the District Court did not make a factual finding that the board of directors sat down in January of 1959, the Pennsalt board of directors and looked at the proposal which is set forth on page 730 of the —

Byron R. White:

What did they rest to it?

Byron R. White:

Did the District Court rest on the conclusion on — that neither one would have joined in?

Edwin M. Zimmerman:

On the fact that the management never considered these proposals, that top management never approved these proposals, and that there’s no way of predicting that top management would’ve — approved it, the proposal.

Byron R. White:

If they had — if top management had decided against it, would you say —

Edwin M. Zimmerman:

I would —

Byron R. White:

What would you say then?

Edwin M. Zimmerman:

I would suggest Mr. Justice White that that was a somewhat harder case, but I would still suggest that even there, you would not want to rely solely and exclusively on such a decision.

And that you would have to give some attention to the other factors to which I refer and let me illustrate why.

Byron R. White:

But assuming real decisions not to go in, you would suggest nevertheless that the — if a rational businessman, should’ve react to market factors or economic factors in the way you suggest, that the — that it should be found, they probably would have gone in?

Edwin M. Zimmerman:

Yes, for this reason that the — and it depends on whether we are talking about the same decision.

If you are referring to a decision not to go in made at a time when the board of directors has before it, the prospects of the joint venture, which they very much want, I would suggest that their decision not to go in cannot be dispositive.

No, I do not say that it does not have considerable significance, but it should not be dispositive.

We have seen in the antitrust field other situations —

Byron R. White:

But if you were just — you would just say then that you put in the — you consider all of the factors.

Edwin M. Zimmerman:

That’s right, I would slot it in.

But —

Byron R. White:

That is —

Edwin M. Zimmerman:

— we will know —

Byron R. White:

Is that what the District Court did?

Edwin M. Zimmerman:

No, I don’t believe so because —

Byron R. White:

Didn’t it consider all of the relevant factors?

Do you think it just considered the behavior of the (Inaudible) people?

Edwin M. Zimmerman:

Yes Mr. Justice White.

This opinion spends virtually no time at all.

No space at all in considering Pennsalt’s capacity or the state of the market or the incentives to enter.

This opinion is radically different from the findings on which this Court relied earlier.

It’s confined almost solely to an examination of proposals and responses.

Byron R. White:

If you wouldn’t — you don’t argue then that this override the companies — a company’s clear-cut decision by not to go in alone by economic factors that might convince somebody to tell them, (Inaudible) and you decide it now.

Edwin M. Zimmerman:

Right.

I argue that we cannot give that conclusive weight but it goes into the package that you take the overall array of considerations.

Now I don’t think there is apt to be that this kind of great disparity between what is economically desirable to the company in the way their corporation might react —

William J. Brennan, Jr.:

Oh, well, Mr. Zimmerman —

Edwin M. Zimmerman:

Yes.

William J. Brennan, Jr.:

Let me see if I get this, suppose that — supposed what we have here was, that Olin should never had any idea of the joint, or never suggested it.

Olin went through everything that it did and finally the board of directors after waiting considerations said, “No, we better stay out of this on our own”.

Pennsalt, done so — everything it did, and now 24% is our policy and this promises us in that , and we’re not going into it.

These decisions are made.

So a month later, this happens, (Inaudible) meeting between the two executives comes about then has generated all of the events which finally resulted in a joint venture, would you be making the same argument today?

Edwin M. Zimmerman:

No, I think that decisions made in such a context would have far more appropriative weight —

William J. Brennan, Jr.:

And your real point —

Edwin M. Zimmerman:

— than the decisions made here.

William J. Brennan, Jr.:

Your real point is that in the context of the joint venture are very much in the mind of both companies and of both management, top management, when all these other events are going give a flavor in this which is rather different —

Edwin M. Zimmerman:

Yes.

William J. Brennan, Jr.:

(Inaudible)

Byron R. White:

This is — this is just — this is just undermining the integrity of the decision?

You would say that the — you’re just impeaching the decision as not real honest decisions that they are —

Edwin M. Zimmerman:

Well, there were none decisions in — again, there were no — and the problem here is the —

Byron R. White:

Well, the decision passed —

Edwin M. Zimmerman:

— management never made —

Byron R. White:

There was never some decisions by somebody, how you do it.

Edwin M. Zimmerman:

They were decisions made to go via the joint venture but two —

Byron R. White:

I know, but there was some decisions —

Edwin M. Zimmerman:

— proposals were left hanging in fire.

Byron R. White:

— not — to go in this.

There were —

Edwin M. Zimmerman:

Well —

Byron R. White:

— decisions were made not to go in alone.

They have to compete, is that it?

Edwin M. Zimmerman:

Yes.

Certainly.

Your Honor, I mean the —

Byron R. White:

If they —

Edwin M. Zimmerman:

The inevitable consequence of going in jointly as that one doesn’t go in alone.

Yes, I am suggesting that you cannot give — well, in the situation here, in the situation where the joint venture is always the context of decision making, you cannot give the decision to go into the joint venture rather than to go individually.

(Inaudible) cannot say that therefore, had the joint venture never existed, they would have not gone in.

Abe Fortas:

So you’re really asking us to arrive at a result that involves modification or prior decision in this Court in this case, aren’t you?

Edwin M. Zimmerman:

I don’t believe so Mr. Justice Fortas because when this case was last here, this Court all but found probable entry and remanded —

Abe Fortas:

Well, that’s a (Inaudible) wouldn’t it?

Edwin M. Zimmerman:

Well, prima facie case of probable entry and I assumed that the appellees were to have the opportunity to rebut the case.

I would suppose that what I am suggesting is quite consistent with what this Court have previously done.

I would like to spend a moment if I may on the question of whether assuming that I have persuaded you that the standard for entry and for judging entry that I proposed is an appropriate one.

And assuming that you agree with me that it’s clear from this record that one would have gone in and the other at least hovered, I would like to address myself the question of whether this would constitute a violation of Section 7.

And in this regard I wish to note very briefly that you have here a very highly concentrated industry with two companies having over 90% assuming that Olin or Penn had gone in, you would’ve had three companies representing 100% of the industry.

It also note that the structure of the industry hasn’t changed in five years.

I would urge that when you have a three-company industry and — but when you have as you have here but very few potential entrants of any significance, and if one of those very few potential entrants of any significance is the other partner here, I would urge that the result of the joint venture was to remove as a control or as an influence on the market one of the very few influences that existed and that this would be a basis for finding a violation of Section 7.

Now, I well understand that there has — there have not been findings on this point on the case below.

We have analyzed in great detail the evidence that has been put in.

Our analysis demonstrates I believe that at most there were two or three potential entrants which had the significance and vitality under Olin and that the other chemical companies were distinguishable because they had no experience in producing sodium chlorate.

They had no experience in selling sodium chlorate.

They had no plant sites.

They had no record of similar sustained interest which has been going on in this case for years on behalf of these two companies.

And unlike these two companies, they did not in fact invest substantial sums of money in this business.

I therefore think there was a small group of potential entrants and Olin for — of that group, the joint venture has deprived this market of the competition that that potential entry could well have provided.

(Inaudible)

Edwin M. Zimmerman:

If there were a remand for determination of the question of violation and if there were a full-pledge hearing on whether there would be distinguishable factors between Penn and Olin has potential entrants and others, I would suppose that we would be all advised not to put more evidence in but I think we have made our case now.

William J. Brennan, Jr.:

In other words, all you’re asking us if you prevail, if you send it back for the — pre-dissolving joint ventures.

Edwin M. Zimmerman:

No, I would suppose that we would be sending it back for appropriate relief, the relief we had asked for dissolution of the joint venture —

William J. Brennan, Jr.:

Well, I mean —

Edwin M. Zimmerman:

— which would —

William J. Brennan, Jr.:

I mean, you want us to say you’ve established the case with a Section 7 violation, nothing remains to be done now except an appropriate decree.

Edwin M. Zimmerman:

Mr. Justice Brennan I would be quite happy if we understand and if we developed a proper standard for entry and I think that would be appropriate to send the case back to see how that standard works.

Edwin M. Zimmerman:

However, this case has been here before.

We have had a very full provision of evidence, the appellees put in all their evidence on the question of violation.

I think this Court could well dispose of this case now and that would make me happier still.

William J. Brennan, Jr.:

Well I — maybe I misunderstood your brief, but I thought — all you ask is the reversal and the remand for the fashion whether an appropriate decree beyond anything else?

Edwin M. Zimmerman:

Yes.

But we make it clear that we understand that this is not a normal procedure of this Court.

We simply suggest that this would be an appropriate case in which not to remand for further trial.

We’ve had seven years now.

Earl Warren:

Mr. Connelly.

Albert R. Connelly:

Mr. Chief Justice, Your Honors.

Of the two points argued by the appellant, I propose to address myself to the first, that is to say to the correctness of the finding of fact, not the conclusion, by the court below as to the probability of independent entry by either Pennsalt or Olin if there had not been a joint venture.

And Mr. DeLone will take up the second and separate question as to whether assuming the probability of independent entry by one whether the joint venture or close competition by the other in such a fashion as to substantially lessen the competition.

The keystone fact in this case, the one which in my view distinguishes it from any other Section 7 case that has come before Your Honors is the fact that neither party to this joint venture had been or was a producer in the marketplace.

We suggest two potential competitors, potential entrants neither of which within the market.

Now, if a merger or combination involves one company that is in the market, actual competitors with another which might be another actual competitor or even a potential competitor, there is some subtraction from the total competitors seen.

And therefore the inquiry proceeds directly to whether there is a probability that that merger, that combination will result in a substantial lessening of competition.

Here, there wasn’t any subtraction.

The combination brought into the marketplace like an additional increase in competition and there is no question concerning the lessening of competition unless there is first found to be a factual probability, an absent to joint venture one or the other would have entered the market anytime.

That keystone fact has two aspects which I think are of significance, number one, a conceptual aspect and two, a temporal aspect.

A conceptual aspect is that this first preliminary issue of probability is not an antitrust issue at all.

When we get to the question of the probability of substantial lessening of competition, that involved looking at the structure of the market concentration, character, nature, and extent of other competition, it requires consideration of the purposes of the antitrust laws.

This preliminary question which is simply a question of whether one company as a matter of probability would or would not have entered the market in the absence of a joint venture is solely a factual question and exactly the same, granted that it’s a very simply factual question, exactly the same whatever the context of the law under which the proceeding had brought.

The second aspect of this keystone fact is the temporal aspect and that is that the question of probability of independent entry.

Right now I’m talking about the probability of substantial estimate competition, the probability of independent entrant is to be looked at and measured not at the time of the venture but prospectively.

The opinion of Mr. Justice Clark when this case was here on the first appeal recognized that, all he said is at page 173 or four.

The difference of course, the difference, he is measuring the difference between a merger which involves somebody who was actually in the marketplace in a country and the joint venture which involved the two potentials.

The difference of course is that the merger’s foreclosure is present while the joint venture is prospective.

The appellant recognized that in its main brief at page 30 when it stated its position, that if the parties had not gone — followed with the joint venture, sooner or later, one of the firms would have entered the market.

Now here, the appellant would nevertheless exclude as irrelevant all post transaction facts which they say were not apparent, they don’t say apparent to whom, but which were not apparent at the time of the transaction.

That argument misses the point completely.

Albert R. Connelly:

Even on the issue of the probability of substantial lessening of competition, Section 7 speaks of probable effects, the probability rule permits a forecast, would be — requires a forecast on whatever facts are available at the time the decision is reached.

But it certainly doesn’t require a disregard of facts that are known at the time the decision is made to the extent that those facts bear upon the central issue of probability.

The timing will depend upon the time of the trial in relation to the transaction, can run all the way from the situation that existed both in Youngstown and the Court was considering that merger, before that have taken place, therefore all of the facts were prospective do the decision in DuPont General Motors where 40 years after the event, they undertook to consider that question in the light of facts which it included, the facts in the intervening 40 years.

On the issue — this preliminary issue to which I am addressing myself is to say the probability of independent entry sooner or later after August 1960.

And the appellant doesn’t give us any clue as to when he says — when they say that this independent entry would have taken place anytime was in the broad definition of sooner or later.

The facts as to what happened in the marketplace during that period, during which they say one of the companies would’ve entered, they may be subject to explanation, they may be — the weight to be given to them has to be considered but they’re clearly relevant to that central issue of probability.

This appeal really presents nothing more than a difference of views as between the Government on the one hand and the District Court on the other.

Obviously we concur in the District Court’s views as to the weight of evidence.

In that connection, Mr. Justice White I asked about of the opinion dealt — with decisions made by the parties, I hope Your Honors will have in mind that there were two full and complete and detailed opinions written there.

And that both of those opinions must be looked at to exact — to understand and appreciate the painstaking care that the District Court gave to all of the evidence, not just the part of the evidence but to all of the evidence.

And in an effort to inject into this factual weight of evidence question, some notion of a legal question or a law question, the appellant asked this Court now to adopt some new rule which would describe decisive weight to what the appellant terms objective evidence and which would accord little or no link to what the appellant describes in the subjective evidence.

That is described from time to time as a legal question or a question of law in the appellants brief whether in the reply brief at page 10 there it ultimately, whether inadvertent or not, the concession that the question really is one of the relative weight of evidence.

On this objective — subjective determination we have stated in our brief, we referred to what we regard as the inadequacies of appellant’s definition, the so-called rule to the inconsistencies and its application depending upon whether the evidence to be looked at is favorable or unfavorable to the Government.

We don’t propose to argue semantics here.

It seems to us that there is a very substantial that — its in weight of evidence between on the one hand, hypothetical testimony by a corporate executive at the trial as to what he would’ve done if Penn-Olin had not been formed.

And on the other hand evidence where the testimonial or document relating to the contemporaneous acts, decisions, and the thinking of the persons who were responsible for making the decision to enter if any such decision was to be made.

We do not contend and the court below did not hold that there is any requirement imposed upon appellant to sustain its verdict to establish a direct evidence, and intent to enter or decision to enter is simply was not the holding of this Court.

We do say that in looking at that question deciding what the probability is, it would be irrational to exclude consideration of what was actually done, the actual decisions were reached by the people who are going to make that decision.

I point out also that on the record on remand, the defendants did introduce substantial additional evidence on external facts as well as additional evidence on the internal consideration.

I think it’s important in, Your Honors looking at this situation to get a little perspective on the market that has been talked about so knowingly.

In 1960, the entire demand in the southeast market amounted to only 47,000 tons of sodium chlorate with a market price of less than $8 million.

And during the five years or four years, that — five years that elapsed between the first — the joint venture and the time of the second trial, the increase had been less than twice in that amount.

Those — that dollar figure can appropriately be compared with the multimillion dollar industries that Your Honors had considered on other cases.

It is true that this was a rapidly growing industry in that southeastern market and that it had growing at some 10% or 12% year on the average.

But the basis for that growth clearly brought out on the remand trial was that conversion of the pulp and paper manufacturers in the southeast to the chlorine dioxide method of bleaching is introduced into the market, new customers for the product.

There came a time however when that opportunity of going in that direction was exhausted and the testimony of the second trial is that by 1964 that had been rather substantially completed but from there on in that rate of growth would be alive and the rate of growth in the pulp and paper industry itself.

There was no longer that opportunity to add new pulp and paper management in custody.

And by 1965, the rate had in fact slowed down to about 5% or 6% a year.

And looking at that market from the standpoint of demand, there was then in the market Hooker and American Potash Company which then had, going back to 1960, productive capacities sufficient to supply the entire market.

As the court below noted, they were multimillion dollar companies, they had adequate resources to expand their facilities to meet any anticipatory demand that might be created in the market.

Albert R. Connelly:

Now, against that background, the cost of putting a plant in, in the southeast, was not high in any absolute sense.

Testimony is that a 15,000-ton plant would have cost about $4 million, 25,000-ton plant about $7 million.

But in relation to the size of the market that was a high price to pay for the privilege of entering the market in trying to take the small share away from Hooker and American Potash.

To make those that definition of the market is important in considering what kind of consideration was given to the possibility of entry by Pennsalt and Olin.

Each of them had considered the possibility of an entry for years.

Then, at least the ninth — middle 1950’s, Pennsalt gave serious consideration to it, conducted a number of studies, and the highest projection that it could make as to possible return on investment was something in the order of 16%, 3.9 to be precise.

Pennsalt figured its estimate returns on the basis of before taxes, and Olin after taxes so there was some confusion, though, they’ll have that in mind.

It was at that point in 1957, that the Pennsalt management determined that independent entry was not a possibility to them.

The investment policy of Pennsalt had been — for some time had been, that in this kind of venture.

That they had to have a projective return of at least 25% before taxes to make the investment at all attractive and that’s it.

The existence of that investment policy was brought out on the — the first trial, also at the second trial, still continued in producing useful results.

Hugo L. Black:

How long did the second trial last?

Albert R. Connelly:

The second trial took two weeks.

Now there was consideration given by Pennsalt in 1958 and 1959 that the possibility of a sodium chlorate plant, not on it’s own, but in combination with ammonium perchlorate, just a the word about that perchlorate because it really goes out of the picture entirely very shortly.

It did have 1957-1958 real promise as a possible growth product.

Used as a rocket propellant and there was estimates made that the demand would increase by 40% in 1959 and by a 140% perhaps in 1961.

And early in 1958, Pennsalt did in fact put up a small pilot plant of its West Coast Portland plant.

And that plant was expanded with commercial production in about 2000 tons in February of 1959.

They did consider, November of 1958 in carrying on to the early part of 1959 the possibility of putting a combination of those two together in the southeast, but increasing doubts as to the demand for ammonium perchlorate led to the conclusion, led to the loss of interest in it in early 1959.

In August of 1960, the Defense Department advised that there was then a substantial excess of capacity of perchlorate and would continue at least for the next two or three years.

Footnote on that, perchlorate story, by 1964 the market had deteriorated to the point that Pennsalt closed its West Coast plant.

The appellant asked us to infer from the fact that Pennsalt went into the joint venture at all.

And had it got been for the joint venture, it could be counted on to go in by itself.

That argument ignores the essential difference that exists between the joint venture and independent entry.

Penn-Olin estimates called for a plant finally at 26,500 tons and cost to $7.5 million of which 4.5 was to borrowed by Penn-Olin requiring an equity investment of only $1.5 million by each of the parents.

This meant that the joint venture offered a — the economics of a larger plant that either would have considered on its own.

It offered the opportunity of combining Pennsalt’s production experience with Olin’s sales experience in the southeast, thereby providing a greater opportunity for competition with American Potash and Hooker.

It provided by this borrowing device that the Penn-Olin had a 50% subsidiary, the borrowings of Penn-Olin would not show up on the balance sheet and therefore not affect the debt ratios either of Pennsalt or Olin.

This meant a substantially higher return on the equity.

Pennsalt estimate was that for the Penn-Olin plan, a return on the total investment would be some 11.8% before taxes, but for Pennsalt its investment amounted to 31%, and that was the one way that the joint venture provided the only way for Pennsalt could achieve an attractive enough return to meet its minimum standards.

Albert R. Connelly:

Olin likewise gave consideration to the possibility of independent entry beginning in the middle of 1950’s.

In 1958 and 1959, it entered into a test marketing project with Pennsalt whereby Olin sold in this market, in the southeast market, to see what the possibilities were for getting into it.

In April of 1959, the first and only recommendation was made by Olin’s chemical division which was to put up a 15,000-ton plant, the cost of $4 million with a projected after tax return of 11%.

That proposal was rejected by the Olin management.

That was a managerial position at that time.

It is true that subsequently, talks of the joint venture late in 1959 led to a consideration, a conclusion, go in to the joint venture in 1960.

The argument that the appellant makes that we’ll perhaps there had been a different decision.

There had not been talks of the joint venture.

If by that, the appellant means that we take the position that Olin’s rejection of the proposal is conclusive could simply eliminates the possibility that Olin would have any interest at anytime in going in, of course we agree with it.

But I take that the burden on it is not upon us to establish the impossibility of all endeavor going in independently but rather the burden is on the Government who established a probability that one or the other would have gone in.

And on that issue, the issue of probability, I ask Your Honors to think on — and look only two things.

First, after this letter of intent, February of 1960 that they entered into, Olin reconsidered even the desirability of going into the much more attractive joint venture.

And it wasn’t finally approved until August 1960 after there had been significant changes made, the capacity — the rated capacity of the plant had been increased.

After then redesigned to bring about a substantial reduction in the cost and there was a further redesign in engineering to produce an improvement in the estimated rate of return.

If, as you consider, the potential to what Olin was considering about the more attractive joint venture, it is impossible to conclude that with those circumstances existing that Olin would nevertheless had went ahead independent.

Now, we point also to evidence concerning other large number of other potential merchant producers of sodium chlorate who were giving consideration to the possibility of entry in the same market.

But this evidence on the other potential merchant producers has a dual relevance.

It bears upon the question of the lessening of competition issue because it bears upon the impact if any of that potential commission — competition had upon the market.

But it’s also bears upon my issue of probability because here are companies that had exactly the same capacity that is described to Pennsalt and Olin, and that be the same interest in terms of sustained consideration, and yet they did not in fact reached the decision to enter the market independently.

To mention just a few here, Allied Chemical which had a chlorine plant in the southeastern market which was indeed actually engaged in the sale of sodium chlorate in that market, as sales agent for American Potash and its predecessor from 1950 right through 1965.

It gave periodic consideration and studied the possibility of putting up a plant on its own.It never reached the point of finding it attractive (Inaudible).

FMC or Food Machinery Corporation, it also had a chlorine plant in the southeast, engaged in the sale of chemicals to the pulp and paper industry, it conducted chlorate studies, almost yearly or at least by two-year gaps throughout the period in 1954 to 1964, negative results.

Diamond Alkali, it had a chlorine plant in the southeast.

It conducted — it made sales to the pulp and paper industry.

It conducted studies, intensive studies in 1958 and 1959 which led to a formal recommendation by staff, the management, of entry into the market, and that recommendation was rejected.

Wyandotte is another.

It also had the same situation with reference to a chlorine plant in the southeast, sales of chemicals to pulp and paper companies, studies in 1952 and 1953, again, in 1959, and no decisions to going up.

Each of those companies as well as others that will be mentioned on this (Inaudible) — each of those companies had the capacity to enter the field, each of the companies considered it.

They had an active interest.

On appellant’s theory, all of those were not merely potential, but were probable entrants and yet throughout all of those years none of them in fact have entered.

Albert R. Connelly:

The only company that —

Abe Fortas:

Mr. Connelly —

Albert R. Connelly:

Yes sir?

Abe Fortas:

I suppose that in the argument that the existence of those companies hence — may have had some market effect.

That is to say that the existence of those companies and the possibility or whatever, that the word, (Inaudible) of entry into the market may have had some effect on the price in the market, that’s a — an observation going from other fields, but I suppose it applies here too.

Albert R. Connelly:

I think as Mr. DeLone will —

Abe Fortas:

And there’s a difference between a potential — a — between the market effect, these companies have had a sort of (Inaudible), let’s say of having been that — the number of their operations.

The possibility of expansion into this field, the difference between a joint venture by companies of that sort for example and companies engaged in totally unrelated fields that don’t have within this same figure of speech, that don’t have between the — numbers in their operations within that field?

Albert R. Connelly:

It could well be sir, In terms of certain industry, but not in this industry because the testimony is quite clear.

That the only price effect of potential competition came not from the existence of this large number of possible entrants but from the standpoint of the — the pulp and paper companies start — of starting production on their own.

Again, that’s a subject to be developed in (Inaudible) next by Mr. DeLone.

Now, the only company did in fact was Pittsburgh Plate Glass in 1961, that significant is the only company in this large group I have referred to which combined manufacturing experience in sodium chlorate, had a plant in Canada, and selling experience in the southeast from its chlorine plant in the southeast.

That’s a combination, the Pennsalt and Olin were able to achieve only by the joint venture.

During this entire period of time, during the 1950’s and up to August of 1960, although each of these companies gave consideration to possibility of entry, neither company was able to justify entry.

Not withstanding the fact that at that time the market was expanding rapidly, at that time there were only two producers in the market, at that time the price levels appeared to be burdened.

Now, when we look at the period of time after August 1960, the sooner or later period during which the appellant says that it is probably that either one or the other that it — they find not only in the increase in the probability, they find that the market becomes less and less attractive, first, with the entry of Pittsburgh Plate Glass in 1961.

That made a — in a small market three producers rather than the two that existed formally.

Secondly, a thread of captive production by the pulp and paper companies, again, in the early 60’s, a development which you had — if it had fully materialized would reduce the demand by some 55% and finally, in 1964 an actual price reduction of approximately 9%.

All the market facts since 1960 in our view make even more able to do the possibility of independent entry by either company had the joint venture not on Olin, and in our submission, the finding of the District Court on this issue is clearly correct.

Earl Warren:

Mr. DeLone.

H. Francis Delone:

May it please the Court.

My position here is a bit odd because if this deal is right, its basic finding as I trust Mr. Connelly have persuaded you, and the subject to which I turn my attention is one which — will in no event reached by the Court.

In other words, if in fact, as defendants have intended, the finding the court below has not shown that there’s reason to be probable, that either Pennsalt or Olin could have entered the market in the absence of a joint venture.

If that finding sustained that, of course, is an end to this mitigation, which the Government has described, I guess fairly as attractive mitigation.

But we must be concerned about the second suggestion which the Government makes here.

It suggests that you should overturn Judge Steele’s fact finding or finding that there was no showing of a probability of entry by Pennsalt or Olin.

And that you should go beyond that.

And that on the record which is now before you, you should find first that it was probable that one of these companies at least would have entered the market in the absence of the joint venture.

And second, it should find that had that one entered the market in the absence of the joint venture, that would have been more competitive if you will than the entry that was made by Penn-Olin.

In other words, they contend that the Section 7 lessening of competition here means that the increase of competition provided by Penn-Olin which did bring a new competitive force in the market as this Court earlier have viewed, they contend that any — that increase was less than the increase which hypothetically would have resulted from separate entry by one of these companies and the other company remaining pondering as I think Mr. Zimmerman referred to it, or in the wings as referred to at the time of our last argument.

H. Francis Delone:

And this second contention which the Government puts in it’s brief this way, it remains only to consider whether the relevant market was highly concentrated and whether the potential competition of the firm that might not have entered immediately represented a sufficiently important restraint on the behavior of the existing sellers in the market, that is removal, brings the joint venture within the band of the statute.

Now, after the first trial, when we really dealt with the question and the contention that both companies was at — would’ve entered or with the contention that that if they had the capability to enter, they were not free to engage in the joint venture.

The Government moved in this Court to the theory which this Court sustained at the last argument we had here which was the District Court should give consideration to the question if one had entered, then would the other been — have been, in the absence of a joint venture what was referred to as a significant potential competitor.

And that is the issue to which most of the testimony at the second trial was particularly addressed, the trial on remand.

There was a two-week trial and the appellees, the defendants called some 19 witnesses under subpoena who were drawn from the actual competitors in the marketplace from the other chemical companies who had been considering the possibility of entering the market and from the pulp and paper company customers who likewise had been considering entering the market.

The court below has never come to the ultimate question in this case of whether under the facts that were then adduced, there would be a substantial “lessening” in the sense that I have explained because it’s found the — there was no probability of entry by one company or the other, and that disposes the case if that’s as far as you go.

The Government says now that on this second question, Your Honors should first reverse what Judge Steele’s has already decided and then should decide the other even though the District Court has never really come to grips with the evidence that was adduced to the trial on remand.

I would hasten to add that at the trial on the remand, the Government adduced no testimony on any of the three issues which had been declared to be the issues there to be tried.

Now, this issue that I’m talking about is quite different from the question of the probability of entry that Mr. Connelly has addressed himself to.

There, the question is, as a matter of fact finding, was it probable that one company would have entered the market, one or the other?

Here, the question is assuming that one would’ve, what would’ve been the effect on competition of having another company still in the wings that might enter the market at some later time?

Mr. Zimmerman phrase it whose presence on the edge might influence decision of those in the market.

So that — it’s really a question of how will the actual competitors be influenced by the presence of a company, one company in the wings that they recognized as a company which might enter the market?

The Government seems to recognize this in it’s brief, and yet in the passage I read to you few moments ago, and yet when it turns to deal with this second question which we say is not properly presented here because it has not yet been considered below, when it turns to that question, it ignores entirely the testimony of the actual competitors in the marketplace, testimony which was adduced by the defendants in the court below.

It quarrels with whether a particular company should be classed as a serious potential entrant or not on the basis only of that company’s internal considerations of whether or not it would enter.

And on that basis it concedes four significant, what it calls potent — serious potential entrants, Pennsalt, Olin, PPG and Allied.

And then it discusses the testimony, some of which Mr. Connelly has already adverted to, with reference to Diamond, Dow — alright Diamond, Wyandotte, FMC, Kaiser or other companies in the chlorate-like group and reasons — for one reason or another that wasn’t really probable that in fact those particular companies would enter the market.

But it seems to — and then it goes on and does essentially the same thing about the pulp and paper companies who later came to a consideration of the same question of whether or not they would enter the market.

Now, Your Honors will see in our — in the appendix to our brief which unfortunately was designated for putting in the record and somehow it was lost and shuffled.

This exhibit that Mr. Zimmerman has already referred to appears at page 3A of our brief and it lists there all of the substantial chlor-alkali companies as they are called, plus two others that are not generally in the chlor-alkali group which are Chapman Chemical Company and Virginia Chemicals.

And then at page — it list them both in terms of — these stipulated facts, terms of their assets, the next page, their land and equipment, the next page, their sales, the next page, their net income.

And then we go through a similar setting for — to the fact with reference to the southeastern pulp and paper companies who as the evidence in the court below at the trial on remand shows were also considering entry.

Now it’s perfectly clear turning first to the chemical companies the actuality which is what the Government — oh, the likelihood of their entry what — which the Government, I think, mistakenly thought this was on that indeed there were eight or nine of such companies which gave repeated, steady consideration to the possibility of breaking in to the southeastern market.

A company set as Dow Chemical which made — which had done research on it for years, which approached the southern pulp mills in late 1959 to try to solicit it’s method of delivering chlorine dioxide by putting up a plant next door to the pulp mill and making it’s own sodium chlorate in the Dow plant and delivering the finished product which is what the pulp now really wants, direct to the pulp mill.

And I don’t think however that I should spend much time talking more about the actuality because in our contention this is not what really counts.

And I really do want to point out the record is entirely clear, there were no barriers to entry by any of the pulp and paper companies.

Indeed, it’s conceded in the very Footnote to the jurisdictional statement which Mr. Zimmerman has cited here and that it has not been contested.

It was also included in the some of the Government’s findings of facts.

So no barriers to entry and this were known in the industry.

And likewise beginning at least in the early 60’s it became feasible for the pulp mills to build their own plant because they could — in their own mills, could take sodium chlorate in liquid form and deliver it into the bleaching part of their plant, and thereby avoid paying great quantities of freight, to ship it in the liquid form.

H. Francis Delone:

They were able to use it in that form and the testimony is that an economically feasible operation for them.

As long as they manufacture it right where they wanted to use it was down to something under 5,000 tons per year.

So that has been the situation which has come to develop.

But what’s really important to — in our contention on the second issue is what did the actual competitors think about potential competition?

How did potential competition influence the market behavior of the actual competitors because that’s what we’re talking about if we assume that one company would have entered and the others significance or influence is only in respect of how it went — might work on the actual operations in the marketplace.

Now, we called on this subject the responsible officials of the Hooker Chemical Company, the — one of the two original market occupants of the American Potash Company, and finally, of Pittsburgh Plate Glass which entered in 1961.

So these are the three actual competitors of the marketplace.

And Mr. (Inaudible) made it clear that so far as he was concerned the potential competition from the chemical companies was as he put it most of the chlor-alkali industry, that’s the group that’s listed in the appendix to which I have already referred.

Mr. Neubauer referred to the chlor-alkali group and Mr. Dirksen referred to the chlor-alkali manufacturers as a class.

He actually used the word as a class.

Mr. Dirksen said that so far as he was concerned, foremost in the group was Allied.

He said that Pennsalt and Olin, he regarded, as lately entrants but viewed the whole class as the potential competition so far as merchant producers were concerned.

And potential competitors such as Dow, Mr. (Inaudible), and Barn of Allied, both recognized that the potential competition — and this goes back to 1960.

The questions were put to them as of 1960’s, “Whom did you recognize as the potential competition?”

And Mr. (Inaudible) and Mr. Barn also corroborated, the chlor-alkali industry as a group, that’s that large group of well-financed companies that I’ve already mentioned.

Now, turning to Mr. Justice Fortas’s question, what was the influence on the — those in the marketplace and if you would look at the testimony of Mr. Cowey, the official of Hooker at Record 177, he makes clear that yes, the actual competitors of the marketplace took into account the possibility that anyone of this group of chlor-alkali producers might enter the market and that tended to hold the pricing down.

There was no actual price change until 1964 when there was reduction because of the threat of captive production by this pulp and paper company.

But he said that, yes, the presence of these large number of well-financed chemical companies, that I’m — is not his terms, I’m not quoting precisely, that that influence intended to keep a break on the price.

But he said equally that that would have been unaffected by whether or not Pennsalt or Olin were included in or excluded out of the group of chlor-alkali companies.

One company more or less made no difference and in fact Mr. Dirksen testified that his business decisions and reactions, this is an actual contender.

His business decisions and reactions would not have been influenced by the inclusion and exclusion of Allied Chemical in the group that he regarded as the likely potentials as —

Abe Fortas:

Suppose all of them got together?

H. Francis Delone:

Even though — excuse me sir.

Abe Fortas:

I beg your pardon.

H. Francis Delone:

Even though Mr. Dirksen regarded Allied as the foremost potential competitor.

He said, you can put it in the group or take it out.

It would make no difference to him.

Now, I didn’t understand your question sir.

Abe Fortas:

Supposed all of the companies in the chlor-alkali group got together and formed a joint enterprise, what would your position be —

H. Francis Delone:

If you —

Abe Fortas:

— on all probability with respect to the antitrust impact —

H. Francis Delone:

Well —

Abe Fortas:

— antitrust consequences?

H. Francis Delone:

It — were not for the pulp and paper companies, you would clearly then have an elimination of all potential competition and at least the potential competition —

Abe Fortas:

But what you’re really (Voice Overlap) —

H. Francis Delone:

— which I’m dealing with and —

Abe Fortas:

Well, that — put your — is that your position, somewhat diluted and I think because if I follow you then, what you’re saying is that Penn — as that Penn and Olin put together, did not constitute a sufficiently large segment of the group of potential competitors to have a necessary antitrust impact.

H. Francis Delone:

Well, not precisely sir.

Maybe I can clarify and it’s the problem were dealing with the hypothetical situation here.

We’re dealing with a question assumed that the court below was wrong and in fact in the absence of this joint venture that one would have entered, the manufacturer out in the southeast.

Then what influence would the other who by hypothesis didn’t enter but was merely pondering and indeed wouldn’t have entered according to the finding of the court below that was referred, how much difference does it make to preserve that company, that other company in the wings because we don’t quarrel with the fact that if the two companies go into the joint venture, then it means they’re eliminated as separate.

They can’t — can no longer be looked on as potential competitors but —

Abe Fortas:

Well, the only —

H. Francis Delone:

— what I’m —

Abe Fortas:

The other aspect of it from your point of view now, I should think is that when you have — when you have this — you have the facts upon which we were working, the problem upon which we were working assumes that there is another company that is in this business that wasn’t in the business before.

H. Francis Delone:

Yes.

Abe Fortas:

And that presumably is providing the competition of an actual competitor so that you have not only a process of subtraction but you also have a process of addition if there are — that a balance I suppose.

H. Francis Delone:

That’s correct.

And that’s why, as we have said, the lessening is a curious kind of a lessening.

The lessening really is, did you increase competition less than might have been — that it might have been increased under the hypothetical situation that I’ve been talking about.

And we had the testimony of Professor Cooke from Harvard Business School, an economist, who turned his attention to the same subject and the Government has ignored this as it’s ignored the actual reactions of those in the marketplace and it seems to me he pretty well summed it up.

He was asked by and — by the Court, page 434, “How important then in determining a threshold price would it be if one of these persons in the chlori — chlor-alkali group put in the papers, “We have no intention now or a forever of going into the sodium chlorate business in the southeast?”

How would that affect the threshold price and the answer was the removal of one would make no difference at all.

The general threat — generalized threat of entry would stay as strong as it was before.

Abe Fortas:

I should think that those in fact, whether it inspired essential profound disbelief in the honor of heir intention.

H. Francis Delone:

Well, he turned to a bit more of something that’s practically what the Government asserts in its brief for the benefit of the testimony when he was asked on the assumption be it — record identifies 10 potential merchant producers of sodium chlorate in the southeast.

If I were to ask you to hypothesize the decisive removal, without an announcement sir, of five of these companies as potential competitors, would the further removal of one of the remaining five potential competitors have an effect on the action of those in the market at page 436.

Answer, “I would expect those in the market to react to four outside as much as they would react to the eight outside.”

And he said parenthetically — and indeed to the extent that they reacted at all, because his testimony was quite clear that the actual competition brought on by Penn-Olin, brought on by PPG’s later entry was more significant indeed than the potential competition.

And the testimony of those in the marketplace was equally clear that from their standpoint, I refer again to the officials of the American Potash and of Hooker and PPG, that the most significant potential competition to them was that threatened by the large group of pulp and paper companies.

H. Francis Delone:

These were the ultimate consumers and if they embarked on the production of this product, it meant that the commercial producers such as Hooker, American Potash, or later Penn-Olin was permanently deprived of a portion of the market.

And responsive to the possibility of captive production, it was in 1964, that the price of this product in the southeastern market was reduced.

Now, it seems to us from this testimony which I have briefly summarized on the second trial that although we do not contend that this Court should try to sift the testimony of 19 or 20 witnesses adduced at that trial without having the benefit of the trial judges’ comments on it and findings on it.

It does seem to us that if there were to be any ruling by this Court on this record, on the ultimate issue whether competition was lessened in the sense that it wasn’t increased as much by Penn-Olin as it might have been increased if one of the Penn-Olin parents had entered and if the other had remained interested.

Even though, we don’t contend that if you look at this record no fair reading of the record could lead this Court to conclude other than that in fact there was no showing of the lessening of competition in the sense that I’ve referred to by the Government and the record indeed is just to the contrary.

The cases that have been relied on at the El Paso case, the Clorox case, the Continental Can case, are quite different situations although there was an element of potential competition in those cases.

El Paso involved a company that was actually bidding for the business in the marketplace and only one company which merged with an actual competitor.

Clorox involved the single substantial potential competitor, the Procter & Gamble Company, which the trade commissioner found and this Court agree was really the only likely entrant, and the combination between those two.

And Continental Can involved a situation where there were — was both actual and potential competition by virtue of the definition of the market between the two companies that were involved in that transaction, so none of them presents a situation such as is presented in this case.

In our contention, the District Court’s finding was correct neither Pennsalt nor Olin would, as a reasonable probability, have entered the market.

But even if that finding were not correct in our contention, there was no lessening of competition by the elimination of the other joint venture parent from the ranks of potential competitors of whom there were a great number in this case.

Thank you.

Earl Warren:

Mr. Zimmerman.

Edwin M. Zimmerman:

Mr. Chief Justice I’d like to comment on several — of the points made.

It seems to me that appellees cannot argue simultaneously that we’re dealing with the market surrounded by a host of possible entrants, namely the rest of the chlor-alkali industry, always on the edge — always exercising influence on the price in the market.

And at the same time argue that the captive producers’ threat of emergence in 1964 led to a price break.

Clearly, if you have a market of actual and potential competitors consisting of some 13 or 15 companies which is what I understand the appellees to argue, I would assume that the market price must be somewhere near a competitive level and it would not require a threat of rebellion by the consumers to lead finally to a price reduction.

I think the significant threat, if there were one, emerged in 1964 or in 1965, the other chemical companies were not regarded and did not have the effect on the market that is claimed beforehand, else we would not see the phenomenon of the price break in response to the threat of the consumer.

Now, if what we have here is the emergence, three or four years after the joint venture, of a reaction by the consumer which indeed does for the first time placed a restraint on the ability of the members of this highly concentrated market to maintain an absolutely stable price, this does not mean that the joint venture was not a violation at the time it was consummated.

The argument in effect, I believe that appellees are making, is that if you have a joint venture which maintains a tightly concentrated industry and if as a result there is an absolute stability of prices so that consumers finally search out other devices, and if four years later, the sellers respond to this new threat by lowering their prices, the joint venture is in some sense legitimatize retroactively.

This I think cannot be a theory that this Court can abide.

Now with respect to the argument that there would be an enhancement of competition, we must note that when we are speaking about the question of violation we are assuming the entry of one firm and the continued presence on the edge of the market of another.

There is no reason to think that a single Olin or a single Pennsalt could not have competed effectively and in a market as highly concentrated as this, I think it is peculiarly important to preserve the possibility of a second firm which might have threatened to enter through new technology and indeed which might have ultimately entered.

I should think that this would be a great contribution to competition.

I would also like to note that Mr. DeLone misreads the significance of note 18 in the jurisdictional statement.

What we were contending against was the Court’s finding that Pennsalt’s process was in some sense superior to Olin’s process.

We were not contending that the possession of a process for making sodium chlorate was not significant.

We were saying each of these were uniquely situated and that they had processes, and in this respect they were significantly different than the other members of this industry.

Finally, I should like to note with respect to the assertions that there was something magical about the investment rate of return that explained the reluctance of Pennsalt to go forward with its project or the reluctance of Olin to go forward with the October or November 1959 project, the argument asserted is that — but for the joint venture there could be no borrowing.

Without borrowing there could be no leverage effect.

Edwin M. Zimmerman:

Without leverage effect there could be no substantial profit.

This simply is not the case and the Court does not so claim, and the record disputes it.

If the Court found on page 834 that the Court’s estimate in Pennsalt indicated a rate of return of 26.2% without borrowing and then in Footnote 28 with 50% of the capital borrowing — borrowed the combined project gave a rate of return of 42.7%.

And if you look at supporting documents, it’s perfectly clear that the combined — that the borrowing was to be by Pennsalt alone and this is at the time when commutations were made for a Pennsalt only project.

There is nothing that would prevent Pennsalt from borrowing and getting the leverage effect.

There’s nothing that prevent Olin from borrowing, from getting the leverage effect.

And in fact the nub of the matter is that they went forward with the transaction without borrowing.

And they went forward at a time when they knew they were walking into antitrust problems and when they — would know that if borrowing were the key elements that they would think twice about the transaction.

That’s all I have.

Earl Warren:

Very well.