RESPONDENT:Penn-Olin Chemical Company
LOCATION:New York Supreme Court Appellate Division, First Department
DOCKET NO.: 503
DECIDED BY: Warren Court (1962-1965)
CITATION: 378 US 158 (1964)
ARGUED: Apr 30, 1964
DECIDED: Jun 22, 1964
Audio Transcription for Oral Argument – April 30, 1964 (Part 1) in United States v. Penn-Olin Chemical Company
Number 503, United States, Appellant, versus Penn-Olin Chemical Company, et al.
Mr. Solicitor General.
Mr. Chief Justice, may it please the Court.
This case here on appeal from the District of Delaware raises a novel and an unusually interesting question under the antitrust laws.
It’s novel also in that the facts are essentially very simple.
Two of the appellees, Pennsalt and Olin Mathieson, each a large well equipped firm, actively interested in entering an important market on its own, although not fully committed to the venture, agreed to combine forces and to enter the market jointly, thereby, foreclosing any possibility of competition between the two in that market, either immediately or sometime in the longer run in the future.
The ultimate question here is whether that combination violated, which was accomplished through a subsidiary corporation whose stock they acquired, violated either Section 7 of the Clayton Act or Section 1 of the Sherman Act.
The question — neither the question nor any question like it has been before this Court previously.
The District Court prepared a careful and independent-minded opinion, which not only establishes the facts, but which I think offers the best avenue for coming to grips with the legal issues in the case.
The Court found that in the southeastern United States, there’s an important market for sodium hydrochloride, a chemical that is used in the pulp and paper industry for the purposes of bleaching.
Sodium hydro — hydrochloride is the, agreed to be, the line of commerce in the case and the southeastern United States are agreed to be the relevant section of the country.
In 1959, there were three suppliers in that market.
Hooker was a plant in Mississippi, which sold 49% of the market, American Potash, also, was a plant in Mississippi, which sold 41% and Pennsalt, which sold just under 9%.
I should say that Pennsalt’s ability to compete in the market with its existing plants was distinctly limited by the fact that the only plant in existence was way out on the west coast, so that for all practical purposes, you had only two suppliers.
During the 1950s, the southeastern market for sodium hydrochloride became more and more attractive to new investors.
Olin Mathieson and Pennsalt, each gave long and careful consideration to building its own sodium hydrochloride plant in the southeast.
The District Court expressly found on page 1574, that’s in volume 2 of the record, that Pennsalt and Olin, right at the top of the page, “Each had had extensive background in sodium chloride,” skipping, “That a suitable location for a plant was available to each company and then, in short, that Pennsalt and Olin, each possessed the resources and general capability needed to build its own plant in the southeast and to compete with Hooker and Am-Pot, American Potash, in that market.
“The Court also discussed the deliberations of each individual management about individual entry and concluded back on page 1573, at the bottom of the text and above the footnote, the possibility of individual entry into the southeastern market had not been completely rejected by either Pennsalt or Olin before they decided upon the joint venture.
I ought to pause here to call attention to page 16 of the appellees’ brief where they quote an excerpt from the testimony of Olin’s president intended to indicate that Olin had not — had decided not to build the plant on its own even if there were no joint venture.
Now, that argument was made to the District Court and the District Court squarely rejected it when it found that the possibility of individual entry had not been completely rejected by either before they decide it upon the joint venture.
Furthermore, that finding, as a footnote to the opinion, immediately below the quotation, the opinion shows, was based upon the statement of Olin’s own president in his deposition which was introduced in evidence.
The reference unhappily is not there and we neglected to print the deposition but, of course, it’s here in the Court.
The reference as to plaintiff’s Exhibit 402, unprinted in full, pages 28 and 29 of the original exhibit and there, the president stated as quoted, “That the question had never reached the point of final decision”.
Furthermore, the testimony quoted by counsel, as they also overlook, was qualified on cross-examination and it was substantially inconsistent with testimony by one of Olin’s vice president, both in his deposition and also as given at the trial.
So that, I think that the findings so amply supportive were certainly entitled to take it as a fact in this Court that Olin, like Pennsalt, had not turned its back on the possibility of individual entry.
I now come to the crux of the matter, both in the opinion and in our analysis of the case.
On page 1575, after finding at the start of the first full paragraph, that Olin and Pennsalt, each had the capability of building a plant and competing individually.
The District Court ruled “that those facts were important,”skipping a few lines, “only — only as a factor in determining whether, as a matter of probability, both companies would have entered the market as individual competitors if Penn and Olin had not been formed.
Only in this event”, the Court said “would potential competition between the two companies have been foreclosed by the joint venture.
” He then went on to say that there was no evidence to support a finding that there was a probability that both companies would’ve simultaneously entered the bargain and he held that if we fail to prove that, we were entitled to judgment only if we showed that Penn-Olin, the subsidiary combination, would be a less effective competitor than Olin alone or Pennsalt alone.
Well, of course, we made no such claim, could make no such claim and the District Court, thereupon, entered judgment for the defendants and the complaint was dismissed.
Now, our first contention in this Court is that the District Court erred in holding that the United States, in order to prove a violation of Section 7, was required to demonstrate a probability that both Olin and Pennsalt would’ve shortly built hydrochloride markets — hydrochloride plants in the absence of Penn-Olin.
Our view is that if one company would’ve entered the market and the other would’ve remained in the wings as a potential competitor available to enter, if the commercial opportunities became sufficiently attractive, then the foreclosure of that future potential competition by the combination rendered it one which may substantially lessen competition within the meaning of Section 7.
The defect in the reasoning of the District Court, it seems to us, is that it took much too short-range of view of the matter and it, therefore, completely overlooked the benefit to the market of having one firm in it and an additional strong firm fully capable of entering the market, sitting on the sidelines, able to become a supplier if the price situation should warrant, if demand should outrun supply or if there were opportunities for technical innovation or other reasons to go in.
There’s no reason to suppose, of course, that Penn-Olin would be any weaker than either of the individual firms and indeed, there’s no reason to suppose that it was stronger than either of the individual firms.
If one looked only at the immediate future and supposed that there would be only one entering, then it wouldn’t matter at all whether it was Penn-Olin that went in, Olin went in or the third one went in, but the difference is that you can’t take so short-range of view.
The Clayton Act, like businessmen, is concerned with projecting ahead, 5, 10, 15 years of prophylactic measure and the difference between — if Olin went in alone, you would’ve still had Pennsalt there.
If Pennsalt went in alone, you would’ve still had Olin there, but when you have Penn-Olin go in, you have neither available as a prospective future entry.
And the existence, as I need hardly argue, of a prospective future entry, especially where there is a concentration of economic power as there was in this market, only two present firms, it’s only new — one new and apparently going in, is extremely important because it fixes a limit, not as good as existing competitors but nevertheless, some limit upon the market power, the monopoly or oligopolistic power of those who are present.
I’m — I’m not — you mean, what was the state of that market?
There were two firms in the market before the joint venture was embarked upon.
One firm had 49% and the other firm had 41%.
Pennsalt was able to ship a little from the west coast but I can’t claim on the findings that that shipment was particularly important.
So, there were only two at the time of the joint venture.
The joint venture went in.
Later, Pittsburgh Plate Glass went in but it had not announced at the time of the joint venture.
And indeed, it’s going in, we think, confirms our view that there were still further opportunities which one of these companies might have taken up.
The antitrust laws have long recognized that potential competition helps to set a limit upon the market power of the producers already in the field.
That potential entrants are rarely, perhaps, never as good as actual competitors there, still isn’t a reason for not preserving the protection to the consumer on the public of the prospective entry.
Arthur J. Goldberg:
Well, I think there — I think we ultimately come to that, Mr. Justice.
My argument, in a sense, has two aspects and maybe I should’ve taken the time to lay them out at the start.
The first branch of it is that the District Court erred in saying that we could recover only if we prove that both would then and there have gone in.
When I say would, I mean a probability that both would then and there have gone in.
Now, we say at the very minimum that that was wrong.
That if we show the probability that one would go in while the other remained a potential competitor, then, at least, we were entitled to judgment and it’s really to that point that I’m addressing myself at the moment that we’re entitled to the chance to show that, then we do go on.
We wouldn’t be content with that, but I wanted to make that point first.
After discussing that a little farther, then I shall go on and argue, as we’ve argued in our brief, that we were entitled to judgment on the findings of the District Court plus a few other specific facts and that what we say, I’ll elaborate it later, but what we say essentially is that given the conditions that existed in this case, and I shall generalize them because we would say given the same conditions in any case, then the probabilities that either would go in or both would go in are high enough so that the public is better protected relying on the free interplay of the market than it is by allowing these two people to interfere with the operation of the basic forces that are the foundation of our theory of a free enterprise economy.
Now, I’ve — I hope I’ve said enough to carry us ahead.
I shall, of course, have to discuss the problem of probabilities in much more detail as I go along, but at the moment as I say, I’d say that at worst, we were at least entitled to show that here, there was a probability that one would’ve gone in because while that would’ve been the same situation as if Olin — as if Penn-Olin went in, you still would have the additional advantage of the additional competitor — the additional potential competitor.
You — you were allowed to show that, weren’t you?
You were allowed —
Well, the judge refused —
— you weren’t (Voice Overlap) proof.
— I perhaps shouldn’t have said allowed to show.
There was no finding upon the point.
Now, you said the best postulate that’s —
Well, I don’t — I doubt that we’re entitled to claim that that was a finding in our favor.
If it was, then I think I’m home, but I take it that what he really was doing was making an assumption and saying that this is the —
Most of it could possibly be argued.
I think that’s all I could — can fairly claim with that.
Perhaps, he would’ve found it.
This was an unusual opinion in one respect because instead of deciding who was going to win and then finding all the facts against the other party, the judge seems really to have faced the fact and tried to apply the law to them.
It makes the case a lot easier to discuss even if he was wrong.
Byron R. White:
Understanding the findings of the District Court, I suppose it’s important to know what the theory of the Government was in the District Court.
Did the Government urge this theory, the theory urged in here?
Well, I haven’t read the briefs.
It certainly urged it in essence, I think.
Byron R. White:
I thought the Government’s position in the trial court was what competition was furnished by the — by the joint venture is wholly irrelevant.
It shouldn’t even be considered by the District Court.
Well, you mean by — by the —
Byron R. White:
I mean — I mean that (Voice Overlap) —
— any interference with —
Byron R. White:
— it was irrelevant to compare that — the competition between the joint venture and what would’ve been true without it, that just the mere making of a joint venture was the — was the point.
If it went that far, we certainly don’t press the position now that any joint venture is a violation of Section 7 or Section 1.
Byron R. White:
(Inaudible) to do with whether or not the Government even attempted to prove what the situation would be absent the joint venture.
Well, it — it put in a great deal of evidence on that point because the record is filled with evidence bearing upon the probability, we said, that these companies would either or both have gone into this market.
But your case in the District Court is very close, asking for a per se rule that the two competitors can’t go into a joint venture into a new market.
Well, there’s certainly some things —
Isn’t that right?
— that suggested that but we wouldn’t say, for example, that two weak companies here, each unqualified to go in and compete alone in this market and demonstrably so, would be a violation of Section 7 and Section 1.
We think there must be some further examination than that.
Jumping — jumping ahead a little bit once more, we suggest that where four — barely, three, I suppose, though I list them as four conditions are met, then at least, I don’t — I say this is a minimum standard, not the full requirement, then at least, Section 7 and Section 1 forbid the combination.
I would say first, an expanding attractive market in which there are few competitors.
Second, that each company will be engaged in that line of commerce or a closely related line and that it’d be fully equipped in terms of financial resources, technological qualifications, commercial context and experience to go into it.
Third, that if each has demonstrated some sign of interest in going into it, then the probabilities on the average that either both will go in or that one will go in while the other remains on the sideline, are sufficiently great under the ordinary operation of market forces that these laws that are intended to prevent people from interfering with the operation of market forces come into play and it should be found that the combination may substantially lessen competition.
That’s the full range of our argument.
As I say, I was back on the smaller point that they — they really both go along together.
Let me direct myself for a little bit longer to the matter of the importance, all other things being equal, of insisting upon the arrangement where there is one potential entrant, Olin or Pennsalt, still on the sidelines, if the other goes in as Penn-Olin did.
A few examples, I think, make it quite clear that the elimination of such potential competition is an improper lessening of competition.
But suppose that in this case, for example, that Olin had gone to Pennsalt and said, “Well, you’re thinking of building in the southeast.
We’re thinking of building in the southeast.
We should both go in,” that would be murder.
“You go in and build your plant.
“Olin goes to Pennsalt, “Build your plant at Calvert City and we’ll agree to stay out for 50 years and let’s have an end to the matter or if you’d like it the other way, we’ll build our plant at Chattanooga and you’ll agree to stay out for 50 years and that’s the end of the matter.
“I take it that such an arrangement, if entered into, perfectly, plainly would be one which may lessen competition and which would violate the Sherman Act.
And I take that nobody would say, “Well, you’ve got to show what are the chances that both would go in next year or the year after.
“That that wouldn’t even be a legitimate subject of inquiry nor that you’d appraise the relative merits of the two competing.
Well, here, the arrangement has exactly that same effect on potential future competition.
It eliminates the additional possible entry, not this year, but 5 years ahead, 10 years ahead, whenever it may come about or take a second case.
Suppose we — we hear a good deal of talk down about the possibility of a turbine motor in an automobile.
Let’s suppose that putting such a car on the market for widespread use would involve the construction of a new plant in a radical redesigning of the chassis and body, can there be any question but that if Ford and General Motors combine to set up a subsidiary to enter that market, that it would be a violation of Section 7 and also Section 1?
I think not.
Well, now, you may say that’s not entering a geographical market but suppose that — to take one last illustration, suppose that Atlantic Swimming Pool Company had a new prefabricated swimming pool that it started marketing in the east and was gradually spreading to the west but hadn’t yet entered the Mississippi Valley, and that Pacific Swimming Pool Company, an independent concern with its own prefabricated swimming pool, is doing the same thing for the west coast.
I take it’s perfectly plain that they couldn’t divide the Pacific Valley or that one couldn’t agree to go in while the other stayed out or that they couldn’t set up a joint subsidiary to go into that geographical matter as long as each was, at least one each, was equipped to do it by itself and had an interest in doing it by itself.
Arthur J. Goldberg:
Well, of course, they don’t — they don’t meet some of the conditions I stated and therefore, I — that would be a harder case and I take it if neither is presently in the line of commerce or that the likelihood that they would go in independently may not, I hesitate to commend myself too categorically but may not be sufficient.
I would think it quite plain if two much smaller steel companies, Mr. Justice, got together for the purpose of entering the market and leaving out, I now see good reason for the caution, leaving out problems of vertical integration preempting possible outlets for steel and such that I don’t think anything I’m now saying would be opposed to that.
No, I think there has to be — we — we say there must be some distinctions here.
We do say that the distinctions should be based on objective events.
And my argument with respect to these narrow first objective conditions, I should say, rather than events, my argument on this first narrow point, let me conclude it and then go on, is that this case is essentially the same as the hypothetical illustrations that I have put.
Well, your hypothetical illustrations all implied a monopolistic situation and as Mr. — Mr. Justice Goldberg’s question revealed, we don’t have that in this case as the (Voice Overlap) —
Oh, it seems to me, we — we don’t — it seems to me that we have, except for my geographical one, at least as narrow as if an — if not a narrower market.
You mean, if — if (Voice Overlap) —
You can only have two companies in the southeast.
You have in there.
You have competition.
Well, just two —
And now, additional —
— I’d call that a duopoly.
I wouldn’t call that adequate company.
And now, additional competition but if — if General Motors and Ford have to go in together to build a turbine motor, then you — that — that implies a monopoly.
If I would say the same thing —
On a different kind of a case on (Voice Overlap) —
— and expect the Court to say the same thing, if there were two — if there were two turbine motor manufacturers in the motor, I wouldn’t —
(Voice Overlap) —
— think would it — I wouldn’t think it would affect it yet.
Byron R. White:
But the trouble is that the line of commerce met, for example, is an automobile, I suppose and he —
Well, I don’t know whether that doesn’t make the example less objectionable than this because —
Byron R. White:
But I wouldn’t think so.
— there at least, there would be the —
Byron R. White:
I wouldn’t think so because they’ve been in competition before this in the — in — in automobiles.
In this case, neither Olin nor Pennsalt have been in competition.
Well, they would still, if the line of commerce is automobiles, they would still be in competition with auto — in automobiles.
Byron R. White:
I would —
And if that is objectionable —
Byron R. White:
— I would agree with you, that would be bad but here, neither party has been — neither party has been engaged in competition with each other and only one of them has ever been in the line of commerce that — that you admit is the line of commerce.
But Olin has been found fully equipped and —
Byron R. White:
Yes, but it’s never been engaged in this line of commerce.
It has never sold sodium chlorate.
Byron R. White:
The trial court so-found.
But it had been selling many related lines.
It had had vast experience.
Indeed, it had developed a process for the use of this sodium chlorate.
Its chemical division reported to management that sale of sodium chlorate is an essential integral part of this company’s business.
Byron R. White:
It’s so well equipped that when they made the joint venture, they left the other company to run it.
They had to — they’ve decided that they should divide it some way.
Indeed, one of the — one of the misfortunes here is that Olin had been carrying on experimental work on a new type of electrolytic cell which it was expected would reduce the cost of manufacture below anything now known and as soon as the merger came about, they issued instructions to drop that further experiment and development.
I think that while it’s true, they weren’t, either to a large extent, selling sodium chlorate in the southeast, they both were found on overwhelming testimony to be well equipped to do it and it was plainly a natural development of their existing business.
I don’t think you could just take the line of commerce and then say, “We’re going to shut our eyes to everything else that surrounds that line of commerce or to everything else that company is doing.
“It seems to me that this is — be very different from a steel company coming in and doing what Olin did here.
Let me go on to the point I’ve already mentioned that we think we’re entitled to judgment on these facts and try and explain the reasoning in a little more detail.
Hugo L. Black:
Do you mean on the facts or on the findings?
On the findings, on the findings.
We take plus one or two facts which aren’t and can’t be controverted but essentially, Mr. Justice, on the findings.
As I suggested, we think that where there is or where there are two firms available to enter an expanding market in which there are few sellers and attractive opportunities and where those firms are both fully equipped to enter the market interested in doing so as an extension of an existing line of business, that then, any combination between them violates Section 7 and Section 1 because it forecloses too good a prospect that both might enter, then or in the very near future or that one might enter while the other remained a potential or — while the other remained a potential and perhaps, later, an actual entrant into the field.
Now, the way that I reasoned it out is — is this.
Given such a situation, as has been suggested by several members of the Court, there are several possibilities.
You could add variations but it seems to me that there are four main possibilities.
One is that both companies will enter the market in the near future.
The second is that one will enter while the other remains a potential entrant if conditions ever warrant.
The third is that the two may combine to enter and the fourth is that nobody may enter at all.
Now, obviously, the desirability of those possibilities ranked in the order in which I’ve stated it.
From the standpoint of a competitive economy, the best would be the first.
It would be a good deal, better than the second.
The second, as I have been arguing, would be a great deal better than the third and the third is better than the fourth.
Indeed, the fourth is best only if none of the others will come about.
The second is better than the third because there would be one waiting in the wings, so that —
There would be one waiting in the wings and in this case, and I mean to emphasize and carry through everything I say in the qualifications, in this case, either was fully equipped to go in alone.
You get an entirely different problem if one or both of the two that combined isn’t equipped to do it alone but that’s not the fact here.
Now, of course —
You — but you — I suppose you’d have a different problem or there’s a matter of degree as to how many others were waiting in the wings potentially.
The — yes, the record doesn’t show much about that.
Of course, that bears on all these probabilities because if there are others waiting in the wings, there’s even less to be said for the joint venture because you’re not going to be left with this duopoly.
I mean, it bears on that one as well as on the other.
The record doesn’t show much about this.
So far as I can judge, those actually in the wings at the time that this was being considered were these two, plus Pittsburgh Plate Glass, which is usually identified in the record by its subsidiary as Columbia Southern but they are the two — one and the same, as I understand.
And which now has gone in?
Which now has built the plant and then, there was Virginia Chemical or Virginia something Company that I find talked about in some of the documents.
There must have been other companies that could.
We argued in the District Court that there were rumors that there were a number of others but we never were able to prove it, so that I don’t purport to be stating anything precise but just as to suggest the general outline of the picture.
Now, of course, we can’t always have our (Inaudible) and nobody can control which of these four possibilities will be the one that eventuate.
I suppose that ideally then, what one would have to do would be to estimate in every case the statistical degree of probability, then apply that statistical degree of probability to whatever value we put on the — each of the various possibilities and strike a balance as to which was the wisest course to follow.
As a matter of fact in this everyday world, however, we have to get along with the tools we have.
There’s no way that you can measure with statistical accuracy the degree of probability in each case and there’s no way that you can put a mathematical value on each of the potentialities in order to apply the mathematical probability to it.
Certainly, testimony after the event is not in general, likely to be very helpful.
For one thing, it would obviously be self-serving.
There will have been a combination and with the best of goodwill, the corporate officials will be testifying in defense of what they’ve already done in that.
It would also be highly speculative because the decision that the corporate officer normally faces isn’t whether he will go in alone or stay out alone.
He also has, overhanging all the consideration, the possibility of the combined ventures.
This is very clearly shown by the fact that Pennsalt kept saying, “Well, it seems unlikely that we’ll go in alone but it’ll be awfully good if we could get Olin to go along with us.
“And then nothing would come into going along together and they’d talk about going back and going it alone.
The District Judge took note of this and said that in fact, the officer doesn’t face the question, which we’re trying to estimate probabilities on here, because he considers all three and he always will in the case, where one is challenging a combination.
So it seems to us that under these circumstances, that’s what is needed is some statement of the objective market conditions under which the probabilities that both will go in or either will go in while one remains on the sidelines, are good enough to say that the combination may substantially lessen competition.
And it’s that that brings me to saying at least as a minimum rule, that where you have the conditions that I have stated, then at least, Section 7 and, I think, Section 1 is violated.
And those conditions, you will recall, are first, a new or expanding market with attractive commercial opportunity.
Second, that there’d be — that the two firms that ultimately combine will be engaged in that line of business or — and be well equipped financially, technologically, in terms of commercial experience and so forth to enter the market.
Third, that they have expressed some interest in the market.
And fourth, of course, one needs a combination in order to have anything to complain about even though that doesn’t bear on the degree of probability.
Now, I don’t mean to suggest that all those conditions are indispensable.
It may be that the Government would advocate a stricter rule but we do — they’re satisfied here quite plainly and we do say that at least when they exist, either in this industry or in any other, that then there — the combination destroys such a, I don’t care what they call it, a probability, a likelihood, a possibility but a good enough prospect that you will have competition between the two firms or competition with one — between — with one in the market and the other a potential competitor to warrant finding that they may substantially lessen competition.
I would like to emphasize that the policy of the law after all is against the combination of firms able to stand on their own feet and to compete with rivals including each other, Section 7 being prophylactic looks ahead.
It deals not with the immediate present but with the structure of the market, so with the review — with respect to what may happen in the future.
And I can’t help noting in this sequence of Section 7 cases that we’ve been having that this is the way that companies look at it.
And it seems to me that the law, in order to deal with realities, must also be careful to project itself and not think — simply to think today or tomorrow and it would seem that where those four conditions are met, then there is a sufficiently high degree of probability that nobody cannot say just what it is, that the market wouldn’t get nothing and that, therefore, the combination may substantially lessen competition.
Now, here, the conditions were met.
The southeastern market for sodium hydrochloride was exceedingly attractive for new investment.
Between 1950 and 1960, the national consumption of sodium chloride had quadrupled.
Used primarily in the paper industry?
It’s used primarily in the paper industry as a bleaching agent.
It has some agricultural uses.
Pennsalt’s Sales Department or Commercial Development Department had been experimenting with the notion of using it in the — for textile bleaching and it’s rather interesting.
You’ll find in our brief that we’ve quoted some excerpts from the sales manager saying, “Well, let’s not go too fast on this until we find who’s going to do the selling here.
If Olin is going to do the selling, there’s no use our — docking ourselves out trying to develop it.”
Hugo L. Black:
When did the agent thought it — is it a — when — when did it enter the market?
I couldn’t tell you, Mr. Justice.
When it first entered the market, it has become important during the 1950s and the projections are for a constantly growing market.
In fact, the projections for the demand in 1964 as projected in the late 1950s were 9000 tons in advance of what the — in excess of what the capacity now is.
We’ll recess now.