Brief for Respondent — Hughes Tool Co. v. Trans World Airlines, Inc.
Supreme Court brief1965
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Text
Othce-Supreme Court, U.S.
‘ FILED |
|e FEB 18 1965 .
IN THE JOMN & DAVIS, CLERK
Supreme Court of the nite
OCTOBER TERM, 1964
No. 443
"HUGHES TOOL COMPANY
and ;
RAYMOND M. HOLLIDAY,
_ Petitioners,
. , agomet
TRANS WORLD AIRLINES} NC.,
Respondent.
=
ON WRIT OF CERTIORARI TQ THE UNITED STATES COURT
| OF APPEALS FOR THE SECOND CIRCUIT
BRIEF FOR RESPONDENT
a
——
' Joux F. Sonyett,
80 Pine Street,
New York, New York 10005,
Atto¥ney for Respondent,
Trans World Airlines, Inc.
Of Counsel:
_ Duprey B. Texney,
Raymonp L. Fats, Jr., e
MarsHaty H. Cox, Jr.,
ABRAHAM P. OrDovER,
Cant, Gorpox, Rersper & Ont,
80 Pine Street,
New York, New York 10005.
February 18, 1965. — 7 ae.
' INDEX
QuESTIONS PRESENTED 1
CounTER-STATEMEST OF Re icipiimntinan *&
The Trade and Commerce Involved _ : 7
-Toolco’s Acqtisition of Control of TWA ssinnpansens 8
Defendants’ Unlawful Conspiraey—
*The Beginning to December. 1960 15
The Evidentiary Record 18
Civil Aeronautics Board Action 1944-1960 Pn ~ 30
The Creation of the Voting Trust .... an ae
The Conduct of the nae since 1960 .. 36
we:
53
58
60
The History of This’ Litigation *
The Northeast -Control Case
Recent Developments °.......
The Rulings Below
+ SUMMaRY OF unas \raarvinnivenanngann <apeguesntainshanstannnnnnnnaninn 62
a» os
ARGUMENT ,
I—The Civil Aeronautics Board ion not have
. exclusive primary jurisdiction of the conduct
* alleged in the Complaint menenennndigion 74
The Statutory Provisions = = 16
The Legislative History ..... | 32
This Cotirt’s Prior Rulings 00 D
No Preliminary Reference to the Board
Was Appropriate, and Even If It Were,
the Default Order Would Be Proper .......... 101 »
ad .
iene oe Geese
ii
ane ae PAGE
Il.—The’ Board has not by any of its orders .
exempted from the antitrust laws the conduct
alleged in.the Complaint | . 105.
The Original Control Orders Dia Not
Exempt Petitioner’s Unlawful Conduct.
from Antitrust Prosecution ~ 105
The Board’s Orders Since 1950 Have Not
Exempted From the Antitrust Laws the
Conduct Alleged in the Complaint .............. ‘112
No Preliminary Reference to the Board. is
Appropriate . 119.
IlIl.—The Complaint clearly states claiins upon
which the plaintiff can be granted relief, and
accordingly the District Cgnrt had — |
tion te enter the default order . 123
The Complaint. Alleges Claims Under See-
tion 1 of the Sherman Act ..... | 126
(a) The Complaint Sufficiently Alleges
Unlawful Joint Action Le 126
(b) The Complaint Alleges an Unlawful
Conspiracy to Appropriate a Cap- .
tive Market © . 129
(ce) The Complaint Alleges an Unlawful
Conspiracy to Boycott . 132
“/( d) The Complaint Alleges an Unlewfet
Tying Arrangement . 136
The .Complaint Alleges ul .Exclu- |
sive Dealing in Violation of Section 3 of .
the Clayton Act 137.
The Complaint Alleges a Violation of Sev-
-tion 2 of the Sherman ACO o...rsssersnesernseseeens ru 138
, an : ” PAGE
The Third CGiaim pe a Claim Under
the Common Law Sufficient to Give the
District Court Jurisdiction ~....:... * 441
Corcrvsiox : . 143
‘Annex A—History of CAB Orders la
Axxex B—Letter from Counsel for Bureat of Eco- °
nomic Regulation to Counsel for TWA .................... 1b
ANNEX C—Excerpts from Brief of Bureau of Eeo-
nomic Regulation dated May 23, 1962, Filed with
the Civil Aeronautics Board in CAB Docket Ne,
11620 : le
7 _ CITATIONS a
Cases: /
American ype v. United Btates, 328 YJ. §S.
781 (1946) — 139
America Transport v. River Plate € Brazil
Conferencés, 126 F. Supp. 91 (S.D.N.Y. 1954), aff'd
on opinion below, 222 F. 2d 369 (2d Cir. 1955) .. 121,
Apgar Travel Agency v. International. Air Trans- .
port Association, 107 F. Supp. 706 (S.D:N.Y. 1952) 121
Associated Press ¥. Taft-Ingalls Corp., CCH 1965 .
_ ‘Trade Cas. ‘71, 348. (6th Cir., Jan. 18, 1965)>......... 137n
Bales v. Kansas City Star Co., 336 F. 2d 439 (8th -
Cir, 1964) . (1385n
Bell v. Hood, 327 U. S. 678 (1946) 3
Carter L. Burgess and Amerié¢an Airlined” Inc., CAB -
Docket 11052, Order No. E-14827 (1960) ............ .-.. 109n
Carter L. Burgess and Trans World Airlines, Inc.,
CAB Docket 8674, Order No. E-11375 (1957) ...... 109n
California v. Federal Power Commiaston, 369 U. S.
482 (1962) , 65, 93, 93n, 95
Campbell v. Gates, 236 N. Y. 457 (1993) Smnbeeineinitnat 142
Civil Acronautics Board vy. Delia Air Lines, Inc.,
367. U. S. 316 (1961) .. OS
ad
‘iv .
PAGE -
Collins v. New York Central System, 327 F. 2d 880
(D.C. Cir. 1963) | 3
Continental Ore Co. v. Union Carbide & Carbon.
Corp., 370 U. S. 690 (1962) ..... iakeodianapentinagaainal 111, 124
Far East Conference v. United States, 342 U. S: 570
: (1952) , %. 97
. Fashion Originators’ Guild re Trade Com-
mission, 312°U. S. 457 (1941) seal cacsiodiceanaaeiitindlahaliedin -133
Georgia v. Penns ylvania R.R., 324 U. ve 439 (1945).. 93, 95
Hamilton Watch Co. v. Benrus Watch Co., 114
‘FF, Supp. 307 (D. Conn.), aff'd, 206 F. 2d 738 (2d
GRR EIR: sncesseninsnenisaicanianesbinuticualastien totals 141n
Hammond : Packing Co. v. Arkansas, 212 U. S. 322
CRIT \sctissishitaiainltpeniennsiaiecsiniipanigpuaiionieda |
Hazel Bishop, Inc. v. Perfemme, Inc., 314 F. 2d 399
(2d Cir. 1963) ......, 143
grr ewitt- -Robins, Inc. v. Eastern Freight- War ys, Inc.,.
371 U.S. 84 (1962) 97, 102, 103,
“ ‘104, 104n
Hornstein v. Podwitz, 254 N. ¥. 443 (1930) 200... 142
_ Hurn v. Oursler, 289 U. S. 238 (1983) ....--.oeseccooeeeceonee- 143
-Internat*onal Bagxing -— v. United States, 358 U.S.
. 2 (: 89) ... vicnihideleilcanpiinlciibapeieantcistanbaniaanti .. 199
-Keeble vy, Hickeringill, 11- East 574n. (KB. 1706) + me
Keogh v. “Chicago & N. W. Ry., 260 U. S. 156: (1922) 66,
97, 98
Kiefer-Stewart ¥. Joseph E. ‘Beagrie & Sons, Inc., ;
340 U. S. 211 (1951) 127
Klor’s, Inc. v. Broadway- aang Stores, 359 U. § 207
(1959)... 7 oe
Lake Central Airlines, Inc. and E “k McC. ‘Blair, |
CAB Docket 10149, Order No. E-L3897 (1959) ...... 109n »
Barry T. Leithead and Trans World Airlines, Inc., .
CAB Docket 12070, Order No. E-16310 (1961) seni .. 108n
‘wale
. se ; m
‘Malcolm A. Maclntyre and Eastern Air Lines. Inc.,
_ Mandeville Island-Farms v. American vihew * Sugar
PAGE
CAB Docket’11102, Order No. E-14943 (1960) ...... 109n °
Co., 334 U. S. 219 (1948) 5 -135n
Missaibinetic Universalist Convention v. Hildreth &
Rogers Co., 183 F. 2d 497 (1st Cir. 1950) debinnsiuiuni,
National:-Supply Co, v. rem, 57 F. Supp. 4 (W.D.
Pa. 1944) ey
Nelson Radio & ial Co. v.’ Mot rola, Inc., 200 F.
2d grt (dth Cir. estas cert. dened, 345 U. S. 925 ;
(1953 126n, 128 ©
Northern Pacific Railw ay v. 0 nited States, 356 U. 8.
1 (1958) scoiceateiequaldlinnatoncamnasiiisieabippandinas . 1386
Osborn v. Sinclair Bitaing Co., 286 F. 2d 939 (4th
Cir. 1960), rehearing denied, 286 F. 2d 840 (1961), ©
cert. denied, 366 U. S,,963 bia ..132, 136
Pacific Northern Airlines, Inc., Paul Porzelt and
Rudolph Deetjen, CAB Docket 9020, Order No.. -
K-12009 (1957) ...: 109n
- Pan American World Airways, Inc. v. United States,
371 U. Sd 296 —. :' eee , 6G, 67, 80, 94, 95,
r * , ° 98,101,102,103
Pennsi yluqnia Sugar Refining Co. v. American Sugar
Refining Co., 166 Fed. 254 (2d Cir. 1908) -............. 135n
Poller v, Columbia Broadcasting System, 368 U. S.
464 (1962) .«.............. Hicacaialisieseahecoabncinenihsiaetacesentanicaadait 123, 126
~ Putnam vy. Air Franspert Association of - America, :
- 112 F. Supp. 885 (S.D.N. A TOE. siintisictuclabneaitulaibnnanies 120
Radiant Burners, Inc. v. Peoples Gas Inght & Coke . ~
(o., 364'U. S. 656 IED Rikatnapanniens . . 133
Radowth x. National: Football Le ague, 352 U.S. 445 P
“(194T) coseeecle SES Re eR NO, 123, 125n
Richfield Oil Corp. v. United States, 99 F. Supp: 280
(S.D. Cal. 1951), aff'd per curiam, 343 U. "8. 922 ;
ERE ERaPERT NO, ARDS WN en A a 132, 136
Ring v: Spina, 148 F. 2d 647 (2d Cir. 1945) —........ ae a
PAGE
River Plate & Brazil Conference v. Pressed Steel Car
Co., 227. F. 2d 60 (2d Cir. 1955) 120
Rumbaugh v. Winifrede Railroad on ae 331 F.
2d 530 (4th Cir.), cert. denied, 379 U. S. 929 (1964) (143
Silver v. New York Stock Exchange, 373 U. S. 341
(1963) : 69, 93, 110
Simpson v. Union Oy Co., 377 U.S. 13. (1964) -......... 72, 135
Snow Crest Beverages Inc. v. Recipe Foods, Inc., 147
F. Supp. 907 (D. Mass. 1956) - 127
S. 8. W., Inc.'v. Air Transport. Association, 191 F. 2d
658 (D.C. Cir. 1951), cert. denied, 343 U. S. 955
(1952) : 121, 122 |
Standard Oil Co. of California v. United States, 337
U. S. 293 (1949) .... : 73, 132, 136
‘Sunkist Growers v. Winkiler & Smith Citrus Proa-
_ ucts Co., 370 U. S. 19 (1962) ... 127
Taussig v. Wellington Fund, Inc., 313 F. 2d°472 (3rd
Cir.), cert. denied,*374 U. S. 806 (1963) -....2......... 143
Texas & Pacific Ry. v. Abilene Cotton Oil Co., 204
U. S. 426 (4907) --------66, 97, 98
Timken. Roller Bearing Co. v. United States, 341
U.S. 593 (1951) "197
. Loolco-Northeast Control Casé, CAB Order ‘No.
E-18470, CCH C.A.B. Cases (1960-1964), 21,292
. (1962), ‘aff'd sub nom., Natwonal Airlines, Inc. v. -
Civil Aeronautics Board, sal F. 2d 880 ¢D.C. Cir.
1963) 53, 54n, 57,
. a 59, 105, 116
Trnisitiantie Route Renewal. ‘Case, CAB - Docket
No. taal Recommended packaian of Examiner
(1964) . 7 :_.35, 36n
Transcontinental & Western Air, Inc., Control by
Hughes Tool Company, 6 C.A.B. 153 (1944) -.......... 9, 3in,
- 8ln, 119n —
Transcontinental & Western: Air, Inc., Further Con .
trol by Hughes Tool Co., 9 C. A.B. 381 (1948) ........ ae
- Trans World Airlines, due. v. Civil’ Aeronautics
Board, 339 F. 2d 56.(2d Cir. 1964) ...:........ :..60, 81
4
. ; PAGE
Trans -World -Airlines, Inc.,* Further’ Control by
Hughes Tool Company, 12 C.A.B. 192 (1950)..13, 107, 118
United Air Lines, Inc. and William A. Patterson, K
- * CAB Docket 7796, Order No. B-10644 (1956) -....... 108n
United Air Lines, Inc. and William A. Patterson,
CAB Docket 7796, Order No. E-10732 (1956) ........ 109n
United Airlines Transport. Corp. and Western Air
‘Express Corp., Interchange of Equipment, 1
‘C.A.A. 723 (1940) ...... ah Tae ewer 100n
United. States.v. Borden Co., 308 U. S. 188 ged ..94, 95
United States v. Columbia Steel Co., 334 U. 3. 495
_ (1948) : 129
United States v: Consolidated Laundries Corp., 291 |
F. 2d 563, (2d Cir. 1961) 140
United States v. E. I. duPont deNemours & Co.,.351
~ U.S. 377 (1956) .... 139
United States v. E. I. duPont deNemours é Co., 353 .
U. S. 586 (1957) 131
- United States v. Griffith, 334 U. S. 100 (1988) ciated > 139°
United States v. Klearflax Linen Looms, 63 F. Supp.
32 (D. Minn. 1945) 139
United States v. Loew’s, Inc., 371 U. S. 38 (1962) .... 136
United States v. New York Great: Atlantic & -
Pacific Tea Co., 173 F. 2d 79. (7th Cir. 1949) .......... 133
United States..v. Philadelphia National Bank, 374 .
.U. S. 321 (19638) . 65, 93
United States v. Procter & Gamble Co., 356 U. 8. 677
(1958) «......: Ln, 52n
United States v. Pullman Co., 50 F. Supp. 123 (E.D. |
Pa. 1943) 99 .
United States v. Railway Express Agency, ‘Tue., 89 F.,
’ Supp. 981 (D. Del. 1950) 120
United States v. Radio Corporation of America, 358
U.S. 334 (1959) a 65, 94, 94n, 95,
101n, 114n, 115n
United States v. United Mine Workers of America,
330 U. S. 258 (1947) . 3
PAGE
United States v. Yellow Cab Co., 332 U. S. 218
DI «auch sede Naan gihkahasiagianiansecions 72, 127, 127n, 129,
130, 134, 139°
United States Navigation Co. v. Cunard S. S. a
284 U. S. 474° aie siceeiashbabitesamabsichianiidainnenindltiaiiinn 97:
Statutes and Rules 2
Air Mail Act of 1934
§7, 48 Stat. 936 (1934) .... 83
Civil Aeronautics Act of 1938 ie
§1107(£), 52 Stat. 1028 (1938) ———
§1107(g), 52 Stat. 1028 (1938)' cue. 100n
Clayton Act
§3, 38 Stat. 731 (1914), Ib USC. sd (1958) .. 72, i32, °
137, 141n
"7, 38 Stat, 731 (1914), as amended, 15 U.S.C.
eRe er nO 72, 73, 93y. 131, 140, 141n
§1l(a), 38 Stat. 734 (1914), as amended, 15 |
U.S.C. §21(a) (1958) .. 100n
Federal Aviation. Act of 1958 | i |
§102. 72 Stat. 740, 49 U.S.C. $1302 (1958) ............ 62, 76
$407(c), 72 Stat. 766, 49 U.S.C.- $1377(ce)
A SESER tae nome .76n, 80
$408, 72 Stat. 767, as amended, 49 U.S.C. §1378
(Supp. V, 1964) snieitiaeibiniiiadatisasinijenabansainanaai passim
§408(a), 72 Stat. 767, 49 U.S.C. §1378(a) (1958) 68
§408(a) (2), 72 Stat. 767, 49 U.S.C. §1378(a) (2)
ae
§408(a)(5), 72 Stat. 167, 49 U.S.C. §1378 (a) (5)
TTI“ satesdcseubeacspicibiaba A ctpeinidlnaiabictteneinieinapcialithaeticaniiiecitinnannind 9, 109:
_ §$408(b), 72 Stat. 767, as amended, 49 U.S.C. |
$1: 378(b) (Supp. V, 1964) 20020... 59, 60, 63, 78, 100n
§408(d), 72 Stat..767, 49 U.S.C. §1378(d) (1958)....63, 78 °
.§408(e), 72 Stat. 767, 49 U.S.C. §1878(e) (1958)....68, 78
" 3 . jo PAGE
§409, 72 Stat. 768. 49 U.S.C. §1379 (1958) .........-76, 76n,
| 77, 108n, 118-_
$411, 72 Stat. 769, 49 U.S.C. $1381 (1958) ....... 63, 67,
79, 80, 81, 82, 99, 104
- $419, 72 Stat. 770, 49 U.S.C. §1382 (1958) PR 77, 109,
- 118,121 |
y414, 72 Stat. 770, 49 USC. §1384 (1958) ........ 4, 63, 68,
' 77°78, 79, 92, 117, 118, 122
$1106, 72 Stat. 798, 49 US. C. $1506 (1958) ........ 92n
Federal Rules of Civil Procedure
Rule 16 paalemnnahanst : . 48, 49
ERS eee ers : 40, 41
Rule 37(b)(2) (iii) = . 1,4
Rule 37(d) ......... sei . — 1,4
Federal Trade Comniission Act
§5(a)(6), 38 Stat. 719 (1914), as cmended, 15
U.S.C. $45(a) (6) (Supp. . arene *100n.
Natura: Gas Act
7, 52 Stat. 824 (1988), a as amended, 15 USC.
| 717({f) (Supp. V, 1964) Aanepanmmnnsnl 93n
Sherman Act :
§1, 26 Stat. 209 (1890), as amended, 15 U.S.C.
§1 (1958) tenetnn : 72, 126, 129,130,
136, ‘137, 141n
§2, 26 Stat. 209 (1890), as amended, 15 U.S.C. .
$2 (1958), . . 72, 138, 1m 141n
shipping Act
$15, 39. Stat.. 733. (1916), as amended, 46 U.S.C.
nN 121
§22, 39 Stat. 736 (1916), as amended, 46 U.S.C.
i _s ReA ee oe sail invideloh 121
Se
a"
; PAGE
Miscellaneous hittin
83 Cong. Ree. 6729-6732, 75th siti 3rd Sess.
(1938)... , 84-92, 100n
Kramer, Does Concerted Action Solely Between a
Corporation and its Officers Acting on its Behalf
‘an Unreasonable Restraint of Interstate Commerce
Violate Section 1 of the Sherman Act?, XI Federal
- Bar Journal 130 (1950) ; 127n
- Report of the Attorner y General’s National -Commrit-
tee to Study the Antitrust Laws (1955) .......... 126n, 128n
Report of the Federal Aviation Commission, S. Doc.
No. 15, 74th Cong, | Ist Sess. (1935) . st
ab ite: or .
3
w THE |
ems Court of the Anited States
OCTOBER TERM, 1964.
No. 443
0 a
HvucuHes Toot Company
and |
. Raymonp M. Hotumay,
~ Petitioners,
against
Trans -Wortp AIRLINES, Inc.,
. - Respondent.
ON WRIT OF CERTIORARI TO THE UNITED STATES, COURT
OF APPEALS FOR THE SECOND CIRCUIT
BRIEF FOR RESPONDENT
The “Questions Presented” and the “Statement” of the
case set out in petitioners’ brief are neither acceptable
as accurate statements of the facts and issues involved
in this controversy nor permissible as representations of
the state of the record of this litigation to date.
Questions Presented
In defining the questions presented by this interlocutory °
‘Sappeal, it is important to bear in mind the limited scope
of the present review. The limitations are the result of —
(a) the riature of the o.der appealed from, that is, an
order. directing the entry .of a default judgment pur- .
suant to Rules 37(b)(2)(ili) and 37(d) ,of the Federal
Rules of Civil Procedure; (b) the opinion of the District
9 | "
_ Court, which, in making the jurisdictionally necessary
statement that the order involved a controlling question .
of law as to which there was a substantial ground for
difference of opinion, identified that controlling question
of law as the question raised below in light of Pan Amer-
ican World Airways, Inc. v. United States, 371 U. S. 296
_ (1963), (“Panagra”); and (c) the order of the Court of
"Appeals limiting its jurisdictionally necessary permission
to appeal to “the issues of (1) Whether the U, S. District |
Court for the Southern Distriet of New ‘York had juris-
diction of the action, and (2) Whether the exercise of its
regulatory power by the Civil Aeronautics Board in the .
premises by. issuance of orders permitting defendants to
act as defendants acted constitutes a: good defense to the
antitrust claim of [TWA]”, and ‘continuing with the words
“in all other respects the application is denied”.
The posture of the ease following Judge Metzner’s
denial of petitioners’ motion to dismiss the complaint was
that the case was not to be disposed of on the pleadings
and plaintiff was to have the right to inquire into the facts.
No final determination in plaintiff’s favor or against
defendants on the issues had yet been made. <A future
‘motion for summary judgment as well as alf\the normal
processes of trial were completely open to defendants.
It was on the question whether plaintiff was to have the
‘right to inquire that the defendants chose -to draw the
line of battle. The default order ensued.
There is therefore a serious question at the very outset
whether peiitionérs are ina position to raise the primary
jurisdiction and exemption issues which are urged to this
Court. The default.order is subject to attack only on
jurisdictional grounds, and it is doubtful that questions of
primary jurisdiction and antitrust exemption, raised by
affirmative defense, are jurisdictional in this sense... De-
fendants had no. right to appellate review of the denial
of their motion to dismiss and, after the denial of that
e
=~,
2 eh aeee 3
.
: .
motion, the District Court undoubtedly had the power to
require discovery. It is settled that a court may issue a°
variety of orders and apply.a variety of sanctions even
before its jurisdiction to proceed or to grant particular
relief is finally established, see, e.g., United States v.
United Mine Workers of America, 330 U. S. 258 (1947);
and discovery is-especially appropriate when it may facili-
tate the court’s determination of a question as to its own
jurisdiction. Cf., Collins v. New York Central System,
327 F. 2d 880 (D.C.- Cir. 1963). Questions of antitrust
exemption and primary jurisdiction are of the very sort
most likely to be illuminated by discovery since they are
vitally affected by the evidence adduced in support of the
antitrust claims asserted. Defendants were, of course,
free to renew their motion at or prior to trial. It is sub-
- mitted -that, whether or not petitioners’ primary jurisdic-
tion or antitrust exemption contentions are meritorious,
“Judge Metzner had jurisdiction to enter the default order.
Cf., Hammond Packing Co. v. Arkansas, 212 U. S. 322
(1909).
There is a similar question with respect to the third .°
issue presented by petitioners’ brief, i.c., the issue
whethér the complaint states, a claim.*. As we have noted,
.the order of the District Court which was appealed from
was a default order subject to attack only on jurisdictional
‘grounds. It is submitted that the question whether the
complaint states a cause of action does not present a
jurisdictional question. Bell v. Hood, 327 U. S. 678, 682-
83 (1946):
If, however, all of the issues which petittenshi seek- to
raise are brought before this Court, respondent believes
that petitioners’ phrasing is impermissible under the
pleadings and under the orders appealed from. shew
questions should be revised as follows:
_1. Whether by reason of the Federal Aviation Act,
the District Court was without the jurisdiction
S
Par arte 4
hore, |
necessary to enable it to enter an order, pursuant
to Federal Rules of Civil Procedure 37 (b) (2) (iii)
and 37(d), directing the entry of a default judg-
yoo inst defendants, . with the amount of
s*to be determined by a Special Master?
2. i by reason of orders issued by the Civil
Aeronautics. Board, the“ conduct alleged in the
complaint is exempt from the antitrust laws under
Section 414 ofthe Federal Aviation Act, and the
District Court was thus deprived of jurisdiction to’:
enter its order under-.Rules Soe and
_ 87(d)?
3. Whether the complaint ‘fails to state claims for
relief sufficiently. invoking the jurisdiction of the
District. Court and, as a result, the District Court
was without jurisdiction sufficient to support its
, order under Rules 87(by(2) (iii) and 37(d)?
Counter-Statement of the Case
This litigation began on June 30, 1961, when- Trans
World Airlines; Inc. (“TWA”), an air carrier with over
13,000 public stockholders, brought this action against the
persons who had controlled and’ manipulated TWA and
all of its affairs from 1940 or before until 1960, for their
own benefit. TWA was enabled to take’ this action be-
cause, as a result of unusual circumstances, a new Board
of Directors and management, composed of able and dis-
interested businessmen, independent of Hughes Tool Com-
pany (“Toolco”) and Howard Hughes, had assumed con-
trol of TWA early in 1961.*. The new Board of Directors
* Petitioners’ constant reference to TWA’s management, as the
“lender-management” is part of petitioners’ deliberate effort. to mis-.
- lead this Court as to facts which this Court has no way of knowing,
because they have never been put in the record. The implication is
that TWA is preséntly managed by financial institutions. Not only
is it improper on the state of the pleadings for Toolco so to imply,
‘but the implication is provably false. When the financial instityitions
acquired the power to designate voting trustees who would in turn
designate directors to replace Toolco’s nominees, they turned to men
of complete independence, of nationally established | stature and with-
a» 5
retained special counsel, also completely independent of °
both TWA and Toolco, to determine whether GWA had a
‘cause of action to recover damages from anyone in .con-
nection. withthe procurement and. financing of aircraft,
ground equipment and training aids or otherwise (fol.
20197), On advice of special counsel this action was
brought. By it, TWA seeks redress under the antitrust
laws and under the common dew for both past and con-
- tinuing injuries inflicted on it by its former maaan.
an
~Botir the Court of Appeals and the District Court would
have much difficulty recognizing th ase which petitioners
have described to this Court as the case with Which they
dealt below. In their two closely interwoven briefs (in
this and the companion No. 501),° the petitioners “have
artfully described the history and the existing status of
this vigorously litigated controversy not as it is, nor
as the record shows.it, but-‘as petitioners would like
it to be in order to induce a deeision in their favor
from this Court. It is a tactic which petitioners have
sought-to use in the past. The District Court, how-
ever, in which the proceedings ‘culminating in petitioners’
default were conducted for over a vear and a half, and the
Court of Appeals. which. in addition to rendering the
order appealed. from, was required to examine inte the
_ pre-trial proceedings on an. earlier application by these
* netitioners for review on an extraordinary. writ, have con-
sistently rejected petitioners’ attempts to disguise their
: contentions as facts, their legal interpretations as deci-
out any personal stake in the controversy. Such men were persuailed
‘to accept this greag responsibility (the personal seriousness of which
i
- is only in part indicated by the all-out attack which has been made> —
‘ on ‘their reputations and their fortunes in Toolco’s cotinterclaims and
’ elsewhere) because they felt that the continued survival of TW A was
_a matter of national importance.
* Rather than similarly divide TWA’s presentation between two
_ briefs, we ha¥e thought it more convenient for the Court to consoli-
7 date in this brief a full statement of the facts and legal principles
» «which we consider controlling in both cases as they affect TWA. _
oy
6
sions by the Board, and their frustration of plaintiff’s
effort to compile proof in the normal manner provided for
by the Federal Rules of Civil Procedure as a failure of
proof by the plaintiff. . :
The: crucial fact is that this case has come before this
Court at the pleading stage. Not only has there been no
trial in which the plaintiff was able to put in its available
evidence, but, when it, became apparent that even a motion
for summary judginent ran the risk of allowing the plain- °
tiff to present evidence which would make defendants’ con-
_~ tentions untenable, the defendants promptly withdrew that
~~ motion (A-121, fol. 2711). *-The decision below, at its
broadest, was on a motion for judgment on the pleadings
‘incorporating-a motion to dismiss for failure to state a
claim and a motiog to dismiss for lack of jurisdiction over
the subject matter. Judge Metzner’s determination in _
plaintiff’s favor on.this motion established that plaintiff
- had the normal right to proceed with pre-trial discovery
of the kind which defendants had already conducted in
extenso. Since discovery was what defendants were deter-
to prevent at all costs, they thereupon defaulted.
Petitioners’ statement fails to give anything like a true
picture of the essentigl basis of TWA’s claims or the
* Record references i in this brief are designated as ‘follows: thos¢
prefixed ““A” refer to vols. I and II in No.443; those prefixed “AA”
refer to vol. I in No. 501; those prefixed “T” refer to vol. II in No.
501 ; those prefixed “B” Tefer to vol. III in No. 501; those prefixed = -
hy gm rate oo val IV, V and VI in No. 443 and No. 501 which have
- been aa | printed ‘for the use of this Court ; references to “fol.” are
to unprin portions of the original Yecord. This No. 443,
and the companion case, No. 501, arise out of a gingl civil action
and are before this Court on a single original record, certified as
such by the United States Court of Appeals for the Second Circuit.
Both cases were heard below on that single record in the Court or
Appeals. All appendices printed for the use of the court below, im
‘both cases, have been designated to be printed for the. use of this
Court in both No. 443 and in No, 501. While the cover pages ot
‘vols. I and II in No, 443 and of vols, I, H and IIT in Na, 501
do not so indicate, each such vosame is part of the printed secerd in
both cases.
7
course of the proceedings to date, If this case is viewed
against an accurate statement of TWA’s claims and a
fair estimate of the evidence which the proceedings to date
suggest would have heen developed in support of them if
~ discovery had continued, and if it is considered i in the con-
’ text of the delaying and obfuscatory. tactics employed by
petitioners since this litigation began, it becomes apparent
that the positions taken by petitioners are withott merit
and are, indeed, merely tools in a continued effort to
disrupt and frustrate any orderly consideration of TWA’s
claims, an effort destructive of the integrity of judicial
proceedings in, the federal courts."
The Trade and Commidree Involved
Contrary to the suggestion of petitioners’ brief that the
_ trade and commerce involved in this case concern only
‘“the acquisition or financing of aircraft for TWA” and
that the markets involved are defined in the complaint
solely “in terms of TWA’s requirements for aircraft”
(Petitioners’ Brief, p. 4), the trade and commerce in-
volved are described in considerable detail in the com-
_ plaint and consist of the furnishing of aircraft to TWA
“and. other air carriers” for use in air transportation in
interstate and foreign commerce (Complaint, paragraph
7(a), A-3), the furnishing of jet-powered aircraft to TWA
“and other air carriers” (Complaint. paragraph 7(b),
ihid.).. the furnishing of aireraft to TWA (Complaint,
paragraph 7(¢c), thid.), the furnishing of aircraft used by
scheduled United States flag air carriers hetween certain
pairs of cities in the United States between which TWA
provides more than 60% of the scheduled air transporta-
* The basic facts which will be set out hereafter ‘are derived from
matters of public record, from the allegations of the complaint which,
‘in the present posture of the case, mutt he accepted as true, and from
evidencé unearthed by TWA im the [itited documentary discovery
permitted to it prior to defendants’ default and refusal to comply
with orders of the District Court directing further discovery.
s
7
oe ot
tion provided By all United States flag air carriers (Com- .
plaint, paragraph 7(d), ibid.), the furnishing of aircraft
used by scheduled Unitéd States flag carriers between ~
_ certain pairs of cities between which: TWA provides the
_ only, scheduled air transportation provided by’ ‘United |
States flag air carriers (Complaint, paragraph 7(e), A- 3-4),
and the financing of the acquisition of aircraft for use by
TWA in air transportation in interstate and foreign com-
merce (Complaint, paragraph 7(f), A-4).
Thus, the actions of defendants which are the subject
“of this litigation were in the area of the development and
supply of ‘commercia. aircraft for.air. carriers generally,
and also involved the financing of such aircraft for use
by TW; a dominant position in this broad field of trade
and’ commerce was thie objective, at which the conspirators ©
aimed. In doing'so, of course, they began by establishing
-control over TWA’s: segment of that market, -and it is
their. dominance and manipulation of the TWA market
for their larger private purposes wmen has so gravely
injured TWA.
S
Toolco’ s Acquisition of Control of TWA
The conspiracy described in the complaint began 5 years
after TW.A’s organization in 1934,* when defendant Tooleo
began to buy up the‘common stock of TWA pursuant to. an
understanding with Howard: R. Hughes (the principal—
and indeed dominant—conspirator and a named defendant
. ° herein,“ who, however, was never found: for :service in
this action). Although the. Civil Aeronautics Board
_. (the “Board”) later, noted that “for all practical pur-
poses” Tooleo had achieved control of TWA for: Hughes .
by. the end of 1940 (6°C.A.B. at 154), an application
requesting approval. of thi¢ acquisition of control was
not submitted to the Board until November 19, 1943
* TWA was incorporated as Transcontinental & Western Air,
Inc.; its name was changed to Trans World Airlines, Inc. in 1950.
F ea =e
oe
(R. 183), and the Board did not enter its order approv-
ing the. acquisition until October 17, 1944. Transcon-
tinental & Western Air, Inc., Control by Hughes Tool
Company, & C.A.B. 153, 154. Toolco then held approxi-
> mately 45% of the TWA common stock and Jack Frye,
president of TWA; was employed in an “advisory capacity”
by Tooleo (6 C.A.B. at 155).* As will be seen, it was
not until after 1960 that TWA was able to speak with its
own voice to the Board, or to any other tribunal.
The question principally considered by the-Board in
ruling on TWA-Tooleo’s application for approval of this °
acquisition of control was whether‘ Tooleo was, in fact,°
a person engaged in a phase of aeronautics within
the meaning of Section 408(a)(5) of the Civil Aero-
‘nauties Act, subsequently the Federal Aviation Act (the
“Act”). The Board noted that among the requisites
for its exercise of any jurisdiction in the matter was a
finding that there was “an acquisition of control” and that
the acquiring person was “engaged in a phase of acro-
nautics” (6 C.A.B. at 155-156). The Board concluded that
*,Tooleo might, under existing contracts, become a dealer
Jin aircraft, if it had not become one already.** Since it
~ was conceded that there had been an acquisition of control, .
the Board found its jurisdiction to have been established
(6 C.A.B. at 156).
Finding that the likelihood of TWA’s tiie forced,
throu e control exercised by Tooleo, to purchase more |
ifcraft than_its. economic operations required was remote
/ in view of the “paternalistic attitude” which Tooleo hed »
. This isan n early example of what ‘proved to be a fairly usual
practice for ‘Foolco of employing TWA employees or execijtives in
an “advisory” “capacity. to Toolco or of using Toolco employ ees as
‘essentially full-time TWA executives. See. ¢.g., the testimony on
deposition of Rummel (fol. 12724 et seq.) and Leslie (fol. 12322) and
the affidavit of ‘Bew (T-104).
+ Obviously, Toolco was already a dealer in aircraft, and it has
never ceased to be such, as other carriers besides TWA have good
reason to know. (See pp. 23 et seq.. infra. )
10
“exhibited up to that time,” the Board concluded that the
continuation of the relationship between Tooleo and TWA
“would not be inconsistent with the public interest”
(6 C.A.B..at 156). .
Public counsel urged that restrictive conditions be im-
posed on-the Board’s approval of the acquisition of con-
trol, and Tooleo suggested that the order provide that
if Tooleo should commence manufacturing aircraft or air-
eraft parts, and if TWA should desire to acquire such
aircraft or aircraft parts, then TWA and Toolco should
be required to “return to the Board for further hearing
upon continuation of the relations between TWA and
Hughes Tool” (6 C.A.B. at 157) (emphasis added)"
The Board instead imposed a condition providing that
its approval would “be effective” so long as commercial
transactions between TWA and Toolco were limited to —
transactions involving complete items of property, the
price of which did not exceed $200 each, with a further
limitation that the total annual expenditure involved in
any such transactions should not exceed $10,000 (6 C.A.B:
at 158). In point of fact, the’ average annual expenditure
by. TWA for aircraft, equipment and supplies bought from
‘or through Tooleo during the next sixteen years exceeded
$17,000,000. ;
At the beginning of 1947, TWA and Tooleo entered into
a Letter Agreement: (dated January 8) which had the-
effect of increasing the extent of Toolco’s control over
TWA and which resulted in an order of the Board insti-
* It is obvious that neither the Board nor its staff had the slightest
' thought that the order issued in this proceeding, might possibly
extend to activities by Toolco in its capacity ast general dealer
in aircraft seeking to obtain a dominant competitive position in
that field. Toolco’s counsel in that proceeding, in a letter written to
the Hearing Examiner at the time, specifically stated : 1<u
“* * * the approval sought by Hughes Re ong in this
case would not constitute a license to pefnit ughes Tool Com-
pany o: TWA to do whatever they desirc in the future * * *,”
(R. 610) .
?
11
i) :
wie 2 an investigation to determine whether that Letter
Agreement constituted a further acquisition of control -
* which would require a new approval order pursuant to
Section 408. Jn an opinion reported as Transcontinental
d Western Air, Inc., Further Control by Hughes Tool
— Co., 9 C.A.B. 381 (1948), the Board concluded that there
_-had been an additional acquisition of control for which its
approval under Section 408 would be required, and that a
hearing was necessary (9 C.A.B. at 391-92). The investi-
gation preceding this order, and the discussion by the
Board in its opinion, were concerned solely with whether
an additional acquisition of contro] had. taken place, and
not with whether that acquisition of control was in the
public interest.
The 1947 Tooleo-TWA Letter Agreement provided,
among other things, that Tooleo would lend TWA
$10,000,000 in return for 234% notes ednvertible by Tooleo
into. TWA common stock, that TWA’s Board of Directors
would be reconstituted so'that the majority would be nomi-
nees of Tooleo, and that, pending completion of the trans-
‘action, no change would be made: in» TWA’s by-laws
without the written consent of .Tooleo (9-C.A.B. at 384):
-The reconstituting of the Board of Directors had already
been accomplished (and the resignation of the previous
president compelled) ew hen, the Board commenced its in- |
vestigation. .
The Board noted: that this Letter Agreement had its
genesis .in disagreement between-TWA’s management and
Tooleo on financing the carrier’s capital ‘needs after .
the end of the war (9 C.A.B.-at>383).. The Board
observed that there was nothing in the record to indicate.
that:a sueressful flotation of equity securities could not .
-have been accomplished during 1945 and 1946, as TWA’s’
management desired (9 C.A.B. at 383-84). It pointed out,
however, that the differences of opinion delaved action on
any definite program and that, as a result, nothing was
12°
done .until an unfavorable turn in the securities market
about September 1946 made any large-scale equity financ-
ing difficult. ‘The Board also observed that by the end of
1946 TWA’s financial condition had become critical and
that in the closing months of that year the carrier was
“facing bankruptcy.” According to the Board, Toolco
. was willing to be of financial assistance but was. unwilling
to furnish additional money without having further con-
trol over its spending. The Letter Agreement of 1947
was presented as a solution to - this = (9 C.A.B.
at 384). j 7.
Referring to its 1944 order, thé Board noted that it
had been “clearly couched in terms of factors then pres-
ent” and related solely to the degree of control existing
at that time (9 C.A.B. at 388). The Board thought it
clear that “we did not intend to, and did not, grant a
blanket, unlimited -in futuro approval of ‘the relation-
ship between Tooleo and TWA”, and that an approval
of anything other than the acquisition of the degree
of control submitted in the first control proceeding
“would have been ‘made in clear, unmistakable language”
(9 C.A.B. at 389). It would be unreasonable to assume
that the approval granted in 1944 would “forever consti-
tute an unlimited ratification of any and all future acquisi-
tions of ownership interest in the carrier” (ibid.). The
Board specifically rejected the argument that its approval
of “the acquisition of control, by the purchase of common
stock” could be held to be “words of art, importing a>
blanket, technical meaning and covering in umbrella-like
fashion all subsequent transactions under which the’
acquirer may have obtained an additional substantive
interest in the carrier” (9 C. A.B. at 389-90). The Board
-went on to say:
“It bears repeating that there is no support in _.
either the record or the opinion for ‘the ‘contention
that the words in question were intended, as an
™\.
13
expression af blanket approval of the relationship
under consideration.” (9 C.A.B. at 390) (Footnets
eantiaa.)
Finding that ‘the ‘Letter Agreement amounted to a fur-
ther acquisition of. control, the Board ordered that an in-
vestigation be conducted to determine whether Toolco’s
‘ acquisition of control’ was consistent with the public
interest and met the conditions of Section 408. |
That fprther investigation’ culminated in an order of...
‘the Board issued on October 6, 1950, reported as Trans
World Airlines, Inc., Further Control by Hughes Tool
Company, 12 C.A.B. 192. The Board’s opinion and order,
only two pages long,-did not discuss in detail the reasons
for its approval. The Board did note the position taken
by public counsel that the control of TWA theretofore
exercised by Toolco had been “detrimental to the interest ©
of the carrier and the public interest”, but that disap-
proval of the additional stock acquisition would not ade-
quately “remedy or mitigate the existing situation”, and
‘that since the Board did not have adequate power to deal
with the situation, it was left with “no alternative than
~ to approve, such additional ‘stock acquisition” (12 C.A.B.
at 192, 193). After setting out the position of ‘public .
counsel, the Board concluded merely that: :
“The ‘record in this proceeding does not permit
us to reach any other conclusion than that reached
by the examiner, viz., that the further acquisition
of control should be approved as being consistent
with the public interest and the requirements of the
Act.” . (iz) C.A.B. at 193) |
The Board. pecordingty agreed with and ee the find.
ings, conclusions, and recommended decision of the Ex-
aminer.
In his 31-page report, the Examiner considered not at.
all any effect the acquisition of control might have on
14
competition either in-the aircraft industry or in air trans-
portation. He directed shimself almost exclusively to
TWA’s financial history. In recounting this history, the
Examiner noted that from February 1944 until the close
of 1946 the management of TWA had made repeated
Fequests of Tooleo for approval of plans. to finance the
earrier’s expansion (12 C.A.B. at 201), that the principal
officers of the carrier were convinced that the sale of
equity securities was preferable to large borrowings
(ibid.), that neither Hughes nor the other Toolco repre-
sentative involved disagreed with the position that addi-
tional financing would be necessary (12 C.A.B. at 202),
that Tooleo and Hughes repeatedly refused to agree to
equity financing (12 C.A.B. at 202-04), that TW4A’s finan.
cial condition deteriorated rapidly during 1946 (12 C.A.B.
at 205), and. that in the closing months of 1946 TWA
could not attract any eapital and was facing bankruptcy
(12 C.A.B. at 206). ‘Summing up, the Examiner said:
«“e * * whatever were TWA’s problems in pro-
moting equity financing to meet its postwar capital
needs, the insistence of Mr. Hughes and Mr. Dietrich
[then Toolco’s chief financial officer and Hughes’
principal lieutenant] on debt as a matter of delib-
erate policy to meet. TWA’s capital requirements
Tight after the war ended must be condemned.”
(12 C.A.B. at 222) rs z
The Examiner concluded, however, that the additional
acquisition of control should nevertheless be approved,
citing principally “the manner in which Mr. Hughes and
his company rallied to the support of the carrier during —
the financial crisis of late 1946 and early 1947” (12 C.A.B..-
at 223)—the same crisis which had been created by Hughes”
refusal to agree to equity financing in the first place.*
* The Examiner. noted that public counsel had posed three alterna-
tives as possible answers, to the question posed in the proceeding (12
C.A.B. at 215-16). The first alternative was that a limitation be
i 15
The order issued . the Board in 1950 provided only
that
ee additional wenitititon of control of Trans
‘World Airlines, Inc. (TWA) by the ‘Hughes Tool
Company (Te@oleo), found to exist ‘by the Board’s
opinion and order of June 30, 1948 (9 C.A.B. 381)
be and it hereby is approved as consistent with the
public interest and the requirements of the Act;
_ provided, that such additional control shall be exer-
cised in accordance with the terms and conditions
of the Board’s opinion ‘and order, 6 C.A.B. 153, as
amended, approving the original acquisition of con-
trol of ‘TWA by Toolco.” (12 C.A.B. at 193)
The reference back to the earlier order and the similarity
in language indicate that this order, like the 1944 order,
did not grant a “blanket, im futuro approval of the
relationship between Tooleo and TWA” and was not
‘intended “as an expression of blanket approval of the
relationship under consideration.”
Defendants’ Unlawful a
The Beginning to December 1960
The: complaint alleges that since approximately 1939
the defendants Tooleo, Howard Hughes and Rayniond M.
Holliday, the co-conspirator Atlas Corporation (“Atlas”) *
imposed on the exercise by Toolco of the rights. flowing from its
’ additional stock -acquisition, presumably by establishing a voting trust
for the stock. Public counsel, however, had dismissed this alternative
as impracticable. The second alternative was to reject approval of the
additional acquisition and reopen the question whether all control -of
TWA by Toolco should be terminated, but public counsel apparently
entertained serious, doubt as to the Board's, power to terminate a con-
irol the acquisition of which had been previously approved. The
third alternative suggested by public counsel was that the history of
Toolco’s relationship with TWA be used as a case history for demon-
strating to Congress the need for public coxtrol of security issues by
air carriers.
* Hughes had for some time held the beneficial ownership of voting
trust certificates with respect to 11% of the common stock of Atlas.
¢
af 5 16
and other persons acting for each of ‘them (Complaint,
paragraph 9, A-8) have engaged in-a course of conduct
which had as its intent and purpose that Tooleo would
. become a dominant source of supply of aircraft to air.
carriers, that defendants would seize control over TWA
and its business to use for their own purposes in advanc-
ing this objective, that -Tooleo would become the sole
supplier of aireraft to TWA, that TWA. would thereafter
be used as-a captive market for aircraft to be supplied
by Tooleo, that the requirements of TWA for aircraft,
. including jet-powered aircraft, would be enlarged for the —
benefit of defendants and Atlas b various means, that
suppliers of aircraft other than the defendants would be
boycotted and foreclosed from furnishing. aircraft to
“TWA and other air carriers, that defendants would sup-
ply TWA with aircraft only on the condition that TWA .
accept such financing arrangements as defendants dic-,
tated, that defendants would allow TWA to procure financ-
ing essential for the acquisition of aircraft only on condi-
tion that it also accept such aircraft as the defendants
- dictated, and that as a result defendants and Atlas would
obtain substantial profits for themselves at the expense. °
of TWA and other air carriers and as a result of the
restrictions upon: competition héretofore described (Com
plaint, paragraph 10, A-9-10).
Among the acts alleged to have been committed by the
defendants prior to December 1960 pursuant to this con- —
spiracy were ;
- —an arrangement to develop with the Convair Division
of General Dynamies Corporation (“Convair”) a jet-
powered aircraft to be manufactured by, Convair and to
be supplied by the defendants to air carriers, including
“TWA, with the intention that TWA would be a captive
market for such aircraft (which development program
was subsequently abandoned as not in the self-interests
. 17
of the defendants and Convair) (Contplaint, paragraph
14, A-11); '
—the development of a plan, also‘later abandoned after
being actively pursued by.defendants, under which Toolco
_ would itself commence the manufacture of jet-powered |
- aircraft to be furnished to TWA and other carriers (Com-
plaint, paragraph 15, A-12) ;
—the taking of action to prevent TWA from meking
-any arrangements for the acquisition of jet-powered air-
craft from Boeing Company (“Boeing”) and Douglas Air-
craft Company, Inc. .(“Douglas”) at a time when’ other
competing carriers were placing orders for such aircraft
(Complaint, paragraphs 15, 16, 17, A-12) ; .
_—the placing of orders by Toolco \for its purchase of
33 Boeing jet-powered ajreraft and .30 Convair jet-pow-
ered. aircraft and the refusal of defendants to assign the
rights to aequire any of such aircraft to TWA (Complaint,
paragraphs 17, 18, A-12-13) ;
—the continued frustration of all efforts of TWA to
acquire jet aircraft itself until the period 1959 to 1960
_when defendants arranged for Toolco to lease certain jet-
powered aircraft to TWA on a -day-to-day basis, but
subject tq the condition and understanding. that TWA
‘would not purchase or lease aircraft from any other
~~ potential supplier (Complaint, paragraph 20, A-13) ;
—the diversion to TWA’s principal transatlantic com-
petitor of six Boeing jet-powered aircraft on order by
Tooleo (Complaint, paragraph 18, A-12-13) ;
—and the foreclosure by these means of all other poten-
tial suppliers of jet-powered aircraft from the TWA
market (Complaint, paragraph 49, A-22).
It'is further alleged that the defendants, together with °
Atlas, which owned 56% of the stock of Northeast Air-:
lines, Ine. (“Northeast”), sought to compel TWA to enter
into a disadvantageous merger with Northeast for the pur-
pose of enlarging TWA’s requirements for new. aircraft
18
and therehy enlarging the market from which suppliers
other than the, defendants would be foreclosed, and for the
‘additional purpose of enabling Atlas and its stockholders,
_ ineluding Hughes, to obtain, stock of TWA on advan-
tageous terms (Complaint, paragraph 21, A-13-14). More-
over, in November 1960, while this proposal for merger
was pending, defendants arranged for the lease by Con-
vair to Northeast of six aircraft ordered by Tooleo from
Convair, including three aircraft which had previously -
heen assigned ‘to TWA (Complaint, paragraph 22, A-14).
_ It is further alleged that, once having acquired control:
' -of TWA, Tooleo and the other defendants continuously
refused to allow equity financing by TWA except on terms
which would i increase Tooleo’s equity position in TWA and
instead caused TWA to obtain funds chiefly by means of |
debt financing (Complaint;>paragraph 23, A-14), that the ©
purpose and effect of this: policy were to niaintain control
by the defendants of the financing of ‘the purchase of air-
craft by TWA and to strengthen defendants’ control ‘over
the acquisition of aircraft by TWA (Complaint, para-
eraphs 23, 24, A-14-15), and that by reason of this policy
TWA was prevented from obtaining the financjng neces-
sary for jts acqujsition of jet-powered aircraft until
December 1960 when the prevailing interest rate for debt
tinancing was approximately 6-614,%, rather than the 4%
to 434% interest rate secured by other air carriers in 1955
and 1956 (Complaint, paragraphs 26, 27, A-15).
The Evidentiary Record
Defendants’ studied and continued resistance to Mo.
covery and their ultimate decision to default: rather than
permit discovery by plaintiff to proceed has succeeded ir
preventing TWA from obtaining significant documentary
information. In addition, as a result of defendants’ deci: -
-sion to terminate discovery proceedings, not:a single word —
of testimony could be obtained from any of. the defend +
‘
&
es
_ 19.
ants, and owe from Hiighes, ' the amen archi-
tect of defendants’ conduct and policies.°
‘It must be borne in mind, therefore, that the “record”
of this proceeding has bee contrived by petitioners, .
défendants below, so that it will seem as barren as pos-
sible of information in support of TWA’s complaint.
TWA was severely limited in introducing even the avail-
able documentary evidence into the record by the fact
that it never itself had the opportunity to conduct deposi-
tion proceedings, during which, in the normal course, such ©
evidence would have Been identified and introduced as .
exhibits. » The small fraction of the do uments obtained
by TWA which is in fact in the record at this time is the
result of deferidants’ attempt, at one stage of the pro-
- ceedings, to join its motion to,dismiss with one for sum-
.mary judgment. The ambiguity of defendants’ position
- as to whether factual material dehors the pleadings would -
be relied on resulted in the submission of an affidavit by
“TWA’s counsel, John F: Sonnett, annexing a small selec-
tion of the-available material’ on which TWA ‘would rely
if a motion for summary judgment or some similar mo-
tion addressed to the merits was to be entertained (fol.
2929-33, T-1-112).°* - Defendants at that point hastily
‘withdrew the summary judgment | branch of their motion
(A-121).
* Defendants’ activities in resisting discovery .are described at
pages 38-53, infra., Tt should be here noted that defendants’ self-
described “busines? decision” to default was attributed by them to
their low estimate of recoverable damages (A-130). No suggestion
was made that for any teason Hughes was unable to testiiv or that
defendants were unable to produce the obviously important “attornev-
client” documents and tax information in accordance with the District
Court's orders.
** A series of documents which were annexed as Exhibit A to the
Sonnett affidavit appear in the record at T-1 to T-84.. They give.a
fasginating glimpse behind the scenes of a few transactions. Con-
sisting as they do primarily of fragmentary verbatim transcripts of
telephone conversations and informal personal memoranda, they make
Even the evidence in this severely limited record suc-
ceeds in documenting many of the allegations of TWA’s
complaint and in demonstrating the baselessness of peti-
tioners’ claim that TWA’s complaint is not really an
antitrust complaint but only ore with “antitrust jargon”.
For example, during Toolco’s examination of TWA
by R. W. Rummel, TWA’s chief technical and aircraft
procurement officer,* this revealing colloquy occurred:
Y
« “Q. Were you ever.told, was it ever suggested
to you by anyone, that you should not approach
anyone to explore the possibilities of their haying ~
_@ useful producf? . |
- “A, Well, Yes, I have been-* * °.” (T-113)
‘a (Emphasis supplied.)
When Toolco’s counsel conducting the proceedings made .
‘no attempt to determine who it was who had given these
‘instructions (T-113-31), the Special. Master specifically in-
structed Rummel:to state who‘had given him such instrue-
tions and in ‘what instances (T-131).. |
Thus, when “Bouglas Aircraft Company. officials stated
to Rummel that they would like to deal directly: with
TWA (T-136), Hughes personally instructed Rummel that .
«* © © Douglas would have to come to him before
_we did any more with them,,and we did not work
with: Douglas” (T-137). | |
‘an extensive use of first names, abbreviations and similar shorthand.
While TWA has not had the opportunity to have them explained
’ under ‘oath, it is believed that, for the most part, the subject matter
is sufficiently plain to establish from these documents alont that the
— which TWA has made in its complaint are based upon solid
act. :
* In addition to being TWA’s chief technical ancbaircraft procure-
ment officer, Rummel was simultaneously employed by Toolco in a
similar capacity and was closely associated with Hughes from the
early 1950's until December 1960.
a ~w te
21
Rummel also testified about Hughes’ personal order to
him to have nothing to do with the Convair 990 aircraft:
“The instructions were that I should not partici-
pate or allow the participation in either contract
. or specification development activities, that we
_.« should not inspect any 990 parts or components at
“~~ the Convair facility, and that we should not dis-
| cuss the 990 with Convair” (T-132).
*- These instructions were issued (and followed to the letter)
with respect to aircraft ordered by Toolco but to be built
_to the specifications of American Airlines (T-66-70, T-111-.
12, T-132, T-159, T-163-77), and which Tooleo was later
to attempt to force upon TWA te aman paragraphs
37-39, 45, A-18, A-20, T-58). ;
TWA’s chief technical officer was similarly directed to
have nothing to do with development of the Lockheed
Electra (T-133, T-145-47), although Hughes and Toolco
were engaged in serious, secret riegotiations involving the
acquisition of 40 such aircraft. (A-852, fol. 13916-17,
T-57, T-146-47), jast as he had earlier been barred from
certain Tooleo negotiations with Loekheed about the Lock-
heed 1049 aircraft which Tooleo subsequently acquired
and sold to TWA (T-145-47, R..1330). Indeed, Rummel
was even ordered at times to cease call contact with the
Boeing Company respecting the 707-131 and 707-331 jet-
powered aircraft (T-134, T-147-56. T-161), and even
though these directions: placed the critically important —
‘ Boeing program in jeopardy “we felt obliged to literally
follow the instructions * * *” (T- 150). aes ‘
Another enlightening illustration of how TWA’s air-
eraft were if fact chosen during the Hughes years can be
seen in the procurement: of the Lockheed 1449A. In De-
cember 1954, after FWA exécutives nominally responsible
for aircraft procurement, including its then president, had
concluded that TWA should purchase Douglas DC7C
piston aircraft to meet its equipment needs until jet air-
ne
.
AG 8 Us ol
craft -becaime ayailable (T-72-77, T-210-12), Tooleo over-
_ ruled this decision and directed instead that a contract be '
signed ‘at. once for the purchase of Lockheed. 1449 -air-
craft (T-72-77, T-211-14). Specifications for these aircraft
- had not even been completed, but Hughes directed, despite
-'TWA’s efforts to dissuade. him, that Tooleo sign a -pur-
chase contract with Lockheed, with which Hughes’ had
been. in personal negotiations, before the end of the year
and that TWA drop its negotiations with Douglas since:
it would in due course be required to purchase from -
Tooleo the Lockheed 1449s. A contract was duly executed
‘on’ December 23, 1954*, with Rummel participating as a
technical consultant’ on TWA’s special requirements.
TWA never was permitted to buy Douglas aircraft.
Read as a whole, the Rummel testimony’ clearly. indi-
- cates, in spite of Toolco’s protestations otherwise, that in .
‘almost..every instance where serious consideration was
_ . given to procurement of aircraft, Hughes and Tooleo madg |
the decisions and gave the orders so as to preémpt for.
themselves the supply of aircraft to TWA, and that nego- |
tiation between TWA and other suppliers of aircraft was
constantly thwarted. Indeed, in most instances ‘TWA’s
management (except Rummel). was -hot informed about
what was going on, and Rummel was ordered by Hughes” _
to keep even them in ignorance (T- 138-41, T-163, T-207).
. With respect to financing it is noteworthy that, in spite
of extensive examination of TWA’s former chief financial
officer, A! V. Leslie’ (also a long-time Tooleo officer),
defendants, failed to inquire into the facts behind and the
reasons for Leslie’s handwritten commentary, “TWA,
-
The placing of that order in that. manner appears to have been
hut another of defendants’ maneuvers to strengthen Toolco's domi-
“nance in aircraft supply while simultaneously easing the ever present
tax problems arising out of the accumulation of énormous surpluses
in Toolco (T-71).
°4
4
23 . | > ; i «
An Appreciation” (T- 85-103)... In that commentary, Leslie
notes: , 7 ae
“Tt was , stated by ‘Hughes at the time the orders
were placed ([to] among. others the writer) that |
TWA. was not to concern itself with thé financing
of this equipment as he through Tooleo, would find
- ‘imitially the required funds.” (4-S5) (Emphasis
~ in original.) |
After thus precluding Tw A from arranging haneeian.
for itself, defendants’ consistent. approach was to refuse
to consider any financing proposal except through Tooleco,
at whatever sacrifice to the interest of TWA. Wien
finally, in desperation, TWA’s directors attempted to
conclude an arrangement which would meet TWA’s
needs and avoid bankruptey, and which ‘would have .
involved some loans from financial institutions directly
to: TWA, Hughes’ attitude is revealed in the ‘following
verbatim transcript of a me&Ssage from Hughes to Wm. A.
Forrester, Jr., on October 28, 1960. a copy of which was
fortunately preserved in Hughes’ telephone rooms. Hughes
said. — ; | |
“T have never liked this plan [the financing plan
ultimately adopted by TWA when the voting trust
came into being]: T have never been in favor of this
plan: I have fought it from the very beginning and’
> I am still fighting it and | assure yon that if it is
emploved it will'be over my dead body *** *. T-have
fought it hammer and tong from the very first day
that I ever heard of it.” (T-S2-85)
From time to time Todleo has sought to suggest that it
is not in‘fact a supplier of aircraft. For example, in
‘footnote 12 at page 13 of petitioners’ brief the statement
is made that:
“It has never been suggested that Tooleo was a
general ‘dealer’ in aircraft ‘suitable for airline |
requirements. The ‘positions’ taken by Tooleo with
=
24
respect to aircraft were solely with a view toward
making the aircraft available to TWA—in other
words, toward facilitating TW4A’s. acquisitions of
aircraft.”
This position of Toolco’s is conclusively refuted by the
present reeord, '
‘For instance, after defendants caused Tooleo to pur-
chase no less than 15 Boeing 707-131 jet aircraft, 18 Boeing °
707-331 jet aircraft and 30 Convair 880 jet aircraft in its
own name, they consistently refused to assign any of their
planes to TWA. Late in 1957, in answer to a letter from
’ TWA’s. then president, Toolco explained:
“For various -reasons.Hughes Tool Company can-
not yet commit itself to TWA with respect to these
aircraft, either as to type or number; but, on a
basis to be determined later, it is expected that
‘some jet aircraft will be made available to TWA.”
(2)
About a year later Tooleo representatives “pointed out that
Hughes Tool has not yet agreed to furnish jet planes to/
TWA” (T-52) and that:
“* * * Hughes Tool Co. had NO intention of sell-
ing or leasing their stuff (jet planes implied) .to
TWA * * *.”°(T-52) (Emphasis in original.)
Indeed, what defendants sought to do, as the list of trans-
actions and contemplated transactions noted below clearly
indicates, was to retain a “good trading position” for
themselves as suppliers of aircraft (T-27) not only to
TWA but fo air carriers generally. Thus:.
(1) Defendants supplied Northeast Airlines with 10
Vickers Viscount aircraft in 1958, long before Tooleo had
any financial interest in Wortheast, but at a time when
Hughes had an interest in Northeast’s then parent, Atlas
‘Corporation (T-1-6) ;
25
(2) Tooleo attempted to sell certain of its Convair
880s to Capital Airlines (T-7); :
(3) Toaleo negotiated ‘with Northeast Airlines begin-
ning early in 1959 for the disposal of certain of its Con-
vair 880s, and Northeast finally received six Toolco 880s
(T-8-19, T-28), three of which had been tsieiioned assigned.
to TWA (T-110);
(4) Aside from the six diverted to Northeast, Tooleo
attempted to sell an additional 14 of its Convair S80s—
seven to National Airlines and seven more to the United
States Government (T-28-31) ; |
(5) Tooleo also attempted to sell certain of its Convair
880s to Northwest Airlines (T-27);
(6) Tooleo diverted to Pan American six of the 18
Boeing 707-331 jet aircraft — needed by TWA (T-7, ©
T-209); |
(7) Hughes ae Tooleo planned to sell all 15 Boeing :
707-131 jet aircraft to American, Airlines (T-62 -63);
' (8) Tooleo contracted for seven Convair 880M aircraft
built to the specifications of Capital Airlines (T-21; T- 27,
T-81, T-112, T-169, T-172, T-174) ;
(9) ‘Toolco’ contracted for 13 Convair 390 aircraft built
to the specifications of American Airlines (T-58-70, T-111-
12, T-164-76) ; |
(10) Tooleo and Hughes planned to build Caravelle jet
_ aircraft in the United States for sale to TWA and other
air carriers (T- 139-40) ;
ny Hughes and Toolco planned to build jet aircraft
with AVRO of Canada for sale to TWA and other air
- earriers (T-35-36, T-137-38). :
Indeed, if Toolco was not a supplier of aircraft to air
carriers generally, it is hard to understand its purchase of
26 | O
-some 300 Pratt & Whitney jet engines’ at a time when
engines were in short supply (T-37-49). By this purchase
alone Toolco acquired rights to enough engines for orig-
inal installation in 75 jet transports. The purchase, which |
-was far beyond any conceivable need of TWA for spare
engines (T-37), effectively gave Tooleo a corner on the jet
engine market (T-37-49), which Tooleo later exploited. in
a sale of most of the engines to Boeing at a substantial
profit (T-39-48). | ,
Toolco’s suggestion that the “positions” it took in air-
craft were solely with a view “toward facilitating “TWA’s
acquisition of aircraft” is conclusively answered by .the
shocking story of how the defendants delayed deliveries to
TWA of urgently needed Convair 880 jet aircraft for more ,
‘than a year, apparently. to enable Tooleo itself to obtain
financing so that it could purchase such aircraft and then
lease them to TWA. That account of what the defend-
ants did is set out in an affidavit by J. William Bew, the -
principal liafson agent between Toolco and Convair in
connection with the purchase, manufacture and delivery
of Convair 880s, and the one man who was on the scene
throughout the period in qu stion (T-104-12).. His recol-
lections. set forth in the affidavit are confirmed by the
testimony of Rummel (T-145, T-157-62, T-179-80). As-
described by Bew and Rummel, Todlco’s tactics included:
—arranging for the bailment ‘from. Convair to
Tooleo of the first four aircraft scheduled to be
delivered ‘to TWA; removing these aircraft from
. the production line and. placing them in an open
field next to the Convair plant under armed ies
hired by Toolco;
—directing. TWA sean to refrain from dis-
cussing delivery terms with Convair;
—demanding that Convair refrain from running
various necessary tests on the aircraft being manv- .
factured ;
27 : ae,
—ordering TWA not to fly eoonpinnes flights or
make final inspections on ‘aircraft tendered for
delivery by Convair; :
—requiring TWA to refuse to accept aircraft
tendered for delivery;
—prohibiting Convair ‘from flying demonstration
flights, even though such flights for other potential
purchasers would have increased the likelihood of
Convair’s selling more S880 aireraft and, under the
terms of Tooleo’s contract with Convair, would have ©
led to a price reduction on the aircraft ordered by
Tooleo and aeny purchased from it by TWA
(S 106-08).
Delta Air Lines, which had been scheduled to receive Con-
vair 880 aircraft on a schedule interspersing deliveries to
it with those to TWA, in fact had received all ten of its .
direraft before TWA had delivery of its second (T-104-12).
Thus, despite defendants’ efforts to obscure their past
misconduct by suggesting that no factual basis exists to
support plaintiff’; allegedly “technical” antitrust com-
_ plaint, ‘even the Tooleo-made record proves otherwise.
In addition to information such as is detailed above, had
defendants not chosen to default, TWA would have had —
discovery from Hughes and Tooleo with regard .to de-
fendants’ actual intentions and entire course of conduct
in the fields of aircraft development, acquisition atyl sup-
ply. Thus, the truth would have been disclosed | about
man activities adumbrated in the present record, ‘a few
examples of which are::
(a) Hughes’ personal interest in the development and
sale of the Boeing 307 ae in 1939 (fol. 13791,
fol. 13795) ;
(b) Hughes’ joint venture agreements. with Loekheed in
1939 and 1940 which led to the development of the Excali-
bur A (Constellation) aireraft and why 40 such aircraft .
28
were ordered for Hughes’ personal account (fol. 13796,
fol. 13803-04, fol. 13847) ;
(c) The numerous purchases and leases: by TWA from
Tooleo of various Lockheed Constellation’ aircraft pur-
chased by Tooleo from Lockheed, Air France, Cal Eastern
_ Aviation, Air Italia,” Delta Air Lines, Resort Airlines
and others and what happened to such aircraft not sold _
or leased by Tooleo to TWA (R. 1330, fol. 14116, fol. 14123,
fol. 14136, fol. 18802 et seq., fol. 13847, A-183, A-800, A-839,
A-847) ; |
(d) Tooleo’s purchase of eight Lockheed 1049G_air-
_ craft in 1955 despite Hughes’ demand that TWA not
deal with Lockheed in regard to these planes and the -
subsequent purchase of these aircraft by TWA from
Tooleo (T-145-47, fol. 13985," R. 1330) ;
(e) Tooleo’s purchase’ of 58 CJ805 jet engines" from
General Electric (fol. 13567) ;
(f) Defendants’ negotiations with Crown, a major stock-
holder of General Dynamics, in which Hughes was offering
to purchas¢ “all his future planes” from General Dy-
namics’ Convair division in return for financial assistance
from Crown (T-31r-34, T-37) ;
(g) Tooleo’s various proposed financing plans during
the jet period which would have set up a Tooleo subsidiary
to léase jet aircraft to TWA and others and the actual-
leasing arrangements which were made with TWA and
eventually Northeast as well (T-85 et seq., B- 237 et seq.,
A-19Y et seq., AA-246-47).
Answers to these questions and the riumerous others of
a similar nature, which are only partially disclosed by the
_ present record, would fill out and complete the pattern of.
‘conspiratorial and -unlawfu! conduct alleged in the com-
plaint.
In point of fact, Howard Hughes i is one of the wealth- -
iest and most powerful men in the world. He has very
29
extensive influence in various industries, including great
. influence in numerous powerful financial institutions. The
‘keystone of Hughes’ interests is his 100% ownership of
Tooleo, one of the great industrial corporations in the —
United States, whose principal business (among many)
is the manufacture of drilling bits for the oil industry.
Since Tooleo has no public security: holders, however,
‘little public information exists about its operations and
influence and it has been able to preserve a most extraor-
dinary secrecy about ‘its activities.
s is indicated by some of the facts summarized above,
as Hughes’ principal interests covering the period of
the past thirty or more years has been aircraft develop-
nient, production and distribution. While manufacture of
commercial air transports under his exclusive control
‘(though seriously contemplated on various occasions) has
never ultimately eventuated, it is believed that a full
investigation would reveal that specialized joint ventures
with aircraft manufacturers. on terms giving to Hughes
or to Taoleo a major interest in production and sales and
substantial control over both design and deliveries were
common during the twenty-odd years in which TWA was
part of the Hughes empire. .
Early in the maturation of Hughes’ plan to acquire a _
dominant position in the field of aircraft development and
sales to air carriers::he foresaw the great advantage
which could be derived from establishing control over a
major air carrier and using that control for his own
benefit. This assured and completely manipulable market
would make it possible for. him to establish, as he did,
himself and Tooleo as a leading source of supply to other
air carriers, and as both an important customer and a
_ competitor of the leading manufacturers of aircraft and
related equipment.
*
Civil Aeronautics Board Action 1944-1960
. Throughout ‘the period’ that began with the Board’s
approval of Toolco’s acquisition of control of TWA in
1944 and ended with creation of the voting trust in
December 1960—the period during which the .events set
out above took place—Tooleo or TWA, dutifully respon-’
sive to Tooléo’s direction, filed a number of applications
with the Board to request modification of the initial
control order, which otherwise would have* prohibited
various transactions between Tooleo and TWA. In each
instance, the application described a discrete transaction
involving either the sale or leasing of aircraft or equip-
“ment by Tooleo to TWA or some financing: arrangement
with respect to TWA.
In only one of these instances does the record show any
action by the Board with respect to the applieation other,
than the order granting it. That one exception relates to
TWA’s application on May 10, 1956 for a modification
to permit TWA'‘s purchase from Tooleo of certain jet
aircraft to be manufactured by Tooleo. On June 8,
1956 the Board ordered an investigation to determine
whether the entry of Tooled into the busin@&s of manu-
facturing jet aircraft would affect the control relation-
ship so significantly as to require a new proceeding
under Section’ 40S (Order E-10360. A-189). After. the
Board ordered. this investigation, Tooleo abandoned its
proposed manufacttring project, and the investigation
was ultimately terminated (Order F-12604. A-195).
In every other instance, as the tabular summary ih
Annex A shows. Tooleo or ‘TWA. acting under the
: control of Todleo, submitted, its application. and the
application was granted. ' The applications themselves
were brief and provided only a superficial description of
the contemplated transactions. For example, the applica-.
tion for a modification to permit TWA to lease one Boeing
707 from Tooleo on a day-to-day basis and to acquire cer-
{
31
tain spare parts from Tooleo, referred fo at page 29 of
* petitioners’ brief, was but two pages long, with two short
exhibits - attached: the Lease Agreement and a Letter
Agreement with respect to the purchase of spare parts
(R. 369-77). The application was filed January 30, 1959,
ani the Board’s order granting it issued on February 26,
1959. | : |
‘This application is typical of the submissions made
to the Board which were the bases of the. Board’s
successive orders modifying the original. control order
in the case of each of these separate transactions. Each —
of the ordérs was issued in ‘a non-adversary administra-
tive proceeding. Except for Order No. E-11432_(June 11,
1957) (A-192) (involving a purchase of substantial addi-
tional TWA stock) and Order No, E-13334 ( ber 30,
1958) (.A-196) (involving- guarantees of loans apparently
considered to potentially increase the control of Toolco),
none ‘purported to approve anything.*
* The language used by the Board in modifying or amending the
original 1944+ Control Ordér took different forms. In the earlier
orders—No. 4437 (A-174). .No. E-922 (A-175), No. °“E-2404
(A-177), No. E-4160 (A-179), No. E-5324 (A-180), No. E-8214
(A-183) and No. E-10300 (A-185)}—the thodification or amend-
ment was achieved by ordering the addition to the 1944 Control Order
ot a paragraph reading substantially : '
“That the terms ‘of this order shall not restrict or affect the
right [of Toolco or TWA f carry out the transactions described
in.the motion requesting modification ].”
In subsequent orders—No, E-10871 (A-190), No. E-11432 (.A-192),
No. F-13334 (A-196), No. E-13542 (A-199), No. E-13873 (.A-2013,
No. E-14169 (A-204), No. E-14504 (¢A-207) and No. E-14877°
(A-209 )—the Board's language. with slight immaterial variation. was
“That order 3210, issued October 17, 1944, as amended by
sudsequent orders, be and it hereby is further amended to permit
{the transactions betwéen TWA and Toolco set forth ‘in the
motion for modification].”
In Orders No. F-13430 (4-211), No. *E:18561 (4-218. and No.
E-16195 (A-218 the modifying language read: |
“That the restrictions imposed on transactions between Toolco
and TWA by order 3210,as modified, are further moditied &
_ permit TW.\ to consummate the transactions destribed * * *.”
?
.
. 32
Except for Order No. E-922 (October 29, 1947) (A-175)
which modified the 1944 control order in respect of
TWA’s purchase of certain Tooleo-manufactured radar
units at cost, each order itivolving any acquisition of.
aircraft or other flight equipment by TWA from. Toolco
cqntains a specific provision (although variously worded)
that it “shall not be deemed a determination for rate-
making purposes of ‘the reasonableness of any of the’
transactions specified therein”, language which is hardly
‘consistent with Toolco’s contention that the terms and
conditions of each transaction received full Board ap-
proval. |
The Creation of the Voting Trust
In December 1960 the defendants finally agreed to out-
_ side financing for TWA in the amount of $165,000,000, on. _
When gp. oe the issue of a possible further acquisition of,
control of TWA by Toolco, the Board adopted a quite different
approach: Thus, in Order No, E-11432 the Board ordered that:
“Any additional acquisition of control of TWA by Toolco
as may result from, the agreement presented herein, be and is
hereby approved, provided that such additional centrol, if any,
_shall be exercised in accordance with the terms and conditions
of [the original Control Order].” (A-194)
The slight ‘variation in. Order Ng. E-13334 (“That any additional
control of TWA by Hughes as may result from the transactions
*.* *") does not seem to have intended any different effect
.(A-198).
The one remaining significant variation is found in Orders No.
E-15430, No. E-15561, and No. E-16195 wherein the Board speci-
fically ordered: Sa. :
“That TWA be and it hereby is exempted pursuant to Sec-
tion 416 from the requirement|s| of section 408 to the extent
mecessary . — eS [to purchase the instant — and
uipment from Toolco, a person engaged in a phase of aero-
eohes’ (No. E-15430), en sanahiah ture additienal jet aircraft
and five engines from Toolco, a person engaged in a phase of
aeronautics’ (No. E-15561), and ‘to consummate the jet aircraft
- jequipment purchases described and set forth in the motion
| herein’ (No; E-16195)].” (A-214, A+217, A-226) -
Such explicit exemptions pursuant to Section 416 were given to
TWA, not of course to Toolco.
Zs 33
ae ' ; . ‘
terms which, by that time, were far less favorable than
those which TWA could have obtained in earlier years.
Asa part of the 1960 arrangements Toolco’s common
stock in TWA was placed, on the insistence of the financial . :
institutions providing the money, in a. voting trust. In
its order approving these arrangements the Board de-
scribed the.voting trust as providing “measures of assur-
ance regarding the management policies of TWA during
.the period the securities are outstanding” (A-221).
_ The Board went on to indicate its understanding of the
reasons why the banks and ‘insurance companies had
found it necessary to seek this protection or assurance .
_ with respect to the management policies of TWA:
“We have not been told officially ofthe reasons
which motivated the decision of the insurance com-
_ panies and banks to seck this protection. However,
we have not been unaware of TWA’s problems.
“Fot example, it is a matter of public record that
TWA’s major competitors arranged the financing
for their jet fleets. at a significantly éarlier, date
than did TWA. The impact of this fact may be
indeed far-reaching. This may havé meant : that
those carriers obtained their financing at a time
when funds could be raised on relatively more at-
tractive terms. In any event, it is clear that TWA
Will pay substantially higher interest rates for its
-funds than its major competitors. The fact that
this, disp: rity in debt burden can play a significant -
part-in tue competitive picture is certainly clear. -
_ “Moreover, it is probable that the delay in av.
ranging financing has also prevented TWA from
securing delivery of a substantially large portion of ~
the jet fleet which was ordered on its behalf. Thus,
TWA was unable to take delivery of the twenty
Convair 880's, most of whi 1 have been available
. ‘for the past several menths. It appears that the
failure to receive this equipment as planned may
have played a substantial part in TWA’s recent
inability to maintain its traffic position relative to
%
6
wy
34
¢
its principal competitors. Thus, we note, for exaniple,
that the carrier’s preliminary traffic reports for the °
month of November 1960 show that TWA’s share
of the Big Four domestic passenger market has -". .
declined from 23.0 to. 20.2 per cent.. By way of con-
trast, United, which “was behind. TWA, has caught
and passed it, increasing its share from 21.3 per
~ eent to 29.0 per cent., It appears to be significant.
that ‘'WA’s major competitors have already taken
‘delivery of neuch larger jet fleets than TWA is
' operating and haye firm orders for ey of
more,
_ “Under these cireumstances, we think it clear that.
* Board action to facilitate TW A’s acquisition of jet:
. qement is in. ‘the public interest. At the same
\ however, it is evident that Toolco’s control of
TWA, as“exercised through Hughes,- has presented
,, substantial problems requiring the Board’s atten-
* tion.” (A-223-24) (Footnotes omitted.)
y
‘The Board also recognized that the creation of the Vot-
ing ‘trust effected an important alteration in the relation:
-ship between. Tooleo and TWA. Thus, the Board. poimied -
out that with the consummation of this plan
“* * "* a. significant and fundamental change will
‘have been accomplished in the control of TWA by
Tooleo. Upon'the execution ef the voting trust, the
Toole control of TWA will change drastically in
both form and substahee. -No longer will the direc-
tors of Tooleo be free to enforce their dictates or
tlrose of Tooleo’s controlling shareholder on TW A”
(A-222) Pn
The Board went on:*
«“* * * the Board wishes to-make clear the fact that -
it would anticipate the proper filing of an- applica-
tion under section 408 of the Act and the obtaining
of the approval of the Board before Toolco would
attempt.to reassume ‘control over TWA. It is clear
that suclr approval ‘would not be forthcoming with-
~~. . . co
et
—_ a)
out a searching inquiry into the public interest
factors affecting this control.Z (A-224- 5) aaaatcaet
sis supplied; footnotes omitted.)
Wid the consunimation of these new’ arrangements,
TWA came, for the first time since before 1940, under
the control of directorsiand management interested ‘ex- .’
clusively in the well-being of TWA. The first step. to be
taken by this new management 4vas to reverse the policies F
of the past: which -had seriously affected TWA’s \traftic
position, as the Board noted in its 1960 order, and which
had prevented TWA from keeping pace with the rapid
development. of jet service in the domestic and interna-°
tional air transportation industry. . ;
The enormity of the task ‘the new thanagement faced
in 1961 and the effectiveness with which it met that chal-
tenge is understored by findings contained in the Recom-
mended Decision of Examiner in the Transatlantic Route
Renewal Case; CAB Docket No. 13577, July 9, 1964, pp.
86-87 : _ te
“Under the control of Howard Hughes, TWA
suffered from, a lack of continuity in its manage-
ment from January 1956 to April 1961. During
this period, there were only thtee - “years, viz., .
* January 1957-January 1958 and ‘July 1958-July
1960, in which the carrier had the benefit: of being |
directed by. a duly elected. president. That office -
“was either’ vacant or occupied by an acting presi-
dent, half of the time. ‘TWA was unable to obtain
adequate financing and its ability to acquire needed .
jet-powered aircraft. was greatly impaired. — Only
after the Civil Aeronautics Board approved a vot-
ing trust arrangement of the Hughes stock of TWA
in 1960..did the Gaaneul and. equipment =
improve. -
“Although TWA introduced jets in its” —
system in fhe early part of 1959, i¢-was not until the
end of the year that three stich aircraft were placed.
in transatlantic. service. Pan: American, on ihe
other hand, had six jets in-transatlantic service in
Y
ail “
”
Py 36
December 1958, a year earlier, and 13 in operation
by December 1959. In June 1960 TWA had nine
. jets in transatlantic service as compared with 22
* for Pan American; and a year later TWA was still
‘operating nine jets in transatlantic service, . while
Pan American had a fleet of 25 jets.
' “Tt seems clear, therefore, that TW.A’s relatively:
° greater decline in transatlantic participation can- ©
- not be attributed to any deficiency in the route pat-
- tern, and this condition should have no bearing on
the question of whether the staff’s area concept
should be substituted for the present route. pattern.
Since TWA’s present management took over in
April 196T, free from the handicaps’ which impeded —
-previous managements, the carrier’s participation .
_in the market has increased from 12.6 percent in
1961 to 17.2 poem in [963.”* .
The Conduct of the Defendants Since 1960
As the complaint makes clear, the defendants sought to .
continue their pattern of unlawful conduct and to achieve
their unlawful objectives even after the creation of the
voting trust in 1960. Thus, during May and June 1961
defendants sought to. stop TWA from purchasing jet air-_
craft from Boeing even though TWA’s Board of Direc-
- tors had already determined, as’ the defendants knew,
that such ‘Boeing aircraft would best meet TW.A’s press-
_ing need for more jets; instead the defendants sought-to
compe! TWA to purchase 13. Convair Model 990 aircraft
* In anticipation of Toolco’s attempt to suggest here (as it pre-.
viously did in the Court of Appeals) that these cohclusions of the
Examiner resulted from self-serving contentions made by TWA -in
a proceeding to which’ Toolco was not a party, it is clear from the
_7Examiner's opinion (and can be established by an inspection of the
record of that proceeding): that his conclusion was. based on material
_ submitted by either the Board’s staff or Pan American World Air-
ways, Inc., whose interest was adverse to TW A's in the Tr ansatlantic
Route Renewal Case. The Examiner’s. conclusion on the route issues
—as the quoted analysis indicates—rejected TWA’s contention there
that its historical competitive weakness entitled it to preferred treat-
ment on route allocations.
one
~
37 ‘
from Tooleo (Complaint, paragraphs 37, 38, 39, A-18).
In efforts to attain. their objectives, defendants made
.threats against TWA, its directors, the voting trustees, -
and the financial institutions lending money to it, includ-—
ing a threat to institute suit; they sought to interfere in,
impair and disrupt the contractual] relationship between
TWA and Boeing by asserting to Boeing. that its contract
-with TWA, which had not been consented to by Tooleo, |
was not binding upon ‘TWA (Complaint, paragraphs 38,
39; A-18). ° .*°
During the same period defendants also by additional
means sought to impede TWA’ S purchase and financing of |.
the jet aircraft selected by ii. They maliciously com-
municated to the Securities and Exchangé Commissiof.
oe unwarranted objections concerning a Registration State-
ment which TWA had to file to complete its financing
arrangements, and they publicly announced, while a pub-
lic offering of securities by TWA was in progress} that
Tooleo proposed to sell 85% of similar TWA securities it.
_was obligated to acquire, with the result that the prices at
_which the securities offered by. TWA could be sold and
“ere sold to the public were decreased substantially
( Complaint, paragraphs 40-45, A-19-20). (These securities
were in fact sold by. Tooleo, but more than two veats
later.) As part of the same unlawful effort, defendants.
algo warned the banks- and. insurance companies from .
which TWA’ was then attempting to borrow $30,000,000:
of short-term funds and $147,000,000 of secured funds to
purchase the Boeing: aircraft, that the voting trust was
invalid and that ‘any financing entered into. without
Toolec’s consent would be invalid (C Complaint, —
/ 46; A-20). 3
These warnings and the other threats and ‘side an-
nouncements by. defendants were made for the express
purpose of impairing TWA’s éfforts to obtain financing
from sources other than defendants, so as to enable de-
. . 38
: fendants to continue to condition the furnishing of financ- -
ing to TWA upon TWA’s acquiring jet-powered ‘aireraft:
only from defendant Toolco.*
The History of This Litigation
On: June 30 , 1961 TWA commenced this ait. '
There followed nearly-two years of proceedings before
the District Court, which culminated in the entfy of the
default judgment. During this period defendants con-
ducted what may be accurately characterized as a complex,
persistent, and ingenious campaign, the aim and result of
which- was to foreclose plaintiff from discovery of evi-
dence on the vital subjects of Hughes’ and ‘Toolco’s’
activities in the areas of financing and aircraft acquisition
—the gravamen of TWA’s complaint. It is the last step ©
in this campaign, the refusal to produce obviously sig-
nificant documents and the refusal of Howard Hughes to
appear for the taking of: his déposition, that petitione
‘now describe as an “election -to rest-on its positions”.
(Petitioners’ Brief, p. 10). Aware of the obvious inade-
quacy of this theory of “electidn” to explain, their be-_
havior in the District Court, petitioners take the further °
| position that in the course of proceedings vigorously con-
tésted for nearly two years (a) nothing worthy of atten-
tion occurred anyway and:(b) the contest was in the wrong
arena. The history of the " oceedings reveals this ne to
be pure sham. : >
In the initial phase of the litigation Toolco filed various
notices of deposition (fol. 76-91) and obtained the priority:
of discovery normally accorded to a defendant under the
* A> verbatim transcript. of a telephone conversation .between
Hughes and Holliday-a few months previously appears in the record
at T-58. In it Hughes directed Holliday to tell Convair that, he
would see to it that TWA bought Convair 990s—how he would do
it, he said, was his business, although he quite plainly assumed that
he could attend to this upon-regaining control of TWA. W hifé never
illuminated by further inquiry, as it stands it quite adequately explains
.the purpose of these obstructive maneuvers.
- then prevailing practice in the Southern District of New -
York (A-85, fol. 586-87). . It then‘used that priority for
the purpose of enmeshing the proceedings in an endless.
_ exploration into irrelevancy, the effect of which was to
make it appear that the record, which defendants them-
selves were solely responsible for creating, was barren
of information in support of plaintiff’s complaint. As an
early step in Toolco’s discovery, a subpoena duces tecum
was served upon TWA (fol. 586-87)—requiring the pfo- _
_ duction: of an enormous volume of documentary mate-.
rial (copies of almost all of which ‘were later found to
be already in Toolco’s files). On August 8, 1961, just
prior to the service of that subpoena, Tooleo moved to
~ dismiss TWA’s: complaint (fol. 276-402).
The various priority ‘and other motions filed by the
parties during the period immediately following service
of TWA’s complaint required the attention of no fewer
than, six District. Judges. The submitted papers alone
included hundreds of pages of material. Due to the
complexity of the case and the burden on the Court, on
August 31, 1961 Hon. Charles M. Metzner was appointed
Judge for .all purposes to supervise the conduct of the .
proceedings (fol. 581). oAll matters then pending became
the subject of a lengthy pre-trial conference before Judge
_ Metzner on September-6, 1961 (fol: 616-69). This was the
first of 19 formal pre-trial hearings that were held before
Judge Metzner. There were, in addition, other confer- z
ences in chambers of: which no record was. kept.
The Court, in a hearing that took up some 52 pages
of transcript, was asked to consider Toolco’s motion to
" dismiss the complaint, in support of which Toolco had
filed 126 pages of papers {thus cenverting it into a motion
for ‘summary judgment) (fol. 276-402), most of which
were formally withdrawn a year and half later in an
attempt to preclude TWA from bringing in matérial re- .
lating to the merits (fol. 2711). In addition, argument
schedule for the taking of depositions. Coynsel for Tooleo
also noted that it planned to counterclaim inst TWA
and others and would not wish to press further @ts motion
as to the complaint until after it had answered and pressed
its counterclaims. In the same breath Toolco’s counsel
virtually withdrew the motion until after Toolco had com:
' pleted its discovery proceedings (fol. 648-49).—On_Sep-
tember 7, 1961 tha Court ruled that Toolco’s motion
“be held in abeyance” until defendant shall notify the ©
Court when it desires the: motions to be heard (fol.
' *§86-87).
While TWA began the massive job of searching its files
. and producing documents in response to Toolco’s sub-
- poena (a procedure Which.required documents to be re-
_ viewed in cities across the nation and occupied counsel -
for several months), a second pre-trial conference was
called for October 2, 1961 before Judge Metzner.
That conference dealt with TWA’s motion under Rule
34 for documentary discovery from Tooleo (fol. 670-704).
TWA demanded discovery of certain tax documents as
_ part of the overall production of documents it sought from
Tooleo. The necessity of establishing an early deposition
date for Hughes, in light of his ebmplete dominance over
defendants’ Activities and over those of TWA in the field
of aircraft “acquisition and finance, was also urged “hy
TWA. Tooleo vigorously o osed TWA’s motion on the
“ground that it should be allowed to complete its entire
discovery proceedings before TWA could begin. .
Thas -Toolco’s intransigent resistance to- Hughes—or
anyoné else—being deposed by plaintiff and to the making
of any discovery of its most significant documentary ree-'.
ords had solidified as early as these first pre- trial con-
_ ferences. As will be seen below, when. that position was at-
’ tacked by order of either the ‘Spetial Master, the District
©
~ a i -
os x
Court“ or even the Court of Appeals, Toolco’s attitude was '
either to ignore the orders or.to defy them.
During the fail $s 1961 TWA produced the documents
called for by“Tooleo’s subpoena, and on Décember 5, 1961
the Court ruled that Tooleo must submit to documentary
discovery in accordance with TWA’s motion pursuant ‘to
. Rule 34. Specifically, the Court ruled that the financial and
-———tax-informiation sought by TWA was relevant and should
be produced (R. 1-2). On December 18, 1961 the Court
ordered production by Tooleo to begin on March 15,. 1962.
-and set January 5, 1962 as the date depositions noticed by
; Tooleo were to commence TR. 1377-78).
« The deposition proceedings conducted by Tooleo began,
. as scheduled, on January 5, 1962 with the taking of TWA’s
. deposition by its president, Charles C.—Titinghast, :.
_., — (fol: 5428) On February 7, 1962, the Court, concerned |
' with having the depositions proceed expeditiously, ap-
pointed former Solicitor General J. Lee Rankin as Special
Master. In the same order the Court set out the deposi-
tion schedule it anticipated would be followed. Thus, the
proeeedings were to continue with the Tillinghast deposi-
tion on February 13, followed by depositions of other -
TWA officers and then by a host of other Tooleo-noticed .
depositions which included 10 corporations and 20. indi-
viduals. All of these were to be completed by April 23,
~~___ 1962, a time schedule in accordance with Toolco’s notices,
at \which time TWA was to begin depositions of Hughes
and others (A-139-48).
: ‘In February 1962 Tooleo filed tts anewer and so-called:
counterclaims, the nub 6f which admitted that TWA had
been. grievously injured by the delays in its aircraft
acquisition program and the financing therefor, but sought °
to shift the blame for TWA’s injuries to the additional
defendants (A-31-84). This opened the second phase of
the proceedings. The additional defendants, already. in
attendance at the depositions after notice of their pend-
\
\°
42
a
ency from. the Special Master, were also required to pro-
duce masses of documents for Toolce’s inspection. The
enlargement of the proceedings required another extensive
pre-trial conference with the Court on February 23, 1962 .
to straighten out questions arising out of the additional
defendants’ presence in the action (R. 2-36)..
TWA charged that Tooleo was using its depositions to
delay proceedings and to discover information. relating
to its counterclaims. TWA pointed out that the Tilling-
hast deposition was. still in progress, even though Till-
inghast had been employed by TWA only a few months
prior to the filing of TWA’s complaint and had no personal - -
knowledge. of the events.of the preceding years. TWA
. requested that this deposition be terminaged. The Court,
on March 5, 1962, ordered. Tooleo to limit its examination
to the scope of the complaint (A-86-87) but refused, at
that time, to terminate the Tillinghast deposition.
Shortly after filing its complaint, TWA undertook
a vast. international search in an unsuccessful effort to
locate Howard Hughes. After all efforts in this direction
had failed, TWA ‘applied to the Special Master for per-
mission: to serve limited interrogatories on Toolco as to
the location of Hughes, its 100% eueenanes: and acanitted
managing agent. .
’ Tooleo vigorously opposed .TWA’s right to serve the
interrogatories, but after submission-of briefs and ex-
tended oral argument thé Special Master; on April 17, |
granted TWA’s application, directed. that any appeal .by
Tooleo be takerf. within 10 days wy specified that the
interrogatories be served on May 2, 1962 (R. 60). No
appeal was taken by Toolco, and ‘on May 2 TWA served
its limited interrogatories on Toolco requesting answers
thereto by May 17 (R. 37-44). Tooleo then objected both
to _— form of the interrogatories and to TWA’s right to
e them at all. The Special Master took further briefs:
and heard additione! oral argument but on Jane 4 ordered
a .
ase c 483 /
Toolco to arfiwer no later than June 20, 1962 (R. “ 1047-
48). Three days later Toolco appealed the - vorder to
: Judge Metzner, but placed no return date on its papers
. (fol. 27680-83). Then, on June 11, ‘it. attempted to.
~ reargue.the point before the Special Mastér. On June 14,
Toolto’s attempt to reargue «was rejected (R: 59-62). .Al-
though not relieved by either the Special Master or the
Court from compliance with the June 20 deadline, Tooleo -
_neither answered the interrogatories nor took any other
“action. on them. * fe. .
Meanwhile on March 15 262 Tooleo had commenced .
production . of documents in accordance. with the court
, _ order of. December 18, 1961. Production was to be made
in Houston,. Los Angeles and elsewhere. However, TWA
counsel were initially refused admission to the key Los
‘Angeles site (the Hughes message center), and only after
“strong admonitions from the Special Master did: produc-
.tion in Los “Angeles belatedly begin.
“TWA was aware that it was regular practice for defend-
ants toy Ase attorneys as business agents and negotiators
for all important matters. Noting from an initial exam-
ination of documents produced by Tooled that no docu-
ments relating to the important areas in which these
agents functioned had beey produced, TWA and the addi-
tional defendants sought to obtain such documents. They
asserted that defendants had, waived any attorney-client
privilege as to ‘these doetfments on the ground that
defendants had: used affidavits qf these attorneys as to
questions of fact both in the litigation and in an ‘unrelated
matter concerning Northeast Airlines pending before the
CAB. In addition, defendants had pleaded advice of
counsel as a defense in the action, and the scope of the
~ activities of these attorneys as business representatives
of Hughes and Tooleo further militated for a finding of
waiver. If Tooleo were allowed to withhold these docu-
. ments, the most ‘significant documentary evidence of
4“
defendants’ aircraft and financing activities would be
unavailable. .
After very extensive briefs and arguments the special
Master, on April 17, 1962, ruled that Tooleo must produce
the documents (AA-95-115). Tooleo then appealed the
’ ruling to the Court. Substantial briefs were submitted on
the appeal, and on May li, extended oral argument was
‘heard by the Gourt (Pol. 24570-612). On July 24 the
Court ruled that Tooleé@ had waived its privilege. Toolco
completely ignored the Court’s decision (AA-116).
Meanwhile on June 25, 1962 TWA: again moved to
terminate the Tillinghast deposition, which was still in
. progress with no end yet in, sight (fol, 26694-700). On
July 12 another lengthy hearing was held before Judge
Metzner to determine whéther the Tillinghast deposition
should be terminated, whether depositions should be alter-
nated so that TWA could ‘commence its discovery without
waiting for Tooleo to exhaust all possibilities of delay,
and whether Tooleo had to answer the interrogatories
asking the whereabouts of Hughes which it had previously
been directed to answer no later than June 20, 1962. The
Court ordered that the Tillinghast deposition be termi-
nated no later than July 25. Judge Metzner also modified
and affirmed the Special Master’s ruling as to the inter-
rogatories seeking the location of Hughes, directing that
they be answered by July 26; he rejected the proposal of
alternating depositions, with leave to renew the applica-
tion in September (AA-88-89).
* On July 18, 1962 Tooleo moved the Court to clarify
and limit its order with respect to.the interrogatories as
‘to Hughes’ location (fol. 1438-40). “This motion was
denied on July 23. (fol. 1440). On July 26 (the return ”
date), however, Tooleo applied to the Court for additional
_ time to answer the interrogatories and was giv en watil .
—— 27, 1962 — 1453-76, R. 59-66). :
“ 4~
On July 27 Toolco_ taferentt TWA that it had received .
authority to accept service of a a subpoena on behalf of
Hughes, a position it confirmed by. letter of August 1,
1962. .Tooleo, however, refused to show its purported
“authorization” to TWA, but mailed a ‘copy to Judge
Metzner (R. 65). At the same time Tooleo sought to
reargue its position vis-a-vis the assertedly privileged
documents—none. of which had yet been produced,
_ although Toolco had eeeey been directed by the en
to produce them.’
_ TWA, which had been shown no “authorization” to ac-
cept’ service for Hughes, continued to seek him. On
August 17, 1962 attempted service in California was again
unsuccessful, and TWA’ Cotinsel left its subpoena with
the Office of the United States Marshal, in Los Angeles.
TWA decided to await Toolco’s answers to interrogatories
which had ‘been most recently ordered bed be filed by
August 27, 1962.
; On August 21 the Court returned the “authorization”
to Toolco’s counsel noting that it was: “returning what
‘you sat is a written authorization from Mr. Hughes” and ~
Stating that it expected Tooleo to obey.the Court's order
“of July ‘26 concerning ‘answers to the a ;
Thereafter, Tooleo sent a copy of the “authorization”
- TWA. TWA replied that it awaited, Tooleo’s: answers
to the interrogatories. On August 27, Toolco informed
TWA that it had no intention of answering the interroga-
tories (R. 45-58).°. TWA, on August 28,-moved the Court, a
for appropriate relief (fol. 1491-93)
The final phase of the proceedings in the-Dis striet Court
began with a pre-trial conference before Judge Metzner
on September 6, 1962, held te consider TWaA’s motion with
respect to the ‘interrogatories (R. 1379-88). That morn-
ing, at about 7:30 (eviderttly prior to the normal hour of
opening the office), Toolco’s counsel had appeared at the
* Tooleo never answer&i them.
U.S. Marshal’s Office in Los Angeles, presented a copy of
the. “authorization”, and “accepted” the subpdena for
‘ Hughes.” A return of service was made by the Deputy
. Marshal reciting these events (fol. 1604-09). Concerned
that a-question might later be raised as to the effective-
ness of the “authorization” to bind Hughes or Toolco,
however, - TWA had submitted the “authorization” to
‘analysis by a handwriting expert (Charles Appell, for -
years relied on by the United States Government in sim-
ilar matters). At the hearing before Judge Metzner in
New York, TWA informed the Court of this and: that’
the signature of “Howard R. Hughes” thereto was a
forgery (B-34-43, R. 68-70). “Tooleo subsequently denied
the charge of forgery and submitted an affidavit executed
by a Notary Public in California to the effect that Hughes —
/ had appeared before the Notary, confirmed the authoriza-
tion and given authority for it; no actual signature of
Hughes was ever submitted, however (fel. 1574-739). The
Court reserved decision on these extraordinary happen-
ings pending further developments, .
¢ ‘TWA then moved before the Special Master to con-
firm September 24, 1962 (the return date of the subpoena
which Toolco’s counsel had purported to accept) as the
date for Hughes’ examination (fol. 26930-31). .
‘On September 15, 1962 the Special Master denied TWA’s
application to take Hughes’ deposition — Septem-
ber 24, but said:
“T feel that there is such a close connection be-
tween Mr. Hughes, as evidenced by some of the
. documents that I a seen, and the fact that he
is the sole owner of the Hughes ‘Tool Company, that
the Hughes Tool Company is responsible for Mr.
aoe with ane to this subpoena” wu Se
o _* ‘e
«“e © * T am piercing the corporate veil as te the
. Hughes a Company, and I am bringing what
Papen ear py oe
assertedly privileged documents, the Special Master on -
September 15, 1962 again ordered Tooleo to.produce them.
. (The next previous order for their production had been
_ that by the District Court on July 24, never modified or
set aside, but ignored by Tooleo. Toolco again appealed
to the Court.
On September 21, 1962, after another hearing,~ the
‘Court modified the ruling of the Special Master and set
the date of the Hughes deposition for October 29, 1962. .
The Court stated:
“The Special Master stated for reasbns set forth
in the record that unless Howard R. Hughes com-
municated with him by today,. Friday, oo
Qist, 1962 he would consider that Mr. Hughes has
acquiesced in this interpretation and that if Mr.
Hughes subsequently either attacked the validity
of the subpoena or failed to appear pursuant to
that subpoena on September 24th, 1962, or at any
future time that the court might direct for the
taking of the deposition of Mr. Hughes pursuant ~
to that subpoena, he, the Special Master, would
consider the imposition of sanctions. upon the Tool
.Company, and that he would entertain a motion
to strike the answer of the Tool Company and
enter judgment against it.
“Without passing upon the power of ,the Special
Master to grant the entry of such judgment, the
court adopts the interpretation and conditions
* On Pebrenty 8, 1963, counsel for Toolco® stated ‘with respect
* to this decision of the Special Master-
“* * * the Tool Company di not seek a- review of those
rulings-of the special master ‘by the Court and accepted i in effect
the — placed upon it by that ruling.” (AA-167)
~
expressed. by the Special ster. Any eben
_tion by the Special Master Fears, be Fev fora
“default judgment woukhd, Fors, be reviewable
upon appeal to the court.’
' Toolco’s deposition proceedings, cm went ahead .
slowly, and two additional TWA officers and one former
officer were partially examined (A-471, A-570, A-579). ‘By
- the time discovery proceedings were halted, Toolco had
‘ spent an entire year inthe process and 13,000 pages of
- testimony ‘had been compiled. The result of all this was
one deposition completed, one. ordered halted after months
of delay and, forays into irrelevancies, and two uncom-
pleted. ;
After the Court’s ruling on September 21, Tooleo em-
barked upon yet,another series of obfuscating tactics, the
‘ aim of which Was to frustrate the taking of Hughes’
‘deposition by TWA and the additional defendants.
Thus. on Septenther 25, 1962: ‘Tooleo moved for a pre-
trial conférence under Fed. R. Civ. P. 16 to define and nar-
’ row the issues—at a time when TWA had not been able to
take a single deposition and still lacked important docu-
mentary information which Tooleo continned to refuse to.
_ produce (fol. 1914-22). . Then on Oétober 11, Tooleo servéd
on TWA the first set of its massive interrogatories which,
when added te tke second set served on November 13,
ineluded thousands of ae (fol. 2214-324, fol. 27491-
566). -
On October 22, 1962 Tooleo again moved to adjourn
the Hughes ‘deposition then scheduled for October 29 (fol.
27082-83):+on October 25 the Special Master set Febru-
ary 11, 1963 as the definitive date for Hughes’ examina-
tion. In setting that date, the Special Master expressly
noted that he was giving Toolco. time to: present what-
ever motions it wished to the Court. (B-460). Although
Tooleo was expressly cautioned that any appeal from:
the ruling should be taken within 10 days, Toolco did not —
appeal. r
As 7
49
o.
‘Then on December 4, 1962 Toolco moved to depose addi
, tional defendants Dillon Réad and Sessel and Irving prior Ne
to any deposition of Hughes (B- 503).. The-Special Master,
undoubtedly mindful ef the tiaue Tooleo could consume
and had ‘consumed in deposition proceedings, denied the
mation on December 28 (B-466). In this decision the
Special Master noted that he considered the ‘February 11,
1963 date for Hughes’ deposition a firm one and .wished
“that there may be no valid basis for ‘misunderstanding -
it” (B-464). Tooleo, appealed that decision to the District -
Court. me
_On January 10, 1963 the District Court
—‘denied Toolco’s motion to depose Dillon Read, Sessel
and Irving prior to Hughes’ dgposition -(A-90) ;
—denied Tooleo’s Rule 16 motion with leave to renew —
after the deposition of Hughes (A-92) +
—directed that TWA need not answer Tooleo’s inter-
rogatories until $0 days after completion by TWA of &
' deposition of Hughes (A- 93- 94); and .
—affirmed once more the ruling of the Special ‘Master |
as to the. assertedly privileged docunients and ordered
Tooleo to produte such documents by noon, January 14,
1963 (A-92). ¢
" As to the Hughes deposition the Court stated:
“The deposition of Howafd R.: Hughes by .the-
plaintiff and the additional defendants should now
go forward. This deposition was: originally sched-
uled for September 24th, 1962 and then adjourned
to’ October 29th, 1962. It has now been adjourned
to Februart 11th, 1963 and this date will be adhered”
to in the absence of extraordinary circumstances. ee
(A-91). |
None of this quelched Toolco’s efforts to escape discov-
ers. ‘The documents were not produced. Tooleo, however,
made application to the Court of Appeals for leave to file
a writ-of mandamus seeking review of all the orders of
s
50
_ the District Court and for a stay of proceedings. On
~ January 23, 1963, after a hearing and the submission of
papers on the motion, that Court denied Toolco’s applica-
tion {fol. 3851).
Meanwhile, on January 14, 1963, Tooleo: moved “in the
' alternative” to hold Hughes’ deposition on ‘written inter-
rogatories or finally to bring on-its motion (pending since
August 8, 1961) to dismiss the complaint’ or for summary
judgment (fol. 2496-515). On. January 19, the Court
denied the motion to depose Hughes on written interrog-
—e but agreed to hear Toolco’ s 1961 motion (AA-120-
29). .A briefing schedule was set for the motion designed
. to afford Toolco the maximum possible time for prepar-
ing its papers without jeopardizing the February 11 date
_ for the commencement of TWA’s -discovery.. The Court
also instructed Tooleo-to advise TWA aud the additional
defendants by January 22, 1963 if it wished them to ton-
duct the Hughes deposition at a location other than the |
Federal Court House in. Los Angeles as specified in
TWAY’s notice (AA-121-22). No such advice was given and _
TWA undertook extensive “and costly preparations for the
examination of Hughes, including the dispatch of numer-
ous attorneys and large quantities of documents to Los
Angeles and the leasing of office. space (R. 1390-92).
As part of the preparation for Hughes’ deposition TWA
_and the additional defendants again sought discovery of *
‘further tax returns, revenue agents’ reports, accountants’
‘work sheets and related memoranda which had never been
produced despite the Court order of: December “18, 1961
requiring their production.
“* The fact that the requests that Hughes be deposed by written
. interrogatories and to bring on the motion to dismiss were presented
. “in the alternative” provides an interesting insight into fendants’
strategy. It is obvious that the motion to dismiss was thought of as
‘merely another tool which might be used to prevent the oral deposi -
tion of Howard Hughes. If the deposition could be taken on written
interrogatories, then’ the motion to dismiss w ould be unnecessary.
©
51
The Special Master, after extensive ar gument, ruled on ”
J anuary 22, 1963 that the documents were relevant to the
case cand. that they should be produced. He ordered
production to commence on January 30, 1963 so that
counsel could prepare for Hughes’ examination (B-237-
47). On February 1, 1963 the Court affirmed the Special
’ Master and ordered’ production to start immediately (AA-..- x
143-44). Tooleo refused to produce the tax .documents,
as well as those over which privilege had been asserted,
notwithstanding the various orders, that they be «made
available, and notwithstanding the intervening refusal
by the Court of Appeals to review those ‘orders on an |
extraordinary writ.
_ On February 1, 1963 Toolco served its papers on its
motion. to dismiss (withdrawi ing its summary judgment
motion). On February 2, 1963, TWA served its answering
papers. On February 6: oral argument was had, and
Toolco’s motion was denied, with a formal opinion issuing
‘on February 7, the next to last business day before Febru-
ary 11 (A-118-29). In order to give Tooleo a further op-
portunity to seek interim relief by application to the Court
of Appeals, Judge Metzner stayed all discovery proceed-
ings until 5 P.M. on February 8, 1943 (A-129). Toolco
made no such application. - nae
On Friday, February 8, 1963, the last business day
‘before the ‘scheduled examination of Hughes, Toolco
informed Judge-Metzner in open-court, shortly after 5:00
P.M., that it had made a “business dtcision” not to pro-
eeed further. Counsel -indicated that Tooleo was fully
aware of the sanctions available te -TWA for such a -
deliberate refusal to comply with the several orders of the
Court (A- 150-51, AA-190-99) .*
oF Petitioners suggest that Toolco’s election to “rest on its positions
in erder-to obtain appellate review of decisions it deemed erroneous”
is akin to the position taken by the United States in United States v.
Procter & Gamble Co., 356 U. S. 677, 680-81 (1958), ( Petitioners’
Brief, p. 10, note 8). The crucial difference, however, is that in the
’
.
me 52
The end of the road was finally reached in May 1963.
it had. taken almost ‘two years, consumed thousands of
pages of deposition testimony, with hundreds of thousands
of documents produced by_all parties,.19 formal pre-trial
conferences before Judge Metzner encompassing some 800
pages of transcript, not to mention the six judges who
functioned prior to Judge Metzner’s appointment, scores
of hearings before the Special Master, a hearing before the
Court of Appeals -and an-incredible intermational, hunt —
for Hughes which invoked the time of the District Courts
in California, New York and Florida as well as attorneys
threughout the United States, Mexico and elsewhere.
The result of. all this was a deliberate refusal to pro-
duce the most needed documents and the only witness with
full knowledge of all the facts. In sum, what Toolco
denied to. TWA was the information which’ bore on the
very heart of the complaint—Hughes’ and Toolco’ s activi- _
ties concerning: financing and aircraft acquisition.
Following appropriate motions by TWA and the addi-
tional defendants, the Court on May 3, 1963 filed opinions
and orders granting a default judgment to TWA on the
complaint and dismissal -of Tooleo’s counterclaims with
prejudice: After. summarizing the record upon which
Procter & Gambke case, the Department of Justice refused ‘to comply
with the discovery order and allowed the complaint ‘to be dismissed
because it regarded the discovery order itself, requiring production of
grand jury minutes, as being improper. There is no possible room
for argument here as to the propriety of Judge Metzner’s orders
directing that a deposition be taken and dir cting that documents be
produced. Petitioners refused to comply w th that order, allegedly,
as a device to secure a review of questions isposed of by,an earlier
order which was not subject to review. In p pint of fact, a familiarity
with ‘all of the petitioners’ strategems before the Special. Master and
the District.Court reveals that the real mot vation for the refusal to
comply with the discovery orders was a fe« of what that discovery
- would disclose.
53
TWA’s motion for entry of a default judgment rested _
(A-132-35), Ge Court said:
“Tt is clear” that the deposition of —— 7 is
essential for the proper presentation of TWA’s case.
.. It is also clear that the failure of Hughes. to appear
on February .11th for his deposition was the result
of a clear and studied determination by Toolco
after all efforts to _postpone—the—appearance of
Hughes -had failed. The default was deliberate and
- willful * * *.” (A- 135-36)
The Court of Appeals commented that.“* *-* Hughes and ©
Tooleo seemed to look upon the entire discovery proceed-.
ings as some sort ‘of a game, rather than as a means of |
securing the-just and expeditious settlement of the impor-
tant matters in dispute” (R. 1434). ;
The Northeast Control Case
In the’meantime, the Civil Aeronautics Board was again’
concerned with Tooleo and Hughes—in the so-called
Tooico-Northeast Control Case (CAB Dkt. 11620). ‘Upon .
a complaint by National Airlines that Tooleo and Hughes
were: violating Section 408 of the Federal Aviation Act
by ‘their activities in connection with Northeast Airlines,
the Board entered.Order No., F-15532 on July 12, 1960,
initiating an investigation into whether Tooleo and Hughes
had unlawfully acquired ,control of Northeast.** Subse-
_quently, on January 8, 1962, Northeas:, Tooleo and Atlas
filed a. joint application with the Board for approval of
the acquisition by Tooleo of Atlas’ controlling .56% inter-
* The Court: had earlier noted that the refusal to obey its orders
to produce documents was “embraced wale the refusal to an,
with the deposition of Hughes” (A- 135).
** TWA, while still under Hughes’ control in 1960, was originally
included, in the Northeast investigation pursuant to Order F-15532.
‘However, the Board, by Order E-17675, November 8, 1961, p. 5
n. 6, dismissed the investigation as to TWA. TWA was not a party”
-and except a$ noted herein played no part in the proceeding. Teolco,
-«
54
est in Northeast. On February 7, 1962 a number of issues
for the Northeast proceeding were outlined in advance of
_ the hearings (Appendix-1 to Report of Pre-Hearing Con-
ference, February 7, 1962) (R.-773). One such issue con-
_—eerned possible violations: by Tooleo of the Federal Avia-
tion Act or of the Board’s 1944 control order regarding
TWA> Another issue concerned the effect that Toolco
control might“ have on the “‘Ronest, economical and effi- _
cient management’ of Northeast” (R. 774). ;
On March 28, 1962 the Board’s staff served sebpeenne --
‘on TWA and some of its officers=in the Northeast control
proceedings, seeking information on the prior relationship
between Tooleo and TWA. ~* This was atthe time when
documentary discovery by Tooleo to TWA. had’ just
begun in the instant litigation (see p. 43, supra), and the
Board’s staff thereafter requested TWA to furnish rele-
vant documents to it as they became available. On April
16, 1962, hqwever, the Board’s staff informed TWA that
its cooperation would no longer -be required. In a letter
to TWA’s counsel (appended hereto as Annex B) the staff
explained that: .
| «® © © the Hearing Examiner,ruled out any inves-
tigation into the economy or efficiency of Toolco’s
- management and control of TWA. With this issue
out, and°with the antitrust litigation in its present
posture, we did not deem ‘ft necessary to press
forward on other issues * ° *.”
Previously, on April 9, 1962, the Board’s staff had by .
letter described to the Examiner the general areas of,
- inquiry it wished to pursue. The letter (available. in the
public record of CAB Docket 116 ) first made clear
however, has since attempted to use the N ortheast case to obtain
ex parte from the Board a ruling: that would. permit it to reassert
control over TWA (“facilitating™, in the Board's euphemistic phrase,
the “termination” of the TWA “Toolco controversy, Order E-21057 )
without any hearing ever being held before any tribunal at which it
might be possible for TWA to establish its right to redress.
eal
2
that the staff had‘ no intention of litigating the issues
in “the TWA-Tooleo antitrust suit:
“The Bureau does not intend to sities to prove,
or disprove, either the allegations of the complaint
or those of the counterclaim. To do so is not
‘essential to a .diSposition of this proceeding. . In
addition, it would inevitably result in a long, drawn-
- out hearing which might have ‘extremely adverse
consequences for Northeast.”
After concluding that the antitrust Senees should be left
“for other times and other forums”, the staff indicated —
it would .concentrate- its attention on the mismanagement
aspects of the Tooleo-TWA situation and especially on
self-dealing and conflicts of interest. As the letter pointed
out: a
“Obviously, potential conflicts \of interest were
inherent in the relationship betw etn TWA, an air- -
line 78 per cent owned by Toolco}\ and Hughes/
Tooleo, who apparently were dealers iy commercial :
aircraft.” ay
Areas of inquiry which the staff felt necessary were listed :
“Most fundamentally, however, we intend \to in-
-quire into whether Mr. Hughes, by reason of his
‘widespread interests, insistence upon direct exer-
cise and control of decision-making power, and
inability, for, whatever reasons,.to make decisions
with the required firmness and speed, ran TWA in
a manner inconsistent with economic and efficient
management (and therefore “inconsistent with sec-
tion 102 of the Act), and whether he could be ~
expected to operate Northeast in the same fashion. —
We believe that the evidence will tend to show that,
for many years, Mr. Hughes insisted upon retain-
ing control of equipment, design, manufacture,
acquisition, disposal and financing; that he at times:
- injected himself into areas of the day-to-day opera-
tions cf the airline, notably its advertising; that, .
_ because of his widespread other business interests,
56
. ‘ »-
or for othér = * re was unable or unwilling
to make decisions on these matters at opportune
times; that he consistently failed to delegate this —
decision-making power to the officers or directors
of TWA, who would, under normal management-
‘ stockholder relations, have exercised these’ func-
tions; that ‘in so doing, he abused the. legal rights
of TWA and its minority stockholders;. that, for
these and other reasons arising ‘out of the man-
agement-stockholder relationship, TWA was unable
to retain chief ‘executive officers; and that, as a
primary result of the conduct of Hughes/ToolJco,
the economy and efficiency of TWA were seriously
More specifically, we believe the evi- —
dence will tend to show, among other things, that
Hughes/Tooleo prevented TWA from taking
advantage of favorable market conditions to secure
additional equity financing; that TWA’s . financing
was eventually arranged at a cost significantly
higher than that of its major competitors; and that
TWA: was put at a serious competitive disad-
vantage because of its inability to. secure jet air-
craft at the same times and in comparable quantities
as its competitors.”
Thé staff was, however, overruled in its desire to in-
quire into the areas it thought critical. ‘The Examiner
took the position that the key qtestion in the Northeast
-_ ease—indeed, the only question—was whether Northeast
would survive, absent financial support from Tooleo. Since
the answer seemed clearly negative, he excluded evidence
of ‘Tooleo’s past mismanagement of TWA. The Examiner
ruled that evidence of illegality might be admitted, “but
narrowed the area of this inquiry by agreeing with the
staff that -possible violations of the antitrust laws by
Toolco were not a proper subject of inquiry. The position
taken by the staff and the reasons why ‘they concluded
that the Examiner’s ruling effectively precluded them
from inquiring into even the limited area he had desig-
. nated: as open to inquiry are fully set. out in the brief
ty
‘57
thereafter filed by the staff with the Board, excerpts
from which are annexed hereto as Annex C.
In affirming the Examiner’s decisiog permitting Toolco ~
tg acquire control of Northeast, the Board noted that
he had excluded evidence of Toolco’s previous uneconomic
and inefficient management of TWA as being “a waste of —
time and effort” and ruled that “the condition of Northeast
and the necessity for immediate help made the basic i issue
not whether Toolco would. provide an efficient management,
but whether Northeast would have any management at #ll.”
Toolco-Northeast Control Case, CAB Order No. E-t8470,
. GCH C.A.B. Cases’ (1960-1964) - 721,292, p. 14,852 (1962)
(R. 833-46), aff'd sub nom., National Airlines, Inc. v. Civil
Aeronautics Board, 321 F.2d 380 (D.C. Cir. 1963). The
Board also made it plain that it: was hot passing upon the
. propriety of Tooleo’s past management of TWA, but that
_ such an inquiry would be pertinent in connection with any
“resumption of control of TWA” by Toolco:
“Should the question. of resumption of control of
TWA come at some future date before the Board
and an inquiry be sought into the efficiency and
economy of Toolco’s past management of TWA,
the materiality of such evidence in that, case will be
* determined at that time. — .
; , - ** « ° i s
“Our findings here ‘are limited to the control re-
lationship presented by the Purchase Agreement
that is before.us. We have not considered nor do
@e pass upon either the route issues in the New
York-Florida Renewal Case, or any public interest
issues that may arise in connection with any future
resumption of -Toolco control of TWA.” (Id. at
p. 14,853) (R. 843) (Emphasis supplied.)
In affirming the Board’s decision, the Court of pions
for the District of Columbia Circuit also noted that the
Board and Examiner had*not pursuéd the question of
efficiency and economy of Toolco’s management of TWA,
58
that it was not possible to determine from the record —
* whether a fuller inquiry might establish violations of law
by Tooleo with respect to TWA, and held that the Board
was justified in concluding that in that case the “real issue” -
before it was whether the public interest would be better
served by the acquisition of Northeast by Toolco than by -
the bankruptcy of Northeast (321 F.2d at 385).
a , a
Recent Developments . - - — ae ‘
After Judge Metzner had entered his order directing.
that a default be entered against Tooleo and a réference
be held to. determine the amount of damages to be paid to
TWA and liis order dismissing Toolco’s eounterclaims
with prejudice, and after these. orders had been affirmed
by: the Court of Appeals for the Second Circuit in. the
decision now on review here, Tooleo sought’ to circumvent
the results obtained in-this litigation by reacquiring con-
trol of TWA through the purchase of certain TWA secu-
rities froni their present holders, for approximately
$108,000,000. In pursuit of this objective, Tooleo applied
to the Board either to disclaim jurisdiction or *to grant
such authorizations or approvals as might be required -
under Section 408 of the’ Act to permet it to acquire the .
outstanding notes
wees the effec which” acquisition will be to
permit Tooleo to name: the voting trustees of the
presently existing voting trust with respect to the
stock of TWA of which Toolco is the beneficial
. owner (the ‘Voting Trust’). or to terminate thé
Voting Trust’ if it so desires.”
TWA. of course, opposed Toolco’s motion, and National
Airlines and Eastern Aiflines each filed a petition for
leave to intérvene. |
Despite the fact that in its 1960 opinion snpinsee the
voting trust it had indicated that it would anticipate
the proper filing of an application under Section 408
59
before Tooleo would attempt to reassume control over
* TWA. and that such approval would not be forthcoming
- Without a searching inquiry into the public interest
factors affecting this control, and despite the fact ‘that,
even more recently, in its opinion in the Toolco-Northeast
¢ Control Case it had referred to the. possible “resumption
of Toolco control of TWA” and the public interest factors
to be considered at such time, the Board granted the
application on July 10, 1964 to the extent of declaring
that Tooleo might exercise its option to acquire the TWA.
notes at such time as it submitted a- plan satisfactory to
the Boat which’ would effectively divest Toolco of the
power to contro! TWA and Northeast simultaneously. |
Despite its prior ¢tatements to the contrary, the Board
concluded that, even if it assumed that “Tooleo temporar-
ily lost all power to control TWA during the period of
- the voting trust, this fact would not have effected a ter-
mination of the Board’s prior approval of the Toolco
‘control of TWA under the unique ‘circumstances prcoent
here.”
Th® Board took this action without any briefs or oral
argument, without any hearing whatsoever, and without ~
even any notice in the Federal Register that it intended
to dispose of Toolco’s application without a hearing, all of -
this in the face of the express language of Section = ;
* .of the Federal Aviation Act. that:
SO eee
- “Any peuieks secking approval of a- transection)’
* * *, specified in subsection (a) of this section,
- shall present an application to the. Board, and*
thereupon the Board shall notify the persons in-
volved in the [transaction], * * * and other persons
known to -have a substantial interest in the pro-
ceeding, of the time - place of a eos hearing.”
TWA immediately inna review ‘of’ this order in the
United States Court of Appeals for th\ Second Cireuit,
A
x
60
and that Court, in a unanimous opinion by Judge Hays,
held: ;
“* «e* © that the Board should have held a hearing
before issuing its order permitting Tooleo to re-
sume control of TWA arid that the declaratory
ruling was an abuse of the Board’s discretionary
power.” Trans World Airlines, Ine. y. Civil Aero-
nautics Board, $39 F.2d 56, 62 (December 7, 1964).
The Court held that a hearing was required by Section
408(b).: Petitions for rehearing with respect’ to that. deci-
sion were denied February 11, 1965.
The Rulings Below
Two rulings By Judge Metzner are pentinteite relevant
on this review. First, of course, is the ruling appearing
at A-:132-36 which was the basis of the appeal to the
Second Circuit. In-that ruling Judge Metzner reviewed
in detail the proceedings leading up to Toolco’s'refusal to
- proceed, and. concluded that the.entry of a default judg-
ment against the defendants was appropriate. °
_ Also relevant is Judge Metzner’s earlier opinion deny-
ing tlfe defendants’ motion to- dismiss the complaint
(A-118-29). Defendants’ contentions in support of that
motion were. substantially the same as they are here:
They argued to Judge Metzner that the Civil Aeronautics
- Board had primary. jurisdietion over the conduct alleged
in the complaintS@at the conduct had -been exempted
from the ntitrust laws by previous Board orders, and
that, in any event, the tomplaint failed to state a claim. ~
In disposing of the exemption, argument Jutge Metzner
ruled that: .
“These orders’ did. not give Tooleo a license to
engage in other acts that may normally be forbid- .
den by the antitrust laws. What has been approved
and exempted is the fact of ‘acquisition of control’
not activities engaged in by the controlling party
) :
wabeoquent to acquisition, which may be illegal.”
(A-123) .
é>
AR ‘
Referring to the Board’s 1960 opinion approving the vot-
ing, trust arrangements, Judge Metzner commented ;
“It is clear from this opinion that the CAB. does
-not:look upon Tooleo as contrglling TWA after
December 1960. Thus, anything done by Tooleo
~ subsequent to that date has not been approved by
orders of the CAB and certainly .no exemption
exists as to the seédnd claim.” (A-125-26)
With respect to “the * primary. jurisdiction argument
Judge Metzner ‘ruled? as follows:
“9 © © the acts complained of by TWA are acts
allegedly done by the controlling party after the
ee oF acquisition had been approved, not only.to the detri.
. nient of the carrier in question, but to other-carriers
Sf and to competitors of the controlling ‘party.- This
in my view is the distinguishing factor between
this case and the- Panagra ease. While the acts
charged here could be proper subjects for considera-
tion by the Board in determining whether control
of TWA by Tooleo was in the public interest, they _
ure not the type of-acts Over which tha, Board has
exclusive primary jurisdiction. They are not within
the contemplation of. the regulatory’ powers granted
the CAB. Cf. Georgia v. Pennsylvania R.R., supra.”
(A127 -28) aly mene omitted, )
Judge neue also found that: .
“* * * There is no doubt that the complaint on its .
face sets forth a claim against the defendant and
is not subject = dismissal under rule 12(b)(6).”
(A-120): -
3
°
wSnne
In a unanimous opinion by Chief Judge Lumbard, ‘the
Court of Appeals affirmed Judge> »Metzner’s ruling. This
opinion is set out*at R. 1413-37; we will not attempt to
.
°
6
- summarize it here although particular portions of it will.
be referred to in the following argument.
% « /
Summary of Argument
eo .
WwW 5
I.
A. Petitioners’ first argument—which - pervades their “
brief and affects all their other-arguments—is that the
powers of the Civil-Aeronautics Board under the Federal
Aviation Act are such that they supersede any antitrust
remedy against petitioners whatever, no matter how
clearly their conduct “has violated the antitrust laws and Me
no matter how clearly it/has hurt TWA. It is important .
to bear in mind in considering this argument the differ-
ence between the Board’s having the’ right, to consider
particulan matters for some of its purposes, and the
Board’s having the sole and exclusive right to deal in any
way with those matters. Petitioners can prevail here only
if they can demonstrate that the anticompetitive conduct
alleged in the complaint is the sole responsibility of the
Board, to the exclusion of the courts* @ -
The Federal Aviation Act itself, reveals that the Board ~
does not have, exclusive primary jurisdiction -of this
predatory eonduct. The anticompetitive practices com: —
plained of are practices which have restrained competi-
tion, not in the air transggrtation market, but in markets
relating to the supply of aircraft and financing to air
earriers: neit on the face of the statute nor in ‘the °
- practices of twenty-five years-of administration is there
any hint that the Board has -been given either: the
exclusivé. responsibility or, indeed;-the power to super-
vise and regulate these peripheral industries. Section 10L
of the Federal Aviation Act, 49 U.S.C. §1302, in mapping
out the Board’s public interest objectives, refers only to
objectives relating to the development and regulation of
o
63
air transportation. It provides no guidance for the
regulation of aircraft supply or aircraft financing. Sec- . :
tion 408, 49 U.S.C, $1378, does not confide to the Board
a comprehensive and pervasive regulation of the general
’ . conduct of a person engaged in “any other phase of aero:
nautics” when that person happens to control ‘an air
carrier, but rather the more limited function of allowing
or vetoing the acquisition of control ‘itself. Section 414,
49 U-S.C. $1384, defining the Board’s power to exempt
+ from the antitrust laws, is notable. for the narrowness
and precise definition of the antitrust exemption author-
‘ized. As applied’ to this case, the only order whieli can
_ result in an exemption is an-order approving an acquisi-
tion of control, and the only thing exempted thereby is
the acquisition of control ‘itself.
- No other provision of the Act in any way extends the
Board's exclusive Jurisdiction or its power to exempt |
beyond the liinits Sindiaated above. Sections 408 (a1) and
: .408(0e) merely: confirm the Board’s fact- gathering and
investigatory tools, insofar as those tools are: neeessary
to the performance of the functions contemplated by See-
- tions 408(a) and (b). Section 411, 49 U.S.C. $1381, cannot
broaden the Board’s power to exempt since it is not one
of the sections*referred to in Section 414, which contains
the sole statutory basis for any antitrust immunity. That.
section is jnapplicable, in any event, for two reasons: first,
because it is available only with respect to practices en-
- gaged in hy an “air carrier, foreign air carrier or a ticket
ayent”; second, because it provides a remedy only against
unfair or deceptive practices “in air transportation or the
"sale thereof”. None of the defendants is an aif*carrier or
a ticket agent and none of the practices complained of is
“in air transportation”. ”. Even if Section 411 could be con-
_ strued to apply to the conduct of one\controlling an air
carrier, it would not, in any event, apply: to defendants’
64.
conduct since 1960, for Toolco ceased tar ysaiinel: EAR in
December of that year. . .
In‘sum, the: Board’s power is limited to dporoving or
vetoing acquisitions of control, and it has no authority
to impose sanctions against these defendants for their past
unlawful conduct; so it plainly does not have an exclusive
right to deal with such practices. .—
B. The legislative history of the Act emphasizes the
narrow limits-of the Board’s authority in this area. The.
Federal Aviation Commission had recommended that the
absolute bar upon acquisitions of control of ‘air carriers
by hiding companies or cihers engaged in a phase of
aeronautics, which had been written into the Air Mail
Act of 1934, be replaced by a power in the Board to per-
mit some such acquisitions. The Commission believed,
however, that the Board’s powers in this particular ‘area
should be “those of veto rather than of initiation”.
Two dominant themes emerge from the Congressional
debate on Section 40S. The first is the great concern on
the part of Congress “that effective enforcement of the
antitrust laws be assured and minimum encroachment
on antitrust enforcement be permitted to the Board.
“CE ]very precaution i ben written into the bill so that
the antitrust laws and alR&laws for the prevention of com-
binations and monopolies shall be enforced” (Senator
McCarran). “What I desire to see is the preservation of
the opportunity’ of competition” (Senator Borah). The_
second theme is that the legislators believed the only
power they were giving the Board was to approve or veto
an acquisition of control. The proviso on which the debate
‘centered was one barring the Board from approving an_
acqpiisition if such approval would have defined anticom-
petitive effects. In view of the evident concern of Con-
gress lest the Board be permitted to sanction any anti-
competitive acquisition, that proviso would undoubtedly
have been more broadly drawn to prevent approval of_
°
- : 65
~ other anticompetitive conduct had Congress thought it was
giving the Board authority to: approve anything | more
than acquisitions. Moreover, the participants in the de-
bate plainly assumed that the only possible anticompetitive *
effects which conduct approved by the Board might have
would be in the field of furnishing air rs. to
the publie. . :
‘The result of the debate was that the provision which
had been drawn to bar the Board from approving any
acquisition of control which “would result in ¢reating a
monopoly or monopolies and thereby unduly restrain
competition or: unreasonably jeopardize another air car-
rier * * *” was revised by eliminating the words “unduly”
and “unreasonably”. The express purpose of this cliange
was to prevent the Board from having “too much room
for unlimited construction”. The striking thing is Cor-
gress’s wariness of giving the Board a discretion which
would enable it to impair. the effectiveness of=antitrust
enforcement, even in-the field of air transportation over
which it was given regulatory powers. In the light of this
attitude it is inconceivable that Congress intended to give
the Board the broad and exclusive jurisdiction over anti-
competitive practices in other fields for which petitioners
argue, without even a reference in the debates to the pos-
sible consequences of such a step.
C. This Court has consistently held that antitrust.
exemption is not to be extended beyond the. areas marked
out by Congress, and that in reconciling the antitrust laws
with regulatory legislation the antitrust laws are tc be
displaced to the minimum extent necessary to make the
regulatory legislation work. E .g., California v. Federal
Power Commissien;, 369 TU. S. 482 (1962); United States
v. Philadelphia National Bank, 374 U. S. 321 (1963). Even
where an agen lias approved a transaction as being in
the public interest’after weighing antitrust considerations
>
66
_ along. with other factors, this Court has held that the
transaction may remain subject to antitrust attack. United
States v. Radio Corporation of America, 358 U: S. 334.
~ (1959).
There are only two: kinds of cases in which primary
‘or exclusive. agency jurisdiction has been found: first,
where Congress has clearly and explicitly authorized an
adniinistrative agency to exempt the very conduct at issue
from -the antitrust laws; second, where the agency is
charged with administering a regulatory scheme in which
‘a prime requisite is a uniformity or coherence which
sporadic judicial action would destroy or impair. The
decision in Pan American World > st Inc. v. United
States, 371 U. S. 296 (1963), (“Panagra”) falls in this
latter category, as is made plain by this Court’s reliance .
on Texas & Pacific Ru. v. Abilene Cotton Oil Co., 204
U. S. 426 (1907), and’ Keogh v. Chicago €.N.W. Ry., 260 -
U.S. 156 (1922), cases in which private actions to recover
damages resulting from the’ charging of unreasonable
rates were precluded to avoid disruption of the system
of uniform rates administered by the Interstate Com-
metee Commission. .
The result in Panagra flowed from the coincidence of
_ several factors not present here. In Panagra the Board,
like the Department of Justice, was charged with pro-
tecting the public interest and the Board was capable: of -
dealing just as broadly and just as flexibly. as ‘could the
courts with the matters .as to which the Department was —
seeking injunctive relief. Here relief is sought by a
private party who has been held entitled to damages, and
the Board. can provide neither damages nor any other
effective remedy. In Panagra, the issues went to prob-
‘lems of route structure and common ecarrier-air carrier
relations which are at the heart of the air transportation .
industry, which the Board is charged to regulate. Here
the unlawful practices complained of affect competition in
. 67,
aircraft supply and aircraft financing, industries not reg-
ulated by the Board. Finally, in Panagra, the relief which
the Department of Justice sought would have had an im-
pact on, and might have disrupted, the coherent route
system developed and administered by the Board. An
" award of damages to TWA here will.affect neither routes
nor rates nor any other system or structure in which
uniformity or coherence is important. ,
D. . Ry conceding in their Petition for Certiorari that
only the Court, and not the Board, can award damages,
petitioners conceded. that the most to which they could -
have been entitled was therefore a stay and, in effect, that
the default order must be affirmed. For even if petitioners
had heen entitled to a stay, its denial would clearly not
have deprived the Court of: jurisdiction to enter its
default order when they reftised to proceed with discovery.
No stay or preliminary reference to the Board was,
in any event, appropriate. The Board does not have
primary responsibility for: determining whether anticom-
petitive ‘practices have been committed which affected
aircraft supply and. financing. nor is ‘the performance of
a preliminary fact-finding function by the’ Board necessary
to preserve any coherent or uniform regulatory scheme.
‘Indeed, a preliminary reference to the Board would be
useless since no jurisdiction at all exists to conduct a
‘proceeding under Section 411, and in a proceeding under
Section 408 the Board’s concern would necessarily be
whether Tooleco should be permitted to acquire or main-
_ tain control over TWA in futuro, rather than the adjudi-
eation of issues relating to past violations of the antitrust
laws.
Il. ee
A. The Board’s orders approving Tooleo’s acquisition,
first of 45% of the stock of TWA and then ‘of approxi-
mately 78% of the stock of TWA, éxempted from the .
ff
68
antitrust laws only the acquisition of control itself; they
did not exempt the pattern of conspiratorial and dabow ‘ful
conduct alleged in the complaint.
In its 1950 order the Board-described its earlier control -
order as not granting “a blanket, unlimited in futuro
approval of the relationship between Tooleo and TWA
***” The 1950 order was similar and had a comparable —
effect. — - m
. The last’of the control orders was issued in 1950, before
the bulk of the anticompetitive conduct alleged in the
complaint took place, and certainly before the bulk of the
adverse economic impact. which that conduct had on TWA.
Even in the investigation which resulted in the 1950
order, the Board and its Examiner, far from finding that
Tooleo’s control had been good for-' TWA, found that the
policies of Hughes. and Toolco, in insisting on debt rather
‘than equity as a means of meeting TWA’s capital require-
ments, “must be condemned.” The Board certainly never
* considered or approved: in its orders prior to and includ-
' ing the 1950 order a course of conduct remotely resem-
bling that alleged in this complaint. oe -
~ More fundamentally, however, the Board is anthorized
by Sections 408 and 414 of the Federal Aviation Act to
exempt from the antitrust laws only an acquisition of
control. As Tooleo’s counsel wrote, in a letter to the
Hearing Examiner in the original control case, “* * * the
approval sought by Hughes Tool Company in ‘this case
would not constitute a- license to permit Hughes Tool
Company or TWA to do whatever they desire in the >,
futur: *° * ©” (R. 610): In their brief,, petitioners con-.
_ sistently confuse approval of an acquisition of control with
the approval of any and every use to which that control
is put. As the Court of Appeals held, however, “surely
Congress did not contemplate that’ CAB approval of an
acquisition would be tantamount to approval of every
transaction which might be entered into by the controlling
; ‘
“
69
party” (R. 1422). There is a pertinent analogy in Silver
v. New York Stock Exchange, 373 U. S. 341 (1963), where -
. this Court held that the mere fact that the New York
Stock Exchange had a general power to adopt rules
governing its members’ relations with non-members did
not compel the conclusion that “particular: applications of
such rules are therefore outside the purview of the anti- |
trust laws” (373 U. S. at 357). Nothing in the Board’s
order approving Tooleo’s acquisition of control of TWA
“authorized, approved, or required” Tooleo to engage in a
conspiracy involving the appropriation of a captive mar-
ket, the boycotting of competitive suppliers of aircraft,
the use of tying and exclusive dealing agreements to fore-
close the ‘TWA market, or the monopolization of the sup-
plying of aircraft. This course of conduct was therefore
not approved by the Board’s orders and was not exempted
by. those orders from antitrust prosecution.
B.. No action taken by the Board since 1950 has
broadened the scope of the exemption theretofore created.
The only matters submitted to the Board after 1950 were
. diserete transactions involving either the sale or lease of
particular aircraft by Tooleo to TWA or particular financ-
ing arrangements for TWA. ‘The applications to the
Board with respect to these transactions were brief and
informed the Board only of their salient features. Many
pieces of the pattern of dealing. between Tooleo and
TWA were never-submitted to the Board, and the Board
-- was plainly not aware of them. The Board, for example,
was certainly never informed of the coercive action by
Hughes and Tooleo whereby TWA was prevented from
even negotiating with competitive suppHers of aircraft
and whereby such competitive suppliers were foreclosed
from the TWA market, or of Hughes’ and Tooleo’s course .
of: dealings with other air carriers and with aircraft
manufacturers. Nor did it ever at any time or in any.:
10
way purport to exempt such activities from antitrust
prosecution.
Contrary to the suggestion. made in petitioners’ brief
that the Board followed a practice of “approving” the
transactions submitted to it, what the Board in fact did
with respect to these transactions was merely to amend
its original control order so that the order would not
“restrict or affect the right” of Tooleo or TWA to carry
out the transaction or so as to “permit” the transaction
to take place. Indeed, the Board generally followed the
practice of. including in each of the amendatory orders a
provision that it “shall not be deemed a determination for
rate making purposes of the reasonableness of any of the
transactions specified therein * * *”, thus disassociating
itself from any approval of the terms presented ; the word
“approve” is carefully restricted (with obvious intention) :
to acquisitions of control. The entire series of orders is
summarized in, Annex A, anil the pattern which emerges
flatly contradicts the interpretation which petitioners seek
to impose.. Nor are petitionérs’ helped by their reference
to an allegedly “extensivg mass” of information contained
in the Board’s files as a result of: various reporting require-
ments and rate making and other proceedings conducted.
The content of these materials, which are dehors the pres-
ent record, is unidentified, and so far as anyone can tell
they had nothing whatever to do with any of the allega-
tions of unlawful conduct contained in ‘the complaint.
Neither TWA nor the Courts ‘below deny the Board’s
power to condition its orders approving acquisitions of
control. -The existence of sucli ‘authority loes not mean,
however, ° ‘that the Board can’ use it to extend beyond
the limits prescribed by Congress the ‘Scope | of whatever
antitrust exemption results from its orders. The Board |
may not, by use of the power -to condition its orders,
exempt from antitrust prosecution activities restraining
trade in the supplying of aireraft and financing to air
1
carriers, markets which the Board is not authorized to
regulate at all, much less to regulate exclusively.
C. It is neither necessary nor appropriate to refer this
matter to the Board to determine the scope of the exemp-
tion created. by its orders. The Board’s business is not
the issuance. of antitrust exemptions, but the approval or
‘disapproval of transactions which it is authorized to regu-
‘late. .The antitrust exemption is an incidental statutory
result of the Board’s lawful order approving certain speci-
fied transactions; th exemption flows from the statute and
not from the Board’s voluntary grant. It is within the .
competence of a court, and indeed, it is the — of
the court, to determine its scope.
‘It would be an extraordinary result ingeed to hold that,
in the posture in which this litigation is presented, the
complaint fails sufficiently to state a cldim invoking
the jurisdiction of the district court. Few, if any, of
the many cases in which the sufficiency of an antitrust
complaint Jias been challenged before this Court—and
sustained—have contained as detailed and precise allega-
tions of classic violations ofthe antitrust laws. \As a
' matter of simple justice, plaintiff should.not be summarily
barred from the only tribunal provided by Congress for
- the redress of such injuries—without even an Opportunity
to prove its case.—
Petitioners denigrate the - ae, apparently - in
the hope that their characterizations will be accepted
without reading it; tvpical.is their entirely baseless claim
that the sole commerce involved is the supply of aircraft
to TWA. ‘That alone would be-enough, but petitioners
simply ignore paragraph 7, which describes the commerce
‘involved as a whole, and pretend that paragraph 8, which -
concentrates ‘on that part of the commerce particularly
72
affecting TWA, stands alone. Paragraph 7 specifically. .
~ — defines, among the relevant markets, the supplying ‘of
aircraft to TWA “and other air carriers.” Similarly they
_pretend that the joint action required for a violation of
“Section 1 of the Sherman Act is not sufficiently alleged,
as if Atlas Corporation were not clearly characterized as
an important co-conspirator, and as if Hughes—one of
the world’s: wealthiest and most powerful men—could
possibly be excused from the conspiracy as a mere agent °
of Toolco, instead of being (as the complaint clearly
states) ‘the prineipal architect of the conspiracy, and its
dominant figure throughout.
An actual examination of the complaint shows allega-
tions’ plainly. sufficient to-charge an unlawful conspiracy
_to appropriate a captive market. an unlawful conspiracy
to boycott, and ‘an -unlawful tving arrangement, all
elassically considered violations of Section 1 of the Sher-
_man Act. Defendants’ suggestion that a person coerced
_ to hoycott another cannot recover for the injury which he.
himself suffers (Petitioners’ Brief, p: 98) is directly
contradicted not only by “United ‘States v. Yellow Cab Co. i
332 U. S. 218 (1947). which recognized that the controlled
‘enb companies involved there were harmed by being fere-
elosed ‘from access to. other cab manufacturers, but also
hy this Court’s very recent, decision in Simpson v. Unjon ;
Oil Co.. 377 U.S. 13 (1964). A Violation of Section 3
of the Clayton. Act through unlawful exclusive dealing
arrangements is expressly and factually alleged, as are
violations of Section 2 of the Sherman Act by. monopoliza-
tion and by attempts and conspiracy to monopolize various |
specialized markets which are described in detail.
In suggesting that they be excused ‘for sdme or all of
these antitrust violations hecause Toolco’s acquisition of
control over TWA was itself immunized by the, Board
from prosecution’ under the antitrust laws,- including
Section -7 of the Clayton Act, petitioners merely restate.
¢
—————
3
without improving, their earlier’ argument as to the expan-
sive scope of the Board’s power to exenipt. Perhaps the
acquisition would have been held -violative of Section-.7
if “it had not been immunized; that question has never
been submitted te a court. The present complaint, how-
ever, charges, not just the acquisition, but a comprehensive
and long-contifued course of unlawful conduct in which ©
the control over TW A was used, as a tool. It is absurd
to suggest that every use which petitioners made of that
tool was implic in the acquisition itself.. Tooleo did not
have to bar TWA from approaching and dealing with
other suppliers.of aireraft. It did not have to insist on
unsound financing arrangements for TWA in” order to
cement its hold on the TWA market. It did not have to
threaten Boeing in an effort to keep Boeing from dealing
with TWA. Even if all of these activities had, in some
‘sense, been implicit in the acquisition, jt’ would have made
no difference since tke Board’s power to exempt was, in _
any event, limited to the acquisition itself and did not
extend to these other activities.
Nor can defendants avoid responsibility for their unlaw-
ful eonduct on the ground that Tooleo was not a manu-
facturer of the aircraft it supplied. ~(Indeed, the extent
of Tooleo’s participation in the manufacturing. arrange-
ments remains unclear as a result of Toolco’s success in
truncating the discovery, see pp. 24-28, supra.) Suppliers
of commodities have frequently been held guilty of re-
straining trade. in a commodity even where they did not
' manufacture it themselves, E.g., Standard Oil Co. of Cali-
fornia v. United States, 337 U. S. 293 (1949). Petitioners’
concession in an earlier brief that if they. had.been manu-
facturers: they would be guilty (see pp. 131-32, infra), logi-
cally leads to the conclusion that they are guilty as suppliers.
Petitioners cap their exercise in record distortion by
characterizing as a claim of “eorporate mismanagement”
(see p. 141. infra) TWA’s:common law claim, which is
—
—<
74
based entirely on conduct sjnce the time when Toolco
ceased to have thé power to control or manage TWA. The
conimon law claim is, in fact, based on allegations of mali-
cious interference with advantageous contractual and other
business arrangements and it-is both sufficient and plainly
pendent to TWA’s second antitrust claim, relating to that
same conduct and that same period of time.
In sum, the complaint is sufficient, the exemption is
inapplicable, and, since the Federa] Aviation Act does not
broadly exclude the federal courts from dealing with
restraint&. pf trade affecting the supplying of tinancing
and aireraft to air carriers, thé default prder must be
. affirmed.
ARGUMENT
I. The Civil’ Aeronautics Board does not have
_ exclusive primary jurisdiction of the conduct alleged
he Ce Competes,
Petitioners’ first gambit i in their effort to frustrate judi-
cial vindication of TWA’s rights is their argument that.
the Federal Aviation Act gives the Board powers in this
area which are so pervasive ‘as to supersede any anti-
trust remedy whatever. This argument . is grounded on
repeated references to the Board’s “plenary powers over
the relationship bétween aA party ‘engaged in a phase of
aeronautics’ arid an air. ca®rier witch it contro
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