# Petition — Pacific Engineering & Production Co. v. Kerr-McGee Corp.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1977
- **Citation:** 434 U.S. 879

## Text

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In the Supreme Court ofthe: 2, cca

United States

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PACIFIC ENGINEERING & PRODUCTION Co. OF NEVADA,

Petitioner,
vs.

KERR-MCGEE CORPORATION AND
KERR-MCGEE CHEMICAL CORPORATION,

Respondents.

Petition for a Writ of Certiorari to the
United States Court of Appeals
For the Tenth Circuit

C. KEITH ROOKER
1800 Beneficial Life Tower
36 South State Street
Salt Lake City, Utah 84111

RICHARD W. GIAUQUE
Suite 500
Kearns Building
Salt Lake City, Utah 84111
Attorneys for Petitioner

Of Counsel:

Rex E. LEE
2840 Iroquois Drive
Provo, Utah 84601
WiLiiaM D. HALL

P.O. Box 34436
Washington, D.C. 20034

SORG PRINTING COMPANY OF CALIFORNIA, 346 FIRST STREET, SAN FRANCISCO 94105

y
i
a 2

ef

In Utah Pie, the Tenth Circuit had reversed a jury verdict in favor
of the plaintiff on the theory, as in this case, that the trial court

27

had acted on an injury to a competitor rather than injury to com-
petition. Here the Court of Appeals criticized Judge Hoffman's
analysis and result as “‘based on [Respondent's} effect on a com-
petitor rather than its effect on competition.” (Appendix A, p.
10; emphasis added.) The Court rejected the very reasoning em-
ployed by the Court of Appeals in this case in the following
terms:

It might be argued that the respondents’ conduct displayed
only fierce competitive instincts. Actual intent to injure an-
other competitor does not, however, fall into that category,
and neither, when viewed in context of the Robinson-Patman
Act, do persistent sales below cost and radical price cuts
themselves discriminatory. 386 U.S. at 702-3, n. 14; emphasis
added.**

The concept of “specific intent to monopolize” is a broad and
elastic one. In this sense, it is no different from questions of
intent that must be resolved by triers of fact in many other set-

11. A case remarkably similar in many respects, though in a different
industry and not involving actual monopoly , is Sanitary Milk v.
Bergjans Farm Dairy, Inc., 368 F.2d 679 (8th Cir. 1966). In that case
the Eighth Circuit approved an instruction that permitted the jury to find
an attempt to monopolize if

the defendants, or any one of them, entered into a conspiracy to
fix prices, “gave unlawful price discriminations to favored chain
stores in order to get large volume of sales’, sold below cost or at
unreasonably low prices in order to destrcy competition ...
“started a price war” in order to increase sales of raw milk. . .,
“if done with the intent to acquire the power to fix the price,
exclude competitors, or control the production of milk [in the
relevant market}. 368 F.2d at 690.

In approving that instruction, then Circuit Judge Blackmun made the

following pertinent observation:
Sanitary’s dominant position in raw milk production was necessarily
an element of influence in anything it might choose to do and
demanded caution on its part it embarked on processing. . . .
We must consider the evidence as a whole. “In cases such as this,
plaintiffs should be given the full benefit of their proof without
tightly compartmentalizing the various factual components and
wiping the slate clean after scrutiny of each”. [Quoting the opinion
of Mr. Justice White for the Court in Continental Ore Co. v.
Union Carbide & Carbon Corp., 370 U.S. 690, 698 (1962).} 368
F.2d at 691.

28

tings. Nor is it different from other elastic legal concepts widely
applied in the law, such as reasonableness, fair competition, fair
comment, and the like. Specific intent, like the other concepts, is
an ultimate factual question. It requires, indeed it permits, no
particularized definition. The necessary concomitant of its
breadth, its elasticity, and its basic factual nature is that it is an
issue as to which it is for the trier of fact, from all the evidence,
to determine whether a defendant was motivated by specific
intent to monopolize.

This Judge Hoffman did. Because of the realities in this area,
“conduct becomes a proxy for intent.” (Sullivan, ANTITRUST, p.
135 (West Pub. Co., 1976).) Alternatively stated, “proof of the
intent that outlaws any given conduct as an attempt to monopo-
lize is most often derived from proof of the conduct itself.”
(Cooper, Attempts in Monopolization, a Mildly Expansionary
Answer to the Prophylactic Riddle of Section 2, 72 Mich. L. Rev.,
373, 397 (1974).) Judge Hoffman had before kim messive
evidence of conduct, and other indicia of intent as well. It neces-
sarily follows that much deference must be given to the trier of
fact, who has heard the witnesses, observed their demeanor, and
considered all of the evidence.

Judge Hoffman found that Respondent was motivated by
specific intent to monopolize in setting its below-cost prices, in
forecasting procurement of all A/P business, in engaging in un-
reasonable surveillance of Petitioner, in projecting future prices
that were hii: when its surveillance indicated Petitioner's imminent
demise and low when Petitioner unexpectedly weathered the
storm, in impairing Petitioner’s small business classification, in
attempting to impair Petitioner's existing contract with United
Technology Corporation by offering a non-existent surplus of
A/P at $.09 to $.10 per pound, two-thirds of the already below-
cost price of A/P, and in incurring losses of $1,607,084 in its

29
A/P operations during the damage period (Appendix B, p. 37)
in order “to recoup the losses of a price war by monopoly pricing
....” (Appendix C, p. 99.)

The Court of Appeals accepted all of these events as facts, but
rejected them as irrelevant. It did so mot because they were not
found to be evidence of specific intent to monopolize, but because
it thought the pricing conduct alone not “predatory” or “‘sinister,”’
and because the other acts “inflicted no independent harm.”
(Appendix A, p. 11.) The analysis of the Court of Appeals
is backwards. The question is not whether those other acts
inflicted independent harm; the question is whether those acts
constitute evidence from which a fact-finder may conclude that
Respondent was motivated by specific intent to monopolize. The
Court of Appeals neither asked nor answered that question. As to
pricing, the question is not, as the Court of Appeals saw it, whether
Respondent engaged in predatory pricing; the question is whether
Respondent's pricing practices constituted evidence from which a
fact-finder might conclude that Respondent was motivated by
specific intent to monopolize. The Court of Appeals neither asked
nor answered that question.

The proper inquiry for the Court of Appeals was whether the
evidence, taken in its entirety, was such that Judge Hoffman's
finding that Respondent “consciously chose and implemented” a
decision to “actively pursue the acquisition of a monopoly” (Ap-
pendix C, p. 99) was “clearly erroneous.” The Court of Appeals
did not ask or answer that question. Rather than considering the
evidence in its entirety, the Court of Appeals took the approach
of “tightly compartmentalizing the various factual components
and wiping the slate clean after scrutiny of each.”"* The Court of

12. A method of appellate review found by this Court to have been
employed by the Tenth Circuit and vigorously rejected in the quoted
language. Continental Ore Co. v. Union Carbide & Carbon Corp., 370
US. 690, 698 (1962).

30
Appeals then dismissed Respondent's predatory acts other than
pricing because “they inflicted no independent harm,” and its
below-cost pricing practices because they were thought to be not
“predatory” or “sinister” even though intended to destroy Peti-
tioner.

The Court of Appeals failed not only to follow the directive of
the Union Carbide case, quoted above, it also failed to heed the
admonition of this Court in United States v. Yellow Cab Co.,
338 U.S. 338, 341-2 (1949):

Findings as to the design, motive and intent with which men

act depend peculiarly upon the credit given to witnesses by
those who see and hear them.

Judge Learned Hand in Alcoa made substantially the same obser-

vation:
[U}pon an issue like the witness's own intent, as to which
he alone can testify, the finding [of the trial court] is indeed
“unassailable,” except in the most exceptional cases. 148
F.2d at 433.

See also, Denison Mines Ltd. v. Michigan Chemical Corp., 469
F.2d 1301, 1309-1310 (7th Cir. 1972).

Although this Court has never done so, other Circuits have
discussed the concept of predatory intent in attempted monopoly
cases, thereby creating the confusion that has led to the Court
of Appeals’ ultimate error in this case."* Although the Circuit

13. Indicative of the confusion and inconsistency concerning whether
predatory conduct is a required element for a finding of an attempt to
monopolize are Coleman Motor Co. v. Chrysler Corp., 525 F.2d 1338,
1349 (3d Cir. 1975) [‘‘From the evidence of predatory practices . . .
the jury could infer the intent and probability of success necessary to
establish a section two violation}; Chisholm Brothers Farm Equipment
Co. v. International Harvester Co., 498 F.2d 1137, 1144-1145 (9th Cir.
1974) [“{T}his specific inteat ‘must be accompanied by predatory con-
duct directed to accomplishing the unlawful purpose’’’}; Moore v. Jas.
H. Matthews and Co., 1977-1 Trade Cases § 61,376 at p. 71,364 (9th
Cir. 1977) [“The rule in this circuit is that dangerous probability can be

31

cases are confused, and even the same circuit, the Ninth, may
have rendered inconsistent opinions, no other Circuit appears to
have done as the Court of Appeals has done in this case and in the
Telex case in literally substituting a legal standard of predatory
acts, each of which must inflict independent harm, for the fact
finder’s conclusion on the ultimate factual issue of specific intent
to monopolize. The confusion, or potential for confusion, that
the cited Circuit court cases created, in borrowing the concept of
predatory intent from Robinson-Patman cases for appli-
cation in attempted monopoly cases has come to full blossom in
this maior error of the Tenth Circuit, committed both in this
case and in Telex.

The issue thus presented urgently requires the corrective and
clarifying attention of this Court. Only rarely does a case arise
that affords the Court an opportunity to clarify the standard of

inferred from: either specific intent coupled with monopoly power or from
‘proof of specific intent to set prices or exclude competition . . . accom-
panied by predatory conduct directed to accomplishing the unlawful pur-
pose’ (emphasis by the court) ]; Lessig v. Tidewater Oil Co., 327 Pod
459, 474 (9th Cir. 1964) [“[T}he specific intent itself is the only
evidence of dangerous probability the statute requires . . .”}; Morning
Pioneer, Inc. v. Bismarck Tribune Co., 1974-1 Trade Cases § 74,956 at
p.96,260 (8th Cir. 1974) [“To establish an ‘attempt to monopolize’ in
violation of §2 of the Sherman Act, it is necessary to prove: (1) a
specific intent to monopolize; (2) an overt act or acts; and (3) a danger-
ous probability of monopolization of a specific product market in a
particular geographic market’’}; Union Carbide & Carbon Corp. v. Nisley,
300 F.2d 561, 586 (10th Cir. 1961) [Where the trial court's refusal to
instruct the jury that the specific intent must be accompanied by conduct
sufficient to create ‘‘a dangerous probability of monopolization” was up-
held}; and Yoder Brothers, Inc. v. California-Florida Plant Corp., 537
F.2d 1347, 1368 (Sth Cir. 1976) [“In order to prove attempted monopo-
lization, the plaintiff must show an intent on the defendant's part to bring
about a monopoly and a dangerous probability of success.”}. See also,
Lektro-Vend Corp. v. Vendo Co. 403 F.Supp. 527,533 (N.D.IIl. 1975)
{To prove ane © section 2, 7 age must establish three elernents
of proof: (1) a gerous ility actual monopolization in a
we aoe market; (2) specific basent to establish 2 monopoly power; and
(3) overt acts}; and V. & L. Cicione, tr} C. Schmidt rd gee Inc.,
403 F.Supp. 643, 652 (E.D. Pa. 1975) [“{[T]wo requisites (for attempt
to bane claims are) specific intent to monopolize and dangerous
probability of success. . .”’}.

32

intent in actual monopolization cases (see Question 1 above) and
the standard of intent iz attempted monopoly cases, on the same
record and facts, and to pronounce those standards authoritatively
in a context in which they may be compared and contrasted. The
unique opportunity afforded by this case for the Court to clarify
important principles and resolve conflicts and confusion among
the Circuits is heightened by the presence of the Robinson-Patman
claims, which afford convenient occasion for examination of the
origins of the concept of predatory intent and the relationship of
that concept as it has developed in the Robinson-Patman cases to
the standard of specific intent in attempted monopoly cases.

3. The Writ Should Be Granted to Review the Court of Appeals’
Holding That Even Over the Long Run, the Legality of Below
Cost Sales Is to Be Measured by Marginal Cost Rather Than
Fully Allocated Cost.

The Court of Appeals has not only held that a finding of specific
exclusionary intent on the part of a dominant, diversified, wealthy
and entrenched competitor fails to establish a specific intent to
monopolize. It has compounded that error by its ill-advised
endorsement of that competitor's sales over a seven-year period
at prices greatly below cost because those prices were above
“marginal cost.” Reliance on the supposed fact that Respondent
did not price-cut below its marginal costs is misplaced. To allow
one having monopoly power to undercut competitors to the point
of their destruction because it remains above its own marginal
cost is to say that the monopolist may use the advantages be-
stowed on it by monopoly to legalize that monopoly! Secure in
the knowledge that from its past and current dominance its costs
are not less than its only competitor, and that it can bear a price
destructive to that competitor because of its unique renegotiation
position’* and its overwhelming financial power, Respondent was
plainly and simply exercising its monopoly power.

14. See discussion at p. 8, supra.

33

Marginal cost was not defined by the Court of Appeals (just
as it was never defined by Respondent in the conduct of its busi-
ness), but it was defined by the District Court. It is “the cost of
producing an additional unit of production.” (Appendix C, p.
97,n. 1.)

In Predatory Pricing and Related Practices Under Section 2 of
the Sherman Act, 88 Harv. L. Rev. 697 (1975), Professors Areeda
and Turner presented a sophisticated econometric analysis of a
proposed, evidently separate offense under Section 2 of the Sher-
man Act called a “ ‘predatory pricing’ antitrust offense.” (88
Harv. L. Rev. at 697.) Among many other arguments, Areeda
and Turner suggest that prices at or above marginal cost but
below full cost in the short run “should not be considered preda-
tory.” (88 Harv. L. Rev. at 711.) Other related articles are a
reply by F. M. Scherer, former Director of the Bureau of Econom-
ics of the Federal Trade Commission, Predatory Pricing and the
Sherman Act: A Comment, 89 Harv. L. Rev. 869 (1976), a
reply by Areeda and Turner, Scherer on Predatory Pricing, 89
Harv. L. REv. 891 (1976), and a rejoinder by Scherer, Some Last
Words on Predatory Pricing, 89 Harv. L. Rev. 901 (1976).

The initial article is seriously oversimplified by the Court of

Appeals:
Professors Areeda and Turner argue that any price above a
firm’s marginal cost . . . should be conclusively presumed

lawful. (Appendix A, p. 14.)

The Court of Appeals fails to note the concession by Areeda and
Turner that this simplistic rule is utterly inconsistent with Moore
v. Mead’s Fine Bread Co., 348 US. 115, 118 (1954) [discussed at
88 Harv. L. Rev. at 699, n. 10}, and Utah Pie Co. v. Continental
Baking Co., 386 US. at 698, 690 (1967) [discussed at 88 Harv.
L. Rev. at 726-27], which Areeda and Turner criticize severely.
Both are Robinson-Patman cases, and condemn sales below full
cost as predatory and therefore potentially injurious to competi-

34

tion. Areeda and Turner also acknowledge their rejection of, and
criticize, the relevant Circuit court cases, including Porto Rican
American Tobacco Co. v. American Tobacco Co., 30 F.2d 234,
236 (2d Cir. 1929), cert. denied, 279 US. 858; National Dairy
Products Corp. v. United States, 350 F.2d 321, 327 (8th Cir.
1965), vacated and remanded on other grounds, 384 US. 883;
Forster Mfg. Co. v. FTC, 335 F.2d 47, 53 (1st Cir. 1964), cert.
denied, 380 U.S. 906; Maryland Baking Co. v. FTC, 243 F.2d 716,
718 (4th Cir. 1957); and E. B. Muller & Co. v. FTC, 142 F.2d
511, 517 (6th Cir. 1944). [88 Harv. L. Rev. at 699.}

The Areeda and Turner suggestions have been favorably re-
ceived by the Fifth Circuit in International Air Indus., Inc. v.
American Excelsior Co., 517 F.2d 714, 723 (Sth Cir. 1975), cert.
denied, 424 U.S. 943, the Ninth Circuit in Hanson v. Shell Oil Co.,
1976-2 Trade Cases § 61,052 (9th Cir. 1976), cert. denied, Jan-
uary 24, 1977 (CCH Trade Reg. Rptr. 60,021 at p. 65,093) and
the Court of Appeals in this case.

The favorable reception accorded Areeda and Turner by the
Fifth and Ninth Circuits, and the Court of Appeals’ flat adoption
of conclusively legal marginal cost pricing in this case, have created
a serious conflict among the Circuits. Given the infrequency with
which cases squarely presenting the marginal cost pricing issue
are likely to come before the Court, particularly under the Sher-
man Act (”o Sherman Act decisions of this Court are cited by
Areeda and Turner as actually involving supposed marginal cost
pricing), consideration and resolution of that conflict is impera-
tive, unless the Court is to endorse by silence the emasculation of
Utah Pie.

The Court of Appeals reaches the following wholly inconsistent
conclusions: ~

(1) Respondent had “an intent that its pricing succeed
in excluding [Petitioner] from the market.” (Appendix A,
p- 11.)

35
(2) “[I]}n the circumstances of this case prices below
total cost would be more consistent with the competitive
goals of the antitrust laws.” (Appendix A, p. 13.)

(3) “The low prices for A/P persisted into the long run
(a period of nearly seven years). . . . The evidence shows
that this is not a case of short-run price-cutting designed to
secure monopoly profits in the long run.” (Appendix A, p.
15; emphasis added.)

(4) “There is nothing in the record to warrant a finding
that Respondent engaged in predatory pricing.” (Appendix
A, p. 15.)

Whatever else might be said for or against the ‘marginal cost”’
pricing hypotheses advocated by Areeda and Turner, it was clearly
erroneous for the Court of Appeals to apply that concept in evalu-
ating the legality of Respondent's prices in this case. In the first
place, neither Areeda and Turner nor any judge or commentator
other than the Court of Appeals in this case has suggested that
the “marginal cost’ view of below-cost pricing might in any way
immunize from the antitrust laws a defendant found to have the
specific intent “that its pricing succeed in excluding [a competitor}
from the market.” (Appendix A, p. 11.)

Further, and even more significant, the Court of Appeals has
applied the “marginal cost’’ test of Respondent's pricing to a
period found by the Court of Appeals to be long-run, involving
nearly seven years of sustained below-cost selling. The entire
thrust of Areeda and Turner exploration is addressed to the pro-
priety of a company’s prices under appropriate short-run citcum-
stances. Aside from the Court of Appeals in this case, no authority
has suggested that the dominant seller in a two seller industry
could act lawfully in knowingly and intentionally selling its
product below cost for a sustained period of seven years for the
express purpose, as both the District Court and the Court of Ap-
peals found, of excluding its rival.

36
On the contrary, in his reply to Areeda and Turner, F. M.
Scherer observes:

(1) That the Areeda and Turner marginal cost test for
predation must in any event be rejected if the pricing prac-
tices involved were sustained over a long period.

(2) That marginal cost pricing can only be considered
rational and nonpredatory in the short run and that the
appropriate goal for antitrust enforcement should, in con-
trast, be long-run maximization of profits. 89 Harv. L. Rev.
at 869.

A fair reading of Areeda and Turner, Scherer’s initial reply,
and the respective final articles cited above, compels a conclusion
wholly contrary to that adopted by the Court of Appeals, to wit:
where the dominant firm has sold far below its full cost, but
above its marginal costs, for a period far beyond the short run,
and where there is substantial additional evidence of its intent
to monopolize and its determination to exclude a rival, such
conduct should be conclusively presumed unlawful. That conclu-
sion finds substantial support in Utah Pie. (386 US. at 699.)

The application of the ‘marginal cost’’ concept by the Court
of Appeals in determining whether Respondent's prices were
illegal disregards the lesson of Utah Pie that prolonged sales
below full cost constitute evidence of predatory intent, par-
ticularly where such below-cost sales are used as a “medium of
eliminating weaker competitors.” Porto Rican American Tobacco
Co, v. American Tobacco Co., supra; see also, Moore v. Mead’s
Fine Bread Co., supra. In International Air Indus., Inc. v.
American Excelsior Co., supra, the Fifth Circuit acknowledged
that the decision of this Court in the Utah Pie case “may hold
that it is not necessary to show a price below marginal cost
in order to make out a prima facie case’ of violation of the
Robinson-Patman Act. (517 F.2d at 724, n.30.)

37

The Court's definition of “cost” in Utah Pie is plainly inconsis-
tent with the Court of Appeals’ adoption of conclusively-lawful
marginal cost pricing. In Utah Pie the Court condemned as a
“discriminatory below-cost price’ (386 U.S. at 699) a price
which was “‘less than {defendant's} direct cost plus an allocation
for overhead.” (386 U.S. at 698.) Marginal cost is, of course, far
below direct cost, let alone “direct cost plus an allocation for
overhead.” The definition of ‘‘cost’’ as such was not central to
the Court’s opinion in Utah Pie. The case thus probably cannot
be fairly read as finally dispositive of the definition of cost,
particularly for purposes of determining specific intent to monopo-
lize in violation of Section 2. Utah Pie, however, gives no com-
fort to Respondent, which argues for the conclusive legality in
both Section 2 and Robinson-Patman contexts of sales far below
the cost levels there condemned.

The Court was not seduced by fancy and transient econometric
hypotheses in Utah Pie. Similarly, the Tenth Circuit also has
formerly shown an appreciation for reality as distinguished from
theory.

For example, in Ben Hur Coal Co. v. Wells, 242 F.2d 481,
486 (10th Cir. 1957), the Tenth Circuit said:

In the final analysis, the question resolves itself into one of
intent and purpose, not a choice of accounting methods.
Emphasis added.

Yet in its decision in this case the Court of Appeals completely
disregarded the hard facts of intent and purpose. It embraced an
economic theory of cost-pricing relationships and ignored an
overwhelming record of anticompetitive intent and purpose on
the part of Respondent.

To so blindfold itself to the plain facts of the case and decide
the critical issue of intent on an “‘economist’s hypothetical model”
(which is all that “marginal cost” pricing amounts to, particu-
larly in light of the fact that the record contains no evidence

38
whatsoever that Respondent set its prices based upon its marginal
cost), flies in the face of this Court's rulings in Illinois Brick Co.
v. State of Illinois, 145 U.S. L.W. 4611, 4617 (June 7, 1977),
and Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392
U.S. 481, 493 (1968).

The Court of Appe's’ adoption of the conclusive legality of
marginal cost pricing, even in the admitted long run, foreclosed
consideration and meaningful review of the District Court's
exhaustive analysis and findings that, based on all the evidence,
Respondent was motivated by the specific intent to monopolize.
Indeed, the Court of Appeals acknowledged that Respondent
intended “that its pricing succeed in excluding { Petitioner} from
the market.” (Appendix A, p. 11; emphasis added.) In holding
such pricing practices conclusively lawful, the Court of Appeals
violated the principle stated by the Court in Utah Pie:

It might be argued that the respondents’ conduct displayed
only fierce competitive instincts. Actual intent to injure a
competitor does not, however, fall into that category... .
386 U.S. 685 at 702-703, n. 14.

The holding of the Court of Appeals not only conflicts with
this sound principle, but is in conflict with the decisions of other
Circuits in adopting a standard of conclusively-lawful marginal
cost pricing.

Equally or even more efficient competitors facing adversaries
with long purses, as in this case, have been certified by the Court
of Appeals as fair game for extermination by price cutting with-
out limit as to time, so long as the prices of the dominant firm
are not cut below marginal cost. The ruling puts at risk every
small business, and many large ones, that compete with adversa-
ries whose only advantage is overwhelming financial muscle or,
as in this case, both overwhelming financial muscle and a special
renegotiation capacity. Judge Hoffman laid his hand on this
key point early in the trial. He interposed a comment during

39
the examination of D. C. Cable, Respondent's financial analyst
and government contracts administrator.

In 1965, Cable had advised his superiors to cease “pricing on
the expectation of forcing {Petitioner} to shut down” {Appendix
A, p. 6):

Q. For how long a period of time do you believe
{Respondent} having other plants and operations and other
products could have been able to sustain losses in the magni-
tude of those indicated here [on Respondent's renegotiation
reports} on its A/P?

A. From the standpoint purely of financial muscle,
there’s no reason why that couldn't continue.

Q. Forever, right?

A. From that specific standpoint, yes.

THE Court: Until the 800 million is gone. (JA 1433.)

CONCLUSION

On each isue, the Court of Appeals’ holding is unprecedented.
Each holding, moreover, represents a significant compounding of
the plaintiff's burden in monopolization cases. Given the weight
of that burden under the best of circumstances, and the importance
of the private action to the implementation of national antitrust
policy, the decision of the Court of Appeals in this case should
not be the last word on these three important issues.

Moreover, the District Court's careful and detailed findings
control the first two issues in this case. Though controlling, and
not rejected, the Court of Appeals has failed to accord these
findings the effect to which they are entitled. The federal anti-
trust laws are entitled to more. So also is a distinguished trial
judge who invested the better part of five years in the creation
of an enormous record and in an exhaustive analysis of that
record.

The issues in this case are of nerve center importance to
Section 2 of the Sherman Act, just as they were in the Te/ex
case, which this Court did not have the opportunity to review.
This case represents an opportunity that probably will not arise

40
again in this generation, and perhaps may never arise again,
for the Court to consider and declare clearly in a single case on
a common record the governing law on these core issues:

(1) The appropriate standard of intent and the permis-
sible range of competitive conduct in a case of clear monop-
oly power and monopoly market shares.

(2) The appropriate standard of intent in a case of
attempted monopoly where the Court of Appeals has sub-
stituted a predatory conduct standard for specific intent to
monopolize, and where a Robinson-Patman claim is present
to provide a useful reference to the doctrinal source of
“predatory intent.”

(3) The legality of marginal cost pricing intended by
a competitor (with, as a practical matter, limitless resources)
not only to injure, but to obliterate an equally or more effi-
cient rival with lesser financial muscle.

These issues warrant the attention of this Court on the merits.
The Writ of Certiorari should issue.

Respectfully submitted this 22d day of July, 1977.

C. KEITH ROOKER
1800 Beneficial Life Tower
36 South State Street
Salt Lake City, Utah 84111

RICHARD W. GIAUQUE
Suite 500
Kearns Building
Salt Lake City, Utah 84111

Attorneys for Petitioner
Of Counsel:

Rex E. LEE
2840 Iroquois Drive
Provo, Utah 84601

WILLIAM D. HALL
P.O. Box 34436
Washington, D.C. 20034

41
CERTIFICATE OF SERVICE
Pursuant to Rule 33, subdivision 3(b), of the Supreme Court

of the United States Revised Rules, the undersigned, a member
of the Bar of the Supreme Court of the United States, having
duly entered his appearance in the foregoing cause as counsel of
record by the filing of the foregoing Petition for a Writ of Cer-
tiorari to the United States Court of Appeals for the Tenth Cir-
cuit, hereby certifies that, in conformity with Rule 33, subdivision
1, the foregoing Petition was served upon Respondents Kerr-
McGee Corporation and Kerr-McGee Chemical Corporation by
depositing three copies thereof, including Appendices A, B and
C thereto, in the United States Mails, with air mail postage pre-
paid, addressed to Respondents’ counsel of record as follows,
this 22d day of July, 1977:

FABIAN & CLENDENIN

PETER W. BILLINGS, EsqQ.

ALBERT J. COLTON, Esq.

STANFORD B. OWEN, Esq.

PETER W. BILLINGS, JR., Esq.

800 Continental Bank Building
Salt Lake City, Utah 84101

C. Keith Rooker

1800 Beneficial Life Tower
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Appendix A
PUBLISH

UNITED STATES COURT OF APPEALS
TENTH CIRCUIT

No. 76-1238

Pacific Engineering & Production
Company of Nevada,
Plaintiff-Appellee,

Vv.

Kerr-McGee Corporation and
Kerr-McGee Chemical Corporation,
Defendants-Appellants.

Appeal from the United States District Court
for the District of Utah
(D.C. No. C-40-70)

Peter W. Billings (Albert J. Colton, Stanford B. Owen, and Peter
W. Billings, Jr., Salt Lake City, Utah; Peter J. Nickles,
Eugene D. Gulland, Washington, D.C.; Willard P. Scott,
Thomas R. Cochran, and William Heimann, Oklahoma
City, Oklahoma, on the brief), Salt Lake City, Utah, for
Defendants-Appellants.

C. Keith Rooker (Richard W. Giauque, Salt Lake City, Utah;
William D. Hall and Kenneth L. King, Washington, D.C.,
on the brief), Salt Lake City, Utah, for Plaintiff-Appellee.

Before HILL, McWILLIAMS and BARRETT, United States
Circuit Judges.
HILL, Circuit Judge. [1]

2 Appendix A

This is an antitrust action brought by Pacific Engineering &
Production Company of Nevada (PE) against Kerr-McGee Chem-
ical Corporation (successor to American Potash and Chemical
Co., which shall be referred to as AMPOT) and its parent cor-
poration, Kerr-McGee Corporation. The trial court gave PE
judgment for treble damages totaling $4,590,594 and for attorneys’
fees of $528,000 [sic} based on its finding that AMPOT was guilty
of monopolizing and attempting to monopolize in violation of § 2
of the Sherman Act, 15 U.S.C. § 2, and of price discrimination
in violation of §2(a) of the Robinson-Patman Act, 15 U.S.C.
§ 13(a). The court also dismissed AMPOT’s counterclaims against
PE.

The trial court's findings are commendably thorough and exact
as to the basic facts. We disagree, however, with the application
of the antitrust laws to those facts and reverse the judgment for
treble damages. The judgment is affirmed as to the dismissal of
AMPOT'’s counterclaims. We will first consider the Sherman
Act issues.

Section 2 of the Sherman Act proscribes both monopolizing
and attempting to monopolize any part of trade or commerce.
The elements of a monopolization case are (1) the possession of
monopoly power in the relevant market and (2) the willful
acquisition or maintenance of that power as distinguished from
growth or development as a consequence of [2] a superior prod-
uct, business acumen, or historic accident. United States v. Grin-
nell Corp., 384 U.S. 563, 570-71 (1966). A case of attempted
monopolization requires proof that defendant's conduct was moti-
vated by specific intent to monopolize and that a dangerous proba-
bility of monopoly existed. E. J. Delaney Corp. v. Bonne Bell,
Inc., 525 F.2d 296 (10th Cir. 1975), cert. denied, ...US. .....
The distinctions between the two offenses are not relevant to
our decision, because the same conduct was relied upon to estab-

Appendix A 3
lish both the attempt and the willful maintenance of monopoly.
The fundamental issue is whether AMPOT engaged in predatory
Price cutting.

PE and AMPOT manufacture ammonium perchlorate (A/P),
a chemical used almost exclusively as an oxidizer in solid rocket
fuel. The ultimate consumer of A/P is the federal government.
Demand is fixed by government procurement policies and thus
is not responsive to price. The direct customers of PE and AMPOT
are missile manufacturers for NASA and the Department of
Defense.

The first ../P producer was Western Electrochemical Com-
pany which became AMPOT in 1954. Kerr-McGee acquired
AMPOT in 1967 and reorganized it into the Kerr-McGee Chemi-
cal Corporation in 1970. PE was organized in 1955 by a former
Western officer and began A/P production in 1958. The same
year, two large industrial chemical manufacturers, Hooker [3]
Chemical Co. and Pennwalt Chemical Corp., also entered the
market.

In the period of 1954-1957, when AMPOT was the only A/P
producer, the price was above 40 cents a pound. From 1958,
when the other three firms entered the market, until 1961, the price
ranged from 32 to 35 cents a pound. During this time the industry
outlook was bright; the mood was characterized by one witness
as euphoric. Industry capacity was increased in response.

By December 1963, this optimism had vanished. The anticipated
demand did not materialize, primarily because of NASA's con-
version from solid to liquid rocket fuel and the diversion of
_ defense appropriations from missile programs to the Vietnam
war effort. Prices continuously declined as the companies com-
peted frantically for the work that existed. In 1964, prices first
went below 20 cents a pound when PE bid a major order at
19.25 cents. In 1965, AMPOT bid 16.40 cents on another major
procurement. The low point came early in 1966 at 14.92 cents,

4 Appendix A

bid by PE. Pennwalt closed its plant in 1965, and Hooker followed
suit in 1966. Both continued to sell from inventory for about
a year. The trial court found AMPOT'’s antitrust violations began
in 1966 and continued through 1970. During this time, prices
were between 15 and 20 cents a pound with the majority of sales
being made at prices under 18.25 cents. [4]

The extent of the price cutting must be attributed in some
part to the practices of the three major consumers of A/P which
were prime contractors on such projects as Minuteman, Poseidon,
and Titan missiles. The so-called Big Three’ accounted for the
bulk of total A/P sales. Their practice was to obtain all their
A/P needs for a period of months or years in one contract. The
winner of the contract secured a substantial share of the total
market for the immediate future. In letting the contract, a buyer
would first send out a request for quotes and bid the prime con-
tract on the basis of the quotes received. These quotes in effect
locked the A/P producers into a ceiling price. After receiving
the prime contract, the buyer would again request quotes on
which the A/P contract would supposedly be let. Instead of
notifying the low bidder, however, the buyer would single out
one or two low bidders and tell them to “sharpen their pencils”
if they wanted the contract. Often a buyer would succeed in
getting the low bidder to underbid itself. The trial court noted
that these ““whipsaw”’ tactics were “unethical if not unlawful.”

The trial court recognized that until 1966 the decline in the
A/P price was due to market forces beyond the control of AMPOT.
The court held that after that time AMPOT began violating the
antitrust laws because it “sought to take advantage of a trouble-
some situation and force PE out of the market.” The primary

1. These companies were Thiokol Chemical Corp. (the largest single
purchaser of A/P), Aerojet General (a subsidiary of General Tire and
Rubber Co.), and United Technology Center (a subsidiary of United Air-
craft). In most years, these companies purchased over 55 percent of all
A/P produced. £5]

Appendix A 5
factor in the trial court’s decision was AMPOT’s below-cost
pricing. It is uncontested that AMPOT’s prices of 15 to 20 cents
were well below its average total cost? which, although not specifi-
cally set out in the findings, was probably in the range of 20 to
26 cents. AMPOT'’s prices were above its “out of pocket cost,”
that is, above average variable cost.* At this price, it was more
profitable to produce than to shut down. The cost of producing
A/P is highly volume-responsive and decreases consistently with
increased production until full plant capacity is reached. Both
AMPOT and PE possessed plant capacity sufficient to supply
substantially the entire market for A/P.*

There was ample evidence that AMPOT knew PE could not
survive at the low price level. PE was a one-product company
which was vastly undercapitalized, while AMPOT was larger
and more diversified. In 1965, a memorandum on the situation
was prepared for AMPOT by a Mr. Cable, its government con-
tracts administrator and special financial analyst. Cable based his
memorandum on the following assumptions which proved to be

essentially correct:
1. The costs of producing A/P are approximately equal
within the industry.

2. A/P consumers are interested in maintaining two sources.

2. Average total cost is the sum of fixed cost and total variable cost
divided by output. Fixed costs are those expenses which do not vary with
changes in output, including most management expenses, interest on
bended debt, depreciation of plant and equipment, property taxes, and
other irreducible overhead. Variable costs are those which vary with
changes in output, such as labor, material, fuel, etc. Areeda & Turner,
Predatory Pricing and Related Practices under Section 2 of the Sherman
Act, 88 Harv. L. Rev. 697, 700 (1975).

3. Average variable cost is the sum of all variable costs divided by out-
put. 7d. [6]

4. PE’s plant capacity was 20,000,000 pounds a year, and AMPOT's
capacity was approximately 30,000,000 pounds a year. During the relevant
period, demand was generally below 20,000,000 pounds a year. [7]

6 Appendix A
3. Pennwalt will not actively compete for business at the
present price levels.
4. Present price levels for A/P will not give PE a profit
and probably will not cover all its cost.

Cable observed that if PE were getting the same price as AMPOT,
it could not survive and its plant would be of interest only to
a consumer of A/P; if PE were getting a higher price, AMPOT
could raise its prices without affecting its market share. Cable
recommended prices be established with the expectation that the
market must be shared with PE either as a going concern or as
a subsidiary of a consumer. He recommended against pricing on
the expectation of forcing PE to shut down. In the face of this
knowledge, AMPOT continued its low prices. In 1968, AMPOT
was bidding two to three cents a pound below PE. AMPOT'’s
market share is indicative of the degree of its success in fore-
closing PE from the market.*

Year Percentage
a 53.5
1067 nme 80.0
BOG cnctinnemeeme 88.0
BOG cccccemetcceee 67.0
en 78.0

In the circumstances of the industry, the trial court found
AMPOT's prices alone were not a sufficient basis for an infer-
ence of predatory intent. The evidence was found sufficient on
the basis of other cumulative factors including AMPOT’s market
projections predicting the achievement of virtually all A/P busi-
ness, its surveillance of PE’s activities, its offer to “dump” a non-

5. There were issues at trial pertaining to the definition of the relevant
market. A/P must be qualified for separate missile projects through a
series of tests. AMPOT contended the market should not include several
projects for which PE had not been qualified. The trial court found the
relevant market included all A/P sold, and for our purposes we need not
question that finding. However, the fact that PE was not qualified for
certain projects (primarily because of the expense of the testing) did give
AMPOT a significant head start in its market share. [8]

Appendix A 7
existent surplus of A/P to a PE customer at a drastically low
price, AMPOT’s opposition to PEs classification as a smal] busi-
ness by the SBA, and AMPOT’s forward price schedules which
indicated an intention to raise prices after PE’s demise.

The surveillance of PE was conducted by AMPOT’s plant
manager at Henderson, Nevada, where PE’s plant also was located.
It consisted of (1) a monthly check of the number of cars in
PE’s parking lot; (2) checking freight office records concerning
the movement of freight cars in and out of PE’s plant; (3)
taking aerial photos of PE’s plant on two or three occasions;
(4) clipping articles in the local papers concerning PE’s activities;
(5) inquiring at the Colorado River Commission concerning
PE’s power consumption; and (6) encouraging the shipping
foreman to inquire of truck drivers concerning shipments to PE.

AMPOT also engaged in intensive scrutiny of PE’s relationship
with American Cyanamid which had lent PE over $2,400,000
with a trust deed as security. When suit was filed to foreclose,
AMPOT retained two Nevada attorneys to monitor the court
files and keep it advised. In 1967, AMPOT learned American
Cyanamid had agreed to subordinate its debt to allow PE to
obtain a $500,000 loan and continue operating.

The “dumping” incident occurred in 1968 after PE had won
a major contract from United Technology Center (UTC). J. C.
Schumacher, AMPOT’s vice president in charge of [9] manu-
facturing electrochemicals, visited UTC’s president and asked
if he would be interested in purchasing surplus A/P at nine
or ten cents a pound. There was in fact no surplus. AMPOT’s
evidence indicated its sales department knew nothing of Schu-
macher’s offer and repudiated it when inquiries were made. The
trial court found this should be considered some evidence of the
attitude of AMPOT in view of Schumacher’s position with the
company. Moreover, another AMPOT officer, in a subsequent
memo to his file, relied on the incident as having placed a
“seed of doubt” that a better price was available.

8 Appendix A

AMPOT's opposition to PE’s reclassification as a small business
for purposes of obtaining financial assistance from the Small Busi-
ness Administration was found to be entirely legal. It was con-
sidered ‘‘symbolic’” of AMPOT’s intent to drive PE from the
market.

The trial court attached major significance to AMPOT'’s for-
ward pricing. On different occasions, the large A/P purchasers
would request submission of tentative bids for future years. Gen-
erally, AMPOT’s forward price schedules were high at times
when it appeared PE’s demise was imminent and were replaced
by lower prices when it appeared PE would be able to continue.
For example, in 1966 AMPOT learned that American Cyanamid
had taken a summary judgment against PE and that an involun-
tary petition in bankruptcy had been filed against PE. AMPOT
then submitted a higher forward price [10] schedule. In Febru-
ary 1967, AMPOT learned that American Cyanamid had agreed
to subordinate its debt and that PE had obtained a loan. The next
October, AMPOT submitted substantially lower forward prices.

AMPOT’s witnesses testified that the forward prices were
attempts to raise the A/P price and were withdrawn only under
pressure from the purchasers. Shortly after the high price schedule
was submitted in 1966, AMPOT met with representatives of two
of the Big Three A/P consumers. AMPOT was told that its
high prices were unatteptable. The consumers said they had been
willing to let AMPOT become the sole supplier at the lower
prices, but they would now attempt to keep PE alive. Two of the
largest consumers did give PE “‘stay alive’ orders at prices above
those paid to AMPOT. The trial court rejected AMPOT’s con-
tention that it was forced to withdraw the higher prices and con-
cluded instead that these events indicated AMPOT'’s intention
to do whatever was necessary to drive out PE.

AMPOT also introduced evidence of its other attempts to
rescue the A/P industry. In late 1965, AMPOT representatives

Appendix A 9
met with the Deputy Assistant Secretary of Defense in charge of
procurement to complain about conditions in the industry. They
pointed out that procurement practices and excess capacity were
endangering the industry and that two [11] former suppliers had
already “mothballed” their facilities. They said AMPOT desired
a system providing both good prices for the government and a
fair profit for suppliers. The government refused to take action
and reminded AMPOT that it was bound by a “National Security
Clause’ in the contract under which it had purchased its plant
from the Navy. The clause required that until March 1972
AMPOT maintain its plant so that it could be operable within
120 days. In light of this situation, AMPOT contended it had no
choice but to produce at 15 cents a pound instead of shutting down.

By 1971, AMPOT felt it was close enough to the expiration of
the National Security Clause that it could take affirmative action.
It notified the Defense Department that it was considering perma-
nent suspension of production. Subsequently, a solution known
as the “SAMSO. Agreement” was reached. The agreement im-
posed a division of the market between AMPOT and PE at a
profitable price.

The trial court rejected AMPOT'’s contention that this evidence
showed an absence of predatory intent. Another clause in AM-
POT’s government contract allowed it to petition for release from
the National Security Clause in return for whatever consideration
the government might request. Inquiries were made concerning
whether AMPOT was interested in a release in return for a lump
sum payment. AMPOT'’s failure to avail [12] itself of this relief
was considered evidence that it was not seriously interested in
exerting pressure to raise prices during the 1966-1970 period.

The trial court found AMPOT must have known it could raise
prices without affecting its market share. The prices the court
found could have been charged, however, were on the average
higher than the forward prices which had provoked strenuous

10 Appendix A

objections from the powerful A/P buyers. During the period of
alleged predation, prices actually became somewhat higher than
they had been even though the industry continued to operate at
less than 50 percent of capacity. Under the trial court's holding,
the only way AMPOT could have avoided violating the antitrust
laws was to raise prices to a noncompetitive level in order to save
its smaller, undercapitalized rival. AMPOT’s decision not to raise
prices was held to be predatory conduct in violation of § 2 of the
Sherman Act. Considering AMPOT’s prices and its other prac-
tices together, the court found AMPOT'’s prices were predatory
because they were set with the specific intent to drive PE from
the market.

We believe there are fundamental flaws in the trial court's ap-
plication of the Sherman Act. The court’s holding that AMPOT’s
conduct was predatory is based on its effect as a competitor rather
than its effect on [13] competition.* As we said in Atlas Building
Products Co. v. Diamond Block & Gravel Co., 269 F.2d 950, 954
(10th Cir. 1959), cert. denied, 363 U.S. 843: “Antitrust legisla-
tion is concerned primarily with the health of the competitive
process, not with the individual competitor who must sink or
swim in competitive enterprise.” In an industry plagued by falling
demand and excess capacity, the sinking of a competitor may be
an indication of a healthy competitive process.

In a two-firm industry, the exclusion of one firm necessarily
results in a monopoly. That does not mean the survivor neces-
sarily violates the antitrust laws. In Union Leader Corp. v. News-
papers of New England, Inc., 180 F. Supp. 125, 140, modified,

6. The court’s opinion demonstrates excessive concern with preventing
the appearance of monopoly even if it requires defiance of the realities of
the market situation. The same prices and other competitive practices which
were found legal so long as there were four firms in the market were held
to become illegal when the number dwindled to two. The trial court's
holding simply makes no provision for the natural demise of an industry
due to changes in consumer desires. [14]

Appendix A 11
284 F.2d 582 (Ist Cir. 1960), cert. denied, 365 U.S. 833, the
district court correctly stated:

[A] person does not necessarily have an exclusionary intent
merely because he foresees that a market is only large enough
to permit one successful enterprise, and intends that his enter-
prise shall be that one and that all other enterprises shall
fail... . To prove that a person has that type of exclusionary
intent which is condemned in anti-trust cases there must be
evidence that the person who forsees a fight to the death
intends to use or actually does use unfair weapons. Putting
the same idea in another way, we may say that there is no
sharp distinction between (a) the existence of an intent to
exclude and (b) the use of unfair means. . . .

Predatory pricing is the essential unfair means alleged in this
case. The other practices employed by AMPOT inflicted no inde-
pendent harm. They were merely auxiliaries to its general pricing
policy and indicate nothing more than an intent that its pricing
succeed in excluding PE from the market. “But intending the
natural consequences of acts which are in all respects lawful, does
not constitute the ‘exclusionary intent’ that is a prerequisite for
finding a violation of section 2 [of the Sherman Act}.” Union
Leader Corp. v. Newspapers of New England, Inc., supra at 584.
If the trial court correctly found AMPOT’s pricing was not preda-
tory in itself, we do not believe AMPOT can be found guilty of
violating the Sherman Act.

The use of the term “predatory” to describe conduct violative
of the antitrust laws has left much to be desired. This court has
noted, ““The term probably does not have a well-defined mean-
ing in the context it was used, but it certainly bears a sinister
connotation.” Telex Corp. v. IBM Corp., 510 F.2d 894, 927 (10th
Cir. 1975), cert. dismissed, 423 US. 802. The Supreme Court
has indicated that any price below cost may be considered preda-
tory. Utah Pie Co. v. Continental Baking Co., 386 U.S. 685, 696
n.12 (1967). We do not believe, [15] however, that the Court

12 Appendix A

has established a definitive standard. The Court was speaking of
the “inferential value’’ of below cost sales. In some instances
there is no inference to be taken from selling below total cost. It
may even be desirable and certainly could not be considered
“sinister. ’

The common circumstance in which sales below total cost
may be expected is that of excess capacity. Professor Samuelson
has noted in this circumstance the distinction between the interest
of individual competitors and the ideals of competition.

Competition, which the businessman regards as destructive,
cutthroat, and ruinous, may actually be the only way to get
the redundant plant capacity into operation or to discour-
age its maintenance. . . . Losses or subnormal profits is the
free enterprise way of discouraging excess capacity.

P. Samuelson, Economics 496 (8th ed. 1970).

Excess capacity was precisely the problem facing AMPOT and
PE. Each had plant capacity sufficient to supply substantially the
entire demand for A/P. Individually, AMPOT and PE faced
demand curves sharply responsive to price. With the nearly iden-
tical products, a small price cut by either of them could result in
the acquisition of virtually all the business. Each of them also
faced consistently decreasing marginal costs.” Additional units of
A/P could be produced at less cost than previous units. In this
situation, each competitor would be tempted to lower price and
expand output to reach a lower point on its marginal cost curve.
This in turn would drive the other competitor back up its mar-
ginal cost curve and increase its losses at the new, lower price.

Pad

7. Marginal cost is the extra cost at any production level of producing
one extra unit of the product. Marginal cost usually decreases over low
levels of output and [16] increases as production approaches plant capac-
ity. Areeda & Turner, supra 88 Harv. L. Rev. at 700. The consistently
decreasing marginal costs in the A/P industry are abnormal. This phenom-
enon is a function of the industry’s excess capacity and of the methods
used in A/P production. [17]

Appendix A 13

The textbook response to this situation is either a price war
resulting in the destruction of all but one firm or the establish-
ment of some form of imperfectly competitive price leadership
oligopoly. See Samuelson, supra at 452. AMPOT, with knowledge
of the consequences, chose to engage in price competition and
was found guilty of violating the Sherman Act. The trial court
found that a rational, non-predatory duopolist would have em-
ployed price leadership to raise the price to a profitable level for
both competitors.

Price leadership is not desirable competitive conduct. Any con-
duct tending to fix prices has been condemned in the strongest
language. United States v. Container Corp. of America, 393 U.S.
333 (1969); United States v. Socony-Vacuum Oil Co., 310 US.
150 (1940). Conscious parallel pricing is circumstantial evidence
of price fixing and may involve many of the same vices. See
Theater Enterprises, Inc. v. Paramount Film Distributing Corp.,
346 U.S. 537 (1954) ; Cackling Acres, Inc. v. Olson Farms, Inc.,
541 F.2d 242 (10th Cir. 1976).

In this case, price leadership would invoke virtually all the
disadvantages of monopoly. Both PE and AMPOT would have
had to restrict output and to incur higher production costs. The
selling price of the product would then be forced higher than it
would be if one producer left the market. In addition, society
would be saddled with the deadweight welfare loss resulting from
idle and misailocated plant capacity. We do not believe the anti-
trust laws should be interpreted to encourage this result.

We conclude that in the circumstances of this case prices below
total cost would be more consistent with the competitive goals of
the antitrust laws. In the case of Telex Corp. v. IBM Corp. supra
at 927, we specifically noted that § 2 of the Sherman Act should
not be construed “to prohibit price changes which are within a
‘reasonable’ range, up or down.” Although this statement points
to the correct result in this case, it still leaves something to be

14 Appendix A

desired. There is no indication of when downward price changes
cease to be “reasonable.” Even in the situation presented here, the
price could be set so low that it should be considered predatory.

The proper identification of predatory pricing has [18] recently
been a subject of controversy. The discussion has focused on the
employment of marginal cost as the floor below which prices
should be considered predatory. In Predatory Pricing and Related
Practices under Section 2 of the Sherman Act, 88 Harv. L. Rev.
697 (1975), Professors Areeda and Turner argue that any price
above a firm’s marginal cost, or in the alternative its average
variable cost, should be conclusively presumed lawful. Any price
below that level should be conclusively presumed unlawful. How-
ever, in Scherer, Predatory Pricing and the Sherman Act: A Com-
ment, 89 Harv. L. Rev. 869 (1976), the author takes issue with
the short-run cost approach. Scherer contends Areeda and Turner’s
proposed rule would permit anticompetitive pricing inconsistent
with long-run welfare maximization. He recommends that courts
continue to inquire into the monopolist’s subjective intent and that
several long-run variables be considered in determining whether
the monopolist’s conduct is anticompetitive.*

We believe that evidence of marginal cost or average varable
cost is extremely beneficial in establishing a case of monopolization
through predatory pricing. The relationship of a firm’s price and
its marginal cost is regarded as the best indicator of the competitive
health of an industry. Samuelson, supra at 438; C. McConnell,
Economics 446-448, 464 (3d ed. 1966). As an indicator of preda-

8. Scherer lists several long-run variables at page 890 which we need
not repeat here. These primarily concern whether the monopolist will be
able to restrict output, reap monopoly profits, and leave residual demand
unsatisfied, and whether the monopolist may become so entrenched through
barriers to entry that it can never be dislodged. Areeda and Turner reject
Scherer’s long-run factors as a potential test for unlawful predation on
the ground they are inherently speculative and indeterminate. Areeda &
Turner, Scherer on Predatory Pricing, 89 Harv. L. Rev. 891 (1976).
Scherer replies in Some Last Words on Predatory Pricing, 89 Harv. L.
Rev. 901 (1976). £19]

Appendix A 15
tory pricing, marginal cost is extremely valuable because: “There
is nO reason consistent with an interest in efficiency for selling a
unit at a price lower than the cost that the seller incurs by the
sale.” Posner, Exclusionary Practices and the Antitrust Laws, 41
U. Chi. L. Rev. 506, 519 (1974).

In the present case, the trial court specifically found that AM-
POT's sales were always at prices above average variable cost and
“contributed to the company’s cash flow.” These prices also were
above AMPOT’s marginal cost. AMPOT never reached its shut-
down point—the point at which it would incur greater losses by
operating than by shutting down. Under the circumstances, selling
at these prices was rational, competitive behavior. [20]

Although we do not intend to adopt a solely cost-based test,
there are no other relevant factors indicating AMPOT’s conduct
was anticompetitive even in the long run. The low prices for A/P
persisted into the long run (a period of nearly seven years), and
the industry's problems were resolved only by the imposition of
external controls in the interest of national defense. The evidence
shows this is not a case of short-run price cutting designed to

secure monopoly profits in the long run. See International “Air

Indus., Inc. v. American Excelsior Co., 517 F.2d 714 (Sth Cir.
1975), cert. denied, ...... US. ....... There is nothing in the record
to warrant a finding that AMPOT engaged in predatory pricing.

We turn now to the trial court’s finding that AMPOT also
violated the price discrimination prohibition of the Robinson-
Patman Act, 15 U.S.C. § 13(a).° The discriminatorily low price
was found in the sales to the large-volume buyers which we

9. 15 U.S.C, § 13(a) provides in pertinent part: It shall be unlawful
. . . to discriminate in price between different purchasers of commodities
of like grade and ity . . . where the effect of such discrimination may
be substantially to lessen competition or tend to create a monopoly in any
line of commerce, or to injure, destroy, or prevent competi*ion with any
person who either grants or knowingly receives the benefit of such dis-
crimination, or with customers of either of them... . [21]

16 Appendix A

have been discussing up to this point. There also existed a num-
ber of small-volume purchasers constituting a relatively small per-
centage of the total A/P market.’® To these purchasers, both
AMPOT and PE sold on the basis of published price schedules
rather than secret bids. These prices were higher than the com-
petitive bid prices. In 1968, the only year for which the trial court
made specific findings, AMPOT’s schedule prices varied from
18.62 cents a pound on orders of 100,000 pounds or more to
32.5 cents for orders under 2,000 pounds. In the same year,
AMPOT'’s bid prices to the major purchasers were from 16 to
18 cents a pound. The price difference could not be cost-justified
because AMPOT produced all its A/P in a continuous process
and made all sales from accumulated inventory. AMPOT domi-
nated the small-sale market primarily because PE made only nom-
inal efforts to compete for this business.

Based on its finding that AMPOT’s competitive bid prices
were predatory, the trial court found the price discrimination
gave AMPOT “‘an illegal ‘edge’ in its ability to undercut PE”
which supplied the necessary element of injury to competition.
This edge was found to be ‘‘slight” but “not insubstantial.” We
disagree with the court’s conclusion that the evidence established
injury to competition.

Some cases suggest discriminatorily low prices might be con-
sidered a violation of the Robinson-Patman Act on facts which
would not establish predatory pricing in violation of § 2 of the
Sherman Act. See Areeda & Turner, supra, 88 Harv. L. Rev. at
726. As it applies to the primary-line injury in this case, the
Robinson-Patman Act should be interpreted no differently from
the Sherman Act. The Supreme Court has admonished that the
Robinson-Patman Act should be reconciled “with the broader
antitrust policies that have been laid down by Congress.” Auto-

10. The trial court never made findings as to what percentage of total
sales this group represented or what buyers constituted the group. [22]

Appendix A 17
matic Canteen Co. v. FTC, 346 U.S. 61, 74 (1953). However,
we perceive no substantial conflict. The primary-line decisions
have consistently emphasized the element of predation. Utah Pie
Co. v. Continental Baking Co., supra at 696 n.12, citing FTC
v. Anheuser-Busch, Inc., 363 U.S. 536, 548 (1960).

The reasoning employed by the trial court in finding injury
to competition has been referred to as the “double inference
test.” International Air Indus., Inc. v. American Excelsior Co.,
supra at 723. From below-cost pricing, predatory intent is inferred;
from the finding of predation, injury to competition is inferred.
See Continental Baking Co. v. Old Homestead Bread Co., 476
F.2d 97, 104 (10th Cir. 1973), cert. denied, 414 US. 975. It fol-
lows that if the first inference is lacking, there is no basis for the
second. [23]

We have held that AMPOT was competing on the merits; its
prices were not predatory. The fact that AMPOT was charging
higher prices in another submarket does not change its legitimate
competition into an injury to competition. Areeda & Turner,
supra, 88 Harv. L. Rev. at 727; see Telex Corp. v. IBM Corp.,
supra. Although PE may have been at a disadvantage because it
was not competing effectively in the high-price submarket, that
does not establish the injury to the health of the competitive
process with which the Robinson-Patman Act is concerned. Atlas
Building Products Co. v. Diamond Block & Gravel Co., supra;
Anheuser-Busch v. FTC, 289 F.2d 835 (7th Cir. 1961).

We realize that our ruling leads to the somewhat untoward
result that the larger of two competitors will survive while the
smaller may expire. Bigness, however, is not a disqualification to
compete. The Seventh Circuit made the point rhetorically in
Anheuser-Busch v. FTC, supra at 843 n.12:

If bigness be a disqualification for a firm to compete,
interesting collateral questions arise, such as, how small
does a company have to be before it has the right to entex

18 Appendix A
into price competition with its competitors? And how large
does it have to be before it mst stop competing in price?

The Robinson-Patman Act was intended to provide small busi-
nesses with protection from abuses by large, powerful business,
[24] but legitimate price competition is not such an abuse.
“[ Neither the Act nor any social value compels the sheltering
of an individual competitor, at the expense of the public inter-
est, from the competitive process.” International Air Indus., Inc.
v. American Excelsior Co., supra at 721, accord, Atlas Building
Products Co. v. Diamond Block & Gravel Co., supra at 956.

Finally, we must consider AMPOT’s appeal from the dismis-
sal of its counterclaims. The only point urged on appeal is that
an alleged agreement between PE and two major A/P purchasers
to give PE “stay alive” orders constituted a group boycot [sic}
illegal per se under Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359
US. 207 (1959). We need only note that the findings of fact which
defeat the group boycott claim are not clearly erroneous. F.R.
Civ. P. 52(a).

The judgment is reversed insofar as it holds AMPOT liable
for violations of the Sherman and Robinson-Patman Acts. The
judgment is affirmed as to the dismissal of AMPOT'’s counter-
claims. [25]

Appendix B

{§ 75,054} Pacific Engineering & Production Co. of Nevada
v. Kerr-McGee Corp. and Kerr-McGee Chemical Corp.

U.S. District Court, District of Utah, Central Division. No.
C-40-70. Filed March 4, 1974.

Clayton, Sherman and Utah Unfair Practices Acts

Relevant Product Market—Cross-Elasticity of Demand—Gov-
ernment-Qualified v. Nonqualified Products—Government Bid
Products v. Price Scheduled Products.—The relevant product
market for an attempted monopoly case involving ammonium
perchlorate (used in rocket fuel) was all of the market, rather
than two markets, one of government-qualified A/P for customers
who purchased in large volume in connection with the manufactur-
ing of missiles for the Department of Defense and who purchased
the product based on a government-required competitive bidding
procedure, and a second market consisting of non-qualified A/P
sold to customers who purchased in quantities of 100,000 pounds
or less and who purchased at list price without competitive bid-
ding. The requisite cross-elasticity of demand existed between the
plaintiff's non-qualified product and the defendant's exclusively
qualified product, and they competed. It was appropriate to note
the fact that one of the defendant's main contentions was that it
could not raise the price of its product for fear of losing business
to the nonqualified product. As for the scheduled sales, while the
plai~ tiff may not have achieved as much success as it desired, the
company certainly was competing for this business, so that it had
to be included in the market along with the government sales.
See 9 760.

Attempt to Monopolize—Intent—Proof—Below-Cost Sales—
Forward Pricing—Dumping—Sales Predictions——The requisite
element of an attempted monopoly in the ammonium perchlorate
field, intent, was established by evidence of below-cost sales, not-
withstanding defensive price reductions, forward pricing activities,

20 Appendix B

a “dumping” incident, and predictions of market sales indicating
that the company’s goal was to capture the entire market. See
§ 770.

Monopoly—Market Shares—Power to Control Prices.—Monop-
oly could be inferred from market shares in a five year period
of 53.5% (not allowing an inference), 80%, 88%, 67% (close,
but allowing the inference) and 78%. Percentages, however, were
not necessary. It was found that the company had the power to
control prices, using its vast financial resources to subsidize below-
cost pricing, and having the power to raise prices as established by
the fact that the plaintiff would have followed any price increase
as long as it would have allowed the firm a profit. See § 755.

Combination and Conspiracy—Parent and Subsidiary—Subsid-
iary’s Deception of Individual Link Between Firms.—Charges of
conspiracy between related companies were rebutted by the plain-
tiff's own contention showing, if anything, that the individual
who was the major link between parent and subsidiary was de-
ceived by those in effective control of the subsidiary, indicating
that there could not possibly have been any agreement express or
implied between the two companies. See § 725.

Price Discrimination—Applicability—Government as Ultimate
Consumer.—The proposition that sales to private parties are ex-
empt merely because the ultimate consumer is the government was
rejected. Since the government as ultimate consumer would bene-
fit by vigorous competition among those it buys from and their
suppliers, no public policy would be served by such an exemption.
See § 3275.

Price Discrimination—Like Grade and Quality—Customer
Usage—Purpose of Specifications—Seller’s Pricing —Two broad
grades of ammonium perchlorate (rocket fuel) each constituted
products of like grade and quality, rather than separate specifica-
tions within them. There was no substantial difference in func-
tional customer usage of the product. The desire for particular

Ap pendix B 21
specifications was more the result of a desire for reproducibility
rather than any initial desire for a “different’’ product than the
broad classification. The seller's own course of conduct strongly
suggested that a determination of like grade and quality was
proper, since the price differences were not on the basis of differ-
ences in grade or quality but were based on differences in size
of sales or the need for pricing to win a contract. See § 3245.

Price Discrimination—Like Grade and Quality—Physical Dif-
ferences—Although two FTC cases supported the proposition
that physical differences probably remove differential pricing from
the reach of the Robinson-Patman Act, neither case holds that ay
physical differentiation is sufficient to eliminate comparisons under
the like grade and quality test. In both cases there were consid-
erably more substantial differences in the compared products than
in the products in the instant case. See § 3245.

Price Discrimination—Defenses—Absence of Competition Be-
tween Plaintiff and Defendant on Differentiated Goods.—The
defense that higher prices charged small-volume buyers did not
violate the Robinson-Patman Act because the plaintiff did not
compete for the small-volume business was rejected as unsupported
by law and fact. Legally, it is irrelevant whether or not the plain-
tiff competed for the small-volume business, since the most com-
mon type of price discrimination claim is that the defendant raised
prices on the same goods in areas where there was no competition
in order to support lower prices where there was competition;
competition is only required on one ‘‘end”’ of the price differentiated
sales in order for there to be competitive injury and a violation of
the Act. See § 3315.

Price Discrimination—Defenses—Availability of Quantity Dis-
counts.—The defense that quantity discounts were available to all
customers provided they ordered sufficient quantities was legally
unsupportable. See 9 3380.

Price Discrimination—Competitive Injury—Subsidization of Be-
low-Cost Sales.—Price discrimination favoring large-volume buy-

22 Ap pendix B

ers were a cause of injury to the plaintiff, since the higher profits
gained from the small-volume sales would necessarily have given
the defendant an illegal edge in its ability to undercut the plain-
tiff on larger-volume schedule sales and large-volume bid sales. The
edge contributed substantially to the defendant's ability to under-
cut the plaintiff's prices and to hold the sales price of large-volume
materials at a below cost level. See J 3300.

Price Discrimination—Variances in Below-Cost Prices.—Vari-
ances in below-cost prices were not violative of the Robinson-Pat-
man Act because it was the below-cost aspect of the prices, not
the variances, that caused competitive injury. See § 3300.

Sales Below Cost—Applicability to Retailers and Wholesalers
—TInapplicability to Manufacturers——A manufacturer's sales be-
low cost to a Utah customer would not violate the Unfair Practices
Act, since the Act does not apply to manufacturers. See 9 6641.47.

Price Discrimination—Defenses—Injury to Monopolist.—Al-
though plaintiff in a monopoly case engaged in price discrimina-
tion, this did not involve competitive injury, in light of the findings
as to the defendant's attempt to monopolize, monopoly power,
and price discrimination, a showing of injury would be difficult.
The plaintiff may have taken some of defendant's business. ‘‘But
the effect of taking business from a monopolist is not ‘substantially
to lessen competition, or tend to create a monopoly in any line of
commerce .. .’ Indeed it has the opposite effect.” (The court noted
that it expressed no opinion as to whether the plaintiff would be
able to defend against buyers who suffered.) See § 3300, 3315.

Refusal to Deal—Boycott—Dual Sourcing. —Arrangements un-
der which two companies undertook dual sourcing to include pur-
chases from a particular company did not constitute a group boy-
cott directed at the other supplier in the field. As for the boycott
theory, a firm agreement did not exist, the allegedly excluded
supplier was not forced by the arrangements to charge lower

Appendix B 23
prices (as demonstrated by a finding that the firm had the power
to raise prices), the facts differed from K/or's in that there was
no dominant economic power trying to drive a small competitor
out of business, the purchasers were free to deal with the com-
plaining supplier and to negotiate the price paid for the alleged
beneficiary of the questioned arrangements, and even if the cus-
tomers intended to follow the policy of dual sourcing there was
nothing to compel them to do so. The governing law is contained
in Seagram (CA-9, 1969, 1969 TRADE Cases § 72,914). There
was no evidence of anticompetitive motives. See J 2450.

Exclusive Dealing—Customers’ Dual Sourcing—Requirements
Contract.—Arrangements under which two companies undertook
dual sourcing to include purchases from a particular company
did not constitute illegal exclusive dealing by requirement con-
tract with respect to the other supplier in the field. The situation
differed from Tampa Electric in that it included more than just a
single buyer and a single seller. Also, the policy did not operate
as a requirement contract because there were not any enforceable
contracts requiring the customers to purchase from the seller. See
§ 2920.

For plaintiff: C. Keith Rooker and Richard W. Giauque (Van
Cott, Bagley, Cornwall & McCarthy, on brief), Salt Lake City,
Utah. For defendants: Peter W. Billings, Alfred J. Colton and
Stanford B. Owen (Fabian & Clendenin, on brief), Salt Lake
City, Utah, Willard P. Scott and Thomas R. Cochran (of counsel),
Oklahoma City, Okla.

Opinion
HoFFMAN, D. J.: The controversy in this private anti-trust
action pertains to the ammonium perchlorate (A/P) industry.
The plaintiff, Pacific Engineering & Production Co. (PE), and
Kerr-McGee Chemical Corporation, one of the defendants herein,

24 Appendix B

were, at the time this action was tried, the only producers of A/P.
Prior to 1958 Western Electrochemical Company (Wecco) and its
successor, American Potash and Chemical Company (AMPOT),
were the only producers of this product. In 1958 H. E. F.
(Hooker), a joint venture between Hooker Chemical Company
and Foote Mineral Company; Pennwalt Corporation (Pennwalt) ;
and PE all entered the industry as producers in competition with
AMPOT. Later AMPOT was acquired by Kerr-McGee Corpora-
tion through the medium of a new subsidiary, American Potash
and Chemical Corporation, and, a few years thereafter, Kerr-
McGee Chemical Corporation, a wholly owned subsidiary of
Kerr-McGee Corporation, took over the AMPOT operations. For
convenient reference, unless otherwise designated, we will refer
to the defendants as AMPOT.

Before 1958 the price of A/P was in excess of 40 cents per
pound. When competition entered the field, combined with other
developments, the price of A/P declined, at times very rapidly,
until it was selling at between 15 and 20 cents per pound during
March, 1966, and through December, 1970, which is the damage
period involved in the present action.

This opinion deals only with the liability. Damages have been
deferred for further consideration.

The Product

A/P is an oxidizer which is used primarily in solid fuel pro-
pellants for military and NASA rockets. It is also used to a lesser
degree in explosives and pyrotechnics. The chemical constitutes
slightly over two-thirds of the contents of the propellant in a
solid fuel rocket. At the present time, A/P is the best oxidizer
available for rocket motor programs. The majority of A/P is
manufactured and sold as Class I (nominal 200 micron size—
standard”) or Class II (nominal 400 micron size—"‘coarse’’).

Each rocket motor manufacturer to whom PE and AMPOT
sell the bulk of their production has its own government approved

——

Appendix B 25
specifications for the components of the products which it manu-
factures. These specifications vary as to the different properties
required of the A/P. The A/P used in these motors and rockets
must meet these specifications and, in addition, must be qualified
for the program. To become qualified the A/P must undergo
several tests. These tests range from simple lab scale ballistic
and physical tests to static test of loaded rocket motors. AM-
POT’s products are qualified for most of the missile programs,
while PE’s are not.

The main differences in the manufacturing process used by
AMPOT and PE are in the annodes used in part of the process,’
the character of the first two steps* and the operating conditions
in the third step.

The Parties

1. The Plaintif—PE was organized in November, 1955, in
the State of Nevada by Fred D. Gibson, Sr., Edgar Marston, and
John Mueller. Gibson was president from the creation of the
company until 1966. He, as well as most of the other members
of PE’s staff, were former officers or employees of Wecco, the
predecessor of AMPOT.

In 1958 PE began construction of a pilot plant at Henderson,
Nevada. This plant was to test the feasibility of manufacturing
A/P using the company’s new process. In 1959 the plant’s capacity
was expanded to approximately 5,000,000 pounds of A/P per
year. The plant was further enlarged in 1961, and the final
capacity became 11,500,000 pounds per year if PE manufactured
its own sodium chlorate, and 20,000,000 if the company pur-
chased sodium chlorate elsewhere.

1. PE uses lead dioxide annodes, whereas AMPOT uses graphite an-
nodes in the first step and platinum in the second.

2. AMPOT uses a continuous process while PE produces on a batch
basis. 3

26 Appendix B

A loan of over $2,000,000 from American Cyanamid made the
1961 expansion possible. This loan was to be paid beginning
with a balloon payment of $1,100,000 in January, 1966. It was
secured by a deed of trust on the majority of PE’s property.
American Cyanamid was allowed two representatives on PE's
board of directors, and also received an option to purchase either
PE’s assets or common stock. In 1964 American Cyanamid’s rep-
resentatives resigned from the board and the company released
its option for reasons hereinafter mentioned.

PE was unable to meet the loan payments and, on March 16,
1966, American Cyanamid instituted a suit in the United States
District Court for the District of Nevada to foreclose its deed of
trust. In the same year, a group of PE’s stockholders filed a peti-
tion in the district court for a reorganization of the company under
Chapter X of the Bankruptcy Act.

These critical financial problems were resolved in March, 1967,
when PE obtained a $500,000 Small Business Administration
guaranteed loan from the First National Bank of Nevada. The
proceeds were paid to American Cyanamid who then subordinated
the balance of its debt to the bank loan.

In 1968 PE defaulted in the performance of its revised obliga-
tions to American Cyanamid and its obligation under its 1967
bank loan. Plaintiff raised $450,000 by an intrastate stock offering
at $1.00 per share and the advance of $300,000 by Raymond
Knisley. Knisley then used the entire $450,000 to buy the Ameri-
can Cyanamid note and then forgave the balance of the debt
reducing the principal to $300,000.

PE discharged its obligation to the First National Bank, Knisley,
and other creditors with the proceeds from a public offering. This
registered offering was conducted from February 3-27, 1970, and
raised approximately $1,555,000.

Since 1958, A/P has been PE’s primary product and provided
the majority of the company’s revenues. The company showed a
profit in the years 1960-64 and a loss in the years 1965-70.

Appendix B 27

2. The Defendants—Wecco was the first producer of A/P.
In the early 1940's the company was founded to »roduce various
perchlorates for experimental work in rocket propellants. In the
middle 1940's a part of a government-owned electrolytic basic
magnesium plant at Henderson, Nevada, was converted into a
potassium perchlorate plant, and Wecco became the operator. In
1951 the company purchased this plant from the government.

1951 was also the year in which Wecco began building an
A/P plant at Henderson. This plant was built for and owned by
the Navy, and it became operational in 1953. Wecco operated
the plant under contract with the Navy.

Commencing in 1954 American Potash and Chemical Company
(OLD AMPOT) began negotiations concerning a merger with
Wecco. This merger was completed by a series of transactions
which occurred in 1954 and 1955. F. D. Gibson, a director and
stockholder of Wecco, and Edgar Marston, Wecco’s largest
stockholder, initially opposed the merger, but finally sold their
stock to AMPOT. Shortly after this merger, Gibson left OLD
AMPOT and devoted his full time towards PE’s activities. After
the merger was completed, OLD AMPOT continued to operate
the A/P plant for the Navy. In 1961 the government offered the
plant for sale and, in 1962, AMPOT purchased it for slightly
over $5,000,000.00.

On December 31, 1967, AMPOT was acquired by Kerr-McGee
Corporation under a statutory merger proceeding which was a
stock for stock transfer. By the terms of the merger, a wholly
owned subsidiary of Kerr-McGee Corporation took over aii assets
and assumed all liabilities of AMPOT. The new subsidiary was
named American Potash and Chemical Corporation (NEW AM-
POT). In October, 1970,° fertilizer and non-fuel mineral opera-

3. Kelly, President of Kerr-McGee Corporation, testified that the con-
solidation occurred in 1969, but Kerr-McGee’s 1970 Annual Report states
the consolidation was effective October 1, 1970.

28 Appendix B
tions were combined with NEW AMPOT, and the new subsidiary
was named Kerr-McGee Chemical Corporation.

This subsidiary continued to produce A/P until the spring of
1971 when Kerr-McGee announced it was closing its A/P plant.
On September 1, 1971, the government held separate meetings
with both PE and NEW AMPOT. These meetings were conducted
at Norton Air Force Base, California, Headquarters, Space and
Missile Systems Organization (SAMSO). As a result of these
meetings, the government imposed a division of business by
government contractors between both companies at prices which
would yield them a potentially reasonabie profit and the operation
of Kerr-McGee Chemical Corporation continues.

Other A/P Producers
Hooker Chemical Company (Hooker)

Hooker is a large industrial chemical company located within
the United States. Among other products, it produces sodium
chlorates at a plant in Columbus, Mississippi. In 1958 Hooker
and Footc Minerals Company formed a joint venture named
H. E. F., Inc. H. E. F. was created in order to develop the capa-
bility to produce A/P at Columbus. The company began produc-
tion in 1959. Due to its location, it had a freight advantage as to
A/P shipments to the Southern and Eastern regions of the United
States, and a disadvantage in shipments to the Western regions.

Hooker became the sole owner of the company in 1962 when
it bought Foote’s interest in the project. In early 1965, however,
the company announced plans to close its A/P plant. The facility
was mothballed in 1966, although in that year the company sold
some A/P from existing inventories.

Pennwalt

Pennwalt Chemical Corporation is another large industrial
chemical manufacturing and marketing company which entered
the A/P field. The company is a major producer of sodium

Appendix B 29
chlorate at a plant near Portland, Oregon, and in 1958 the com-
pany (then Pennsalt) began a pilot plant for the production of
A/P. This plant was gradually expanded until its capacity reached
12,000,000 pounds per year.

In early 1965 Pennsalt terrninated most of its A/P production
although it sold A/P from inventory until 1967.

Consumers of A/P

As previously mentioned, the primary use for A/P is as an
oxidizer in solid fuel propellants for military and NASA rockets.
Therefore, the ultimate consumer is the United States, and the
Government determines what quantity of A/P will be purchased
in any given year. Additionally, the procurement of A/P which
is sold to the armed services is governed by the Armed Services
Procurement Regulations. The actual purchase of A/P, however,
is made by the companies producing the products in which the
A/P is used. Although there are several of these companies, we
are basically concerned with the three largest which are herein-
after described.

1. Thiokol Chemical Corporation (Thiokol)

During the 1960's Thiokol was the largest user of A/P. Its
corporate headquarters are at Bristol, Pennsylvania, and it has
five divisions which use A/P. These are Wasatch at Promontory,
Utah; Longhorn at Marshall, Texas; Huntsville at Huntsville,
Alabama; Elkton at Elkton, Maryland; and Georgia at Wood-
bine, Georgia. The main projects for which the company used
A/P were the Minuteman and Poseidon missile programs.

2. Aerojet General ( Aerojet)

Aerojet is a subsidiary of General Tire and Rubber Company,
and its A/P plant is located near Sacramento, California. Its main
use of A/P involved the 260-inch motor, Polaris and Minuteman
programs.

30 Appendix B
3. United Technology Center (U.T.C.)

U. T. C. is a subsidiary of United Aircraft, and its A/P plants
are located at Sunnyvale and Coyote, California. The main use
which the company made of A/P was in the Titan III—C and D
program.

Summary of Pricing in the A/P Industry

Wecco began the production of A/P in 1948; however, its sales
volume did not begin to grow until 1950. Sales then grew to
approximately 7,000,000 pounds yearly for the years 1954-57.
The price of A/P during this period was above 40 cents per pound.

From 1958, immediately after AMPOT’s three competitors
entered the market, until 1961 the price declined to the 32-35
cents per pound level. From 1962-64 the price further declined
until it was between 20-26 cents per pound. This trend continued
in 1964 when PE received a U. T. C. order for 11,550,000 pounds
at 19.25 cents per pound, and in 1965 when AMPOT bid 16.4
cents per pound on a large procurement at Thiokol Wasatch.
Prices continued to decline and, during the damage period when
PE and AMPOT were the only A/P suppliers, the price fluctuated
between 15 and 20 cents per pound. The prices during the damage
period were below fully allocated cost for both companies.

PE claims AMPOT'’s actions were unlawful and were responsible
for the drastic decline in the price of A/P. The plaintiff maintains
these actions were responsible for the following:

1. Violations of Section 2 of the Sherman Act—

a. Monopolization of the A/P market.

b. Attempt to monopolize the A/P market.

c. Conspired to monopolize trade and commerce in the
A/P market.

2. Violation of Section 1 of the Sherman Act by conspir-
ing and combining to monopolize the A/P market.

3. Violation of Section 2(a) of the Clayton Act as
amended by the Robinson-Patman Act.

4. Violation of the Utah Unfair Practices Act.

Appendix B 31
Defendants counter with accusations that PE’s actions violated the
following:
1. Section 10(b) and Rule 10(b) 5 of the Securities
Exchange Act of 1934.
2. Section 1 of the Sherman Act by conspiring illegally
to restrain trade, and Section 3 of the Clayton Act.
3. The Robinson-Patman Act.

Factual Evidence Concerning the Monopoly and
Attempted Monopoly Charges

The following facts are those which we have found proven by
the evidence and relevant to PE’s charges of monopoly and at-
tempted monopoly and AMPOT'’s defenses to these claims.* We
will first discuss PE’s evidence and then AMPOT’s although,
where appropriate, AMPOT'’s contentions will be included with
those of PE and vice versa. Even though we will defer a discussion
of our findings concerning these claims until all of the facts have
been presented, when it is convenient to do so, we will resolve the
conflicting interpretations of the evidence within this section.

A. The following facts are those which PE relies upon to estab-
lish AMPOT’s predatory intent and monopolistic practices.

1. Market Forecast and Intent to Achieve all Existing Business.

One of the basic elements of PE’s claim is that AMPOT’s®
predatory intent can be seen by examining the actions of AM-
POT’s employees. These employees frequently made projections
of future sales of A/P. Three of these are relevant on the attempted
monopoly claim.

The first can be found in a memo from Schnier, AMPOT’s
Manager of Chemical Fuel Sales 1965-66, to Francis, AMPOT’s

4. Where appropriate we will include additional facts within our con-
clusions of law.

5. Although the primary defendant is now Kerr-McGee Chemical
Corporation, where appropriate the name AMPOT will be used.

32 Appendix B

Vice-President in Charge of Marketing. This memo contained a
prediction that PE would receive only 45 tons of new A/P orders
in 1966. The existing business which was credited to PE was the
result of a 1964 contract with U. T. C. originally for 5,750 tons
of A/P. This contract called for shipments to begin in December,
1964 and continue for 17 months.

The second projection is contained in a memo from Campbell,
a member of AMPOT’s Sales Department, to O'Brien, Director
of Field Sales. This memo was written in October, 1967, and con-
tained a prediction that in 1968 the total sales of A/P would be
11,738 tons and that AMPOT would sell 9,328 of them. This
indicates that Campbell felt the company would have over 78%
of the market in 1968.

The last projection is a graph made in July, 1968, by Jenny,
Manager of AMPOT’s Chemical Fuel Department. Jenny's pre-
diction was that PE would sell 3,000 tons of A/P per year in the
years 1968 through 1970, with 2,000 of the foregoing coming
from PE’s second long term contract with U. T. C. This contract
called for PE to supply U. T. C. with up to 9,755 tons of A/P
from the second quarter of 1968 through the second quarter of
1971. Jenny predicted that the rest of the sales in the A/P indus-
try, which he felt would amount to 8,000 tons each year, would
be awarded to AMPOT. Jenny thus was predicting that AMPOT
would sell over 70% of all A/P sold.

Jenny justified his projections on the basis that, if they were
accurate, both AMPOT and PE would be operating at 50% of
their capacity. He hoped his calculations were correct and that
AMPOT would sell this tonnage. His position reflected the com-
pany’s attitude which was to obtain as much business as possible
so that its plant would remain in a viable operating condition.
Standing alone, of course, there is nothing unlawful in attempt-
ing to obtain as much business as possible.

In 1969, after AMPOT lost two competitive bids to PE, Jenny's
figures were revised downward to 5,339 tons of A/P sales for

Appendix B 33
AMPOT. As a result of this loss of business, AMPOT established
a new policy of reviewing each bid prior to submitting it. It was
hoped that this policy would enable the company to obtain as
much business as possible. It seemed to be successful as, in June,
1969, O’Brien wrote Jenny's superior that AMPOT had not lost
any business since the new policy took effect.

As far as intent to achieve all existing business is concerned,
AMPOT priced its A/P in order to obtain as much business as
it could up to its productive capacity.* In addition, when AMPOT
was not selling to a company such as U. T. C., it would make
that company a target account in order to try to obtain that busi-
ness. This policy, together with the actions of the company's em-
ployees, establishes PE’s claim that AMPOT desired to obtain as
much of the existing A/P business as possible.

2. Major Sales of A/P Were Below Cost.

Another aspect of PE’s claims is that AMPOT sola its A/P
below cost’ for the entire damage period in order to drive PE
out of business. The evidence establishes that AMPOT did sub-
mit bids on all major procurements during the damage period at
prices below its fully allocated cost. In addition, the majority of

6. This capacity in later years was apparently more than the market
capacity.

7. Although many types of cost were discussed at trial, there are three
which the court considers significant. These are manufacturer's cost, out-
of-pocket cost, and fully allocated cost. We will accept defendant's defini-
tions of these costs. These are as follows:

(a) Manufacturer's cost—The fully allocated cost at Kerr-McGee's
Henderson plant without the addition of general corporate overhead and
selling expenses;

(b) Out-of-pocket cost—The cost necessary to produce the oo
which does not take into account plant depreciation, interest on debt, or
any of the corporate overhead or selling expenses. This cost does, how-
ever, include iibee maintenance labor, and the cost of chemicals and
electricity;

(c) Fully allocated cost—The full cost of manufacturing and selling
the product.

34 Appendix B
sales made pursuant to these bids were also below the company’s
manufacturing cost.* All of AMPOT'’s sales, however, were above
its out-of-pocket cost and contributed to the company’s cash flow.
As might be expected, AMPOT’s officers knew the cost of man-
ufacturing and selling A/P. As early as 1963 one of the com-
pany’s cost accountants prepared two graphs which showed the
company’s fully allocated cost and the suggested selling price.
There {sic} graphs revealed the following:

’ Fully Allocated Cost— Suggested Selling Price
Volume of A/P Cents Per Pound Cents Per Pound®
eee 26.1 31.0
EE 23.7 28.9
> i SD 22.1 27.0
ae Tne 21.0 25.6

It is quite likely that these figures are accurate since AMPOT bid
on major sales of A/P during the year 1963 at between 25 and
30 cents per pound.

Further evidence of AMPOT’s awareness of the cost of A/P
is illustrated by a pro forma statement of manufacturing cost
which was submitted to Stanford Research in September, 1965
by AMPOT'’s Vice-President in Charge of Finances and Adminis-
tration. According to this statement,’® the cost of A/P was be-
tween 25 cents per pound at a 4,500 tom capacity and 15.92 cents
per pound at a 13,500 ton capacity.”

Internal communications among AMPOT'’s officers indicate the
company not only knew the cost of A/P but realized the price
had become greatly depressed. In fact, the price was so depressed
that AMPOT’s treasurer did not make an effort to determine

8. AMPOT’s schedule or drug store sales were, however, always sold
at prices ecual to or above fully allocated cost.

9. This price includes an 18% pre-tax profit.
10. At trial Kerr-McGee claimed this statement was hypothetical.
Ll. This capacity was never obtained during the damage period.

Appendix B 35
the full complete cost of A/P. He felt this would only be aca-
demic since the manufacturing costs were considerably in excess
of the sales price. Additionally, in January, 1967 a proxy state-
ment and prospectus issued by AMPOT in connection with its
merger with Kerr-McGee stated that the price received for A/P
in recent years had been below cost.’

Although AMPOT did not reveal its exact cost for the years
during the damage period, PE presented an expert who recon-
structed AMPOT'’s fully allocated cost and revealed them to be
as follows:

Cents
Year Per Pound
SEE stshtnalitllidilasnnaibiecdoinntnnidpeitinitie 29.37
ERS CREE ewr och Ae ME Pate 21.64
IIT Ta hehe oisuintidhghiatinigs dusihoiacduoinih 19.32
ET ee 21.81

When these costs are compared with AMPOT’s bids on pro-
curements of 250,000 pounds of A/P or more, ** which during
the damage period ranged between approximately 15 to 20 cents
per pound with the majority below 18.5 cents per pound, it can
be clearly seen that AMPOT was selling its A/P at prices far
below cost.

Perhaps the clearest evidence that AMPOT set its pricing poli-
cies with full knowledge that its price was below cost can be
found in an internal memo which was sent to AMPOT'’s Vice-
President in Charge of Finances and Administration on June 10,
1965. This was the day before AMPOT submitted a bid of 15
cents per pound on a multi-year procurement at Thiokol-Wasatch.
The memo was a voluntary non-routine memo prepared by Cable,

12. This reference was to fully allocated cost.

13. This figure was chosen by Kerr-McGee's expert as one which rep-
resented major sales.

»

36 Appendix B
administrator of government contracts and special financial an-
alyst, and must be accepted as such.
In this memo, Cable made the following four assumptions:
1. The costs of producing A/P are approximately equal
within the industry;
2. A/P consumers are interested in maintaining two sources;
3. Pennwalt (Pennsalt) will not actively compete for busi-
ness at the present price levels; and
4. Present price levels for A/P will not give PE a profit and
probably will not cover all of its cost.

After these assumptions, Cable posed the question of whether

PE was getting the same price as AMPOT or whether it was being
maintained as an alternate source and receiving a share of the
A/P business regardless of its price.

He then observed that, if PE was getting the same price as
AMPOT, it had a limited life expectancy and, if so, its facilities
would only be of interest to a consumer of A/P. Acquisition by
a consumer, Cable pointed out, would be a depressing influence
on the price of A/P and undesirable. He further observed that,
if PE was getting a higher price, AMPOT could raise its price to
the level of PE without affecting its share of the market.

The conclusion reached in this memo was that, since the com-
pany must share the market with PE, either as a going concern
or a captive capacity, AMPOT should price its A/P on that expec-
tation rather than one of forcing PE to shut down. He added,
however, that the company’s price should be set low enough to
discourage Pennwalt’s (Pennsalt’s) resumption of production.

In spite of this analysis, AMPOT bid 15 cents per pound and
accepted a total loss of 13.4 cents per pound based on its fully
allocated cost. Although this bid has been pointed to as crucial
due to PE’s claim that it represented a new step in the low pric-
ing of A/P, it is not as important for this reason” as it is to show

14. We do not choose to give great weight to this particular bid due
to the fact that its effect on pricing was minimal because of the extremely

Appendix B 37
that officials of AMPOT were aware that PE was facing bank-
ruptcy if the price of A/P remained below cost.

AMPOT's below cost pricing policy resulted in heavy financial
losses for the years 1965-1969. These losses were as follows:

Year Loss

OE ac FEE PI U2) $458,092.00
gf Se EPL airtel Tel $362,131.00
RNIN innichinds octinticacdimncctighises $210,676.00
SASS, WBE BO $328,625.00
ERS, SERRE $247,560.00"°

As will be discussed in detail infra, AMPOT argues it was
forced to sell A/P at these low prices due to the tactics of the
rocket motor manufacturers and the conditions existing in the in-
dustry. However, the net result of AMPOT’s pricing policies
can be secn by analyzing one of its exhibits. This exhibit lists the
competitive bids of A/P at volumes above 250,000 pounds which
resulted in procurements for the years 1961-1971. This study
reveals the following:

(a) Between June, 1963 and October 1964, when the
price of A/P was above 20 cents per pound, PE and AMPOT
were obtaining a similar number of awards;

(b) From January, 1965 through February, 1966, when
the price of A/P fell below 20 cents per pound, PE did not
obtain any major awards and it only obtained one during
the remainder of 1966;

(c) During the period from March through December,
1966, AMPOT received six awards;

long period of time during which the prices were depressed. Even though
this bid probably did reduce the price of A/P to new levels it was basi-
cally a continuation of an existing situation.

15. It should be noted that these losses take into account the “drug
store” sales which were sold on a profitable basis.

38 Appendix B

(d) In 1967, PE received five awards while AMPOT tre-
ceived seven or eight.

(e) In 1968, when PE was bidding 2 to 3 cents per pound
higher than AMPOT, PE received one award and AMPOT
fifteen or sixteen.

(f) In 1969 PE received three awards and AMPOT six.

(g) In 1970 PE received three awards and AMPOT four.

Although these figures represent numbers and not volume, they
are fairly indicative of the percentages of the A/P business which

each company received. These percentages are as follows:"®
Year PE AMPOT
NID | heevsnicinsesisidsnctenitoalehiges 27.0 53.5
SNOE ddicseuintintiontcebtetpetinuni 19.0 80.0
_. PRES ROEET ea treet 12.0 88.0
SEIN stisiinccenttendinneinctinnthingies 33.0 67.0
I emai ceethinemtnnestnlesibniiniei 22.0 78.0

3. AMPOT’s Broad and Continuous Surveillance of PE

Another aspect of PE’s claims is that AMPOT’s surveillance of
PE is indicative of its predatory intent. The evidence shows that
AMPOT conducted detailed investigations of PE’s operations and
activities. Although these investigations took several different
forms, there are two which are most significant.

The first is AMPOT’s scrutiny of PE’s relationship with Amer-
ican Cyanamid. The interest in this relationship was due to the
fact that PE had borrowed over $2,400,000 from this company.
The loan was secured by a trust deed, and PE’s ability to repay
it was questionable. AMPOT’s investigation of this situation

16. All of these percentages except those for 1966 were supplied by
AMPOT. PE's percentages indicate that AMPOT received a higher share
of the market. The difference, however, is slight and we will consider the
above figures as accurate. These percentages include sales of both qualified
and nonqualified A/P since the claims are based on AMPOT'’s attempt to
monopolize or monopolization of the entire market.

Appendix B 39
began as early as 1963 and intensified a few years later when
American Cyanamid instituted suit to enforce PE’s obligation.

AMPOT initially checked records in Nevada's state and federal
courts to discover if an action had been filed. Once the suit was
filed, AMPOT closely followed its progress. AMPOT'’s inquiry
became so intense that the company asked two Nevada attorneys
to keep track of the court files and inform the company of all
developments in the case. The company’s tactics were successful
and, by early 1967, it had learned that PE worked out an arrange-
ment with American Cyanamid whereby PE’s debt was subordi-
nated so that PE could obtain a $500,000 loan.

The second activity was the detailed surveillance of operations
at PE’s plant. This surveillance was carried out by Henry Curtis,
the manager of AMPOT’s Henderson plant. Curtis gathered
information and sent it to his superiors. On several occasions he
was told that his work was very valuable. His activities consisted
of the following:

(a) A monthly check of the number of cars in PE’s park-
ing lot;*” ,

(b) Checking on the movement of freight cars in and
out of PE’s plant by examining records in the freight office;

(c) Taking aerial photos of PE’s plant on two or three
occasions;

(d) Clipping articles in the local papers concerning PE’s
activities;

(e) Inquiring at the Colorado River Commission concern-
ing PE’s power consumption; and

(f) Encouraging his shipping foreman to inquire of
truck drivers concerning shipments made to PE'’s plant.

17. This check gave him a feeling for the number of employees work-
ing and allowed him to approximate PE’s payroll and level of plant
activity.

40 Appendix B

In addition to these activities, on one occasion a letter from a
foreign country addressed to PE was deliverd to AMPOT by mis-
take. Curtis read through the envelope and saw that the letter
contained a request for 100 pounds of A/P. He then made a
Xerox copy of the envelope, passed the information contained
in the letter to AMPOT'’s export salesman, and mailed the letter
to PE.

This extensive surveillance was conducted only against PE, and
Curtis was not instructed to cease these activities until sometime
between one and three months prior to the taking of his deposi-
tion. AMPOT’s evidence concerning this activity tends to support
its claim that the surveillance was necessary in order for the
company to be prepared to fill PE’s A/P orders if PE should go
out of business. We choose, however, to believe AMPOT’s activi-
ties were far too extensive to be justified on this rationale and
we believe that these activities are evidence of AMPOT'’s preda-
tory intent. We agree that reasonable inquiries as to a co...peti-
tor’s activities are permissible, but AMPOT went beyond the rule
of reasonableness.

4. AMPOT’s Efforts to Impair PE’s Contract with U. T. C.

In December, 1967 PE bid on a procurement of A/P at U. T. C.
As a result of this bid in April, 1968 PE was awarded a blanket
purchase order for up to 19,500,000 pounds of U. T. C.’s Class I
A/P requirements for the Titan Rocket Motor Program. This
A/P was to be supplied from May, 1968 through December, 1971
at a price of 17.94 cents per pound.

This award was one of the largest obtained by PE. As another
aspect of its attempted monopoly claim, PE contends that AMPOT
endeavored to induce U. T. C. to breach this contract. After the
award, J. C. Schumacher, AMPOT’s Vice-President in Charge
of Manufacturing of Electrochemicals and Sales and Manufactur-
ing of Rare Earth Products, and Freeman, AMPOT’s A/P prod-
uct manager, visited U. T. C. officials. During this visit Adelman,

Appendix B 41
U. T. C.’s President, was told that AMPOT was interested in sell-
ing a large quantity of surplus A/P. Adelman informed Schu-
macher and Freeman that U. T. C. had just purchased A/P from
PE. In response, Schumacher stated that U. T. C. was not totally
obligated to PE, and he asked if U. T. C. would be interested in
A/P at a price of 9 or 10 cents per pound."®

After this meeting, Reddington, U. T. C.’s Manager of General
Procurements, was asked to make inquiries concerning this surplus
A/P. He called AMPOT'’s plant and was informed that AMPOT
did not have a large supply of A/P on hand.

AMPOT'’s trial testimony indicates Schumacher took it upon
himself to initiate this conversation with U. T. C. due to his per-
sonal animosity toward PE and its officers, and that AMPOT’s
sales department disavowed the offer when inquiries were made.
Additionally, AMPOT’s Vice-President in Charge of Sales told
the company’s marketing director that Schumacher did not have
the authority to give U. T. C. a quotation. In essence, AMPOT
admitted the episode but claimed that it was not responsible.

Although there may be some merit in AMPOT'’s response, we
must consider the fact that this incident was carried out by one
of the company’s highest officers. Bearing this in mind, we find
this incident does reflect predatory intent toward PE.

This finding is bolstered by a memo to file which was written
by Jenny on February 17, 1970. The subject was a visit with
Reddington concerning the sale of A/P. In a blind postscript to
some of AMPOT’s marketing people, Jenny stated that the seed
of doubt had been placed, that perhaps a better price is available
on the remaining U. T. C. requirement for regular A/P for use
in the Titan 3-C program. This memo indicates AMPOT was
attempting to obtain the business which U. T. C. had under con-

18. At this time A/P was selling at a price of 15 to 20 cents per
pound, and the price of 10 cents per pound was below AMPOT's out-of-
pocket cost.

42 Appendix B
tract with PE and gives credence to PE’s claim that Schumacher's
visit was more than just an “unauthorized gambit.”

5. Destruction of PE’s Small Business Administration Classi-

fication

Another aspect of the attempted monopoly claim is that
AMPOT was responsible for PE’s losing its Small Business Classi-
fication. This classification meant that PE was entitled to small
business set-asides on certain procurements and that PE was eligi-
ble for favorable Small Business Administration financing.

The evidence presented conclusively establishes that AMPOT
interfered with PE’s classification. In June, 1962 a bid which
contained a small business set-aside was issued for a November
procurement of A/P. At this time AMPOT protested PE's classi-
fication’® and, as a result of this protest, PE waived its claim to
the set-aside. PE took this action due to the time pressures gen-
erated by the procurement.

AMPOT remained concerned about PE’s status and continued
to complain to government officials. As a result of these com-
plaints, it was determined that PE was not a small business for
purposes of government procurements.

In September, 1963, PE decided to apply for reinstatement of
its Small Business Administration classification and AMPOT again
objected. This objection continued even after PE was reclassified
as a small business.2° AMPOT’s final action concerning PE’s
classification occurred in late 1966 and early 1967 when AMPOT
again investigated PE’s status.

6. AMPOT’s Forward Pricing Would Vary in Response to
PE’s Financial Condition

The last, and perhaps one of the most significant, of PE’s

claims which we have found relevant is that AMPOT’s forward

19. The basis of this protest was that, as a result of its loan to PE,
American Cyanamid had options on PE and officials on PE’s Board of
Directors.

20. This reclassification was due to American Cyanamid’s release of its
options on PE.

Appendix B 43
pricing would vary in response to PE's financial condition, On
occasions, the rocket motor manufacturers would request the A/P
suppliers to submit bids for future years. PE claims that AMPOT
would lower these prices when it appeared that PE would remain
a competitor and raise them when it appeared the company was
about to collapse.

PE claims AMPOT began this pricing activity with its 15 cents
per pound bid to Thiokol in 1965. This bid was the result of
a meeting held on June 11, 1965. In attendance were three of
AMPOT's top officers, and they set the price knowing that PE
might default on its mortgage to American Cyanamid and be
forced into bankruptcy. AMPOT quoted this price of 15 cents
per pound through June, 1967; however, for fiscal years 1967
and 1968 the company stated that the price would be the price
for fiscal year 1966, increased or decreased to equal fully allocated
cost plus 6% profit. Since the 15 cent bid was well below
AMPOT's fully allocated cost, the bids in fiscal 1967 and 1968
represented a considerable rise in the price of A/P.

In January, 1966 AMPOT bid the following to Thiokol:

Time Period Cents Per Pound
January 1, 1967—June 30, 1967 ...................... 15.00
July 1, 1967—December 31, 1967 ......... areas 23.29
January 1, 1968—December 31, 1968 ............. ... 23.99
I BI TI rtcscesencestisnecnsensoctnensicnesl alae 24.717!

In this same month (January, 1966) AMPOT computed its
cost at 20.25 cents per pound.**

In May, 1966 these high forward prices were lowered. As a pre-
lude to this lowering, American Cyanamid had informed AMPOT

21. These figures are based on certain volume levels but for our pur-
poses these are not relevant.

22. This type of cost was not specified although it appears to be man-
ufacturing cost.

44 Appendix B
that it had decided to delay bringing suit against PE. In addition,
AMPOT also learned that Thiokol had awarded an order for 500
tons of A/P to PE. The new prices quoted were as follows:

Time Period Cents Per Pound
January 1, 1967—Jume 30, 1967 22... eee ceeeeeeeee 15.00
July 1, 1967—December 31, 1967 .............-.-.----- 15.75
January 1, 1968—December 31, 1968 ................. 16.50
January 1, 1969—December 31, 1969 -................ 18.15
January 1, 1970—December 31, 1970 ................. 19.97
January 1, 1971—December 31, 1971 .............--. 21.97
January 1, 1972—December 31, 1972 ................. 24.17

The next event which affected forward pricing occurred on
September 21, 1966, when American Cyanamid obtained summary
judgment against PE. Paralleling this event was the fact that by
October 6, 1966, AMPOT had learned that an involuntary peti-
tion in bankruptcy had been filed against PE. On November 30,
1966 AMPOT withdrew its May, 1966 quotes to Thiokol and
replaced them with the following:

Time Period Cents Per Pound
January 1, 1967—June 30, 1967 ...00002 eee 15.00
July 1, 1967—December 31, 1967 ..........000000-0--0 15.74
January 1, 1968—December 31, 1968 000000000... 16.50
January 1, 1969—December 31, 1969 ................. 25.00
January 1, 1970—December 31, 1970 ..0.0000000000.... 25.00
January 1, 1971—December 31, 1971 ................. 25.00
January 1, 1972—December 31, 1972 ................. 24.00
January 1, 1973—December 31, 1973 ................. 25.00

In December, 1966 and January, 1967, representatives of
AMPOT met with officials of both Thiokol and Aerojet. These
meetings were separately held but officials of both companies in-
formed AMPOT that they were upset with the company's with-
drawal of its forward prices. Thiokol informed AMPOT that it
expected to have two sources of A/P available in 1967. Aerojet

23. AMPOT felt certain that the other source was PE.

Appendix B | 45
told the company’s representatives that it was willing to support
one supplier up until the time AMPOT’s forward prices were
withdrawn but that it would now try to keep PE alive.

Additionally, in February, 1967, AMPOT discovered that
American Cyanamid had agreed to subordinate its $2,000,000
debt to allow PE to obtain a $500,000 bank loan. In the same
month AMPOT undertook a financial aiualysis which revealed
that this arrangement would allow PE to operate for slightly less
than ten months. This analysis also showed that a price increase
would be necessary in order for PE to avoid a cash drain and
that PE’s price would have to be raised to 19.25 cents per pound.

In October, 1967, AMPOT quoted Aerojet the following prices:

Time Period Cents Per Pound
I I i er ccrcectissiieccccsineintsinse 16.50
January/February 1969 ......................-.c-cccceceseseees 17.25
March/September 1969 .............. shateeillaensinicteelets 18.00

AMPOT claims that these forward pricing activities repre-
sented an attempt to raise the market price of A/P to a reason-
able level. The company claims, however, that its efforts did not
succeed due to the resistance of the rocket motor manufacturers
and the conditions in the industry. In view of PE’s evidence and
AMPOT's lack of effective rebuttal, we choose to give weight
to PE’s interpretation of these activities.

[ Rebuttal}

B. In rebuttal to PE’s evidence, AMPOT claims the depressed
prices were the result of the problems which existed within the
industry and not its policies. The primary contentions which we
find relevant and established by the evidence are the following:

1. Problems in the A/P Industry

The major problem which existed within the industry was an
excess of supply. This condition was exacerbated by the fact that
many of the major A/P procurements were stretched out over a

46 Appendix B
long period of time and by the fact that there were re-bids on
many of the procurements.

This excess capacity existed due to predictions of great demand
for A/P. These predictions induced all four major suppliers
of A/P either to enter the field or expand their capacity. From
1959-1963 the attitude of the Department of Defense and propel-
lant manufacturers was extremely bullish and there were estimates
of future sales of A/P exceeding 100,000,000 pounds annually.
As the president of U. T. C. stated in his deposition, in the early
60's there was almost a euphoria as far as the future was con-
cerned and everyone visualized the field as a potential bonanza.
By December, 1963, this optimism had vanished and the rocket
people were competing frantically for the work which existed.
It is this competition which AMPOT claims set the stage for the
pressure which was exerted on the A/P suppliers.

An additional problem facing PE was the fact that the com-
pany was vastly under-capitalized. This meant that PE was faced
with even more severe problems than the other A/P producers.

2. Practices of the Rocket Motor Manufacturers

Although AMPOT claims this overcapacity set the stage for
the conditions which the A/P suppliers faced, the heart of the
company’s defense is that the rocket motor manufacturers took
advantage of existing conditions and forced the suppliers to
lower the price of A/P. It appears as if the manufacturers were
able to carry out their activities due to the procurement prac-
tices in the A/P industry. Under these practices the rocket manu-
facturers would receive an indication of interest from the gov-
ernment concerning a particular program. The manufacturers
would then send out Request for Quotes (RFQ's) to the suppliers.
Once the manufacturers received quotes from the various sup-
pliers they would submit a bid to the government and a con-

24. Including those furnishing material other than A/P.

ie Appendix B 47
tract would be awarded to one of them. At this stage the winning
manufacturer would send a second RFQ to the A/P suppliers.
As a practical matter, however, the first RFQ set the ceiling price
for the second.

The rocket manufacturers were interested in obtaining a high
price for the first RFQ and a low price for the second. This
desire can be explained by the fact that the manufacturer would
share with the government in any savings between the first and
the second bid. It was this arrangement which prompted the
manufacturers to try to negotiate for a lower price with the A/P
suppliers. They would carry out these negotiations by calling the
suppliers and telling them to “sharpen their pencils.”

The manufacturers negotiated with the low bidder without in-
forming the bidder that its price was low. On several occasions
this practice resulted in the low bidder further reducing its price.
In addition to this type of negotiation, the manufacturers em-
ployed other methods of reducing the price. They would send
RFQ's to both qualified and nonqualified sources and would never
tell a company when it was the only qualified source. In fact,
whenever a bidder asked if the bidding was going to be com-
petitive, the response was always in the affirmative. The manu-
facturers strengthened their position in these activities by exchang-
ing price and quantity information among theinselves.

An example of these practices can be found in events surround-
ing a 1962 {sic} procurement of A/P. In July Thiokol decided to
award PE a “stay alive’ quantity as part of a larger procurement.
This decision was made as it was thought PE probably could not
as yet continue operations without Thiokol business. After

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_2254%3A1. Public record. Not legal advice.