Petition — Aqua Media, Ltd. v. United States

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Supreme Court, U.S, ~

FILED

AUG 5 1978

IN THE \

Supreme Court of the United Ses eee 00%" 8, cue

OcTOBER TERM, 1977

No. €8-237

Aqua Menta, Ltp. and A. M. LievipaTtiIne Co.,

Petitioners,

—against—

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Dae E. FREDERICKS,

111 Pine Street,

San Francisco, California 9411!

Attorney for Petitioners

Aqua Media, Ltd. and

A. M. Liquidating Co.

Of Counsel:

JOHN B. MarcHANT,

CynTHia H. PLevin,

SEDGWIcK, DetTert, Moran & ARNOLD,

111 Pine Street,

San Francisco, California 94/1}.

Dated: August 1, 1978.

PERNAU - WALSH PRINTING CO. - 562 MISSION STREET - SAN FRANCISCO, CA 94105

A BOWNE COMPANY

Subject Index

Page

cca cas ek cheeks h¥ishen Oke Kanak bese uaeen ines 1

Opinions below and jurisdiction ...............00-cceeeees 2

SE: SII. io bin cdinwha ance seuebknaensneeneneces 2

SE Oe OP Gc etcskevactuaensanss c6dbsebaenweuen 3

ee ee ee ee eT eR +

We IR: Wks ha vee Pen scone anicdecs bh slatexse anes 5

NE I io win vdaghdnecscsangoksseseueedeuws 7

Summary of reasons for granting the writ ................ 10

Section 7 of the Clayton Act only proscribes acquisitions 11

Neither the language of Section 15 of the Clayton Act,

the legislative history of the Clayton Act, nor the

equitable powers of the court permit rescission of a

COMMUMIMALO GOGUIEEIOMR ooo ccccccccsaciscecvecccde 15

A. The language of Sections 7 and 15 of the Clayton

Act does not support the court’s conclusion .... 15

B. Congressional history of the antitrust laws demon-

strates that Section 15 was not intended to allow

punishment of individuals who have not violated

SE Sac vie hbk ewuae cee ie ee hc Lua be cbikeeuacs 17

C. Equitable powers of the court do not authorize

a rrr re ere rr re ae 22

Sellers are not proper parties to a Section 7 case where

the acquisition was consummated prior to the filing

ee Wb Sa euaea as tc os coke ee cuaneenwnes 24

IR ole, a a on Cea ce eee a Oe Ke eR Eee ek 27

Table of Authorities Cited

Cases Pages

Abell v. United States, 518 F.2d 1369 (Ct. Cl. 1975) ..... 16

Aerojet-General Corp. v. American Arbitration Assn., 478

cf 8 2. Bt we. ) eeery errs Tare Tres 27

Allen v. Grand Cent. Aireraft Company, 347 U.S. 535

EONGD vance censsevauseaersbesibicsuboedeeeu rious 22

Conley v. Gibson, 355 U.S. 41 (1967) 2... ccvencvesctos 25

Dailey v. Quality School Plan, 380 F.2d 484 (5th Cir.

Ne ashes cc ko eps a RP Ea ieee nai eee ee 11,12, 14

Deckert v. Independence Shares Corp., 311 U.S. 282 (1940)

ee PT TTT Tere Oe Te ee Te 25, 26, 27

Ford Motor Company v. United States, 405 U.S. 562 (1972) 23

Heine v. Board of Levee Commissioners, 86 U.S. 655 (1874) 238

Hughes Tool Co. v. Trans World Airlines, 409 U.S. 363

EN ns ne Kd wae S/kk pak ben he be ee ka Seba nesie ek ena ee 27

Hurwitz v. Directors Guild of America, Inec., 364 F.2d 67

(2d Cir. 1966), cert. denied 385 U.S. 971 (1966) ...... 27

In The Matter of Dean Foods, et al., 70 F.T.C. 1146 (1966) 13

Keller v. Potomae Electrie Power Co., 261 U.S. 428 (1923) 25

MeGuire v. Columbia Broadeasting Company, Ine., 399

ee SD CO SR BOD iv vives kbncces dsgeeomcneetoes 12,13

Massachusetts v. Missouri, 308 U.S. 1 (1939) ............ 25

Muskrat v. United States, 219 U.S. 346 (1911) .......... 25

Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41 (1938) 26

Northern Natural Gas Company v. Grounds, 441 F.2d 704

Pe Sk SURE 44 thccrctcdeswanaanhenb haters teue es 16

Porter v. Warner Holding Co., 328 U.S. 395 (1946) ...... 24

Preiser v. Rodriguez, 411 U.S. 475 (1973) .............. 16

Rawls v. United States, 331 F.2d 21 (8th Cir. 1964) ..... 16

Record Club of America, Ine. v. Capitol Records, Inc., 1971

srede Cam, FIGGOS (BUI. FOIE) vice scssscscuscs 13

Rees v. City of Watertown, 86 U.S. 107 (1873) .......... 23

TABLE oF AUTHORITIES CITED ili

Pages

Sanford v. Commissioner of Internal Revenue, 308 U.S. 39

CRE: Sas wha ee bad Chk aia sha es ow bid kate tke cick ek qe 16, 22

Tidewater Oil Co. v. United States, 409 U.S. 151 (1972) ..15, 26

United States v. Chrysler Corp., 232 F.Supp. 651 (D.N.J.

Gils eRe enn bales fiw bebe o-oo eta k K cawe bk. 24

United States v. E. I. duPont de Nemours & Co., 353 U.S.

I la Dehetre eng Oia eta. sg wg ee et un 23, 25

United States v. E. I. duPont de Nemours & Co., 366 U.S.

ee ND ns canes tN eo b ha ere hs ox keke tolnkn 9, 14, 25

United States v. Falstaff Brewing Corp., 410 U.S. 526

PUNE G40 CCUE CSS esas bce ii eheae he xO kk ARERK «Ce bees 14

United States v. Fixico, 115 F.2d 389 (10th Cir. 1940) .... 16

United States v. Freeling, 31 F.R.D. 540 (S.D.N.Y. 1962) 17

United States v. Ingersoll-Rand Co., 218 F.Supp. 530 (W.D.

Pa.) aff’d 320 F.2d 509 (3d Cir. 1963) ................ 24

United States v. Pabst Brewing Co., 183 F.Supp. 220 (E.D.

PEE Es ee Th es RAKE ood eke kk te lk 13, 14, 26

United States v. Phillips Petroleum Co., 1972 Trade Cases

eee i Ee ek a's ie ne bbs oak cde teed. 26

United States v. Reed Roller Bit Company, 274 F.Supp.

573 (W.D. Okla. 1967)

United States v. Smelser, 87 F.2d 799 (5th Cir. 19387) .... 28

U.S. v. Parker-Hannifin Corp., 1974 Trade Cas. 75,061

ee NN EEE {7 Sao hay ico cabae One a hee ook Occ excs 13

Whittacker & Company v. Sewer Improvement Dist. No. 1

of Dardanelle, Ark., 221 F.2d 649 (8th Cir. 1955) ..... 23

Willapoint Oysters v. Ewing, 174 F.2d 676 (9th Cir. 1949) 17

Yuba Consol. Gold Fields v. Kilkeary, 206 F.2d 884 (9th

ee Ee a eit on tuber saat ual corset. 25

Codes

Internal Revenue Code, §337 .........ccccccccccceccecce 6

Constitutions

United States Constitution, Art. III ..................... 25

iv TABLE OF AUTHORITIES CITED

Statutes Pages

os a 685 kN ee FIR RARER Le Rae eke tb kincew ores 13

15 US.C.:

eee Seer rere rs yee ee ree 18, 19, 21, 22

rr re rere ee ee ree ee TTT Te eee 12

SPORES Vib sia Virereca Cokes b nereabesseeeteraees 26

SE eae eee ees Kiet basa een eede HRC eA eee ee passim

SPR ee Corer eee Tee eee 3, 15, 16, 17, 18, 22, 24, 26

28 US.C.:

SED Luk cee beck enek eee Dy eh oee ew eae keke 2

| ee ry ray pe ere ree 2

i EE pre err rr ree er Tr Pr rer ery 2

Texts

2A Sutherland, Statutes and Statutory Construction (4th

Ed. 1973):

OE rere eee re eT oe ee Tee eRe ee 16

IE cen ee eed dee tbe we Dade heews teh ete ee 16

DEE LN cer wee meek Ea Rea A ee neues oa ee eT 16

Other Authorities

H.R. Rep. Ne. 627, 63d Cong., 2d Sess. 4 (1914) ......... 18

ee we a) Re er ee 19, 20, 21

IN THE

Suprewe Court of the United States

OcTOBER TERM, 1977

No.

Aqua Menta, Lrp. and A. M. Liguipatinc Co.,

Petitioners,

—against—

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

STATEMENT

Petitioners Aqua Media, Ltd. and A. M. Liquidat-

ing Co. (sometimes referred to collectively as “Aqua

Media”) respectfully pray that a Writ of Certiorari

issue to review the judgment of the United States

Court of Appeals for the Ninth Circuit (Carter, J.)

entered on March 28, 1978, affirming a preliminary

injunction order of the United States District Court

for the Central District of California (Lydick, J.),

entered on April 28, 1977.

OPINIONS BELOW AND JURISDICTION

The district court’s preliminary injunction order,

presently unreported, together with supporting find-

ings of fact and conclusions of law, are attached as

Appendix A. The opinion of the United States Court

of Appeals for the Ninth Circuit affirming the pre-

liminary injunction order is reported at 575 F.2d

222 and is attached as Appendix B. The judgment

below was entered on March 28, 1978; petitioners-

appellants’ petition for rehearing was denied on May

18, 1978. This petition is filed within ninety (90)

days of entry of the judgment below, tolled by the

petition for rehearing, as required by 28 U.S.C.

§2101(¢).

The jurisdiction of this Court is invoked under

28 U.S.C. §1254(1) and 28 U.S.C, $1651. The antitrust

statutes relating to this petition are contained in

Appendix C,

QUESTIONS PRESENTED

1. As a matter of law is rescission an available

remedy for redressing violations of Section 7 of the

Clayton Act?

2. May a selling corporation be joined as a party

defendant for purposes of implementing an order of

relief against an acquiring company where the acqui-

sition allegedly violative of Section 7 of the Clayton

Act was consummated prior to the filing of suit?

STATEMENT OF THE CASE

This antitrust case presents significant questions of

first impression relating to the role of corporate

sellers in actions instituted by the United States for

alleged violations of Section 7 of the Clayton Act, 15

U.S.C. §18. The questions presented arose when the

United States filed a civil action’ seeking, alter-

natively, rescission or divestiture of a consummated

corporate acquisition on the ground that both the

buyer and seller violated Section 7 by virtue of their

respective purchase and sale of assets.’ Petitioners

moved for dismissal, arguing that their action did

not violate the law, that mandatory relief was there-

fore inappropriate and that they were not proper

defendants, but the district court denied the motion,

concluding as a matter of law that rescission was an

available remedy. The district court then issued a

preliminary injunction ostensibly to maintain the

status quo pending trial and a final decision as to

whether rescission would best restore competition.

The Ninth Circuit affirmed, agreeing that rescission

was a remedy which could be employed by district

courts even where such relief necessarily would in-

fringe upon the rights of third parties who were not

even alleged to have violated any law in connection

with the underlying acquisition.

‘Statutory authority for federal jurisdiction in the district

court is found in Section 15 of the Clayton Act, 15 U.S.C. §25.

2Later the government conceded in both the district court and

Court of Appeals that the sellers, petitioners here, did not violate

Section 7 although the government continued to assert that peti-

tioners were nevertheless proper parties,

The Parties

Commencing in 1967 Aqua Media, Inc. (now known

as A. M. Liquidating Co.) engaged in the business

of providing pure water to industrial users in Cali-

fornia, various other states and certain foreign

countries (“service business”). In 1972 it began to

manufacture systems and equipment for sale inter-

nationally to customers whose businesses required

purified water (“manufacturing business”). Then, in

early 1976, for reasons set forth below, the company

adopted a plan of complete liquidation pursuant to

which it sold its California service business* to Arrow-

head Puritas Waters, Inc. (“Arrowhead”), a wholly-

owned subsidiary of Coca-Cola Bottling Company of

Los Angeles (““CCLA”), for $4,750,000. CCLA and

Arrowhead, together with petitioners, were named as

defendants in the action which was filed in district

court.

Petitioner Aqua Media, Ltd. is a California limited

partnership formed by shareholders owning approxi-

mately 54% of the outstanding stock of Aqua Media,

Inc. On the date following sale of Aqua Media, Inc.’s

California service business to Arrowhead, Aqua

Media, Ltd. purchased the residual assets of Aqua

Media, Inc. (the manufacturing business and certain

service business assets located outside California) for

$405,000. Aqua Media, Inc. then changed its name to

A. M. Liquidating Co. and began liquidation and

preparation for eventual dissolution.

*The intrastate nature of this transaction raises a serious ques-

tion as to the applicability of Clayton Act $7. However, the

absence of a full factual record precludes presentation of that

issue in this petition.

The Acquisition

In early 1976 representatives of Arrowhead ex-

pressed an interest in acquiring Aqua Media’s Cali-

fornia industrial water service business and related

assets for cash. It was contemplated that Aqua Media

would retain its name and associated good will, its

manufacturing business, its interests in partnerships

doing business in other states, and its wholly-owned

subsidiary, Aqua Media International.

The expressed interest of Arrowhead prompted the

Board of Directors of Aqua Media, Inc. to review

the historical development of the company, the present

state of the marketplace, and prospects for future

growth. The Board noted that the company’s primary

business had been the sale of purified water to in-

dustrial users within California but that the Cali-

fornia market for industrially purified water appeared

finite and had remained essentially static for three

years. The Board and management wished to expand

into growing national and international markets

through the manufacture and sale of systems and

equipment as opposed to the furnishing of industrially

treated water itself. However, the company lacked

sufficient working capital both to maintain its position

in the California service market and expand into the

national and international markets. Consequently,

Aqua Media entered into negotiations with Arrow-

head for sale of its California service business and

related assets.

On July 20, 1976 Aqua Media, Inc. and Arrowhead

executed an asset purchase agreement whereby Arrow-

head agreed to acquire the California service business

of Aqua Media, Ine. The contract was entered into

pursuant to a plan of complete liquidation designed

to meet the requirements of Internal Revenue Code

§337 in order that the sale would be essentially tax

free at the corporate level. The remaining assets and

business of the company not being sold to Arrowhead

(the manufacturing business and service business out-

side California) were to be sold to a newly created

limited partnership (which came to be known as

Aqua Media, Ltd.) in which every Aqua Media share-

holder would have the right to participate.

Aqua Media, Inc.’s shareholders approved a plan

of liquidation which called for dispersal of the net

cash proceeds from sale of the company’s assets in

the form of liquidating distributions to its 27 share-

holders. The first distribution was scheduled to be

made “prior to December 31, 1976,” and the second

during early 1977. (C.T. 35).'

The acquisition agreement was closed on August

2, 1976. At that time Arrowhead paid $2,750,000 in

eash and delivered two promissory notes aggregating

$2,000,000 payable February 28, 1977. Aqua Media

delivered appropriate documents passing clear title

‘References ‘‘C.T. .......’’ are to the Clerk’s Transcript and ref-

erences ‘‘R.T. ....’’ are to the Reporter’s Transeript, which, to-

gether with certain exhibits transmitted in separate envelopes to

the Clerk of the Court of Appeals, comprise the Record on

Appeal.

to the assets sold. Arrowhead took physical possession

of the assets.’

On August 3, 1976, Aqua Media, Inc. sold its

residual assets to the newly created limited partner-

ship known as Aqua Media, Ltd., for $405,000. The

corporation then changed its name to A. M. Liqui-

dating Co. and began payment of liquidating distri-

butions to its shareholders. At the time this suit was

filed, those distributions totalled $2,091,000. The Anti-

trust Division of the U. 8S. Department of Justice did

not advise Aqua Media that it was contemplating

filing suit challenging the validity of the acquisition

until after those distributions were made. (C.T.

49-52).

Procedural History

The complaint (C.T. 332-340) filed by the Depart-

ment of Justice on December 23, 1976 named both the

buyers (CCLA and Arrowhead) and the sellers (A.

M. Liquidating Co. and Aqua Media, Ltd.) as defend-

ants. It alleges that the acquisition by Arrowhead of

Aqua Media’s California service assets and business

violated Section 7 of the Clayton Act and prays for

divestiture or rescission as alternative remedies ‘‘to

prevent and restrain the continuing violation by the

defendants ... of Section 7 of the Clayton Act (15

U.S.C. §18).”

‘The parties also agreed that Arrowhead would temporarily

operate certain services for Aqua Media’s service business in

Arizona, New Mexico, Texas and the Pacifie Northwest, and that

Arrowhead would serve as Aqua Media’s exclusive distributor of

its systems and equipment in California for a limited period of

time. These ancillary agreements, since terminated by the parties,

are not relevant to the instant petition.

The complaint does not attack the sale by Aqua

Media, Inc. of its manufacturing business assets and

uon-California service business assets to Aqua Media,

Ltd.

Petitioners promptly moved alternatively for dis-

missal, summary judgment or an order striking the

prayer for rescission, contending that, as a matter of

law, rescission was not an available remedy in Section

7 cases and, alternatively, that rescission was not

available as a matter of law given the particular

factual circumstances of this case, t.¢., that the trans-

action was fully consummated prior to commencement

of the action, that approximately 60% of the net cash

proceeds of sale had already been distributed to the

shareholders of A. M. Liquidating Co., and that the

shareholders were not parties to the action. On

February 7, 1977 the district court denied those

motions.

The government immediately moved for a_ pre-

liminary injunction to preclude distribution of the

remaining proceeds of sale te the sharehoiders, On

March 14, 1977 the district court granted the govern-

ment’s motion although acknowledging that “sellers

are not liable under the Clayton Act.” (R.T. 102-103).

The court concluded that the “argument that reseis-

sion here is not available is inconclusive, and the

court retains that option. A preliminary injunction,

in our view, is necessary to maintain the status quo.’”

The preliminary injunction order, entered on April

28, 1977 (C.T. 646), enjoins execution of the plan of

"See Appendix B7.

liquidation, precludes distribution to the shareholders

of the remaining proceeds of sale, and, despite the

fact that Aqua Media, Ltd. was not a party to the

original sale, restrains that entity from making any

distributions to its partners, from selling assets of the

partnership, from terminating the partnership, and

from altering or amending the partnership agreement.

Following entry of the preliminary injunction

order, petitioners ascertained through discovery that

the government based its contention that rescission

Was an appropriate form of relief upon a conclusion

that the contract by which Arrowhead agreed to

acquire the Aqua Media assets was illegal. Peti-

tioners thereupon moved to dissolve the preliminary

injunction arguing both that the contract was not

illegal and that the alleged illegality was not a

recognized ground for rescission either in the abstract

or in this case. The district court on July 18, 1977

denied petitioners’ motion.

Timely appeal was taken and the Ninth Circuit

agreed to expedite its review. The opinion of the

court of appeals concedes that its ruling is one of

‘first impression in the federal circuit courts” and

acknowledges that this Court’s decision in United

States v. E. I. duPont de Nemours d& Co., 366 U.S.

316 (1961) leaves the question of availability of the

remedy of rescission in Clayton Act §7 cases ‘‘an

open question.” 575 F.2d at 229 n. 7. The Ninth

Circuit held that a rescission order may be entered

against a corporate seller which has not violated the

Clayton Act or any other law.

SUMMARY OF REASONS FOR GRANTING THE WRIT

The role of the corporate seller in cases brought

under Section 7 of the Clayton Act has never been

addressed by this Court. The question of whether

rescission is an available remedy for redressing vio-

lations of Section 7 by the acquiring company, and

the related question of whether a seller may be re-

tained as a defendant for the purpose of implementing

a relief order against an acquiring company even

where the acquisition involved was consummated prior

to the filing of suit, rightfully deserve this Court’s

attention.

The court of appeals acknowledged that in answer-

ing these questions it was faced with a case of first

impression. In support of its holding that rescission

can be ordered where a violation of Section 7 is

found, the Ninth Circuit relied upon (1) inapposite

decisions which dealt with the propriety of awards

of relief against parties who had violated the law,

(2) a mistaken understanding of the congressional

history of the Clayton Act, and (3) an interpretation

of the provisions of that act which ignores aecepted

rules of statutory construction.

Section 7 of the Clayton Act is undoubtedly one

of the most significant provisions of this nation’s

antitrust laws. Review of the decision rendered by

the court of appeals is appropriate in order to settle

an important question of federal law which has not

been, but should be, resolved by this Court.

SECTION 7 OF THE CLAYTON ACT ONLY

PROSCRIBES ACQUISITIONS

Section 7 of the Clayton Act provides, in relevant

part:

“No corporation engaged in commerce shall ac-

quire, directly or indirectly, the whole or any part

of the stock or other share capital and no corpo-

ration subject to the jurisdiction of the Federal

Trade Commission shall acquire the whole or any

part of the assets of another corporation en-

gaged also in commerce, where in any line of

commerce in any section of the country, the effect

of such acquisition may be substantially to lessen

competition, or to tend to create a monopoly.”

(15 U.S.C. §18) [Emphasis added]

The activities of the seller (acquired) corporation

are not prohibited by any language in Section 7.

Only a few reported decisions have construed the role

of corporate sellers under Section 7, but they uni-

formly hold that it is aimed at the acts of the pur-

chaser rather than those of the seller.

Only one court of appeals decision has addressed

the question of possible seller liability in Section 7

cases although it did so in the context of a private

treble damage action. In Dailey v. Quality School

Plan, 380 F.2d 484 (5th Cir. 1967) the Fifth Circuit

held that a seller’s actions are not proscribed by See-

tion 7, stating:

“This leaves one question. [Seller] contends that

the complaint should be dismissed as to it insofar

as the cause of action against it rests on Section

7 of the Clayton Act. The argument is that See-

tion 7 is directed against the acquiring corpora-

tion and not against the seller, This position is

well taken. Section 7 by its terms proseribes only

the acquiring corporation. There seems to be no

decision to this effect but the language of the

statute is clear. We thus affirm the dismissal as

to | seller | on the Section 7 charge.”

380 F.2d at 485.

The Ninth Circuit adopted the reasoning of Dailey

in MeGuire ve Columbia Broadcasting Company, Lne.,

399 F.2d 902 (9th Cir. 1968) in which it was called

upon to construe analogous language in Section 3 of

the Clayton Act.” Instead of focusing upon the lia-

bility of a purchaser, as is the case with Section 7,

the proscription in Section 3 is upon the seller. In

affirming summary judgment in McGuire the Ninth

Circuit held:

“The language of the statute defines liability in

terms of a person who makes a sale or contracts

for sale and nowhere provides for liability of the

buver. Here, General Foods ts not the seller, and

consequently no cause of action ts created against

it, While no case which holds to this effect has

heen drawn to our attention, the language in the

statute seems plain. A similar interpretation of

Section 7 of the Clayton Act (15 U.S.C. S18) was

made in Dailey v. Quality School Plan, 380 F.2d

44 (5th Cir. 1967) where the court held that See-

tion 7 forbidding certain acquisitions applied only

7Seetion 3. provides in relevant part:

“It shall be unlawful for any person ... to make a sale ..

of goods, wares, merchandise, machinery, supphes or other

commodities... Where the effect of such... sale... may

be to substantially lessen conipetition or tend to create a

monopoly ino any line of commerce.” [Emphasis added. |

15 U.S.C. $14.

to an acquiring corporation and not to the corpo-

ration being acquired.” [Emphasis added].

399 F.2d at 906.

The Federal Trade Commission has also held that

Section 7 has no application to corporate sellers. In

its decision in In The Matter of Dean Foods, et al.,

70 F.T.C. 1146 (1966), the commission stated that “it

is clear under the language of [Section 7] that the

Clayton Act prohibition was directed solely against

the acquiring company and did not encompass the ac-

tivities of the acquired company,” and then proceeded

to dismiss the Section 7 claim against the selling

company. Jd. at 1290. However, because the activi-

ties of the seller were found by the commission to

constitute an “unfair trade practice” in violation of

Section 5 of the F.T.C. Act, which was separately

charged, the Commission retained the seller as a de-

fendant to the Section 5 claim.

Other district courts have reached similar conclu-

sions regarding the inapplicability of Section 7 to

sellers.© See U.S. uv. Parker-Hannifin Corp., 1974

Trade Cas., 175,061 (C.D. Cal. 1974); Record Club

of America, Inc, v. Capitol Records, Inc., 1971 Trade

Cas., 173,694 (S.D.N.Y. 1971).

A seemingly contrary result was reached in United

States v. Pabst Brewing Co., 183 F.Supp. 220 (E.D.

Wis. 1960) where the district court held that an

8In United States v. Reed Roller Bit Company, 274 F.Supp.

573 (W.D. Okla. 1967) the court was presented with a request

for rescission but found it “unnecessary” to decide the question.

274 F.Supp. at 590.

award of relief agaist a seller might be appropriate.

Upon analysis, however, Pabst is distinguishable from

Dailey and cases following it for in Pabst the sellers

closed the acquisition in spite of knowledge that the

Department of Justice intended to challenge the

acquisition under Section 7. Pabst is further distin-

euishable on the grounds that a close continuing con-

nection remained between buyer and seller subsequent

to closing by the virtue of the seller’s stock ownership

in the acquiring company.

This Court has never before been called upon to

decide the propriety of awards of relief against (or

orders dismissing) sellers. In United States v. Fal-

staff Brewing Corp., 410 U.S. 526, 529 n.9 (1973),

the Court merely noted m passing that the seller had

heen dismissed. In the one decision touching on the

issue, United States vu. KL. duPont de Nemours &

C'o., 366 US. 316 (1961), this Court reversed a district

court ruling denying the government’s request for

complete divestiture by duPont of its General Motors

stock, in the process stating that upon remand:

“General Motors, Christiana, and Delaware [sel-

lers| will thus be able to renew, for the district

court’s decision in the first instance, any objee-

tions they may have to the power of the court

to grant relief against them.” 366 U.S. at 334-

BOO.

Consequently, as noted by the court of appeals

below, this Court has never ruled upon the e;plica-

bility of Section 7 to a seller or upon the extent

to which a seller may be embroiled in litigation in-

volving the government and an acquiring company,’

and petitioners submit that a writ of certiorari should

issue to settle the important questions of federal law

presented here.

NEITHER THE LANGUAGE OF SECTION 15 OF THE CLAYTON

ACT, THE LEGISLATIVE HISTORY OF THE CLAYTON AOT,

NOR THE EQUITABLE POWERS OF THE COURT PERMIT

RESCISSION OF A CONSUMMATED ACQUISITION

The court below concluded that the language of the

Clayton Act, that Act’s legislative history and the

broad equitable powers of federal courts all support

its conclusion that rescission is an available remedy

for violations of Section 7 of the Clayton Act. Upon

analysis, however, none of these three touchstones

of the Ninth Circuit opinion supports its conclusion.

A. The Language of Sections 7 and 15 of the Clayton Act Does

Not Support The Court’s Conclusion

Two portions of the language of Section 15 of the

Clayton Act were singled out for analysis in the Ninth

Circuit’s opinion. The first of these was that portion

of Section 15 which empowers courts to ‘prevent

and restrain” violations of the act. The second was

the portion of Section 15 which provides tha

“Whenever it shall appear to the court before

which any such proceeding may be pending that

the ends of justice require that other parties

should be brought before the court, the court may

°In the one prior instance where the question was squarely

presented, this Court declined to rule on jurisdictional. grounds.

Tidewater Oil Co. v. Unted States, 409 U.S. 151 (1972) (inter-

locutory appeal barred by Expediting Act).

‘ause them to be summoned, whether they reside

in the district in which the court is held or not.

ere

Each of these sections must be construed in accord

with basic principles of statutory construction which

require that statutes which are in part materia be

construed together. Sanford v. Commissioner of In-

ternal Revenue, 308 U.S. 39 (1939) ; 2A SUTHERLAND,

STATUTES AND StatTuTORY CONSTRUCTION, §51.01 et seq.

(4th Ed. 1973) [hereinafter SUTHERLAND]. Such a

mode of interpretation gives effect to all provisions

of both statutes and ensures development of an har-

monious interpretation of statutes which were in-

tended to be read together. Rawls v. United States,

331 F.2d 21 (8th Cir. 1964); Northern Natural Gas

Company v. Grounds, 441 F.2d 704 (10th Cir. 1971) ;

SUTHERLAND, supra, at §51.02. When, in construing

statutes in part materia together, the court concludes

that a conflict exists between the language of two

provisions, the specific substantive statute must con-

trol over more general remedial provisions absent ex-

pression of any contrary Congressional intent. Preiser

v. Rodriquez, 411 U.S. 475 (1973); Abell v. United

States, 518 F.2d 1369 (Ct. Cl. 1975); United States

v. Firico, 115 F.2d 389 (10th Cir. 1940) ; SUTHERLAND,

supra, at $51.05.

In accord with these rules Sections 7 and 15 of

the Clayton Act must be construed together for they

are clearly mm part materia since Section 15 establishes

the framework for redressing violations of Section 7.’

To the extent that the language of Section 15 is sus-

ceptible of an interpretation which would make the

provisions of Section 15 broader than the provisions

of Section 7, the more specific substantive language

of Section 7 must control.

A review of the Ninth Circuit’s opinion requires

the conclusion that that court erred in applying the

rules of sound statutory construction set out above for

after conceding that Section 7 does not prohibit the

activities of a seller the Ninth Circuit went on to

conclude that Section 15, which merely provides the

statutory basis for redressing violations of Section 7,

authorizes the award of relief against sellers. Each

of the portions of Section 15 upon which the Court

relied to support its decision must be read consis-

tently with Section 7. Neither can be read to provide

a remedy where Section 7 finds no wrong.

B. Congressional History of the Antitrust Laws Demonstrates

That Section 15 Was Not Intended to Allow Punishment of

Individuals Who Have Not Violated The Law

In concluding that rescission might be an appro-

priate remedy in an action brought pursuant to Sec-

tion 7 of the Clayton Act the Court below relied in

part upon that portion of Section 15 of the Clayton

Act which provides that:

Statutes are considered to be tn pari materia when they

relate to the same person or thing or have the same object.

United States v. Freeling, 31 F.R.D. 540 (S.D.N.Y. (1962):

Willapoint Oysters v. Ewing, 174 F.2d 676 (9th Cir. 1949).

“Whenever it shall appear to the court before

which any such proceeding may be pending that

the ends of justice require that other parties

should be brought before the court, the court may

cause them to be summoned, whether they reside

in the district in which the court is held or not

”

The Ninth Circuit read this portion of Section 15

as evidencing a congressional conclusion “that on oc-

casions third parties whose conduct is not specifically

addressed by the Clayton Act would be so related

to the anticompetitive effects at which the act was di-

rected that their presence would be necessary in order

to fashion complete relief.” 575 F.2d at 228. Having

thus concluded that one of the remedial sections of

the Clayton Act was intended to reach the activities

of parties whose actions are not prohibited by the sub-

stantive portions of the statute, the court went on

to decide that rescission is an appropriate remedy

where a violation of Section 7 has occurred. The court

of appeals’ conclusion is based upon an ‘inaccurate

reading of congressional intent in adopting the above-

quoted portion of Section 15.

As first reported by the House Committee on the

Judiciary in 1914, Section 15 of the Clayton Act

contained the precise language set out above H.R.

Rep. No. 627, 638d Cong., 2d Sess. 4 (1914). The

drafters of Section 15 adopted this language ver-

batim from Section 5 of the Sherman Act (15 U.S.C,

§5) which was originally enacted in July of 1890.

The subject portion of Section 15 is not analyzed

in the Congressional Record. However, the reasons

for adoption of Sherman Act Section 5 were discussed

in detail by the 51st Congress which first enacted it.

According to proponents of the bill this particular

language was intended to cure two problems:

1. It was intended to allow nationwide service

of process so that all members of a “trust” might

be made defendants in a single action. Section

737 of the Revised Statutes at that time pre-

cluded such a complete adjudication by providing

that a defendant could be sued only where he re-

sided or was found.

§1 Cong. Rec. 2640-2642 (1889)."

“Pertinent portions of the Congressional Record read as

follows:

“Mr. Spooner [proponent of the amendment to the Sherman

Act which became Section 5]: Mr. President, I offer this

amendment to cure what seems to be a very great defect in

the bill. Most if not all of the combinations, however they

may be called, aimed at by the bill, are detrimental to the

publie interest. . . . Manifestly, to deal with the trust or

combination of [the magnitude of the Sugar Trusts made

up of 17 different corporations} it must be possible to bring

into one action, into one court, the essential parties defend-

ant. One of the arguments made by the Senator from

Ohio in favor of this bill was that there might be under its

provisions such a concentration of defendants; but as the law

stands today there could be none, and I desire to eall the

attention of the Senate for a moment to the sections of the

Revised Statutes bearing upon the subject. Section 737

provides:

‘Sec. 737. When there are several defendants in any suit

at law or in equity, and one or more are neither in-

habitants of nor found within the district in which the

suit is brought, and do not voluntarily appear, the court

may entertain jurisdiction, and proceed to trial on the

adjudication of the suit between the parties who are

properly before it; but the judgment or the decree ren-

dered therein shai! not conclude or prejudice other parties

2. It was intended to empower courts before

which antitrust suits were brought to enforce

their judgments through writs of tmyjunction

which could be served outside of the jurisdiction

of the court. As the propounder of the language

not regularly served with process nor voluntarily appear-

ing to answer; and non-joinder of parties who are not

inhabitants of nor found within the district, as aforesaid,

shall not constitute matter of abatement or objection to the

suit.’

Whoever may be parties defendant in the action, under

that section the court might proceed as to those within the

jurisdiction; but its judgment could have no effeet whatso-

ever upon those not served or not voluntarily appearing.

Section 738 provides:

‘Sec. 738. When any defendant in a suit in equity to

enforee any legal or equitable lien or claim against real

or personal property within the district where the suit is

brought .. .’

And it was amended so as to include suits brought to

remove a cloud upon title to land in a distriet—

‘is not an inhabitant nor found within said district, and

does not voluntarily appear thereto, it shall be lawful

for the court to make an order directing such absent

defendant to appear, plead, answer or demur to the com-

plainant’s bill at a certain day, therein to be designated.’

Then follows a provision for obtaining jurisdiction in a mode

to be pointed out by the order of publication or otherwise:

‘But the said adjudication shall, as regards such absent

defendant without appearance, affect his property within

such distriet only’

Then comes this seetion to which I call the attention of the

Senator from Ohio:

‘Sec. 739. Except in the eases provided in the next three

sections, no person shall be arrested in one district for

trial in another in any civil action before a Circuit or

District Court; and except in said cases and eases pro-

vided by the preceding sections, no civil suit shall be

brought before either of said courts against an inhabitant

of the United States, by any original process, in any other

district than that of which he is an inhabitant or in which

he is found at the time of serving of the writ.’

“One object of the amendment is to provide that the Court

may bring in these parties wherever they reside or wherever

they are doing business and have as full and complete juris-

diction over them upon publication as if they voluntarily

appeared in this action.”

Cong. Ree., supra, at 2640.

which became Section 5 stated, ‘‘as the law stands

today that writ cannot be made effective except

where it is served within the jurisdiction of the

Oia.

A review of the Congressional history of Section 5

can lead only to the conclusion that that portion of

the statute which reads

‘*Whenever it shall appear to the court ... that

the ends of justice require that other parties

should be brought before the court, the court may

cause them to be summoned... .”

was intended only to extend the geographical reach of

the district court’s power so as to enable a single court

to resolve all issues related to each violation of the

antitrust laws, and to allow that same court to enjoin

activities found violative of the antitrust laws even if

those activities occurred outside the court’s physical

jurisdiction. Sherman Act Section 5 did not increase

the number of parties against whom relief could be

awarded—it merely decreased the number of actions

which would be necessary to obtain total relief.

2Pertinent portions of the Congressional Record provide:

“Mr. Spooner: . . . Another matte which is covered by the

amendment is this. For myself, I think the efficacious remedy

will be found to be, not the criminal prosecution provided

for by the Senator from Texas ... but the vigorous and

drastie use of the writ of injunction. Under the law as it

stands today that writ can only be served and punishment

for its disobedience enforced within the distriet over which

the court has jurisdiction. By the amendment which I have

sent to the desk this writ of injunction may be served any-

where within the United States, and if it is disobeyed the

attachment for contempt may be served anywhere within

the United States. I think the amendment ought to be

adop ”

Id. at 2642.

As discussed above, the language of Section 5 of

the Sherman Act was adopted in toto as a portion

of Clayton Act Section 15. The Congressional Record

contains no discussion of the reasons for inclusion

of this language in Section 15. However, commonly

applied rules of statutory construction require that

statutes dealing with the same subject matter (here

the antitrust laws), particularly where they contain

identical language, should be construed consistently.

Allen v. Grand Cent. Aircraft Company, 347 U.S. 535

(1954); Sanford v. Commissioner of Internal Reve-

nue, 308 U.S. 39 (1939). Thus, the subject language

of Section 15 can only be read as an extension

of the jurisdictional reach of courts enforcing the

antitrust laws. Petitioners submit that the court of

appeals erred in construing this key language as carte

blanche authority to summon innocent third parties

before district courts.

C. Equitable Powers of the Court Do Not Authorize The

Remedy Awarded

The opinion rendered by the court of appeals con-

tains numerous references to the breadth of the in-

herent power of a court of equity to design flexible

decrees adequate to restore competition. Petitioners

do not take issue with the proposition that equity’s

powers are broad and flexible. However, it does not

follow from the premise that equity has broad inher-

ent power to fashion decrees that equity may award

affirmative injunctive relief against a party who has

not even violated the law." To hold otherwise, par-

ticularly in actions based upon statute, would be to

allow equity to usurp the power possessed solely by

Congress for such a holding would allow a court of

equity to create a remedy which is outside the

authority of the law, Rees 1. City of Watertown, 86

U.S. 107 (1873); Whittacker d& Company v. Sewer

Improvement Dist. No. 1 of Dardanelle, Ark., 221

F.2d 649 (8th Cir, 1955); Heine v. Board of Levee

Commisstoners, 86 U.S, 655 (1874).

The court below in creating a remedy directed at

a party whose activities did not violate the law went

beyond even the broad powers of a court of equity.

Rather than fashioning an effective remedy against

a party whose activities had been condemned by

Congress, the court ordered a party which has com-

mitted no wrong to repurchase a business which it no

longer wishes to own, to compete in a market from

which it intentionally departed, and to invest its

human and financial resources in a manner contrary

to its independent best business judgment. Creation

of such a “remedy” can be considered as nothing less

than judicial legislation.

“Petitioners do not argue that the full extent of equity's

inherent power should not be utilized in redressing violations of

the Clayton Act, Prior decisions of this court have hioned

divestiture as a remedy for redressing violations of Section 7 by

acquiring companies, United States v, EB, I, duPont de Nemours

& Co,, 353 U.S, 586 (1957), and have held that additional relief

ancillary to divestiture may be appropriate, Ford Motor Company

v. United States, 405 U.S, 562 (1972), Petitioners merely assert

that even the far reaching powers of courts of equity are subject

to certain limitations which the court below exceeded, United

States v, Smelser, 87 F.2d 799 (5th Cir, 1937),

SELLERS ARE NOT PROPER PARTIES TO A SECTION 7 CASE

WHERE THE ACQUISITION WAS CONSUMMATED PRIOR

TO THE FILING OF THE SUIT

The court of appeals recognized that petitioners

here, and sellers in general, do not violave Clayton

Act §7 but held that Clayton Act §15 was sufficiently

encompassing to permit joinder of third parties in

Section 7 cases and authorize broad relief against

third parties.

In the court of appeals petitioners conceded, based

upon a line of district court decisions, that a district

court is empowered to enjoin sellers (as well as buy-

ers) from completing an asset sale where the govern-

ment establishes the reasonable probability that the

acquisition might violate Section 7. United States

v. Chrysler Corp., 232 F.Supp. 651 (DN. 1964) ;

United States v. Ingersoll-Rand Co,, 218 F.Supp. 530

(W.D. Pa.) aff'd, 320 F.2d 509 (38d Cir, 1963), How-

ever, petitioners noted that in this case the govern-

ment did not seek to enjoin the transaction prior

to its consummation and that, based upon a literal

5, any violation resulting from

reading of Section 1

the acquisition could no longer be ‘‘prevented” or

“restrained.” The court of appeals’ response to this

argument was that it “strains the normal meaning of

the terms ‘prevent’ and ‘restrain’ far out of perspec-

tive,” 575 F.2d at 230, That response is without ana-

lytical support. Porter v. Warner Holding Co., 328

U.S. 395 (1946), upon which the court of appeals

relied, is inapposite inasmuch as it sought only to

construe the scope of the equity powers of federal

courts to award relief against a law violator, See

also United Stales v. E. I. duPont de Nemours & Co.,

366 U.S. 316, 334-335 (1961). The legislative history

of Section 15 discussed above, reveals no intent to

proscribe the actions of sellers or to permit their

joinder. Reference to the only stated Congressional

intent relating to the statutory language in question

requires the conclusion that the ‘short answer”

offered by the court of appeals is itself short of the

mark, Decisions such as United States v. 2. I. duPont

de Nemours & Co., 353 U.S. 586 (1957), regarding the

extent to which district courts may order necessary

and appropriate relief to eliminate the effects of

acquisitions found violative of Clayton Act §7, do not

address the fundamental question of the extent to

which third party sellers may be summoned before

district courts and subjected to prejudicial relief

orders,

Petitioners submit that where a complaint fails as

a matter of law to state a claim for relief against a

party, that party is entitled to dismissal. Yuba

Consol, Gold Fields v. Kilkeary, 206 F.2d 884 (9th

Cir, 1953); Deckert v. Independence Shares Corp.,

311 U.S. 282 (1940); Conley v. Gibson, 355 U.S. 41

(1957). In retaining corporate sellers as defendants

in Section 7 cases filed subsequent to consummation

of the acquisition district courts assume jurisdiction

over sellers where there is no pending ‘‘case or con-

troversy” within the meaning of Article III of the

United States Constitution, Muskrat v. United States,

219 U.S. 346 (1911); Keller v. Potomac Electric

Power Co,, 261 U.S. 428 (1923); Massachusetts v.,

Missouri, 308 U.S. 1 (1939),

While it is true that some district court decisions

have held sellers to be proper parties in Section 7

cases, United States v. Pabst Brewing Co., 183

F.Supp 220 (.D. Wis. 1960) ; United States v. Phil-

lips Petroleum Co., 1972 Trade Cases 173,899 (C.D.

Jal. 1971) ;’* none has analyzed Section 15 or exam-

ined its Congressional history. Neither have they of-

fered any explanation for arriving at the conclusion

that sellers ought to be retained as defendants. In

light of the limited but clear Congressional history

pointing to a legislative intent to address only the

necessity for nationwide service of process, together

with the absence of any legislative intent which

would support broad construction of Section 15, pe-

titioners urge that this Court also review denial of

their motion for dismissal. Courts of appeals and the

Supreme Court may dismiss actions which fail to

state a claim upon which relief may be granted,”

“The Phillips decision later reached this Court but in Tide-

water Oil Company v. United States, 409 U.S. 151 (1972) the

Court declined to decide issues relating to the selier’s role on the

vround review was when precluded by the Expediting Act.

The parties have stipulated to entry of a consent Final Judg-

ment in distriet court, the terms of which are set forth ver-

hbatim in Appendix D, As of the date this petition was filed, the

proposed Judgment is still subject to provisions of the Antitrust

Penalties and Procedures Act, 15 U.S.C. §16(b)-(h) and has not

been approved by the district court. Even if approved, however,

the issues presented here are not moot as Paragraph XXIII(B)

of the proposed judgment (Appendix D23) expressly provides

that a further hearing (trial) may be held to determine whether

rescission of the aequisition should be ordered. It is clear that

interlocutory appeal of an equity ease brings the entire case

before the reviewing court and that where “insuperable objection

to maintaining the bill clearly appears, it may be dismissed and

the litigation terminated.” Deckert v. Independence Shares Corp.,

supra at 287; Myers v, Bethlehem Shipbuilding Corp., 303 U.S.

41, 52-53 (1938).

Deckert v. Independence Shares Corp., supra; Hughes

Tool Co. v. Trans World Airlines, 409 U.S. 363

(1973) ; Aerojet-General Corp. v. American Arbitra-

tion Assn., 478 F.2d 248 (9th Cir. 1973); Hurwitz v.

Directors Guild of America, Inc., 364 F.2d 67 (2d Cir.

1966), cert. denied 385 U.S. 971 (1966), and peti-

tioners should be ordered dismissed.

CONCLUSION

For the foregoing reasons this Court should issue

a writ of certigrari to review the opinion and judg-

ment of the United States Court of Appeals for the

Ninth Circuit.

Respectfully submitted,

Dae E. FREDERICKS,

111 Pine Street,

San Francisco, California 94111,

Attorneys for Petitioners

Aqua Media, Ltd. and

A. M. Liquidating Co.

Of Counsel: |

JOHN B. MarcHANT,

CynTuia H. PLevin,

SEDGWICK, DETERT, MorAN & ARNOLD,

111 Pine Street,

San Francisco, California 94111.

Dated: August 1, 1978.

(Appendices Follow)

Appendices

Appendix A

United States District Court

Central District of California

Civil No. 76-3988-LTL

United States of America, )

Plaintiff,

VS. |

Coca-Cola Bottling Company of Los Angeles;

Arrowhead Puritas Waters, Ine.; Aqua

Media, Ltd.; and A. M. Liquidating Co.,

Defendaats. ;

[Filed April 27, 1977]

[Entered April 28, 1977]

PRELIMINARY INJUNCTION ORDER

Whereas, plaintiff has moved for a preliminary in-

junction, and

Whereas, it appears reasonably probable that plain-

tiff will prevail at trial on the merits, and

Whereas, the Court may find it necessary after

trial to order rescission of the Asset Purchase Agree-

ment dated July 20, 1976, and ancillary agreements

among the defendants in order to secure effective and

expeditious relief, and

A-2

Whereas, the parties have been heard and the

Court has made findings of fact and conclusions of

law, and good cause appearing,

It Is Hereby Ordered That:

1. The plan of complete liquidation of A. M. Li-

quidating Co. is enjoined from execution, except that

A. M. Liquidating Co. (hereinafter “A, M.”) may

distribute all of its property and assets subject to all

of its liabilities, to The Bank of California, National

Association, as trustee, to be held, administered and

distributed pursuant to the terms and conditions of

the A. M. Liquidating Trust Agreement dated April

19, 1977 (hereinafter the “Trust Agreement”). A. M.,

its officers, directors, employees, suecessors and as-

signs and all other persons acting on behalf of any

of them, are each enjoined from otherwise effecting

any dissolution or termination of, or selling, disposing

of or diminishing any asset of, A.M.; and from doing

any other act which would in any way impair the

ability of A. M. to comply with any final order of

this Court implementing the relief prayed for by the

Plaintiff in the complaint.

2. <A. M. is ordered promptly to provide to the

Plaintiff copies of the lists of assets and liabilities

designated as Exhibits A and B to the Trust Agree-

ment, and shall promptly notify Plaintiff of the

nature and location of any later discovered asset or lia-

bility, pursuant to paragraph 1.1 of said Trust Agree-

ment. A. M. is further ordered promptly te provide

to Plaintiff copies of all correspondence between it

and the Trustee of said Trust. A. M. is further or-

A-3

dered promptly to advise the Court, in camera, as to

the manner of apportionment of attorney’s fees and

costs of litigation between A. M. and Aqua Media,

Ltd.

3. <A. M. is enjoined from taking any action to

alter or amend the Trust Agreement except upon

further order of this Court or upon the entry of a

final order from which no appeal could be taken

terminating this action.

4. Aqua Media, Ltd., its general and limited part-

ners, employees, successors and assigns and all other

persons acting on behalf of any of them, are each en-

joined and restrained from performance of the fol-

lowing acts:

a) Making any distributions to the partners,

including any that are provided for by para-

graph 17 of the Agreement of Limited Partner-

ship of Aqua Media, Ltd. dated August 1, 1976

(hereinafter the “Partnership Agreement”), a

copy of which is attached hereto marked Exhibit

b) Making any distribution of all or any part

of the credit balance of any partner’s capital ac-

count, including any distribution pursuant to par-

agraph 7 of the Partnership Agreement (Exhibit

A, p. 6).

e) Making distribution of profits to the part-

ners, including any distribution pursuant to par-

agraph 6 or paragraph 8 of the partnership

agreement (Exhibit A, pp. 6-7).

A-4

d) Undertaking or permitting any act or omis-

sion in breach of any of the covenants, terms

or conditions of the Partnership Agreement

(Exhibit A).

e) Undertaking any act or vote authorizing

or effecting the expulsion or removal of a general

partner, termination of the partnership, the sale

of all or substantially all of the assets of the

partnership, or altering or amending the partner-

ship agreement including any act or vote pursu-

ant to paragraph 12 or 13 of the Partnership

Agreement (Exhibit A, pp. 8-9).

5. Aqua Media, Ltd., is further ordered to give

written notice to the Court and the Plaintiff of any of

the following acts or events:

a) The death, resignation, bankruptcy or elec-

tion of a general partner. No action shall be

taken by Aqua Media, Ltd. pursuant to subpara-

graphs (b) or (c) of paragraph 14 of the Part-

nership Agreement (Exhibit A, p. 12) until

expiration of a period of fifteen (15) days follow-

ing such notice. |

b) The death, removal or election of a limited

partner. No action shall be taken by Aqua Media,

Ltd. pursuant to paragraph 15 of the Partner-

ship Agreement (Exhibit A, p. 12) until expira-

tion of a period of fifteen (15) days following

such notice.

ec) The assignment of a partner’s interest. No

action shall be taken by Aqua Media, Ltd. pursu-

A-5

ant to paragraph 20 of the Partnership Agree-

ment (Exhibit A, p. 14) until expiration of a

period of fifteen (15) days following such notice.

d) The intention of the partnership to sell,

assign, transfer or convey any asset having a fair

market value of more than $5,000, other than in

the ordinary course of business. No such sale, as-

signment, transfer or conveyance shall be made

by Aqua Media, Ltd. until expiration of a period

of fifteen (15) days following such notice.

e) The intention of the general partners to

cause the voluntary reduction of the then current

level of business of the partnership. No such in-

tended action shall be taken by Aqua Media, Ltd.

until expiration of a period of fifteen (15) days

following such notice.

6. In the event notice is given to Plaintiff pursu-

ant to the foregoing orders and, during the fifteen

(15) day period provided for therein, Plaintiff gives

written notice to the Court and the defendants that it

objects to any such intended action, which notice

shall state the reasons for said objection, Aqua Media,

Ltd. and its general and limited partners, employees,

successors and assigns and all other persons acting on

their behalf are each further ordered to refrain from

the intended action objected to by plaintiff unless or

until the Court has ruled upon any motion or appli-

eation by Aqua Media, Ltd. that such action he per-

mitted.

A-6

7. The foregoing Orders shall remain in full force

and effect until further Order of the Court.

Dated: 4-27-77

/sf/ I. T. Lydick

Sheppard, Mullin, Richter & Hampton

333 South Hope Street, 48th Floor

Los Angeles, California 90071

Attorneys for Defendants

CCLA and Arrowhead

Lawrence T. Lydick

United States District Judge

[ Exhibit A is not reproduced herein ]

Approved as to form:

/s/ Crossan R. Andersen

Crossan R. Andersen

Antitrust Division

Department of Justice

1444 U.S. Court House

312 North Spring Street

Los Angeles, California 90012

Attorneys for Plaintiff

/s/ John B, Marchant

John B. Marchant

Sedgwick, Detert, Moran & Arnold

111 Pine St., 11th Floor

San Francisco, California 94111

Attorneys for Defendants

A. M. Liquidating Co. and

Aqua Media, Lt.

/s/ Don T. Hibner

Don T. Hibner, Jr.

A-8

United States District Court

Central District of California

Civil No. 76-3988-LTL

United States of America,

Plaintiff, |

vs.

Coca-Cola Bottling Company of Los Angeles; .

Arrowhead Puritas Waters, Ine.; Aqua

Media, Ltd.; and A. M. Liquidating Co.,

Defendants. |

[Filed April 27, 1977]

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

On February 7, 1977, plaintiff filed a motion for a

temporary restraining order and preliminary injunc-

tion against Aqua Media, Ltd. and A. M. Liquidating

Co. On February 11, 1977, the parties entered into a

stipulation and proposed order essentially to maintain

the status quo, pending the resolution of plaintiff’s

motion which was then set by the Court for hearing

on March 14, 1977. On the basis of the briefs, sup-

porting affidavits, depositions and exhibits, the Court

enters these findings of fact and conclusions of law on

this motion for a preliminary injunction. The Court

has not had the benefit of the examination of wit-

nesses tested under cross-examination nor of the delib-

erate and thorough presentation by counsel which may

be expected during the trial on the merits, after which

the Court may reach contrary conclusions,

A-9

FINDINGS OF FACT

1. On December 23, 1976, the United States filed

its Complaint, charging that an acquisition by Coca-

Cola Bottling Company of Los Angeles (“CCLA”)

and its subsidiary, Arrowhead Puritas Waters, Ine.

(“Arrowhead”), of certain assets of Aqua Media, Ine,

(“Aqua Media’), along with certain agreements inci-

dental to said acquisition, violated Section 7 of the

Clayton Act (15 U.S.C. §8).

The Defendants

2. Defendant CCLA is a California corporation,

with its principal office in Los Angeles. Among its

other activities, CCLA holds exclusive franchises for

bottling, canning and distributing certain soft drinks

in California, Nevada and Hawaii. In 1976 CCLA

had total sales of $142 million and total assets of $90

million.

3. In 1969 CCLA acquired all the capital stock of

a company named Arrowhead and Puritas Waters,

Inc., after which the present name was adopted, and

Arrowhead was integrated into CCLA’s overall oper-

ations. Arrowhead, a California corporation head-

quartered in Los Angeles, is engaged in both the

residential bottled water business and the high purity

industrial water service business. The latter operation

is conducted within Arrowhead’s Industrial Water

Division (often called “ITWD”). Arrowhead’s 1975

revenues from its high purity industrial water service

business exceeded $3 million. Arrowhead has manu-

factured water cooler dispensers, glass bottles, water

conditioning equipment and food dispensing machines.

A-10

4. Defendant A. M. Liquidating Co., formerly

known as Aqua Media, Ine. (hereinafter “Aqua

Media”), is a California corporation with its princi-

pal place of business in Sunnyvale, California. Since

1967 Aqua Media had been engaged in providing

high purity industrial water service to customers in

California, in other states, and in certain foreign

countries. Beginning in 1972, Aqua Media also com-

menced the manufacture of high purity industrial

water systems and equipment for sale in California

and other states. In 1975 Aqua Media had revenues

of approximately $7 million.

5. Defendant Aqua Media, Ltd. is a limited part-

nership organized in California on August 1, 1976 to

acquire and operate those assets of Aqua Media which

were not sold and transferred to Arrowhead under the

acquisition agreements described hereinbelow, includ-

ing all issued and outstanding stock in Aqua Media

International, a California corporation, and 50% part-

nership interests in Aqua Media of Arizona and Aqua

Media of Texas. Aqua Media, Ltd. maintains its prin-

cipal office in Sunnyvale, California, and is engaged

in the manufacture of high purity industrial water

equipment for sale in various states, ineluding Cali-

fornia, and foreign nations, and providing high purity

industrial water service in states other than California

and in foreign nations.

Details of the Acquisition

6. The acquisition which is the subject matter of

this action consists of several written and oral agree-

A-ll

ments between Arrowhead and Aqua Media as fol-

lows:

(a) On July 20, 1976, Arrowhead and Aqua

Media entered into an Asset Purchase Agreement

whereby Arrowhead acquired “substantially all

of the California industrial water service business

assets of Aqua Media.” The purchase price was

$4,750,000, payable $2,750,000 cash on closing and

$2 million in notes payable February 28, 1977.

The notes were unconditionally guaranteed by

CCLA. Aqua Media agreed not to compete with

Arrowhead in the industrial water service busi-

ness in the State of California for a period of

four years, and the agreement provided for a

similar covenant not to compete on the part of

the founder and president of Aqua Media, Jaren

F. Leet. Aqua Media was free to continue in the

manufacture and sale of capital equipment for in-

dustrial water purification in California and to

engage in any business outside California in com-

petition with Arrowhead.

(b) Letter agreement dated July 19, 1976 pro-

viding that after the close of the Asset Purchase

Agreement Arrowhead would perform in Califor-

nia certain water purification support services for

Aqua Media’s customers outside California.

(ec) Distributorship agreement executed Au-

gust 2, 1976 whereby Aqua Media appointed Ar-

rowhead as its exclusive distributor for the

sale in California of industrial water purification

systems and equipment manufactured by Aqua

A-12

Media. Said agreement is cancellable by either

party upon giving of 90-day notice.

(d) Parol agreement made on or about Au-

gust 2, 1976 whereby it was agreed that Arrow-

head would acquire from Aqua Media certain

customer accounts for service to be provided in

the State of Nevada.

7. The Asset Purchase Agreement closed on Au-

gust 2, 1976, at which time title to the assets was

transferred from Aqua Media to Arrowhead and the

purchase price for such assets was paid and delivered

by Arrowhead to Aqua Media. Upon closing, the other

agreements referred to above became binding and

effective.

8. On May 3; 1976, after having been approached

hy Arrowhead about purchasing Aqua Media’s Cali-

fornia industrial water service business and related

assets, Aqua Media adopted a plan of complete liqui-

dation, pursuant to Internal Revenue Code Section

307.

9. Pursuant to said plan, Aqua Media engaged in

negotiations with CCLA and Arrowhead for the sale

of its assets relating to the providing of high purity

water service to its California customers, resulting in

the acquisition which is the subject of this action, as

more particularly described hereinabove.

10. Pursuant to said plan, Aqua Media entered

into an agreement with Aqua Media, Ltd. for the sale

of its remaining assets (except for accounts receivable

and other current assets) for $405,000. The sale and

——

——————$

—_

A-13

transfer of such assets closed on August 3, 1976 sub-

ject to an escrow which closed September 1, 1976, at

which time Aqua Media received $202,500 in cash, the

balance of the purchase price of $202,500 payable by

promissory note due on March 31, 1977.

11. Pursuant to said plan, Aqua Media proceeded

to collect its assets, pay its liabilities and make liqui-

dating distribution to its shareholders. Prior to De-

cember 23, 1976, the date on which this action was

filed, liquidating distributions of $2,091,000 had heen

authorized. On December 23, 1976, Aqua Media had

assets of $2,488,075, subject to liquidated and undis-

puted liabilities of $240,015. There were also certain

disputed and contingent liabilities. It was then esti-

mated that, upon completion of performance of the

plan, there would be an additional $1,394,000 distribu-

table to the shareholders, payment of which was to

be made prior to the expiration of a period of 12

months from the date the plan was adopted, @.e. on or

before May 2, 1977.

12. If the plan does not qualify as a “337 Liquida-

tion,” Aqua Media may have to pay additional in-

come taxes in the amount of approximately $600,000,

thereby reducing the cash distributions to the share-

holders in the amount of $1.72 per share.

Background of the Industry

13. Industrial water service companies provide

services that effect the removal of substantially all, or

all, minerals and other solid matter dissolved in

water. There are numerous categories of industrial

A-14

and commercial businesses which require chemically

and/or biologically pure water, meaning H.O with no

chemical or biologic contaminants.

14. A substantial number of industrial and commer-

cial concerns who must employ high purity industrial

water find it necessary to engage service compa-

nies to produce or assist’ them in producing such

water and provide on-going service thereafter. Con-

tinuous proper functioning of their water purification

system is essential to the on-going operations of many

firms.

15. A number of users prefer to deal with a water

service company rather than purchase a permanently

installed self-regenerating DI system due, inter alia,

to the high initial cost of a permanently installed

self-regenerating system, the cost and inconvenience

of maintaining such a system, the bother of training

personnel to operate such a system, and the necessity

of obtaining emergency service should a company’s

high purity water purification system break down.

Interstate Commerce

16. CCLA is engaged in interstate commerce.

17. At the time of the acquisition, Aqua Media

engaged in interstate commerce. It provided high

purity industrial water service in the States of Cali-

fornia, Arizona, New Mexico, Oregon, Nevada, and

Texas.

18. As part of the transaction, Arrowhead agreed

to provide Aqua Media with continuing regeneration

A-15

services to support Aqua Media’s Arizona, New Mex-

ico and Texas Partnerships, and Aqua Media’s Pa-

cific Northwest and other domestic and international

service business.

19. As part of the transaction, Arrowhead and

Aqua Media agreed that Arrowhead will directly

serve 28 Nevada water service customers of Aqua

Media, from whom revenues exceeded $21,000 for an

eight-month period.

20. Arrowhead has provided mobile DI service

and/or supplies to customers in Arizona, including

Arizona Public Service Commission, the Salt River

(Utilities) Project, and the Maricopa County Parks

and Recreation Department, Phoenix. Arizona Pub-

lic Service, during the period of August 1975 through

October 10, 1976, paid Arrowhead over $223,000 for

such goods and services. Arrowhead supplied services

and related products to (a) Southern California Edi-

son’s Mohave Generating Station in Laughlin, Nevada,

and (b) Reno Sheet Metal, Reno, Nevada.

21. Arrowhead purchases substantial amounts of

supplies necessary to conduct its service operations

from out-of-state suppliers. Arrowhead purchases resin

for use in its plants, DI exchange tanks and mobile

DI units, and for resale to its customers. Such resins

regularly were shipped directly to Arrowhead from

Rohm and Haas in Philadelphia, Pennsylvania. Large

orders of resin intended for Arizona’s customers, such

as Southern California Edison’s out-of-state facility,

were shipped directly to the customers from Pennsyl-

vania. Arrowhead also purchased from out-of-state

A -16

sources the following products: pumps directly from

Goulds Pump in Seneca Falls, New York; Gelman fil-

ters made in Michigan through a California distribu-

tor, David J. Tripp; and monitors, cells and patch

eords directly from Balsbaugh Laboratories in Massa-

chusetts. An Arrowhead report on purchases it made

during the period 8/1/75-7/31/76 showed that pur-

chases of resin from Rohm and Haas (Pennsylvania)

were $205,600; of Gelman filters from David J. Tripp |

were $58,600; of monitors, cells and patch cords from

Balsbaugh Labs (Massachusetts) were $28,400; and of

pumps from Goulds Pump (New York) were $10,600

—for a total of $303,200.

22. Arrowhead has been and is now engaged in

interstate commerce.

Line of Commerce

23. Prior to the acquisition, Aqua Media was “en-

gaged in two lines of business, the manufacture and

sale of industrial water reverse osmosis and deioniza-

tion systems and equipment and the furnishing of in-

dustrial water service to others. [It] desire[d] to sell

and transfer to [Arrowhead] substantially all of its

California industrial water service assets.” (Asset

Purchase Agreement).

24. Defend..nts’ services are related to high purity

water, as distinguished from other types of industrial

water.

25. The services offered and equipment used by

Arrowhead and Aqua Media are essentially similar.

A-17

26. High purity industrial water service firms are

specialized vendors who offer a unique cluster of ser-

vices and equipment. These services consist of the de-

sign of complete water purification systems to meet

customers’ specified needs; the provision of all nec-

essary equipment via lease, sale or under service

contract; installing, starting and de-bugging the

equipment; providing training to customers’ employ-

ees; providing regular, frequent servicing of the

equipment; replacing used or worn equipment; regon-

erating ion exchange resins; and providing emergency

back-up water in bulk or by mobile DI units.

27. High purity industrial water service firms pos-

sess unique production facilities. Such companies

maintain central facilities for the regeneration of ex-

hausted resins. Such “regeneration plants” provide

substantial economies of scale in the regeneration of

large quantities of ion exchange resin,

28. Other substantial facilities provided only by

industrial water service companies are mobile DI

units (sometimes called mobile demineralizers), which

consists of large trailer-mounted two and three bed

deionizers. Said units are available for dispatch to

the premises of a customer, such as an electrical util-

ity of semiconductor manufacturer, for emergency

or temporary use when the customer’s water system

becomes inoperative or requires a supplementary sup-

ply of high purity water.

29. Only industrial water services companies offer

portable DI exchange tanks and service.

A-18

30. High purity industrial water service firms sell

to distinct customers. Major customers include: hos-

pitals; laboratories; plating companies; aerospace

firms; electronics manufacturers; food processors;

power utilities/shipping companies; pharmaceutical/

cosmetic companies; and educational institutions.

31. Customers and competitors of Arrowhead and

Aqua Media recognize the high purity industrial

water service industry as a separate and distinct busi-

ness. Numerous manufacturers, hospitals, laborato-

ries, and electrical utilities who require high purity

water consider contracting with the service companies

active in this field as the only practical solution to

their water requirements.

32. The high purity industrial water service mar-

ket has distinctive prices and lacks sensitivity to price

changes in other markets. Because many customers

find no reasonable substitute for their services, pricing

by service companies is largely restricted only by

the competition presented by other service companies.

33. The proper “line of commerce,” or product

market, is high purity industrial water service, in-

eluding the provision or sale of certain goods and

equipment incidental thereto.

Section of the Country

34. The Court finds that each of the three geo-

graphical markets—the State of California, the sub-

market of Southern California, and the sub-market of

Northern California—are commercially realistic and

economically significant markets, and that each con-

iii pen

A-19

stitutes a “section of the country” within which to test

the validity of the instant acquisition.

The Effects of the Acquisition

A. The Southern California Market

35. Prior to the acquisition, the respective market

shares, on a dollar-volume basis, for the Southern

California market were as follows:

IwWD 51%

Aqua Media 26%

Culligan 23%

An effect of the acquisition by Arrowhead has been to

substantially eliminate competition in the Southern

California market.

B. The Northern California Market

36. Prior to the acquisition the Northern Califor-

nia market shares, on a dollar-volume basis, were as

follows:

Aqua Media 81%

Culligan 10%

IwWD 9%

An effect of the aequisition by Arrowhead has been to

substantially eliminate competition in the Northern

California market.

A - 20

C. The State as a Whole

37. Prior to the acquisition the 1976 market

shares, on a dollar-volume basis, for the State of Cali-

fornia were as follows:

$ (millions) %

Aqua Media 5.0 44

Arrowhead 4.5 36

Culligan—LA 1.2 )

Culligan—Santa Clara 25 2

Culligan—Orange County 20 2

Culligan—San Diego 36

Continental—LA 25 2

Continental—Palo Alto 02 -

[WC, Aqua-Con, ete. 25 2

TOTAL 12.58 100

An effect of the acquisition by Arrowhead has heen

to substantially eliminate competition in the Califor-

nia market.

38. The elimination of Aqua Media removes a mar-

keter who was responsible for lowering prices in

Southern California. When Aqua Media expanded

from its Northern California base to invade the South-

ern California market, it engaged in sharp price cut-

ting, which Arrowhead ultimately met. In bidding to

the Los Angeles Department of Water and Power

(DWP), Aqua Media’s first bid was 54% lower than

Arrowhead’s previous quotes. Arrowhead subsequently

responded with lower bids and in March 1976, Aqua

Media bid the lowest quotation DWP received, which

bid was over 2% times cheaper than the price before

Aqua Media entered the market. Following Arrow-

aa arena mane

A - 21

head’s acquisition of Aqua Media’s service assets in

California, the quotation to DWP was increased by

approximately 35%.

39. The merger eliminates Arrowhead’s efforts to

obtain Aqua Media’s customers by price cutting, since

Arrowhead acquired Aqua Media’s pre-existing ser-

vice contracts with customers. Prior to the mer-

ger, Arrowhead had emulated Aqua Media’s earlier

invasion of the Southern California market by en-

gaging in substantial price competition in North-

ern California. Arrowhead was also on the verge of

building a regeneration plant in Northern California,

which plan is now shelved.

D. Other Effects of the Acquisition

40. An effect of the acquisition has been to sub-

stantially raise barriers to entry into the relevant line

of commerce.

41. The relevant line of commerce is a concen-

trated industry, and an effect of the acquisition has

been to accelerate a trend towards concentration in

the relevant market.

42. Both Arrowhead and Aqua Media have in-

creased their respective shares of the relevant line of

commerce through acquisition, in addition to internal

expansion.

It is Probable that Plaintiff will Prevail on the Merits

43. From all the foregoing, the Court finds it rea-

sonably probable that the effect of the CCLA-Arrow-

A - 22

head acquisition of the California high purity indus-

trial water service assets of Aqua Media may be to

lessen competition substantially and tend to create

a monopoly in the high purity industrial water ser-

vice business in the Southern California, Northern

California and State of California markets.

The Remedy of Rescission

44. Rescission may be an effective, practical and

feasible means of restoring competition in the affected

markets. Rescission may be superior to other forms

of relief.

45. Aqua Media, Ltd. has superior knowledge of

' the business and assets which Aqua Media sold to

CCLA-Arrowhead and continues to engage in the high

purity industrial water service business in Arizona,

New Mexico, Texas and other states. In California, it

continues to engage in the manufacture of high purity

industrial water systems and equipment for sale in

California and other states.

46. Divestiture may be difficult or impossible for

want of an appropriate purchaser of the acquired

assets. It is not conclusive that divestiture will be

available and that rescission will not be needed.

47. The potential hardships which Aqua Media and

Aqua Media, Ltd. may suffer as a result of retain-

ing rescission as a possible remedy are insufficient to

require abandonment of the remedy of rescission.

48. <A. M. Liquidating Co. intends to immediately

distribute to its shareholders the net proceeds of ap-

A - 23

proximatly $2 million paid to it by CCLA on Febru-

ary 28, 1977, and intends to dissolve completely on or

before May 3, 1977. Such actions would either se-

verely limit the Court’s ability to order effective relief

or make such relief impossible.

49. To qualify for the nonrecognition of gain or

loss in accordance with Section 337 of the Internal

Revenue Code of 1954, as amended, A. M. Liquidating

Co. desires to distribute all of its assets to a liquidat-

ing trust, within 12 months from May 3, 1976, the date

on which the Plan was adopted. Such distribution

to a liquidating trust would not impair the Court’s

ability to order rescission or other relief against these

defendants, so long as the net proceeds of liquidation

which would be distributable to the shareholders are

retained by the trustee during the pendency of this

litigation, and are subject to the jurisdiction of the

Court.

50. If Aqua Media, Ltd. were to substantially alter

its high purity industrial water service or equipment

manufacturing business or were to terminate the part-

nership, the Court’s ability to order relief against it

might be substantially impaired.

CONCLUSIONS OF LAW

The Court makes the following conclusions of law:

1. This Court has jurisdiction over the subject

matter of this action and these defendants by virtue

of Section 15 of the Clayton Act (15 U.S.C. § 25).

2. CCLA and Arrowhead are corporations engaged

in the flow of commerce, as defined in United States

A - 24

v. American Building Maintenance Industries, 422

U.S. 271 (1975), and are subject to the jurisdiction

of the Eederal Trade Commission.

3. Aqua Media, Inc. (now named A. M. Liquidat-

ing Co.) is a corporation which was engaged in the

flow of commerce prior to the sale of its assets to Ar-

rowhead and to Aqua Media, Ltd.

4. Aqua Media, Ltd. is a partnership engaged in

the flow of commerce.

5. The proper “line of commerce” is high purity

industrial water service, including the provision of

goods and equipment incidental thereto.

6. The proper “sections of the country” are (1)

Southern California, (2) Northern California, and

(3) the State of California.

7. It is reasonably probable that the effect of the

CCLA-Arrowhead acquisition of the high purity in-

dustrial water service assets of Aqua Media may be

substantially to lessen competition or to tend to create

a monopoly in each of the three sections of the coun-

try.

8. It is reasonably probable that the plaintiff will

prevail at trial on the merits.

9. The remedy of rescission of a sale of assets may

be ordered in a proceeding under Section 7 of the

Clayton Act in order to restore effectively market

competition.

10. Economic hardships to the defendants in a Sec-

tion 7 case and adverse tax consequences to the de-

A - 25

fendants’ shareholders ean influence the choice only

as among two or more effective remedies. If the

Court concludes that measures other than rescission

will not be effective to redress a violation, and that

rescission is a necessary element of effective relief,

the Government cannot be denied the latter remedy

because economic hardships and adverse tax conse-

quences may result.

11. A preliminary injunction is necessary in this

case to preserve the status quo, and to preserve the

ability of the Court to order effective relief should

plaintiff prevail at trial on the merits.

Dated: 4-27-77

/s/ UL. T. Lydick

Lawrence T. Lydick

United States District Judge

Approved as to form:

/s/ Crossan R. Andersen

Crossan R. Andersen

Antitrust Division

Department of Justice

1444 U.S. Court House

312 North Spring Street

Los Angeles, California 90012

Attorneys for Plaintiff

A - 26

Appendix B

/s/ John B. Marchant

John B. Marchant ' United States Court of Appeals,

Sedgwick, Detert, Moran & Arnold Ninth Circuit.

111 Pine St., 11th Floor

San Francisco, California 94111

Attorneys for Defendants

A. M. Liquidating Co. and aaa

Aqua Media, Ltd.

Nos. 77-2683, 77-2778.

United States of America, }

/s/ Don 'T. Hibner Plaintiff-A ppellee,

Don T. Hibner, Jr. ve.

Sheppard, Mullin, Richter & Hampton Coca-Cola Bottling Company of Los Angeles

333 South Hope Street, 48th Floor and Arrowhead Puritas Waters, Inc.,

Los Angeles, California 90071 Defendants,

Attorneys for Defendants and

CCLA and Arrowhead Aqua Media, Ltd., and A. M. Liquidating Co.,

Defendants-Appellants. '

March 28, 1978.

Rehearing and Rehearing En Banc

Denied May 18, 1978.

Appeal From The United States District Court

For The Central District of California.

Before: CarTER and GoopwIn, Circuit Judges, and

SoLomon,* District Judge.

JAMES M. Carter, Circuit Judge:

These are consolidated interlocutory appeals from a

preliminary injunction and from an order denying

appellants’ motion to dissolve the same injunction.

*Honorable Gus J. Solomon, United States District Judge,

District of Oregon, sitting by designation.

B-2

The injunction arose in a suit by the United States

against both the buyers and the sellers in a corporate

acquisition which is alleged to violate Section 7 of

the Clayton Act, 15 U.S.C. §18. The complaint

sought divestiture or rescission of the acquisition as

alternative remedies. To preserve the possibility of a

decree of rescission at the conclusion of trial, the

district court, on motion of the government, issued a

preliminary injunction maintaining the status quo

pendente lite. The sellers contend on appeal: (1) the

remedy of rescission is not legally available to re-

dress violations of Section 7 of the Clayton Act, and

(2) even if legally permissible, rescission is precluded

by the particular facts of this case. We AFFIRM.

I. FACTS.

A. Background and Parties.

The buyer-defendants below are Coca-Cola Bottling

Company of Los Angeles (CCLA) and its wholly-

owned subsidiary, Arrowhead Puritas Waters,

Inc. (Arrowhead). The seller-defendants, appellants

herein, are A. M. Liquidating Company, a closely

held California corporation presently in liquidation,

and Aqua Media, Ltd., a California limited partner-

ship. Appellant A. M. Liquidating Company was

formerly called Aqua Media, Inc., but when the ma-

jority of the assets of Aqua Media, Inc. were sold to

Arvowhead the corporation changed its name and

began liquidation. The limited partnership, Aqua

Media, Ltd. was formed at the time of the sale by

certain stockholders of Aqua Media, Inc. to purchase

B-3

and operate the company’s remaining manufacturing

and service business. For convenience both appel-

lants are some times collectively referred to as “Aqua

Media”.

The defendants in the antitrust suit below are all

industrial water service companies engaged in the

provision of high purity industrial water services.

Numerous categories of industrial and commercial

businesses require water from which substantially all

the impurities have been removed.’ This chemically

and biologically pure water is obtained either by

purchasing it directly from industrial water service

companies or by purchasing the purification equip-

ment itself from the same companies.”

Aqua Media, Inc. was incorporated in 1967.’ Its

primary line of business was the provision of purified

water to industrial and commercial users. Most of

its business centered in California, but eventually the

company’s services expanded into Arizona, New Mex-

ico, Texas and the Pacific Northwest. Certain foreign

countries also purchased from the corporation.

*Major customers include hospitals, laboratories, plating com-

panies, aerospace firms, electronics manufacturers, food proces-

sors, power utilities/shipping companies, pharmaceutical/cosmetic

companies and educational institutions.

*Many users prefer to purchase the water itself rather than

equip and maintain purification systems due, inter alia, to the

high initial cost of a permanently installed system, the cost and

inconvenience of maintaining a system, the bother of training

personnel to operate the system, and the necessity of obtaining

emergency service should a company’s high purity water purifi-

cation system break down.

*Aqua Media, Inc. was originally incorporated under the name

“Pacific Pure Water Co.” On April 30, 1969 its name was

changed to Aqua Media, Inc.

B-4

In 1972 Aqua Media, Inc. developed a secondary

line of business—the manufacture of systems and

equipment for industrial water purification. Origi-

nally the company considered its two lines of business

to be compatible, but by early 1976 its board of di-

rectors had determined that the best vehicle for ex-

pansion into national and international markets was

the provision of systems and equipment rather than

provision of the water itself. Because the California

market was considered to be finite the board concluded

that Aqua Media, Ine., as then capitalized, did not

have sufficient working capital to expand into the

national and international markets while at the same

time maintaining its California water provision

services. It was in this posture that Aqua Media,

Ine. received Arrowhead’s invitation to enter nego-

tiations for the sale of its California service business

and related assets.

B. The Acquisition.

On May 3, 1976, in contemplation of the possible

sale of its California service business to Arrowhead,

Aqua Media, Ine. adopted a plan of complete liqui-

dation in compliance with the Internal Revenue Code,

§ 337. The plan, designed to make the eventual sale

tax free at the corporate level, was contingent upon

the company entering a binding contract of sale with

Arrowhead.

Aqua Media, Inc. then negotiated with Arrowhead

and on July 20, 1976, the two entered an asset pur-

chase agreement whereby Arrowhead acquired “sub-

B-5

stantially all of the California industrial water serv-

ice business assets of Aqua Media.” R. 632. The

purchase price was $4,750,000, payable $2,750,000 cash

on closing and $2,000,000 in promissory notes payable

February 28, 1977.

In addition three ancillary agreements were en-

tered: (1) a letter agreement dated July 19, 1976,

provided that Arrowhead would provide certain water

purification support services for Aqua Media’s cus-

tomers outside California; (2) a distributorship

agreement executed August 2, 1976, appointed Arrow-

head to be Aqua Media, Inec.’s exclusive distributor

for the sale in California of Aqua Media’s water

purification systems and equipment; and (3) a parol

agreement on or about August 2, 1976, granted to

Arrowhead certain of Aqua Media’s customer accounts

in Nevada.

The acquisition agreement was closed on August 2,

1976, when Arrowhead paid the $2,750,000 cash and

delivered two promissory notes in the aggregate of

$2,000,000 payable on February 28, 1977. Aqua Media

passed clear title to the assets sold.

On the next day, pursuant to its plan, Aqua Media,

Ine. sold its remaining assets* to the newly formed

limited partnership, Aqua Media, Ltd.° Aqua Media,

‘These included the remaining water service assets outside

California and the manufacturing business assets. The purchase

price was $405,000.

5When it approved the sale of assets to Arrowhead, the board

of directors of Aqua Media, Inc. also approved a written offer

by two members of the company’s management team to purchase

the remaining assets. The sale of these residual assets was con-

B-6

Inc. then changed its name to A. M. Liquidating

Company.

The liquidating company proceeded to collect its

assets, pay its liabilities and make liquidating dis-

tributions to its shareholders. Prior to December 23,

1976, the date on which this action was filed, liquidat-

ing distributions of $2,091,000 had been authorized

and paid. On December 23, 1976, the company had

assets of $2,488,075 subject to liquidated and undis-

puted liabilities of $240,015 and certain contingent

and disputed liabilities. It was then estimated that

upon completion of the plan an additional $1,394,000

would be distributable to the shareholders.

C. Procedural History.

The Department of Justice filed its complaint on

December 23, 1976, naming both the buyers (CCLA

and Arrowhead) and the sellers (A. M. Liquidating

Company and Aqua Media, Ltd.) as defendants. The

complaint sought: divestiture or rescission as alterna-

tive remedies ‘“‘to prevent and restrain the continuing

violation by the defendants ... of Section 7 of the

Clayton Act (15 U.S.C. §18).” Appellants moved

alternatively for dismissal, summary judgment or an

order striking the prayer for rescission. They con-

tended that Section 7 of the Clayton Act applies only

to the conduct of buyers in prohibited acquisitions,

not that of sellers. Accordingly they maintained

ditioned upon the creation of a limited partnership in which

every Aqua Media shareholder would have the right to partici-

pate as a limited partner in the same proportion as their voting

stock bore to all of the issued and outstanding stock of the cor-

poration.

B-7

rescission was not an available remedy in Section 7

eases. They also argued that even if rescission was

available in proper cases, as a matter of law it is not

available in the facts of this case. The motion was

denied from the bench.

The government then moved immediately for a

temporary restraining order and a preliminary in-

junction to prevent A. M. Liquidating Company and

Aqua Media, Ltd. from further inplementing the

plan of liquidation by distributing the proceeds of

the sale, except for certain payments currently due

to bona fide creditors. By stipulated order appellants

were temporarily enjoined pending a hearing on the

government’s motion. On March 14, 1977, after a

hearing, the district judge granted the government’s

motion. He explained:

“In our view the government has sustained its

burden of showing substantial likelihood of its

success on the merits when the action is tried and,

further, that the public interest outweighs the

hardships claimed by the Defendants.

“While we concur with the abstract proposi-

tion that sellers are not liable under the Clayton

Act, we hold that in this case the requested in-

junction may issue because on the record before

us an effective remedial order, if the merger is

completed, would be either impossible or severely

limited.

“The argument that rescission here is not avail-

able is inconclusive, and the Court retains that

option.

“A preliminary injunction, in our view, is

necessary to maintain the status quo.”

B-8

The preliminary injunction order was filed April

27, 1977, accompanied by extensive findings of fact

and conclusions of law.’ Appellants moved to dissolve

the injunction on the same grounds they originally

argued. Their motion was denied. From the pre-

liminary injunction and the denial of their motion to

dissolve it A. M. Liquidating Company and Aqua

Media, Ltd. appeal.

Il. LEGAL AVAILABILITY OF

RESCISSION.

We note at the outset that this case is before us

in a unique posture. The district judge has not held

a trial on the merits and has not decreed any final

relief. We are only conducting an interlocutory re-

view of the preliminary injunction. Yet the injune-

tion is forward-looking, preserving the status quo

pendente lite in contemplation of a potential decree

of rescission. Appellants’ arguments center not on

any immediate harm caused them by the injunction

itself, but on the legal and factual availability of the

ultimately possible remedy of rescission. Thus our

review of the legal issue involved—the availability of

*Factually the district judge concluded that rescission might

be the only effective remedy if a violation is eventually proven.

It was noted that divestiture might be unworkable due to the

lack of interested buyers and the high entry barriers in the high

purity industrial water service market.

Legally the judge concluded that it was reasonably probable

that the government would prevail at a trial on the merits; that

the remedy of rescission of a sale of assets may be ordered in

a proceeding under Section 7 of the Clayton Act in order to

restore effective market competition; and that economic hardships

to the sellers, in the event rescission is found to be the only

effective remedy, cannot outweigh the public’s interest in mean-

ingful antitrust relief.

B-9

rescission in Clayton §7 cases—is conducted largely

in the abstract. And our review of the factual avail-

ability of the remedy in this case is significantly re-

stricted by the lack of a well-developed factual back-

ground.

The precise issue on appeal is whether the district

court based its decision on an erroneous legal premise

or abused its discretion in granting the preliminary

injunction, Aguirre v. Chula Vista Sanitary Service

and Sani-Tainer, Inc., 542 F.2d 779, 780-81 (9 Cir.

1976); Douglas v. Beneficial Finance Co., 469 F.2d

453, 454 (9 Cir. 1972). Aqua Media’s central chal-

lenge is directed at the district court’s legal conclu-

sion that rescission is a permissible remedy in Clayton

Act §7 cases. Appellants maintain their conduct is

not proscribed by §7 and that there is no legal au-

thority for an order of rescission again a non-violator

of the act. The avaiiability of rescission of an acqui-

sition violative of §7 of the Clayton Act is a matter

of first impression in the federal circuit courts, but

our review of the statutory scheme provided by §7

and $15 of the Clayton Act, the history of equity

jurisdiction in the federal courts, and the treatment

of similar claims in the lower courts convinces us

that in appropriate cases rescission can be ordered.

In relevant part § 7 of the Clayton Act reads:

“No corporation engaged in commerce shall

acquire, directly or indirectly, the whole or any

part of the stock or other share capital and no

corporation subject to the jurisdiction of the

Federal Trade Commission shall acquire the

B -10

whole or any part of the assets of another corpo-

ration engaged also in commerce, where in any

line of commerce in any section of the country,

the effect of such acquisition may be substantially

to lessen competition, or tend to create a monop-

oly.”” (Emphasis added.)

By its express terms, §7 proscribes only the act

of acquiring, not selling, when the forbidden effects

may occur. Aqua Media is correct in its initial as-

sertion that technically it has not violated the Clayton

Act. See Dailey v. Quality School Plan, 380 F.2d

484 (5th Cir. 1967); U. S. v. Parker-Hannifin Corp.,

1974 Trade Cases £75,061 (C.D.Cal.1974); Record

Club of America, Inc. v. Capitol Records, Inc.,

1971 Trade Cases {73,694 (S.D.N.Y.1971); Jn the

Matter of Dean Foods, et al., 70 F.T.C. 1146 (1966).

Nevertheless, the fact that sellers are not violators of

§7 does not force courts to close their eyes to the

fact that the sellers are parties to an acquisition

which is prohibited by law. Congress recognized that

on occasion third parties whose conduct is not specifi-

cally addressed by the Clayton Act would be so re-

lated to the anti-competitive effects at which the act

was directed that their presence would be necessary

in order to fashion complete relief. Accordingly, in

§ 15 of the Clayton Act Congress invoked the equity

jurisdiction of the federal courts and provided that

when the interest of justice requires, third parties

can be joined in proceedings under the act:

“The several district courts of the United

States are invested with jurisdiction to prevent

and restrain violations of this Act, and it shall

B-11

be the duty of the several United States attor-

neys ... to institute proceedings in equity to pre-

vent and restrain such violations. . . . Whenever

it shall appear to the court before which any

such proceeding may be pending that the ends

of justice require that other parties should be

brought before the court, the court may cause

them to be summoned .. .” (Emphasis added.)

The equity jurisdiction of the federal courts tradi-

tionally has permitted the fashioning of broad and

flexible decrees molded to the necessities of the indi-

vidual case. Particularly, when equity jurisdiction

has been invoked to enforce federal statutory prohi-

bitions, the Supreme Court repeatedly has recognized

the power of the equity court to mold the necessary

decrees to give effect to congressional policy. See, e.g.,

United States v. First Nat. City Bank, 379 U.S. 378,

383, 85 S.Ct. 528, 13 L.Ed.2d 365 (1965); J. I. Case

Co. v. Borak, 377 U.S. 426, 433, 84 S.Ct. 1555, 12 L.Ed.

2d 423 (1964) ; Mitchell v. Robert De Mario Jewelry,

Inc., 361 U.S. 288, 291-92, 80 S.Ct. 332, 4 L.Ed.2d 323

(1960) ; Porter v. Warner Holding Company, 328 U.S.

395, 398, 66 S.Ct. 1086, 90 L.Ed. 1332 (1946); Hecht

Co. v. Bowles, 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed.

754 (1944). In such cases “[c]ourts of equity may, and

frequently do, go much farther both to give and with-

hold relief in furtherance of the public interest than

they are accustomed to go when only private interests

are involved.” United States v. First Nat. City Bank,

supra, 379 U.S. at 383, 85 S.Ct. at 531, citing with ap-

proval Virginia Railroad Co. v. System Federation

No. 40, 300 U.S. 515, 552, 57 S.Ct. 592, 81 L.Ed. 789

(1937).

B-12

Porter v. Warner Holding Company, supra, is an

instructive example. There the Supreme Court was

concerned with the power of a federal court, in an en-

forcement proceeding under §205(a) of the Emer-

gency Price Control Act of 1942, to order restitution

of rents collected by a landlord in excess of the per-

missible maximums. The Administrator of the Office

of Price Administration had sought restitution, but

both the federal district court and the federal circuit

court below were unwilling to assume jurisdiction to

order the requested relief absent statutory authoriza-

tion. In a strongly worded reversal the Court ex-

plained the inherent equity jurisdiction of the district

court:

“. . . Unless otherwise provided by statute, all

the inherent equitable powers of the District

Court are available for the proper and complete

exercise of that jurisdiction. And since the public

interest is involved in a proceeding of this na-

ture, those equitable powers assume an even

broader and more flexible character than when

only a private controversy is at stake. [Citation

omitted.] Power is thereby resident in the Dis-

trict Court, in exercising this jurisdiction, ‘to do

equity and to mould each decree to the necessities

of the particular case.’ Hecht Co. v. Bowles, 321

U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754. It may

act so as to adjust and reconcile competing claims

and so as to accord full justice to all the real par-

ties in interest; if necessary, persons not origi-

nally connected with the litigation may be brought

before the court so that their rights in the subject

matter may be determined and enforced. In ad-

dition, the court may go beyond the matters im-

B-13

mediately underlying its equitable jurisdiction

and decide whatever other issues and give what-

ever other relief may be necessary under the cir-

cumstances. Only in that way can equity do

complete rather than truncated justice. Camp v.

Boyd, 229 U.S. 530, 551-552, 33 S.Ct. 785, 57

L.Ed. 1317 (1913).

“Moreover, the comprehensivness of this equita-

ble jurisdiction is not to be denied or limited in

the absence of a clear and valid legislative com-

mand.” Porter v. Warner Holding Co., supra,

328 U.S. at 398, 66 S.Ct. at 1089.

Indeed, the necessity of broad equity powers to en-

force the antitrust laws has often been declared.

When construing §1 of the Sherman Act and §3 of

the Clayton Act in International Salt Co., Ine. v.

United States, 332 U.S. 392, 400-01, 68 S.Ct. 12, 17, 92

L.Ed. 20 (1947) the Supreme Court stated that the

district courts:

“.. are invested with large discretion to model

their judgments to fit the exigencies of the partic-

ular case. [Citations omitted.] In an equity suit,

the end to be served is not punishment of past

transgressions nor is it merely to end specific il-

legal practices. A public interest served by such

civil suits is that they effectively pry open to

competition a market that has been closed by de-

fendants’ illegal restraints. If this decree accom-

plishes less than that, the Government has won a

lawsuit and lost a cause.”

And when affirming the power of the district court

under § 7 of the Clayton Act to order divestiture, an-

other far-reaching and drastic remedy, the Supreme

B-14

Court was careful to note the “general consideration”

that the “courts are authorized, indeed required, to

decree relief effective to redress the violations, what-

ever the adverse effect of such a decree on private

interests.” United States v. E. I. du Pont de Nemours

& Co., et al., 366 U.S. 316, 326, 81 S.Ct. 1243, 1250,

6 L.Ed.2d 318 (1961).

The district courts have frequently been faced

with the necessity of granting relief against third

parties in order to effectively enforce § 7 of the Clay-

ton Act. Consistently they have held that $15 of the

Clayton Act and their general equity jurisdiction au-

thorized relief against such parties if necessary to

eliminate the effects of an acquisition offensive to

the statute. See, e.g., United States v. Phillips Petro-

leum Company, 367 F.Supp. 1226, 1261-62 (C.D. Cal.

1973), aff’d mem., 418 U.S. 906, 94 S.Ct, 3199, 41

L.Fd.2d 1154 (1974) ; United States v. Pabst Brewing

Company, 183 F.Supp. 220, 221 (E.D. Wis. 1960);

United States v. BE. I. du Pont de Nemours & Co.,

177 F.Supp. 1, 10-12 (N.D.TI. 1959), reversed on other

grounds, 366 U.S. 316, 81 S.Ct. 1243, 6 L.Ed.2d 318

(1961).” Several district courts have retained sellers

"In the du Pont litigation, supra, the district court initially

dismissed the government’s entire complaint. Reversing the Su-

preme Court seemed to sanction joinder of third parties:

“The motion of the appellees Christiana Securities Company

and Delaware Realty and Investment Company for dismissal

of the appeal as to them is denied. It seems appropriate

that they be retained as parties pending determination by

the District Court of the relief to be granted.’’ United

States v. E. I. du Pont de Nemours & Co., et al., 353 U.S.

586, 608, 77 S.Ct. 872, 885, 1 L.Ed.2d 1057 (1957).

On remand the district court granted relief against not only

the buyer, but also the seller, General Motors, and other related

B-15

as parties while specifically considering rescission

under § 7, but ultimately decreed other forms of relief

thought to be more effective. United States v. Reed

Roller Bit Company, 274 F.Supp. 573 (W.D.OkKL

1967) ; United States v. Phillips Petroleum Company,

supra.

Based on the foregoing we conclude that rescission

is not without the pale of equitable discretion in ap-

propriate circumstances." We are mindful that the

equity power of the courts is not unbounded. Each

decree must be tested on review to determine whether

third parties, Christiana and Delaware. The Supreme Court

again reversed, on grounds unrelated to the availability of relief

against these third parties, but stated:

“General Motors, Christiana and Delaware will thus be able

to renew, for the district court’s decision in the first in-

stance, any objections they may have to the power of the

Court to grant relief against them.” United States v. E. I.

du Pont de Nemours & Co., et al., 366 U.S. 316, 334-35,

81 S.Ct. 1243, 1255, 6 L.Ed.2d 318 (1961).

This second pronouncement seems to leave as an open question

the issue of whether relief can be granted against third parties.

Appellants contend this second pronouncement by the Supreme

Court implies that sellers cannot be joined as parties in an

action under §7 when the acquisition is consummated. How-

ever, the comment is nothing more than a recognition of the

issue by the Court. If anything, the Supreme Court’s first pro-

nouncement suggests the leaning of the Court.

‘We note that the remedy of rescission has been approved,

albeit in distinguishable circumstances, by the Supreme Court

in J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.

2d 423 (1964). Borak involved a violation of §14(a) of the Se-

curities Exchange Act of 1934. It resulted in rescission of a

merger where the consent of the stockholders was obtained

through the use of false and misleading proxy statements. Ad-

mittedly this case involves a different statute and arguably in-

volves no nonviolating parties, but its relevance is in showing

that the remedy of rescission is an appropriate form of equitable

relief. The Supreme Court justified the remedy by resort to the

broad equitable powers of the court to effectuate congressional

policy. See 377 U.S. at 433, 84 S.Ct. 1555.

B-16

the district court has abused its discretion or whether

the dictates of due process have been infringed. The

fact that sellers in \ 7 cases are not technical violators

of the law is itself a strong equity consideration

against rescission. Normally relief should be molded,

if possible, which does not adversely affect the inter-

ests of nonviolators. Nevertheless, if effective imple-

mentation of public policy cannot be decreed without

adversely involving third parties, courts in equity

may, within limits, involve such parties in the relief

to be granted.

Aqua Media seeks to avoid the broad equity power

invoked by § 15 of the Clayton Act by construing the

section as a limitation on the equity power of the

district courts.’ Section 15 invokes the equity juris-

diction of the district courts to “prevent and restrain”

violations of the Clayton Act. Appellants would have

us interpret this language to authorize the district

court to act against violations only prior to the time

the acquisition actually occurs. Allegedly, after an

illegal acquisition occurs it becomes a “fait accompli”

and can no longer be “prevented” or “restrained”.

Thus, Aqua Media concedes the authority of the

district court to grant relief against sellers prior to

consummation of a disputed acquisition agreement,

but contends no authority to fashion relief exists if

the buyer and seller are fortunate enough to finalize

°*Aqua Media also argues, based on contract law, that rescis-

sion cannot be ordered absent assent of the parties. Suffice it

to say that this contention is inapposite. The equity power of

district courts to fashion effective relief is not constrained by

technical doctrines of contract law.

B-17

their purchase-sale contract before the acquisition is

challenged.

The short answer to appellants’ contention is that

their reading of §15 strains the normal meaning of

the terms “prevent” and “restrain” far out of per-

spective. Moreover, as previously noted, the Supreme

Court in Porter v. Warner Holding Company, supra

at 398, 66 S.Ct. 1086, 1089 has precluded us from

implying, where not explicit, a statutory restriction

of the district court’s inherent equity jurisdiction:

“ , . the comprehensiveness of this equitable

jurisdiction is not to be denied or limited in the

absence of a clear and valid legislative command.

Unless a statute in so many words, or by a neces-

sary and inescapable inference, restricts the

court’s jurisdiction in equity, the full scope of

that jurisdiction is to be recognized and applied.

‘The great principles of equity, securing complete

justice, should not be yielded to light inferences,

or doubtful construction.’ Brown v. Swann, 10

Pet. 497, 503, 9 L.Ed. 508.”

See also Mitchell v. DeMario Jewelry, supra, 361 U.S.

at 291, 80 S.Ct. 332.

Furthermore, the Supreme Court has given us ex-

plicit direction as to the scope of relief affordable

under § 15:

“ . . The relief which can be afforded under

[§ 15] is not limited to the restoration of the

status quo ante. There is no power to turn back

the clock. Rather, the relief must be directed to

that which is ‘necessary and appropriate in the

public interest to eliminate the effects of the

B-18

aquisition offensive to the statute,’ United States

v. DuPont & Co., 353 U.S. 586, 607, 77 S.Ct. 872,

1 L.Ed.2d 1057 (emphasis added), or which will

‘cure the ill effects of the illegal conduct, and

assure the public freedom from its continuance.’

United States v. United States Gypsum Co., 340

U.S. 76, 88, 71 S.Ct. 160, 95 L.Ed. 89 (emphasis

added ).” Ford Motor Company v. United States,

405 U.S. 562, 573, n. 8, 92 S.Ct. 1142, 1149, 31

L.Ed.2d 492 (1972).

Section 7 of the Clayton Act was intended to arrest

anticompetitive acquisitions before they work their

evil, which may be at or any time after the acquisi-

tion. The district court, upon motion of the govern-

ment, may decree effective relief “at any time that

an acquisition may be said with reasonable probability

to contain a threat that it may lead to a restraint of

commerce or tend to create a monopoly of a line of

commerce.” United States v. E. I. du Pont de

Nemours & Co., et al., 353 U.S. 586, 597, 77 S.Ct. 872,

879, 1 L.Ed.2d 1057 (1957).

Ill, DISCRETION OF THE DISTRICT

COURT TO ENTER THE

INJUNCTION.

Aqua Media does not explicitly allege that the dis-

trict court abused its discretion in entering the pre-

liminary injunction preserving the status quo pendente

lite. However, their argument of the facts throughout

their brief and at oral argument can be construed

B-19

as an allegation that in the circumstances of this case

it was an abuse of discretion by the district court

to grant the injunction. Aqua Media presents a strong

argument that even if rescission is legally available,

it is impermissible in the facts of this case. The

strongest point in appellants’ favor is the fact that

over $2 million of the consideration paid for their

California water service assets already has been dis-

tributed to the shareholders. This is a compelling

argument against the decree of rescission which makes

it difficult to conceive of how such a decree might be

fashioned without impermissibly injuring either Aqua

Media or its shareholders.

Again, however, we note the unique posture of this

case. We are not reviewing an actual order of rescis-

sion by the district court. The court has not yet

granted rescission and may never do so. Rather, we

are reviewing a preliminary injunction designed to

preserve the ultimate availability of rescission in the

event it is determined necessary at the conclusion of

a trial on the merits. We can reverse the grant of

this injunction as an abuse of discretion only if we

conclude that under no conceivable circumstances

could a final decree involving rescission be permis-

sible. This we cannot do.

First, in the event a violation is ultimately proven

and rescission is deemed necessary, it does not seem

impossible for the district court to devise some way

to rescind the acquisition without forcing the undoing

of the approximately $2 million distribution already

made to Aqua Media’s shareholders. If nothing

B - 20

else, the buyers in this transaction—CCLA and

Arrowhead—as actual violators of § 7, might be re-

quired to give back the illegally acquired assets of

Aqua Media without accepting full repayment. It is

well established that economic hardship, particularly

that of violators of the antitrust laws, can influence

choice only as among two or more effective remedies

and that the district courts are required to decree

relief effective to redress antitrust violations “what-

ever the adverse effect of such decree on private

interests.” United States v. du Pont de Nemours &

Co., et al., 366 U.S. 316, 326-27, 81 S.Ct. 1243, 1250,

6 L.Ed.2d 318 (1961).

Second, numerous factors which have not yet been

developed at trial may color the availability of relief

against Aqua Media. The trial judge specifically noted

in his “Findings of Fact and Conclusions of Law”

that he has not yet had the benefit of cross-examina-

tion and presentation of argument by counsel to

develop a complete picture of the transaction in

dispute. It is not inconceivable that proof at trial

could show Aqua Media to be a culpable party, though

not a technical violator of §7. For example, it may

turn out that Aqua Media was fully aware that its

sale to Arrowhead would violate the provisions of

§7. Or proof may show that Aqua Media is now in

a strong equitable bargaining position only because it

conspired with Arrowhead to make a quick sale and

then speeded up its distribution of the proceeds of

the sale before the FTC could conduct an investigation

B - 21

and bring suit.” If any culpability on Aqua Media’s

part is proven it would be relevant to the form of

relief eventually granted.

Third, even though the complaint alleges only a

violation of § 7 of the Clayton Act, amendment of the

complaint is still possible. The complaint should not

be dismissed unless “it appears beyond doubt that the

[United States] can prove no set of facts in support

of [its] claim which would entitle [it] to relief.”

Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102,

2 L.Ed.2d 80 (1957). Further discovery or the proof

adduced at trial may expose a violation by Aqua

Media of other provisions of the antitrust laws. An

acquisition in violation of Clayton §7 is also poten-

tially a violation of Section 1 or 2 of the Sherman

Act or Section 5(a)(1) of the Federal Trade Com-

mission Act. See Von Kalinowski, Antitrust Laws and

Trade Regulation § 15.06. We are not intimating that

these acts have been violated or that such violations

could be proved against Aqua Media. We simply

recognize that proof of what actually occurred is yet

to be made. A showing that Aqua Media violated

some other antitrust provision is at least a possibility

and would not only be relevant to the availability of

rescission against it under §7 of the Clayton Act,

but also would be an independent ground for relief.

Precisely because we do not know what trial will

show and because we do not know what form of relief

Within 13 days of reaching the negotiated agreement on

July 20, 1976, Aqua Media held an annual shareholder meeting

at which the proposals were approved and proceeded to close the

agreement with Arrowhead on August 2, 1976.

B - 22

the district court will eventually devise, if any, we

cannot say that there are no circumstances in this

case in which rescission would be permissible.

Finally, we note that Aqua Media has not pursued

on appeal its contention in the district court that the

preliminary injunction would cause undue hardship.

In that regard the district court has permitted A. M.

Liquidating Company to distribute its assets to a

trustee, satisfying § 337 of the Internal Revenue Code

and making the liquidation tax free at the corporate

level. And evidence seems sufficient that 1.) the

partners of Aqua Media, Ltd. will not be unable to

meet their obligations to make capital contributions

to the partnership because the liquidation has been

suspended, and 2.) Aqua Media, Ltd. will be able to

raise sufficient operating capital to pursue its manu-

facturing business while defending this suit.

IV. CONCLUSION

The federal district courts are not precluded as a

matter of law from ordering rescission of acquisitions

found to be in violation of §7 of the Clayton Act.

Each case must be decided on the basis of the equities

of its individual facts. The preliminary injunction

issued in this case was within the discretion of the

district judge because we cannot say that no form

of relief involving rescission is available on the facts

of this case and because the interests of the enjoined

parties have been adequately protected by the pre-

liminary injunction order. The order of the district

court is AFFIRMED.

B - 23

United States Court of Appeals

For The Ninth Circuit

Nos. 77-2683 and 77-2778

United States of America, !

Plaintiff-Appellee,

vs.

Coca-Cola Bottling Company of Los Angeles,

Arrowhead Puritas Waters, Inc., .

Defendants,

and

Aqua Media, Ltd., and A. M. Liquidating Co.,

Defendants-Appellants. :

[Filed May 18, 1978]

ORDER DENYING PETITION FOR REHEAR-

ING AND REJECTING THE SUGGESTION

FOR REHEARING EN BANC

Before: Carter, Goopwin and SoLomon, Judges.

The panel in the above entitled case voted to deny

the petition for rehearing. Judge Goodwin voted to

deny the petition for rehearing en bane, and Judge

Carter and Judge Solomon recommended the rejection

of the suggestion for rehearing en bance.

The petition for rehearing and rehearing en bane

having been circulated to all active judges, and no

judge having voted for a rehearing en bane,

B - 24

It Is Ordered that the petition for rehearing is

denied and the suggestion for rehearing en bane is

rejected.

Appendix C

CLAYTON ACT §7, 15 U.S.C. $18:

§18. Acquisition by one corporation of stock

of another

No corporation engaged in commerce shall acquire,

directly or indirectly, the whole or any part of the

stock or other share capital and no corporation sub-

ject to the jurisdiction of the Federal Trade Com-

mission shall acquire the whole or any parts of the

assets of another corporation engaged also in com-

merce, where in any line of commerce in any section

of the country, the effect of such acquisition may be

substantially to lessen competition, or to tend to cre-

ate a monopoly.

No corporation shall acquire, directly or indirectly,

the whole or any part of the stock or other share cap-

ital and no corporation subject to the jurisdiction of

the Federal Trade Commission shall acquire the whole

or any part of the assets of one or more corporations

engaged in commerce, where in any line of commerce

in any section of the country, the effect of such acqui-

sition, of such stocks or assets, or of the use of such

stock by the voting or granting of proxies or other-

wise, may be substantially to lessen competition, or to

tend to create a monopoly.

This section shall not apply to corporations pur-

chasing such stock solely for investment and not using

the same by voting or otherwise to bring about, or

in attempting to bring about, the substantial lessening

of competition. Nor shall anything contained in this

section prevent a corporation engaged in commerce

C-2

from causing the formation of subsidiary corporations

for the actual carrying on of their immediate lawful

business, or the natural and legitimate branches or

extensions thereof, or from owning and holding all

or a part of the stock of such subsidiary corporations,

when the effect of such formation is not to substanti-

ally lessen competition.

Nor shall anything herein contained be construed

to prohibit any common carrier subject to the laws to

regulate commerce from aiding in the construction of

branches or short lines so located as to become feed-

ers to the main line of the company so aiding in such

construction or from acquiring or owning all or any

part of the stock of such branch lines, nor to prevent

any such common carrier from acquiring and owning

all or any part of the stock of a branch or short line

constructed by an independent company where there

is no substantial competition between the company

owning the branch line so constructed and the com-

pany owning the main line acquiring the property

or an interest therein, nor to prevent such common

carrier from extending any of its lines through the

medium of the acquisition of stock or otherwise of

any other common carrier where there is no sub-

stantial competition between the company extending

its lines and the company whose stock, property, or an

interest therein is so acquired.

Nothing contained in this section shall be held to

affect or impair any right heretofore legally acquired:

Provided, That nothing in this section shall be held

or construed to authorize or make lawful anything

C-3

heretofore prohibited or made illegal by the antitrust

laws, nor to exempt any person from the penal pro-

visions thereof or the civil remedies therein provided.

Nothing contained in this section shall apply to

transactions duly consummated pursuant to authority

given by the Civil Aeronautics Board, Federal Com-

munications Commission, Federal Power Commission,

Interstate Commerce Commission, the Securities and

Exchange Commission in the exercise of its jurisdic-

tion under section 79] of this title, the United States

Maritime Commission, or the Secretary of Agricul-

ture under any statutory provision vesting such power

in such Commission, Secretary, or Board.

CLAYTON ACT § 15, 15 U.S.C. § 25:

§ 25. Restraining violations; procedure

The several district courts of the United States are

invested with jurisdiction to prevent and restrain

violations of this Act, and it shall be the duty of the

several United States attorneys, in their respective

districts, under the direction of the Attorney General,

to institute proceedings in equity to prevent and

restrain such violations. Such proceedings may be by

way of petition setting forth the case and praying

that such violation shall be enjoined or otherwise pro-

hibited. When the parties complained of shall have

been duly notified of such petition, the court shall

proceed, as soon as may be, to the hearing and

determination of the case; and pending such petition,

C-4

and before final decree, the court may at any time

make such temporary restraining order or prohibi-

tion as shall be deemed just in the premises. When-

ever it shall appear to the court before which any

such proceeding may be pending that the ends of

justice require that other parties should be brought

before the court, the court may cause them to be

summoned whether they reside in the district in which

the court is held or not, and subpoenas to that end

may be served in any district by the marshal thereof.

Appendix D

Crossan R. Andersen

Howard J. Parker

Martin J. Kaplan

Carolyn D. Wulfsberg

Antitrust Division

U.S. Department of Justice

300 N. Los Angeles Street

Los Angeles, California 90012

Telephone: (213) 688-2506

Attorneys for Plaintiff

United States District Court

Central District of California

Civil No. 76-3988-LTL

United States of America, i

Plaintiff,

VS.

Coca-Cola Bottling Company of Los

Angeles;

Arrowhead Puritas Waters, Inc.;

Aqua Media, Ltd.; and

A. M. Liquidating Co.,

Defendants. }

STIPULATION

It is stipulated by and between the undersigned

parties, plaintiff United States of America, and de-

fendants Coca-Cola Bottling Company of Los Angeles,

Arrowhead Puritas Waters, Inc., Aqua Media, Ltd.

and A. M. Liquidating Co., by their respective attor-

neys, that:

D-2

1. A final judgment in the form hereto attached

may be filed and entered by tie Court upon the

motion of any party or upon the Court’s own motion,

at any time after compliance with the requirements

of the Antitrust Procedures and Penalties Act [15

U.S.C. § 16] and without further notice to any party

or other proceedings, provided that plaintiff has not

withdrawn its consent, which it may de at any time

before the entry of the proposed final judgment by

serving notice thereof on defendants and by filing

that notice with the Court.

2. In the event plaintiff withdraws its consent or

if the proposed Final Judgment is not entered pur-

suant to this Stipulation, this Stipulation shall be of

no effect whatever and the making of this Stipulation

shall be without prejudice to plaintiff and defendants

in this or any other proceeding.

Dated:

/s/ Hugh P. Morrison, Jr.

Hugh P. Morrison, Jr.

Acting Assistant Attorney General

/s/ Richard J. Favretto

Richard J. Favretto

/8/ Charles F. B. McAleer

Charles F. B. McAleer

/8/ Raymond P. Hernacki

Raymond P. Hernacki

Attorneys, Department of Justice

Crossan R. Andersen

Howard J. Parker

/8/ Martin J. Kaplan

Martin J. Kaplan

D-3

/s/ Carolyn D. Wulfsberg

Carolyn D. Wulfsberg

Attorneys, Department of Justice

For Defendants Coca-Cola Bottling

Company of Los Angeles and

Arrowhead Puritas Waters, Ine.

/8/ Don T. Hibner, Jr.

By: Don T. Hibner, Jr.

Sheppard, Mullin, Richter &

Hampton

For Defendant Aqua Media, Ltd.

/s/ Dale E. Fredericks

By: Dale E. Fredericks

Sedgwick, Detert, Moran &

Arnold

For Defendant A. M. Liquidating Co.

/s/ Karen L. Witte

By: Karen L. Witte

Cooley, Godward, Castro,

Huddleston & Tatum

D.4

United States District Court

Central District of California

Civil No. 76-3988-LT'L

United States of America, )

Plaintiff,

VS.

Coca-Cola Bottling Company of Los

Angeles;

Arrowhead Puritas Waters, Inc.;

Aqua Media, Ltd.; and

A. M. Liquidating Co.,

Defendants. |

FINAL JUDGMENT

Plaintiff, United States of America, having filed its

complaint on December 23, 1976, defendants having

filed their respective answers thereto, plaintiff's mo-

tion for a preliminary injunction having been heard

and granted by the Court, the Court having entered

findings of fact and conclusions of law, and the par-

ties by their respective attorneys of record, having

each consented to the preparation and entry of this

Kinal Judgment, and without this Final Judgment

constituting evidence or an admission by any party

with respect to any issue consented to;

Now Therefore, upon the consent of each of the

parties hereto and upon a determination by this

Court that entry of this Judgment will be in the

public interest, it is hereby

D-5

Ordered, Adjudged And Decreed as follows:

This Court has jurisdiction of the subject matter

of this action and of each of the parties hereto, The

Jomplaint states a claim upon which relief may be

granted against defendants Coca-Cola Bottling Com-

pany of Los Angeles and Arrowhead Puritas Waters,

Ine, pursuant to Section 7 of the Clayton Act (15

U.S.C. § 18), Defendants Aqua Media, Ltd, and A. M.

Liquidating Co. are proper parties defendant to this

action pursuant to the general equity powers of this

court.

In this Final Judgment the following definitions

shall apply:

A. “Arrowhead” means defendants Arrow-

head Puritas Waters, Inc. and Coca-Cola Bottling

Company of Los Angeles, and its subsidiaries ;

B. ‘‘Aqua Media” means defendant Aqua

Media, Ltd.;

C. ‘Group A Assets” means those properties,

equipment, inventory, customer contracts, and

other items listed or deseribed in Exhibit A

attached hereto;

D, “Group B Assets” means those properties,

equipment, inventory, customer contracts, and

other items listed or deseribed in Exhibit B

attached hereto;

KE. ‘*Restrictive Covenants” means those cov-

enants not to compete given by Aqua Media and

D-6

Jaren F. Leet to Arrowhead pursuant to the

Asset Purchase Agreement.

i. “High purity industrial water service”

means the provision of high purity water purifi-

cation service for commercial and industrial

applications and includes the provision and/or

sale of certain goods and/or equipment used

incident to and in conjunction with such service.

High purity industrial water service includes,

but is not limited to, bulk water service, deioniza-

tion exchange tank service, mobile demineraliza-

tion service, reverse osmosis service, and the

provision and/or sale of deionization and/or

reverse osmosis equipment used incident to and

in conjunction with such service and any com-

bination of the preceding services and equipment.

High purity industrial water service is provided

to customers which require water purified to a

high degree by the total or substantial removal

of minerals, organic compounds or other dis-

solved matter;

G. “Person” means any individual, partner-

ship, association, firm, corporation, or other legal

or business entity;

H. “Purchaser” shall mean any one or more

persons acquiring assets pursuant to this Final

Judgment ;

I, “Southern California” shall mean Imperial,

Kern, Los Angeles, Orange, Riverside, San Ber-

nardino, San Diego, San Luis Obispo, Santa

——EeoeoeeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeEeeeeeeeeeeeeeee eee a

D-7

Barbara and Ventura Counties in the State of

California; and

J. The term “Northern California” means

that part of California exclusive of “Southern

California.”

IlI

The provisions of this Final Judgment applicable

to Arrowhead and Aqua Media, respectively, shall

also apply to the directors, officers, agents, employees,

subsidiaries, partnerships, successors, and assigns of

each, and to all other persons in active concert or

participation with any of them who receive actual

notice of this Final Judgment by personal service

or otherwise.

Any divestiture made pursuant to this Final Judg-

ment shall be made to one or more purchasers who

shall reasonably demonstrate to the plaintiff and/or

the Court, as hereinafter provided, that at the time

of divestiture (1) the assets acquired shall be capable

of being operated as a going business or businesses,

(2) that the purchaser(s) has the potential to com-

pete effectively with Arrowhead, and (3) that the

proposed divestiture will effectively restore competi-

tion to the high purity industrial water service

market in both Northern California and Southern

California.

A. Arrowhead is ordered and directed to com-

pletely divest itself within one vear from the date

of this Final Judgment of all of its right, title, in-

D-8

terest and obligations in either the Group A or Group

B Assets in substantial conformance with the de-

scription in Exhibits A and B respectively in this

Final Judgment. In the event Arrowhead submits to

the plaintiff an executed contract of divestiture with

a bona fide purchaser in substantial accord with the

provisions of this Final Judgment, which divestiture

cannot reasonably be completed within said one year

period, then such period shall be extended for a rea-

sonable time not to exceed six (6) months within

which to complete said divestiture. The application

of the provisions of Paragraphs XII to XIX and

XXI of this Final Judgment shall be delayed for a

like period. For the purpose of this provision, an

agreement for divestiture shall be in substantial

accord or conformance with the provisions of this

Final Judgment if the assets to be sold are at least

equal to ninety (90) percent of the assets described

in Schedule A.

Arrowhead shall utilize its best efforts to sell the

assets and to make known promptly the availability

of the assets by the ordinary and usual means. In

the event that the divestiture ordered herein has not

been completed within sixty (60) days from the entry

of this Final Judgment, such best efforts shall in-

clude without limitation:

A. Arrowhead shall prepare a brochure sep-

arately describing Group A Assets and Group B

Assets, the operations carried on by Arrowhead

therewith, and the divestiture ordered and di-

rected by this Final Judgment;

D-9

B. Arrowhead shall forward said brochure to

each person requesting same, to each prospective

purchaser known to Arrowhead, and to each

company listed in Exhibit D attached hereto;

C. Arrowhead shall employ the services of an

investment banker, business opportunity broker

or similarly qualified person to assist in the di-

vestiture ordered and directed by this Final

Judgment ;

D. Arrowhead shall cause an advertisement

offering the assets for sale to be published (1)

in the national edition of The Wall Street Jour-

nal for at least seven days during each six month

period following the entry of this Final Judg-

ment, and (2) for a reasonable period in at least

two additional trade or business publications of

national circulation, including one circulated to

the water treatment trade;

E. Arrowhead shall direct a person holding

a senior management position with Arrowhead

or a parent thereof to devote his best efforts and

a substantial portion of his time to promote and

complete the divestiture directed and ordered

by this Final Judgment;

F. Arrowhead shall furnish to all bona fide

prospective purchasers all necessary information

regarding the assets and the operations carried

on by Arrowhead therewith, including revenue

and cost data and other available information

similar to that provided to Arrowhead by Aqua

Media, Inc. prior to the Asset Purchase Agree-

D-10 D-11

ment dated July 20, 1976. Arrowhead shall approved by the plaintiff or the Court, Arrowhead

permit prospective purchasers to make such shall make available to each purchaser at such pur-

inspection of the assets as may be reasonably chaser’s option:

necessary for the above-stated purpose. Arrowhead

shall not be required to submit any such infor-

mation or materials to anyone unless the recipient

thereof executes an affidavit requiring recipient

to keep such information and/or materials con-

fidential, not to reproduce the same, and to return

the same to Arrowhead in the event a sale to

such recipient is not consummated.

G. Prior to the twelfth (12) month after

entry of this Final Judgment, Arrowhead shall

design and successfully test an accounting sys-

tem capable of producing actual cost data, and

shall also provide pro forma income, balance

sheet and operating statements addressing the

assets to be divested had such assets actually

been operated as an independent, going business.

After the sixth (6) month following entry of

this Final Judgment, the plaintiff may petition

the Court for an order that such accounting sys-

tem be designed and implemented at an earlier

date. Upon such petition plaintiff shall have the

burden of proving that such accounting system

and financial statements would facilitate the sale

of such assets.

Vil

1. Arrowhead’s existing engineering, market-

ing and installation information and assistance

sufficient to allow said purchaser effectively to

compete in the high purity industrial water serv-

ice market. Such assistance shall include the

provision of engineers and other qualified operat-

ing or management employees to assist in the

establishment of management, plant operations,

and field service engineering systems, and in

solving operational problems as they may arise;

2. Any information utilized by Arrowhead in

purchasing raw materials and parts in its high

purity industrial water service business sufficient

to allow said purchaser to compete effectively in

the high purity industrial water service market.

For a period of one year after the divestiture, if

such raw materials and parts are not available

to the purchaser at substantially the same price

and terms as to Arrowhead, Arrowhead will sell

said raw materials and parts to purchaser at

Arrowhead’s direct cost.

3. A list of all employees of Arrowhead’s In-

dustrial Water Division, together with their job

description, annual compensation, accrued sick

leave and accrued vacation pay. Purchaser shall

A. Arrowhead is ordered and directed to the best

of its ability to cooperate with each purchaser. Sub-

ject to any limitation in a contract of divestiture

have the right, but not the obligation, to offer

employment to each such employee.

D-12

B. The cost of all mformation and assistance pro-

vided by Arrowhead to the purchaser prior to com-

pletion of the divestiture shall be included in the

purchase price. If within one year after divestiture

. Arrowhead, pursuant to this paragraph, provides to

the purchaser additional information and/or assist-

ance the cost of which has not been specifically in-

cluded in the purchase price, such information and/or

assistance shall be provided at a price set forth in

each contract of divestiture that does not exceed

Arrowhead’s costs incurred in providing such serv-

ices.

C. Arrowhead shall have no obligation hereunder

to furnish information or assistance to the purchaser

if substantially the same information or assistance is

available at a price which does not exceed the price

set forth in the contract of divestiture either by em-

ploying a consulting firm or the necessary personnel.

Arrowhead shall not be obligated to furnish to the

purchaser customer information unless the service

contract of said customer was acquired by the pur-

chaser. Arrowhead shall not be obligated to hii

additional personnel in order to comply with the pro-

visions of this paragraph.

Vill

The divestiture ordered and directed by this Final

Judgment shall be made in good faith and shall be

absolute and unqualified, and except upon written

approval by the plaintiff or the Court, Arrowhead

shall accept no lien, mortgage, deed of trust or other

D-13

form of security on or interest in any portion of the

assets sold. Arrowhead shall take no action which

will impair or impede the divestiture ordered by this

Final Judgment.

Any contract of sale pursuant to this Final Judg-

ment shall require the purchaser to file with this

Court its representation that it intends to continue

the business of high purity water purification service

in Northern California and Southern California, if

assets are there acquired, and agree to submit to the

jurisdiction of this Court for that limited purpose.

Each sixty (60) days following the entry of this

Final Judgment until divestiture has been completed,

or until the end of twelve (12) months from the date

of entry .of this Final Judgment, whichever first

occurs, Arrowhead shall file with this Court and serve

upon plaintiff and Aqua Media an affidavit describing

in detail the fact and manner of its efforts to accom-

plish the divestiture ordered by this Final Judg-

ment. Such reports shall be supplemented by such

additional information as the plaintiff may reasonably

request.

At least thirty (30) days in advance of the antici-

pated closing date of each contract of divestiture pur-

suant to this Final Judgment, Arrowhead shall sub-

mit to plaintiff and Aqua Media the name of the

proposed purchaser and all pertinent information re-

D-14

specting the proposed divestiture together with such

additional information as plaintiff may reasonably

request in writing. Within twenty (20) days after

Arrowhead has supplied all the requested informa-

tion, plaintiff will advise Arrowhead and Aqua Media

in writing of plaintiff's approval or objections to the

proposed divestiture. If plaintiff objects to the pro-

posed divestiture, then such contract(s) of divesti-

ture shall not be conswnmated unless (1) plaintiff

notifies Arrowhead in writing of any subsequent ap-

proval or unless (2) the Court approves after a

hearing at which Arrowhead shall have the burden

of proving that the proposed divestiture will effec-

tively restore competition to the high purity industrial

water service markets in Northern California and

Southern California, if assets are there acquired.

XII

If Arrowhead has not notified the plaintiff and

Aqua Media within nine (9) months following the

date of entry of this Final Judgment that it has en-

tered into a contract of divestiture, each party shall

notify the other in writing of the name and descrip-

tion of not more than three persons it wishes to

nominate as a possible trustee. The parties shall seek

to agree upon one of the nominees to serve as a

trustee for the divestiture ordered by this Final Judg-

ment, and if they are unable to agree, the Court may

select a trustee from said nominees after hearing the

parties as to the qualifications of the candidates.

D-15

XIII

If Arrowhead is unable to complete the divestiture

required by this Final Judgment within the period

prescribed in Paragraph V_ above, the Court shall

appoint a trustee to serve for a maximum period of

fifteen (15) months except as hereinafter provided.

XIV

The trustee’s main endeavor shall be to accomplish

prompt and full divestiture of the assets described

in Paragraph XVI of this Final Judgment, as one

or more going businesses in accordance with the pro-

visions of Paragraph IV of this Final Judgment in

order effectively to restore competition to the high

purity industrial water service market in both

Northern California and Southern California and to

further the public interest.

The trustee shall perform at the expense of Arrow-

head under a schedule of court-approved fees, in-

centive compensation and costs to be fixed at the time

of the trustee’s appointment. The trustee shall have

the right at any time to petition the Court, with prior

written notice thereof to all parties, for further fees

and/or incentive compensation for prompt accom-

plishment of the purposes of the Trust.

XVI

After consulting with the parties, the trustee shall

select assets consistent with the description of assets

D - 16

in Exhibit C together with such other assets as the

trustee may deem necessary to enable the trustee to

sell one or more going high purity industrial water

service businesses and thereby effectively restore com-

petition to the high purity industrial water service

market in Northern California and Southern Cali-

fornia. Should the trustee select assets in excess

of, or inconsistent with, the description of assets in

Exhibit C, any party may petition the Court. Upon

such petition the moving party shall have the burden

of proving that the trustee’s selection of assets is

contrary to the purposes of the Trust.

XVII

A. The trustee shall have all such powers as are

necessary and proper to accomplish divestiture in

accordance with the provisions of this Final Judg-

ment. Subject to the provisions of this paragraph,

the trustee shall have authority to manage, control,

operate and sell by any reasonable means the assets

selected for divestiture. Subject to the provisions of

this paragraph, the trustee may require Arrowhead

to convey all rights, titles, interests and obligations

in the selected assets or any portion thereof to any

purchaser. Such conveyance shall be absolute and

unqualified.

B. The trustee shall have the power to manage

the assets selected for divestiture only after the con-

clusion of the sixth month of the term of the Trust.

If the trustee elects at any time to manage such

assets, the trustee shall notify Arrowhead thereof in

D-17

writing. Should Arrowhead object to the exercise of

the trustee’s management powers, it shall have ten

(10) days from receipt of such notice within which

to petition the Court. Upon such petition, Arrow-

head shall have the burden of proving that manage-

ment by the trustee will not facilitate the sale of such

assets. Once the trustee assumes such management

powers, the trustee may require Arrowhead to con-

vey all rights, title, interests and obligations in the

selected assets or any portion thereof to the trustee.

Such conveyance shall be absolute and unqualified.

C. The trustee shall have the power to conduct

a sale of the assets selected for divestiture upon

sealed or public bids after reasonable notice to the

parties describing the method of sale. Such sale

shall convey the assets so as to be operated as one

or more going businesses and shall be subject to the

provisions of paragraph XIX of this Final Judg-

ment. Aqua Media shall have the right to bid at any

such sale.

D. The trustee’s authority shall include without

limitation :

1. The right of access to Arrowhead’s finan-

cial, accounting, production, customer and other

records related to any asset owned or in the

possession or control of Arrowhead which the

trustee may deem necessary to assist in the se-

lection of assets or otherwise;

2. The power to retain investment bankers,

business opportunity brokers, accountants, ap-

praisers, consultants, attorneys and any other

D-18

persons reasonably needed to assist in the pro-

motion, analysis, or execution of any sales(s) or

in managing, operating, or controlling the assets

pursuant to this Final Judgment;

3. The power to implement an accounting

system to provide revenue data, cost data and

other financial and accounting information re-

lating to the selected assets such as would per-

mit the trustee to develop a meaningful pro

forma operating statement and actual income and

balance sheet statements to be used by the trus-

tee in implementing this Final Judgment and the

sale of the selected assets; and

4, The power to interview and offer employ-

ment to officers and employees of Arrowhead’s

Industrial Water Division.

XVIII

A. Pending confirmation of a sale, the price,

terms, and other conditions of any offer shall be

treated as confidential and not subject to disclosure

to a third party without prior approval by the Court.

The trustee shall not disclose financial or production

information or the identification of particular Ar-

rowhead customers to persons other than prospective

purchasers and. shall only disclose such information

to prospective purchasers after having entered into

a nondisclosure agreement with such prospective pur-

chasers.

B. Arrowhead shall have the right to designate

certain financial information disclosed to the trustee

D-19

as “secret.” The information so designated shall be

limited to that which, if released to a competitor,

would grant an unfair competitive advantage and

shall be as narrowly restricted as is commercially

reasonable. Prior to furnishing information desig-

nated as “secret,” the trustee shall give written no-

tice to the parties identifying the information and

to whom it is to be disclosed. Arrowhead shall have

two (2) business days from the receipt of the notice

within which to object to such disclosures and to

petition the Court to review the intended disclosure.

This Court will permit, prohibit or limit such dis-

closures within seven (7) days following the dispatch

of Arrowhead’s objection.

XIX

The trustee shall advise the parties of all signifi-

cant matters arising in the negotiations. Upon the

reaching of an understanding in principle on the

basic terms and conditions of a prospective sale and

at least forty-five (45) days before any proposed

consummation date, the trustee shall advise the

Court, with notice to the parties, of the identity of

the prospective purchaser or purchasers and _ shall

describe the terms and conditions of the prospective

sale. Within fourteen (14) days of said notice, any

party may file a statement of objections to the pro-

posed sale. Such prospective sale shall not be exe-

cuted until the parties have had an opportunity to

present views and recommendations on any issue pre-

sented and to be heard thereon. Such objections shall

D - 20

be evaluated by the standard set forth in Para-

graph IV,

Arrowhead shall provide such reasonable assistance

as the trustee may request to enable him to sell

selected assets. Such assistance shall include, but shall

not be limited to:

A. Furnishing, without cost, all information

regarding selected assets and the operations con-

ducted by Arrowhead or Aqua Media, Inc. there-

with, including, without limitation, revenue data,

cost data, and such other information as shall

be requested by the trustee;

B. Permitting the trustee or his agents to

make any inspection of any assets and operations

of Arrowhead utilized in its high purity indus-

trial water service business;

C. Providing a list of all present and former

employees employed by Arrowhead or Aqua

Media, Inc. in the industrial high purity water

service business, together with last known resi-

dence addresses, job descriptions, and annual

compensation, to the extent known to Arrow-

head. The trustee shall have the right, but not

the obligation, to interview privately and offer

employment to any such employee;

D. Providing, upon the trustee’s request, en-

gineers, accountants, or other qualified operating

or management employees to assist in the estab-

lishment of management, plant operation and

field service engineering systems; in solving op-

D-21

erational problems which may arise; and in any

other manner ;

Kk. Providing, upon the trustee’s request, any

information utilized by Arrowhead in purchasing,

and/or aid the trustee in obtaining, raw materials

or parts in connection with the high purity in-

dustrial water service business; and

F. Selling, upon the trustee’s request, at its

out-of-pocket prices, any raw materials or parts

used in connection with Arrowhead’s high purity

industrial water service businesses.

XXI

For a period of twelve (12) months following the

closing of each contract of divestiture, Aqua Media

is enjoined and restrained from competing for the

high purity industrial water service business of cus-

tomer accounts acquired by the purchaser pursuant

to this Final Judgment. Said injunction shall apply

to the provision of service at locations in California

and to the sale or provision of equipment for use

at locations in California.

XXII

Aqua Media is ordered and directed to:

A. Convey to each purchaser a covenant not

to compete in the high purity industrial water

service business in California for a period of

twelve (12) months following the closing of each

contract of divestiture. Such covenant(s) shall

not apply to the sale or provision of equipment

D - 22

to customer accounts other than those customer

accounts acquired by the purchaser(s) pursuant

to this Final Judgment. Such covenant(s) shall

be enforceable only by the purchaser(s) of assets

pursuant to this Final Judgment.

B. Offer to the trustee and to the purchaser

distributorship agreements for the sale of high

purity industrial water purification equipinent

manufactured by Aqua Media, the terms of which

agreements are to be equally or more favorable

to the trustee or the purchaser than those con-

tained in the distributorship agreement dated

August 2, 1976 between Arrowhead and Aqua

Media, Inc., provided that Aqua Media shall not

be obligated hereunder to offer a distributorship

agreement to any person that is engaged in the

business of selling high purity industrial water

purification equipment not manufactured by

Aqua Media;

C. Cooperate with the purchaser or trustee

in respect to such offers of distributorship agree-

ments and to make available to such purchaser

or trustee upon request existing engineering and

marketing information with respect to the equip-

ment to be distributed sufficient to allow said

purchaser or trustee to compete effectively for

the sale of such equipment;

D. Not less than thirty (30) days prior to

the closing date of any distributorship agreement

or contract of divestiture pursuant to this Final

Judgment, Aqua Media shall file with this Court

D - 23

and serve upon plaintiff, copies of the proposed

covenant and/or distributorship agreement and

an affidavit describing in detail the fact and

manner of its compliance with this paragraph.

Such report(s) shall be supplemented by such

additional information as the plaintiff may rea-

sonably request.

XXIII

A. In the event the trustee is unable to accom-

plish or complete the divestiture required by this

Final Judgment during the term of the Trust, such

term shall be extended pending further orders of the

Court. Should the trustee have assumed management

or control of, or taken title to the assets selected for

divestiture, he shall continue to manage, operate and

preserve such assets pending further order of the

Court.

B. The trustee may at any time petition the

Court for further instructions. Subsequent to ex-

hausting efforts to sell in the manner provided in

Paragraph XVII-C or upon further instruction from

the Court, such petition may include a request that

the Court hold a further hearing for the purpose of

determining such other and further relief as may be

required. At any such hearing Aqua Media shall

not assert that this Court is without power to order

such further relief as to Aqua Media as may be just.

At such hearing Arrowhead and the plaintiff shall

not assert that the Court is without power to order

the trustee to convey to Aqua Media such assets as

will accomplish or complete the divestiture ordered

D - 24

by this Final Judgment and effectively restore com-

petition to the high purity industrial water service

market in California.

C. To effect any conveyance pursuant to Section B

of this paragraph, the trustee shall submit to the

Court and the parties a description of the terms of

the conveyance to Aqua Media ineluding but not

limited to any consideration or restitution to be paid

by Aqua Media to Arrowhead for the assets con-

veyed. Within thirty (30) days thereafter all parties

will advise the trustee of their objections, if any,

to the proposed conveyance.

D. Any conveyance made pursuant to this para-

graph shall be absolute and unqualified, and Arrow-

head shall take no action which will impair or im-

pede such conveyance.

XXIV

Aqua Media and Arrowhead are directed and or-

dered to terminate upon the entry of this Final

Judgment, the Restrictive Covenants and the same

shall no longer be enforceable thereafter.

XXV

At any time during the period of ten (10) years

from the effective date of this Final Consent Judg-

ment, without prior written approval of the plain-

tiff, Arrowhead is enjoined and restrained from

acquiring :

A. Any capital stock of any person engaged

in the high purity industrial water service or

equipment sales business in California;

D - 25

B. All or any part of the assets (except for

the purchase of products, inventory, or equip-

ment in the normal course of business) of a

person engaged in the high purity industrial

water service or equipment sales business in

California.

XXVI

Except upon prior written approval of the plain-

tiff, for a period of not less than two (2) years from

the closing date of the last contract of divestiture as

provided for herein:

A. Arrowhead shall continue to operate as a

going business in both Northern California and

Southern California that portion of its high

purity industrial water service business not di-

vested as a result of this Final Judgment;

B. Arrowhead is enjoined and_ restrained

from selling or disposing of any asset, or taking

any other action that would substantially impair

or diminish its ability to compete effectively in

both Northern California and Southern Cali-

fornia in the provision of all different sizes of

mobile demineralizers, standard deionization sys-

tems and associated service, engineered reverse

osmosis-deionization systems and associated ser-

vice, and the delivery of high purity water in

tanker trucks;

C. Arrowhead shall continue to employ per-

sonnel and maintain a fleet of vehicles in both

Northern California and Southern California.

D - 26

These personnel and this fleet shall be sufficient

to allow Arrowhead to continue in the business

of providing to customers in both geographic

areas all the different sizes of mobile de-

mineralizers, standard deionization systems and

associated service, engineered reverse osmosis-

deionization systems and associated service, and

the delivery of high purity water in tanker

trucks;

D. Arrowhead shall operate an ion exchange

resin regeneration facility in Southern California

with capacity for resin regeneration of both

mobile units and of stationary canisters substan-

tially similar to its capacity as of August 2, 1976

of Arrowhead’s Washington Boulevard resin

regeneration facility or Arrowhead’s Signal Hill

resin regeneration facility.

Should divestiture under this Final Judgment result

in the transfer to the trustee or the sale of Arrow-

head’s Sunnyvale resin regeneration facility, Arrow-

head shall, within eighteen (18) months after such

transfer or sale, establish and commence operation

of an ion exchange resin regeneration facility in

Northern California with capacity for resin regenera-

tion of both mobile units and of stationary canisters

sufficient to service the remaining service accounts in

Northern California plus an allowance for reasonable

business growth. Thereafter Arrowhead shall operate

such facility for at least eighteen (18) months.

D - 27

XXVII

For ten (10) years from the date of entry of this

Final Judgment, sixty (60) days prior to conveying,

directly or indirectly, to any person engaged in the

high purity industrial water service or equipment

business in California (1) any assets employed by

Arrowhead in the high purity industrial water ser-

vice or equipment business in California, other than

in the ordinary course of business, or (2) any voting

securities of Arrowhead’s, Arrowhead shall provide

the plaintiff in writing with (1) the name and address

of the purchaser, and (2) a description of the assets

to be sold, together with the purchase price. There-

after, Arrowhead shall provide the plaintiff with such

other information and documents regarding the trans-

action as may be requested.

XXVIII

A. For the purpose of determining or securing

compliance with this Final Judgment, any defendant

shall permit any duly authorized representative of

the Department of Justice, upon written request of

the Attorney General, or Assistant Attorney General

in charge of the Antitrust Division, and on reasonable

notice to any defendant at its principal office, subject

to any legally recognizec privileges:

f. Access, during the office hours of such

defendant, which may have counsel present, to

inspect and copy all books, ledgers, accounts,

correspondence, memoranda and other records

and documents in the possession or under the

D-28

control of such defendant relating to any mat-

ters contained in this Final Judgment; and

2. Subject to the reasonable convenience of

such defendant and without restraint or inter-

ference from it, to interview officers, directors,

agents, partners or employees of such defendant,

who may have counsel present, regarding any

such m

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