Appendix — McDonnell Douglas Corp. v. Northrop Corp.
Supreme Court brief1983
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Office - Supreme Court, U.S
93°88 FILED
No. ___ JUL 18 1985
EVAS
IN THE CLER
Supreme Court of the United States
OCTOBER TERM, 1983
McDOoNNELL DOUGLAS CORPORATION
Petitioner,
Vv.
NORTHROP CORPORATION
Respondent.
APPENDIX TO PETITION FOR WRIT OF
CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE NINTH
CIRCUIT
GEORGE S. HECKER (Counsel of Record)
CHARLES A. WEISS
E. PERRY JOHNSON
DANIEL C. SCHWARTZ
BRYAN, CAVE, MCPHEETERS
& McROoBERTS
500 North Broadway
St. Louis, Missouri 63102
(314) 231-8600
ETS a]
PRESS OF BYRON S. ADAMS PRINTING, INC., WASHINGTON, D.C.
TABLE OF CONTENTS
Page
Order of Ninth Circuit Denying Petition for Rehearing la
Notice of Entry of Judgment by Ninth Circuit ....... 2a
Opinion of Ninth Circuit as Amended ............455 Ba
Order Amending Opinion of Ninth Circuit ........... 52a
CHUNG OE TPUMETEGE CUE cnc cisc ccc dineecccniaseas 53a
Order of District Court Dismissing Complaint and Grant-
ie HAT CUGMIIONE ona ccc cecesosccceess 76a
Findings of Fact and Conclusions of Law in Support of
Order Dismissing Complaint and Granting Summary
Ds oo eine ceeerGansas nay oapueeceun aan 79a
Order of District Court Dismissing First Amended Coun-
terclaim and Granting Summary Judgment ...... l2la
Findings of Fact and Conclusions of Law on Plaintiff
Northrop Corporation's Motion For Summary Judg-
WG ea EL eae Ney Meek ent etss baneenbeeke te 123a
RR A Oe See eee rer ee 127a
armen Bet 9 2,10 UE. OS oc ceccicsvicesescaes 128a
TS Ey fy Re Se eerrerr errr rere rer Tree 128a
Defense Acquisition Regulation 4-117 ............... 129a
Defense Acquisition Regulation 9-201 .............5. 130a
Defense Acquisition Regulation 9-301.2 ............5. 13la
Teaming Agreement of October 2, 1974 ............. 132a
Basic Agreement of June 27, 1975 .........ce eee eees 134a
Agreement Between McDonnell and Northrop dated Au-
Sy ERS da eras nee ey ree ldla
Northrop’s Amended Complaint ...............00005 147a
McDonnell’s Amended Answer and Counterclaim ..... 177a
la
APPENDIX
ORDER OF NINTH CIRCUIT DENYING PETITION FOR
REHEARING
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Nos. 81-5165
81-5172
NORTHROP CORPORATION,
Plaintiff/Appellant/C ross-A ppellee,
v.
McDoNNELL DOUGLAS CORPORATION,
Defendant/Appellee/Cross-Appellant.
ORDER
Before: POOLE and BOOCHEVER, Circuit Judges, and
SOLOMON, * Senior District Judge.
The panel as constituted in the above case has voted to deny
the petition for rehearing and to reject the suggestion for a
rehearing en banc.
The full court has been advised of the suggestion for en banc
rehearing and no judge of the court has requested a vote on the
suggestion for rehearing en bane. Fed. R. App. P. 35(b).
The petition for rehearing is denied and the suggestion for a
rehearing en banc is rejected.
“ Honorable Gus J. Solomon, Senior United States District J udge
for the District of Oregon, sitting by designation.
2a
NOTICE OF ENTRY OF JUDGMENT BY NINTH CIRCUIT
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Nos. 81-5165 and 81-5172
NORTHROP CORPORATION,
Plaintiff/Appellant/Cross-Appellee,
v.
McDOoNNELL DOUGLAS CORPORATION,
Defendant/Appellee/C ross-Appellant.
OFFICE OF THE CLERK
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
NOTICE OF ENTRY OF JUDGMENT
Judgment was entered in this case as of the file-stamp date
{February 28, 1983] on the attached decision of the Court.
3a
OPINION OF NINTH CIRCUIT AS AMENDED
UNITED STATES COURT OF APPEALS, NINTH CIRCUIT
Nos. 81-5165, 81-5172
NORTHROP CORPORATION,
Plaintiff Appellant Cross-Appellee,
Ve
McDOoNNELL DouGLas CORPORATION,
Defendant/Appellee/Cross-Appellant.
Argued and Submitted March 1, 1982.
Decided Feb. 28, 1983.
As Amended May 9, 1983.
George L. Hecker, Cave, McPheeters & McRoberts, Los
Angeles, Cal., for McDonnell Douglas Corp.
John W. Chierichella, Eldon H. Crowell, Crowell & Moring,
Washington, D.C., for Northrop Corp.
Appeal from the United States District Court for the Cen-
tral District of California.
Before POOLE and BOOCHEVER, Circuit Judges, and
SOLOMON, * Senior District Judge.
BOOCHEVER, Circuit Judge:
This appeal and cross-appeal present complex issues con-
cerning the extent to which private parties may obtain redress
for alleged injuries occurring in the heavily regulated military
aircraft industry. The principal issues are whether: (1) suit
against the Government pursuant to 22 U.S.C. § 2356 (dis-
closure of proprietary data) is the exclusive remedy; (2) the
Government is a necessary party; (3) the claims present non-
* Honorable Gus J. Solomon, Senior United States District Judge
for the District of Oregon, sitting by designation.
da
justiciable political or foreign policy questions; (4) certain
agreements between the parties are per se illegal restraints of
trade; and (5) the Government so pervades the relevant mar-
ket that no trade or commerce exists for Sherman Act pur-
poses.
The case arises out of a series of “teaming” agreements that
Northrop and McDonnell Douglas (“McDonnell”) entered into
at the Government’s request to develop military aircraft. The
agreements allegedly limited Northrop to marketing those
aircraft developed through the teaming effort that were suit-
able for land-based operation and McDonnell to marketing
those suitable for aircraft-carrier operation. Despite its ex-
tensive involvement in the military aircraft industry, the
Government is not a formal party to either the agreements or
this action.
The trouble giving rise to Northrop’s complaint and McDon-
nell’s counterclaim began when McDonnell was awarded a
large Navy contract, Northrop lost the competition for a simi-
lar Air Force contract, and McDonnell subsequently began
marketing land-based aircraft to foreign countries. Northrop
contends that McDonnell’s marketing of land-based aircraft
violated the agreements. It filed suit claiming, inter alia,
fraud, breach of contract, economic coercion, refusal to deal,
unfair competition, and industrial espionage. McDonnell sub-
sequently filed a counterclaim seeking, inter alia, a declaration
of rights under the agreements and damages for Northrop’s
allegedly illegal conduct and breaches of the agreements.
After some preliminary procedural maneuvering, the dis-
trict court dismissed Northrop’s first amended complaint in its
entirety and, alternatively, granted McDonnell summary
judgment as to five of the eight counts in the complaint. North-
rop Corp. v. McDonnell Douglas Corp., 498 F.Supp. 1112
(C.D.Cal. 1980). The district court also dismissed McDonnell’s
counterclaim and, alternatively, granted Northrop summary
judgment on the ground that the counterclaim was the “mirror
image” of Northrop’s complaint.
oa
We conclude that dismissal and summary judgment were
inappropriate as to Northrop’s complaint and McDonnell's
counterclaim. Accordingly, except for the denial of a motion to
modify a finding of fact, which we affirm, the decision of the
district court is reversed and the matter remanded for further
proceedings.
I
BACKGROUND
A. Facts
Between 1965 and 1972 Northrop devoted substantial re-
sources toward developing a lightweight, moderately priced,
multi-mission jet fighter. This development effort produced an
aircraft design Northrop termed the P-530.
In 1972, the United States Air Force awarded Northrop a
multi-million dollar contract to produce two prototype aircraft
(designated the “YF-17") based generally on the P-530 design.
The Air Force concurrently awarded a similar contract to
General Dynamics Corporation to produce two prototypes
based on an alternative design concept (designated the “YF-
16”). Both contracts were awarded as part of the Air Force's
Air Combat Fighter (“ACF”) competition for prototype devel-
opment of lightweight land-based fighters. In keeping with its
usual procurement policy (see generally Armed Services
Procurement Regulations [(“ASPR*“], 32 C.F.R. §§ 7-104.-9,
9-201(d), and 9-202.2(b) (1981)), the Government obtained unli-
mited rights through the contracts in the technology incorpo-
rated in the YF-16 and YF-17 prototypes.
McDonnell did not compete for an ACF contract. Instead,
McDonnell concentrated on improving its F-15 design, which
was for a more specialized and expensive land-based fighter
than the YF-16 and YF-17 designs.
In 1974, the United States Navy announced the Navy Air
Combat Fighter (*NACF”) competition to develop a light-
weight fighter suitable for aircraft carriers. To cut costs, Con-
Ha
gress directed the Navy to make maximum use of the technol-
ogy already developed and paid for in the Air Force's ACF
program. The Navy was thereby forced to limit its NACF
competition to proposals based on General Dynamic’s YF-16
and Northrop’s YF-17 technology. Because of the headstart
possessed by General Dynamics and Northrop in this technol-
ogy and the limited funds the Navy had available to compen-
sate other companies for the expense of catching up, the
NACF competition was effectively limited to General Dyna-
mics and Northrop.
Although General Dynamics and Northrop were essentially
the only NACF competitors, neither possessed significant ex-
perience in producing carrier-suitable aircraft. To overcome
this shortcoming, the Defense Department and Navy urged
them to “team” with companies having greater Navy experi-
ence. McDonnell was one of three or four companies that
possessed the requisite Navy experience. Although, as noted
by the district court, the parties dispute who was the pursuer
and who the pursued,” the outcome of the corporate courtship
‘In teaming arrangements, often used in large military projects,
two or more private contractors pool their financial and technological
resources to work on a project they would be unable to handle alone.
See Experimental Engineering v. United Technologies Corp., 614
F.2d 1244, 1245 (9th Cir. 1980).
* See 498 F. Supp. at 1115. The record supports the district court's
view that Northrop and McDonnell “desperately needed each other if
they—jointly and severally—were to succeed in tapping the great
potential of the opportunity presented by the Navy's need for a new
aircraft... ." /d. For instance, a McDonnell executive noted in an
internal memorandum that a teaming agreement:
was the only crap game in town, so we had to play it... . The
Navy wasn't going to let us propose our own airplane and win
with it, so we had to go this way.
Similarly, although both parties make extravagant claims about their
respective contributions to the eventual teaming effort, it seems
clear that neither party would have gotten far without the other.
Ta
is clear. On October 2, 1974, Northrop and McDonnell ex-
ecuted a “Teaming Agreement” to develop and propose
variants of the YF-17 to the Air Force and Navy.
The Teaming Agreement was the first of three major writ-
ten agreements between the parties. The parties agreed that
Northrop would concentrate on the Air Force’s ACF competi-
tion while McDonnell concentrated on the Navy's NACF
competition. The proposal submitted to the Air Force listed
Northrop as prime contractor and McDonnell as associate con-
tractor; the roles were reversed in the proposal submitted to
the Navy. The Agreement was intended “to be the basis for
later agreements to be definitized.”
On January 14, 1975, Northrop’s YF-17 lost the ACF
competition to General Dynamics’ YF-16. On May 2, 1975, the
Navy announced that McDonnell’s proposed fighter had won
the NACF competition, designating the winning design the
“F-18". Approximately two months later, the parties entered
into a “Basic Agreement” drawn along the same lines as the
prior Teaming Agreement.’ The Basic Agreement has five key
provisions:
1. In the “Definition” clause, the F-18 is defined as “a
carrier-based derivative of [Northrop’s] YF-17 aircraft... .”
2. In the “Objective” clause, the parties expressed their
commitment to:
work together (without in any manner intending to create
a joint venture or otherwise incur or imply joint or several
liability) for the purpose of obtaining and performing con-
tracts for the development and seeduntion of derivatives
of {Northrop’s] YF-17 aircraft that are responsive to the
requirements of the U.S. Navy and foreign customers.
Both the Teaming and Basic Agreements were drafted in appar-
ant accordance with ASPR 32 C.F.R. § 4-117 (1981) (authorizing
“contractor team arrangements”). The Government was not a party
to either agreement.
Sa
3. Inthe “Contract Responsibilities” clause that is at the
heart of this dispute, the parties agreed:
3. (a)... that [McDonnell] will be prime contractor in
connection with contracts with the U.S. Navy for the
development of the F-18 and for the production of those
F-18 aircraft purchased by the U.S. Navy for its own use.
Furthermore, in the event a foreign customer desires to
procure from [McDonnell] . . . F-18 aireraft of basically
the same configuration ... [McDonnell] will be prime
contractor. ...
(b) {Northrop] may elect to be prime contractor on any
or all contracts for the development and production of
aircraft derived from the [Northrop] YF-17 other than
those referred to in paragraph (a) above.
(emphasis added). The parties dispute whether the under-
scored phrase “of basically the same configuration” limits
McDonnell to providing only carrier-suitable derivatives of the
F-18.
4. The “Data Exchange” clause mutually obligates the
arties to exchange available information on the F-18 and
"F-17 technology. Pursuant to this clause, the exchanged
technology “may be used by the receiving party only in
furtherance of the contracts referred to in paragraph
tk
5. The "Division of Effort” clause provides that, absent a
contrary Navy directive, all F-18 production was to_be
erformed according to the distribution of labor specified
y the parties in the agreement (see the “Workshare”
discussion, infra, at § IID).
The Government subsequently awarded McDonnell a prime
contract for over $1.06 billion to make the F-18 operational.
McDonnell, in turn, awarded Northrop the principal sub-
contract for the project. Under the prime contract, the
Government paid McDonnell for interim design activities not
covered by prior contracts. This payment was “flowed down”
‘The parties sharply dispute whether this clause reflects a
“license” of technology, or is merely a new teaming arrangement
consistent with ASPR 32 C.F.R. $ 4-117 (1981).
9a
to the subcontract, reimbursing Northrop for its previously
unfunded interim design work. Both the prime contract and
subcontract granted the Government unlimited rights in F-18
technology and incorporated by reference an addendum (No.
438 to MIL-D-&8706) that authorized the use and submission of
any YF-17 technology found applicable to F-18.
In late 1975 and early 1976, Iran commenced negotiations
with Northrop to become the first customer of a YF-17 deriva-
tive land-based fighter. Northrop’s land-based derivative was
designated the F-18L; McDonnell’s Navy design had become
known by this time as the F-18A. Concerned that Northrop’s
sales of F-18L fighters to Iran might undermine its F-18A
program, the Navy persuaded the parties to enter a new
agreement on August 26, 1976.
The August 26, 1976 Agreement essentially reaffirms the
Basic Agreement, but contains a more explicit provision
regarding the type of fighter Northrop could develop and
market. The August 26th Agreement provided that Northrop
“has elected to design, develop and produce for sale to the
United States and to foreign governments all aircraft designed
only for land-based operations which are derived from the
YF-17."" Northrop’s agreement to limit its F-18L production
to land-based aircraft assured the Navy that Northrop’s
efforts would not interfere with McDonnell’s completion of the
carrier-suitable F-18A. The August Agreement also satisfied
the Navy’s demand that the parties agree upon a Foreign
Military Sales Master Plan pursuant to Defense Department
Directive 5105.38M.
B. Procedural Posture
Northrop initiated the present action on October 26, 1979. In
its first amended complaint, Northrop alleged that McDonnell
has waged a deliberate campaign to monopolize the market for
‘The August 26th Agreement expressly provided that McDon-
nell’s rights under the Basic Agreement were left unchanged.
10a
YF-17 derivative aircraft by crippling Northrop as a viable
competitor. Although Northrop attacked on a broad front, its
numerous allegations generally related to one of four main
theories of wrongful conduct on the part of McDonnell.” First,
McDonnell allegedly delayed production of all F-18 deriva-
tives, including Northrop’s F-18L, in order to promote sales of
its own land-based F-15 in the interim. Second, McDonnell
allegedly attempted to restrict Northrop’s F-18L to a special-
ized class of limited-use fighters known as “day fighters” so
that McDonnell’s F-15 and F-18A fighters would be more
attractive to customers desiring multi-mission aircraft. Third,
McDonnell allegedly breached its obligations under the Basic
Agreement to exchange F-18 technology and to subcontract
* The relief sought by Northrop in the first amended complaint may
be summarized as follows:
Count One—injunctive relief to prevent McDonnell from
misappropriating Northrop’s property by breaching the Agree-
ments.
Count Two—injunctive relief to prevent McDonnel from
misappropriating Northrop's property by exceeding the “license” of
technology granted under the Agreements.
Count Three—a declaration of the parties’ rights under the Agree-
ments.
Count Four—damages for fraud by McDonnell in the inducement
to enter the Agreements.
Count Five—an accounting for profits earned by McDonnell as a
result of its breaches of the Agreements.
Count Siz—injunctive relief and damages for McDonnell’s alleged
attempt to monopolize the domestic and foreign markets for F-18’s in
violation of section 2 of the Sherman Act.
Count Seven—injunctive relief and damages for McDonnell’s acts
of unfair competition.
Count Eight—recovery in quantum meruit for contributions to
the joint business relationship for which Northrop has not been
compensated.
lla
the specified share of work to Northrop on F-18A aircraft sold
in foreign countries. Finally, McDonnell allegedly breached
paragraph 3 of the Basic Agreement by representing to foreign
customers, particularly [srael, that McDonnell could serve as
prime contractor on any version of the F-18, including a land-
based version. McDonnell subsequently filed its counterclaim.
II
DISMISSAL OF NORTHROP’S CLAIMS
The district court dismissed Northrop’s complaint for (A)
lack of subject matter jurisdiction; (B) failure to join an in-
dispensable party—the United States; and (C) failure to statea
claim because of non-justiciable political and foreign policy
questions. Northrop challenges each of these determinations
on direct appeal (No. 81-5165).™
*« We discern no merit in McDonnell’s contention that Northrop has
abandoned the claims in counts 4-8 of its complaint by not explicitly
challenging the district court’s rulings that Northrop could not show
injury in fact and failed to allege an unlawful combination. The two
findings are found in the order drafted for the court by McDonnell,
but are not mentioned in the court's findings or opinion. Our review of
the findings and opinion demonstrate that, notwithstanding the in-
consistent language in its order, the court considered itself precluded
from examining the injury issue by the political question and act of
state doctrines. The application of those doctrines has been chal-
lenged on appeal. Northrop's discussion in its Opening Brief of the
evidence of an unlawful combination suffices to preserve the claim.
The conduct and relief at issue in counts 4-8 overlap and are
inextricably intertwined with that in counts 1-3. We decline to seize
upon the variance between the district court's order and its findings
and opinion to effect an abandonment of claims, particularly given
that the evidence relevant to the allegedly abandoned claims is so
similar to that underlying the other claims that must be tried on
remand in any event.
l2a
A. Subject Matter Jurisdiction: Exclusivity of 22 U.S.C,
§ 2356
The district court held that the "Government's clear agency
in [Foreign Military] sales [FMS] and its, at least putative,
agency relationship in the licensing of commercial sales per-
missible only in the best interest of United States foreign
policy can only be clarified in an action brought pursuant to 22
U.S.C. § 2356."" 498 F.Supp. at 1119. It then dismissed the
entire complaint for lack of jurisdiction,” because § 2356 makes
suit against the United States the exclusive remedy. Northrop
argues that its claims do not involve MeDonnell’s disclosures
but rather, inter a/lia, fraud, breach of contract, and attempt to
monopolize, none of which are within the statute. McDonnell
characterizes misuse and misappropriation as the sine qua non
of all of Northrop’s claims, states that those are within the
statute, and argues that it was the Government's agent in
using the information.
Section 2356, on its face, does not encompass Northrop’s
claims for fraud, breach of contract, attempt to monopolize, or
anything else not pertaining to disclosure of proprietary in-
722 U.S.C. § 2356 (1976) waives sovereign immunity for claims
within its scope, and provides that;
(a) Whenever, in connection with the furnishing of assistance
under this chapter—
(1) a
(2) information, which is (A) protected by law, . . . is disclosed
by the United States Government or any of its officers, employ-
ees, or agents in violation of such restrictions, the exclusive
remedy of the owner. . . is tosue the United States Government
for reasonable and entire compensation for such practice or
disclosure in. . . district court. . . orinthe Court of Claims... .
*The court denied McDonnell's motion to dismiss with respect to 10
U.S.C. § 2273 (1976) and 28 U.S.C. $8 1546(a)(2) and 1491 (1980), 49%
F.Supp. at 1119-20. McDonnell has not cross-appealed that denial.
l3a
formation.’ Moreover, even if, arguendo, misuse and
misappropriation were the sine qua non of such claims,
McDonnell's alleged misuse and misappropriations are not cov-
ered by the statute because, as discussed below, it is not an
agent of the Government."”
Because at least some of Northrop’s claims can arguably be
construed as challenging McDonnell’s disclosure of proprietary
data, it is appropriate to consider whether McDonnell is the
Government’s “agent” within the meaning of § 2356 in disclos-
ing information to potential foreign buyers. In addressing this
question it is important to note that there are principally two
types of foreign sales—F MS sales and commercial sales, Com-
mercial sales are distinguishable from FMS sales in that:
(C]ommercial sales are made directly between a private
contractor and a foreign country; the sale does not go
through the government-to-government channels which
foreign military sales go through. Consequently, the FMS
rules do not apply to commercial sales. Although not a
party to the sale, the government plays a substantial role
inasmuch as a contractor must obtain an export license
before it can conclude a commercial sale.
Scherzer, Janik and Green, Foreign Military Sales: A Guide to
the United States Bureaucracy, 13 Geo.Wash.J. of Int'l L. &
Econ, 545, 555 (1979).
Neither the district court nor the parties have offered any
explicit guidance regarding the extent to which the disclosure
claims, if any, pertain to FMS rather than commercial sales.
*Inreviewing a dismissal for lack of subject matter jurisdiction, we
review the pleadings and evidence in the light most favorable to
plaintiff. See Western Waste Service Systems vy. Universal Waste
Control, 616 F.2d 1094, 1095 (9th Cir.), cert. denied, 449 U.S. 869,
101 S.Ct. 205, 66 L.Ed.2d &8& (1980),
Toa certain extent, our discussion of why the Government is not
a necessary party under Rule 19 applies here. Northrop is not claim-
ing that the Government has misused proprietary information or that
it has directed McDonnell to do so.
lda
We leave that question for resolution on remand, To the extent
that any disclosure claims involve FMS sales, § 2356 is the
exclusive remedy, Northrop does not challenge that position.
To the extent, however, that any disclosure claims involve
commercial sales, $ 2356 is inapplicable."
The Foreign Assistance Act defines “officer or employee,”
terms carried over from the Mutual Security Act of 1954, as
“civilian personnel and members of the Armed Forces of the
United States Government.” /d., § 644 at 515. The legislative
history of the Act states that the section is a “rewrite and
'! Section 2356 was originally promulgated as § 517 of the Mutual
Security Act of 1951, Pub, L.No, 165, 65 Stat, 373, 382, That section
referred to the “disclosure of information by reason of acts of the
United States or its officers or employees.” Reprinted in (1951) U.S.
Code Cong. & Ad.Serv. 517,526. The available legislative history
refers only to disclosure by the Government, See S. Rep, No, 703, 82d
Cong., Ist Sess. (1951), reprinted in id, 2250 at 2298. The provision
was carried over as § 506 of the Mutual Security Act of 1954, Pub. L.
No, 665, 68 Stat. 832, 852. That section also referred only to Govern-
ment disclosure. C/. Kaplan vy, United States, 153 F.Supp. 787, 790,
139 Ct.Cl. 682 (1957) (dismissing a claim under the section because
the product manufactured for the Government was not used “in
connection with the furnishing of any assistance in furtherance of the
purpose of this Act”; noting that the Government assumes liability
under the section for certain disclosures by “United States Govern-
ment officials”).
The section was reenacted in its present form as Section 606 of the
Foreign Assistance Act of 1961, Pub. L. No, 87-195, 75 Stat. 424, 440.
The Foreign Assistance Act authorized the President to “furnish
military assistance. . . toany friendly country. . . by—(a) acquiring
from any source and providing ... any defense article or defense
service... .” Jd. § 508; reprinted in [1961] U.S. Code Cong. & Ad.
News 470, 482-83. Specifically, it permitted the President to “furnish
defense articles from the stocks of the Department of Defense” or
enter into procurement contracts. /d. § 507 at 484. It did not mention
export licenses for commercial sales. Therefore, “the furnishing or
assistance under this Act” in section 606 (now § 2356) does not ex-
pressly include commercial sales such as McDonnell's.
Lda
simplification, without substantial change” of the previous ver-
sion. S.Rep. No. 612, 87th Cong., lst Sess. (1961), reprinted in
(1961) U.S.Code Cong. & Ad. News 2472, 2501. It therefore
does not appear that the addition of the term “agent” in 1961
broadened the scope of § 2356,
Neither the language nor the legislative history of § 2356
suggests that the section encompasses disclosure by Govern-
ment contractors. Indeed, we are unable to find a single case in
which a private contractor has been found to be an agent of the
Government under § 23856, Even under general agency princi-
ples, procurement contractors are ordinarily independent con-
tractors unless the contract expressly makes them the Govern-
ment’s agents. See generally United States v. Township of
Muskegon, 355 U.S. 484, 486, 78 S.Ct. 483, 485, 2 L. Ed. 2d 436
(1958); Deltec Corp. v. United States, 326 F.2d 1004, 1005 n, 1
& 1006-07 (Ct.Cl. 1964),
McDonnell argues that § 2356 embodies the same policy as
28 U.S.C. § 1498 of (1976 & Supp.1980):" “to insulate con-
tractors from lawsuits disruptive of the procurement process.”
H.R.Rep. No. 872, 82d Cong., lst Sess. 1420 (1951), It also
relies on Hughes Aircraft Co. v. United States, 5384 F.2d 889
(Ct.C]. 1976), in arguing that § 2356 extended § 1498 to foreign
sales. The language of the two sections, however, is very
different.'’ Moreover, both the legislative history that McDon-
nell quotes and the Hughes court were discussing the language
‘2 Suit against the Government under § 1498 is the exclusive reme-
dy for unlawful use of a patented invention by the Government,
'’ For instance, in contrast to the “officers, employees, or agents”
language of § 2356, § 1498 provides that:
For the purposes of this section, the use or manufacture of an
invention described in and covered by a patent of the United
States by a contractor, a subcontractor, or any person, firm, or
corporation for the Government and with the authorization or
consent of the Government, shall be construed as use or manu-
facture for the United States.
28 U.S.C. § 1498(a) (1976) (emphasis added)
l6a
“by or for the United States” of § 1498. They did not address
the disclosing parties encompassed within § 2356.
McDonnell argues that it is an agent of the Government
because of the International Traffic in Arms Regulations
(“ITARS”), 22 C.F.R. §§ 121.01 et seq. (subchapter M) (1981).
These regulations provide that a State Department license is
required for export of equipment on the United States Muni-
tions List; the license may be denied in furtherance of world
peace, national security, or foreign policy; and that State De-
partment approval is required before opening marketing talks
with a prospective foreign buyer. 22 C.F.R. §§ 123.01,
123.05(a), and 123.16(a) (1981). The regulations require that a
proposed agreement regarding a license to manufacture
abroad or the furnishing of technical assistance (the disclosure
of technical data) relating to Munitions List items must be
approved by the State Department; the agreement may be
disapproved for the same reasons as above; and the sales pitch
must be approved. 22 C.F.R. §§ 124.01, 124.06(a), and
124.12(a) (1981).
When the Government permits disclosures abroad, it does
not concern itself with the commercial ramifications of the
arrangement. The regulations make this explicit with respect
to proposed manufacturing license and technical assistance
agreements. For instance, the regulations on proposed manu-
facturing license and technical assistance agreements require
each agreement to state that:
No liability shall be incurred by or attributed to the U.S.
Government in connection with any possible infringe-
ments of privately owned patent or proprietary rights. . .
by reason of the U.S. Government's approval of this
agreement.
22 C.F.R. § 124.10(h) (1981). They also require the cover letter
to state that State Department approval will not be construed
“as constituting either approval or disapproval of any of the
business terms or conditions between the parties to the agree-
ment.” 22 C.F.R. § 124.11(d) (1981). Finally, the regulations
apply the same standards to the export of technical data. 22
l7a
C.F.R. §§ 125.03 n. 2, 125.03-.05 (1981). See generally Sher-
zer, Janik and Green, supra, 13 Geo.Wash.J. of Int'l L. &
Econ., at 581-90. Therefore, McDonnell’s contention that the
ITARS confer agency status on it also fails.‘* Accordingly,
McDonnell is not the Government's agent in making commer-
cial sales for purposes of § 2356 so as to justify dismissal of
Northrop’s complaint on the ground that its exclusive remedy
is against the Government.
B. Joinder of the Government
1. Joinder under Fed.R.Civ.P. 19 entails a practical two-
step inquiry.'* First, a court must determine whether an ab-
sent party should be joined as a “necessary party” under sub-
432 C.F.R. § 7.104.9(8) (1981) provides that the Government may
“have or permit others” to disclose information in which it has unli-
mited rights. “Permitting” McDonnell to disclose information by
granting it an export license, however, does not make it an agent of
the Government under § 2356.
'4@Due to the rigid, formalistic approach taken by some early
courts, Rule 19 was revised in 1966 to emphasize that the appropriate
focus is on the practical ramifications of joinder versus nonjoinder.
Eldredge v. Carpenters 46, 662 F.2d 534, 537 (9th Cir. 1981), cert.
denied, __ U.S. , 102 S.Ct. 231, 74 L.Ed.2d 183 (1982). The
Rule now provides:
(a) Persons to be Joined if Feasible. A person who is subject to
service of process and whose joinder will not deprive the court of
jurisdiction over the subject matter of the action shall be joined
as a party in the action if (1) in his absence complete relief cannot
be accorded among those already parties, or (2) he claims an
interest relating to the subject of the action and is so situated
that the disposition of the action in his absence may (i) as a
practical matter impair or impede his ability to protect that
interest or (ii) leave any of the persons already parties subject to
a substantial risk of incurring double, multiple, or otherwise
inconsistent obligations by reason of his claimed interest. . . .
(b) Determintion by Court Whenever Joinder not Feasible.
Ifa person. . . cannot be made a party, the court shall deter-
mine whether in equity and good conscience the action should
proceed among the parties before it, or should be dismissed, the
l&a
section (a). Second, if the court concludes that the nonparty is
necessary and cannot be joined for practical or jurisdictional
reasons, it must then determine under subsection (b) whether
in “equity and good conscience” the action should be dismissed
because the nonparty is “indispensable.” See generally Provi-
dent Tradesmen's Bank & Trust Co. v. Patterson, 390 U.S.
102, 108-25, 88 S.Ct. 733, 737-46, 19 L.Ed.2d 936 (1968);
Eldredge v. Carpenters 46, 662 F.2d at 537.
The district court concluded that the Government was “both
necessary and indispensable,” 498 F.Supp. at 1119, because:
Northrop’s claims “called into question” the Government's un-
fettered right to “designate the who, what, when and where of
weapons system production,” 498 F.Supp. at 1117; injunctive
relief would “necessarily limit the United States Government
inits F-18 procurement activities,” /d. at 1118; and relief would
impinge on the Government’s conduct of foreign relations by
limiting the source of land-based F-18’s for foreign buyers."
The court apparently concluded that the Government could not
be joined because Congress has not authorized such suits
absent person being thus regarded as indispensable. The factors
to be considered by the Court include: first, to what extent a
judgment rendered in the person's absence might be prejudicial
to him or those already parties; second, the extent to which, by
protective provisions in the judgment, by the shaping of relief,
or other measures, the prejudice can be lessened or avoided;
third, whether a judgment rendered in the person's absence will
be adequate; fourth, whether the plaintiff will have an adequate
remedy if the action is dismissed for nonjoinder.
'® Review of the district court’s decision is complicated by its failure
to articulate clearly the considerations underlying its conclusions as
to each step in the Rule 19 inquiry. For example, after reciting the
factors in subsection (b)’s test for an indispensable party, the court
observed that Northrop “disclaims the necessity of joinder,” a con-
sideration pertinent to subsection (a). Jd. at 1117-18.
The confusion that frequently accompanies joinder rulings is attri-
butable in part to the degree to which the factors cited in Rule 19’s
two subsections overlap each other. Impairment of the absent party's
ability to protect its interest (19(a)(2)(i)) is similar to the prejudice to
19a
against the Government." /d. Our standard of review of the
district court’s decision is abuse of discretion. Bakia v. County
of Los Angeles, 687 F.2d 299 (9th Cir.1982) (per curiam), and
Walsh v. Centeio, 692 F.2d 1239 (9th Cir.1982). We hold that
the court abused its discretion in holding that the government
is anecessary party. Because, as discussed below, we conclude
that the Government is not a necessary party to this action, we
need not determine whether joinder is feasible, and, if not,
whether the Government's presence would be indispensable.
Subsection (a) of Rule 19 defines two categories of parties
that should be joined if feasible. If the Government fits within
either category it would be a necessary party. Eldredge, 662
F.2d at 537; A.J. Kellos Construction Co. v. Balboa Insurance
Co., 495 F.Supp. 408, 414 (S.D.Ga.1980), rev'd on other
grounds, 661 F.2d 402 (5th Cir. 1981). We conclude that it does
not.
To fit within the first category, it must appear that “com-
plete relief’ cannot be accorded between Northrop and
McDonnell absent the Government's joinder. Rule 19(a)(1).
See generally 3A J. Moore & J. Lucas, Woore's Federal Prac-
tice, © 19.07-1[1], at 19-128 (2d ed. 1982). This factor is con-
cerned with consummate rather than partial or hollow relief as
the absent party consideration under subsection (b); risk of leaving a
defendant exposed to inconsistent obligations (19(a)(2)(ii)) is similar
to the prejudice to the defendant factor under (b); and whether
complete relief can be accorded (19(a)(1)) is similar to the adequacy of
relief inquiry under (b).
‘6 Although the district court's opinion does not discuss the feasibil-
ity of joining the Government, one of its conclusions of law provides
that “no act of Congress would permit Northrop to bring this particu-
lar action against the United States” (emphasis added). Because the
Government is not a necessary party, we need not address North-
rop’s contention that the court should have joined the Government in
aclaim under 22 U.S.C. § 2356(a)(2) (waiving sovereign immunity for
disclosure of protected information) (see Section IIA, infra) rather
than find it indispensable.
20a
to those already parties, and with precluding multiple lawsuits
on the same cause of action. Advisory Committee's Note, 39
F.R.D. 89, 91 (1966). McDonnell does not directly contend that
the Government’s absence would preclude the district court
from being able to fashion meaningful relief as between the
parties, and we discern no reason for so concluding.
McDonnell's necessary party argument is founded upon two
contentions: (1) the Government would allegedly lose a valu-
able source of supply if Northrop were granted any of the relief
it requests; and (2) any decree entered in Northrop’s favor
would allegedly expose McDonnell to conflicting obligations.
McDonnell’s two contentions track the alternative subparts (i)
and (ii) of Rule 19(a)(2), concerning prejudice to the absent
party or to those already parties. Subparts (i) and (ii) are
contingent, however, upon an initial requirement that the
absent party claim a legally protected interest relating to the
subject matter of the action. Cf. Central Council of Tlingit &
Haida Indians v. Chugach Native Association, 502 F.2d 1323,
1326 (9th Cir. 1974), cert. denied, 421 U.S. 948, 95 S.Ct. 1680,
44 L.Ed.2d 102 (1975) (Secretary of the Interior not a neces-
sary party to a boundary dispute between Native American
groups because he claimed no protectable interest).
The Government is not a party to any of the teaming agree-
ments, and has never asserted a formal interest in either the
subject matter of this action or the action itself. On the contra-
ry, the record reflects that the Government has meticulously
observed a neutral and disinterested posture, and regards this
as a private dispute. The Navy has declared its intent to
respect the teaming relationship, and has consistently advised
the parties to resolve their disagreements in accordance with
law and their private agreements. McDonnell offers no cogent
reason why we should second-guess the Government's assess-
ment of its own interests.
A nonparty to a commercial contract ordinarily is not a
necessary party to an adjudication of rights under the contract.
See, e.g., Helzberg’s Diamond Shops, Inc. v. Valley West Des
2la
Moines Shopping Center, Inc., 564 F.2d 816, 820 (8th Cir.
1977); Trans Pacific Corp. v. South Seas Enterprises, Ltd.,
291 F.2d 435, 436-37 (9th Cir.1961); 7 C. Wright & A. Miller,
Federal Practice and Procedure: Civil § 1613, at 135 (1972).
This rule is not inapplicable merely because the absent party
happens to be the Government. See, e.g., Coastal Modular
Corp. v. Laminators, Inc., 635 F.2d 1102, 1108 (4th Cir. 1980);
Fidelity & Casualty Co. v. Reserve Insurance Co., 596 F.2d
914, 918 (9th Cir.1979); R.C. Hedreen Co. v. Crow Tribal
Housing Authority, 521 F.Supp. 599, 608 (D. Mont.1981). The
correlative rule that all parties who may be affected by a suit to
set aside a contract must be present, see Lomayaktewa v.
Hathaway, 520 F.2d 1324, 1325 (9th Cir.1975), cert. denied,
425 U.S. 903, 96 S.Ct. 1492, 47 L. Ed. 2d 752 (1976), is inapplica-
ble here because Northrop is not seeking to set aside or enjoin
performance under any contract between McDonnell and the
Government.
McDonnell correctly points out that this case differs from the
usual commercial dispute in that the absent party, the Govern-
ment, is involved with the agreements at issue, even though it
is not a party to them. The Government prompted the parties
to enter the teaming agreements and, due to its extensive
involvement in the military procurement arena, exerts a
tremendous influence on them. Although we have previously
adjudicated disputes between federal defense contractors
where the Government was not a party, see E.rperimental
Engineering, Inc. v. United Technologies Corp., 614 F.2d
1244 (9th Cir. 1980); American Pipe & Steel Corp. v. Firestone
Tire & Rubber Co., 292 F.2d 640 (9th Cir. 1961), we have found
no decision directly addressing the necessity of joining the
Government when such disputes are litigated.'’ We are there-
' The most useful decision appears to be Coastal Modular Corp v.
Laminators, Inc., 635 F.2d at 1108, where the Fourth Circuit held
that the Navy was not a necessary party to a contract action between
airport contractors merely because the defendant “theorize{d| the
possibility that the Navy would institute suit against it.”
22a
fore reluctant to rely too heavily on the rules applicable to
ordinary commercial contracts and will take a closer look at the
nature of the Government’s interest in this dispute.
McDonnell’s contention that the Government's interests will
be prejudiced—the controlling inquiry under Rule 19(a)(2)(i)—
springs from the erroneous premise that Northrop is challeng-
ing the Government's rights in the data and technology
surrounding the F-18 development effort and right to control
Weapons system production. First, neither Northrop’s allega-
tions regarding McDonnell’s use of YF-17 derivative technol-
ogy nor its requested relief would in any way challenge the
Government's “unlimited rights” to use and dispense that
data. The Government's rights in that data, although unli-
mited, were neither sole nor exclusive and did not divest
Northrop of the residual right to continue to use the technology
itself and to share it with other private parties. See Regents of
University of Colorado v. K.D.I. Precision Products, Inc.,
488 F.2d 261, 264 (10th Cir. 1973) (interpreting language iden-
tical to that in 32 C.F.R. § 7-104.9(a) [see note 14, supra]).
Second, Northrop seeks no relief from the Government and
no relief against McDonnell that would preclude McDonnell
from complying with any Governmental directive or from
producing a particular aircraft. As Northrop represented
below:
If the Government . . . goes to McDonnell and says “we
have unlimited rights in this data and taking those unli-
mited rights and giving them to you we want you to do
this,” the Government [is] free to do that. They can go to
Grumman, they can go to LTV, they can go to Lockheed.
They have unlimited rights. That is not anything we are
contesting here.
'*“Unlimited Rights” are defined in 32 C.F.R. § 7-104.9(a)(7)
(1981) as the “rights to use, duplicate or disclose technical data or
computer software in whole or in part in any manner and for any
purpose whatsover, and to have or permit others to do so.”
23a
It is undisputed that McDonnell may use the YF-17 deriva-
tive data in responding to a Government procurement request.
Unlike other contractors, however, McDonnell would be liable
to Northrop i’, in electing to respond, it violated its antecedent
promises to Northrop.
Focusing on Rule 19(a)(2)(ii), McDonnell argues that North-
rop’s contruction of the agreements would deter McDonnell
from responding to such a Government request by saddling it
with inconsistent obligations, and, in so doing, would interfere
with the Government's procurement prerogatives. To reach
this conclusion, however, it would be necessary to make sever-
al assumptions that are unwarranted on this limited record and
at this preliminary stage of the proceedings. We would have to
hypothesize both that the Government will ask McDonnell to
develop land-based F-18's and that, when presented with the
opportunity to participate as prime contractor in such a
procurement request, McDonnell would forego that opportun-
ity because of its prior contractual agreements with Northrop.
To conclude that such a hypothetical election by McDonnell
would impair the Government's unlimited right to use F-18
technology, we would have to assume further that the Govern-
ment has an enforceable expectation that a defense contractor
like McDonnell will fill a procurement request.’ The Record is
replete with evidence to the contrary. There are any number of
commercial considerations, including existing contractual
obligations, that routinely prompt defense contractors to de-
cline to participate in a particular Government procurement
offering. As Northrop cogently argues in its brief, a con-
'* McDonnell cannot avoid this fallacy in its argument by suggest-
ing that the Government might ask it to modify the carrier-suitable
features of the F-18A under the “changes clause” of its prime con-
tract with the Navy. First, no such change order has been issued.
Second, the mere existence of the changes clause found in most
Government military contracts, does not permit a contractor to
breach its preexisting contractual obligations to other private par-
ties. See Westinghouse Electric Corp. v. Garrett Corp., 437 F.Supp.
1301, 1338 n.53 (D.Md. 1977), aff'd, 601 F.2d 155 (4th Cir. 1979).
24a
tractor’s commercially based decision to forego a military con-
tract does not impair the Government’s unlimited rights in the
desired product's technology or right to control military
procurement activity.”
We conclude that the Government’s hypothetical interest in
having McDonnell serve as prime contractor for land-based
F-18’s does not mandate joinder under Rule 19(a).*’ Specula-
tion about the occurrence of a future event ordinarily does not
render all parties potentially affected by that future event
necessary or indispensable parties under Rule 19. See Coastal
Modular Corp., 635 F.2d at 1108; Arthur v. Starrett City
Associates, 89 F.R.D. 542, 547 (E.D.N.Y. 1981); Sierra Club
v. Leslie Salt Co., 354 F.Supp. 1099, 1105(N.D.Cal. 1972). The
* Northrop points out that:
The impact on the government that would result from an award of
declaratory or monetary relief to Northrop in this case is no different
from that which would occur if {McDonnell}, when presented with the
opportunity for a federal contract, determined that it had insufficient
capacity to perform any resulting contract unless it diverted facilities
and personnel currently dedicated to the production of DC-9’s and
DC-10’s for its commercial airline customers. In such an event,
[McDonnell] would be required to balance the value of the added
federal business against the liabilities it would incur by abandoning
its prior contractual commitments to the airlines. And if [McDonnell]
elected to pursue the later-presented federal opportunity, the air-
lines would be entitled to seek declaratory and/or monetary relief
under their contract with [McDonnell]. Clearly, the United States
would not be indispensable to such litigation. To so hold would—
contrary to all precedent—pervert Rule 19 by transforming it into a
haven for sellers like [McDonnell] who, when they find it expedient or
profitable, elect to disavow prior commitments by subsequently
entering into contracts that are inconsistent with their previous
contractual promises.
“1 Any interest the Government may have in McDonnell’s produc-
tion efficiencies and sunk costs, if cognizable, is at most a disputed
question of fact that was not addressed below and therefore does not
justify dismissal at this juncture.
25a
Government is not a necessary party to what is essentially a
contract and antitrust action between private parties solely
because the dispute arises in the regulated military aircraft
industry. Cf. Grumman Corp. v. LTV Corp., 665 F.2d 10 (2d
Cir. 1981) (resolving an antitrust and securities law dispute
between private manufacturers of military aircraft with no
suggestion that the Government’s joinder was necessary). Ab-
sent a more particularized and compelling governmental in-
terest, private disputes arising within this important commer-
cial sector should be governed by traditional Rule 19 princi-
ples. Finally, if Northrop eventually succeeds on any or all of
its claims, a matter on which we express no opinion, we believe
that adequate relief could be shaped that would neither impair
a significant Government interest nor subject McDonnell to
any greater inconsistent obligation than it freely assumed.
C. Failure to State a Claim
The district court held that the complaint failed to state a
claim because the political question and act of state doctrines
precluded judicial inquiry into the subject matter of this dis-
pute. The act of state doctrine is essentially the foreign coun-
terpart to the political question doctrine. Both doctrines re-
quire courts to defer to the executive or legislative branches of
government when those branches are better equipped to hand-
le a politically sensitive issue. Jnternational Association of
Machinists v. OPEC, 649 F.2d 1354, 1358 (9th Cir. 1981), cert.
denied, 454 U.S. 1163, 102 S.Ct. 1036, 71 L.Ed.2d 319 (1982).
Neither doctrine is susceptible to inflexible definition, and
both must be applied on a case-by-case basis by balancing a
variety of factors. /d. at 1358-59. With that in mind, we turn to
the case at hand.*
= In reviewing a dismissal for failure to state a claim, we construe
the material allegations in the complaint as being true. Benson v.
Arizona State Board of Dental Examiners, 673 F.2d 272, 275 n.7 (9th
Cir. 1982).
26a
1. Political Question: The district court construed the com-
plaint as asking the court to decide "WHO will be the exclusive
builder (prime contractor) for the carrier-suitable or land-
based versions of the F-18 weapons system” and to be, in
effect, “the super-procurer and sales licensor of a military
weapons system.” 498 F.Supp. at 1120. It held that the case
therefore presented a nonjusticiable political question under
Baker v. Carr, 369 U.S, 186, 82 S.Ct. 691, 7 L.Ed.2d 663
(1962). Id.
Baker contains several considerations that help identify a
political question: (1) a textually demonstrable constitutional
commitment of the issue to a coordinate political department;
(2) a lack of judicially discoverable and manageable standards;
(3) the impossibility of deciding without an initial policy
determination reserved for nonjudicial discretion; (4) the im-
possibility of deciding without expressing lack of respect for
the coordinate branches of government; (5) unusual need for
adherence to a political decision already made; and (6) the
potentiality for embarrassment from multifarious pronounce-
ments by various departments. 369 U.S. at 217, 82.5.Ct. at
710. See also Goldwater vy. Carter, 444 U.S. 996, 998, 1008.Ct.
533, 534, 62 L.Ed.2d 428 (1979) (Powell, J., concurring)
(summarizing indicia of a political question). The district court
did not identify which of the Baker factors suggests that
Northrop’s entire action presents a political question. MeDon-
nell invokes the last three Baker factors because the Govern-
ment approved McDonnell’s sale of F-18's to Canada, has au-
thorized it to export F-18 technology to several other coun-
tries, and has allegedly asked it to make a presentation about
the F-18 to the Air Force and a Defense Department commit-
tee.”
* Although the record offers little evidence of a Government re-
quest for such a presentation, and Northrop vigorously disputes it,
we assume it to be true for purposes of this issue.
27a
We discern no support for characterizing Northrop's claims
as political questions regardless of which factors are con-
sidered. Northrop does not challenge the wisdom or legality of
any governmental act or decision. Instead, it seeks to restrain
and recover damages from McDonnell for the latter's allegedly
improper tactics in marketing F-18’s. The challenged activity
by McDonnell was neither authorized nor directed by any
branch of Government. The mere fact that the challenged
conduct oecurred in a regulated industry does not alone alter
its private commercial character. The issues presented for trial
are not political questions—they are legal issues, involving
private commercial activity which the judiciary is uniquely
equipped to resolve. Northrop’s claims do not seek the kind of
direct interjection of the judiciary into the Government's
procurement activity that would transform this private suit
into a political question. See Gilligan v. Morgan, 413 U.S. 1, 93
S.Ct. 2440, 37 L. Ed.2d 407 (1973) (court supervision of Nation-
al Guard training constituted a political question); Sarnoff v.
Connally, 457 F.2d 809, 809-10 (9th Cir.), cert. denied, 409
U.S, 929, 93 S.Ct. 227, 34 L. Ed.2d 186 (1972) (action challeng-
ing war-power provisions of the Foreign Assistance Act pre-
sented a political question); Rappenecker v. United States, 509
F.Supp. 1024, 1028-30 (N.D.Cal.1980) (claim that President
was negligent in responding to seizure of American cargo
vessel by Cambodian gunboats dismissed as political
question).
2. Act of State: Pursuant to the act of state doctrine, this
nation’s courts will not “sit in judgment on the acts of” another
country. Underhill v. Hernandez, 168 U.S, 250, 252, 18 S.Ct.
“ McDonnell’s reliance on Haig v. Agee, 453 U.S. 280, 101 S.Ct.
2766, 69 L.Ed.2d 640 (1981) and Rostker v. Goldberg, 453 U.S. 57,
101 S.Ct. 2646, 69 L.Ed.2d 478 (1981) is misplaced. In contrast to
Northrop, the plaintiffs in Agee and Rostker directly challenged the
propriety of decisions made by the President and Congress. Agee
challenged the validity of the President's revocation of his passport.
Rostker involved an equal protection challenge to the validity of the
males only provision of the Military Selective Service Act.
28a
83, 84, 42 L.Ed. 456 (1897). Even in private suits, American
courts will not resolve issues requiring “inquiries . . . into the
authenticity and motivation of the acts of foreign sovereigns. ”
Occidental Petroleum Corp. v. Buttes Gas & Oil Co., 331
F.Supp. 92, 110(C.D.Cal.1971), aff'd, 461 F.2d 1261 (9th Cir.),
cert. denied, 409 U.S, 950, 93S.Ct. 272, 34 L. Ed.2d 221 (1972).
The doctrine has no explicit fountainhead in our Constitution
or statutes, and derives principally from the judiciary’s desire
not to interfere with the conduct of foreign policy by the
political branches of government. /»ternational Association of
Machinists v. OPEC, 649 F.2d at 1359; Timberlane Lumber
Co. v. Bank of America, N.T. & S.A., 549 F.2d 597, 605 (9th
Cir. 1976). In determining whether the doctrine compels dis-
missal, courts must carefully “balance [the] relevant con-
siderations.” Timberlane, 549 F.2d at 606, 607 (quoting Banco
Nacional de Cuba v. Sabbatino, 376 U.S. 398, 428, 84.8.Ct.
923, 940, 11 L.Ed.2d 804 (1964)). The justification for forbear-
ance depends greatly on the importance of the issue's implica-
tions for our foreign policy. /d.
McDonnell argued below that Northrop's claims would re-
quire the district court to review the procurement actions of
foreign sovereigns in order to decide whether McDonnell’s
alleged conduct was causally connected to Northrop’s lost for-
eign F-18 sales. The court stated that “if’ McDonnell was
correct in its assertion, the doctrine mandated dismissal. 498
F.Supp. at 1121. The court failed, however, to determine
whether McDonnell was in fact correct and never identified a
foreign act of state that would require review to adjudicate
Northrop’s claims.
Northrop concedes that military procurement decisions by
foreign sovereigns are acts of state. The issue here, however,
is whether resolution of Northrop’s claims would necessitate
direct judicial inquiry into such decisions. We conclude that it
would not.
29a
Northrop's damage allegations pertain to McDonnell’s pri-
vate commercial conduct and are not inextricably bound up in
any foreign act of state.” The claims relating to the increased
costs associated with duplicating technology that McDonnell
was allegedly contractually obligated to furnish Northrop will
not require the court to inquire into any foreign procurement
decisions because Northrop can establish the fact of damage
without reference to lost sales by proof of increased costs.
Northrop has alleged injury of a type and amount sufficient to
avoid dismissal. See Radiant Burners, Inc. v. Peoples Gas
Light & Coke Co., 364 U.S, 656, 659-60, 81 S.Ct. 365, 367-68, 5
L.Ed.2d 353 (1961) (per curiam). Whether Northrop can
eventually establish the amount of damages without implicat-
ing foreign procurement decisions, and whether that implica-
tion is permissible, are disputed questions which we need not
address at this stage of the proceedings. See Wi/liams vy.
Curtiss-Wright Corp., 694 F.2d 300, 304 (8d Cir, 1982); n-
dustrial Investment Development Corp. v. Mitsui & Co., 594
F.2d 48, 55 (5th Cir.), reh. denied, 599 F.2d 449 (1979), cert.
denied, 445 U.S. 908, 100 S.Ct. 1078, 63 L.Ed.2d 318 (1980).
The same conclusion applies to Northrop’s contract and tort
claims for monetary relief.
We decline to construe the act of state doctrine to shield all
violators of private agreements that involve some foreign gov-
ernmental act. As noted by the Fifth Circuit in reaching this
same conclusion:
Precluding all inquiry into the motivation behind or cir-
cumstances surrounding the sovereign act would useless-
ly thwart legitimate American goals where adjudication
would result in no embarrassment to executive depart-
* Although “seemingly commercial activity” can trigger act of
state concerns, see OPEC, 649 F.2d at 1360 (alleged oil price-fixing
by cartel of foreign nations), purely commercial activity ordinarily
does not require judicial forbearance under the act of state doctrine.
Alfred Dunhill of London, Inc. v. Cuba, 425 U.S. 682, 698 96 S.Ct.
1854, 1863, 48 L.Ed.2d 301 (1976).
30a
ment action. [Plaintiff] must only question that govern-
ment’s motivation to the extent of measuring its damage.
No ethical standard is set by which the propriety of its
decision is tested. Surely the limited nature and effect of
determining the proportional cause of plaintiffs’ damage
allocable to defendants’ conduct does not trigger the type
of special political consideration protected by the act of
state doctrine.
Id.
McDonnell’s contention that Northrop’s claims for injune-
tive relief are barred is also unpersuasive. Even if Northrop’s
harm from future misconduct would be measured solely by lost
sales, there is no reason to extend the act of state doctrine to
future decisions by foreign governments. The court need only
find a likelihood that McDonnell’s actions will cost Northrop
some amount of future sales. That finding would not create the
foreign policy tensions that the act of state doctrine was de-
signed to avoid.
A comparison of this case with OPEC and Timberlane, this
court’s most comprehensive forays into act of state analysis,
confirms that the doctrine is inapplicable here. The doctrine
compelled dismissal in OPEC because the plaintiff directly
sued a cartel of sovereign nations, charging them with violat-
ing this country’s antitrust laws, and sought to enjoin and
recover damages from the nations. 649 F.2d at 1361. In Tim-
berlane, we refused to invoke the doctrine even though the
activity complained of (conspiracy to monopolize Honduran
lumber export business) primarily involved foreign citizens,
took place in a foreign nation, and had the greatest impact on
the foreign nation. We reasoned that the plaintiff did not seek
to name any foreign nation or officer as a defendant and did not
directly challenge the foreign nation’s conduct in a way that
would threaten relations with the country. 549 F.2d at 608. We
emphasized that “there is no indication that the actions of the
Honduran [government] reflected a sovereign decision that
[plaintiff's commercial] efforts should be crippled or that trade
with the United States should be restrained.” /d.
3la
Timberlane is clearly the more analogous decision. In con-
trast to the OPEC plaintiff, Northrop does not seek monetary
or injunctive relief against any sovereign and does not ask the
court to pass judgment on any foreign sovereign’s act or policy.
As noted in Timberlane, the act of state doctrine “does not
bestow a blank-check immunity upon all conduct blessed with
some imprimatur of a foreign government”.” 549 F.2d at 606.
Ill
WORKSHARE CLAIMS
Northrop requested that McDonnell be enjoined from sub-
contracting to anyone else the share of work Northrop was
entitled to under the teaming agreements and Navy sub-
contract. Neither the district court’s opinion nor its Findings of
Fact and Conclusions of Law address Northrop’s workshare
claims. The court’s order stated that those claims “are moot
and not ripe for determination in light of [McDonnell’s] stipula-
tion of November 28, 1979.” That stipulation apparently in-
volved the parties’ respective share of the work generated by
Canadian sales.
Northrop argues that the court erred in finding that the
stipulation mooted its Canadian workshare claims and that, in
any event, the workshare claims are not limited to Canada.
McDonnell does not argue the mootness issue. It contends that
the workshare claims were properly dismissed for absence of
an indispensable party, lack of subject matter jurisdiction, and
nonjusticiability, “regardless of whether [they] were moot.”
Our disposition of the dismissal rulings relied on by McDon-
nell makes it necessary to address the mootness issue. On
*In a similar vein, the court noted that “mere governmental
approval or foreign governmental involvement which the defendants
had arranged does not provide a defense.: Jd. Accord, Continertal
Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 82 S.Ct.
1404, 8 L.Ed.2d 777 (1962); United States y. Sisal Sales Corp., 274
U.S. 268, 47 S.Ct. 592, 71 L.Ed. 142 (1927).
32a
remand, the district court should make specific findings and
conclusions regarding the scope of the stipulation and the
extent to which Northrop’s workshare claims are mooted by it.
If, as Northrop contends, the stipulation was purely pendente
lite or was limited to Canadian sales, wholesale dismissal for
mootness was clearly inappropriate.
IV
SUMMARY JUDGMENT
The district court granted McDonnell summary judgment on
the grounds that: (1) the contract-responsibility clause of the
Basic Agreement, as amplified in the August 26, 1976 Agree-
ment, was per se unreasonable under section 1 of the Sherman
Act; and (2) Northrop had failed to establish a prima facie case
of attempt to monopolize under section 2 of the Sherman Act.
We conclude that summary judgment was inappropriate on
either ground.
Before turning to the specifics of the two issues, we note by
way of overview that the summary judgment rulings reflect
two basic inconsistencies. The first inconsistency pertains to
the jurisdictional requirement of interstate commerce. The
court held that no “trade or commerce” existed for section 2
purposes because the Government exercised absolute control
over the relevant markets, yet, concomitantly, ruled that suffi-
cient interstate commerce would be restrained by Northrop’s
interpretation of the contract-responsibility clause to justify
holding the practice per se unreasonable under section 1. The
second inconsistency stems from the court holding that there
was nothing so unique about this practice or industry to war-
rant rule-of-reason analysis under section 1, but that this case
is so unlike those cases where section 2 sanctions have tradi-
tionally been applied that the section was inapplicable here.
A. Applicable Standard
Summary judgment is appropriate under Fed.R.Civ.P.
56(c) only where there is no genuine issue of material fact and
33a
the moving party is entitled to judgment as a matter of law.
Bank of California, N.A.v. W. H. Opie, 663 F.2d 977, 979 (9th
Cir. 1981); Sherman v. British Leyland Motors, Ltd., 601 F.2d
429, 438-39 (9th Cir. 1979). This court has noted that “the
showing of a genuine issue for trial is predicated upon the
existence of a legal theory which remains viable under the
asserted version of the facts, and which would entitle the party
opposing the motion (assuming his version to be true) to a
judgment asa matter of law.” Ron Tonkin Gran Turismo, Inc.
v. Fiat Distributors, Inc., 637 F.2d 1376, 1381 (9th Cir. 1981),
cert. denied, 454 U.S. 831, 102 S.Ct. 128, 70 L.Ed. 2d 109
(1982). In reviewing the record to make this determination, the
court must draw all inferences in the light most favorable to
Northrop, the party opposing the motion. Mutual Fund In-
vestors, Inc. v. Putnam Management Co., 553 F.2d 620, 624
(9th Cir. 1977). Although summary judgment is sometimes
appropriate in antitrust litigation. see, e.g., Thomsen v. West-
ern Electric Co., 680 F.2d 1263, 1265 (9th Cir. 1982); Ron
Tonkin Gran Turismo, 637 F.2d at 1381; Thi-Hawaii, Inc. v.
First Commerce Financial Corp., 627 F.2d 991 (9th Cir. 1980),
it is generally disfavored, especially when motive or intent is at
issue. See, e.g., Poller v. Columbia Broadcasting System,
Inc., 368 U.S. 464, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962); Be-
taseed, Inc. v. U. & 1. Inc., 681 F.2d 1203, 1207 (9th Cir. 1982);
A. H. Cox & Co. v. Star Machinery Co., 653 F.2d 1302, 1305
(9th Cir. 1981); California Steel & Tube v. Kaiser Steel Corp.,
650 F.2d 1001, 1003 (9th Cir. 1981).
B. Restraint of Trade
Northrop challenges the district court’s ruling that the
“contract-responsibility” clause (quoted supra at 5-6) at issue
in counts 1-3, 6, and 7 of Northrop's complaint is per se un-
reasonable as a market-allocation restraint of trade under sec-
tion 1 of the Sherman Act. We conclude that the court erred in
applying per se, rather than rule-of-reason, analysis in this
novel context.
34a
Generally speaking, the Sherman Act bans all arrangements
that are adopted to reduce competition, or which, regardless of
purpose, have a significant tendency to reduce competition.
Thus, arrangements that are adopted for and tend to achieve
other purposes are not condemned by the Act merely becuase
they carry some incidental and inconsequential restraining
effect on competition. L. Sullivan, Antitrust, $63 at 166
(1977).
Although this determination is ordinarily made through
rule-of-reason analysis—a process calling for thorough in-
vestigation of the industry at issue and a balancing of the
arrangement’s positive and negative effects on competition—
certain agreements or practices are so “plainly anticompeti-
tive,” National Society of Professional Engineers v. United
States, 435 U.S. 679, 692, 98 S.Ct. 1355, 1365, 55 L.Ed.2d 637
(1978); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S.
36, 50, 97 S.Ct. 2549, 2558, 53 L. Ed.2d 568 (1977), and so “lack
{ ] any redeeming virtue,” Northern Pacific Railway v.
United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545
(1958), that they are conclusively presumed illegal without the
need for detailed rule-of-reason analysis. Horizontal market
division, the practice claimed to exist here, is one of four main
categories of competitive restraints this court has held un-
reasonable per se. See A. H. Cor & Co. v. Star Machinery, 653
F.2d at 1305; Gough v. Rossmoor Corp., 585 F.2d 381, 386 (9th
Cir. 1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59
L.Ed.2d 494 (1979). Nevertheless, even within this class of
restraints, there are recognized circumstances where rule-of-
reason analysis remains appropriate. See, e.g., Broadcast
Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1, 99
S.Ct. 1551, 60 L.Ed.2d 1 (1978) (blanket licensing arrange-
ment between horizontal competitors not per se illegal); Turf
Paradise, Inc. vy. Arizona Downs, 670 F.2d 813, 821-24 (9th
Cir.) (as amended) (temporal market allocation provision of
lease drafted by horizontal competitors not per se illegal), cert.
denied, __. U.S. —_, 102 S.Ct. 2308, 73 L.Ed.2d 1308
(1982).
35a
Northrop argues that three such circumstances make rule-
of-reason analysis appropriate here: (1) neither the exact type
of teaming arrangement at issue in this case nor the military
aircraft industry in general have been subject to prior antitrust
scrutiny; (2) the arrangement actually enhanced competition
by introducing a new competitor, McDonnell, into a market
from which it was otherwise foreclosed; and (3) the contract-
responsibility clause is an essential aspect of, and reasonable
limitation upon, the agreement to exchange technology. We
agree that the case involves novel antitrust considerations,
and reject McDonnell’s contention that this is simply a run-of-
the-mill case of market allocation between horizontal
competitors.” We shall discuss each of these factors support-
ing the rule of reason.
1. Judicial experience with the challenged conduct: This
factor strongly supports application of rule-of-reason analysis.
As recognized in United States v. Topco Associates, 405 U.S.
596, 607-08, 92 S.Ct. 1126, 1133-34, 31 L. Ed.2d 515 (1972), and
recently reaffirmed in Broadcast Music, 441 U.S. at 9, 99S.
Ct. at 1557, “[iJt is only after considerable experience with
certain business relationships that courts classify them as per
se violations. .. .” Neither the district court nor McDonnell
point to a single instance in which the military aircraft industry
in general or Government prompted contractor teaming agree-
ments in particular have received judicial scrutiny in a Sher-
man Act context.
McDonnell reads Broadcast Music too narrowly. McDonnell
argues that because the contract-responsibility clause can be
viewed as a simple market-splitting device and because
“In doing so, we note that the contract-responsibility clause at
issue here differs significantly from the horizontal price-fixing |
arrangements the Supreme Court has uniformly subjected to per se
condemnation. See, e.g., Arizona v. Maricopa County Medical Soci-
ety, ___ U.S. —__.,, 102 S.Ct. 2466, 73 L. Ed.2d 48 (1982); Catalano,
Inc. v. Target Sales, Inc., 446 U.S. 643, 100 S.Ct. 1925, 64 L.Ed.2d
580 (1980) (per curiam).
36a
market-splitting devices have been held per se unreasonable in
other contexts, per se treatment was appropriate here. Ac-
cording to McDonnell, a court need go no further than
determining the general type of “practice” at issue in decid! ig
whether to apply rule-of-reason analysis. This is precisely the
type of “literalness” expressly condemned in Broadcast Music:
The Court of Appeals’ literal approach does not alone
establish that this particular practice is one of those types
or that it is “plainly anticompetitive” and very likely with-
out “redeeming virtue.” Literalness is overly simplistic
and often overbroad.
“(i]t is only after considerable experience with certain
business relationships that courts classify them as per se
violations... ." See White Motor Co. v. United States, 372
U.S. 253, 263 [83 S.Ct. 696, 702, 9 L. Ed.2d 738] (1963). We
have never examined a practice like this one before; in-
deed, the Court of Appeals recognized that “ijn dealing
with performing rights in the music industry we confront
conditions both in copyright law and in antitrust law which
are sui generis.” 562 F.2d, at 132. And though there has
been rather intensive antitrust scrutiny of ASCAP and its
blanket licenses, that experience hardly counsels that we
—— outlaw the blanket license as a per se restraint of
trade.
441 U.S. at 9-10, 99 S.Ct. at 1557,
In Maricopa County, the Court rejected the contention that
it should not apply the usual per se rule against horizontal price
fixing because the judiciary had little antitrust experience with
the health-care industry. The Court rejected the argument
because “ ‘so far as price-fixing agreements are concerned,
[the Sherman Act] establishes one uniform rule applicable to
all industries alike.’ __. U.S. at —__, 102 S.Ct. at 2476,
quoting United States v. Socony-Vacuum Oil Co., 310 U.S.
150, 222, 60 S.Ct. 811, 843, 84 L.Ed. 1129 (1940). The Court
was careful to point out, however, that its decision “should not
be confused with the established position that a new per se rule
is not justified until the judiciary obtains considerable rule of
37a
reason experience with the particular type of restraint chal-
lenged.” ____ U.S, at ___., 102 S.Ct. at 2476 n. 19 (emphasis in
the original). We find no significant judicial rule-of-reason
experience with either the particular practice or industry at
issue here and therefore conclude that imposing a new per se
rule would be premature.
2. Effect on competition: This is the most troubling and
conceptually elusive of the three factors. Echoing the district
court, McDonnell argues that the agreements destroy
competition because they split the market into product
categories—limiting Northrop to selling land-based F-18L's
and McDonnell to selling carrier-suitable F-18A’s. Although
tenable, the argument is overly simplistic and is not an entirely
accurate reading of either the agreements or the relief sought
by Northrop.
The critical inquiry in determining whether per se con-
demnation should be extended to a previously unexamined
business practice is whether the “practice facially appears to
be one that would always or almost | ways tend to restrict
competition and decrease output, . . . or instead one designed
to ‘increase economic efficiency and render markets more,
rather than less, competitive.’ " Broadcast Music, 441 U.S. at
19-20, 99 S.Ct. at 1562 (citations omitted). Accord, Krehl v.
Baskin-Robbins Ice Cream Co., 664 F.2d 1348, 1356 (9th Cir.
1982). In making this inquiry, we are mindful of the Court’s
admonition that “departure from the rule-of-reason standard
must be based upon demonstrable economic effect rather than
. . . upon formalistic line drawing.” Continental T.V., Inc. v.
GTE Sylvania Inc., 433 U.S. 36, 58-59, 97 S.Ct. 2549, 2561-62,
53 L.Ed.2d 568 (1977).
The agreements call for a joint effort by both “teammates” in
the production and sale of al! F-18's. The agreements allocate
which party may act as prime contractor and which is principal
subcontractor (depending on the type of F-18); they do not
foreclose, at least in the traditional market-splitting sense,
these competitors from competing in regard to their respective
38a
versions of the jointly developed F-18 fighter concept. There is
evidence, which must be accepted as true at this posture of the
proceedings, that the agreements have not eliminated head-to-
head competition in international markets between the two
variants of the joint F-18 development effort—a surprisingly
procompetitive occurrence in an industry typified by single-
source products.* For example, Canada, the first international
purchaser of an F-18, chose McDonnell’s carrier-suitable F-
18A over Northrop’s land-based F-18 even though it intended
to base the aircraft on land. The market appeal of carrier-
suitable aircraft for land-based operation was demonstrated
during the 1970's by McDonnell’s successful marketing of its
carrier-suitable F-4 “Phantom” for land-based use.
More important, however, is the fact that but for the team-
ing effort General Dynamics and other manufacturers of air-
craft fitting the same general buyer needs as the F-18 would
have had neither F-18 variant to compete against. Thus, not
only do the agreements not preclude all competition between
the parties’ respective variants of the F-18, they actually fos-
ter competition by allowing both parties to compete in a mar-
ket from which they were otherwise foreclosed.”
Thus, McDonnell’s impact-on-conipetition argument is
misleading in the special context of this industry and practice.
For although the agreements suppress competition between
*The record indicates that almost every military aircraft mar-
keted by an American manufacturer since World War II has, for all
practical purposes, been available from only a single source. One
obvious reason for this phenomenon is the magnitude of the economic
and technological bases necessary to enter the military aircraft mar-
kets where a single product such as the F-18 reflects nearly a decade
of development and sells for over $15 million each.
* Moreover, the agreements do not impinge upon the parties’
unfettered right to develop and market aircraft suitable for any type
of basing so long as the new aircraft are not “of basically the same
configuration” as the team produced F-18 (see © 3 of the Basic Agree-
ment).
39a
the parties in the sense that they designate which party will be
the prime contractor for different versions of the F-18, there
would be no competition but for the agreements. As noted by
one deponent:
The agreements between Northrop and [McDonnell] do
not have the effect of limiting competition to an extent
greater than the naturally existing limitations brought
about by ... the Congressional mandate limiting the
Navy to choosing between a General Dynamics YF-16 and
a Northrop YF-17. Without the opportunity of teaming
with Northrop, [McDonnell] would not have been able to
participate in the Navy competition and would not be ina
position to participate in sales of current generation YF-
17 type fighters either in the United States or abroad.
Given this evidence, it would be a reversion to the kind of
“formalistic line drawing” eschewed in GTE Sylvania, 438
U.S. at 58-59, 97 S.Ct. at 2561-2562, to hold this novel teaming
arrangement a per se violation of the Sherman Act solely
because it arguably has some characteristics of a horizontal
restraint.
Where the effect on competition is equivocal, it is appropri-
ate to examine the purpose of the restraint in deciding whether
to apply the per se rule Broadcast Music, 441 U.S. at 19-20, 99
S.Ct. at 1562-1563. The teaming effort at issue here was done
at its customer's request (the Government). The undisputed
purpose of the teaming effort was to develop a particular
weapons system desired by the Government. There is evi-
dence that the contract-allocation clause was included to avoid
repeating a previous military-aircraft contracting “fiasco”™
that occurred due to lack of teaming, not to suppress competi-
tion. Thus, viewing the evidence in the light most favorable to
Northrop, the agreements are not the sort of “naked restraint
of trade with no purpose except stifling competition,” White
” This occurred when a single contractor was unable to resolve the
conflicting design demands of producing variants of a single aircraft
for both the Air Force and Navy.
40a
Motor Co., 372 U.S. at 263, 83 S.Ct. at 702, for which per se
condemnation is appropriate.
We note by way of conclusion on this point, without deciding
on the basis of the incomplete record before us, that there is a
question as to whether it even matters if the agreements
foreclosed some competition between Northrop and McDon-
nell. In distinguishing the price-fixing practice fashioned by
the health-care foundation in Maricopa County from the
blanket licenses in Broadcast Music, the Court stated that:
The foundations are not analogous to partnerships or
other joint arrangements in which persons who would
otherwise be competitors pool their capital and share the
risks of loss as well as the opportunities for profit. In such
joint ventures, the partnership is regarded as a single firm
competing with other sellers in the market.
Maricopa County, —_ U.S. at , 102 S.Ct. at 2479-80. As
the Court notes, affiliated businesses cannot be held to con-
spire with each other where they function as essentially a
single economic unit. Accord, Murray v. Toyota Motor Dis-
tributors, Inc., 664 F.2d 1377, 1379 (9th Cir.) (per curiam),
cert. denied, U.S. , 102 S.Ct. 2905, 73 L.Ed.2d 1314
(1982). See also Thomsen v. Western Electric Co., 680 F.2d
1263, 1266 (9th Cir. 1982). No adverse effect on competition
need be shown here if it develops on remand that, despite the
disavowal of a joint venture contained in the agreement,
Northrop and McDonnell should be viewed as “teammates”
constituting a single economic unit for purposes of the F-18
market.
3. Limitation upon license of technology: As an additional
basis for holding per se treatment inappropriate, Northrop
argues that the agreements are reciprocal licenses of technol-
ogy and that the contract-responsibility clause is a reasonable
use limitation. Reciprocal license agreements are not per se
violations if the technology was otherwise unobtainable by the
licensee (McDonnell) and the use limitation is “reasonable.” A
& E Plastik Pak Co. v. Monsanto Co., 396 F.2d 710, 715 (9th
Cir. 1968).
dla
McDonnell argues that the YF-17 technology transferred by
Northrop was otherwise available to McDonnell, albeit in less
useful form, because the Government had purchased unlimited
rights in such technology. McDonnell argues further that the
use limitations sought by Northrop are unreasonable because:
(1) they are broader and of longer duration ‘arguably for as
long as F-18’s can be marketed) than is necessary to protect
Northrop’s legitimate interests; (2) the F-18 product they are
sought to be imposed on is far different from the “paper”
technology and YF-17 prototype technology provided by
Northrop; (3) the Government provided the business oppor-
tunity /i.e., the chance to compete for the Navy contract), not
Northrop; and (4) territorial restraints are unreasonable
where the parties receive their guid pro quo in the mutual
exchange of valuable information.
The fatal weakness in McDonnell’s argument is that, al-
though advanced in support of summary judgment, it hinges on
bitterly contested facts. Also, McDonnell’s position regarding
the availability of the technology appears somewhat
disingenuous—for if the technology was readily obtainable and
usable, why do the memoranda by McDonnell’s top executives
indicate the necessity of teaming to obtain the technology?
Although Northrop’s licensing theory alone is probably an
insufficient reason to require rule-of-reason analysis, it does
add weight to the other factors, especially the argument that
the antitrust implications of such teaming/technology licensing
arrangements in the military aircraft industry are sui generis.
C. Attempt to Monopolize
Northrop contends that McDonnell breached the agree-
ments in such a manner as to attempt to monopolize the F-18
market.*' McDonnell argues that even if its conduct con-
travened the terms of the agreements, there was sufficient
\ See footnote 6 supra, and accompanying text for a more specific
description of Northorp’s claims.
42a
governmental involvement by regulation and licensing of for-
eign sales efforts to support dismissal.
The parties characterize the district court's ruling very dif-
ferently. Northrop contends that the court held that McDon-
nell’s conduct in the F-1&8 markets was “immune” from section 2
of the Sherman Act because the military aircraft industry is
subject to such pervasive federal regulation. McDonnell
argues that the ruling is based, not on animmunity theory, but,
rather, on the conclusion that two of the requisite elements of
attempted monopolization are absent—namely, “dangerous
probability of success” and “monopolistic intent.”
Careful study of the district court’s opinion and findings fails
to disclose the exact basis for the ruling. The truth appears to
lie somewhere between the extremes advocated by the par-
ties.
The most tenable reading of the district court’s opinion is
that, although the court based its decision on the pervasive role
of the government in the military-aircraft industry (rather
than on the absence of the elements of attempt to monopolize),
it did not squarely base its decision on immunity grounds. * The
court appears to have reasoned that the Government so con-
trols the normal competitive process—from the inception of
the F-18 design to its eventual marketing—that no “trade or
commerce” as defined by the Sherman Act exists. “ The district
court’s ruling is erroneous regardless of whether it is evaluated
® This reading of the decision is corroborated by the absence of any
direct immunity analysis or case law references in the opinion and by
the fact that McDonnell did not explicitly argue for immunity in the
lengthy memorandum it submitted in support of its motion for sum-
mary judgment.
“In the district court’s words:
The concern of product and geographic market from the tradi-
tional antitrust viewpoint becomes unimportant here for one
very basic reason. The United States Government has the abso-
45a
as being based on “trade or commerce,” “immunity,” or “fail-
ure to prove a prima facie case” grounds.
1. Interstate commerce: Viewing the record in the light
most favorable to Northrop, we cannot conclude as a matter of
law that Northrop’s section 2 claim fails for lack of a sufficient
nexus with interstate commerce. Neither party disputes the
district court's findings that the relevant product market is the
“F-18 weapons system” and that the relevant geographic mar-
ket is “arguably the world.” 498 F.Supp. at 1123. The fact that
the Government exercises significant control over the entry of
private parties into these markets does not mean that there is
no trade or commerce involved in competing in such markets.
As noted by Northrop, there is undisputed evidence that the
F-18 is being assembled in at least two different states, using
materials and components shipped by vendors from all over the
country and world. The Supreme Court has repeatedly ob-
served that, consonant with the broad purposes of the anti-
trust laws, almost any activity that has “interstate incidents”
lute and over-riding potential of the product that brings these
parties into vitriolic conflict.
What strikes the Court under such circumstances is that there
is not the “trade or commerce among the several States, or with
foreign nations” essential to antitrust concerns of monopoliza-
tion including the critical inquiry here—attempt to monopolize.
The United States Government is the market concerned with
production and distribution of weapons systems for governmen-
tal military establishments. As such, this differs from the basic
thrust of antitrust laws applicable to governmental procurement
practices in competition with consumer enterprises buying
goods generally available in the marketplace.
... No single group of producers has any power to expand a
market share Coven that considered by the United States
Government in the implementation of domestic defense and
foreign policy which is in the best interest of its citizens.
Political considerations aside, the monopoly, ifany, enjoyed or
threatened by MDC is a governmental creation outside the
reaches of the Sherman Act Section 2.
498 F.Supp. at 1123 (footnote omitted) (emphasis is in the original).
dda
satisfies the Sherman Act’s jurisdictional requirement. See,
e.g., McClain v. Real Estate Board of New Orleans, Inc., 444
U.S. 232, 100 S.Ct. 502, 62 L.Ed.2d 441 (1980); Hospital
Building Co. v. Trustees of Rex Hospital, 425 U.S. 738, 96
S.Ct. 1848, 48 L.Ed.2d 338 (1976). Accord, Community Buil-
ders, Inc. v. City of Phoenix, 652 F.2d 823, 827 (9th Cir. 1981)
(need only affect a “not insubstantial” amount of interstate
commerce).
The fact that the Government is the sole domestic purchaser
and reg:!ates foreign F-18 sales does not mean that no market
exists * | :acompetitor can attempt to monopolize. A manu-
facturer ean attempt to monopolize a market by eliminating
competition through predatory actions regardless of the prod-
uct’s sophistication and the limited number of its potential
customers. The record does not indicate as a matter of law that
the military aircraft industry enjoys some sort of natural mo-
nopoly that renders inapplicable the premise of the antitrust
laws that competition will assure the consumer the best prod-
uct at the lowest price.
The Record is replete with evidence regarding the competi-
tive nature of the military aircraft industry. The Air Force and
Navy competitions alone are evidence of the competitive proc-
ess fostered by the Government to ensure its choice of the best
weapons system at the lowest cost. In foreign F-18 markets,
the Government's role is limited to determining what technolo-
gies may be exported to what countries. Once this determina-
tion is made, the Government allows the foreign buyer to
choose freely between the competing offerings of exportable
technologies.
2. Implied immunity: To the extent, ifany, that the district
court’s decision can be viewed as a determination that Con-
gress intended to confer blanket antitrust immunity on private
conduct in the military aircraft industry by virtue of its ex-
tensive regulation of that industry, the decision is in error.
Although there are no reported antitrust decisions involving
45a
this industry, treatment of the immunity question in regard to
other regulated industries is instructive.”
Courts have generally framed the immunity issue in terms of
whether Congress intended to repeal the antitrust laws with
respect to the particular industry when it enacted the regulato-
_ ry scheme. Phonotele, Inc. v. American Tel. & Tel. Co., 664
F.2d 716, 726, 731-32 (9th Cir. 1982) (as amended). See general-
ly Comment, The Application of Antitrust Law to Telecommu-
nications, 69 Calif.L.Rev. 497, 505-14 (1981). Antitrust im-
munity is disfavored and “can be justified only by a convincing
showing of clear repugnancy between the antitrust laws and
the regulatory system.” National Gerimedical Hospital v.
Blue Cross of Kansas City, 452 U.S. 378, 388, 101 S.Ct. 2415,
2421, 69 L.Ed.2d 89 (1981), quoting United States v. National
Association of Securities Dealers, 422 U.S. 694, 719-20, 95
S.Ct. 2427, 2442-43, 45 L.Ed.2d 486 (1975). Pervasive regula-
tion of an industry alone is insufficient to confer blanket im-
munity on every action taken within the industry. Otter Tail
Power Co. v. United States, 419 U.S. 366, 372-75, 93 S.Ct.
1022, 1027-28, 35 L. Ed.2d 359 (1973); United States v. R.C.A.,
358 U.S. 334, 346, 79 S.Ct. 457, 464, 3 L.Ed.2d 354 (1959).
Immunity is especially disfavored where the antitrust implica-
tions of a business decision are neither compelled nor explicitly
4 In looking at the treatment accorded other regulated industries,
we are cognizant of Professor Sullivan’s warning that:
It is important to recognize that there is no single conception
which defines the scope of the exemption for a regulated indus-
try. Although one can draw on case law from one industry for
guidance as to outcome in another, there are, in a sense, as many
sets of exemption doctrines as there are industries subject to
state or federal regulation. In each industry the process of
accommodating regulatory doctrine to antitrust doctrine is re-
sponsive to particulars such as those here referred to and, in
some degree no doubt, to the degree of confidence which the
court has in the quality of the regulatory performance by the
particular regulatory agency.
Antitrust, supra, § 239 at 743-44.
46a
approved by a governmental regulatory body. Gerimedical
Hospital, 452 U.S. at 389, 101 S.Ct. at 2421-22; National
Association of Securities Dealers, 422 U.S. at 730-34, 95 S.Ct.
at 2448-50; Gordon v. New York Stock Exchange, 422 U.S. 689,
689-90, 95 S.Ct. 2598, 2614-15, 45 L. Ed.2d 463 (1975). Immun-
ity from the antitrust laws is justified only where necessary to
ensure that the regulatory scheme works, and even then only
to the minimum extent necessary. Si/ver v. New York Stock
Exchange, 373 U.S. 341, 357, 83 S.Ct. 1246, 1257, 10 L.Ed.2d
389 (1963).
Applying these standards to the present case (lemonstrates
the inappropriateness of granting blanket immunity, especial-
ly at the summary judgment stage. Although both McDonnell
and the district court speak at length about the extensive
matrix of federal regulations under which the military aircraft
industry operates, neither points to a single instance in which
the predatory conduct alleged by Northrop was either compel-
led or directly approved by a governmental body.
As we noted in rejecting a similar immunity claim in Pho-
notele:
Antitrust immunity is not conferred by the bare fact that
defendants’ activities might be controlled by an agency
having broad powers over their conduct. There is no
_— presumption that Congress intends the antitrust
aws to be displaced whenever it gives an agency regulato-
ry authority over an industry... . the area of immunity
from antitrust laws is not coterminous with areas of agen-
cy jurisdiction or agency expertise.
664 F.2d at 729 (citations omitted). A regulatory mandate
sufficient to confer implied antitrust immunity may in some
cases exist where there is explicit congressional approval of
the challenged conduct and its ultimate anticompetitive effect,
and there is no inconsistency or “plain repugnancy” between
the conduct and the express policies of the regulating body. /d.
at 731-32. As in Phonotele, no such mandate is evident here.
47a
The principal regulatory provisions pertaining to the milita-
ry aircraft industry are the International Security Assistance
and Arms Export Control Act (“ISAAEC Act”), 22 U.S.C.
$$ 2751 et seq., implemented, inter alia, by the International
Traffic In Arms Regulations (“ITARS”), 22 C.F.R. §§ 121.01
et seq. (1981), and the Armed Services Procurement Act (“ASP
Act”), 10 U.S.C. $§ 2301 et seq., implemented by ASP Regula-
tions (“ASPR”), 32C.F.R. §§ 1-100 et seq. (1981). These provi-
sions contain no affirmative indication that Congress intended
to modify or eclipse the application of the antitrust laws to the
military aircraft industry. Indeed, there are several indica-
tions that Congress intended private conduct in the industry to
be subject to the antitrust laws. For instance, the ITARS
require the inclusion of a clause in all technical assistance
agreements that expressly acknowledges that license approval
by the Office of Munitions Control is not to be construed as
“passing on the legality of the agreement from the standpoint
of antitrust laws.” 22 C.F.R. § 124.11(d) (1981). Similarly, the
ASP Act provides that a military procuring agency must notify
the Attorney General whenever the agency has reason to
believe that a “violation of the antitrust laws” has occurred. 10
U.S.C. § 2305(d). Finally, ASPR § 4-117, which describes and
authorizes “contractor team arrangements” and was the basis
for the agreements now in issue, provides that “[t ]hese [team-
ing] policies do not authorize arrangements in violation of
anti-trust statutes... .”” ASPR § 4-117(b).
The Court held in Otter Tail that because the regulatory
scheme in question preserved the right of voluntary action by
private actors, its pervasiveness could not be construed to
* Another factor militating against immunity is the apparent in-
adequacy or nonexistence of agency structures to remedy
anticompetitive behavior in the military aircraft industry. See
Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213, 224,
86 S.Ct. 781, 787, 15 L. Ed.2d 709 (1966), modified, 383 U.S. 932, 86
S.Ct. 781, 15 L. Ed.2d 709 (1966); Phonotele, 664 F.2d at 734-35. See
also, Comment, supra, 69 Calif.L.Rev. at 511.
4éa
mean that the scheme was intended to supplant the antitrust
laws. 410 U.S. at 373, 93 S.Ct. at 1027. A similar conclusion is
warranted in this case. Where, as here, the challenged conduct
is the product of the regulated business’ independent initiative
and choice, it is properly subject to antitrust scrutiny. Pho-
notele, 664 F.2d at 735 n. 49.
3. Prima facie case of attempt to monopolize: In addressing
this issue, it is appropriate to bear in mind the admonition that
summary judgments are most disfavored in antitrust cases
where, as with this issue, “motive and intent play leading
roles.” California Steel & Tube, 650 F.2d at 1003, At least two
elements of proof are indispensable to make out a prima facie
case of attempt to monopolize: (1) specific intent to control
prices or destroy competition, and (2) predatory conduct de-
signed to accomplish that unlawful purpose. Blair Foods, Inc.
v. Ranchers Cotton Oil, 610 F.2d 665, 669 (9th Cir, 1980):
Greyhound Computer Corp. v. IBM Corp., 559 F.2d 488, 504
(9th Cir. 1977), cert. denied, 434 U.S. 1040, 98 S.Ct. 782, 54
L. Ed.2d 790 (1978). Although this court has periodically stated
that dangerous probability of successful monopolization is also
an indispensable element, e.g., William Inglis & Sons Baking
Co. v. ITT Continental Baking Co., 668 F.2d 1014, 1027 (9th
Cir.) (as amended), petition for cert. filed, U.S. 103
S.Ct. , 74 L.Ed.2d __, 50 U.S.L.W. 3998.03 (U.S. June
11, 1982) (No. 81-2289); Janich Bros., Inc. v. American Dis-
tilling Co., 570 F.2d 848, 853 (9th Cir. 1977), cert. denied, 439
U.S. 829, 99 S.Ct. 103, 58 L.Ed.2d 122 (1978), there is also
Ninth Circuit authority for the view that probability of success
is merely circumstantial evidence of intent. E. g., Forro Preci-
sion, Inc. v. IBM Corp., 673 F.2d 1045, 1059 (9th Cir. 1982):
Blair Foods, Inc., 610 F.2d at 669; Lessig v. Tidewater Oil Co..
327 F.2d 459, 474 (9th Cir.), cert. denied, 377 U.S. 993, 848.Ct.
1920, 12 L.Ed.2d 1046 (1964).” We need not add further fuel to
” The significance of the dangerous-probability-of-success inquiry
“has been controversial ... within this circuit.” Hunt-Wesson
Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 925 (9th Cir. 1980),
cert, denied, 450 U.S. 921, 101 S.Ct. 1369, 67 L.Ed.2d 348 (1981).
49a
the controversy by adding our opinion regarding the inquiry’s
proper significance, because, as discussed below, there was
sufficient evidence of McDonnell’s probability of success to
avoid summary judgment. Finally, evidence of market power,
while not essential, may suggest the existence of specific intent
to monopolize. Janich Bros., 570 F.2d at 853. The interplay
between these elements is exhaustively discussed in Con-
tinental Baking, 668 F.2d at 1027-31 (“Each element interacts
with the others in significant and unexpected ways”, id. at
1027).
Although specific intent may be demonstrated by direct
evidence of unlawful design, if corroborated, Continental Bak-
ing, 668 F.2d at 1028, intent is, for practical reasons, more
commonly proven through circumstantial evidence such as by
inference from predatory conduct and market power. Forro
Precision, 673 F.2d at 1059; California Computer Products v.
IBM Corp., 613 F.2d 727, 736-37 (9th Cir. 1979). The combina-
tion of direct and circumstantial evidence of McDonnell’s intent
was sufficient to avoid summary judgment. The memoranda
prepared by top McDonnell executives offer strong direct evi-
dence of McDonnell’s alleged intent to monopolize. The record
also contains evidence that McDonnell possesses great lever-
age in the relevant market and, through its allegedly predato-
ry actions, has a dangerous probability of successfully
monopolizing that market. These latter factors offer additional
evidence in support of Northrop’s allegation of monopolistic
intent. See Biair Foods, 610 F.2d at 669.
Northrop’s assertions in the pleadings of predatory conduct
are also adequate to avoid summary judgment. We cannot
accept McDonnell's contention that its alleged breaches of the
agreements, fraud in the inducement, and various other unfair
practices could not be found predatory in the circumstances of
this case. The alleged activity is clearly conduct “without
legitimate business purpose.” Janich Bros., 570 F.2d at 853.
McDonnell's argument is unpersuasive for two reasons. First,
McDonnell appears to concede that this alleged conduct would
be predatory if, as we have already determined, it enjoyed
50a
market power. See Hunt-Wesson Foods, Inc. v. Ragu Foods,
Inc., 627 F.2d 919, 925 (9th Cir. 1980), cert. denied, 450 U.S.
921, 1018S. Ct. 1369, 67 L. Ed.2d 348 (1981). Second, McDonnell
focuses too closely on each of the individual practices com-
plained of without reference to the intent motivating them or
to their overall effect on Northrop’s ability to remain McDon-
nell’s principal competitor in the F-18 market. Cf. Continental
Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699,
82 S.Ct. 1404, 1410, 8 L.Ed.2d 777 (1962) (plaintiff should be
given “the full benefit of [its] proof without tightly
compartmentalizing the various factual components. . . .”).
V.
MCDONNELL’S CROSS-APPEAL
McDonnell concedes that most of its counterclaim is a “mir-
ror image” of Northrop’s complaint and that the disposition of
one should be consistent with the other. The disposition of the
motions to dismiss and for summary judgment of Northrop’s
complaint dictated that the counterclaim be treated similarly
in that it was subject to the same perceived flaws. In light of
our reversal of the district court’s rulings on Northrop’s
claims, it is necessary to remand for further consideration of
the counterclaim. ”
VI
CONCLUSION
We reverse the district court’s dismissal and summary judg-
ment rulings as to Northrop’s complaint and MecDonnell’s coun-
* In the two limited aspects of the counterclaim that can arguably
be construed as non-mirror images of Northrop’s claims, McDonnell
essentially sought an affirmative declaration of what the court held
below. Had we affirmed the district court in regard to Northrop’s
complaint, there may have been some justification for treating those
two claims as non-mirror images. Given the present posture of the
case, however, summary treatment of those aspects of the countere-
laim is unwarranted.
5la
terclaim; affirm the denial of the motion to modify finding of
fact #31;" and remand the matter for further proceedings
consistent with this opinion.
REVERSEL, in part: AFFIRMED, in part: and RE-
MANDED.
court to strike the words “Northrop claimg that” from the beginning
of the second sentence of MeDonnell's proposed finding of fact #31.
The finding goes on to say that both parties intended the agreements
to limit McDonnell to marketing car "er-suitable aircraft and North-
rop to land-based aircraft. The disurict court denied McDonnell’s
motion to reinstate the deleted phrase. Although conceding that the
phrase “is not material to the [district] court's orders”, McDonnell
argues that the deletion is inconsistent with other findings that the
parties intended different interpretations of the Agreements and
sought different relief based upon their respective interpretations.
* McDonnell contends that it was clearly grroneous for the district
McDonnell’s objection to the deletion is apparently aimed at
protecting itself from being caught in contradictory positions in
responding to Northrop’s claims and in pressing its own countere-
laims. Our disposition of this appeal renders this fear more illusory
than real. For this and other reasons, we find no abuse of discretion.
52a
ORDER AMENDING OPINION OF NINTH CIRCUIT
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Nos. 81-5165 &
81-5172
NORTHROP CORPORATION,
Plaintiff Appellant/Cross-Appellee,
v.
McDonneEci DovGlas CORPORATION,
Defendant Appellee Cross-Appellant.
ORDER
Before: POOLE and BOOCHEVER, Circuit Judges, and
SOLOMON, ”* Senior District Judge.
IT IS HEREBY ORDERED that the opinion in
the above entitled case, reported at 700 F.2d 506, be
amended as follows:
1. Page 519, column 1, paragraph 1, between
“Td.” at line 3 and “Because” at line 4, insert:
Our standard of review of the district court’s decision is
abuse of discretion. Bakia v. County of Los Angeles, 687
F.2d 299 (9th Cir. 1982) ( per curiam), and Walsh v. Cen-
teio, 692 F.2d 1239 (9th Cir. 1982). We hold that the court
abused its discretion in holding that the government is a
necessary party.
2. Page 529, column 1, paragraph 3, at line 8, insert a
period after “Government”, deleting that portion of the sent-
ence now reading ", and with the antitrust approval of the
Government’s legal staff.”
* Honorable Gus J. Solomon, Senior United States District Judge
for the District of Oregon, sitting by designation.
53a
OPINION OF DISTRICT COURT
UNITED STATES DISTRICT COURT
C.D, CALIFORNIA
Civ. A. No. 79-4145-R.
NORTHROP CORPORATION,
Plaintiff,
v.
McDonNeELL DovuGLAs CORPORATION,
Defendant.
Overton, Lyman & Prince, Peter Brown Dolan, Frederick
A. Clark, Los Angeles, Cal., Crowell & Moring, Eldon H.
Crowell, W. Stanfield Johnson, Washington, D.C., Sheppard,
Mullin, Richter & Hampton, Don T. Hibner, Jr., William M.
Elliott, Robert B. Watts, Jr., Northrop Corporation, Los
Angeles, Cal., for Northrop.
Bryan, Cave, McPheeters & McRoberts, George 8. Hecker,
Robert F. Scoular, Charles A. Weiss, Francis M. Gaffney, Los
Angeles, Cal., St. Louis, Mo., Kadison, Pfaelzer, Woodard,
Quinn & Rossi, John J. Quinn, Richard K. Simon, Ellen B.
Friedman, Los Angeles, Cal., for McDonnell Douglas.
OPINION
REAL, District Judge.
Plaintiff NORTHROP CORPORATION (NORTHROP)
filed suit complaining in eight causes of action of its First
Amended Complaint that defendant McDONNELL DOUG-
LAS CORPORATION (MDC) has violated an agreement in
which NORTHROP would have the exclusive sales rights of
the F-18 aircraft of suitable configuration for land operation
and MDC would limit its sales to F-18 aircraft that are “carrier-
suitable.” NORTHROP asks for injunctive relief and damages
resulting from MDC’s alleged (1) violation of this agreement;
dda
(2) misappropriation of NORTHROP’s property: (3) fraud in
the inducement of a Teaming Agreement and Basic Agree-
ment; (4) attempt to monopolize the F A-18A and the F-18L
fighter aircraft market; and (5) unfair competition. In addition
NORTHROP seeks a declaration of the respective rights of the
parties under its Basic Agreement of June 27, 1975 with MDC,
an accounting of the profits earned by MDC by reason of its
fraudulent acquisition of NORTHROP’s proprietary technol-
ogy and breach of trust and recovery in quantum meruit for
materials and services rendered to MDC for which NORTH-
ROP has not been compensated.
MDC has moved to dismiss the First Amended Complaint on
various grounds and alternatively moves for Summary Judg-
ment. Each ground will be handled separately in this opinion
although the lines between dismissal and summary judgment
on the various counts may occasionally become somewhat
blurred.
The Odyssey into this litigation begins in NORTHROP’s
Think Tank in 1965. In that year NORTHROP began develop-
ment of a new lightweight supersonic fighter aircraft for pur-
chase by the United States and sale in the international weap-
ons system market. The design efforts produced a P-530 and
P-630 aircraft concept in 1969 prompting the United States Air
Force to undertake an Air Combat Fighter, or “ACF,” Pro-
gram for prototype development of lightweight fighter air-
craft.
NORTHROP submitted a proposal to the Air Force based
upon its P-530 design and in 1972 was given a contract for a
prototype ACF aircraft denominated the YF-17. NORTHROP
was paid approximately 39 million dollars for its work on two
prototype YF-17 aircraft. Simultaneously GENERAL
DYNAMICS CORPORATION was awarded a prototype con-
tact for its proposed YF-16. Both of these development con-
tracts were limited to design of an airplane for land-based use.
MDC did not enter the competition for Air Force research and
development contracts relying on its own assessment that its
20a
F-15 and F-4 would adequately fill its competitive needs
through the 1980s. Any development by MDC in the meantime
was limited to improving the technology embraced within its
F-15 design.
The United States Navy in 1973 had decided to develop a
new lighter weight aircraft for its carrier fleet. Requested
funding for what was to be named as the Navy Air Combat
Fighter of NACF program’ brought Congress to the realiza-
tion that the development of individual technology between
the various armed services utilizing aircraft was not cost effi-
cient. By directive Congress required the Navy to make max-
imum use of the paid-for technology developed in the ACF
program. With that kind ofa stricture upon the Navy’s devel-
opment needs the data, technology and hardware of only two
aircraft was available for use in the NACF competition i.e.,
NORTHROP’s YF-17 and GENERAL DYNAMICS’ YF-16.
In June 1974 the Navy published to the aerospace industry a
pre-solicitation notice with a set of requirements for its NACF
competition. Congress had severely limited Navy funding to
supplementing YF-16 and YF-17 technology and so the Navy
was required to look to what a MDC executive described as the
only “crap game in town.” What the Navy faced was a crap
game in which the two potential participants did not know how
to play. As a way out of its dilemma the Navy used its persua-
sive abilities to convince both NORTHROP and GENERAL
DYNAMICS to look to a partnership with some aircraft manu-
facturer that had experience in the design, development and
manufacture of carrier-suitable aircraft. This brought on the
industrial courtship and marriage of NORTHROP and MDC.
Who was the pursued and who the pursuer is disputed by the
parties. The undisputed fact is a neutral view that they desper-
ately needed each other if they—jointly and severally—were
to succeed in tapping the great potential of the oppoi tunity
'This program started with the acronym VFAX. It was later
changed to NACF. For the purpos 2s of clarity the entire program
will be referred to by its last acronym: NACF.
56a
presented by the Navy's need for a new aircraft to meet the
military seapower needs of the nation.
On October 2, 1974 NORTHROP and MDC executed a
Teaming Agreement “to team for the purpose of developing,
proposing and producing a USAF derivative of the YF-17
(USAF ACF) and a carrier-suitable version of the YF-17
(USN ACF) to satisfy U.S. Navy VFAX requirements.” This
agreement by its own terms was to terminate on June 30, 1975
unless mutually extended.
The team effort had a dual purpose. It was to be a joint effort
of NORTHROP and MDC to successfully design fighter air-
craft for both the Navy and Air Force utilizing derivatives of
the YF-17 technology developed by NORTHROP. To fulfill
the obligations of the Teaming Agreement NORTHROP pur-
sued the Air Force ACF competition while MDC turned its
efforts to the design responsibilities involved in the Navy
NACF program.
As competition goes there are winners and losers. !n Janu-
ary 1975 NORTHROP found itself losing the Air Force ACF
competition to GENERAL DYNAMICS. MDC was notified
on May 2, 1975 that it had won the Navy NACF competition.
This latter event was the birth of the F-18.
In what has been denominated the “Basic Agreement” ex-
ecuted June 27, 1975 the parties agreed:
3. Contract Responsibilities
(a) ...that MDC will be prime contractor in connection
with contracts with the U.S. Navy for the develop-
ment of the F-18 and for the production of those F-18
aircraft purchased by the U.S. Navy for its own use.
Furthermore, in the event a foreign customer desires
to procure from MDC... F-18 aircraft of basically
the same configuration . . . MDC will be prime con-
tractor...
(b) NOC may elect to be prime contractor on any or all
contracts for the development and production of air-
57a
craft derived from the NOC YF-17 other than those
referred to in paragraph (a) above.
It is this market sharing provision that underlies the present
disputes between NORTHROP and MDC.
The Basic Agreement mutually obligated MDC and
NORTHROP to exchange design, design analysis and test
data on the F-18 and YF-17 technology. The parties made clear
that the relationship created was not “in any manner intended
to create a joint venture or otherwise incur or imply joint or
several liability.”
In answer to the award of the Navy NACF competition to
the MDC-NORTHROP team the government awarded a
prime contract in excess of $1.063 billion dollars to MDC to
fully design and develop the aircraft—the F-18. NORTHROP
was awarded a subcontract by MDC requiring NORTHROP to
provide “personnel, materials, services, facilities, logistics
support, data and management required to design and de-
velop, fabricate, qualify, test, document and deliver the...
F-18 major assemblies/equipment in accordance with
MACAIR Statement of Work (SOW) No. WS-F-18-27.”
New vigor had been infused into the NORTHROP YF-17
effort. In late 1975 and early 1976 it began an effort to interest
the Shah of Iran in becoming the first customer of a YF-17
derivative day fighter. The Navy’s concern that NORTH-
ROP’s Iranian effort might dilute its own F-18 development
prompted a new agreement between MDC and NORTHROP
on August 26, 1976.
The agreement of August 26, 1976 reaffirmed the June 27,
1975 agreement. It also provided that NORTHROP “has
elected to design, develop and produce for sale to the United
States and to foreign governments all aircraft designed only
for land-based operations which are derived from the YF-17.”
This election was in answer to the demands of the Navy that
the parties agree upon a Foreign Military Sales (FMS) Master
Plan. It also assured the Navy that NORTHROP’s develop-
ment of a day fighter would not interfere with the design and
development of the now designated Navy's F-18-A.
58a
The design of the F-18 now completed and ready for produc-
tion, MDC turned to new markets to make sales. These market
efforts involve on-going presentations in what NORTHROP
claims are violations of the Basic Agreement between the
parties to Canada, Israel, Spain and Australia. Perceiving that
its claimed exclusive position in furnishing land based F-18s to
the world market was about to evaporate with MDC’s success-
ful effort in Canada, NORTHROP filed suit and in its First
Amended Complaint alleges eight causes of action variously
described as acts of fraud, systematic breaches of contract,
wrongful economic coercion, concerted refusals to deal, unfair
competition and industrial espionage.
Both parties make extravagant claims as to its own contribu-
tion to development of the F-18. Although the truth may lie
somewhere between these claims, this Court need not make
that determination to dispose of the motions before it.
MDC has now moved for dismissal on the grounds that 1.)
there is a failure to join an indispensable party i.e., the United
States; 2.) the court lacks subject matter jurisdiction; 3.) fail-
ure to state a claim upon which relief can be granted because of
nonjusticiable political and foreign policy questions exclusively
within the jurisdiction of the executive and legislative bran-
ches of government; and 4.) NORTHROP fails to state a claim
upon which relief can be granted under Sec. 2 of the Sherman
Act.
MDC also asks for summary judgment on the grounds that
1.) the relief requested in the First, Second, Third, Sixth and
Seventh causes of action would constitute an illegal restraint of
trade in violation of Sees. 1 and 2 of the Sherman Act. NORTH-
ROP cannct establish injury in fact in its Fourth, Fifth, Sixth,
Seventh and Eighth causes of action.
59a
1. FAILURE TO JOIN AN INDISPENSABLE PARTY-
THE UNITED STATES GOVERNMENT
Federal Rules of Civil Procedure Rule 19 provides:
(a) Persons to be Joined if Feasible. A person who is
subject to service of process and whose joinder will not
deprive the court of jurisdiction over the subject matter of
the action shall be joined as a party in the action if (1) in his
absence complete relief cannot be accorded among those
already parties, or (2) he claims an interest relating to the
subject of the action and is so situated that the disposition
of the action in his absence may (i) as a practical matter
impair or impede his ability to protect that interest or (ii)
leave any of the persons already parties subject to a sub-
stantial risk of incurring double, multiple, or otherwise
inconsistent obligations by reasons of his claimed interest
(b) Determination by Court Whenever Joinder not
Feasible.
Ifa person. . . cannot be made a party, the court shall
determine whether in equity and good conscience the ac-
tion should proceed among the parties before it, or should
be dismissed, the absent person being thus regarded as
indispensable. The factors to be considered by the Court
include: first, to what extent a judgment rendered in the
person’s absence might be prejudicial to him or those
already parties; second, extent to which, by protective
provisions in the judgment, by the shaping of relief, or
other measures, the prejudice can be lessened or avoided;
third, whether a judgment rendered in the person's ab-
sence will be adequate; fourth, whether the plaintiff will
have an adequate remedy if the action is dismissed for
nonjoinder.
MDC claims the application of Rule 19 F.R.Civ.P. because of
NORTHROP’s allegations that the disclosure of data and
technology-particularly by NORTHROP to MDC-created a
license limiting MDC’s right to use the data and technology in
its sales efforts of F-18 design aircraft not “carrier-suitable.”
In essence MDC urges that to successfully maintain such a
claim the Court must necessarily decide that NORTHROP has
proprietary rights which derogate both the rights of MDC and
60a
the United States government in whatever data and technol-
ogy NORTHROP disclosed to MDC. The rights of the United
States Government and, derivatively of MDC are claimed to be
created pursuant to Armed Services Procurement Regulations
(ASPR),- as “law binding on the parties in a Government
contract...” /TT Arctic Services, Inc. v. United States, 524
F.2d 680, 690 (Ct.C].1975).
There is no dispute between the parties that the YF-17 data
and technology developed by NORTHROP was in fulfillment
of its obligations under a government contract. The ASPRs'
clearly give the United States Government unlimited rights in
the YF-17 data and technology. The fluidity’ of NORTHROP’s
argument does not change the fact that NORTHROP’s YF-17
contract with the United States Government incorporated the
ASPRs applicable to the very rights in data and technology
NORTHROP now claims MDC is misappropriating.
Procurement of the design, development and production of
weapons systems for the defense of the nation is a governmen-
tal function peculiarly left to an amalgam of executive and
“These regulations have recently been redesignated Defense
Acquisition Regulations (DAR) and will be used herein in-
terchangeably.
’ See particularly ASPR § 9-202.2(b) (June 1979); § 9-201(b) (July
1976); $ 9-201(d) (July 1976); $ 7-104.9 (March 1979); § 7.104.9(a)
(August 1969); § 7.104.9(a), (b)(2) (April 1972); § 9.202.3(b)(2) (June
1979).
* At one point counsel for NORTHROP advises the Court
a. December 3, 1979 “The Government did not. . . obtain the
P-530, P-630 data from NORTHROP.”
b. December 3, 1979 "The United States Government has rec-
ognized NORTHROP’s right in it.”
On the other hand NORTHROP asserts
a. “NORTHROP does not allege for the purposes of this action
that the Government does not have unlimited rights to use
YF-17 F-18A technical data”; NORTHROP’s Memorandum of
Points and Authorities In Opposition to Motion to Dismiss And
for Summary Judgment. p. 94.
6la
legislative powers. In the exercise of those plenary powers the
Government—subject only to self-imposed limitations—has
the right to designate the who, what, when and where of
we?»ons system production. When that right can be called into
question by a Court in what cosmetically’ is a dispute between
private parties, the United States Government comes within
the considerations of indispensability delineated by Rule 19
F.R.Civ.P.
Dismissal does not, however, become automatic because the
United States Government's rights in the data and technology
surrounding the development of the F-18 is inextricably bound
up with the private dispute between NORTHROP and MDC.
Dismissal is proper only when a judgment may be prejudicial to
the rights of the absent person or those already parties before
the Court. Another consideration is whether a judgment can
be shaped to provide relief for a complaining party minimizing
or eliminating the prejudice. The adequacy of the remedy
available without the absent person is a third consideration. A
fourth concern of the Court is the availability of an adequate
remedy to the complaining party if the action is to be dismissed
for nonjoinder.
NORTHROP disclaims the necessity of joinder of the
United States Government by assertions that the fashioning of
NORTHROP’s requested relief is simply not dependent upon
determination of the rights of the United States Government.
The assertions fall short of the uncontroverted facts. Any
injunctive relief against MDC as prayed by NORTHROP nec-
> NORTHROP continually argues that “*. .. NORTHROP has no
claim against, and seeks no relief directly or indirectly from, the
Government.” This argument completely ignores that the considera-
tion of NORTHROP'’s rights and the impact upon the claimed rights
of MDC and the United States Government allegedly created by
contracts for development of the F-18.
62a
essarily limits the United States Government in its F-18
procurement activities.”
NORTHROP urges as controlling authority the decision in
Occidental Petroleum Corp. v. Buttes Gas «& Oil Co., 331
F.Supp. 92 (D.C. Cal. 1971), affd on the District Court's
opinion 461 F.2d 1261 (9th Cir. 1972), cert. denied, 409 U.S.
950, 93 S.Ct. 272, 34 L.Ed.2d 221 (1972). If NORTHROP
depends upon Occidental Petroleum the dependence is totally
misplaced. Judge Pregerson in deciding the indispensable par-
ty issue does no more than apply the general rules governing
Rule 19 joinder to the facts of the case. Although helpful in that
analysis it does not address the issue here where the interest of
the United States Government subsumes the very subject
matter of the action i.e., data and technology surrounding the
F-18 development contracts. Without determination of United
States Government derivative rights and the so-called deriva-
tive “flow-down rights” claimed the MDC no meaningful relief
can be given by this Court.
The relief claimed by NORTHROP impinges. upon the
United States Government defense procurement policies in
yet another important respect. The United States Govern-
ment has plenary power in the conduct of foreign relations. It
alone decides who will provide weapons systems, data and
technological know-how to foreign governments.” NORTH-
ROP would have this Court order that the only entity that
could provide the source of data and technological assistance
*’ NORTHROP’s position is that the United States Government can
procure land based F-18’s ONLY from NORTHROP and carrier
based F-18s ONLY from MDC.
7 DAR § 7-104.9(a) and DAR § 9-202.2. The extent of “flow-down”
cannot be determined without interpretation of the United States
interests in the contracts for development of the F-18.
*See: Foreign Assistance Act, 22 U.S.C. § 2151 et seq.; Interna-
tional Security Assistance and Arms Export Control Act, 22 U.S.C.
§ 2751 et seq.; International Traffic in Arms Regulations.
63a
for land-based F-18 aircraft for either FMS" or licensed com-
mercial sales abroad is NORTHROP. Concomitantly MDC is
the ONLY authorized source for carrier-based F-18 data and
technological assistance.
NORTHROP attempts to pigeon-hole each of the aspects of
relief urging on the Court that declaratory relief and damages
would leave unencumbered the government interests in F-18
data and technology. Without real analysis that simplistic
suggestion has much appeal. What it lacks is substance.
NORTHROP claims that MDC is breaching their agreement
by disclosing to potential foreign buyers F-18 data and technol-
ogy that NORTHROP provided to MDC. This approach mixes
the license and business opportunity theories pressed by
NORTHROP." However, no disclosure can be made in connec-
tion with the sales activity involving military data or technol-
ogy without an express approval of an appropriate United
States Agency. What is required is the determination of
whether an exporter of data or technology acts as an agent of
the government because of the pervasive statutes and regula-
tions controlling the exporter. This is particularly critical if, as
in the case here, the exporter is a government contractor for
the very data or technology being exported. If that question
lends itself to resolution in favor of MDC, then it is clear that
NORTHROP’s exclusive remedy is against the United States
pursuant to 22 U.S.C. § 2356(a)(2)(A) or (b). Whatever the
outcome of such a consideration, the interest of the United
States Government is very much in issue.
The United States Government is both necessary and in-
dispensable to the equitable and just determination of the
* Foreign Military Sales are made directly by the United States to
foreign nations pursuant to mutual assistance and foreign policy
considerations.
‘0 These theories evoke vehement protestations from each side that
the F-18 is the result of their singular genius. The dispute need not be
resolved to decide these motions.
ba
controversy framed by the allegations of NORTHROP’s First
Amended Complaint.
2. SUBJECT MATTER JURISDICTION
MDC claims that the application of 22 U.S.C. $ 2356, 10
U.S.C. § 2273 and the Tucker Act effectively defeat the sub-
ject matter jurisdiction of the Court over the complaints of
NORTHROP.
a. 22 U.S.C. § 2356
In its pertinent part 22 U.S.C. § 2356 provides:
(a) Whenever, in connection with the furnishing of
assistance under this chapter—
“ x «
information, which is (A) protected by law,. . . , is
disclosed by the United States Government or any of its
officers, employees, or agents in violation of such restric-
tions,
the exclusive remedy of the owner. . . is to sue the United
States Government for reasonable and entire compensa-
tion for such practice or disclosure . . .
NORTHROP focuses on disclosure “by the United States
Government” as the controlling language of § 2356. NORTH-
ROP then argues that MDC and not the United States Govern-
ment is disclosing and threatening to disclose F-18 data and
technology in its sales efforts abroad. The argument glosses
what must be the real concern of this Court.
Section 2356 has alternate iterations fixing liability on the
United States Government. This provision is “the exclusive
remedy of the owner” when either “the United States Govern-
ment or any of its officers, employees, or agents” (emphasis
added) make the disclosure of protected information. The
question of the United States Government's clear agency in
FMS sales and its, at least putative, agency relationship in the
licensing of commercial sales permissible only in the best in-
65a
terest of United States foreign policy can only be clarified in an
action brought pursuant to 22 U.S.C. § 2356.
b. 10 U.S.C. § 2273
Subsection (b) of 10 U.S.C. § 2273 provides:
(b) Any person who believes that—
(1) adesign developed by him after July 2, 1926, relat-
ing to aircraft or an aircraft component, is being used; or
(2) an article embodying a design developed by him
after July 2, 1926, relating to aircraft or an aircraft compo-
nent, is being used or manufactured; by or for the United
States without just compensation to him from the United
States or any other source may, .. . sue in the Court of
Claims to recover reasonable and entire compensation.
Again NORTHROP has alleged claims that come within the
reaches of 10 U.S.C. § 2273. There is no question that
NORTHROP’s suit against the Government cannot be pursued
in this Court under § 2273(b). MDC’s claim of exclusivity
apparently derives from the concluding language of § 2273
providing the claimant with “reasonable and entire compensa-
tion.”
Although § 2273 provides for entire compensation it asks too
much to interpret that language as creating an exclusive reme-
dy. Nothing in the legislative history indicates a desire or
intent toward exclusivity. Recognizing that treating § 2273 as
a parallel avenue of recovery may cause some problems of
judicial coordination the logistics are neither novel nor im-
possible. A party pressing suit alternatively against the
government in the Court of Claims under § 2273 and in this
Court on theories of misappropriation can recover only once to
be made whole. Courts are equipped to deal with such even-
tualities and are capable, with the help of vigilant parties, to
assure that no double recovery may be had by the injured
party.
ce. The Tucker Act 28 U.S.C. $ 1346(a)(2); 28 U.S.C. 1491
For the same reasons that 10 U.S.C. § 2273 does not defeat
the jurisdiction of this Court no prolonged discussion of the
66a
contractual relationship between the United States Govern-
ment and NORTHROP need be undertaken.
3. NON-JUSTICIABLE POLITICAL QUESTIONS AND
THE ACT OF STATE DOCTRINE
a. Non-Justiciable Political Question
MDC asserts that NORTHROP’s claims require this Court
to enter the political question arena in contravention of the
prohibition of Baker v. Carr, 369 U.S. 186, 82 S.Ct. 691, 7
L.Ed.2d 663 (1962).
The Supreme Court in Baker (supra) made clear the distine-
tion between jurisdiction in a subject-matter sense and justi-
ciability of the subject matter. It says at 198, 82 S.Ct. at 700
The distinction between the two grounds is signifi-
cant. In the instance of nonjusticiability, consideration of
the cause is not wholly and immediately foreclosed;
rather, the Court’s inquiry necessarily proceeds to the
oint of deciding whether the duty asserted can be
judicially identified and its breach judicially determined,
and whether protection for the right asserted can be
judicially molded. In the instance of lack of jurisdiction the
cause either does not “arise under the Federal Constitu-
tion, laws or treaties (or fall within one of the other
enumerated categories of Art. III, § 2), oris not a “case or
controversy” within the meaning of that section; or the
cause is not one described by any jurisdictional statute.
Giving the nonjusticiable portion of the distinction the
appellation “political question,” the Court then proceeds to
provide the considerations for determination of nonjusticiabil-
ity. Alternatively they are:
1, A textually demonstrable constitutional commitment
of the issue to a coordinate political department; or
2. Impossibility of deciding without an initial policy
determination of a kind clearly for nonjudicial dis-
cretion; or
3. Impossibility of a Court’s understanding independent
resolution without expressing lack of the respect due
coordinate branches of government; or
—
bia
4. An unusual need for unquestioning adherence to a
political decision already made; or
The potentiality of embarrassment from multifarious
pronouncements by various departments on one ques-
tion.
or
Stripped of all of the rhetoric by both parties in pursuit of
their independent interests what NORTHROP asks this Court
to decide is WHO will be the exclusive builder (prime con-
tractor) for the carrier-suitable or land-based versions of the
F-18 weapons system. NORTHROP would in effect make this
Court the super-procurer and sales licensor ofa military weap-
ons system. Considerations of the separation of powers and of
the complex statutory structure relegating to the Executive
Branch of the United States the concerns for the military
arsenal—its development, procurement and deployment—
bring this case within the political question considerations
delineated in Baker v. Carr (supra).
b. Act Of State Doctrine
The reticence of United States Courts to intervene in pri-
vate actions when an act of state" is involved finds its fountain-
head in Underhill v. Hernandez, 168 U.S. 250, 252, 18 S.Ct.
83, 84, 42 L.Ed. 456 (1897) when the Supreme Court expressed
the doctrine in this manner.
Every sovereign state is bound to respect the indepen-
dence of every other sovereign state, and the courts of one
country will not sit in judgment on the acts of the govern-
ment of another done within its own territory.
The judicial policy considerations of Underhill were reaf-
firmed with an exhaustive review of the intervening author-
ities in Banco Nacional De Cuba v. Sabbatino, 376 U.S. 398, 84
S.Ct. 923, 11 L.Ed.2d 804 (1964). In Sabbatino the Supreme
Court expressed the constitutional underpinnings of the Act of
'\ An “act of state” is an executive or administrative exercise of
foreign power by an independent State.
68a
State Doctrine and explained its reasoning as arising out of the
constitutional separation of powers giving the Executive
Branch of government the obligation to protect the interest of
United States citizens in their relationship with foreign
governments.
MDC urges the Act of State Doctrine be applied to the claims
of NORTHROP particularly because both NORTHROP and
MDC would be compelled to inquire into the actions of the
governments of Australia, Canada, Germany, Greece, Israel,
Korea, Spain, Turkey, and the United Kingdom in establishing
that the alleged acts charged against MDC are causally con-
nected to the failure of NORTHROP to accomplish F-18 sales
in these countries.
If MDC is correct in its assertion—and antitrust precedent
supports MDC"—this Court would be required to inquire into
sensitive questions of vital concern of the military security of
those foreign governments in which NORTHROP claims
MDC’s acts thwarted its sales efforts. Underhill and Sabbati-
no compel dismissal. The Ninth Circuit views of the Act of
State Doctrine in Occidental Petroleum Corp. v. Buttes Gas &
Oil Co., 331 F. Supp. 92 (D.C. Cal. 1971), and Timberlane
Lumber Co. v. Bank of America, 549 F.2d 597 (9th Cir. 1976)
are not in conflict with such a decision. The Sherman Act
discussion to follow should make clear that even if Timberlane
cannot be factually distinguished" the antitrust concerns are
probably non-existent as an offsetting concern.
See Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364
U.S. 656, 81.S.Ct. 365, 5 L. Ed.2d 358 (1961); Salerno vy. American
League of Professional Baseball Clubs, 429 F.2d 1003 (2d Cir. 1970),
cert. denied 400 U.S. 1001 (1971), both cases construing pleading of
the “by reason of” provision of the Sherman Act.
'’ Timberlane (supra) involved a judicial determination of a mort-
gage dispute. Here we are concerned with one of the most vital
concerns of a sovereign—its military arsenal and the decision affect-
ing it.
69a
4, ILLEGAL RESTRAINT OF TRADE-SHERMAN ACT
SECTION 1
MDC has moved for summary judgment on NORTHROP’s
First, Second, Third, Sixth and Seventh causes of action be-
cause it asserts that the agreements upon which these causes
of action depend constitute an illegal allocation of markets in
violation of the Sherman Act Section 1. MDC claims that this
clear division of markets—carrier-suitable F-18s to MDC and
land-based F-18s to NORTHROP—comes within per se
declarations of violations of the Supreme Court in antitrust
cases.
NORTHROP uges that the agreement is not in restraint of
trade but rather enhances competition. NORTHROP further
urges that the restraints imposed by the Basic Agreement are
subject to a rule of reason analysis that can be made only after a
full trial of the case. The rule of reason argument is pressed
because of NORTHROP’s claim of uniqueness of the industry
concept embodied in the MDC-NORTHROP relationship and
its alleged horizontal-vertical aspects.
On both scores NORTHROP is wrong. There is no vertical
relationship alleged, shown, or that can be shown between
MDC and NORTHROP to invoke the reasoning of Continental
T.V., Ine. v. GTE Sylvania lnc., 483 U.S. 36, 97S.Ct. 2549, 53
L.Ed.2d 568 (1977). NORTHROP and MDC are horizontal
competitors competing in the market place for weapons sys-
tems sales. The agreements themselves are eloquent evidence
of the absence of any vertical aspect of the relationship. The
Teaming Agreement is simply that—a joint effort to obtain a
design contract in the U.S. Navy NACF competition. The
Basic Agreement specifically eschews a joint venture or other
relationship creating joint and several liability.
NORTHROP’s enhancement of competition theory, because
somehow or other “carrier-suitable F-18A and NORTHROP’s
land-based F-18L have been keen, head to head competitors in
every international competition” is totally untenable. The
testimony concerning competition is belied by two irrefutable
70a
facts—1.A land-based F-18 design cannot be sold by NORTH-
ROP to the U.S. Navy—or for that matter to any navy in the
world.’ 2. NORTHROP’s own position in this litigation is that
MDC is offering the land-based design in violation of the Basic
Agreement.
NORTHROP'’s “unique industry context” theory suffers an
even greater defect that is not cured by the affidavit of Dr.
Almarin Phillips. The activity that is at issue here is the sa/e of
F-18 aircraft. The sophistication of the technology and the
complexity of the requirements for production do not change
the simple principles of marketing products taught in basic
mar‘eting courses or learned by the experience of selling any
product subject to the scrutiny of a discerning buyer.
As appealing as the rule of reason argument of NORTHROP
is to this Court, the undisputed facts of this case and the simple
interpretation of the language of the Basic Agreement bring
this case clearly within the per se illegality defined by the
Supreme Court in United States v. Topco Associates, Inc., 405
U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972).
One more contention of NORTHROP must be disposed of
before we leave the restraint of trade aspect of this litigation.
NORTHROP claims validity of the market division provided in
the Basic Agreement as an ancillary restraint attached to the
licensing of some undefined and amorphous YF-17 data and
technology. NORTHROP’s aim misses the mark. There is no
data or technology licensed to MDC. MDC does not derive its
right to build an F-18 weapons system (carrier-based) from any
license agreement with NORTHROP. The Teaming Agree-
ment was one required by the United States Government and
NORTHROP was paid for any manner of its participation or
disclosures in that joint effort. MDC obtained its abilities to
build and sell F-18 weapons system from its participation in the
“Tt takes little expertise to recognize that a land-based design
F-18 simply cannot be used for aircraft carrier launch and landing
procedures without making it a carrier-suitable aircraft.
Tla
NACF competition with the proprietary rights that neither
reserved but did obtain as the result of that participation.
Ancillary restraints under these circumstances are not toler-
ated in such transactions particularly when they take on the
per se characteristics of division of market.
5. ATTEMPT TO MONOPOLIZE-SHERMAN ACT SEC-
TION 2
The Sherman Act Section 2, 15 U.S.C. $2 (Supp. 1980),
provides:
Every person who shall. . ., attempt to monopolize...
any part of the trade or commerce among the several
States, or with foreign nations, shall be deemed guilty ofa
felony...
In American Tobacco Company v. United States, 328 U.S.
781, 785, 66 S.Ct. 1125, 1127, 90 L.Ed. 1575 (1946) the United
States Supreme Court first approved the definition of attempt
to monopolize as follows:
The phrase ‘attempt to monopolize’ means the employ-
ment of methods, means and practices which wou d, if
successful, accomplish monopolization, and which, though
falling short, nevertheless approach so close as to create a
dangerous probability of it, which methods, means and
practices are so employed .. . for the purpose of such
accomplishment.
Monopolization in that context was given a meaning limited
to the power to exclude competitors or to fix prices in a rele-
vant market.
NORTHROP’s allegations and arguments in support of its
attempt to monopolize claim are again somewhat vague. It
claims in essence only that the issue requires trial. This Court
is aware of the admonition of Poller v. Columbia Broadcasting
System, 368 U.S. 464, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962). To
read Poller as a prohibition to summary judgment in antitrust
cases overreaches the language that it should be “used sparing-
ly in complex antitrust litigation where motive and intent play
leading roles, the proof is largely in the hands of the alleged
72a
conspirators, and hostile witnesses thicken the plot.” Poller at
473, 825.Ct. at 491. When material facts are not in dispute and
only questions of law remain to be resolved, trial courts should
not be reluctant to make prompt disposition of matters without
penalizing the parties with long and expensive pre-trial prac-
tices that would lead to the same result.
Attempt to monopolize cases are peculiar because they, even
more than merger cases, deal in probabilities of success in the
market delineated by the product and the geographic market-
ing capabilities of the producers.
The peculiarity is exacerbated by the very purpose of
competition. Competition to be effective requires that the
participants “attempt” to sell all of the product they can pro-
duce to the exclusion of competitors in the same product and
geographic market. The antitrust laws were enacted not to
protect competitors but rather to assure free and aggressive
competition in the market place of “trade or commerce among
the several States, or with foreign nations.” NORTHROP’s
arguments are all competitor-protective oriented. What is dis-
turbing is that traditional considerations of competition and
commerce do not adequately answer the concerns of the Court
in the analysis of F-18 sales activity.
No one could contest that the product market of concern to
the Court is F-18 weapons system. Some argument can be
made that submarkets ought to be recognized in F-18 aircraft
configured for land-based activities ani those suitable to
seagoing aircraft carrier deployment. Geographically, the
world is arguably the market place. Certainly included would
be those reaches of the world market encompassing nations
with the wealth capacity and the use capability needed for
consideration of the use of F-18 weapons systems.
The concern of product and geographic market from the
traditional antitrust viewpoint become unimportant here for
one very basic reason. The United States Government has the
absolute and overriding control of both the production and
73a
sales potential of the product that brings these parties into
vitriolic conflict.
What strikes the Court under such circumstances is that
there is not the “trade or commerce among the several States,
or with foreign nations” essential to antitrust concerns of
monopolization including the critical inquiry here—attempt to
monopolize. The United States Government is the market!
concerned with production and distribution of Weapons sys-
tems for governmental military establishments. As such, this
differs from the basic thrust of antitrust laws applicable to
governmental procurement practices in competition with con-
sumer enterprises buying goods generally available in the
marketplace.
The United States Government also makes the world mar-
ket. No single group of producers has any power to expand a
market share beyond that considered by the United States
Government in the implementation of domestic defense and
foreign policy which is in the best interest of its citizens.
Political considerations aside, the monopoly, if any, enjoyed
or threatened by MDC is a governmental creation outside the
reaches of the Sherman Act Section 2.
NORTHROP cites Ovitron Corp. v. General Motors Corp.,
295 F.Supp. 373 (S.D.N.Y. 1969) (Ovitron J) as support for the
application of the Sherman Act to governmental procurement
activities. Ovitron I is distinguishable. The Court there was
concerned with a very clear charge of predatory pricing. More
importantly Ovitron I does not reach the issue presented here
i.e., the impact of the government's absolute ability to make
the market. NORTHROP ina motion to correct the record has
gone outside of the record upon which the Court in Ovitron
The Foreign Assistance Act, 22 U.S.C. $2151 et seq.: Interna-
tional Security Assistance and Arms Export Control Act, 22 U.S.C.
§ 2751 et seq.; and International Traffic in Arms Regulations
comprehensively give the government plenary power in military
procurement practices.
T4da
made its decision. But even taking all of the facts NORTHROP
would now have this court consider in reading the decision in
Ovitron I the result would not change. Ovitron Corp. v.
Ceneral Motors Corp., 364 F.Supp. 944 (S.D. N.Y. 1973)
(Ovitron IT) suggests the impossible task NORTHROP would
have in proving antitrust damage. To prove such damage
NORTHROP would have to show that it would be the success-
ful bidder in the procurements it alleges have been frustrated
by MDC’s conduct. Aside from the political question and act of
state problems already disposed of in this opinion NORTH-
ROP still faces the task of showing that the United States
Government would turn to it for its F-18 needs. The only way
this Court ean conceive that it could be done would be to show
an absolute need of F-18 weapons systems by the United
States and its chosen allies in military procurement. Added to
the absolute need would be this Court’s award of NORTH-
ROP’s prayed for relief giving it the ec/usive right to bid the
F-18 weapons systems apportioned to it by the Basie Agree-
ment. In light of the disposition made of the restraint of trade
issue herein that cannot come to pass.
CONCLUSION
1. MDC’s motion to dismiss the complaint because of the
failure to include an indispensable party is granted.
2. MDC'’s motion to dismiss the complaint for lack of subject
matter jurisdiction [22 U.S.C. § 2356] is granted.
3. MDC'’s motion to dismiss the complaint for lack of subject
matter jurisdiction [10 U.S.C. § 2273 and The Tucker Act 28
U.S.C. § 1346(a)(2) and § 1491] is denied.
* The additional facet NORTHROP asks this Court to consider is
that the radios which was the product involved were on the Munitions
List. The assumption of that fact would not change the reasoning
herein.
75a
4. MDC’s motion to dismiss the complaint for failure to state
a claim (nonjusticiability and Act of State Doctrine) is granted.
5. MDC’s motion for summary judgment on the First,
Second, Third, Sixth and Seventh causes of ¢ction (illegal
restraint of trade-Sherman Act Sec. 1) is granted.
6. MDC’s motion for summary judgment on the Sixth cause
of action (attempt to monopolize Sherman Act Section 2) is
granted.
76a
ORDER OF DISTRICT COURT DISMISSING COMPLAINT
AND GRANTING SUMMARY JUDGMENT
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL NO. 79-04145-R
NORTHROP CORPORATION,
Plaintiff,
. S
McDonNELL DovuGLas CORPORATION,
Defendant.
ORDER DISMISSING COMPLAINT AND GRANTING
SUMMARY JUDGMENT
The Court, having considered the motion of defendant
McDonnell Douglas Corporation to dismiss this action pur-
suant to Rules 12(b)(1), 12(b)(6), 12(b)(7), 12(h)(2) and 19,
Federal Rules of Civil Procedure, and, in the alternative, for
summary judgment pursuant to Rule 56, Federal Rules of Civil
Procedure, the arguments and Memoranda of Points and Au-
thorities presented by counsel, and having rendered an opinion
filed on September 5, 1980, and good cause appearing, enters
the following Order and Judgment in accordance with the
Findings of Fact and Conclusions of Law filed herewith,
IT IS HEREBY ORDERED AND ADJUDGED.
1. Defendant's motion to dismiss plaintiffs First
Amended Complaint (hereafter “the Complaint”) for failure to
join an indispensable party is granted.
2. Defendant's motion to dismiss the Complaint for lack of
subject matter jurisdiction, on the ground that the remedy
provided by 22 U.S.C. § 2356 is exclusive, is granted.
3. Defendant's motion to dismiss the Complaint for failure
to state a claim upon which relief can be granted, or in the
77a
alternative for summary judgment, on the bases of the political
question doctrine and Act of State doctrine, is granted.
4. Defendant's motion to dismiss the Complaint for failure
to state a claim upon which relief can be granted, or in the
alternative for summary judgment, on the grounds that to
grant the injunctive, declaratory or damages relief sought by
plaintiff in the Complaint would require the Court to construe
and enforce the agreements of the parties in a manner which
would constitute a per se violation of Section 1 of the Sherman
Act, is granted.
5. Defendant's motion to dismiss the Cartwright Act
claim (California Business and Professions Code § 16,700 et
seq.] included in the Seventh Count of the Complaint for failure
to state a claim upon which relief can be granted, or in the
alternative for summary judgment, on the ground that no
combination is alleged between defendant and any other per-
son, is granted.
6. Defendant's motion to dismiss the plaintiff's claims for
damages under its Fourth, Fifth, Sixth, Seventh and Eighth
Counts of the Complaint for failure to state claims upon which
relief can be granted, or in the alternative for summary judg-
ment, on the grounds that plaintiff has not suffered and cannot
show any injury in fact as a result of defendant’s alleged acts, is
granted.
7. Defendant's motion to dismiss the Sixth Count of the
Complaint (Section 2, Sherman Act) for failure to state a claim
upon which relief can be granted, or in the alternative for
summary judgment, is granted.
8. Defendant's motion to dismiss the Complaint for lack of
subject matter jurisdiction on the grounds that the remedies
provided by 10 U.S.C. § 2273 and the Tucker Act, 28 U.S.C.
§ 1346(a)(2) and § 1491, are exclusive is denied.
9. Plaintiff's claims arising out of the allocations of work
to NORTHROP pursuant to the Basic Agreement are moot
and not ripe for determination in light of MDC’s stipulation of
November 28, 1979. No decision need be reached by this Court
on what now is in the posture of an advisory opinion.
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10. Plaintiff's Complaint is hereby dismissed, with preju-
dice, and at Plaintiffs costs.
Dated Dee 1, 1980.
s Manuel Real
UNITED STATES DISTRICT JUDGE
79a
FINDINGS OF FACT AND CONCLUSIONS OF LAW IN
SUPPORT OF ORDER DISMISSING COMPLAINT AND
GRANTING SUMMARY JUDGMENT
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
Civil No. 79-04145-R
NORTHROP CORPORATION,
Plaintiff,
Vv.
McDonNELL DoUGLAS CORPORATION,
Defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
(These Findings of Fact and Conclusions of Law are
respectfully submitted by McDonnell Douglas Corporation
pursuant to the Court's instructions. ]
The Court, having read and considered defendant's Notice of
Motions and Motion to Dismiss and Motion for Summary Judg-
ment and the pleadings, affidavits, declarations, depositions,
answers to interrogatories, documents and exhibits on file
herein, the memoranda of points and authorities submitted by
the parties previously and in support of and in opposition to
defendant's Motions to Dismiss and for Summary Judgment,
having heard and considered oral argument of counsel, and
having rendered an opinion filed on September 5, 1980, and
good cause appearing therefor, now makes the following Find-
ings of Fact and Conclusions of Law. Any Finding of Fact
which is also a Conclusion of Law is to be treated as both, as is
any Conclusion of Law which is also a Finding of Fact.
FINDINGS OF FACT
1. McDonnell Douglas Corporation (“McDonnell”) is a
corporation incorporated under the laws of the State of Mary-
land, having its principal place of business in St. Louis County,
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Missouri. McDonnell is engaged, inter alia, in the design,
development and production of military aircraft.
2. Northrop Corporation (“Northrop”) is a corporation
incorporated under the laws of the State of California, having
its principal place of business in Los Angeles County, Califor-
nia. Northrop is engaged, inter alia, in the design, develop-
ment and production of military aircraft.
3. Northrop resides and is doing business in the Central
District of California. McDonnell is doing business in the Cen-
tral District of California.
4. This action is between citizens of different States. The
amount in controversy exceeds the sum or value of $10,000
exclusive of interest and costs.
5. Northrop initiated this action, which involves the F-18
supersonic fighter aircraft, with a three-count complaint filed
on October 26, 1979. Northrop alleged that under a Basic
Agreement with McDonnell, dated June 27, 1975, it “licensed”
McDonnell to use Northrop's proprietary data and technology
in connection with the development, manufacture and sale of
the F-18 aircraft. In Counts I and II, Northrop alleged that
McDonnell was misusing Northrop’s property and was abusing
the “license” created under the Basic Agreement in connection
with offers by McDonnell to sell F-18 aircraft to the Govern-
ments of Canada and Israel. Northrop sought preliminary and
permanent injunctions to enjoin McDonnell from misusing or
otherwise abusing the alleged license in connection with these
proposed sales. In Count III, Northrop sought a declaration of
the rights of the parties under the Basic Agreement.
6. A hearing was held on Northrop’s request for a prelimi-
nary injunction on December 3, 1979, and the Court denied
Northrop’s request.
7. On December 12, 1979, Northrop filed a First
Amended Complaint which added five counts to the original
three-count complaint. Northrop bases each of those eight
counts on the underlying allegation that McDonnell has mis-
used Northrop’s proprietary data, technology, and know-how
and abused the “license” allegedly created under the Basic
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Agreement. Each count incorporates by express reference all
of the allegations of the preceding counts, including this
underlying allegation. Northrop alleges that, pursuant to the
Basic Agreement and a supplemental Agreement dated Au-
gust 26, 1976: (1) Northrop has the exclusive right to sell F-18
aircraft, regardless of configuration, to the United States
Government for use by its Air Force; (2) Northrop has the
exclusive right to sell all “land-based” F-18 aircraft, as well as
all F-18 aireraft which are not “carrier-suitable” and do not
conform to the configuration and structure of F-18 aircraft
being purchased by the Navy for its own use, to any customer,
foreign or domestic; (3) McDonnell is restricted to selling only
carrier-suitable F-18 aircraft to the Navy for the Navy's own
use, and with respect to sales to foreign customers, whether
directly or indirectly through the U.S. Government, McDon-
nell is restricted to selling only F-18 aircraft which are both
carrier-suitable and conform to the configuration and structure
of F-18 aircraft being purchased by the Navy for its own use;
and (4) with respect to each prime production contract
obtained by McDonnell for F-18 aircraft, Northrop has the
unqualified right, except for the Navy's direction to the contra-
ry, to perform or have performed by others all of the work
described in an attachment to the Basic Agreement, which was
intended to equal approximately 40% of the cumulative direct
labor hours required to manufacture F-18 aircraft. Northrop
requests declaratory and injunctive relief and damages result-
ing from MeDonnell’s alleged: (1) violation of the Basic Agree-
ment and the August 26, 1976 Agreement; (2) misappropria-
tion of Northrop’s property; (3) fraud in the inducement of the
Basic Agreement, the August 26, 1976 Agreement, and a
previous Teaming Agreement executed on October 2, 1974; (4)
attempt to monopolize the F-18 fighter aircraft market; and (5)
unfair competition. In addition, Northrop seeks a declaration
of the respective rights of the parties under the Basic Agree-
ment; an accounting of the profits earned by McDonnell by
reason of its alleged fraudulent acquisition of Northrop’s
proprietary data, technology and know-how and its alleged
breach of trust; and recovery in quantum meruit for materials
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and services provided to McDonnell under the agreements for
which Northrop alleges it has not been compensated.
8. McDonnell has moved that Northrop’s First Amended
Complaint be dismissed for want of an indispensable party
(Rules 12(b)(7), 12(h)(2) and 19, Fed. R. Civ. P.), lack of
jurisdiction over the subject matter (Rule 12(b)(1), Fed. R.
Civ. P.), failure to state a claim upon which relief can be
granted (Rules 12(b)(6) and 12(h)(2), Fed. R. Civ. P.), and
alternatively for summary judgment (Rule 56, Fed. R. Civ.
P.).
9. Northrop has taken the position “that virtually the
same operative facts underlie each of Northrop’s causes of
action.”
10. Northrop, beginning in 1965 initiated an effort to de-
velop a new generation of multi-purpose lightweight fighter
aircraft. This effort resulted in the
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