Joint Appendix Vol II — Weyerhaeuser v. Ross-Simmons Hardwood Lumber
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FILED
Qf) 236 24 2006
OFFICE OF THE CLERK
SUFR
No. 05-381 EME COURT. U.S.
Jn the Supreme Court of the Gnited States
WEYERHAEUSER COMPANY,
Petitioner,
Vv.
Ross-SIMMONS HARDWOOD LUMBER Co., INC.,
Respondent.
On Writ of Certiorari to the United States Court of
Appeals for the Ninth Circuit
JOINT APPENDIX — VOLUME II
ANDREW J. PINCUS MICHAEL E, HAGLUND
Counsel of Record Counsel of Record
Mayer, Brown, Rowe Haglund, Kelley, Horngren,
& Maw LLP Jones & Wilder LLP
1909 K Street, N.W. 101 SW Main St.
Washington, DC 20006 Suite 1800
(202) 263-3000 Portland, OR 97204
(503) 225-0777
Counsel for Petitioner | Counsel for Respondent
PETITION FOR CERTIORARI FILED SEPT. 23, 2005
CERTIORARI GRANTED JUNE 26, 2006
TABLE OF CONTENTS
(By Docket Date)
Page
VOLUME I
Relevant Docket Entries — United States District
Court for the District of Oregon (Portland)................... la
Relevant Docket Entries — United States Court of
Appeals for the Ninth Circuit ................:cssseseesseeeseeeeees Sa
Defendant’s Memorandum in Support of Motion for
Summary Judgment (Oct. 31, 2002) .............:cccceeeeeeeees 6a
Defendant’s Reply Memorandum in Support of
Motion for Summary Judgment (Nov. 25, 2002)......... 25a
Hearing Transcript (Jan. 15, 2003).............cssssssseeseeseeeeseees 34a
Opinion Denying Summary Judgment (Jan. 21, 2003)......54a
‘Plaintiffs’ Proposed Jury Instructions (Feb. 14, 2003).......70a
Defendant’s Requested Jury Instructions
re ID cerectanigericinbenicncaceeiettnmalincsnimisniiandeniive 97a
Defendant’s Proposed Verdict Form (Feb. 14, 2003)...... 123a
Fourth Amended Complaint (Feb. 27, 2003) ................... 129a
Stipulated Glossary (Apr. 1, 2003)...........cc.cceeeeseeeeeeeneees 145a
Sapulated Facts (Ape. 1, 2003)........000.scccoserrserevestossssseeses 1Sla
Excerpts of Relevant Trial Testimony In the United
States District Court for the District of Oregon
SESS SEER LS aR Le Teco ee er 163a
Plaintiffs’ Opening Argument (Apr. a 164a
Testimony of William Nelson (Apr. 8-9, 2003)......... 166a
Testimony of Grant Wheeler (Apr. 9, 2003).............. 222a
Testimony of Rodney Buck (Apr. 9, 2003)................ 238a
Testimony of James Harrison (Apr. 9, 2002)............. 246a
(I)
TABLE OF CONTENTS
(By Docket Date)
Page
Testimony of Thomas Collet (Apr. 9, 2003).............. 253a
Testimony of Clifford Chulos (Apr. 10, 2003) .......... 256a
Testimony of Mark Rasmussen (Apr. 10, 2003)........ 267a
Testimony of George Lukin (Apr. '0, 2003)............. 328a
Testimony of James Webber (Apr. 10, 2003)............ 336a
Testimony of Eugene Novak (Apr. 10, 2003)............ 338a
Testimony of Paul Ehinger (Apr. 10, 2003)............... 360a
Testimony of Richard Zerbe (Apr. 11, 2003)............. 375a
Testimony of Ludwig Rabold (Apr. 11, 2003)........... 402a
Testimony of Mel Kayser (Apr. 11, 2003)................. 405a
Testimony of Wayne Demarest (Apr. 11, 2003)........ 4l4a
Testimony of Sonny Powell (Apr. 11, 2003) ............. 417a
Testimony of Steve Fitzgerald (Apr. 11, 2003).......... 418a
Testimony of William Blaney (Apr. 11, 2003).......... 419a
Testimony of Wayne Kidd (Apr. 11, 2003) ............... 433a
Testimony of Delores Pigsley (Apr. 14, 2003) .......... 445a
Testimony of Leo Sheehan (Apr. 14, 2003)............... 446a
Testimony of John Simmons (Apr. 14, 2003)............ 453a
Testimony of Philip Smith (Apr. 14, 2003)................ 456a
Testimony of Jerry Martin (Apr. 14, 2003)................ 478a
Testimony of David Bosley (Apr. 14, 2003).............. 495a
Testimony of Arnold Curtis (Apr. 14, 2003).............. 500a
Testimony of David McCullam (Apr. 14, 2003)........ 517a
Testimony of George Brulotte (Apr. 14, 2003).......... 519a
(il)
TABLE OF CONTENTS
(By Docket Date)
Page
Testimony of David Princehouse (Apr. 15, 2003) .....528a
Testimony of Heinz Hohendorf (Apr. 15, 2003)........ 548a
Testimony of Steven Carter (Apr. 15, 2003).............. 557a
VOLUME II
Excerpts of Relevant Trial Testimony Cont’d
Testimony of Roy Burke (Apr. 15, 2003)...............0. $77a
‘Testimony of Robert Taylor (Apr. 15, 2003)............. 579a
Testimony of Vicki McInnally (Apr. 15, 2003)......... 592a
Testimony of David Kurtz (Apr. 15, 2003)................ 6lla
Testimony of Larry Bray (Apr. 15, 2003).................. 612a
Testimony of Raymond Poppe (Apr. 15, 2003)......... 615a
Testimony of Bruce Sutten (Apr. 15, 2003)............... 618a
Testimony of Gary Nelson (Apr. 16, 2003) ............... 629a
Testimony of Jerry Bain (Apr. 16, 2003)................2. 642a
Testimony of Bernie McCain (Apr. 16, 2003)........... 654a
Testimony of Philip Tedder (Apr. 16, 2003).............. 660a
Testimony of Delroy Fisher (Apr. 16, 2003).............. 669a
Testimony of Randall Pozdena (Apr. 16, 2003)......... 692a
Argument on Defendant’s Motions and Jury
Rastyuctions (Apt. 17, 2003) .....0...cscosesrorssesscessecensessees 718a
Argument on Jury Instructions Cent’d
See SE chid AibdeichDeaiahile apeihitadieideipeapientoheiadsgniin 723a
Plaintiffs’ Closing Argument (Apr. 17, 2003)................. 731a
Plaintiffs’ Rebuttal Argument (Apr. 17, 2003)................ 736a
(111)
TABLE OF CONTENTS
(By Docket Date)
Excerpts of Relevant Trial Exhibits
GEE CG TINNY icin osdecstccsiceatsnncnsivaiiapsendenieahdiiapiailipainans
EPI WIM aliciacivesiisnesistcuiisdincitsaitidsrainsesasidiilaminniaialiatel
EE TIEN cicnscscopuiscmntnpeghabeanleiisiinmenginmtnameniiinaliaamaed
I BPO iiciecitsis cccnssdibhantchinssiitsiihinaialeieiiindinianbaciadaas:
SONNE TAD ccinicssvicsinenstinistsedstrindsabiiaadineiiipbialaddeiiiiedas
INGE CBO sncicersviviscatnspescioisniiiaiidiicdiniditibatddiaiettimiidiakaaa
OE BEF inrctcsscrtnasiistnniepinisicuieteiteisminatntaliibiiiaiaidiaasna
IIE Ne ictcsptniscbcninteviticrmnienitasentasanmnaiiaamenaniel
IR DE sis cscacevisvinicnersassinptnientiaesiesnpuiiateapiaahaiaiiveds
TEE DI sciscsnincnovisscrssisrvrisisnssnsiegeaiaesnepitionintaaiainn :
SIGE OGD nicviccncconsceensvsserenemmnniincsibeisabeiasnideniiaaiadin
Exhibit 40S .............. olepieilibekinsiohadiicatasaain ania
BE GO vn rsincssnnseenepinigionmionassieitcbonnitapeminibdivaialiin
IN IT hcccicseseanoecersesesniosiociteniicistivasvicmannatatia
TNE ID i cinncssensenerniticscnerninnsnnpminaivnidiniciintnidihesail
I BOP wctncccccncevinsncepepicctensssucntecicntipemuiinisiivaitiitiaiinns
Re OI ete iioccsssstvscbinnsininnamnssniattveiidectaphuanaailiaia
BEMNIIIE OG Ease cocoecesosconssnmecatodonicittensegenennipanbetaagiotianial
BIE 8S cacsccnesenessrnieinionnmnstete ermnanianmpniglinaial
SMR BED oni cacsaresesentssnadsncoiniiaosianemsenttnenesideeataliiiga
IE EG cn ccvcesscssecimninanpionstensibeliamibioapumiectiamuliin
IIR GSS oeiscccnoscicscenasvneesstnientetninitnnesmnivitéaaiiaainin
ERI BAG... .ncccrocssotcsspooscavesourasassunsobivasasnionannantasinatinns
TABLE OF CONTENTS
(By Docket Date)
ITT iailhcenipinstontaneniiintenninsnsepdeintiendtinsigtemiedsegnttaies
REE EN ED
ST discinnciinatitsuseneshdeunsatndnstebebiendinvenistetetiiasibaetntiia
IIIT uiiciinichieeiipaseectinindibsialbtebieieliiitinetgcanienidimnnieabalie
Tlic ic Rieinihevlapitadheiasipaititcansiiaieeinn
EniDit 486 2... sccecnsersccesassesereorensensencncenscecnnsncenesesess
IIT bsnnttethideiiesensthteiiibsicabasbadtnitimabeeeteeganeapeinibnaseentan
SE RE ERAEN Ese Sanat Rech ORE SEES SOMO
SETI hadi teccticieniinchortitghiiciatbidieliicnliinncaningadipniciinbpiioguile
NT da tincistasindsciepiliciihiaiibilaepieninlesctininatantennininnetions
ERSTE ESSE SAT EA Fw ROO Cre OF
EIS A A eae eae ee vem
ESE ESD Sa ae
Excerpts of Relevant Trial Exhibits (Color)................0.-«.
EERE AES GEA Pe eon a a
I OA srtensstussitsecvtnineesetseniennstliontunesenstneniiininasbseniionsonn
SNE a coclinipcntsheinchcpsannsiinisiicttaiasiuiuinnianisanncacetunteiandtii
TABLE OF CONTENTS
(By Docket Date)
Page
REID DINU shicisctuisinalsiniinstcchsnsindasadichibieiinabsitsdicdielptsascieaiahiali 927a
SUITE SEIT intihlinicinesinencnacianpasendiipinitbatantenisduitiacmanesiiivias 928a
a Ne acct shivtsibesscdeetvagieibciaadahbctltaieiisiedenla 930a
Defendant’s Amended Proposed Verdict Form
RS EE Eee eresenenearesensereeenenonens 93la
Defendant’s Supplemental Requested Jury
ES ee 933a
Defendant’s Memorandum in Support of Motion for
Judgment as a Matter of Law (Liability)
OR ER ater ee eee aoe See 936a
Court’s Draft Jury Verdict Form (Apr. 17, 2003)............ 949a
Court’s First Draft of Jury Instructions
SR i, ee ieneititinesan ni ctnnands trap ticsqvnnntsintianetel 95la
Verdict for Plaintiff (Apr. 18, 2003) ..............cccceeseeeeeees 967a
Court’s Instructions to the Jury (Apr. 21, 2003) .............. 969a
Court’s Final Draft of the Verdict (Apr. 21, 2003).......... 985a
Defendant’s Memorandum In Support of Post-Trial
eT ND Celtis ccennidainerneniicntentsétcmninnmnes 987a
Hearing on Post-Trial Motions (May 29, 2003)............... 994a
(VI)
TABLE OF CONTENTS
(By Docket Date)
Page
The following opinions have been omitted in printing
this joint appendix because they appear on the following
pages in the appendix to the Petition for a Writ of Certiorari:
Judgment of the District Court for the District of
Oregon (Portland) (Apr. 22, 2003) .............csccscccenseeeeees 47a
Opinion and Order of the United States District Court
for the District of Oregon Denying Defendant’s
Renewed Motion for Judgment as a Matter of
Fy SE eee 28a
Opinion of the United States Court of Appeals for the
Peete Capea (Gy SI, ZOIDS) onecccccesevcesesvscocsscecnereessecnsees la
Order of the United States Court of Appeals for the
Ninth Circuit Denying Petition for Rehearing and
Rehearing En Bane (July 8, 2005).....00.0......cccccceeeeeeeeee 48a
(Vil)
577a -
[Vol. 6-B (Apr. 15, 2003)] [Testimony of Roy Burke]
* * *
[Tr. 11] Q. So you don’t know anything about contracts
that were signed in 1998 just as another competitor was start-
ing up a mill in Northwest Washington?
A. I know about some alder contracts, yes.
MR. HAGLUND: Okay. Let me ask that you be handed
Exhibits 432 and 433.
MR. SIMON: Objection. Beyond the scope of the direct,
Your Honor.
THE COURT: Let me look —
MR. HAGLUND: This is to explore bias, Your Honor.
THE COURT: [’ll allow it, within limits, if it is limited
to that. I need to see the exhibits, though, before I make a
final ruling.
(Pause in proceedings.)
THE COURT: I'll permit very limited examination on
those.
Do you know about those contracts, Mr. Burke? Were
you aware of them?
THE WITNESS: Yes.
THE COURT: All right. You can inquire very generally
as to what they are, not in detail.
BY MR. HAGLUND:
Q. Is it a fair statement that these contracts committed all
of the volume from Crown Pacific tree farms in Northwest
Washington to Weyerhaeuser?
[Tr. 12] MR. SIMON: Objection, Your Honor. That is
not gencral inquiry about the contracts.
578a
THE COURT: To the extent that he knows, without re-
ferring to them, he can testify.
THE WITNESS: | am pretty sure these contracts were
done by my former boss; but, yeah, we had contracts with
Northwest Hardwoods.
BY MR. HAGLUND:
Q. And you were aware that those contracts in ‘98-’99,
committed the alder saw log volume from —
THE COURT: I'll sustain objection to counsel’s state-
ments about what the contracts called for.
BY MR. HAGLUND:
Q. Okay. Just a couple other questions. Mr. Burke, isn’t
it true that you got a call from Bill Nelson shortly after this
lawsuit was filed?
A. He called me wanting to buy some logs.
Q. Didn’t he tell you about —
MR. SIMON: Objection, Your Honor, hearsay.
-——JHE COURT: Objection will be overruled. You may
answer it.
THE WITNESS: | am pretty sure he didn’t say anything
about it.
BY MR. HAGLUND:
Q. And you didn’t tell him that you couldn’t afford to
[Tr. 13] testify against Weyerhaeuser?
A. No, absolutely not.
Q. Your company has been on the sales block for the last
two-and-a-half years, hasn’t it?
A. Oh, yeah. That’s common knowledge.
* * *
579a
[Vol. 6-B (Apr. 15, 2003)] [Testimony of Robert Taylor]
* > *
[Tr. 19] So as I moved to the east United States and the
eastern business, those same criteria held true, the same
processes, which was excellent for me. And then when I was
appointed in the role I am today in the late 1990s, it gave me
an opportunity to then go to customers, new customers, and
really sell the value of that product, but know how alder sub-
stitutes in and out with a number of species.
Q. Would you describe that for us a little bit.
A. Well, you know, the customer really determines what
species they use. It’s all about style, it’s about taste, it’s all
about experience and look for them, as well as how well it
machines and how well they are able to control their costs,
and make a good margin of profit by processing it.
You know, the alder clearly can be substituted for other
products as well as be substituted out based on those styles
and trends. So when we are around the world, what we’re
trying to do is understand the customer, understand what
they’re trying to produce, and look to see how we can fit a
product into their need.
And sometimes that’s alder and sometimes it’s other
products for alder, so it’s a real advantage we have by being
close to that customer to understand what their needs arc.
Q. Now, there has been testimony in this trial about vari-
ous technological improvements that have been made at [Tr.
20] Northwest Hardwoods, and other witnesses have gone
into detail, the various pieces of machinery, how they’re op-
erated. Let me ask you from a big picture perspective, why
does Northwest Hardwoods make the investments it makes?
A. Well, it starts with understanding where value is cre-
ated; and, secondarily, understanding the resource that’s
580a
available and trying to put equipment in that extracts the
most value out of that resource.
Starting with a sawmill, if logs are small and crooked,
you have to put equipment in that maximizes the value and
the amount of lumber that comes out of that log in order to
then protect that as it moves through the entire manufacturing
process. We also install technology to help improve the de-
cision by the employee that’s handling the wood.
Unlike softwood lumber, every employee that handles a
piece of hardwood is making a decision based on the value of
a piece of lumber, that log, that block. And it’s important
that we provide those tools to the employee, whether it be
equipment and/or education in order for them to protect the
value and get more value out of it, so we really design our
mills in order to do that.
And then hopefully if we’ve done our job well, and
sometimes we don’t do our job as well as we could, we limit
the amount of — of loss from the time that log lands at our
[Tr. 21] facility until the time the customer receives the lum-
ber. We take ownership during that entire process. We will
not pass on to the customer any defects, to the best of our
abilities.
Q. Let’s change topics a little bit and talk about some of
the experiences that Northwest Hardwoods was seeing in its
lumber sales market in the late 1990s, in particular directing
your attention to the latter part of 1997, early part of 1998.
What was the company experiencing?
A. There was a lot of — I guess turmoil might be a good
word, going on in the world marketplace. We had an Asian
crisis beginning to occur, and the demand primarily in Japan
was reducing. Their economy, their bubble economy had
kind of burst and things were tough there.
In Europe, things were also slowing down, and customers
that would use alder for the building of furniture needed less.
58la
And then the third component was the eastern U.S. furniture
producers were starting to move offshore. And all of those
things started to occur, even though minor, some of those,
and we had to change our focus on customers that we sold to.
Q. Tell us about that. What exactly were the changes?
What were the changes that Northwest Hardwoods started
making in response to this economic situation?
A. Well, first of all, the cabinet industry in the United
* * *
[Tr. 30] A. From — in the early ‘90s was eastern business
vice president.
Q. And from time to time, would you have meetings
with Arnold Curtis and the managers of Northwest Hard-
woods?
A. On occasion, but they didn’t occur very often.
Q. Did you hear Mr. Curtis or Mr. Hohendorf ever ex-
press an opinion that Northwest Hardwoods should maintain
high log prices?
A. Never.
Q. In the year 2000, were there any recommendations
from Weyerhaeuser, or decisions made with respect to modi-
fying the accounting of corporate and business level costs?
A. Yes.
Q. What happened?
A. Yes. All selling gencral administration costs were
asked to be kept at the business level, and the units, the
manufacturing units were asked only to keep track of those
costs that they controlled.
Q. Did that have ~ was that just for Northwest Hard-
woods?
I
582a
A. No, that was the entire company. And it was for stan-
dardization, so that when businesses were being compared
against, everyone was using the same accounting principles.
MR. SIMON: Your Honor, we ask that a copy of the ju-
ror notebook be given to this witness.
THE COURT: He has it, | think.
* * *
— [Tr. 33] business, meaning why should you be in busi-
ness. And the second part included strategy and rationale,
which is, what can do you and how attractive of an industry
are you in. Then you look at the execution of that strategy
and the outcome.
All of which each business went through in order for the
Weyerhaeuser senior management team to understand what
businesses should be a part of the company, what businesses
need to improve to be industry leaders, because the goal is to
be an industry leader, and then what businesses need to be
just held or divested.
Q. Some of those documents contain some statements
about what some other hardwood mills in the Pacific North-
west were doing or experiencing or facing. First of all,
where did that information come from?
A. It was all estimates. In the western U.S., there isn’t
any place to find data regarding even production of lumber,
so everything is just looking at our best guess estimate, using
whatever resources we had available to us. It’s very difficult
to come up with actual numbers. It was strictly an estimate
for the western United States.
Q. Now, what’s the point or purpose of making these es-
timates about what some of the competitors’ situations might
be?
A. Well, for us, what we were more concerned with was
what [Tr. 34] our business units were doing and how to im-
a
Neen ene enn ene
583a
prove those. Because, again, our goal was to be number one
or two in our industry, in the hardwood industry, and that
was our objective, to display how we were performing.
Q. Now, we’ve been talking about the investment direc-
tion setting and the company level. Was there also some-
thing called an annual planning process within Northwest
Hardwoods?
A. Well, it wasn’t just Northwest Hardwoods. It was the
entire company.
Q. Would you just explain what that is and how it differs
from IDS?
A. The IDS was done in springtime to provide the Wey-
erhacuser senior management team information by mid-year,
so they could begin to set their goals. The annual planning
process occurred in October, and that was for each business
to plan for the following year.
The company would do that so they could roll all the
businesses up and then go to Wall Street, you know, to indi-
cate how performance and forecast looked. There was a lot
of pressure to predict what future earnings were going to be.
Q. Now, who participated at Northwest Hardwoods in
this annual planning process? Not the Weyerhaeuser com-
pany-level IDS, but who were some of the participants in the
annual [Tr. 35] planning process?
A. As far as the annual planning process, it was really
done at the mill levels, and then it was rolled up to Northwest
Hardwoods’ leadership team.
Q. And that would include you?
A. Yeah.
MR. SIMON: Thank you. | have nothing further.
THE COURT: Cross-cxamination.
584a
MR. HAGLUND: Thank you, Your Honor.
CROSS-EXAMINATION
BY MR. HAGLUND:
Q. Mr. Taylor, would you agree that if the alder resource
in the Pacific Northwest were to be off limits or to disappear,
that the existing hardwood industry here would also disap-
pear?
A. Well, you know, the mills that we have today, are
constructed with equipment to handle the alder and maple
resource. | — I know we've run a few tests on softwoods,
such as hemlock, but because we have never had a need to
run other softwood species —
THE COURT: His question related to hardwoods. The
hardwoods industry woul. disappear?
BY MR. HAGLUND:
Q. Was the answer yes?
A. If there were no other hardwoods to run, yes. Then
* * *
[Tr. 39] Q. And Weyerhaeuser maintains detailed acrial
and other inventories of the entire forest resource in the Pa-
cific Northwest, correct?
A. They keep track of inventories, that’s correct.
Q. Quite closely, correct?
A. They usually do that every three to five years, yes.
Q. And you were involved in reviewing these materials
before they were actually shared with senior management
that was above you, correct?
A. That’s correct.
Q. So you had input into what is Exhibit 400, correct?
585a
A. That’s correct.
Q. Okay. Let’s move to Exhibit 405. Are you familiar
with this document? It is also in your book, and I’ll blow it
up more in a moment. This is 405.
A. Yes.
Q. Is Del Fisher in the upper right-hand corner?
A. That’s correct.
Q. And was this — this shows — oh, I don’t see a date.
Was this also prepared for this strategy session you’ve de-
scribed?
A. Yes. This is — it appears, based on the comments, this
is 1999.
Q. Well, wouldn’t it have been 2000 if your third bullet
* * *
[Tr. 43] Q. I'll restate the question. Isn’t it true that your
senior management team of Northwest Hardwoods gave two
$1,000 recognition awards at the end of 2000, and one of
those was to Gene Novak?
A. I — I would have to check that. I can’t remember
three years ago what that recognition was.
Q. Well, do you remember that you did give one to Gene
Novak?
A. I do not recall that, no.
MR. HAGLUND: Okay. May | approach the witness?
THE COURT: You may.
THE WITNESS: Okay. Yes, | do remember this.
BY MR. HAGLUND:
Q. Would you read what’s stated in your — is that your
handwriting in the lower left-hand corner?
586a
A. That’s correct.
Q. Could you read what you wrote to Mr. Novak.
A. “Recognition award of $1,000 will appear on the 12-
29 pay period. Thanks for your support and assistance.”
And this was to the Project Grizzly team.
Q. And Mr. Novak was part of that team?
A. That’s correct.
Q. And he got a thousand dollar bonus at year end as a
result?
A. That’s correct. According to this, yes.
* * *
[Tr. 50] weren’t added until after you bought Coast
Mountain?
A. That’s not correct.
Q. Isn’t it true, Mr. Taylor, that the forest licenses were
not a significant factor in Weyerhaeuser’s valuation of the
purchase — in Weyerhaeuser’s valuation of Coast Mountain?
A. That’s correct.
MR. HAGLUND: Novy, if the witness could be handed
Exhibit 482.
(The clerk complies.)
BY MR. HAGLUND:
Q. Now, Mr. Taylor, I want to ask you some questions
about the procedures for establishing transfer pricing for al-
der saw logs supplied to the Northwest Hardwoods mills
from company lands.
Is it a fair statement that it’s your understanding that
those transfer prices are to be set
587a
quarterly at fair market value as reflected by sales to
purchases from third parties?
MR. SIMON: Your Honor, I object. It’s beyond the
scope of direct on this line.
THE COURT: The objection will be overruled.
THE WITNESS: It’s my understanding that prices arc
set based on the market.
BY MR. HAGLUND:
[Tr. 51] Q. Transfer prices are set based on market, is
your understanding?
A. That’s correct.
Q. Okay. I'd like to — you’ve got 482. It’s a 66-page
exhibit. I am only going to be dealing with a few pages, but |
need to tell you what the numbers are. !f you could first turn
to Page 13.
First, Mr. Taylor, let me tell you that Exhibit 482 consists
of the year-end profit and loss statements for each of your
hardwood — your alder sawmills in Oregon, Washington and
British Columbia for the period of 1997 through 2001. Each
one is a two-page document and all of them are contained in
this exhibit.
| assume you're quite familiar with these, and the format.
Is that a fair statement?
A. That’s correct.
Q. And the first one | want to show you is for the first
year that you owned Coast Mountain. And you call it your
Delta, BC, sawmill, correct?
A. Ah, Delta, BC, correct.
Q. And here, if we blow this up a little bit, | want to go
to the middle where the logs are. We can see two major
S88a
categories of logs, is that correct, third party and Weyco or
Weyerhaeuser.
A. That’s correct.
[Tr. 52] Q. Now, the third party logs would be those that
your company is buying from outside suppliers; is that right?
A. |~1 am not familiar with the exact category. I’m as-
suming that that’s correct. There is a difference between
Weyerhaeuser and then third party.
Q. And the Weyerhaeuser category would be those com-
ing from either private hands like those you acquired from
MacMillan-Blodel or the forest licenses you acquired from
Coast Mountain?
A. That’s correct.
Q. Okay. And if we move across here to the far column,
which shows the year-end data, wouldn’t you agree?
A. Correct.
Q. If you look on the screen, what we see in 2001 is that
you bought 22.4 million board feet from third parties; is that
right?
A. That’s correct.
Q. And the average price that you paid for per thousand
board feet is $282 per thousand board feet, correct?
A. Right.
Q. And the second category, which is the private com-
pany wood or the forest license logs, you bought 9.8 million,
or you supplied 9.8 million board feet of those logs to your
Delta sawmill in 2001?
A. Correct. That’s what this says, yes.
(Tr. 53] Q. And the transfer price that you recorded in
your year-end financial statement was $282; is that right?
589a
A. That’s what this says, yes.
Q. So at least in British Columbia in 2001, there was no
differential between the transfer price and the third party
price on a year-end all average basis, correct?
A. Other than the handling costs.
Q. Okay. Other than a very small difference between
handling costs?
A. Uh-huh.
Q. Okay. Now, I'd like to have you turn to Eugene,
which is Page 45 in this document. Some of the page num-
bers are sideways because of constraints in the copy.
Now, would you agree with me, Mr. Taylor, that this is
the Eugene mil! year-end Page 2 statement for the financial
performance of the Eugene sawmill?
A. That's actually Page |.
Q. Okay. That’s Page |. You’re right. Page | of the
two-page year-end financial statement?
A. Correct.
Q. Now, if we go down to the same section of logs, do
we have these same two categorics, purchased third party,
purchased Weyerhaeuser or fee trmber?
A. Yes.
Q. And I’ve marked those with a highlighter on the
screen; [Tr. 54] is that right?
A. That’s correct.
Q. Now, if we move across, do we see here, Mr. Taylor,
that the third party volume that you bought from third parties
for the Eugene mill in 2001 was 32.1 million board fect?
A. Correct.
590a
Q. And you paid an average price of $449 a thousand for
that?
A. For the 12 months, yes.
Q. Okay. And then when we look at what was delivered
to the Eugene mill from your company lands, it was 3.6 mil-
lion board feet, correct?
For the 12 months, yes.
And the average price is $436?
Correct.
And that’s a differential of just $13?
For the year average.
For the year average.
Pe? es Pe FP?
Right, but not for each individual purchase.
Q. I agree. Just the year-end average $13 per thousand
differential year-end.
Okay. Now, let’s turn to Longview 2001, which is Page
10 of this document, Exhibit 48?. Would you agree that
Page 10 of this exhibit is the Longview mill, Page | of the
[Tr. 55] year-end financial statement for 2001?
A. Correct.
Q. We go down to the same area in the first column. Do
we see the same two categories of third party open market
logs and company logs?
A. All logs, right.
Q. Well, we see two different categories, night? The
same two we saw before.
A. We don’t separate saw logs from pulp logs, so it’s all
logs.
a
59la
Q. I understand. Then if we go across for Longview in
2001, it is correct that you bought 23.2 million logs on the
open market for the year? You need to answer out loud.
A. Yes.
Q. And the average cost was $537, correct? =~
A. That's correct.
Q. And then you supplied from company lands 11.1 mil-
lion board feet, correct?
A. Correct.
Q. And the average price for the year was $362?
A. For all logs, yes.
Q. And let me represent to you that’s a $175 differential?
A. There is a difference in price between saw logs and
pulp logs.
* * *
[Tr. 66] Q. All right. And then you also made a state-
ment in response to Mr. Haglund, you didn’t see a relation-
ship between the alder lumber market and the alder log
market?
A. That’s correct.
Q. Let’s take those through and I'd like you to explain
what you meant. First, why did you disagree with him when
he asked, “Can Northwest Hardwoods control the price of
logs?”
A. Well, | view the lumber market and the log market
different. So in the logs, it’s driven by the softwood harvest,
and there are a lot of decisions that take place by a landowner
because of the softwood volumes on there. The hardwoods
come along after. So the volume in value is determined on
what that softwood harvest is.
592a
{Vol. 6-B (Apr. 15, 2003)| [Testimony of Vicki McInnally|
* * *
[Vol. 68] Eugene Novak. | take it you know who Mr.
Novak Is.
A. Yes.
Q. Did you work with Mr. Novak, and in what capacity?
Tell us a little bit about that relationship just generally.
A. Gene Novak was on our financial lead team. He was
a business analyst for Northwest Hardwoods. He did report
to me for the duration of my stay there, which was three-and-
a-half years.
Q. Which time period?
A. From November 1998 through August of 2001.
Q. And directing your attention to the time period of
early 2001 — or, frankly, let me broaden it. From any time
that Mr. Novak reported to you during that time period when
you were controller of Northwest Hardwoods, did you ever
make any statements at all to Mr. Novak that it was North-
west Hardwoods’ business strategy or objective to have or
maintain high log prices?
A. | never made a statement like that, absolutely not.
Q. As a matter of fact, is it Northwest Hardwoods — or
was it ever Northwest Hardwoods’ strategy to maintain high
log prices during your tenure there?
A. Never. Our strategy is to manage our log costs. The
very first | heard about that supposed conversation was in
Gene Novak’s deposition several months after he left the
company.
* * *
(Tr. 77] Q. I understand that. And when he came to
town, was it unusual for him to meet with you in your office?
593a
A. Occasionally we would meet. Typically we would
meet in Portland because | was traveling there more often.
Q. Let me put it this way: Did Mr. Novak ever meet
with you in Federal Way ‘= your office?
A. Yes.
Q. And was it just the two of you in that office?
A. There may have been several times when it was just
the two of us.
Q. Does that separate Mr. Novak from any employee tha
reports to you?
A. No.
Q. Many times they would come into your office and
have a discussion?
A. Very, very often, yes.
Q. And in 1998-1999 time period, do you ever remember
Mr. Novak at one of these meetings explaining to you about
this disconnect between what he considered was happening
to the alder lumber prices and alder log prices?
A. In the ‘98 to ‘99 time frame?
Q. Yes.
A. We had several discussions. In ‘99, I asked Gene to
help put together a model on the western log resource activ-
ity. And for several months in ‘99, the latter part of [Tr. 78]
‘99, he was working on a model that showed ail of the logis-
tics flows from the resources, the standing timber to each of
the logs —
Q. He was trying to check out —
A. ~ each of the plants.
Q. I’m sorry. He was trying to figure out the problem,
right?
594a
A. Yes. This is a model that’s very familiar that we use
in other geographies, and | asked Gene to help put one to-
gether for the west. Because he worked on a similar model
in our northeast and our southeast operations. I said, “We
needed to get — because it’s such a complex set of mills and
sourcing areas, that would help if we had a model put to-
gether.”
So Gene and | did have conversations about that model.
As a matter of fact, we took it for a trial run. It would have
been in the very end of ‘99-— or actually the end of 2000.
Q. My question simply was: Mr. Novak was familiar
with this model then, obviously?
A. He was putting it together.
Q. And he was familiar with it from prior assignments,
correct?
A. Yes.
Q. Now in this time frame that we have been discussing,
[Tr. 79] in 1998 and 1999, did Mr. Novak ever come in to
you and ask, “Why are log prices so high when we control so
much of the market?”
A. | don’t remember any of those specific conversations.
Q. In general, was that the topic of any of the questions
he had for you?
A. It would have been more in the latter — as we were in-
vestigating our strategy for 2001 is when we had more con-
versations.
Q. How about 2000? In 2000, would he have had a
question similar to what | just asked?
A. The end of 2000 and early 2001 is when we were put-
ting all the information together and we were having a lot of
conversations about how to manage our log costs down.
595Sa
Q. In that time frame, Ms. McInnally, do you recall Mr.
Novak coming in to you and saying, “Why are log costs so
high when we control so much of the alder log market?”
A. No, | do not remember him asking that.
Q. And you never said, “We have a strategy in connec-
tion to alder logs”?
A. I’ve never said anything to that effect. 1 would never
say anything to that effect. That was fictional.
Q. Is it your opinion that Mr. Novak, after he had some
personal problems with his divorce, that he never did any
good work for Weyerhacuser again after that?
* * *
[Tr. 83] THE COURT: All right. Any further questions
of this witness? |
BY MR. KELLEY:
Q. Ms. MclInnally, in 2000 and after, did sales expenses
go away in terms of allocation for Northwest Hardwoods
mills?
A. We had several changes in how we allocated over-
head costs each year. In 2001, they entirely were held at the
business level. In 2000, which you’re referring to, we re-
tained the IT costs and the business management costs at the
business level, because it was difficult to allocate those costs
based on units of production.
Q. But the expenses still existed, right?
A. That’s true. They were declining, but they still ex-
isted. We were asked to keep our accounting processes as
simple as possible, and by the time we put together the plan
for 2001, all of the costs were held at the business level.
Q. And now Weyerhacuser as a parent corporation car-
ries significant debt, does it not?
596a
MR. SIMON: Objection, beyond the scope of the direct.
THE COURT: She testified, as I recall, about the alloca-
tion and the savings of the money necessary for the corpora-
tion, Weyerhaeuser.
MR. KELLEY: Relates to allocation, Your Honor.
THE COURT: | will permit it.
* * *
[Tr. 89] THE COURT: You may continue your cross-
examination of this witness.
MR. KELLEY: Thank you, Your Honor.
Your Honor, may | approach? I have some blowups of
some exhibits.
THE COURT: You may.
BY MR. KELLEY:
Q. Ms. Mclnnally, I am going to ask you some questions
about 400 and 405. Maybe it is casicr than me trying to put
them on the screen if you could look over here, please. Can
you see that?
A. Yes.
Are you familiar with Exhibit 400, Ms. McInnally?
Yes, | put that together in the spring of 1999.
You put that together?
Yes.
Q. Yes. And on the primary contributors with you on
this exhibit, were they not David Weyerhacuser?
POP
A. David Weyerhaeuser.
Q. Rob Taylor?
A. Rob Taylor.
597a
Q. Del Fisher?
A. Jerry Martin, Del Fisher.
[Tr. 90] Q. And this was to be used, as I understand it, in
1999, which is called the IDS seminar or meeting?
A. Yes.
Q. And that’s a report where Northwest Hardwoods is
and where it’s going into the future, correct?
A. Correct.
Q. Now, have you seen the original of this document
without the redactions lately?
A. Not lately. Not for a couple years.
Q. Well, you put it together. Let me ask you, do you re-
call specifically what has been redacted by your lawyers
from this document?
A. I can tell that the outlook is missing, future years, and
typically we put key bullets at the top.
Q. Do you recall specifically what the verbiage was in
these key bullets?
A. There’s a second exhibit that has one of the bullets on
it, next page. Industry consolidation has occurred in the
west. Northwest Hardwoods is a consolidator.
Q. Anything else you recall about the bullets on Exhibit
400?
A. I don’t recall what they said.
Q. Do you recall on the outlook where the graph went and
what Northwest Hardwoods’ share was projected to be in the
2003 to 2007 time frame?
[Tr. 91] A. The intent of this chart was to show the sup-
ply outlook, so this is a chart that is intended to give a fore-
cast of where the harvest levels are going.
598a
Q. And my question only was: Do you recall in the 2003
and 2007 time frame, what share of the market is represented
in Exhibit 400 for Northwest Hardwoods?
A. I don’t recall the share after what’s shown there. |
can’t recall what that says. It has been several years.
Q. Then if you take a look, please, at Exhibit 405, you
also, did you not, prepared this document?
A. Yes. This is — this is the way that we show our com-
petitiveness for our strategic review. This one is for Wash-
ington state.
Q. Did you put this Powerpoint presentation together?
A. Yes, I did, and the analysis, the numbers behind it.
Q. And I understand that you and the same individuals |
mentioned, Mr. Weyerhaeuser, Mr. Taylor, Mr. Fisher, were
the wordsmiths, if you would, of these bullet points?
A. What you’re looking at, this is the note pages for the
speakers, so when we’re presenting this, typically what the
senior team would have seen is just what is in the box, the
slide up above. And so these were notes below for Dale to,
as he was explaining the chart, there were notes that he could
refer to.
Q. This was on the screen for the entire audience?
[Tr. 92] A. And in their notebooks.
Q. And these were Mr. Fisher’s talking points?
A. Correct.
Q. Do you recall what’s been redacted on this exhibit
from No. 405?
A. We may have had some letters in there representing
different competitors.
Q. Do you recall specifically that you did have, in fact?
599a
A. I don’t recall —I don’t recall.
Q. Let me see if you can explain for me exactly what this
shows. The zero to 100, that would show a profit margin,
would it not?
A. On the left axis is the net margins, which is the profit
margin. It’s the earnings of that plant divided by the lumber
that they sold. And so it goes from zero to 100. You could
see Centralia was $100 margin, correct. That is the left axis.
Q. And the bottom axis, this is what?
A. On the bottom that shows the log supply for that time
period that we’re working with. In this case, it is roughly
250 million feet of log availability in that area servicing those
mills.
Q. Were there any projections in terms of where the sup-
ply of the alder resource was going on Exhibit 405?
A. No, that’s - that’s more of a current view snapshot,
[Tr. 93] where we’re at today. The intent of that is to show a
balance where you’re at with your supply that’s available
versus the capacity that you have in the area. We do that
with all of our businesses.
Q. You’re looking at a snapshot of where you are now,
not what the forecast is in the years to come?
A. Correct. This isn’t long term.
Q. Ms. MclInnally, would it be any assistance to you in
recalling specifically what was redacted from these two
documents if you saw the original of the document unre-
dacted from your lawyers?
MR. SIMON: Your Honor, we have an objection to this
that I would like to be heard outside —
THE COURT: All right. You can do that.
Any further questions?
600a
MR. KELLEY: Yes, Your Honor. I would like to re-
fresh her recollection.
THE COURT: All right. We will call her back in the
morning if necessary.
MR. SIMON: Your Honor, this witness is from out of
town and left two teenage children at home.
THE COURT: You may show me then the originals and
Ill make a determination.
MR. SIMON: Well, | don’t have them, he has them. |
have a different issue that | want to raise with the Court [Tr.
94] about that and this procedure.
THE COURT: Ladies and gentlemen, we'll excuse you
for a little extra recess for a few minutes. Sometimes these
things do happen.
(Open court; jury not present:)
THE COURT: All right. What’s the problem?
MR. SIMON: Your Honor, the problem is that when
these documents were first delivered to Mr. Haglund by Mr.
Novak, who took them from Weyerhaeuser, they contained
competitively-sensitive information dealing with other com-
petitors. At the time, Mr. Michael Haglund was a — and
we’re out of the presence of the jury, Your Honor — was a
part owner and chairman and member of the Board of Direc-
tors of Washington Alder.
THE COURT: I recall that.
MR. SIMON: We objected to Mr. Haglund seeing this
compctitively-sensitive information.
THE COURT: I understand that.
MR. SIMON: There was no objection made at the time
by Mr. Haglund on that point, no motion to compel at all. |
And, therefore, Your Honor, | think the jury will draw an er-
601a
roneous inference when the jury hears there are names of
other competitors on there of why we didn’t provide it.
So I have two points: One is | think that that information
should be provided and disclosed under seal and [Tr. 95]
confidentially so our other competitors don’t find out about
that, but more significantly, Your Honor, | would like an in-
struction to the jury that the reason why it says, “redacted,”
and they’re correct, my office redacted it.
THE COURT: I will find a way to teil them that, so you
won't be tarred with that brush. And my recollection is that
in some of the later arguments, you said that since Mr.
Haglund was no longer involved, you didn’t have any prob-
lem with it, so the real issue now is to make sure the jury
doesn’t draw any prejudice from the fact that it was redacted.
MR. SIMON: And the only way, Your Honor, the only
way in my opinion, and I submit this to the Court quite sin-
cerely, the only way for the jury to understand that and ac-
cept that is for the jury to understand that at the time they
were redacted, from Mr. Haglund’s view, it was because of
his connection with an active ongoing competitor in Wash-
ington.
THE COURT: We’re not going to do that. | can find a
way to tell them it was redacted and the reasons it was re-
dacted were valid at the time and they aren’t any longer; and,
therefore, they’re being disclosed voluntarily by the defen-
dant.
MR. SIMON: And the record reflects my disagreement
with that and my objection. | appreciate the [Tr. 96] oppor-
tunity to put that on the record.
THE COURT: Very well. Let’s see if there are any
other arguments now while we’re at it. You're going to show
those original exhibits to her —
MR. KELLEY: Correct, Your Honor.
602a
THE COURT: - to refresh her recollection. And I will
tell the jury at the time you do that the reason they were re-
dacted originally, that purpose is not in effect any longer, it
should not be construed in any way against the defendant, the
fact that they were redacted.
MR. KELLEY: Your Honor, these documents remained
in this form after Mr. Haglund no longer had any interest in
Washington Alder whatsoever.
THE COURT: | understand that. You didn’t particularly
ask for me to relieve the redaction or I might have done it.
Anyway, let’s get on with the testimony. The jury can come
back in now.
You'll want these under seal, I assume, still?
MR. SIMON: Yes, Your Honor.
THE COURT: Okay.
(Open court, jury present at 3:30 p.m.)
THE COURT: Ladies and gentlemen, you’ve heard a lit-
tle bit about some redaction on some exhibits. I want you to
know the reason those were redacted by the defendant when
they were disclosed originally is no longer in [Tr. 97} exis-
tence anymore. It shouldn’t have anything to do with hold-
ing anything against the defendant that they have been
redacted. I have now ordered that the redaction be lifted, but
you should not hold against the defendant anything for re-
dacting them originally, because that reason is now gone.
All right. You may proceed.
MR. KELLEY: Thank you, Your Honor.
THE COURT: And we'd better mark these “A” num-
bers, so we keep these straight.
MR. KELLEY: Your Honor, | have previously marked
them as our next document, 485 and 486.
603a
THE COURT: Let’s give them “A” numbers because
they’re the same exhibits without the redaction. So 400 will
be 400A; is that right?
MR. KELLEY: Correct, Your Honor, and 405A.
THE COURT: All right. Those are the only two?
MR. KELLEY: Yes, Your Honor.
THE COURT: All right.
MR. KELLEY: May | approach again, Your Honor?
THE COURT: You may.
And I assume, once again, other than as stated, there is no
objection to 400A and 405A.
MR. SIMON: Yes, there is, Your Honor. With respect
to 400A, we’re going into post-2002 data, which is contrary
to this Court’s ruling.
[Tr. 98] THE COURT: All right. We’ll have to get that
out. We'll have to stay within — this case involves every-
thing up to December 31st, 2001, so we’ll have to find a way
to get that information beyond that time out of the exhibit.
Assuming that’s done, | assume 400A and 405A can be re-
ceived subject to your previous objection.
MR. SIMON: Subject, yes.
THE COURT: They’ll be received.
(Plaintiffs’ Exhibit Nos. 400A and 405A were received.)
BY MR. KELLEY:
Q. I'd like to hand you 400A. Would you take a look at
that document, please.
A. Uh-huh.
Q. And before I ask you if that refreshes your recollec-
tion, let me just repeat, this is a document that you prepared
for an IDS presentation in 1999 looking forward, correct?
604a
A. Yes. I was new to Northwest Hardwoods, so I facili-
tated putting it together, the chart.
Q. In 1999?
A. Uh-huh.
Q. Now, does looking at 400A refresh your recolleetion,
Ms. Mcinnally, in terms of what the projection was for the
2003 to 2007 time frame?
[Tr. 99} MR. SIMON: I object, Your Honor. If evidence
is coming in post-2002, then I object to that, Your Honor.
And I am not quite sure that the Court’s ruling makes clear to
this witness what is and is not permitted.
THE COURT: What’s your position about why we’re
talking about 2007 now?
MR. KELLEY: Because it was a projection made, Your
Honor, in 1999 going forward in terms of what the market
was and what share they wanted of that market.
THE COURT: I will permit that, but you should under-
stand the case is about acts that occurred only up to Decem-
ber 31st, 2001. This projection was made before that time
and so I will permit it. ,
Go ahead.
MR. KELLEY: Thank you, Your Honor.
BY MR. KELLEY:
Q. Ms. MclInnally, now, the next column. Does a review
of Exhibit 400A refresh your recollection as to what the pro-
jected share for Northwest Hardwoods was during the next
five-year period?
A. Yes. What the next column shows, the main intent is
that we have —
Q. | just want to know what the column says. | am sure
Mr. Simon will ask you additional questions in followup.
605Sa
What does this column reflect in terms of [Tr. 100] North-
west Hardwoods’ market share, 2003 to 2007?
A. We’re showing a supply share and it is different than
market share. And the share is 85 percent. It is due to the
log costs.
THE COURT: It is 85 percent of the supply of logs
available or — you said supply, what —
THE WITNESS: What’s happening is we were project-
ing declining availability primarily due to all the regulations
that were unknown at the time.
THE COURT: Declining ability of logs?
MR. SIMON: Availability, Your Honor.
THE COURT: Availability, excuse me.
THE WITNESS: ‘99 was the time frame where all the
salmon regulations were coming into play, and there was a
huge amount of uncertainty. And so those of us who have
capacity were concerned about what will the regulations do,
and stream-side management.
At this time this chart was put together, we did not know,
so you can see at the bottom, we took some projections about
how much will be available at that time. And we were con-
cerned because it was an unknown and we projected that
there may be less available.
THE COURT: Let me get back to my question. That last
column is talking about an estimated percent share of the
logs, alder logs; is that right?
[Tr. 101] THE WITNESS: On the axis it’s showing the
logs that will be available, each harvest for each year. And
then what we’re interested in is, because our mills are be-
coming more efficient —
THE COURT: All | want to know is what that last col-
umn is. What does it say?
606a
THE WITNESS: The total log supply availability, and of
that, how much we project Northwest Hardwoods’ will be.
THE COURT: Okay. Supply of log availability. That’s
what it means.
THE WITNESS: Yeah, it’s supply.
THE COURT: All right. Go ahead. Excuse me, Mr.
Kelley.
MR. KELLEY: No problem, Your Honor.
BY MR. KELLEY:
Q. In 1999, you projected that Weyerhaeuser would go
over 85 percent of the supply share in this time frame, 2003
to 2007?
A. It was a function of having less available and our
mills becoming more efficient.
Q. And having said that, the projection was 85 percent of
the supply share?
A. That was our projection at the time, and we were very
concerned about that.
{[Tr. 102] Q. Let me hand you 405A, and ask you the
same question, Ms. McInnally, if that refreshes your recollec-
tion in connection with certain information that was previ-
ously redacted.
A. I can’t tell by looking at this chart what year it is.
Q. Okay. | think you testified earlier this was from an
IDS in 1999?
A. 1999.
Q. Does that sound accurate?
A. Yes, but it doesn’t have a date on it. We did very
similar charts in ‘99 and 2000.
607a
Q. A similar chart like this was available in both 1999
and 2000?
A. Yes, that’s correct, but they were slightly different.
We ended up putting Washington and Oregon together for
simplicity in the following year, so this must be 1999.
Q. And 405A, does it refresh your recollection in con-
nection with what these particular redactions were?
A. Yes, we had the —
Q. Let’s start with this one.
A. Those days, specifically what it says? It says, “Other
capacity.”
Q. The next box, Ms. MclInnally?
A. Washington Alder. These are the names of plants in
the area.
(Tr. 103] Q. And the following box?
A. Ross.
Q. Based on your understanding, would that be Ross-
Simmons?
A. Yes.
The next box, ma’am?
Pacific.
This right here is Pacific?
Right. | am not familiar with that business, Pacific.
DPOF
And there is a line right here. What does that indi-
~
cate!
A. Well, it looks like what’s happened is there’s another
line that you’re missing.
Q. Does this line continue up, ma’am?
608a
Yes, it does. And it says, “2012 supply.”
This line does?
Yes, uh-huh.
Or does this line?
No.
The line immediately next to Ross-Simmons —
POP S&H PY
No, go over. Let’s see. Well, there are two lines on
here that you need to draw out.
Q. If you identified this as Ross-Simmons, is there a line
that has a supply indication that goes up immediately next to
Ross-Simmons?
{Tr. 104] A. Yes, and that’s called current supply.
Q. Current?
A. Which is intended to mean that there is roughly 200
million feet of saw logs, and all the rest of the capacity is
pulp logs.
Q. And then is there one more projection in terms of the
supply into the future?
A. That’s the second line.
Q. Would that be here, ma’am?
A. Yes.
Q. And that goes to 2012?
A. Yes.
Q. So, now is your recollection refreshed that you did, in
fact, in 1999 at this IDS, project forward in terms of what the
supply would be?
A. Yes. This is similar to the other chart. Here we're
putting where the supply is in the future.
609a
Q. And one last question, this box here, who is that?
A. That’s Cascade. Earlier ] stated that this was a certain
point in time, and I did not recall putting timelines in there —
Q. | understand.
A. — until I saw this.
Q. So in 1999, when this document was created, the cur-
rent supply showed that there was not enough supply for all
of [Tr. 105] the competition in the marketplace; is that cor-
rect?
A. Actually, that is not correct, because all those mills
were running. There’s also quite a few puip logs, so there is
other volume that’s out there that is maybe smaller in diame-
ter which allowed the remaining capacity.
Q. That’s a good point. Ross-Simmons now, you know,
is no longer operating; is that correct?
A. That’s what | understand.
Q. You know that, don’t you? How about Pacific, do
you know whcther or not they’re still operating?
A. I don’t know.
MR. KELLEY: That’s all I have, ma’am. Thank you.
THE COURT: Further questions?
_ MR. SIMON: Yes, Your Honor. May I inquire of the
Court, though? [ want to comply with the Court’s rule, since
Mr. Kelley just asked whether or not those companies are
still operating, am I now free to go into what happened post-
December 31, 2001?
THE COURT: No, except as to projections based upon
data made available before December 31st, 2001.
MR. SIMON: Even though Mr. Kelley just asked about
what’s happening now with his last two questions?
610a
THE COURT: Whether they are still in existence. | will
ict you — that’s a good point. I will let you go into that to the
extent it talks about what is available
* * *
6lla
| Vol. 6-B (Apr. 15, 2003)} [Testimony of David Kurtz]
* * *
[Tr. 110] A. You mean the actual prices for the prod-
ucts?
Q. Yes.
A. Quarterly. It is usually quarterly. Every now and
then, they might have gone to monthly, but generally quar-
terly price negotiations.
Q. And how much volume are we talking about, first
with respect to Weyerhaeuser selling pulp logs to Georgia
Pacific?
A. 40,000 green tons.
_ Q. And what about the volume that was being sold to
Northwest Hardwoods from Georgia Pacific in Oregon?
A. It was 80 percent of the annual harvest, and that har-
vest would fluctuate, but it was probably three to five million
feet.
Q. Why was it just 80 percent, do you recall?
A. We generally try not to sell 100 percent. Kind of like
not putting all your eggs in one basket. We try to sell a per-
cent and that way we have that remaining 20 or 30 percent to
sell on the open market to make sure we are getting a correct
price. It doesn’t have to go there, if we think we’re getting a
good price, all 100 percent can go to the same home.
Q. Now, on a monthly basis or the quarterly basis, were
those separate — were those separate selling arrangements?
A. Yes. What I had was a buyer in Washington that
* * *
612a
[Vol. 6-B (Apr. 15, 2003)] [Testimony of Larry Bray|
* * *
(Tr. 117] logs to the Ross-Simmons STEDCO Joint Ven-
ture?
A. No. We’ve had a history ever since I started or even
before that that selling logs month to month, on a month-to-
month basis, and that’s always the way it had been there.
MR. JOHNSON: No further questions.
THE COURT: Cross-examination.
CROSS-EXAMINATION
BY MR. HAGLUND:
Q. Isn’t it true that after this lunch within a year you en-
tered into — or your company entered into two successive
one-year contracts to sell 80 percent of the volume from the
Toledo tree farm to — the alder volume to Northwest Hard-
woods?
MR. JOHNSON: Objection, Your Honor.
THE COURT: The objection will be overruled.
THE WITNESS: Our company entered into an agree-
ment, a buy-sell agreement, whereas, the Bellingham paper
mill would get pulp wood from a Weyerhaeuser operation in
Washington state, and at the same time, Georgia Pacific
would sell to Northwest Hardwoods a certain percentage of
their Toledo-only harvest. | think that was a one or a two
year — one-year agreements.
Q. And it was devoted, in terms of what GP was selling,
exclusively to the hardwood component of that tree farm,
[Tr. 118] correct? |
A. Could you restate that?
Q. In terms of the contract with Northwest Hardwoods,
what GP was willing, agrecing to sell was 80 percent of the
613a
hardwood saw logs generated from the harvest on the Toledo
tree farm?
A. That’s correct.
Q. And this was a commitment that was a year-long con-
tract in two successive years, correct?
A. That’s correct.
Q. It wasn’t a month-to-month situation, was it?
A. Well, the contract was in place for a one-year time
frame. But in reality what we did is we had month-to-month
negotiations, and pricing would be done each month based on
current market conditions and based on negotiations between
a representative of Northwest Hardwoods and myself. And
that’s the way we’ve donc it for the last six years.
Q. Okay.
A. In selling alder off that tree farm.
MR. HAGLUND: Could the witness be handed Exhibit
430.
THE COURT: Is this the contract?
MR. HAGLUND: Yes.
THE COURT: Mr. Bray, we just heard a witness say that
the price was negotiated quarterly instead of monthly. [Tr.
119] Would that be correct?
THE WITNESS: | believe that the contract states that it
would be negotiated quarterly, and that’s probably what’s in
the first contract. The second contract says monthly. We
actually did it on a monthly basis.
BY MR. HAGLUND:
Q. Now - and the close relationship with Northwest
Hardwoods has continued throughout the last several years,
correct?
614a
A. The last several years, we haven’t owned the tree
farm.
Q. Well, Pll withdraw that question then.
Now, did Mr. Gary Schimmel ever talk with you about
the contract he had discussed with Mr. Nelson?
A. I can’t recall that.
MR. HAGLUND: No further questions.
THE COURT: Any further questions?
MR. JOHNSON: One question, Your Honor.
REDIRECT EXAMINATION
BY MR. JOHNSON:
Q. The 20 percent that was not sent to Northwest Hard-
woods, what did you do with that 20 percent?
A. It was sold to H.R. Jones Veneer in Grand Ronde and
Morton Alder, sold to other outside buyers of hardwood.
MR. JOHNSON: No further questions.
THE COURT: You may step down. Thank you, sir.
* * *
615a
[| Vol. 6-B (Apr. 15, 2003)] [Testimony of Raymond Poppe]
* * *
- [Tr. 122] regard to general inventory levels?
A. Yes, I did.
Q. And how did you go about managing the log invento-
ries?
A. We - in larger producers of logs, more often than not,
our purchase agreements are based — were done on a quar-
terly basis, and the smaller suppliers that weren’t apt to be
producing steadily on a quarterly basis, we would negotiate
with them and write our purchase agreements with them as
their product was — became available.
Q. As a resource manager, were you concerned about the
potential for stain in logs?
A. Stain was a very significant issue with alder logs be-
tween April and October. So stain was another — or that part
of the season was another concern when we were looking at
controlling inventories and maintaining the supply, stain was
a significant issue.
Q. From whom did you purchase logs in general?
A. From the large timberlands people, from independent
loggers who bought timbers sales, from small landowners.
Anyone who — who had hardwood logs to offer.
Q. We’ heard some testimony in this case about nego-
tiations with log suppliers, and the shopping that can go on
between suppliers and log buyers. Are you aware of what
I’m talking about?
A. I am not sure that I understand “shopping.”
[Tr. 123] Q. Are there times when a supplier would
come back to you and say, “Cascade had offered $5 more
than you. Will you beat their bid?”
616a
A. That was something that would occur occasionally. It
was my practice not to engage in that whipsawing of prices
because I'd already made an offer basec on my best informa-
tion and more often than not probably wouldn’t produce any
— any results anyway. If I understand your question, that’s
what | call whipsawing of the buyers, and I didn’t engage in
that.
Q. Mr. Poppe, did you purchase logs from Northwes*
Hardwoods — or did you purchase logs from Weyerhaeuser
timberlands?
A. Yes, we did.
Q. And how were those prices negotiated?
A. Those were — excuse me, I came here with a cold.
We negotiated with Weyerhaeuser, Weyerhaeuser timber,
at arm’s length. And the market prices is what we dealt with -
the same with Weyerhaeuser, with Weyerhaeuser timber-
lands, as we would another large timberland operator.
Q. During that time frame, 1990 to 1993, relative to what
you were buying from third parties, what types of logs was
Northwest Hardwoods buying from Weyerhaeuser timber-
lands in Longview?
A. From ‘90, ‘91, we were buying a sawmill sort from
[Tr. 124] Weyerhaeuser and Weyerhaeuser timberlands.
Probably somewhere in ‘91 and probably because of the pa-
per mill right there in Longview, we began buying the pulp
logs as well. So in that frame — time frame, we bought again,
beginning probably somewhere ‘91, we bought the camp run
hardwoods or pulp logs as well as saw logs.
Q. Mr. Poppe, who did you report to as a resource man-
ager at Northwest Hardwoods?
A. I reported to Heinz Hohendorf.
617a
Q. Did Mr. Hohendorf ever instruct you that it was the
business strategy of Northwest Hardwoods to buy more logs
than it needed at Longview in order to keep logs away from
competitors?
A. Never.
Q. Did Mr. Hohendorf ever tell you that you should buy
logs at high prices, higher than the market, in order to raise
the log prices to competitors?
A. Never.
MR. JOHNSON: No further questions.
THE COURT: Cross-examination.
MR. KELLEY: Briefly, Your Honor. Thank you.
CROSS-EXAMINATION
BY MR. KELLEY:
Q. Sir, if I understand your testimony, when you faced a
situation in which a competitor might be raising what he
* * *
618a
[Vol. 6-B (Apr. 15, 2003)] [Testimony of Bruce Sutten|
* * *
(Tr. 128] standing timber that we utilize inside of our op-
erating unit. | am also responsible for-appraisal work and for
the evaluation of any land adjustment, and land adjustment is
simply where we buy land and timber and/or sell land and
timber or reproduction. We are constantly either consolidat-
ing Our properties or getting rid of properties that don’t fit the
core, so that’s my responsibility.
Q. So you’re a part of Western Timberlands?
A. Yes, | am, Western Timberlands.
Q. Now, as part of your duties, do you negotiate with
Northwest Hardwoods’ personnel on the transfer price for
hardwood logs?
A. Yes, 1 do. In fact, I do all of the transfer prices for all
the operations in the Twin Harbors area. That is one of my
fundamental responsibilities. Northwest is only one of many
units we have in our operation. We have western lumber
business, which has three sawmills; the western veneer busi-
ness, we have two veneer plants.
We have pulp, paper and packaging, a pulp mill that I ne-
gotiate transfer prices with, and Centralia Northwest Hard-
woods. All of those are divisions of the corporation, Twin
Harbors, Timberlands being the division that handles the land
and timber, and then | have to sit down on a monthly basis
and negotiate prices with all of the other individual operating
divisions.
[Tr. 129] Q. So in terms of Northwest Hardwoods, with
whom do you negotiate?
A. For Centralia, who | negotiate, Centralia mill which is
the closest to our operation logistically, the shortest haul for
our trucks, and our tree farm is actually right up against their
operating boundaries, is the Centralia sawmill.
619a
That doesn’t preclude, though, if Centralia needs to move
some inventory from Longview that I won’t sit down and
negotiate prices with Longview mill, but predominantly our
production goes to Centralia. Centralia also has a pulp facil-
ity at DePaul. We split our hardwood into two essential sorts
coming out of the woods. Our loggers make a definitive ef-
fort to make an eight inch plus grade log sort which goes di-
rectly to the sawmill, and then a fiber sort which goes
directly to the fiber facility.
Q. Now, with regard to who you negotiate with at Cen-
tralia, during the 1990s, who was that person?
A. Bernie McCain.
Q. Now, with regard to the logs that you would transfer
to the Longview sawmill, through the majority of the 1990s,
who were you negotiating with?
A. 1990s would be Jerry Bain.
Q. Now, how would these negotiations work? How
would they happen?
[Tr. 130] A. Oh, boy. Northwest Hardwoods, when it
was first acquired by Weyerhaeuser Company, it was ac-
quired as a wholly-owned subsidiary. Because of the legal
sensitivities around that, at that point in time, and the time
frame I do not recall. I simply do not remember when the
time frame was, it was a hand’s off negotiation.
Essentially what that means is it was arm’s length where I
sat and negotiated with Bernie at that point in time and Heinz
Hohendorf, as open market logs. And so I was dealing with
them as if it was another customer, any other customer in the
business. After the company decided or made the decision in
the legal sense to turn it from a wholly-owned subsidiary to a
division, then the rules changed.
| have very, very definitive rules that tell me how I set
my transfer prices and how | deal with my transfer prices,
620a
and when it became a division of the company, I deal my
transfer prices with it as a division of the company exactly
like 1 would with western lumber business, which is one of
the my softwood mills, or with the pulp and paper business,
which is the pulp mill. And there is a corporate policy that I
have to follow in order to establish those transfer prices.
Q. Now, the majority of logs that you deal in are coni-
fers, in terms of the scope of your duties?
(Tr. 131] A. Yes, itis.
Q. So how do you know when you sit down with Mr.
McCain or Mr. Bain that you are getting the market price?
A. Well, to step back to the wholly-owned subsidiary.
At that point in time, our operating unit had excess hardwood
above and beyond what Centralia and Longview nceded out
of my operating unit. And during that time frame, I actually
sold logs to a company by the name of Hampton Hardwoods,
which is owned by Hampton Tree Farms, which is — well,
they had a large sawmill here in Oregon and some in Wash-
ington.
At that point in time, they had a hardwood mill located in
our operating unit. I also sold logs to Cascade Hardwoods.
So during that time frame, it was very easy to get it because I
was sclling logs on the open market and it was not hard for
me to establish what market value was and how hard I had to
push Jerry or Bernie.
When it became a division, what we fell back to at that
point is the market evidence that I have to accumulate to do
appraisals. I’m constantly out looking at timber, either when
we're dealing with a land transaction that has merchantable
timber on it, or if it’s just a stand of merchantable timber.
And part of my responsibilities as senior appraiser is to
know what the markets are, so 1 know what I have to pay for
that, just as if you were appraising a house [Tr. 132] or an
apartment building. You do comp sales, and that’s the only
62la
way you are going to know about where you have to be to
pay for that patch of timber or that patch of land for timber.
Now, my largest responsibilities are the softwood part of
it. Well, you don’t get pure stands of Doug fir out in our
neck of the woods. We have Doug fir, hemlock, spruce, ma-
ple, alder, cedar, all growing on the same piece of property.
So to do a credible appraisal for that piece of property,
you have to have a good solid understanding of what those
markets are for each of those species and for the quality as-
sociated with each of those species that exist on a piece of
property to establish what your comp sale is going to be, so I
can take it forward to my management team, and say, “Okay.
This is what 1 am recommending that we actually spend for
that piece of property.”
Without credible information, quite frankly, | would get it
thrown back in my face and I’d be doing something different.
Q. You mentioned that when you were sending logs to
the Centralia mili, you will — Western Timberlands will sort
pulp and saw logs. Is that what you said?
A. Yes.
Q. Now, with respect to the Longview tree farm, how
does [Tr. 133] it work there?
A. That’s a little different down there. The location —
currently, the location that their hardwood goes to is one
fault. The hardwood all goes to the Longview operation.
And so for us at Twin Harbors, we specifically have two iso-
lated disposal points, which mileage wise | would say they
are 25 to 30 miles apart, physically the sawmill and physi-
cally the pulp mill.
-To save money operationally, you make the decision off
the landing or out of the woods to take the truck of gray to
the sawmill, so that you don’t have to end up putting it on
622a
another truck and hauling it back down the highway to the
sawmill, so we make that split in the woods.
In Longview, that’s not the case. They’re going to one
location. They take it out of the woods, take it to that loca-
tion. They get paid appropriately. They can get paid essen-
tially what they show up with. On the average, back to the
acre, | would assume it is pretty close.
Quite frankly, I’ve never sat down and made a compari-
son directly between the two of them. | know from my facts,
you know, what we get back per acre.
MR. JOHNSON: No further questions.
* * *
[Tr. 134] CROSS-EXAMINATION
BY MR. HAGLUND:
Q. Mr. Sutten, you work out of the Grays Harbor area?
A. Yes. I work out of where our operating unit is in a
small town called Cosmopolis.
_Q. And is Weyerhaeuser the dominant log exporter of
conifer logs out of Port of Grays Harbor?
A. Now we are. Yes, we are. The export market is ex-
tremely weak at this point. We’re dominant, but very, very
weak ourselves.
Q. Are you also the dominant exporter of chips out of the
Port of Grays Harbor?
A. We don’t export chips overseas out of the Port of
Grays Harbor. We do transfer chips from our operations out
of Grays Harbor to other operations in Longview.
Q. Now, is it a fair statement that the bulk of what your
office does in Cosmopolis is source export logs to combine,
on the open market to combine with export logs from your
own tree farms?
623a
A. No. The Twin Harbors tree farm, as we have transt-
tioned, we transitioned the second growth management in
about 1976. And when I’m saying second growth manage-
ment, we were truly in second growth. We have the pride to
say that we are the first industrial tree farm in the United
States right there at Twin Harbors.
* * *
[Tr. 139] Q. And he would follow the same process that
you follow when you negotiate transfer prices; ts that cor-
rect?
A. We have a policy that we have to follow.
Q. Okay. And in looking at the detailed records, Mr.
Sutten, it appears that the — that the vast bulk of your volume
from the Twin Harbors tree farm goes to Centralia?
A. Oh, yes. Yes, it does.
Q. And you do your best to establish transfer prices that
are at market value?
A. That’s my job.
Q. And that’s the policy?
A. That’s the policy.
Q. And when one looks at the Longview record, sir, it’s
clear that that’s what you do when you sell logs from Twin
Harbors to Longview, correct?
A. Yes, it is.
Q. Because if one were to compare the prices for high,
medium and low logs within the various diameter classes that
you're selling in a given quarter, mostly to Centralia, but
some to Longview, you’d have the same pricing, correct?
A. If I was selling from the Twin Harbors operation to
the Centralia mill and to the Longview, | get paid the Cen-
624a
tralia price, plus the additional trucking that it costs me to go
there.
[Tr. 140} Q. And, in fact, if one would go through the
detail as we have done, that’s what it shows. You’re getting
the same price for —
MR. JOHNSON: Objection, Your Honor. Counsel is
testifying.
THE COURT: It’s cross-examination. I’!] hear the ques-
tion.
MR. HAGLUND.: I will back up a second.
BY MR. HAGLUND:
Q. There are quarters, aren’t there, Mr. Sutten, if I under-
stand your testimony correctly, where you negotiate both
with Mr. McCain on the vast bulk of your volume going to
Centralia, as well as with Mr. Bain on the smaller amount of
volume that goes to Longview?
A. Yes, I do.
Q. And the —
A. Or | have, I should say.
Q. You have. We’re talking about a historic period, ‘96
through 2001, correct?
A. Yes.
Q. And you’ve been in this position that whole time
frame?
A. Yes, I have.
Q. And if the records show that you’re getting the same
price whether you’re sending those logs to Centralia. or
Longview, you are acting according to the policy as you
know [Tr. 141] it?
A. That’s right.
625a
Q. Okay. Now — And when it comes to the prices that
the Longview tree farm is paying for deliveries to Longview,
you’ve never looked at that, you said?
A. I’ve never made an absolute comparison, no; but,
again, I go back to the comment that I made earlier, we make
a definitive grade definition break in the woods. And that
definition break in the woods that we make for the Centralia
mill also holds true for anything out of Twin Harbors opera-
tion that is transferred to the Longview operation, which is
entirely different than what Longview does, because Long-
view takes camp run wood direct to their Longview opera-
tion.
So we’re talking apples and oranges here, because Twin
Harbors makes an extra exerted effort to draw value on a
grade basis, because we have two different places. Longview
doesn’t. They don’t make the extended effort to do the same
kinds of things we do.
So when I ship logs to Longview, it’s the same quality
control out of the woods that we would have if I was going to
Centralia. So | would have to assume without looking at the
numbers specifically that, yes, my numbers would be higher
because of the quality of our logs.
Q. But let me — what you’ve described is a situation [Tr.
142] where your tree farm does more sorting in the woods
than the Longview tree farm does, as you understand it, cor-
rect?
A. Yes.
Q. But when you send a log truck into Centralia, the log
truck is offloaded, is it not, and the logs are placed on the
. ground on what is called a roll-out scale, correct?
A. That’s correct.
Q. And a Northwest Hardwoods’ log scaler trained in the
high, low, medium specs scale those logs, right?
626a
A. Correct.
Q. And then your timberland division is paid according
to the data that he inputs into his handheld, and goes into the
computer system?
A. That’s correct.
Q. And the same system is used in Longview, is it not?
A. Yes, it is.
Q. Now, isn’t it true, Mr. Sutten, that in 1997 or 1998,
you had a conversation with George Lukin, then of Pacific
Hardwoods, in which you told him that your superiors had
been told — or had told you to give Northwest Hardwoods
some extra help in log procurement, and that you were to go
into the market and tell log suppliers that you wouldn’t buy
their export conifer unless they also delivered their alder saw
logs?
A. Oh, absolutely not.
(Tr. 143] MR. JOHNSON: Objection, Your Honor.
THE WITNESS: Absolutely not, no.
MR. JOHNSON: Outside the scope.
THE COURT: The objection will be overruled as to the
scope. It is cross-examination and it is appropriate.
MR. HAGLUND: I didn’t quite get —
THE COURT: And my memory is that was another wit-
ness, so it is proper impeachment.
You may proceed. The answer stands. He said it was ab-
solutely not.
MR. HAGLUND: And | would —
THE WITNESS: Id like to expound on that a little bit;
and, quite frankly, the reason I would like to expound on it is
we have — every year, we, in management at my level or ac-
627a
tually a level below me and above, go through what we call
antitrust training. And I do not — never do I attach a buy-sell
agreement to each other.
I will buy and I will sell to the same customer, but there
is no attachment ever that I have done in the 25 years I have
been doing this. I do not do that.
BY MR. HAGLUND:
Q. So George Lukin testified to the contrary, that was
false?
A. I have absolutely no idea what George said, but I do
not do that and I would not have donc that.
(Tr. 144] Q. And in your antitrust compliance program,
_ there’s an explicit reference to tying arrangements being im-
proper, correct?
A. That was the guidance we’ve gotten from our attor-
neys and our antitrust training that we’ve had over the years
that I’ve had it, yes. And | simply do not tie buy-sell agree-
ment. I will buy and scll to the same customers, but they are
entirely separate transactions, entirely separate contracts with
entirely separate volumes attached to it.
Q. | understand there are separate contracts, but —
A. There’s no tying.
Q. — isn’t it true that you have told loggers that if —
A. Never.
Q. — they want to sell their export logs to you, they’ve
also got to send their alder saw logs to Northwest Hard-
woods?
A. I recommend that they do that, but I’m not — depend-
ing on the market, the majority of the time, they come back
and tell me that Northwest isn’t paying a high enough price,
you should sell to Cascade Hardwoods or scll them to Ross-
628a
Simmons. But really, quite frankly, I would never tie that,
no.
If | bought the standing timber then it becomes mine in
fee patent, then I can sell it internally to all of our facilities as
a fee patent piece of timber and company asset. [Tr. 145] But
for me to tie a purchase of export logs to Northwest Hard-
woods division, or the pulp and paper division, I do not do
that.
Q. How strongly do you recommend that your suppliers
send their alder saw logs to Northwest Hardwoods?
A. I suggest because I don’t really, quite frankly, on the
hardwood side of the business, I don’t have privy to the types .
of prices that Bernie is working with day to day to day.
I do have abSolute control over our local sawmills in the
softwood business, because I’m the one who scts the prices.
So for our own sawmills, | will offer prices for all the volume
on the piece of property that the logger owns that I can util-
ize. As far as Northwest Hardwoods is concerned, | recom-
mend he calls Bernie or Steve Axel (ph), depending on where
it’s located. That’s as far as it goes.
* * *
629a
[Vol. 7-A (Apr. 16, 2003)] [Testimony of Gary Nelson]
* * *
[Tr. 16] You may call your next witness.
MR. SIMON: Thank you, Your Honor.
Your Honor, the defendant calls Mr. Gary Nelson.
THE COURT: All right.
(The witness was duly sworn.)
THE WITNESS: Gary Gene Nelson, Junior. N-E-L-S-O-
N.
DIRECT EXAMINATION
BY MR. SIMON:
Q. Good morning, Mr. Nelson. Michael Simon for
Northwest Hardwoods and Weyerhaeuser. | want to begin by
reading a brief statement about who you are. | will ask you if
it is correct and then I have some questions for you.
I understand you are presently the executive director of
the Port of Grays Harbor up in Washington, but previously
you were the general manager of the plaintiff Ross-Simmons
Hardwood Lumber Company; that you were employed by
Ross-Simmons from February 1997 through approximately
December of 1999. Am I correct, sir?
A. Yes.
Q. Will you briefly describe your job functions and his-
tories and any changes that took place while you were at
Ross-Simmons from February of 1997 through end of 1999.
What were you doing?
A. I started as vice president of raw resources, which is
{Tr. 17] essentially the log procurement manager and was in
that capacity until the summer of ‘98. Then I took on the title
of general manager, CEO —- COO I think at that time.
630a
Q. Essentially the chief operating officer, equivalent to
like a president or general manager?
A. No. I think John Simmons was president and CEO at
the time. J] was in charge of operations.
Q. While you were doing raw resource material log pro-
curement, was that for both the Joint Venture mill in Toledo,
Oregon, and for the Ross-Simmons Longview mill or one or
the other?
A. It was both.
Q. Would you take us through — would you describe for
us how you went about — how Ross-Simmons went about
procuring logs for the Toledo mill, and as part of the Joint
Venture, what did they do and what were the experiences that
you saw, starting with 1997?
A. When I came on board, we had a log buyer, full-time
log buyer in Toledo at the mill by the name of Dave Frazier.
It didn’t work out too well. | think | let him go that summer
and took over responsibility for procurement there.
It was a network of log suppliers — timberland owners
and log suppliers. After 15 years in the business, you kind of
know who is who and who to call. There is mailings you get
on distribution lists, some of the larger [Tr. 18] companics,
Georgia-Pacific, Willamette will have regular offerings,
maybe quarterly offerings, and they will mail out a prospec-
tus, if you will.
A lot it is just inquiries. We advertise in the newspaper,
in the local papers, and we have people call in and then we
would go out and look at their logs and bid or appraise the
logs for them.
I would say — I can’t say percentage-wise. I don’t have
the documents in front of me. You can look and see what
was small private versus larger timberland owner.
63la
Q. Were you able to get — why don’t you describe what
you were able to get generally in terms of the timber resource
or alder log supply at the Toledo Joint Venture mill in terms
of quality and price.
A. In ‘97, we actually had a pretty good log — actually
had too many logs. In late 1997, we actually had to back-
haul some logs up to Longview to get them processed before
they stained on us.
Going into ‘98, again, the market started weakening in
late ‘97 as did log prices go down. And then you have peo-
ple who just don’t log. Every time you have a drop in prices,
the marginal supplier says, I’m not willing to sell at that
price. Availability drops off.
The ovevall age class in that kind of working circle was,
we felt, much younger than what we had in the
* * *
{Tr. 21] Siletz, 1 think in the deck, and then we picked up
the cost of transportation. So we paid the actual cost there
and then picked up the transportation. We ended up with a
delivered log in Longview comparable to what the market
was in Longview.
Q. Let’s talk about the market in Longview. In the 1997
time period, what was Ross-Simmons’ experience in terms of
buying logs for its Longview mill in terms of could it find
adequate supply at appropriate market prices or appropriate
prices?
A. Yeah. I think we had a good supply of logs. We also
were buying in Port Angeles at that time. I think Bill Nelson
had started or instigated a program with Crown Pacific in
Port Angeles for regular supply. That relationship deterio-
rated, | think, in the fall of ‘97. I’m not sure why to this day,
but that fell apart. But we did continue to procure logs in
Port Angeles. That was a small increment of our logs for
Longview.
632a
In Longview, Longview Fiber was, I’m sure, the largest
supplier of the whole spectrum, from small diameter pulp
logs up to large diameter sawlogs. There was a fair amount
of activity until late ‘97 was about the time that everybody
called the Asian flu. The export market slowed down and,
therefore, logging slowed down, so there were less logs
available.
[Tr. 22] Q. I want to spend some time on that. I want to
close this part of the story and make sure I understand at
least, in your experience, through the end of 1997, you were
saying that there was an adequate supply of logs at appropri-
ate prices for both the Toledo Joint Venture mill and Ross-
Simmons’ Longview operation. Do I have that right?
A. Yes.
Q. Then what happened the later part of 1997 that af-
fected the Ross-Simmons business and the Toledo Joint Ven-
ture operations?
A. I would say in probably the fourth quarter of ‘97 we
started seeing demand decrease.
Q. Demand for what?
A. Demand for our lumber.
Q. Okay.
A. So we weren’t moving as much lumber. Usually
when that happens, you are not getting the price that you
thought you were going to get. So you got not only a little
deterioration of volume but also the average sales price
started to deteriorate. And then you start making adjust-
ments. You start running the mill at 80 percent capacity or
something like that.
You try to slow things down. Slow production down to
meet the sales. That’s kind of where we were at in ‘97, at the
end of ‘97, first part of “98, and it just continued [Tr. 23] to
deteriorate. That was in Longview. The issues with
633a
STEDCO down in Toledo were pretty much the same except
we were still battling some quality problems with the lumber
coming out.
Q. Let’s talk about quality issues out of Toledo. What
did you observe?
A. What the lumber sales staff told me was they had a
hard time moving the same grade of STEDCO lumber versus
Ross-Simmons lumber. I’m not really sure why. I don’t
know if it was because it was a new product out there in the
market or if there was truly something less desirable about
the product. That was more finished grade product. The
other issues we had were getting, 1 guess, true boards, if you
will.
Q. What does that mean?
A. The head rig — one of the head rig rails was off kelter,
so we end up, as the saw went through the log, it tended to
dive at the inner snipe. You ended up losing extra fiber on
the end. The head nig — excuse me — the gang saw — we had a
combination gang/edger. We continually had problems get-
ting cants stuck. I think we finally got that figured out, how
to lubricate it and keep the spaces of the saws from getting
hot so we didn’t end up with uneven lumber. That was the
issue. You end up with poorly manufactured lumber.
[Tr. 24] Q. We heard terms like “snipe” or “uneven lum-
ber.” What is snipe?
A. It is at the end of the board. It gets real narrow. The
saw dives in and it ends up like this.
Q. You are making a point like an upside down V?
Yes.
I take it customers don’t want that?
No ~ that eventually gets trimmed off. It is lost fiber.
OP? >
By fiber you mean wood?
634a
A. Yeah.
Q. Did you say thin? Thick?
A. In the gang setup there at SEDCO you end up with —
] can’t remember — six or seven boards, maybe eight, but you
end up with one board that is an inch-and-a-half and the rest
are 2 inch, for example, when they all should be the same.
That had to do with the saws not tracking through the cant
evenly. So when you run that through the kiln and dry it and
plane it, you come up with skips.
Q. What’s that?
A. A skip is when it goes through the planer, and the
planer puts a nice, smooth surface on it. If it is not uniform
thickness, the planer tends to jump over spots. You will have
a rough spot or a frayed spot in between.
Q. Now, you mentioned that the market was having
problems, [Tr. 25] the lumber market was having problems at
the end of 1997. Did that continue into 1998?
A. Yeah. There were a few bright spots, but in general |
think the trend was probably down in terms of demand and
prices. There are several markets. Any time you cut a saw-
log or an alder log, you are going to have chips on the low
end. You are going to have prime or select on the top end
and everything in between.
Usually you have a buyer for select. You have a different
buyer that buys the chips. You have a different buyer that
buys the median or lower grades. It is not all the same mar-
ket. The trick in sales is try to get everything to kind of
move proportionately so you don’t end up with your warc-
house out of balance.
Q. How are the sales done for Ross-Simmons?
A. We had a sales staff —
Q. Who was it?
635a
A.- Sonny and John.
Q. Sonny Powell?
A. Sonny Powell. And Sonny took care of our $2S or
our dried lumber primary. John took care of the pallet and
shook, the green lumber sales.
Q. When you say that Mr. Sonny Powell took care of the
S2S or dried lumber, that’s the more valuable higher grade
product. Am | correct?
[Tr. 26] A. Yes.
Q. Did Mr. Powell — to whom did Mr. Powell sell?
What types of customers did he sell?
A. When I came in ‘97, we were selling primarily to
wholesalers. | think the philosophy at the time was let’s turn
our money. Let’s get our money back. Let them figure out
how to merchandise that or market it. Is it going to Europe
or Asia or staying in the United States?
Q. Would you spell that a little bit more. What was the
business philosophy of Ross-Simmons during this time pe-
riod with respect to what its priorities were?
A. The priority was to sell as much lumber as we could.
It seemed to be that the — and, again, I didn’t have, other than
to witness which direction lumber was flowing, it seemed
that there was North Pacific, I think, was a big brokerage that
we used. We would sell to brokers, and they would market
the lumber to whoever. A lot of times we never knew who
the end user would be.
Q. I understand the financial records are in here. I won’t
ask any details about that. Is it generally your understanding
that 1997 was one of the biggest sales and profit ycars for
Ross-Simmons?
A. I don’t think so. I thought that ‘96 or ‘95 was better.
I don’t know.
636a
Q. We will look at the financials later. I won’t go into
* * *
[Tr. 31] Did you mean anything besides what it says?
A. No.
Q. The next sentence, what did you mean by that? “Un-
fortunately, we could only push log prices down to a certain
point as our competition kept a floor on log prices.” What
did you mean by that?
A. It is a tactic that all log buyers use. If you screw up
and you buy too many logs at a high price and you can’t take
any more logs, then obviously you don’t want the competi-
tion to get logs at a lower price. You try to do everything
you can to keep that — even if you are not buying — a standard
one was if I was buying, | would pay X, but I’m not taking
logs. It was just really a strategy | think we all used to pro-
tect ourselves on the downside.
Q. Do you have any knowledge at all specifically that
Northwest Hardwoods did that?
A. No.
Q. Do you have any knowledge at all of any anticompeti-
tive activity by Northwest Hardwoods or any activity at all
designed to push log prices up or keep logs away from com-
petition?
A. Not by Northwest Hardwoods, no.
Q. That next sentence on paragraph 3, “Also softwood
log markets were poor so the overall logging activity was
down resulting in a supply of alder logs that was lower than
[Tr. 32] normal.” What did you mean?
A. Anybody that has been in the woods in the Northwest
know that alder and cedar are not a predominant species.
Hemlock and fir are. Most companies, when they go to log,
they are logging Douglas fir or hemlock or a combination.
637a
Along with that they will harvest alder. There is very few 90
or 100 percent stands of alder. It is usually a come-along
specics. It comes along with everything else that they har-
vest.
So if the demand, either domestically or in export market
for Douglas fir is down, the supply of aider logs on the mar-
ket is going to diminish.
Q. Is that what you experienced in ‘97 and ‘98?
A. Yes.
Q. Look at paragraph 5, Mr. Nelson. It says, “Produc-
tion costs were higher than anticipated due to not being able
to produce at the projected Ievel of four 8-hour shifts per
week.” You told us you curtailed back to four 8-hour shifts.
A. Uh-huh.
Q. What did you mean by that statement?
A. I guess that means that we didn’t produce at four 8-
hour shifts per week. I don’t recall.
Q. Okay. Fair enough. May I ask that you be shown
Exhibit 1020. This is a letter dated August 12, 1998. It
* * *
(Tr. 46] Q. You believe that decision to sit and hold,
though, caused the market to become stagnant, though, didn’t
you?
A. I couldn’t say. Log market or lumber market?
Q. Lumber market.
A. I don’t know if that contributed or not.
Q. You don’t specifically recall telling anyone that or
writing that?
A. No.
638a
Q. Now, if | understood correctly, you testified that in
your entire tenure at Ross-Simmons, you didn’t see any un-
fair activity.on behalf of Weyerhaeuser in terms of log pric-
ing or trying to keep logs away from competitors. Is. that
right?
A. Right.
Q. Do you remember, sir, in 1999 Weyerhacuser seeking
an exemption from — secking an exemption so they could ex-
port logs and at the same time still purchase alder from state
properties in Oregon?
A. In Oregon, yes.
Q. Do you recall that?
A. Yes, 1 do.
Q. Do you recall that you — do you recall what your
opinion was of that at the time?
A. Yeah.
Q. What was it?
[Tr. 47] A. I didn’t think they should be able to. It was
one niche that we had available to us. I didn’t think they
should be able to do both.
Q. Did you, in fact, think that it violated the intent of the
federal substitution rules?
A. It had nothing to do with the federal. I thought it was
the state. It was state land we were talking about, not federal.
Q. In May of 1999, sir, do you believe it was your opin- ~
ion that this effort by Weyerhaeuser to both export log and
purchase alder sawlogs from Oregon property violated both
the federal substitution rules and the Oregon substitution
rules?
A. I think the Oregon substitution rules.
639a
Q. Do you recall that it was your opinion at the time that
Weyerhaeuser was attempting to use a loophole so that it
could do both?
A. I’ve got to remember what the rules were. | think it
was you could not — if you exported — if you exported out of
the state of Oregon, you couldn’t buy Oregon state timber or
logs, and they were trying to get an exemption so that they
could buy Oregon state timber or logs. And I didn’t think
that was fair.
Q. Mr. Nelson, would it refresh your recollection about
what your exact position was in May of 1999 about this issue
[Tr. 48] if 1 showed you a letter that you wrote at the time?
A. That would be great.
MR. KELLEY: May | approach, Your Honor?
THE COURT: You may.
THE COURT: Has this been marked?
MR. KELLEY: It has not, Your Honor.
BY MR. KELLEY:
Q. Have you had a chance to review your May 14 letter?
A. Yes.
Q. Does that refresh your recollection of Wcyerhaeuser’s
efforts to both export logs and purchase alder from state
lands violated both federal substitution rules and Oregon
substitution rules?
A. Yes, because |] think what was driving this, sir, was
they made a decision, | think, in early ‘99 to start exporting
conifer logs out of Coos Bay. That was the change that kind
of — | think up until that time Weyerhaeuser could buy ODF
timber. It was when they made — in fact, this goes back to
the early ‘90s. Weyerhaeuser took a position that they
64%a
wouldn’t export logs out of the state of Oregon. Then in ‘99,
I think, is about the time they reversed that, so that changed.
So the Oregon timber was something that Northwest
Hardwoods, as Weyerhaeuser, had been able to access. And
when they changed their mind and decided to export conifer
[Tr. 49] logs, I thought that was a violation.
Q. In fact, you thought that they found some kind of a
loophole, did you not?
A. Yeah.
Q. At the time, in May of 1999, did you believe that
Weyerhaeuser controlled about 50 percent of the export mar-
ket and 70 percent of the hardwood lumber manufacturing
facilities?
A. That’s what I said, yeah.
Q. Did you believe they had the motive — their motives
were suspect?
A. | think that’s what it says here.
Q. In fact, you describe it as an 800-pound gorilla, do
you not?
A. Yes, I do.
Q. All you were asking for was a level playing field to
compete against a mega-corporation like Weyerhaeuser?
A. Yes.
MR. KELLEY: No further questions.
THE COURT: Further questions of this witness?
MR. SIMON: Yes, Your Honor.
REDIRECT EXAMINATION
BY MR. SIMON:
64la
Q. Mr. Nelson, did Ross-Simmons, when you were
there, buy a significant amount of timber from these Oregon
state [Tr. 50] timber sales, the ODF timber sales?
A. Probably not. A lot of the ODF timber came out of
the Tillamook forest which was kind of a tributary to Gari-
baldi, but we did pick up some in northwest Oregon, occa-
sionally a little bit down on the central coast, but it wasn’t a
lot.
Q. Thank you. Now, when Mr. Kelley was asking you
questions, I think | heard you say that with respect to driving
log prices, you said sometimes Cascade Hardwood would
drive log prices; sometimes Washington Alder would drive
log prices. Then you said sometimes us, Ross-Simmons,
would drive log prices. What do you mean by that?
A. There are several instances when that occurs. Usually
the most common is when a new player emerges. I think I
would — I’m sure STEDCO had a similar experience when
they first started up. You have to, 1 say, buy your way into
the market. You have to get credibility with the local suppli-
ers. And the way you do that is through a price premium.
Washington Alder, when they started up, whenever that
was. It was in the spring of whatever, in Port Angeles, we
noticed an immediate jump in prices up there. Again, it is
buying your way into the market; buying credibility with the
suppliers.
The other time that this happens is, let’s say a sawmill
has.a run or sells a bunch of their inventory, so
* * *
642a
[Vol. 7-A (Apr. 16, 2003)] [Testimony of Jerry Bain]
* * *
{Tr. 53] Q. Who were the suppliers during the 1990s that
you purchased from?
A. Oh, in a given year we would have 250 to sometimes
300 suppliers, small suppliers from one to two — load suppli-
ers all the way up to the larger suppliers.
Q. Who are some of the larger suppliers?
A. Cavenham (phonetic), Weyerhaeuser, Hampton.
Those were probably our major larger suppliers.
Q. How about Rayonier?
A. Rayonier, we got logs from them.
Q. Simpson?
A. We never got anything from Simpson in Longview.
Q. I am going to ask the witness be shown Exhibit 14
and Exhibit 482.
Mr. Bain, Exhibit 14 is a plaintiffs’ exhibit. Do you see
the area where Longview is?
A. Yes.
Q. What is that red area right next to Longview?
A. That is the Weyerhaeuser timberlands.
Q. Now, the blue area in this map are the state timber-
lands both in Oregon and Washington. During the 1990s,
how did Northwest Hardwoods go about purchasing logs on
state lands?
A. On state lands we weren’t able to bid the timber sales,
but we could buy the logs off the timber sales from whoever
* * *
6434
[Tr. 56] price and negotiate a separate agreement for pulp
logs at market price.
Q. What was the market price based on?
A. Based on — at the time whatever the market was.
Their sales rep. pretty well knew what the log market was in
the region, and I might have a price that [ wanted to pay, he
would have a price he wanted, and we negotiated a price
from that.
Q. Do you have Exhibit 482 in front of you?
A. Okay.
_Q. This is an exhibit of the plaintiffs. If you look at the
first page, it shows the average price for the year for third-
party logs in Longview and the average price for Weyco logs
in Longview. Do you see that?
A. Yes.
Q. It has it for different years from 1997 to 2001?
A. Yes.
Q. If you turn the page to page 2, if you look about two-
thirds of the way down, do you see where those numbers
came from, the purchase logs, third-party, and purchase logs
~ Weyco? |
A. Yes.
Q. Now the average for the end of the year, the average
purchase price for Weyerhaeuser was different from the av-
erage price to third parties -
[Tr. 57] A. Correct.
Q. — at Longview? Please explain that.
A. The average price on the third party is primarily saw-
logs, which is always at a higher rate. The average price for
Weyerhaeuser is a weighted average of the pulp logs and the
644a
sawlogs that were purchased and melded together for the end
of the year.
Q. So for Weyerhaeuser, you are buying both pulp logs
and sawlogs?
A. Correct.
_ Q. In general for third parties you are buying what?
A. Primarily sawlogs. We bought very little — we did
buy some pulp logs from third parties but not very much.
Most of the pulp logs we got from Weyerhaeuser was enough
to meet our needs. We did buy a little bit. We would have
some supplier that would say: Hey, I want to sell my pulp to
you also. Okay. We will buy your pulp, and this is the mar-
ket and buy their pulp log.
Q. Let’s talk a little bit about pulp logs then. First of all,
how did those trucks come into the mill?
A. They came in from all of our suppliers, sorted the
sawlogs on one load and sorted pulp logs on another load.
Q. From Weyerhaeuser, why didn’t you have them send
all the loads altogether?
A. Actually they wanted to do that. The main reason is
* a *
[Tr. 59] needed one. At that time they went out on the
market, paid extremely high prices, offered extremely high
prices for logs. Extremely higher than what we could pay.
We just backed away from the market and stayed where we
were at.
Q. Do you know why they were paying high prices?
A. I don’t know. They were — like I say, they were short
of logs at one time and —
Q. Throughout the 1990s who did you report to?
A. What year? Excuse me.
645a
Q. From 1993 to 2000, who did you report to as resource
manager?
A. I don’t know when Heinz left. Heinz Hohendorf part
of the time and Jay Mehta (phonetic) was in there a short
time and Del Fisher until I retired.
Q. Now, did any of those individuals ever express to you
that it was a strategy of Northwest Hardwoods to raise the
level of log costs in order to hurt competition?
_A. Oh, absolutely not.
Q. Did any of those individuals ever tell you to buy more
logs than Longview needed in order to keep logs away from
-Ross-Simmons or other competitors?
A. Absolutely not.
MR. JOHNSON: No further questions.
THE COURT: Cross-examination.
CROSS-EXAMINATION
[Tr. 60] BY MR. HAGLUND:
Q. Now, Mr. Bain, you were the resource manager in
Longview from ‘93 to 2000 until you retired, correct?
A. Yes.
Q. You would have been the top log buyer at the Long-
view mill resourcing for that mill during that time frame, cor-
rect?
A. Yes, that’s correct.
-Q. You reported to the three individuals you mentioned,
Mr. Hohendorf, Mr. Mehta and then Mr. Fisher from ap-
proximately ‘97 through 2000?
A. Yes.
Q. From the time frame — you started at Longview in
‘86, right?
646a
A. ‘87.
Q. And from ‘87 until some point in ‘93 when you be-
came the resource manager, you were reporting to a resource
manager named David Wood. Is that correct?
A. David Wood for part of the time and then he retired.
Then Ray Poppe.
Q. Now, is it your testimony, sir, that in ‘89 and, again,
in 1993 that the Longview mill had no significant stain prob-
lems?
A. We periodically, throughout the whole time, would
have stain problems.
[Tr. 61] Q. Did you have a significant stain problem in
1989 and, again, in 1993?
A. I can’t answer to 1989, but in ‘93 is when we pur-
chased a large amount of pulp for the chipping operation, and
we had — a lot of the pulp logs were stored on land and a lot
of those did get stained and did affect the chip quality.
Q. Do you ever remember a significant stain problem in
the sawlog inventory in “89 or ‘93?
A. No. Like | say, I can’t say for ‘89, but ‘93 I was
there.
Q. Weren’t you there in ‘89?
A. | was there. I was a log buyer. Resource manager
was responsible.
Q. You can’t remember?
A. I don’t recall.
Q. Okay. Okay. So there might have been a significant
stain problem. You just can’t remember at this point in ‘89?
A. I don’t recall.
647a
Q. Okay. Now, is it true, sir, that throughout your entire
career as a log buyer for Northwest Hardwoods that you have
made it a personal practice never to increase your original bid
above your first bid in the face of a competing bid?
A. On a bid basis, no, | never did change the bid on a
[Tr. 62] bid.
Q. You would never change the bid?
A. Not on a bid.
Q. When you say “bid,” what do you mean?
A. If somebody has a stand of timber or a group of logs
on a bid basis and normally you have a one-shot chance to
bid those logs, you send the bid in and that’s it.
Q. Let’s not use the situation where you are following a
formal written bid procedure. You have been — let’s take the
situation where you have got a call from a logger or land-
owner. They say: | got a patch of timber. It is going to be
harvested in two months. | would like to find out what the
market is doing and get a quote from you guys. You would
go out and look at it, right?
A. Correct.
Q. Then you make a phone call and give them the quote?
A. That’s correct.
Q. The occasion occurred, did it not, where that logger or
landowner would call you back up and say: Ross-Simmons
is $3 a ton higher. If you want the wood, you need to beat
them. That happened?
A. Oh, it did happen.
Q. Was it your personal practice never to increase — |
A. It was my personal practice to avoid that. If there was
somebody that | really knew, that | trusted, I might [Tr. 63]
meet the price. But to go over that, absolutely not. It was
648a
very rarely that that did happen, but occasionally there was a
situation, somebody that I really knew — because some of
these people that you are referring to at times would — they
would come to me or whoever was there and say: Well,
Ross-Simmons offered this price. And would they go over to
Ross-Simmons and say: Northwest Hardwoods offered this
price, back and forth. They jerk you around like a yo-yo. It is
a practice you try to avoid.
Q. | want to make sure we understand your testimony.
You never would beat the bid?
A. I never did beat the bid. I would match it.
Q. You only did that once or twice to the best of your
recollection?
A. You know, I don’t know exactly how many but not
very many.
Less than 10?
Yes.
In 15 years?
You know, you are getting specific.
lo or a
That’s what the case is all about, sir, getting specific.
A. But I can’t say exactly over 15 years. But I know it
was a very small amount. dain
Q. Now, from time to time do you, as a log buyer or [Tr.
64] resource manager for Northwest Hardwoods, receive an-
titrust training at corporate headquarters?
A. I had been to, | think, two different meetings over the
years.
Q. And is it made clear in that antitrust training that an
employee will be fired if they violate the company’s — Wey-
erhaeuser’s antitrust policies?
A. Yes.
649a
Q. So there are major consequences of failing to live up
to those guidelines and policies, correct?
A. Yes.
Q. Now, is it your understanding that tie-in situations
were covered in your training?
A. What was that question, please.
Q. As part of your training did you ever have explained
to you in these Weyerhaeuser antitrust sessions that tie-in
sales were not legal?
A. Tie-in — 1 don’t understand the question.
MR. JOHNSON: Objection, this is beyond the scope of
the direct.
THE COURT: The objection will be overruled.
Explain what you mean by tie-in.
BY MR. HAGLUND:
Q. A tie-in situation is where a particular company has a
particular product that a buyer or supplier wants —
[Tr. 65] MR. JOHNSON: Your Honor, I do object —
THE COURT: Objection, overruled.
| MR. JOHNSON: - to his characterization of what tie-in
is.
THE COURT: I will hear the question first.
BY MR. HAGLUND:
Q. I will try to explain it as simply as I can. It is a situa-
tion where a company has a product that some other party
wants and as a condition of selling that product to that party,
the seller says: You also have to buy something else or sell
something to me?
A. I was never involved in that.
650a
MR. JOHNSON: Objection.
THE COURT: Objection overruled. He can state his
premise, and we will argue about the law later.
BY MR. HAGLUND:
Q. You are not familiar with that concept at all?
A. Ine *vas involved in any of it whatsoever. | know
what you .alking about now, but, no, we never got into
that situation.
Q. Did you ever develop relationships with any of your
suppliers, Mr. Bain, where you had an agreement with that
supplier that you would get a last look at buying their timber?
A. A last look? No. No.
[Tr. 66] Q. You never ever had a relationship with a sup-
plicr where they knew that they could go into the market, get
the Ross-Simmons price, come to you and you would meet
it?
A. No. No.
Q. Never?
A. No.
Q. Okay. Would that violate your training to engage in
that kind of activity?
A. I don’t know. I’m not sure of that.
Q. You are not sure?
A. Yeah. That’s just -
Q. You never did it, but you can’t recall whether it
would violate your training?
A. I don’t recall if it would violate training. I just never
did it.
65la
Q. Okay. Let me ask some questions about the log grad-
ing and sorting procedures at Longvicw. There has been tes-
timony previously about the sorting system in place within
the alder mills. Is it a fair statement that when logs come
into Longview, just like in Centralia or Eugene, that they will
be taken off the truck, rolled out on the ground and scaled?
A. Correct.
Q. And that happens whether it is wood bought from a
third party or from Weyerhacuser tree farms?
* * *
[Tr. 71] Q. Now, the pulp logs are going to fetch a lower
value, correct?
A. Correct.
Q. Now, when you would negotiate with — let me ask
this first. You have testified earlier that when you are buying
sawlogs, whether it was from a third party or from the Wey-
erhacuser tree farm, that they come into the yard, they would
be scaled and the data put into the computer system?
A. Yes.
Q. Now, you also bought some camp run from what I
understand?
A. From who?
Q. From third parties.
A. I just said that after 1991 we changed, went away
from buying camp run, and we got sawlog sorted and pulp
sorted.
Q. But let’s be clear. You still continued to buy some
camp-run wood from third parties?
A. You know, if we did, it was a very minimal amount.
I don’t recall exactly. 1 can’t go back and say specifically.
But if it was, it was a minimum amount because we made a
652a
big cffort to get away from buying camp run because camp
run is very risky when you are buying camp run from any
supplier.
Q. Now, it is not your testimony that you did not buy any
camp-run log truckloads in the year ‘95 to 2001, is it not?
MR. JOHNSON: Your Honor, I think it has been
* * *
[Tr. 73] and Centralia would negotiate with Bruce. Now,
we'd wait for the other to get done with the other. We would
do it simultaneously.
Q. Let’s make sure we got our names and positions
straight. Mr. Sutton, he is the marketing manager for the
Twin Harbors tree farm that is closest to the Centralia saw-
mill?
A. That’s correct.
Q. He would negotiate with Mr. Bernie McCain?
A. That’s correct.
Q. And Chuck Lappe is the marketing manager for the
Longview tree farm, the closest to your operation?
A. That’s correct.
Q. On a quarterly basis you would negotiate with him for
the prices for sawlogs?
A. Yes. For the Longview region, yes.
Q. You were familiar, weren’t you, from time to time
with the prices that Mr. Sutton and Mr. McCain were negoti-
ating, correct?
A. Oh, yes.
Q. Is it a fair statement that the sawlog prices for the
volume received from the Weyerhaeuser Longview tree farm
would be comparable to the market prices you were paying
653a
for the same grade and diameter class of sawlogs from third
parties?
[Tr. 74] A. Yes.
Q. Okay. And that’s what the computer data should
show?
A. That’s correct.
MR. HAGLUND: Nothing further, Your Honor.
THE COURT: Further questions of this witness?
REDIRECT EXAMINATION
BY MR. JOHNSON:
Q. Has any supplier ever expressed this dissatisfaction to
you about Northwest Hardwoods’ scaling?
A. At times, yeah.
Q. And did you work with that supplier to see if they
could better understand the scaling system?
A. I tried to at times.
Q. Have any suppliers ever chosen to sell to Ross-
Simmons or Cascade or someone else because of Northwest
Hardwoods’ scaling system?
A. It has happened, yes.
MR. JOHNSON: No further questions.
MR. HAGLUND: Nothing further.
THE COURT: You may step down.
* * *
654a
[Vol. 7-A (Apr. 16, 2003)] [Testimony of Bernie McCain]
+ * *
[Tr. 75] DIRECT EXAMINATION
BY MR. JOHNSON:
Q. Mr. McCain, you graduated from high school in
1965, served in the Navy for 18 months and then got a for-
estry degree from Centralia College in 1973. In 1973, you
then went to work at Northwest Hardwoods as a log buyer at
the Centralia mill. You were named resource manager for
Northwest Hardwoods’ Centralia mill in the early 1980s.
And that is your current position?
A. That’s correct.
Q. Mr. McCain, could you tell this Court and the jury
about your gencral approach to buying logs at Northwest
Hardwoods.
A. Well, I try to keep it rather simple. | try to buy the
highest quality log I can at the lowest price.
Q. Now, when you are going out and offering a price for
logs, what factors are you considering?
A. You factor a lot of things, but mainly you factor the
quality of the wood, the size of the wood, the availability,
timing, when it is going to come in, the supplier. But mainly
you extract the price, look at the wood and the quality of the
wood.
Q. Now, Mr. McCain, we have heard testimony about
log staining in this trial. How do you go about managing
your log inventories to minimize the potential for stain?
[Tr. 76] A. At the log yards at Centralia, we can hold
about almost 3 million feet of logs in our yards at Centralia.
Our monthly cut there is on the average around four, four and
a half million feet of logs.
655a
We advocate stump-to-dump three weeks. That’s a pretty
good average for logs to stay fresh from landing to the yard.
Then we can rotate our inventory in probably two to three
weeks in the yard so we are in real good shape.
We have had bigger inventories at times. At that point
we direct logs to go into the water. They go in the water.
They stay fresh in the water there for that moment before we
use them. With our small yard it keeps us keen on keeping
our log inventory fresh just by the size of our yard.
Q. Mr. McCain, during the 1990s, who did you consider
your competition for logs to be?
A. In the ‘90s, kind of go around in my mind geographi-
cally there, Edmond Company bought hardwood in Tacoma.
Sheers bought logs in Sheldon. Steve Pullen bought hard-
wood in Sheldon. Willis Enterprises bought logs in the Ho-
quiam area. Olympic Fiber bought hardwood in Aberdeen.
Dahlstrom’s in Aberdeen bought logs. WTD in South Bend
at that time bought logs. Alexander in Onalaska bought logs,
hardwood. Northwest Fiber in Morton bought logs. Cascade
Hardwoods in Chehalis. I might have left somebody out.
[Tr. 77] Q. Do you know who Mr. Bill Nelson is?
A. Yes.
Q. Mr. Bill Nelson testified earlier in this trial that dur-
ing the early 1980s when he was at Cascade Hardwoods,
there was what he called a log war between you and him. Do
you recall anything about that?
A. No. I don’t recall any log wars, no.
During the 1990s, who did you report to?
1990s I reported to Mr. Heinz Hohendorf.
From 1997 on through 2000?
I reported to Jay Mehta and Mr. Fisher at that time.
>O>Oo
656a
Q. What types of conversations would you have with the
person that you reported to?
A. The types of conversations throughout the time period
there, we would — I would contact all the superiors in what I
thought the market was doing, where log flows were going to
be during the season. Alder is real susceptible, like any log,
in wintertime it slows down. It is susceptible to other mar-
kets, especially hemlock.
If that market slows down and the logging slows down,
why alder is kind of a come-along species. 1 wanted to keep
them abreast where the market — where the log flows are go-
ing to be and keep abreast where inventory was and things
like that in general so they were informed and had an idea of
what the future looked like. It is very hard to [Tr. 78] call
sometimes, but you do the best you can.
Q. During the 1990s, what was the strategy of Northwest
Hardwoods in terms of log prices?
A. Well, basically it is — you asked me before, we try to
buy the best quality log at the best price or lowest price we
can. That’s generally what the market is doing in your area.
We try to do it that way.
Q. Did either Mr. Hohendorf or Mr. Mehta or Mr. Fisher
ever express to you that it was the strategy of Northwest
Hardwoods to maintain high log prices to hurt competition?
A. No, I never heard that message.
Q. Did any of those individuals ever express to you that
you should buy more logs than you needed in order to keep
logs away from your competitors?
A. No, never.
MR. JOHNSON: No further questions.
THE COURT: Further questions of this witness?
MR. KELLEY: Briefly, Your Honor.
657a
CROSS-EXAMINATION
BY MR. KELLEY:
Q. Good morning, Mr. McCain. During your time at
Northwest Hardwoods or Weyerhaeuser, did you reccive
some training, sir, in connection with antitrust?
A. Yeah. We annually have that meeting.
Q. In the sessions that you attended, do they address [Tr.
79] issues related to log buying?
A. Yes.
Q. And do you have an opinion of whether or not issues
related to a last look at logs is addressed in that — in those
sessions?
MR. JOHNSON: Objection to the form of the questions.
THE COURT: Overruled.
THE WITNESS: I don’t understand “last look.” Could
you explain that more?
BY MR. KELLEY:
Q. Your witness statement says that you never had a last
look, an arrangement where you had a last look at a log. Let
me make sure you and I are communicating. | interpret that
to mean that you never had a situation with a supplier of any
kind where you told them to go around. Go ahead and look.
Shop it around. See what bids you get. But give me the last
look at your logs before you sell them.
A. No. I have had people call me. When people call
you, you have got a range of customers that are — that’s their
business. They log. And you have got people that has got a
few loads in the backyard, and they really need help. I give
them prices. They ask me if there is anybody else buying
hardwood in the area. | say: Yeah, you can check other
places, and I gave them names. As far as saying, you [Tr.
658a
80] know, if you get another price, give me a call back. |
give them a price at that time and it is over with.
Q. You give the best price. If they want it, yeah, great. If
they don’t, sell to somebody else?
A. Right. The only other situation is if somebody else
calls you and you get the prices and say, well, would you like
to take a look at it? What do you think? Is it worth more? It
could be. No promises. If the quality is there, the stand tex-
ture looks good for the mill and everything, | say: I would
appreciate it if | could come out and take a look.
Q. Fair enough. In your whole time, though, have you
ever had an arraignment that I described, this last look, where
you told the supplier: Go ahead and shop it. Let me have the
last look at the log?
A. I don’t recall.
Q. You don’t recall ever having such a situation?
A. No.
Q. Were last looks like that covered in your antitrust
training?
A. | don’t know if they said last looks in our antitrust.
Q. Fair enough. Mr. Johnson just asked you some ques-
tions about Bill Nelson in the early 1980s. You were at Cen-
tralia at the time, correct?
A. Correct.
* * +
[Tr. 82] three grades?
A. Correct.
Q. When the scalers are going through at the mill look-
ing at the logs, they input all that information in a little hand-
held?
659a
A. Correct.
Q. That information goes to a central location in Port-
land?
A. I believe so, yes, our log system.
Q. Is it your understanding, sir, that all purchases from
Weyerhaeuser timberlands, transfer of purchases, are at the
same as market prices?
A. That’s correct.
MR. KELLEY: Thank you.
THE COURT: Any further questions?
MR. JOHNSON: No further questions.
* * *
660a
|Vol. 7-A (Apr. 16, 2003)] [Testimony of Philip Tedder]
* * *
[Tr. 87] was marked as demonstrative Exhibit No. 18,
which is this map of the United States?
A. Yes.
Q. I won’t ask you to describe it as it has been fully de-
scribed previously, but were you the person who pulled to-
gether the data that went into the standing hardwood
inventory information as well as the hardwood lumber pro-
duction information that is displayed in the purple and red
circles?
A. Yes, I was.
Q. For the record, Dr. Tedder, the data that you devel-
oped this map from was from what year?
A. Well, it is from several years. The production date of
the — the hardwood production lumber data is from the cen-
sus of manufacturing from 2001. 1 think that’s indicated
down there on the bottom. The hardwood inventory is from
different years. Most of them are 2000 and earlier.
The Forest Service does recurring inventory of cach state
over a ten-year rolling average. They update it every five
years. So to give an average date on that inventory that was
portrayed, | would say the average date of it is about five
years old.
Q. Okay. Thank you. Dr. Tedder, there is some evi-
dence in this case to the effect that Weyerhaeuser actually
Owns approximately 7 percent.of the standing alder inventory
in [Tr. 88] Oregon and Washington. There are other — there
is other evidence showing that Weycrhacuser in the late ‘90s
was purchasing approximately 64 percent of the alder sawlog
harvest in Oregon and Washington. If you would, sir, please
assume that both those sets of facts are true.
66la
Do you have an opinion about whether Weyerhaeuser,
given those facts, has the power to control the price for alder
sawlogs in Oregon and Washington?
A. Yes.
Q. And what is that opinion?
A. I think that anybody that has a 65 percent ability to —
that purchases 65 percent of the volume that is harvested
each year, they have a very strong control over what price
they want to pay for it.
Q. Now, Dr. Tedder, did you also look at the question of
whether there is an economically distinct market for finished
alder lumber?
A. Yes.
Q. Is there a distinct market, economically distinct mar-
ket, for alder lumber?
A. | think there is a fairly distinct market for alder of
lumber. It is used for cabinet facing, furniture, that sort of
thing locally. I think there is some that is pecled. I’m not
sure it is used as facing. | think it is used as core veneer. |
would say it is distinct.
* * *
[Tr. 90] largest sawmills in the Eugene of area?
A. Seneca sawmill today, | think, is either first or second
in lumber production in a single spot.
Q. In Oregon?
A. In the United States.
Q. Now, in your experience running those mills, as well
as your experience as a forest economist looking at log and
lumber supply and market performance, could you describe
your own views on the relationship between log and lumber
markets?
662a
A. Yes.
Q. Please do so.
A. Log prices have to follow lumber prices because. if
they don’t, you eventually are not going to make any money.
So in the softwood market you will find that there is usu-
ally a lagged value of softwood logs to the softwood lumber
price. Now, the lag of that is caused by the fact that you just
don’t buy logs on a daily basis. You go and look at a stand
to appraise the stand. It may take a couple of months once
you look at it to harvest it to get it to your log decks.
So you are bidding on logs based upon the lumber price
that is going on right now and you think might happen later.
But a lot of times that doesn’t turn out right. So there is al-
ways a little bit of a lag of the log price. If [Tr. 91] the lum-
ber price falls, log prices will fall.
If lumber prices go up — it is kind of funny — log prices
go up a little faster on that side of the coin. But they always
have to follow because there always has to be that log-to-
lumber ratio that affords a producer, a manufacturer, to make
some money.
They get out of whack. Every once in a while, every cou-
ple of months, they pull apart, but they pull back together.
And they kind of oscillate in an area that generally allows
some of the lower end producers to break even or make a lit-
tle bit of money. So that’s the relationship.
Q. So you have observed that — both in your work over
the last 30 years, you have observed that both in the hard-
wood log and lumber markets as well as the softwood log
and lumber markets. Is that correct?
A. That’s correct.
Q. Now, did you also examine the expert witness disclo-
sure statement of William Nelson?
663a
A. Yes.
Q. Specifically did you have an opportunity to examine
the methodology that Mark Rasmussen used to develop a
number of his scenarios designed to show how much the log
market for alder sawlogs was increased by Northwest Hard-
woods based upon certain assumptions during the period of
‘97 through
* * *
[Tr. 93] objective in the markets they are in?
A. Their objective, and it is clearly stated that they want
to be the No. | producer in the individual wood product sec-
tors.
Q. As a forest economist, what’s the advantage of that to
the company that gets to that position?
A. Well, the more volume that you have at your avail-
ability, the more you can affect what price you sell it at.
Q. And what’s important about being able to set the price
at which you sell the product?
A. The more you have, the stronger you are in negotiat-
ing the selling price.
Q. And the higher your profits then?
A. Usually it is the way it works out.
Q. Now, Dr. Tedder, | want you to assume for the mo-
ment and for purposes of this question that Weyerhaeuser has
a 75 percent market share of the market for finished alder
lumber in the United States.
Are you aware, sir, of any other wood products market
segment or wood products market where any company en-
joys a share that is as high as 75 percent?
664a
A. No. I think the next closest thing is Louisiana Pa-
cific’s OSB production, about 50 percent U.S. production,
but nothing close to that.
[Tr. 94] Q. And you are talking about all market seg-
ments in the wood products industry in the whole of the
United States?
A. Yes.
Q. Now, there has been some mention in this case of al-
der being a come-along species. Are you familiar with that
term?
A. Yes.
Q. Do you agree that alder is a come-along species?
A. Yes.
Q. Harvested generally along with the dominant species
in the Northwest, like conifer?
A. That’s correct.
Q. Now, from a forest economic standpoint where alder
is a come-along species, is it more or less sensitive to the
forces of supplv and demand?
A. | think it would be really less sensitive.
Q. Why do you say that?
A. Well, it is either there or it isn’t there. You have a
certain amount available to you that is harvested when you
harvest the softwood stands. The person or the owner of
these companies — of the logs has to get rid of it. It is there
whether you want it or not.
Q. So from the standpoint of a landowner with a patch of
timber that they wish to harvest, the driver is going to be
when they decide to put conifer logs into the market. Is [Tr.
95} that your understanding?
665a
A. That’s right. And then you don’t — you can’t store the
alder because you have to replant under the State Forest Prac-
tices Act the stand that you took off of.
Q. Now, I would like to display on the on the screen Ex-
hibit 99. Are you familiar with Exhibit 99, Dr. Tedder?
A. Yes.
Q. Does this show the log inventories at Northwest
Hardwoods’ Longview mill from ‘89 through 2000?
A. That’s what I understand it to be.
Q. Now, in your opinion if we look at 1989 and 1993,
are you aware of any business reason to run up log invento-
ries of alder logs to those levels?
A. No.
Q. Why do you say that?
A. Well, for two reasons. One, you know, that’s in the
winter, so you want to have a few logs built up. I think some
of those come because people accelerate their harvest or
manufacturers tend to come up a little bit in preparation for
the winter years.
But you really don’t want to hold that much volume.
One, of course, it will stain. The logs will degrade, even if it
is raining on them. Some of the logs get crushed, broken,
that sort of thing. But another business reason, you know,
from the standpoint of running a [Tr. 96] company.
You look at that number there, that’s 18 million feet. So
18 million feet at $400 a thousand, $500 a thousand, that’s 8-
or $9 million. If you can get by with half of it, it is not really
a good business decision to be spending money on a very
large log deck because you have to borrow against that log
deck as well. It just reduced your crediting from an individ-
ual mill’s perspective. ,
666a
Q. I would like to display now Exhibit 82. You under-
stand this to be a depiction of Weyerhaeuser’s — Northwest
Hardwoods’ division lumber inventories from ‘88 to 2000?
A. Yes.
Q. Now, there has been reference to a statement in Wey-
erhaeuser’s 1998 annual report referring to 1998 as a year in
which there were market downturns. And “Mr. Rogel says
we took downtime to balance inventory levels with market
conditions.”
Looking at this data displayed on Exhibit 82, does it ap-
pear that Northwest Hardwoods followed the advisor state-
ment of Mr. Rogel that I just quoted?
A. Well, when you look at that, after you have added all
the mills in there, it looks like to me it goes up instead of
down. It goes up quite a bit from ‘98 — it looks like a mill in
‘99 came down and back up and fell off some. It is
* * *
[Tr. 103} what caused that to know what really hap-
pened? :
A. I don’t understand your question.
Q. Yes, sir.
A. I thought that pulp mill was a different business than
the hardwood sawmill business.
Q. So what did Northwest Hardwoods’ Longview mill
do with those pulp logs?
A. They probably whole log chipped them and sold them
the to a pulp mill.
Q. Which pulp mill?
A. Weyerhaeuser’s pulp mill, but it is a different busi-
ness.
667a
Q. Thank you, sir. Now, Mr. Haglund asked you
whether or not log prices have to follow lumber prices. Do
you recall that?
A. Yés.
Q. And you gave a long answer about that. You were
mostly talking about softwoods, weren’t you?
A. Yes.
Q. Thank you. Would you agree or disagree with the
following statement: If you harvest less softwoods in the Pa-
cific Northwest, you have less alder coming along with those
softwood harvests? .
A. I would say that that’s generally a correct statement.
Q. Would you agree or disagree with the next statement:
* * *
[Tr. 113] expresses frustration and concern over how
high alder sawlog prices have gotten.
MR. HAGLUND.: Is this a speech or question?
THE COURT: It is a speech. We will let it go on for a
little while longer.
THE WITNESS: Frustration and concern over the alder
sawlog high prices.
BY MR. SIMON:
Q. Assume that there is agreement with that frustration
and concern.
A. By whom?
Q. By a number of folks with him. A guy named Jerry
Martin, John Martin and mill managers. End of assumption.
A. That’s a good assumption on that one.
668a
Q. Is that set of facts consistent or inconsistent with your
conclusion that as of early 2001 Northwest Hardwoods could
control the price of alder sawlogs?
A. Well, based upon the fact that Rob Taylor runs it, and
you said that he said that he was upset with the high price of
alder. sawlogs and all his management at Weycrhaeuser
agreed with him, then it is inconsistent.
MR. SIMON: Thank you, sir. | appreciate your time.
THE COURT: Further questions?
MR. HAGLUND: Yes.
* * *
669a
[Vol. 7-A (Apr. 16, 2003)} [Testimony of Delroy Fisher]
* * *
[Tr. 118] Q. Did you have supervisory responsibilities?
A. Yes. I had four resource managers in Washington
and Oregon. Below those folks there was another eight log
buyers. Then in 2000 I also had another resource manager at
our Delta mill in British Columbia, and we had three addi-
tional log buyers working.
Q. During this entire time period who did you report to?
A. Rob Taylor, vice president of business.
Q. Now, during that period, say 1997 through 2000,
what were the factors affecting the price of alder sawlogs as
you saw it is as the western raw materials manager for
Northwest Hardwoods?
A. During that period, I would generally characterize the
‘97 through 2000 period as one of declining resource for a
number of reasons and also increasing sawmill capacity.
Some of the reasons for the decline, I think it was well men-
tioned here through this case so far, is that there were new
sets of regulations being adopted in both Oregon and Wash-
ington. We were also feeling the impact of the 1994 North-
west Forest Plan from the federal government. Those chiefly
were the two big reasons.
Then also during that period there was a very low chip
market. Chip markets were declining. Domestic — or the
conifer markets were also declining, both domestically and
export. Consequently you have this increase in [Tr. 119] ca-
pacity, lowering supply, which tends to drive prices higher
on the hardwood.
I would also say that —- I’m sure you all know about the
come-along aspect of alder. I would just exemplify that a
little bit, if | could. If you took any acre of ground out there,
with a mixture of softwood and hardwood, the typical com-
670a
mercial forest would have about ten loads per acre on it.
Eight to nine of those loads is going to be conifer. One to
two loads are going to be hardwood.
You can tell the supply of hardwood is very much related
to the marketability of that softwood component. That be-
comes an artificial constraint on supply as the softwood mar-
kets go down.
Q. Mr. Fisher, what is the Forest and Fish Report?
A. The Forest and Fish Report was one of those exam-
ples of regulations that were applied in the late ‘90s. It was
actually implemented in the year 2000, early 2000, as an
emergency rule. I believe it was in March of 2000. Then it
became a permanent rule later that year. Essentially what it
did was it added protection around fish-bearing streams.
We have been operating under a Forest Practices Code — |
am speaking of Washington here — it is very similar for Ore-
gon as well. This particular Forest and Fish Report was from
Washington. We had been operating under a set of laws that
were adopted in the ‘70s. They were [Tr. 120] updated in the
‘90s. But really they hadn’t changed significantly in that pe-
riod of time.
It became a point where the federal government started
understanding more about the salmon populations and their
habitats. It became clear, as | think you all know, the salmon
became listed as an endangered species. This developed into
a process called the Timber, Fish and Wildlife which was a
group of people representing basically all the stakeholders in
the community: The forest industry, the regulatory people,
consumers, general public, and the federal agencies as weil.
The attempt was, in Washington state, was to get all
stakeholders — and | forgot to mention the Native American
Tribes as well were involved. We tried to get all the stake-
- holders in a room and agreeing what would be an effective
way to protect the salmon habitat in the state of Washington.
67la
That was an arduous process, adversarial. We did have envi-
ronmental groups involved in that as well.
Eventually that did culminate in 2000 with a rule that es-
sentially expanded those buffer zones, those zones that are
very close to the streams from approximately 25 to 50 feet
under the old rules to as much as 180 feet under these new
rules.
There was opportunity with the new rule to do some par-
tial extraction. But the cost of this is a very [Tr. 121] com-
plicated and complex rule to understand just how much you
could remove from this riparian zone. It took a lot of money,
a lot of landowners, especially small ones and even large
ones, even Weyerhaeuser to some extent, did not want to in-
vest that money to understand how much they could actually
extract. So in a lot of cases that full buffer became unable to
be logged.
50 foot of that was automatically no touch. Nothing
could happen on either side of the stream for 50 feet. That
remainder, roughly 100 to 130 feet, there was some partial
logging that you could do. But the cost was very difficult
because you actually had to measure every tree that was in
this buffer zone.
Then you would have to develop — put that into a model
to understand just how many trees you could remove which
was stated in the regulation. Then based on that you would
have to get an approved application through the Department
of Natural Resources to do that extraction.
The whole concept — and | think it is a good one actually
~ but that entire concept was to help improve the streams by
providing more adjacent woody material on either side of the
stream that would eventually over time fall into the stream
and create a better habitat for the fish.
Now alder, unfortunately, that is some of the best places
where alder grows. So we took a disproportionate hit [Tr.
672a
122] compared to the conifer logs or conifer timber in the
forest because most of the alder is in those riparian zones or
very close to them.
There was one study that actually found that over 50 per-
cent of the area tied up in this new area was indeed hard-
wood. So there was a significant impact due to these new
regulations. There were similar laws, although they are not
actually included yet in the state of Oregon —
MR. HAGLUND: Objection, Your Honor. Incomplete
laws.
THE COURT: Yes. Ask another question.
BY MR. JOHNSON:
Q. Mr. Fisher, | want to show you — first off, would you
submit monthly reports to Mr. Taylor about what your obser-
vations were about what was going on in terms of the raw
r aterial flow?
A. Yes. I was required, like all of the managers that re-
ported to Mr. Taylor, to provide him with a monthly report
on what was going on in your segment of the business.
That particular report from me tried to summarize in a
general way what was happening to our inventories, or log
prices, our purchasing ability and what might be impacted in
that purchasing ability as well as some other specialty pro-
jects | was working on.
Q. I would like to show you a couple passages from
things
* * *
[Tr. 125] month, September of 1998.
Could we pull that up, Mr. Moody.
You write: “Competitor activity increased throughout the
month: Lost bids from Hampton, Simpson, Port Blakely and
673a
Merrill Ring, evidence indicating as high as $50 over our of-
fers. With low inventories at all competitors, due mostly to
low logging activity from fire weather, price acceleration is
likely until imventories recover. Washington Alder and
Westwood began purchasing.”
First, who are Hampton, Simpson, Port Blakely Merrill
Ring?
A. Those are major timber suppliers in Washington state
and Oregon. All of these names mentioned here, they put
their volume up basically on a quarter basis. They will send
you a prospectus of how much wood they have for sale. They
will ask all the competitors, softwood and hardwood, to sub-
mit bids for that quarter. You have got one bid, one shot.
And as I indicated here, we were not successful on any of
those.
Q. How would you hear that you were $50 below the
compctitor’s offers at that point?
A. Once the bids are finally accepted and they find out
who basically got the bid, they will tell you if you were
close. Whether this is an accurate number, who knows?
They like to tell you that you were way off. They happen to
* * *
[Tr. 132] chipping operation that sits right next to the
mill. So that was the supply for export chipping as well as
our domestic needs. The domestic needs there are to third-
party customers that we sell to.
In this particular time we were buying a little bit more
pulp logs. But, again, the pulp logs were for chipping after
we did some extraction. The remainder of that was for chip
supply.
Q. Thank you, Mr. Moody.
Mr. Fisher, | now want to turn to something a little bit
different. There has been testimony and discussion in this
674a
case about a process called IDS. What is IDS and what was
your involvement generally in that process?
A. IDS stands for investment, direction and setting. That
was a Weyerhaeuser way of looking at each one of our busi-
nesses. I think Mr. Taylor actually described that fairly well
yesterday. But it is a process that the senior management
people at Weyerhaeuser — it is a tool actually to assess how
each onc of the multiple businesses of Weyerhacuser are do-
ing. Like any other competitive situation, each one of the
businesses inside of Weyerhaeuser are competing for capital
dollars.
This was one tool to help assess and allocate those capital
dollars. It was a snapshot that we did — | think we did it
maybe three times I think, as | recall. It [Tr. 133] was a
snapshot view of your business at one point in time taking a
look at what you are presently doing and seeing where you
think you might be going in the future.
Q. So you reported this IDS process up to senior man-
agement at Weyerhaeuser?
A. That’s night.
Q. Was the IDS — what was put together in the IDS, was
that distributed to your resource managers or other people
withon Northwest Hardwoods?
A. No. That was a fairly confidential document. It was
just for the senior leaders of the businesses. I think we
shared some excerpts of it to an expanded lead team of man-
agers. But basically that was a very confidential document
that was for review internally.
Q. Right. Do you have the witness notebook there?
A. Ido.
Q. Going up to Exhibit 400, Plaintiffs’ Exhibit 400.
A. All night.
675a
Q. First off, 1 will represent to you that the highly confi-
dential sealed exhibits were put on by the attorneys in this
case. | see it says: Northwest Hardwoods’ projected supply
share. At the bottom, do you see where it says: The source,
Dick Wakely, Del Fisher, 3-99.” Did you have any involve-
ment in putting together this document?
A. Yes. I did the raw material section in this document
[Tr. 134] trying to assess from our strategic planning group,
which is where Mr. Wakely came from. He did the forecast-
ing, what he thought the available wood might be.
That’s a key message here. It is not what really will hap-
pen. It was what we think might be available to happen. So
it is a projection and an estimate at this particular point in
time.
I supplied, in looking at the fiber — one of the real diffi-
cult parts in doing an exercise like this is trying to understand
what is sawable fiber. As you recall, there is a large inven-
tory out there of hardwood that includes pulp logs as well as
sawlogs, and the definition of sawlogs is constantly moving.
Q. Wait. What do you mean by that? Why is the defini-
tion of puip logs and sawlogs constantly moving?
A. Really it aligns to several factors: One, what your
customer base is looking for on the lumber side and your mill
capability to extract lumber from smaller and smaller diame-
ter logs.
Northwest Hardwoods, we knew the resource was shrink-
ing. Now, that’s a gencral term. It is declining. We may
have years that it still does very well, but then years it falls
off maybe harder than it should. But all of those are factors
based around the other factors that I talked about earlier,
which is the softwood markets, the
* * *
676a
[Tr. 138] estimate of where we thought people were. |
mean, we all basically understand what cost and raw material
is. We all basically understand what it takes to run a saw-
mill. We have a general idea of what the lumber markets are.
So you can get to some understanding of margins. We obvi-
ously knew our own. The rest was am assessment.
What we did conclude out of this and what you will see
perhaps in a later chart was that there was, in fact, overcapac-
ity for the supply as we saw it coming. That was going to
have to be reckoned with in some way with our own facilities
as well as the market in general. So we are showing here on
this chart that there is probably not enough wood to serve all
of these operators.
Q. Now, in terms of the discussions on the IDS what was
the strategy then of Northwest Hardwoods in terms of this
view that you had that the supply may be constrained in the
future?
A. We needed to be the best we could be. That’s really
what we always — that is what we always try to be. We know
our markets. We don’t really try to focus on others. We look
at our markets, what our growth potential is. We try to buy
raw material that best fits our facilities, and we try to keep
growing our business, quite frankly.
Q. There has been discussion in this case, and you have
been talking about supply of hardwood sawlogs or hardwood
[Tr. 139] logs in the late 1990s into 2000. How did this re-
duction of supply and these new entrants affect the price of
hardwood logs in the Pacific Northwest?
A. I think before I answer that directly, because it is re-
lated to where we are, we are in Washington and Oregon and
one mill in British Columbia, but each one of our mill loca-
tions is in a log market area.
I have heard a lot of comments here that we are lumping
all of the Northwest’s hardwoods together and comparing it
677a
to the rest of the industry and so forth. In reality, we work
within a log market area. That means the way we can buy
logs in that local area is where you are going to be most
competitive.
Most of our logs are bought within a 50- to 75-mile_ra-
dius of our mills. We actually have five different — our mills
are located in five marketing areas, log sourcing areas. There
are log sourcing areas where we do not have mills.
But in those areas it has its own dynamics of supply and
demand, different quality of wood. Some competitors are
more aggressive than others. There may be more competitors
in any one particular market. You have to really understand
the effect of price. It is really how it is occurring in each one
of the marketing areas that we exist in. With the exception of
the Sedro Woolley mill and [Tr. 140] Arlington mill, we only
have one mill in each of those supply areas. Sedro Woolley
and Arlington, | would say, are in both the same supply area.
Q. Mr. Fisher, during this time frame, say ‘97 to 2000,
what was the strategy of Northwest Hardwoods in terms of
raw material costs to the mills?
A. Our strategy was always to buy the best log we could
get for our conversion facilities at the best possible price
which means the lowest possible price and at the same time
treating our suppliers fairly.
In other words, we liked to establish long relationships
with our suppliers, but we never forced them to deal with us.
We just always tell them what we think we can afford to pay
for logs. We manage then an inventory for each one of those
mills to be sure we don’t go too far over our inventory tar-
gets or too far under. Both have big impacts on the financials
of each one of the mills.
You should also understand that each one of these mills
have their own P & L, their own profit and loss. We do sum
them up on the statement at the end of the month and quarter,
678a
but each one of those mills is an independent profit center.
Those mill managers are responsible for their log costs and
their profitability.
So there is an interaction that goes on between our re-
source people and the mill manager. Ultimately it is [Tr.
141] the mill manager that is going to answer for his profit
and loss statement.
Q. Mr. Fisher, was it ever the strategy of Northwest
Hardwoods to raise the cost of logs to hurt competitors?
A. Absolutely not.
Q. Was it ever the strategy of Northwest Hardwoods to
buy more logs than you needed in order to keep logs away
from competitors?
A. Absolutely not. That would be a defcative attitude.
But, again, if we buy too many logs than we need, they
would just spoil. One of the things that we practice and
preach to our suppliers is that we want fresh logs. In saying
that, it is very difficult. We are constantly improving to do a
better job on that.
In the summer months, as you have heard, logs do de-
grade very fast once they come off the stump. As soon as it
is off the stump, it is susceptible to stain and it usually
doesn’t happen — it probably takes about four weeks in really
warm weather for that to occur. In winter months it is not
nearly as bad, but we focus all the time with our suppliers to
give us fresh logs.
MR. JOHNSON: No further questions.
THE COURT: Cross-examination.
MR. HAGLUND: Thank you, Your Honor.
* * *
(Tr. 143] MR. HAGLUND: I’m sorry, Mr. Fisher.
679a
BY MR. HAGLUND:
Q. Do you have 1257 there?
A. Yes.
Q. Turn to page 3 of that document.
A. I don’t see page numbers.
Q. At the bottom it has got your Weyerhaeuser Bates
stamp of 055524.
A. Okay.
Q. Do you see that?
A. Yes.
Q. Now, actually, I apologize. Go to the page before
that, 23. If you look —I will highlight it. Is this your January
1998 set of notes?
A. I believe so.
Q. Do you in your notes here, “Note the misalignment or
disconnect between the log and lumber markets”?
A. Yes. What I’m referring to there is, again, I take a
look at lumber markets as part of my job as well. But that’s
not my responsibility. But logs, like I just said, an example |
just gave you, you can have logs running higher or lower
than what lumber markets are doing. That’s probably what I
was commenting on here.
Q. Now, are you looking at Exhibit 1275 now?
A. Yes.
* * *
[Tr. 146] Q. Now, negotiation training, I want to ask you
some questions about that. Isn’t it true, Mr. Fisher, that
Weyerhaeuser, Northwest Hardwoods, trains buyers to de-
velop last look relationships with its major suppliers?
680a
A. No, it is not.
Q. And that’s your testimony here under oath?
A. Yes.
Q. Okay. Let’s turn to page — if you could look at the
page in the exhibit that ends with the number 24.
A. On 478 or 1275?
Q. Either one. It was just this one page missing that we
have now talked about.
A. What’s the number again?
Q. Ending in 24. This is your February 1998 report.
You found it? :
A. Yes.
Q. | would like to highlight a sentence. It reads: “Rela-
tions with major suppliers continues to improve; Crown Pa-
cific, Rayonier, PLS, Willamette, G-P and Roseburg are
gencrally in first refusal positions.”
A. That’s correct.
.Q. Sir, isn’t a first refusal position exactly the same as
having a situation where you have got the last look at that
parties’ volume?
A. Absolutely not.
(Tr. 147] Q. Isn’t it a situation, sir, where with these
large industrial landowners, like Roseburg Forest Products,
Willamette Industries, Georgia-Pacific, you develop a rela-
tionship with that supplier where they know if they go into
the market to get a price from a competitor knowing they will
come back to you and you have a right of first refusal to
match the competitor bid and get that wood?
A. No, that’s not correct at all.
68la
What we do with these particular suppliers, we do have
relationships with all of them, and we do sit down and we do
try to negotiate price. Sometimes they say they are willing
to; sometimes they say they want to put bids up. There is
never anything that is always continuous, but we are always
working with all of our suppliers, whether small or large, to
get the logs that we are looking for.
Q. Mr. Fisher, is it your testimony, sir, that first refusal
has no meaning in this sentence?
A. | didn’t say that at all. First refusal means we can sit
down with them; that they will listen to our log bids or our
log prices that we would offer. They have no obligation to
Stay with us at all. They can go to someone else if they so
desire.
Q. Mr. Fisher, if you — are you all right?
A. Yes, sir.
Q. You have signed some contracts that are in evidence
in [Tr. 148] this case that have the term “right of first refusal”
right in there, haven’t you?
A. In the contract?
Q. Right.
A. Are you referring to the G-P contract?
Q. Yes.
A. Yes. That was a contract that we negotiated with
those folks for a buy/sell relationship which was selling some
softwood logs out of our northern Washington region and
being able to buy some logs with alder logs down in Toledo
off of their tree farm. Again, first refusal just means that we
have the opportunity to sit down and discuss our price with
them. They do not have to accept it.
Q. That’s not right at all, is it?
682a
MR. JOHNSON: Objection.
THE COURT: You can arguc that. Move ahead.
BY MR. HAGLUND:
Could the witness be shown Exhibits 430 and 431.
Are we done with these?
No, not yet.
I have them.
Mr. Fisher, do you have Exhibit 430 in front of you?
I do.
Q. Now, this is the 1998 contract under which Georgia-
Pacific agreed to sell 80 percent of their hardwood [Tr. 149]
volume sawlogs from the Toledo tree farm to your company,
right?
POP ee
A. That’s correct.
Q. If one looks at paragraph 3 in the purchase price sec-
tion, did we see the term “right of first refusal” in the second
to last sentence?
A. Yes.
Q. And that sentence reads: “It is understood that both
companies will always have the first right of refusal on the
base volumes. If the buyer is unwilling to pay the sales price,
then the volume commitment is assumed to have been met by
seller for that quarter.”
Now, when you have a right of first refusal in a contract,
isn’t it your understanding, as you have managed these con-
tracts over the years, that it means that if the seller of some
alder log volume comes to you and says - or they have got a
legal obligation if they get a quote from a competitor to bring
you that quote and give you the right to meet it, correct?
683a
A. That would be a process that could define first right
of refusal. That’s not the way these contracts were actually
administered.
Q. But as you understand the contract documentation,
Weyerhaeuser, when it has a right of first refusal in the con-
tract, has a right to require the seller to sell the logs [Tr. 150]
to Weyerhaeuser provided you will match the competitor's
price, correct?
A. In this particular contract, yes.
Q. And isn’t it true, sir, that when you have an oral right
of first refusal understanding with a major supplier, it is the
very same thing, just not reduced to a written contract?
A. That’s not the context in which we did business with
those suppliers. I may, in fact, have used the wrong word in
that report. But that’s not the way we actually conducted
business. —
Q. But if that’s the understanding, it should be no differ-
ent than what you described relative to when that term is in-
cluded in a contract, correct?
MR. JOHNSON: Objection.
THE COURT: Objection will be sustained.
BY MR. HAGLUND:
Q. Now, Mr. Fisher, I would like you to turn to the page
ending 33.
A. Which exhibit?
Q. Either one.
THE COURT: Give him the number.
MR. HAGLUND: Sorry, Your Honor. 478. That’s the
complete one.
THE WITNESS: What was the number?
684a
[Tr. 153] circled on this exhibit, correct?
MR. JOHNSON: Objection. | want to clarify. I don’t
think the pink area is the state forest.
MR. HAGLUND: Oh, you are very right, Mr. Johnson.
I’m sorry.
BY MR. HAGLUND:
Q. It is the blue, the much larger zone, correct?
A. Yeah, I think that’s right. It is blue.
Q. The pink is Willamette Industries that at this point in
time was not yet, November of ‘98, a hostile takcover target
of your company which was announced two years later, cor-
rect?
A. I believe that is the Willamette ownership.
Q. Okay. But to restate my question, and I appreciate
the correction on the state lands, the Tillamook and Clatsop
state forests are shown in blue in the area that I’m outlining
on the screen, correct?
A. | believe that’s right.
Q. And depending upon which forest and where it was
located, that volume could have very well gone to Longview,
correct?
A. I don’t know the location of that sale.
Q. I just asked you: Depending on where it was located,
if it was far enough north, it could have likely gone to Long-
view, correct?
* * *
[| Vol. 7-B Tr. 5} had closed, correct?
A. When was that date?
68Sa
Q. August of ‘98.
A. Well, it says here, “They began.” | don’t know if that
necessarily was right in September, but you could be right.
Q. Okay. And if you look also on this page, there’s a
reference to, “Oregon land and timber prepared for bid sales.
One unit sold this month. Sales will be sold with hardwoods
reserved.” See that?
A. Yes.
Q. Now, is it a fair statement that this refers to the fact
that when Weyerhaeuser sold land it acquired from Diamond
Wood in the late 1990s, that for much of that land, you in
cluded a decd restriction requiring the buyer to commit to
sending the alder saw logs ~ any alder saw logs harvested in
the next three years to Northwest Hardwoods at prices desig-
nated in the deed restriction?
A. We established a guaranteed price for the alder saw
logs at the time these prospectuses were sent out. Essentially
what it did, it guaranteed a delivery and guaranteed a price,
not unlike the Oregon Department of Forestry would do with
their sales where they would peg a price for the minor spe-
cies and then bid the major species, such as Douglas fir. This
is a very similar process, except this included the land as
well.
{Tr. 6] Q. Isn’t it a fair statement. Mr. Fisher, that the
landowner was required under the terms of those deed re-
strictions to deliver any alder they harvested from the land
they bought from your company in the next three years to a
Northwest Hardwoods mill?
A. If they chose to harvest, that’s correct.
Q. They did not have the freedom to sell it to anybody
else, correct?
A. Not for the first three years, that’s correct.
686a
Q. Okay. Now, you’re familiar with the contracts that
were eniered into with Crown Pacific; is that right?
A. Yes.
Q. And is it a fair statement that those were a unique
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