Amicus Curiae Brief — Kaiser Aluminum & Chemical Corp. v. Bonjorno

OCTOBER TERM, 1985

KAISER ALUMINUM & CHEMICAL CORPORATION AND

KAISER ALUMINUM & CHEMICAL SALES, INC., PETITIONERS

v.

JOSEPH A. BONJORNO, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

CHARLES FRIED

Solicitor General

DOUGLAS H. GINSBURG

Assistant Attorney General

W. STEPHEN CANNON

Deputy Assistant Attorney General

CATHERINE G. O’SULLIVAN

STEVE MAC ISAAC

Altorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

QUESTION PRESENTED

Whether the evidence adduced at trial was sufficient to

establish that petitioners engaged in a “price squeeze” violative

of Section 2 of the Sherman Act, 15 U.S.C. 2.

(I)

TABLE OF CONTENTS

a et bee ek ee cbesés’s

AS I eS A

a ES SI SE a a

- TABLE OF AUTHORITIES

Cases:

Aspen Skiing Co. vy. Aspen Highlands Skiing Corp., No.

Se ee

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263,

er ee Oo abe sews bacees ene 11,

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.

(RR SST eee REE pay St a ae

California Computer Products v. International Business

Te Ee ob? ee

City of Kirkwood v. Union Electric Co., 671 F.2d 1173 ..

Continental Ore Co. vy. Union Carbide & Carbon Corp.,

RE na ea i ere Cas wae

Copperweld Corp. v. Independence Tube Corp. 467 U.S.

RSL ECES Nena Sar ee a

Dimmitt Agri Industries, Inc. v. CPC International, Inc.,

rs a cig cee 6 o> eh Ke 02

ae eG. DUI, ZI cc ccccsccrcccsecees

Matsushita Electric Industrial Co. v. Zenith Radio Corp.,

SO Ey opens rccceccrcenesene

Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 .

Northeastern Telephone Co. v. American Telephone &

Telegraph Co., 651 F.2d 76, cert. denied, 455 U.S.

(ge SET A a hy SP ao

Sunkist Growers, Inc. v. Winckler & Smith Citrus Prod-

eta Gb brad pes) 0.50 oe mal 6

Telex Corp. v. International Business Machines Corp.,

510 F.2d 894, cert. dismissed, 423 U.S. 802 ...........

Theatre Enterprises, Inc. vy. Paramount Film Distributing

ee a

United States vy. Aluminum Co. of America, 148 F.2d

a ee pnduvereersveceusus

United States v. E. 1. duPont de Nemours & Co., 351 U.S.

ee ey GD sasaki ve ckeduesce een

_United States v. Grinnell Corp., 384 U.S. 563 ..........

(111)

15-

ba

14

IV

Statutes and rule: Page

Co ee Rr od 8 A ee ee 3

Robinson-Patman Act § 2(a), 15 U.S.C. 13(a) .......... 3

Sherman Act, 15 U.S.C. 1 ef seq.:

ea RRM Ls becker ea ek teen 5, 4, 5, 35

Pa ae as EUG ko acco keene Netwer ae reaaes eee passim

Se ES Sue e ee ONG aes eb eais 9

Miscellaneous:

3 P. Areeda & D. Turner, Antitrust Law (1978) ...10, 12, 15, 16

4P. Areeda, Antitrust Laws (1986) ................... 15, 16

R. Bork, The Antitrust Paradox (1978) ................ 12

K. Cohen & R. Cyert, Theory Of The Firm -- Resource

Allocation In A Market Economy (1965) ............ 15

M. Handler, Reforming The Antitrust Laws (1982) ...... 11

H. Hovenkamp, Economics and Federal Antitrust Law

SU abc's s be mass bake FE vac ne hr Race onek cas. 12

R. Posner & F. Easterbrook, Antitrust Cases, Economic

Notes, and Other Materials (2d ed. 1981) ............ 12

L. Sullivan, Handbook of the Law of Antitrust (1977) ... 12

A. Thompson, Economics Of The Firm (1985) .......... 15

en REFINE Me tee

In the Suprenie Court of the United States

OCTOBER TERM, 1985

No. 84-1907

KAISER ALUMINUM & CHEMICAL CORPORATION AND

KAISER ALUMINUM & CHEMICAL SALES, INC., PETITIONERS

V.

JOSEPH A. BONJORNO, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

This brief is submitted in response to the Court’s order in-

viting the Solicitor General to express the views of the United

States.

STATEMENT

1. Respondents are the successors in interest to the Colum-

bia Metal Culvert Company, Inc. (Columbia), a now-defunct

company that fabricated aluminum culvert pipe during the time

period relevant in this case.' Petitioner Kaiser Aluminum &

Chemical Corporation (Kaiser) is a major manufacturer of

aluminum, including the aluminum coil that is the raw material

used in fabricating aluminum culvert.? At the time of the events

at issue here, Kaiser sold aluminum coil to independent

fabricators such as Columbia through Kaiser Aluminum &

Chemical Sales, Inc., a wholly-owned subsidiary. Kaiser also

manufactured and sold aluminum culvert pipe to end-users in

competition with independent fabricators such as Columbia.

Pet. App. A7.

' Culvert pipe is used principa!!y in constructing housing developments and

highways. It provides an underground channel to carry off water drained from

streets and other surfaces. Pet. App. A129.

2 Aluminum in corrugated sheet form also may be used in producing culvert

pipe (C.A. App. 821a-822a); we will refer only to coil because Columbia pur-

chased only aluminum coil during the period relevant to this litigation.

(1)

2

From 1962 until 1971, Columbia purchased aluminum coil ex-

clusively from Kaiser. In 1971, however, Columbia purchased

some aluminum coil from Reynolds Aluminum Co., one of

Kaiser’s competitors. The circumstances surrounding

Columbia’s decision to purchase coil from Reynolds rather than

Kaiser —and Kaiser’s reaction to that decision—are subject to

dispute,’ but it is clear that Columbia ceased purchasing

aluminum coil from Kaiser in 1971. Pet. App. A7, A36, A120.

Columbia had been one of the largest independent producers

of aluminum culvert pipe (C.A. App. 136a), and the record in-

dicates that Kaiser officials at one point told Columbia that if

Columbia “had one pound of metal in [its] plant other than

Kaiser’s,” Kaiser would “stop selling [to Columbia} entirely”

(C.A. App. 177a). Another Kaiser official, Holmes Coilins,

warned that if Columbia purchased aluminum from Kaiser’s

competitors, Kaiser might open a fabrication plant “across the

street” from or “next door” to Columbia’s fabrication plant

(C.A. App. 1286a-1287a). In 1973 — after Columbia ceased pur-

chasing aluminum from Kaiser—Kaiser opened a culvert

fabrication plant approximately 40 miles away from Columbia’s

plant and hired Robert Kennedy, a Columbia salesperson, to

serve as its independent distributor in Columbia’s marketing

area (C.A. App. 179a-180a).

in early 1974, the price of the aluminum coil used to

manufacture culvert pipe rose sharply. (C.A. App. 277a). As

the price of aluminum coil increased, the margin narrowed

between Columbia’s cost for aluminum coil and the price it re-

ceived for finished pipe; Columbia found it increasingly dif-

ficult to make a profit. In 1975, Columbia for all practical pur-

poses ceased production of culvert pipe. Pet. App. A7.

3 Kaiser claims that it “never refused to fill a Columbia order” and that

“there is no jury finding that Kaiser refused to deal” (Reply Br. 7 n.5). On the

other hand, the court of appeals concluded in both of its decisions in this case

that the evidence was sufficient to support a finding that Kaiser’s policy was to

refuse to deal with Columbia unless Columbia purchased all of its aluminum

from Kaiser. See Pet. App. Al3, A120 n.1.

3

2. Columbia filed suit against Kaiser in 1974, alleging viola-

tions of Sections 1 and 2 of the Sherman Act (15 U.S.C. | and 2)

and Section 3 of the Clayton Act (15 U.S.C. 14).4 Columbia

claimed that Kaiser had engaged in a course of conduct designed

to maintain its monopoly power in the aluminum culvert pipe

market by driving Columbia out of business (Pet. App.

A120-A121).

The district court granted Kaiser’s motion for a directed ver-

dict at the close of Columbia’s presentation of its case to the

jury. The court found that the relevant product market could

only be defined so as to include both aluminum and steel culvert

pipe and that Kaiser’s share of thai market was too small to sup-

port a finding of monopolization under Section 2. The court

also concluded that Columbia’s evidence was insufficient to sup-

port its claims under Section | of the Sherman Act and Section 3

of the Clayton Act. Pet. App. A1l21-A122.

The court of appeals reversed in part, affirmed in part, and

remanded the case for a new trial (Pet. App. Al117-A150). It re-

jected the district court’s conclusion regarding the relevant

market, holding that the evidence permitted the jury to find that

aluminum culvert pipe constituted a separate product market

(id. at Al29-A133). The court of appeals further found that

there was sufficient evidence to allow the jury to find “that

[Kaiser] intended specifically to punish Columbia for buying

from Reynolds. And given the formerly close relations between

[Kaiser] and Columbia, the jury might well have inferred that

[Kaiser] knew of the drastic impact its maneuvers would have on

Columbia’s prospects for survival” (id. at A136). The court cited

evidence concerning the threats directed against Columbia by

Kaiser officials, Kaiser’s decisions to locate a new culvert plant

near Columbia’s plant and éssist Kennedy —Columbia’s former

salesman —in establishing himself as a competitor of Columbia,

and Kaiser’s ability to price its culvert pipe so as to disadvantage

independent fabricators such as Columbia (id. at A134-A135).

The court therefore remanded the case for a new trial.’ This

Court denied Kaiser’s petitior for a writ of certiorari (439 U.S.

876 (1978)).-

4 A claim under Section 2(a) of the Robinson-Patman Act, 15 U.S.C. 13(a),

apparently was abandoned before trial.

5 The court of appeals also concluded that there was sufficient evidence of a

conspiracy between Kaiser and its subsidiary to permit the jury to consider

4

The case was retried in 1979. Columbia again contended that

Kaiser possessed a monopoly over aluminum culvert pipe in the

relevant geographic market and that Kaiser’s conduct violated

Sections | and 2 of the Sherman Act. Columbia introduced

evidence that Kaiser sought to control Columbia’s growth (C.A.

App. 168a-169a) and threatened to retaliate against Columbia

(C.A. App. 177a) and another independent culvert pipe fabrica-

tor (C.A. App. 748a, 759a-761a) for purchasing aluminum from

Kaiser’s competitors. Columbia contended that Kaiser acted

upon this threat and atternpted to preserve its monopoly over

aluminum culvert pipe by appointing Kennedy as an independ-

ent distributor and establishing a culvert plant in Columbia’s

marketing area (Pet. App. Al3).

Columbia also claimed that Kaiser manipulated the prices of

aluminum coil and finished pipe so as to subject Columbia to a

“price squeeze.” Kaiser did not sell aluminum coil to Columbia

during the period of the alleged “squeeze”; Columbia’s theory

was that Kaiser’s competitors followed Kaiser’s lead in increas-

ing the price of coil and, as a result, Columbia was “squeezed”

as effectively as if it had purchased its aluminum directly from

Kaiser. Pet. App. A36, A43. Columbia presented expert testi-

mony that Kaiser may have exercised price leadership in the

aluminum industry (C.A. App. 570a-450a).°

Columbia’s Section | claim (Pet. App. A!36-A144); it affirmed the directed

verdict with respect to the Section | claim asserted against Kennedy, holding

that there was insufficient evidence that Kennedy joined Kaiser in a conspiracy

violative of Section 1 (Pet. App. A1l44-A146). Finally, the court of appeals

agreed with the district court that Columbia had not presented sufficient

evidence that Kaiser had imposed an exclusive dealing arrangement violating

Section 3 of the Clayton Act. The court of appeals concluded that the district

court properly entered a directed verdict because of Columbia’s “failure * * *

adequately to prove that aluminum coil and sheet used in culvert fabrication

was a ‘line of commerce’ within the meaning of the Clayton Act” (Pet. App.

A147). It stated that Columbia had not presented sufficient evidence to

demonstrate whether aluminum “sold to culvert manufacturers, or some much

larger market constituted the relevant line of commerce” (ibid. ).

® Columbia’s expert economic witness, Professor Oliver Williamson,

estified that the aluminum industry was oligopolistic and that parallel pricing

and “price leadership” were common in oligopolistic industries (C.A. App.

597a-601a). Williamson also testified that although Kaiser was not the leading

nanufacturer of aluminum, the other major manufacturers might well follow

The jury rendered a special verdict, finding that Kaiser had

violated both Sections 1 and 2 of the Sherman Act. It awarded

damages totaling $5,445,000 after trebling. Pet. App. A35-A36,

o/-A7\1. The district court denied Kaiser’s motion for judg-

ment notwithstanding the verdict, but ordered a retrial limited

to the issue of damages (Pet. App. A33-A66). The court upheld

the jury’s finding of an aluminum culvert pipe product market,

noting that the record contained the evidence that the court of

appeals previously had identified as sufficient to support this

market definition (id. at A39-A41). The court also found suffi-

cient evidence in the record to support the jury’s conclusion that

Kaiser’s conduct violated Section 2. It noted that the evidence

showed that Kaiser implemented its threat to locate a culvert

plant in close proximity to Columbia’s plant, supported the

business started by Columbia’s former salesman, and priced its

aluminum culvert pipe in a manner that undercut Columbia’s

prices for the same product. Pet. App. A43-A44.’

The district court also upheld the jury’s determination that

the antitrust violations caused Columbia’s damages, but con-

cluded that Columbia had not adduced sufficient evidence to

support the damages award itself. The court therefore ordered a

new trial limited to the damages issue. Pet. App. A44-A66.

The retrial resulted in a damages award of $9,567,939 after

trebling, and Kaiser again moved for judgment notwithstanding

the verdict. The district court denied the motion, but held that

Columbia was not entitled to recover damages for loss of its

“going concern value.” The court accordingly reduced the judg-

ment to $4,651,560. Pet. App. A74-Al116.

3. The court of appeals upheld the jury’s determination

regarding liability and reinstated the damages award entered in

the limited retrial (Pet. App. AS-A29). At the outset, the court

Kaiser’s pricing decisions with respect to aluminum coil used for culvert pipe

because Kaiser was the leading producer of that particular form of aluminum

(C.A. App. 600a-601a, 624a-625a). Williamson stated that, in his view, “Co-

lumbia was subject to a squeeze and * * * the actions that were initiated by

Kaiser were fundamentally responsible” for the squeeze (C.A, App. 622a).

’? The district court also concluded that the evidence was sufficient to sup-

port the jury’s determination that Kaiser and its subsidiary engaged in a con-

spiracy in violation of Section | of the Sherman Act (Pet. App. A41-A42).

6

rejected Columbia’s contention that its prior decision foreclosed

Kaiser’s challenge to the sufficiency of the evidence supporting

the monopolization claim, noting that there were “material dif-

ferences in the evidence presented at the two trials” (id. at A12).

The court of appeals then considered whether the record con-

tained sufficient evidence that Kaiser’s conduct constituted the

willful acquisition or maintenance of monopoly power in viola-

tion of Section 2.* The court concluded that, viewed in the light

most favorable to Columbia, the evidence was sufficient to

show that Kaiser had “attempted to control its competition” by

requiring Columbia and other “independent fabricators * * * to

purchase all of their raw materials from Kaiser,” and that to the

extent Kaiser was unable to control the competition, Kaiser

“tried to destroy it” (Pet. App. Al3 (footnote omitted)).

With respect to Kaiser’s efforts “to control its competition”

the court noted that both respondent Bonjorno and another in-

dependent aluminum culvert pipe fabricator testified that Kaiser

tried to coerce their companies into purchasing aluminum coil

exclusively from Kaiser. Moreover, the court of appeals ob-

served, a Kaiser official had stated that if Columbia purchased

aluminum from Kaiser’s competitors, Kaiser might “open a pipe

fabrication plant ‘across the street’ from Columbia”; the court

noted that Kaiser in fact “carried through with its threats by

locating a pipe plant only 40 miles from Columbia’s and by

refusing to sell any more coil to Columbia.” Pet. App. Al3. The

court of appeals also cited “evidence that [a Kaiser official] told

Columbia[] * * * that Kaiser would control Columbia’s growth

and market,” and that Kaiser made “veiled threats” to a com-

peting seller of aluminum coil, warning the seller that it could

not “ ‘sit back and enjoy a participation in this market by merely

being a supplier of coil sheet to independent pipe fabricators’ ”

such as Columbia (id. at Al3 & n.2). The court concluded that

“|.Jrom this evidence, a jury could infer that Kaiser wanted to

control the source of the raw materials for the independent

fabricators and thus, indirectly, wanted to control the price of

independents’ finished pipe” (id. at A13).

* Kaiser did not dispute that u had monopoly power in the aluminum

culvert pipe market (Pet. App. A7, Al2 n.1)

7

Turning to evidence demonstrating Kaiser’s efforts to

“destroy” Columbia, the court of appeals first considered Co-

lumbia’s argument that Kaiser engaged in a “price squeeze” by

“deliberately rais{ing] the price of the raw materials to the same

level as the price that it charged for the finished pipe, thus

making it impossible for Columbia to operate at a profit if it

sold pipe competitively with Kaiser” (Pet. App. Al4). The court

observed that “[t}he mere existence * * * of a ‘price squeeze’ is

not necessarily an antitrust violation,” and that Columbia was

required to “present evidence that [Kaiser] deliberately pro-

duced the effect” and that the “ ‘squeeze’ was not the result of

natural market forces such as supply and demand or legitimate

competition” (ibid.).

The court found that Columbia had “produced evidence that

Kaiser controlled both the price of the raw material” —the

aluminum coil—and “the price of the finished [aluminum

culvert] pipe” (Pet. App. A14). In light of the fact that Kaiser

had an 80% share of the aluminum culvert pipe market, Kaiser’s

control over the price of pipe was not contested (id. at

Al14-Al15).*

The court viewed Columbia’s evidence with respect to Kaiser’s

ability to control the price of the raw material as “more prob-

lematic” (Pet. App. A15). It first noted that Kaiser “produced

over 80% of the aluminum used for making pipe,” but that

Kaiser contended it was not the dominant manufacturer and

therefore did not control the price of the raw material (ibid.).

The court observed that Columbia’s theory was “that Kaiser was

a price leader, and that Reynolds and Alcoa, the other major

aluminum producers, usually followed Kaiser’s pricing strategy.

Thus, Kaiser’s prices would determine the market prices” (ibid. ).

The court found the opinion of Columbia’s expert witness that

Kaiser was a “price leader” with respect to aluminum coil “well

supported by the evidence” (id. at A17). It noted that “[i]f there

* Kaiser did not contest the jury's finding that the aluminum culvert pipe

. *

market constituted the relevant product market (Pet. App. Al2 n.1). Kaiser

produced approximately 80% of the aluminum culvert pipe sold in the

stipulated geographic market (id. at A7).

were price leadership, it would be most likely that Kaiser set the

pricing policies [in coil] because of its extensive expertise and in-

vestment * * * in the area” (id. at Al6). The court concluded

that there was sufficient evidence regarding Kaiser’s control

over coil prices to submit the issue to the jury (id. at Al7).

The court next considered whether the evidence showed that

“Kaiser deliberately manipulated the coil and pipe prices to

create a squeeze” (Pet. App. Al7). It concluded that “{t}here

was evidence that the squeeze was not caused by natural market

forces” (ibid.), because the evidence supported an inference that

Kaiser’s price changes were made for “strategic” reasons and

showed that the “price of pipe was often below the price of the

coil” in 1974 (id. at A18). The court held that the record con-

tained “sufficient evidence for the jury to conclude that Kaiser

not only possessed the power to create the price squeeze, but

that it exercised that power to destroy its competition” (id. at

Al18-Al9).

The court of appeals also found that “Kaiser sought to

destroy Columbia by setting up Robert Kennedy as a

distributor” (Pet. App. Al9). The evidence indicaied that

Kaiser’s own credit department had at one point “concluded

that Kennedy’s operation was an ‘unacceptable credit risk,’ ”

and the court reasoned that the “jury could infer that by going

against the very strong recommendation of its credit depert-

ment, Kaiser displayed its intent to drive Columbia out of

business” (ibid.). The court concluded that “[g]iven the evidence

of Kaiser’s anticompetitive behavior * * * there was sufficient

evidence to permit the monopolization claim to go to the jury”

(id. at A20 (footnote omitted)).'°

‘© The court of appeals stated that there was no need to consider whether

this Court’s decision in Copperweld Corp. v. Independence Tube Corp., 467

U.S. 752 (1984), precluded a finding that Kaiser and its wholly-owned sub

sidiary engaged in a conspiracy violative of Section 1, because “the damage

award may be sustained solely on the separate section two verdicts that d

depend on a theory of intra-enterprise conspiracy” (Pet. App. A9). The «

rejected Kaiser's challenge to the damages award based upon alleged

tradictions between Columbia's evidence at the liability trial and its evid 4

the damages trial (id. at A20-A23), Kaiser's contention that the district ®ou

erred by ordering a retrial limited to the damages issue (/d. at A23-A24), and

Kaiser's arguments concerning the conduct of the damages trial and «}

9

DISCUSSION

The court of appeals’ analysis of the “price squeeze”

issue —the only aspect of the decision below challenged by peti-

tioners —is troubling. The court of appeals correctly recognized

that a defendant can implement a price squeeze violative of the

antitrust laws only if he controls price in the relevant raw

material market. The court erred, however, in concluding that

the jury could find that Kaiser exerted the requisite control over

aluminum coil prices on the basis of evidence that Kaiser was a

“price leader” with respect to the price of aluminum coil.

Despite the error in this aspect of the decision below, we do

not believe that review by this Court is warranted. Cases in

which an antitrust plaintiff relies upon the existence of a price

squeeze to establish liability under Section 2 are relatively rare,

and we think it unlikely that any other court of appeals would

adopt the view of price leadership evidence set forth in the opi-

nion below. Contrary to petitioners’ contention, the court of ap-

peals did not announce a rule of law rejecting the precedent that

requires a showing of market power in the raw material market

in price squeeze cases. Thus, the case turns on the sufficiency of

the evidence to support the jury’s verdict. Reversal would re-

quire not only a holding that the price leadership evidence can-

not support a finding that Kaiser controlled price, but also a

determination that none of the conduct independent of the price

squeeze on which the court of appeals relied could support the

verdict. While the latter question is discussed in the petition

(Pet. 26 n.22) and in petitioners’ reply brief, it is at least doubt-

ful whether it is “fairly included” in the petition’s questions

presented for purposes of this Court’s Rule 21.1(a). In these cir-

cumstances, we are unable to conclude that the price leadership

issue presented in this case is of sufficient importance to warrant

this Court’s review.

1. A “price squeeze” occurs, as an economic matter, when

the margin between the cost of raw materials used in a product

and the market price of that product is less than the Cost of pro-

*

evidence relating to the damages award (id. at A24-A26). Finally, the court of

appeals found that the district court erred by setting aside the portion of the

damages award premised on Columbia's going concern value; the court of ap-

peals reinstated the jury's award of damages (id. at A26-A29).

10

ducing and marketing the product. The manufacturer of the

finished product is subject to a “squeeze” because the price of

the finished product does not permit the recovery of raw

material, production, and marketing costs. Price squeezes are

frequent occurrences and generally do not reflect either an-

ticompetitive conduct or market failure. For example, a price

squeeze often may be the result of a change in the relationship

between prices in the raw material market and prices in the

finished product market that is atiributable to differences in the

forces of supply and demand operating in the two markets. See,

e.g., 3 P. Areeda & D. Turner, Antitrust Law 4 728c1, at 232

(1978).

Questions regarding the significance of a price squeeze under

the antitrust laws arise in situations in which a vertically in-

tegrated company producing a finished product also sells raw

materials to independent manufacturers that produce the same

finished product. If the vertically integrated company can con-

trol the market price for the raw material, it will have the power

to implement a price squeeze. Thus, a “monopolist of copper in-

got can squeeze independent pipe fabricators by raising his ingot

price while refusing to raise his pipe price, or by lowering his

pipe price while maintaining his ingot price” (3 P. Areeda & D.

Turner, supra, 4 728c, at 231). Of course, the fact that such a

monopolist has the power to implement a price squeeze does not

mean that every price squeeze that occurs in such a market is the

result of anticompetitive conduct by the monopolist. For exam-

ple, as we discuss below (see pages 11-12), a reduction in the

pipe price could simply reflect the monopolist’s decision to

engage in lawful competition in the pipe market.

A well known case regarding the treatment of price squeezes

under the antitrust laws is United States v. Aluminum Co. of

America (Alcoa), 148 F.2d 416 (2d Cir. 1945). The defendant in

Alcoa possessed monopoly power over aluminum ingot, the raw

material used to fabricate a finished product—aluminum

sheet —that the defendant sold in competition with independent

fabricators. The government claimed that the defendant “con-

sistently sold ingot at so high a price that the ‘sheet rollers’ [the

independent fabricators], who were forced to buy from it, could

not pay the expenses of ‘rolling’ the ‘sheet’ and make a living

profit out of the price at which [the defendant] itself sold

‘sheet’ ” (148 F.2d at 437).

The court determined that the fact that the defendant reduced

its price for ingot after the government commenced an in-

vestigation into complaints by independent aluminum sheet

manufacturers established a “prima facie case that [the defend-

ant] had been holding ingot at a price higher than a ‘fair price,’

and had reduced the price only because of pressure” (148 F.2d at

437). The court concluded that it was “unlawful” for the defend-

ant “to set the price of ‘sheet’ so low and hold the price of ingot

so high” (id. at 438) because the result of the defendant’s con-

duct was that “there was * * * little or no inducement [for in-

dependent fabricators] to continue in the ‘sheet’ business” (id. at

437). The court acknowledged that the price squeeze “was only a

consequence” of the defendant’s “control over the price of

ingot” and therefore “perhaps * * * ought not to be considered

as a separate wrong” (id. at 438).'' Nevertheless, the court con-

cluded that the squeeze did constitute an unlawful exercise of

the defendant’s monopoly power in the raw material market

(ibid.).

The implicit assumption underlying this aspect of

Alcoa —that a monopolist has a duty to set its prices in a manner

that avoids injuring competitors —is fundamentally inconsistent

with the principle that the antitrust laws “were enacted for the

protection of competition, not competitors” (Brunswick Corp.

v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (em-

phasis in original)). Courts and commentators accordingly have

rejected the view that the antitrust laws limit a monopolist’s

ability to utilize otherwise lawful methods of competition, such

as above-cost price cuts. See California Computer Products v.

International Business Machines Corp., 613 F.2d 727, 744 (9th

Cir. 1979); Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d

263, 281 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1981) (“a

monopolist is permitted, and indeed encouraged, by § 2 to com-

pete aggressively on the merits”); M. Handler, Reforming The

Antitrust Laws 92 (1982) (footnote omitted) (“[A] monopolist is

not to be shackled in his competition[.] * * * This is rhe doctrine

'! Indeed, the court specifically stated that the squeeze formed no part of

“the reasoning by which [it] conclude{d] that the monopoly was unlawful”

(148 F.2d at 438).

12

which the various courts of appeals in the 1970’s have enun-

ciated, discarding the contrary implications of Alcoa”); 3 P.

Areeda & D. Turner, supra, 4 729c, at 235-238.'?

The Alcoa price squeeze discussion in inconsistent with this

basic principle of modern-day antitrust analysis because the

court failed to consider the fact that a price squeeze generally is

not the result of anticompetitive conduct. As we have discussed,

price squeezes typically are caused by differences in supply and

demand in the raw material and finished product markets. A

squeeze also might occur because the vertically integrated firm is

more efficient in producing the finished product and therefore

incurs production and marketing costs that are lower than the

costs of its independent competitors. Of course, “[a]ny ‘squeeze’

resulting from these causes is desirable, involving a shift in

bu(s]iness from less to more efficient operations.” R. Bork, The

Antitrust Paradox 243 (1978); see also H. Hovenkamp,

Economics and Federal Antitrust Law § 5.6, at 149-150 (1985);

R. Posner & F. Easterbook, Antitrust Cases, Economic Notes,

and Other Materials 874-875 (2d ed. 1981); 3 P. Areeda & D.

Turner, supra, 44 728cl-728c3, 729c, at 232-233, 235-238.

2. A plaintiff attempting to prove that a defendant im-

plemented an unlawful price squeeze plainly must demonstrate

that the defendant possessed monopoly power in the relevant

raw material market. A defendant that lacked power over the

price of the raw material would have no control over one end

‘2 The Alcoa court’s reasoning that a monopolist must charge a “fair” price

also has been rejected. See, e.g., Berkey Photo, Inc. v. Eastman Kodak Co.,

603 F.2d at 294 (“unless the monopoly has bolstered its power by wrongful ac-

tions, it will not be required to pay damages merely because its prices may later

be found excessive. Setting a high price may be a use of monopoly power, but

it is not in itself anticompetitive”); 3 P. Areeda & D. Turner, supra, 4 729c, at

237 (Alcoa’s price squeeze holding runs counter to the principle that “a lawful

monopolist is entitled to charge a monopoly price”); L. Sullivan, Handbook

of the Law of Antitrust § 47, at 118 (1977) (“{t}he reasonable price standard is

intrinsically vague and difficult”). Indeed, the monopolist’s decision to main-

tain prices at high levels may have the desirable effect of encouraging entry

into the monopolized market. Berkey Photo, Inc., 603 F.2d at 294.

13

of the “squeeze” and, therefore, could not be held responsible

for any diminution in the margin between the raw material cost

and the market price for the finished product. See City of

Kirkwood vy. Union Electric Co., 671 F.2d 1173, 1176 n.4 (8th

Cir. 1982) (price squeeze occurs when a “vertically integrated

company which has monopoly power at the wholesale level but

faces competition at the retail level sets its wholesale rates so

high that its wholesale customers will be unable to compete with

it in the retail market”); Berkey Photo, Inc., v. Eastman Kodak

Co., 603 F.2d at 276 (“whatever problems of murkiness may

plague the Alcoa opinion, on this point it it pellucid. The

defendant had employed its monopoly power in the ingot

market to impose a price squeeze”).'?

Indeed, when the defendant lacks power over price in the raw

material market, its market power in the finished product or

“downstream” market is irrelevant. If the defendant used its

downstream market power to raise prices, any pressure on com-

petitors would be lessened or eliminated. Of course, if the

defendant chose to reduce its prices in the downstream market,

competitors’ profits might suffer. But a monopolist’s com-

petitive, above-cost pricing is not an abuse of monopoly power,

even if such pricing disadvantages less efficient rivals. See, e.g.,

Northeastern Telephone Co. v. American Telephone &

Telegraph Co., 651 F.2d 76, 86-87 (2d Cir. 1981), cert. denied,

455 U.S. 943 (1982); Telex Corp. v. International Business

Machines Corp., 510 F.2d 894, 926 (16th Cir.), cert. dismissed,

423 U.S. 802 (1975). Thus, proof that the defendant possessed

power over price in the raw material or “upstream” market is an

indispensable element in establishing that the defendant en-

gaged in a price squeeze unlawful under Section 2.

'3 Price squeeze issues frequently have arisen ir cases where a regulated enti-

ty, generally an electrical utility, seeks relief from “excessive” wholesale rates

in Order to compete on an equal footing at a retail level. This Court held in

FPC v. Conway Corp., 426 U.S. 271 (1976), that federal regulators may

remedy such squeezes by “ ‘put{ting}] wholesale rates in the lower range of the

zone of reasonableness’ ” (426 U.S. at 279 (citation omitted))s Conway con-

cerned the authority of the Federal Power Commission to order relief under

the Federal Power Act, not Section 2 of the Sherman Act.

14

a. Kaiser contends (Pet. 17-18) that this case warrants

review because the court of appeals imposed liability for the

price squeeze without finding that Kaiser possessed monopoly

power in a defined raw material market. Although the court of

appeals’ discussion of this issue is not completely clear, we do

not believe that the court of appeals dispensed with that re-

quirement.

Monopoly pcwer, of course, is “the power to control prices or

exclude competition.” United States v. E. I. duPont de

Nemours & Co., 351 U.S. 377, 391 (1956) (footnote omitted);

see also United States v. Grinnell Corp., 384 U.S. 563, 571

(1966). The district court in this case instructed the jury that, in

order to establish that the price squeeze violated Section 2,

“(Columbia] would have to show by the evidence that the Kaiser

defendants were dominant or had sufficient power in the raw

material market to control the price of the coil or to exclude

competitors” (C.A. App. 3949a (emphasis added)). Thus, the

jury was required to find that Kaiser exercised power over price

in the relevant market before holding Kaiser liable for the price

squeeze.

The court of appeals expressly stated that “(t]he mere ex-

istence * * * of a ‘price squeeze’ is not necessarily an antitrust

violation. The plaintiff must present evidence that the defend-

ants deliberately produced the effect * * * [so that] the jury

{may] conclude that the ‘squeeze’ was not the result of natural

market forces such as supply and demand or legitimate competi-

tion” (Pet. App. Al4). And the court concluded that the

evidence introduced by Columbia showed that “Kaiser con-

trolled * * * the price of the raw material.” /bid.; see alsc id. at

Al15. Thus, the court recognized that Columbia had the burden

of demonstrating that Kaiser exercised the requisite degree of

control over raw material prices.

b. The court of appeals stated that evidence that Kaiser was

the “price leader” in the market for aluminum coil was sufficient

to establish Kaiser’s power over the price of aluminum coil (see

Pet. App. A15-A17). In our view, the court of appeals erred by

concluding that the jury reasonably could have relied upon this

evidence to find that Kaiser controlled prices in the raw material

market.

15

Price leadership is a common phenomenon, particularly in

basic industries, such as aluminum and steel, that rest upon an ~

undifferentiated commodity and may be characterized as

oligopolistic. See, e.g., A. Thompson, Economics Of The Firm

394-398 (4th ed. 1985); K. Cohen & R. Cyert, Theory of the

Firm: Resource Allocation In A Market Economy 241-249

(1965). Competitors in such industries sometimes follow the

price increases of a “leader,” with the result that pricing changes

within the industry are fairly uniform. See 4 P. Areeda, Anti-

trust Law 44 1410b, 1432 (1986). It is possible that a firm exer-

cising price leadership in a raw material market might be able to

impose a price squeeze upon a competitor in a related finished

product market, even where the price leader did not sell the raw

material to the downstream competitor. However, such a

strategy is not likely to be successful and, therefore, is not likely

to be pursued in practice.

A monopolist engaging in a price squeeze generally must bear

the cost of lost sales in the raw material market resulting from

the high above-market raw material prices that are necessary to

implement the squeeze. In the price leadersnip context, a price

Squeeze strategy could succeed only if the price leader’s com-

petitors in the raw material market also were willing to forgo

sales by adhering to the price leader’s prices. It is more likely

that such firms would choose to sell the raw material to the

target of the squeeze and others at a lower price, as Kaiser’s

competitors in fact did in this case (see C.A. App. 155a-156a,

185a, 241a). Thus, where firms selling to the target of the price

squeeze are in a posiuon to profit by charging a lower price and

expanding sales, eviaence of price leadership is insufficient to

show that the defendant controlled the price at which the raw

material was sold by other firms in that market. See Dimmitt

Agri Industries, Inc. vy. CPC International, Inc., 679 F.2d 516,

530-531 (Sth Cir. 1982) (rejecting contention that evidence es-

tablishing that an industry is “an oligopoly, with [the defendant]

as its price’ leader” suffices to establish Section 2 liability); cf.

Matsushita Electric Industrial Co. v. Zenith Radio Corp., No.

83-2004 (Mar. 26, 1986), slip op. 12.

This conclusion is supported by the settled rule that parallel

price movements by competitors are not by themselves evidence

sufficient to establish a price-fixing agreement in violation of

Section 1 of the Sherman Act. Theatre Enterpriscs, Inc. v. Para-

16

mount Film Distributing Co., 346 U.S. 537, 541 (1954); 4 P.

Areeda, supra, 4 1432. If price leadership and parallel price

movements are not sufficient to show an agreement under Sec-

tion 1, the same evidence should not be sufficient to

demonstrate that Kaiser had the ability to force its competitors

to follow its prices. Price Jeadership evidence does not tend to

exclude the substantial possibility that horizontal competitors

have made purely independent pricing decisions. Cf. Monsanto

Co. v. Spray-Rite Service Corp., 465 U.S. 752, 768 (1984)

(evidence that tends to exclude the possivility of independent ac-

tion by the manufacturer and distributor must be adduced in

resale price maintenance cases). We submit that where, as here,

firms selling to the target are in a position to profit from the

situation by charging a lower price and expanding sales, impos-

ing liability on a firm that did not sell raw material to the target

of the squeeze would be appropriate only if sellers of the raw

material had entered into an agreement with respect to price.

The court of appeals did not find any evidence of a horizontal

price-fixing agreement in this case. It simply emphasized that

Kaiser, as the largest producer of aluminum coil for use in

culvert pipe, had “the largest interest in pipe prices” (Pet. App.

A16), and that competing sellers customarily followed Kaiser’s

prices (ibid.).'* The court of appeals erred by concluding that

this price leadership evidence demonstrated the control over raw

material price needed to establish a price squeeze. '*

3. Despite the court of appeals’ misplaced reliance on the

price leadership evidence, we are unable to conclude that review

by the Court is warranted in this case. Questions regarding price

squeezes do not arise with any frequency under the antitrust

laws because a defendant rarely possesses sufficient market

power in both the raw material and finished product markets to

'4 Kaiser claims that competitors did not follow its prices (Pet. 25-26).

'S Respondents contend (Br. in Opp. 12) that “the record establishes that

[Kaiser] did in fact have dominant and monopolistic power in coil,” an ap-

parent reference to evidence that Kaiser “produced over 80% of the aluminum

used for making pipe” (Pet. App. AI5). Kaiser argues (Pet. 24-25) that the

product market should not be limited to aluminum coil used in culvert fabrica-

tion, and that its share of the proper market is significantly lower, The court

of appeals did not address the significance of this evidence in discussing

whether Kaiser exercised power over the price of aluminum coil.

17

support a credible claim that it controlled prices in both

markets. For that reason alone, the questions presented do not

appear to be of sufficient importance to warrant review by this

Court. In addition, we are aware of no other price squeeze case

in which a court has relied upon price leadership evidence to

find that the defendant controlled prices in the relevant market.

We doubt that other courts of appeals will adopt the reasoning

of the court below because of the obvious shortcomings of price

leadership evidence as proof of power over price.

Moreover, review by this Court is not necessary because the

question’ whether price leadership evidence is sufficient to

demonstrate control over price appears not to have been

dispositive in this case. The court of appeals’ opinion suggests

that the court apparently viewed evidence independent of the

price squeeze as providing sufficient groainds for upholding the

jury’s verdict on the Section 2 claim; the court expressly con-

cluded that this evidence showed that Kaiser “attempted to con-

trol its competition, and failing that, tried to destroy it” (Pet.

App. Al3). Thus, the court found that Kaiser had (1) told “Co-

lumbia’s owners that Kaiser would control Columbia’s growth

and market”; (2) “attempted to coerce” Columbia and another

independent fabricator “into purchasing only from Kaiser”; (3)

threatened to “open a pipe fabrication plant ‘across the street’

from Columbia”; and (4) “carried through with [this] threat”

when it opened a plant forty miles from Columbia’s factory

(ibid.). The court of appeals concluded that this

evidence—which is wholly unrelated to the price squeeze

claim — permitted “a jury [to] legitimately infer that Kaiser at-

tempted to control its competition.” /bid.; see also id. at A105

(district court decision).

Whether the evidence was legally sufficient to support such a

finding by the jury is not, in our view, an issue fairly comprised

in the questions presented in the petition for certiorari

(although, as we have explained, that issue is discussed in the

petition and reply brief). Were the Court to conclude that the

question is presented, however, we would have grave doubts

18

that the evidence suffices to sustain a verdict under Section 2

because Kaiser’s conduct may well be characterized as no more

than aggressive competition. '®

Nor do we believe that Kaiser has shown any persuasive

ground for believing that a decision by this Court on the price

squeeze issue would affect the outcome of the case. Kaiser

asserts (Reply Br. 8-10) that because the price squeeze issue

figured prominently at trial and in the court of appeals’ deci-

sion, the decision below must be reversed if the evidence relating

to the price squeeze claim is found to be insufficient as a matter

of law. But antitrust plaintiffs are not required to “compart-

mentalize” their proof (Continental Ore Co. v. Union Carbide

& Carbon Corp., 370 U.S. 690, 699 (1962)). And each and every

allegation of anticompetitive conduct need not be proven in

order to establish Sherman Acct liability. Cf. Aspen Skiing Co.

v. Aspen Highlands Skiing Corp., No. 84-510 (June 19, 1985),

slip op. 13. In Sunkist Growers, Inc. v. Winckler & Smith Citrus

Products Co., 370 U.S. 19 (1962), upon which Kaiser relies

(Reply Br. 9-10), the Court found that a new trial was required

16 In our view, Kaiser’s conduct is most reasonably understood in light of its

interest in increasing its sales of aluminum, which led it to develop and pro-

mote new uses for aluminum. Thus, Kaiser invested substantial resources in

develc ping a market for aluminum culvert pipe as a substitute for steel and

concrete (C.A. App. 57a-59a, 73a-74a). Selling aluminum culvert pipe directly

to users and selling coil to independent fabricators of culvert pipe both serve

the lawful goal of maximizing sales of aluminum. Kaiser apparently concluded

that selling through Columbia was an efficient means of serving a particular

area of the country, as ng as Columbia was willing to purchase all of its coil

from Kaiser. When Columbia instead turned to Kaiser’s competitors for coii,

however, Kaiser had to locate a fabricatizg plant in Columbia’s area or risk

losing sales, because the cost of transperting finished pipe from a distant plant

is substantial (C.A. App. 794a). Viewed from that perspective, Kaiser’s deci-

sion to locate a fabrication plant in Columbia’s marketing area was a rational

and, on its face, procompetitive response to its loss of Columbia as a coil

customer. Further, we see nothing anticompetitive in Kaiser’s decision to ap-

point Kennedy as an independent distributor. It is undisputed that Kennedy

was dissatisfied with his compensation from Columbia, and that he was told

that he was free to seek employment elsewhere. Kaiser’s decision to appoint

Kennedy as a distributor thus served both Kennedy’s and Kaiser’s interests.

Finally, the statements of the Kaiser official cited by the court of appeals can

plausibly be viewed merely as the sort of posturing one might expect from an

aggressive salesman.

Pe re |

19

because “one theory of liability” was found to be erroneous (370

U.S. at 29). Here, by contrast, Columbia has presented only a

single theory of liability —that Kaiser violated Section 2 by seek-

ing to drive Columbia out of business — supported by a variety

of evidence, including the evidence relating to the price squeeze.

A determination that the price squeeze evidence cannot support

Columbia’s theory of liability does not render the other evidence

insufficient to support the jury’s verdict.

Kaiser also argues (Reply Br. 9-10) that a new trial regarding

damages would be necessary if this Court found that the record

did not contain sufficient evidence to support the price squeeze

claim. However, the court of appeals concluded (Pet. App.

A23-A24) that on the facts of this case

it would be extremely difficult. if not impossible, to

segregate and attribute a fixes amount of damages to any

one act. [Respondents’] basic injury was t! at Columbia was

driven out of business. Further, the theory of the section

two violation here is not that any one act in itself is

unlawful, but that all the acts taken together show the

willful acquisition or maintenance of a monopoly which

damaged and forced Columbia out of business.

Che court therefore concluded that the district court did not err

by ordering a second trial limited to the issue of damages

because “[w]hen the antitrust injury is of an indivisible nature,

* * * the issues in the liability trial are not so interwoven with

the issues in the damages trial as to require a retrial of both” (id.

at A24). This reasoni..2 suggests that a new damages trial would

not be required if the price squeeze claim were eliminated as a

basis for the jury’s finding of liability. See also Pet. App. A81

(district court decision).

Finally, we note that the 1979 trial was bifurcated; the jury

rendered its special verdict regarding liability, heard the

evidence regarding damages, and then rendered its special ver-

dict regarding damages (Pet. App. A35, A67-A71). The inter-

rogatories submitted to the jury, which were the result of an

agreement between Kaiser aiid Coiumbia, did not tequest the

jury to specify the facts that formed the basis of its determina-

tion regarding the Section 2 claim (Pet. App. A67-A69,

A80-A81, A105). The uncertainty regarding the liability jury’s

20

determination thus stems from the generalized nature of the

special verdict form agreed to by Kaiser. In these circumstances,

we do not agree that a third trial necessarily would be required if

this Court were to reject the court of appeals’ price squeeze

analysis.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

CHARLES FRIED

Solicitor General

DOUGLAS H. GINSBURG

Assistant Attorney General

W. STEPHEN CANNON

Deputy Assistant Attorney General

CATHERINE G. O’SULLIVAN

STEVE MAC ISAAC

Attorneys

MAY 1986

US GOVERNMENT PRINTING OFFICE 1966— 49150720239