Jurisdictional Statement — Pan American World Airways, Inc. v. United States

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’ Questions presented... ___- Lacan vabeaonae es cokes

Statute involved. ................-..- iad ane a aes

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CITATIONS

Cases:

Additional Service to Latin America, 6 C.A.B. 857. 8, 11,

Addysxton Pipe and Steel Co. vy. United Stater, 175

U.S. 211, affirming 85 Fed. 271....,............-

Fashion oar ged Guild vy. Federal ‘Trade Commis-

SOR eee i ak oe Cae ce cn eee

Georgia v. Pennaytrania R. Co ., 824 US. 439. Sree

Grace, Wo R. & Co. Civil Aeronautics Board, 154

F. 2d 271, yeas granted, 028 U.S. 832, dis-

* missed as moot,-332 U.S. 827_..........._-- 1

Interstate Commer? Commission v. Mechling, 330

of = Sar eas ehweeas eases casas wah

Lehman v. Civil Acronnutile Board, 209 F. 2d 289, cer-

tiorari denied, 347 U. Medias was avis Pee caees

New York-Balboa .Through Service Proceeding, Re-

CE, Fe ce NOPE 6h von cca nteessdndgan+sdae

Northern Pac. Ry. Co. v. United States, 356 US ee

Orega. Steam Navigation Co. v. Winsor, 20 Wall. a

Pan American-Panagra Agreement, 8 C.A.B. 50_____-

Panagra Terminal Investigation, 4 C.A.B. 670_.-.-__-

Schaffer Transportation Co. v. United States, 355 U S.

Shawnee Compress (Co. v. ‘hie, 209 U.S. 423___.

Timken Roller Bearing Co. v. United States, 341 U.S. 593.

620605— 61——-1 (1)

25-26

16

16

16

II

* Casese—Continued

United States v. Addyston Pipe & Steel Co.,85 Fod. Page

271, affirmed, 175 U.S. 211_........-.....------ 17

United States v. Columbia Steel Co., 334 U.S. 495. 2, 20-21, 27

United -States v. Crescent Amusement (o., 323 U.S.

REEL SE RA Ree CeO FN 2

United States v. duPont & Co., 366 U.S. 316......-.- 16

United States v. Paramount Pictures, 334 U.S. 131-.. 17

United States v. seat diiaita Oil Co., 310 US.150. 16

Statutes:

Civil Aeronautics Act of 1938, toniin 2(d), now Fed- :

eral Aviation Act of 1958, 49 U.S.C. 1302(d)-.--- 25

_ Foreign Mail Act of 1928, 45 Stat. 248, 1449... .. 6

Interstate Commerce Act, 24 Stat. 379, National

Transportation Policy, 49 U.S.C. preceding Sec. 1. 26

Sherman Act, 26 Stat. 209, as amended:

09 hie SRM EPs ceheudaceucacas chaaies 2, 16

ER ee Os cance ncanecanadenapuse 2, 16

isola

- C.A.B. Order No. E-9481, August 10, 1955_........- 11

Jn the Supreme Gourt of the Wnited States

OcTOBER ‘TERM, 1961

No. ——

Unirep States oF AMERICA, APPELLANT

r

Pan AMERICAN Wort Airways, INc., W. R. Grace

& Co., aND Pan ay aus, Aways, Ixc,”

* —————EEE ’

s

ON 4PPEAL FROM thr UNITED STATES DISTRICT COURT FOR

THE SOUTHERN DISTRICT QF NEW YORE

JURISDICTIONAL STATEMENT

OPINION BELOW

The opinion of the district court is reported at 193

F. Supp. 18. The opinion .is reprinted in the ap-

pendix to the jurisdictional statement in No, 257, this

Term, in which appellee Pan American World Air-

ways, Ine., has appealed from another portion of the

_ Judgment in this case. Because of the length of the

_ opinion, we are not reprinting it here; we shall refer

to the appendix in No, 257 as “App.”

_ The judgment of the district court was entered on

May 8, 1961 (infra, p. 29), and the notice of appeal

_"

was , filed by the United States on J uly 7, 1961.

The jurisdiction of this Court is conferred by Section

2 of the Expediting Act of February 11, 1903, 32

Stat. 823,.as amended, 15 U.S.C 29. United States

v. Columbia Steel Co., 334 U.S. 495; United States Vv. - |

Crescent Amusement Co., 323 U.S. 173.

QUESTIONS PRESENTED

1. Whether appellees unlawfully divided markets in

air transportation, in violation of Sections 1 and 3

of the Sherman Act. :

2. Whether, in the circumstances of this ease, the

ownership by appellee Grace of 50 percent of the stock

of appellee Panagra, an air carrier which serves the

same geographic area that Cirace’s steamship sub-

sidiary serves, constitutes a combination in unreason-

able restraint of trade.’ |

STATUTE INVOLVED

Sections 1 and 3 of the Sherman Act, 26 Stat. 209

as amended, 15 U.S.C. 1, 3, provide in pertinent part:

SECTION 1. Every contract, combination in the

form of trust or otherwise, or, conspiracy, in

restraint of trade or commerce among thé sev-

eral States, or with foreign nations, is declared .

. to be illegal * * *. Every person who shall —

make any contract or engage in any combina-

tion or conspiracy declared * * * tu be illegal

_ shall be deemed guilty of a misdemeanor, * * *.

‘We are not pressing the issue, raised in our notice of ap-

peal, whether Grace attempted to monopolize, conspired to

monopolize, or iad i nam. American air transporta-

tion services.

»

3

Section 3. Every contract, combination in

form of trust or otherwise, or conspiracy, in

restraint of trade or commerce in any Terri-

tory of the United States or of the District of -

Columbia, or in restraint of trade or commerce

between any such Territory and another, or

between any such Territory er Territories and

any State or States or the District of Colum-

bia, or with foreign nations, or between the °

District of Columbia and any State or shanties

or foreign nations, is declared illegal. Every

person who shall make any such contract or

engage in any such combination or conspiracy,

shall be deemed guilty of a misdemeanor, eine

STATEMENT

The governnment’s complaint in this civil antitrust

case, filed on January FH, 1954, charged that since

1928 appellees Pan American World Airways, Ine.

(:Pan American”), W. R. Grace and Company

(“Grace”), and their jointly-owned subsidiary, Pan

American-Grace Airways, Ine. (** Panagra’’), had en-

gaged in a combination and conspiracy, and had heen |

parties te contracts, to restrain and monopolize air

transportation between the United States and South

Ainerica, and had attempted to monopolize and had

monopolized such transportation, in violation of See-

tions 1, 2, and 3 of the Sherman ‘Act. The complaint

alieged, among-other things, that Pan American and

G ‘ace, when they organized Panagra, agreed that its

operations would be confined to the west coast of

South America and that, Pan American would operate,

to the cast coast of South America and between the

- United States and the Canal Zone; that, pursuant to

\ n

as eet ee

4

such an agreement, Panagra has refrained from seek-

ing or obtaining operating rights on the east coast of

South America; that.Pan American used its 50 per-

cent control of Panagra to prevent the latter from se-

curing authority from the Civil Aeronautics Board to

extend its route from the Canal Zone to the United

States; and that Pan American and Grace had éxer-

. cised their joint control of Panagra to “block and pre-

vent” any action by Panagra that either of them

viewed as “contrary or detrimental to its own — u-

lar interests.”

After trial, the district court held that Pan Ameri-

ean had monopolized and attempted to monopolize

such transportation, but that the government had

failed to prove its*other charges. The court ordered

Pan American to divest itself of its stock’ interest

in Panagra,’ and dismissed the complaint as to the —

other two defendants. _

The underlying facts, as found by the district court

and as supplemented by undisputed evidence, are as

follows:

1. Description of the Companies. Pan American and

Grace each owns 59 percent of the stock of Panagra.

Panagra has been certificated by the Civil Aeronau-

ties Board as an air carrier to engage in transporta-

tion betwen the Canal Zone and the west coast of

South America to Santiago, Chile, and across the

Andes to Buenos Aires and Montevideo. Panagra

provides a through service to and from the- United

States by equipment interchanges with. Pan Ameri-

* Pan American has appealed from that part of the judgment.

No. 257, this Term, pending on jurisdictional statement.

5

can between the Canal Zone and Miami, and National

Air Lines, between Miami and New York. In recent

years, Panagra has carried from 79 percent to 86

percent of the airline passengers on United States_

. flag carriers between this country ard western South

Americ¢a,- and from 50 percent to 75 percent of such

passengers transported by all air carriers (ineluding

foreign carriers) (App. 4a, 37a, 50a).

Pan American, the largest United States interna-

tional air carrier, carries passengers, freight\and mail

between the eastern United States and the Canal Zone

and between the Canal Zone and the east coast of

South America. The southern terminal of its route

is Buenos Aires (App. 3a, 37a). Pan . American and

Panagra together presently carry from 75 percent to_

88 percent of airline passengers on -United States

flag carriers between this country and South America,

and about 50 percent of such airline passengers trans-

ported by all carriers. The other 50 percent.of this

_ traffic is divided among more than ten other airlines.

- Prior to 1948, when Braniff commenced’ certificated

operations, between Texas, the Canal Zone, and South

America (see n. 7, pp. 10-11, infra), Pan American

was the only United States air. carrier operating

between this country and the Canal. Zone (App. 36a-

38a, 40a, wea

Grace ig engaged in various inuustrial and other

enterprises in -western South America. It wholly

owns Grace Line, Inc., which operates a steamship

service between that area and the United States.

Grace Line is the only United States flag water-car-

rier providing regularly scheduled service between the

Ta).

6

east coast of the United States and the west \coast of

South America.’ In this service, Grace carries from 81

percent to 94 percent of all passenger traffic, about ©

60 percent of all northbound freight and about 50

percent of all southbound freight (App. 3a-4a ; Exhs:

— GS-68-72, GS-87-96).

2. The Organization of Panagra. At the time Pan-

agra was organized in 1929, Pan American was seek-

- ing to develop an air transportation service through-

out South America. Its proposed service to eastern

South America’ was based upon its contracts with

the Post Office to carry air mail. Under these con-

- tracts, a subsidy was provided for service from Florida

to Cuba, Puerto Rico, the Canal Zone and Trinidad.

The Postmaster General had an option to extend such

subsidized services along the northeast coast of South -

America to Dutch Guiana (App. 8a-10a).‘ ’ Pan

American was also negotiating for operating rights

in the western South: American countries (App. lla-

At the same time, Girace was investigating the pos-

sibilities of an airline on the west -coast of South

America. Grace believed that in a decade air service

would become “a real competitor of our steamers,” and

that its early entry into the air transportation field

* Such scheduled service is commonly described as “liner serv-

ice” or “regular carriage,” as distinguished from “irregular”.

or. “tramp” service.

“Unde the Foreign Mail Act of 1928, 45 Stat. YAR, 1449,

the Post: iaster General awarded ten-year contracts for air mail

service, with payment being made on the basis of mileage flown

(not the amount of mail carried) (App. 9a).

7

would put it in a-*position “to meet any flying compe-

tition” (App. l2a; Exh. G-333). |

In September 1928, “Pan -American and Grace

agreed to “associate for the commencement of an air-

plane service in Peru with the view of ultimately in-

augurating a through mail service from the Panama

Canal to Valparaiso, Chile”. The plan was to form

_ a corporation in which the two companies-would sub-

scribe in equal shares. Pan American, was, to “have

charge of the operation of the service from the Canal

to Valparaiso and [Grace s] houses on the West Coast

of Seuth America [w ere to] be the agents of the com-

pany on a re asonable compensation basis” (App.

13a-l5a). ee |

Panagra was organized by Pan American and. Grace

| in January. 1929. In March 1929, the Postmaster

‘General awarded the new company a contract for air

mail service from the Canal Zone down the west evast -

of South America to Santiago, Chile, which became:

Panagra’s western terminus. In August 1929, Pan-

agra’s route was extended by the Postmaster General

to Buenus Aires and Montevideo (App. l5a-17a).

September 1930, the Postmaster General awarded

Pan American a_ route from Dutch Guiana to Santos,

Brazil, with an option to extend to Buenos Aires.

Pan America’s service to Buenos Aires was com-

menced i in 1931 (App. 21a).

. Shortly after the organization of ‘Panagrs, it be-

_came evident that there would be a “bitter family

quarrel” ( App. 2a) between Pan American and Grace

because “both interests [were] determined to have

620605—61——- 2

7]

&

a part in the management” of Panagra (Exh. G-43). -

During the ‘early years, the disputes primarily con-

~ cerned the pace and scope of development of the serv-

ice within South America. Grace sought to exercise

control through its South American offices, with the

result. that officials of Panagra and Pan American

_ charged Grace with providing insufficient support for

the new air service and with favoring its own steam--

~ ship lines." ~ Beginning in the late 1930’s, with the ex-

. pansion of air travel, Grace sought to take over the

active management of Panagra. Thereafter, the dis-

pute focused largely on attempts by Grace to exteid —

Panagra’s operations north of the Canal Zone to the

United States, a route on which Panagra would be in =.

competition with Pan American. These attempts

are described in Civil Aeronauties Board decisions.°

3. Division of Territories in South America.. As

the district court found, “There is no doubt that de-

fendants came to agree upon a division of territories” —

(Appmpla) between Pan American and Panagra, un-

der which Pan American would serve the north and

~ east coasts of South America and Panagra would

serve the west coast, and the trans-Andean route be-

tween Santiago and Buenos Aires. The’ complaint

~ alleged, and Pan American.asserted below, that such

§£g., Exs. G45, G-60, G-336, G-344, G-346, .G-347, G-363-

366, G-375-379, G-381, G-382; G-404, G-416, G-422, G-428;

G-430, G-434, G-436-438, G-440, G-442-444, G-453, G-—455, -

G-456, G-458, G—461-464, G-466, G-468, G77, GATS, G-481,

G-484, G-487, G-489.

* Panagra Terminal incited: 4 CARB. 610; Additional

Service to Latin America, 6 C.A.B. 857, 912-916; Pan Amer-

ican-Panagra Agreement, 8 C.A.B. 50; New York-Balboa

Through Service ) Preséeding, Reopened, 18 C.A.B. 501, 504-506. ’

9.

an agreement was made at the time Panagra was

formed and that it covered not only South American

traffic, but also traffic between the United States and

the Canal’Zone, from which Panagra was to be ex-

cluded. Grace contended, on the other hand, that the ©

territorial division. was made only after Panagra had

been formed, and that it was limited to South America

(App. 6a, 31a-32a).

Both Pan. American and Grace naan Trecog-

nized, and endeavored to enforce, the agreement for

division of territories. In 1930, Pan American or-

dered a subsidiary to cease flights’from Buenos Aires

_ to Santiago on the ground that thé ‘“‘agreement” pro-

hibited its operation on that route and ‘‘likewise re-’

stricts”’ Panagra from operating ‘east of the ‘Andes

except on that route (App. 32a; Exh. G-67). In

disputes about service in Colombia, Grace insisted, in

1931 (and again in 1937) that Pan American stay

out of the western part of the country, ‘definitely in

Panagra’s territory under our agreement” (App. 33a;

Exhs. G-94, G-118, G-120), while Pan American, in

1946, relied. upon the agreement to object to any

service by Panagra to Bogota (Exh. G-148). Simi-

larly, in 1929 and 1935, discussions between Pan

American and Grace about proposed service by Pan

American and Panagra to Bolivia were framed in

terms of the territorial agreement (App. 33a; Exhs.

G-65, G-97). | |

4. Panagra’s Flights to the United States. Begin-

ning in 1938, Grace attempted to extend Panagra’s

‘service to the United States. Pan American rejected

Grace’s proposal that Panagra seek to institute such

° 10

service. In~1939, Pan American and Grace reached

an agreement under which Grace took over the man-

agement of Panagra, and Pan American promised

to provide an adequate connecting service between

Miami and the Canal Zone. Thereafter, to meet the

possible threat of competition by another United

States air carrier, Grace again pressed for Panagra to

apply to extend its route to the United States. Pan

American’s representatives on the Panagra Board

of Directors repeatedly blocked all attempts by Grace

to have Panagra file an application for such author-

ity. with the Civil Aeronauties Board. Grace then

commenced proceedings betore the Board on behaif

of Panagra to obtain such authority. In 1946, during

' the pendency of litigation which resulted from that at-

tempt; Pan American and Grace reached a settlement

which the Board approved.’ . The settlement included

"Grace filed with the Board a petition to extend Panagra’s

_ routes to the United States, and a complaint t6 require Pan

American to terminate certain allegedly illegal conducts It

also intervened in a pending Board certification proceeding in

which other carriers were seeking authority to operate be-

tween New Orleans and the Canal Zone. After an investiga-

tion, the Board concluded that it had no authority to extend

Panagra’s routes unless Panagra itself applied therefor, and

dismissed the proceeding. Panaqra Terminal Investigation, 4

C.A.B. 670. The Court of Appeals for the Second Cireuit

reversed, holding that, if Pan American's objection to Panagra’s

applying for a route extension was due to “illegality and

fraud.” the Board could entertain the application filed by

Grace. WR. Grace & Co. v. Civil Aeronautics Boar? 54 F.

2d 271, 287-282. After this Court had granted certiorari to

review: that decision (328 U.S. 832), Grace and Pan American

entered into the 1946 settlement described in the text. The.

writs were then dismissed ag moot. 332 U.S, 827.

In the interim, in May 1946, the Board had certificated

Braniff Airways to fly from Texas to the Canal Zone and

OO Oe

Il

a Through Flight Agreement*between Pan American

; and Panagra, under which the latter could fly directly

to Miami, under the Pan American certificate. After

further prolonged controversy between the parties,

the Board in 1955 approved an interchange agreement

among Panagra, Pan American and National Air

Lines, under which Panagra has been able toe pre-

vide through service on its planes to New York City>

( App. 46a-—5la).

5. The. decision of the district court. After trial.

the district court found that Pau American had me-

nopolized and attempted to monopolize commerce, in

violation of Section 2 of the Sherman Aet. The court

rejected the government's other charges.

The court found that there was no conspiracy be-

tween Pan American and Grace to restrain of monep-

vlize trade (App. 240-292). The organization of

Panagra by thd two companies was, the court fond,

an economically sound and mutually advantageous

‘joining of complementary resources in a ** pioneering

venture” to develop United States commercial avia- -

tion im western South America (App. 27a-28a). In

the court's view, it was the parties’ respective strong

“hargaining position,” not a conspiracy, which re-

sulted in the agreement for joint control and partici-

pation. The agreement was intended to assure the

_ best chance of success and also to protect the parents’

points: in Colombia, Ecuador, Peru, Bolivia, Paraguay, Brazil

and Argentina. Additional Service. to Latin America. 6

* CAB, 857.

| *C.A.B. Order No. E-9481, Angust HH), 1955.

2 12.

‘‘independent systems from * * * competition’’ by

giving each a veto ‘‘against the possible treachery of

the other to expand the operations of the company

[Panagra] in competition with their respective inde-

pendent linés”’ (App. 25a).

- The court accepted Grace’s position on the agree-

ment for the division of territories., It held that the -

agreement .was made after Panagra had been formed

and after its route was extended to Buenos Aires in

November 1929; and that it covered only the routes

_of Pan American and Panagra in South. America,

and not the Canal Zone-United States traffic (App.

_ 32a, 34a). The court held that this agreement for

division of territories was valid becaiise it was ‘‘con-

sistent with the best interests of this country in estab-

lishing and developing American international avia-

tion in the years from 1929 to 1938’’ and with the

government’s policy 1n those “formative years”’ of air

transportation, which was to subsidize one United

States airline on each route (App. 30a-3la, 34a)...

The court ruled that Pan American, by blocking the

extension of Panagra’s operating authority to the

United States and thus excluding competition by

_ Panagra, had monopolized and attempted to monopo-

_ lize air traffic between the United States and South

America and between the United States and the Canal

Zone (App. 34a-52a).* ,

As to Grace, the court held that control or 50 per-

~ cent ownership of an aitline by a parallel steamship

” * The court rejected Pan American’s arguments ‘that the issues

in this case should be referred to the primary jurisdiction of

the Civil Aeronautics Board and that antitrust immunity was

provided by prior Board approval of various agreements

between the parties (App. 52a-56a).

.

13

company does not per se violate the Sherman Act

(App. 57a-6la). It further held that no restraint on

competition had been shown to have resulted from the

relation between Grace and Panagra. The court

was ‘‘not persuaded that the * * * market ‘is the—

same,”’ i.e., that air traffic was competitive with sea

traffic to the west coast of South America. The court

‘ruled that the principal business of Panagra is the

transportation of passengers, that of Grace the car-_

riage of freight; and that it had not beem»shown that

passengers or shippers of one of these carriers were

potential customers of the other (App. -6la-65a).

Finally, it ruled that, in any event, -the government

had to show that Grace had restrained or monopolized

commerce. There was, the eourt believed, no such

showing; on the contrary;\Grace was the partner

whieh had “fostered and fought for Panagra develop-

ment and expansion’’ (App. 28a, 65a). |

The court’s judgment, entered on May 8, 1961, (1)

dismissed the action with respect to Grace and Pa-

hagra ; (2) directed Pan American to divest itself of

its stock in Panagra pursuant to a plan of divestment

to be approved by the Civil Aeronautics Board and

the court; and (3) pending the divestiture, enjoined

Pan American from interfering with the filing or

processing of applications by Panagra_ to — 7 or.

extend. its routes (App. 7la-72a).”

‘© Thereafter, Pan American moved to suspen! the injunction

in paragraph 3 of the judgment, pending appeai to this Court. -

On June 13, 1961, the district court granted the motioh unless

Grace agreed to stipulate that, in the vent of a reversal by

this Court, its nominees would vote to withdraw any Panagra

application filed with the Board during the interval. Grace °

filed such a stipulation on June 22, 1961. ,

14 .

THE QUESTIONS ARE SUBSTANTIAL

This is a major antitrust case which significantly

affects air service rendered by United States carriers

between this country and South America. For many

years, the development of such service has been

handicapped by the fact that Panagra, the prineipai

American flag carrier operating between the Canal

Zone and western South America, was equally owned

by Pan Ameriean and Grace, which are, respectively, |

Panagra’s principal air and water competitors. The

record shows that, as a result of the joint ownership |

and control of Panagra by Pan American and Grace

and the agreement between the two latter companies

which, in order to avoid competition, divided the

operating areas of Pan Ameriean and Panagra, the

economic development of Panagra was seriously ham-

pered. As the district court noted (App. 2a), this

suit was brought by ‘the United States. at the request

of the Civil Aeronautics Board, because of the lat-

ter’s inability to solve the air transportation -prob-

lems — by the — ownership and control of

Panagra. . |

The principal relief sought was the divestment by

both Pon American a: } Grace of their stock interests

in Panagra. The district court found that Pan

American had monopolized and attempted. to monop-

olize air transportation between the United States, the

Canal Zone and South America, and directed Pan

American to dispose of its interest in Panagra. The

court held, however, that. the other co-owner of

Panagra, appellee Grace, had not violated the Sher-

ie

a

a

.

-

2.

15

man Act, either through its participation in an acree-

ment to divide the South American air transportation

market, or by its 50 percent stock interest In Panagra.

The effect of this ruling is to permit Grace to con-

tinue its control of Panagra—a control that permits

Grace to -block any action by “Panagra that Grace

considers to be contrary to itstown economic interest.

As we show Delow, the economic interests of Grace

and Panagra ‘have frequently clashed in the past, and

are likely to do so in the future. |

Grace -is the dominant reular water carrier be-

tween the eastern United States and western South

America, and Panagra (as a result ‘of its through-

flight agreement with Pan Ametican and National

Airlines) is the dominant air carrier between tose,

same areas. The district court erred in holding that

the agreement between Grace and Pan American fér

the division of territeries between the latter ‘and

-anagra did not. violate the Sherman Act. Moreover,

contrary to the conclusion of the district court, the

record establishes that there is. significant competi-

tion. between Grace and Panagra over these routes

and that Grace has not hesitated to restrict Panagra’s

competitive efforts when. they’ clashed with its own

economic interests as a’ water carrier. In these cir-

cumstances, we believe that Grace's 50 percent owner-

ship of Panagra itself constitutes a combination with

Panagra in unreasonable restraint of trade and that

this combination, like the illegal monopolization by

Pan American, should be terminated by an order

directing Grace to divest its stock interest in Panagra.

16

‘‘Divestiture or dissolution has traditionally been the

remedy for Sherman Act violations whose heart is

intercorporate combination and control’? (United

States v. du Pont & Co.,.366 U.S. 316, 329).

1. The district court had “no doubt’’ that, in 1929,

Pan ‘American and Grace “agreed upon a division

of territories” in South American air service, under

which the west coast of South America and Santiago-

Buenos Aires were allocated to Panagra, and eastern

and northern South America to Pan American. There -

is equally no doubt that agreements to divide terri-

tories between actual or poter tial competitors are per

se unreasonable restraints of trade in violation of See-

tions I.and 3 of the Sherman Act. Northern Pacific

Ry. Co. v. United States, 356 U.S. 1, 5; Addyston

Pipe and Steel Co. v. United States, 175 U.S. 211,

affirming 85 Fed. 271 (C.A. 6).° Moreover, agree-

ments to divide markets cannot be saved from il-

legality by a claim that they aid rather than injure 7

the public or that they actually are in conformity

with government poliey. United States v. Socony-

Vacuum Oil Co., 310 U.S. 150, 220-222; Fashion Orig-

inators’ Guild v. Federal Trade Commission, 312 U.S. °

457, 467-468; Georgia v. Pennsylvania R. Co., 324

US. 4389, 458-461. The. district court erred in con-

cluding that the 1929 agreement between Pan Ameri-

~ ean and Grace to divide markets in South America

was. nevertheless legal because it “seems } fectly

consistent wit! the air transportation policy of .this

country in those formative years’’ (App. 3la).

aa

aC

F :;

17

; ; \

Nor can the agreement for division of markets be

justified as part of a ‘‘pioneering venture’” (App.

28a) by.Pan American and Grace for’ the organization

and development of Panagra. First, such an agree-

ment to divide markets, illegal ufidér the Sherman

" Act, cannot be justified under common law principles

as merely ancillary and necessafy to a joint venture-

United States v. Addyston Pipe & Steel Co.,-85 Fed.

at 280-283; Timken Roller Bearing. Co. v. United

States, 341 U.S. 593; United States v. Paramount Ptc-

tures, 334 U.S. 131,150, 153. As this Court stated

in Timken, rejecting the contention that a world-wide

division of markets was merely ‘ancillary,’ to.a legal

joint venture, ‘‘every afteement and. combination to

restrain trade’’ could be labeled a ‘‘ joint venture’”’ (p.

' 598). Second, the district court found that the agree-

ment for division of territories was made more thar

one year after the agreement for the organization of

Panagra, and about ten months after the formation

of that company. Such a subsequent agreement for

division of markets would not come within the com-

‘mon-law doctrine, which covers only. ancillary re-

straints imposed at the time that a joint venture is

undertaken. See United States v. Addyston Pipe &

Steel Co., 85 Fed. at 282-284, 288-291. Third, even

if the agreement to divide markets was made at the

time of the original agreement between Pan Ameri-

can and Grace for the organization of Panagra (as

the complaint alleges, and as Pan American contends,

Juris. St. No. 257, p. 5), rather than a year later, the

division of territories would still be invalid under -

18

common-law principles, For at common-law an an-

eillary restraint is valid only if it is reasonably lim-

ited both in time and extent." This agreement not

to compete, however, was unlimited in duration, and

exceeded anything reasonably necessary for the pro-

tection of the respective interests of Pan American’

and Grace in connection with the formation of Pan-

agra. Fourth, even assuming’ arguendo that the

agreement not to compete was valid when entered into

in 1928 or 1929, any reasonable period necessary to

protect Pan American and Grace had long expired

when, more than 30 vears later, the district court de-

cided this case. Indeed, it would seem that ‘otteh an

agreement ceased to be valid no later than 1938, when

the Civil Aeronautits Act subjected both. Pan Ameri-

ean and Panagra to a detailed regulatory scheme

under which their entry into new markets ‘required’

prior government authorization. Cf: Vorthern Pa--

cific Ry. Co. v. United ‘States, 356 U.S. 1, 12." |

2. As the trial court found (App.’ 37a), “Panagra ‘

is the dominant United States flag air line participat-

ing (almost entirely with Pan American) in the

movement of passengers between the United States

and points in western South America * * *. During

1 Shawnee Suiea Co. v. Andervon, 209 U.S . 423: Oregon

Steam Navigation Co. v. Winsor, 20 Wall. 64.

2 If this Court agrees that the agreement for. division of

markets is. unlawful, the district court on remand might con-

clude that, in view of the close interrelationship between that

agreement and the joint ownership and control of -Panagra by

Pan American and Grace, effective relief against the agree-

ment would require not only cancellation ‘and an injunction .

against its performance, but also divestiture of Grace's in-

terest in Panagra.

s

19

7

the 1950-1957 period, Panagra carried between 79%

and 86% of this traffie and from 84°. to 93% of the

eastern, United States, western South America traf-

fic.”’ The record shows that Grace, through its

Wholly-owned steamship subsidiary, is the only United

States flag water carrier operating a scheduled service

~ between the east coast of the United States and the

West coast of South America; m this service, it car-

ries frome 8h percent to 94 percent of all. passenger

traffic, about 60 percent of all. north-bound freight

traffie and 50 percent of all south-bound ‘reight traf-

fie (see the Statement, supra, pp. 5-6). The district

court found (App. b8a) that on this rows Grace

“provides regular liner service between sul stantially

the same areas served by Panagra although\it is not

co-extensive.”” It helds (¢bid.), however, that Panagra

and Grace.*cater primarily to two different) inter-

ests—Panagra sells passenger transportation predom-

inantly whereas Grace Line’s principal service is the -

carriage of freight’’; and that*the air and ship trans-

portation, both of passengers and of cargo, provided

iby these two carriers are not “reasonably inter-

changeable’ and do not make up a single market’”,

| (App. G4a). ' :

| In-so holding, the district court applied an erro- |

heous standard for determining whether the corporate

interlock between Grace and “Panagra constitutes a

combination in unreasonable restraint of trade that

- eviolates Sections 1 and 3 ef the Sherman ‘Act. The

test is not whether air and sea transportation between

the same areas are “reasonably interchangeable” to all

- travelers and shippers for all purposes. It is enough

that there-is a substantial area of competition be-.

ie

20

tween the two forms of transportation. The fest is

whether, in all the cireumstances, the ownership and

contro} of an air carrier by a water carrier, where

both serve the same rkets, does, or is likely to,

‘unreasonably — restrain the trade of one carrier in

_ favor of the other. ie

In Untted States v. Columbia Steel Co., 334 US.

495, the question was the validity, under Sections 1

and 2 of the Sherman Act, of the proposed acquisition

by United States Steel of the assets ofandependent

steel fabricator on the. west coast. The government’ ~

charged that the contract for the purchase of su:

assets was in unreasonable restraint of trade, and that |

it indicated an intent by United States Steel to at-

tempt to monopolize the market in fabricated steel -

products (pp. 498-499). This Court, in holding that

_ the acquisition did not violate Section 1 of the Sher-

man Act, stated {p. 527) that the-touchstone for de- -

tarmining ‘the legality of “the acquisition of competi- _

tors in’ identical or similar lines of merchandise’’ is

whether ‘‘such acquisition results in’ or is aimed at

‘unreasonable restraint *.* *. In determining what

constitutes unreasonable restraint, we do not think

the dollar volume is in itself*of compelling. signifi-

‘eance; we look rather to the pereentage of business |

‘ eenedied, the strength of the remaining competition,

whether the action springs from business ‘require-

ments or purpose to monopolize, the probabie

_. development of the industry, consumer demands, and

’ other characteristics of the’ market.”> The Court

‘‘agree[d], too, with. the government’s position that

potential competition from producers of . presently .

—

_

21 .

non-competitive articles as well as the possibility that

acquired facilities may be used in the future for the

production of 1iew articles in competition with others

-may: be taken into consideration -in weighing the effect

of any acquisition of. assets tn restraint of trade’’

- (p. 528).

A similar standard should govern the legality of

| the combination of an air carrier and a water carrier

’ that serve the same areas: In hoth situations, the

question is whether the joint ownership and control of

firms serving the same'market “results in or is ainfed

¥ .

at unreasonable restraint” of actual or “potential eom-

petition” (Columbia Steel, supra). In a |

that question, it is immaterial that in one case t Me

straint results from an acquisition, ‘whereas in i

other case the restraint results from existing owner-

ship and control. ¢ For the central inquiry in both cases.

’ is the effect of the combination upon competition. :

We submit that, under the standards: enunciated °

in Columbia Steel, Grace's 50 percent stock interest

in Panagra violates See ‘tions 1 and 3 of the Sherman

Act. For such stock interest is” a combination by

which. Grace is able to restrain, and in the past has:

significantly restrained, the competition of Panagra—

an air carrier serving: the same market as Grace that

is in actual and potential competition with it for the ,

transportation of passengers and property between

the eastern United States and western -South

America. a 7 | |

a. The record shows that in recent years Panagra

has ¢arried about 1,100: persons per month and Grace

. 22

_ about 315 persons per month between those areas.”

Correspondence in the record shows that, in 1951,

passenger traffic to those areas Was being Actively

sought by ‘both Panagra and Grace, each of which

succeeded in diverting passcagers from the other |

(Exs. G-387-388, 391). A Pan American official

testified at the trial (Tr. 516-517) that his company

tries to persuade passengers traveling to South Amer-

ica that an air trip is more pleasant than a sea trip,

and he stated that Pan American and the steamship

lines are “very definitely’? in competition for pas-

sengers traveling to Buenos Aires and Rio de Janeiro,

since “we are both trying to get the same market.”

While it is undoubtedly true, as the district court

suggested (App. 62a), that businessmen on a quick.

trip to South America may not be potential’ steam-

ship passengers, the record shows that more than

one half of all air line passenger traffic between the

United States and South America is non-business

traffic (Tr. 591, 620). Grace and Panagra are plainly

in competition for such traffic." Cf. Lehman vy. Civil

Aeronautics Board, 209 F. 24 289.(C.A. D.C.), certi-

- orari- denied, 347 U.S.-916. In the cited ease. the

court upheld an order of the-Civil Aeronautics Board,

under ‘Section 409(a)(1) of the Civil Aeronautics

" Exs. GS-79-81. The district court stated (App.-63a) that

Panagra carried 25 times as many passengers to South Amer-

ica as Grace did. Most of the Panagra passengers involved in

that comparison, however, were to Buenos Aires and Monte-

video, which are not serted by Grace. On the basis of the

figures given in the text, which are limited to the areas actually

served by both carriers, Panagra carried only about three and

a half times times as many passengers as Grace.

23

Act, which disapproved, as adversely affecting the

publie interest, an interlocking relationship between

an air carrier (Pan American) and a water carrier

- (United Fruit Company). The court pointed out

(p. 291) that the Board had found that Pan Amer-

iean and United Fruit ‘‘are in competition to a sub-

stantial degree’’; but that such competition “does

not * * * extend to the full operations of either

company. It is limited to the passenger tourist

traffic going into the Caribbean area- from the United

States."" The court rejected the argument “that the

difference between a leisurely sea voyage via United

Fruit and a fast air trip via Pan American eliminates

the element of competition.”’ It stated (pp. 291-

' 292): .

** * The general area traversed, however, is

largely the same; and each carrier offers its

own type of service in the effort to obtain the

custom. Competition exists between types of

vacationing in, and in traveling to and fro, the

same area, and therefore between the carriers

which seek the traffic. The prospective travel-

ers cannot be isolated into two groups, the

members of each of which must be assumed to

have determined the kind of transportation

they will use, or the kind of vacation they will

. choose, without considering an available alter-

_ native. ,

The court further stated (p. 292) that although the

tourist traffic was only a small percentage of the

water carrier’s total business, the amount was “con-

sequential’, and that it was not “merely incidental”’

to the water carrier’s other operations, but was “an

integral part of the whole.”’

24

~

The reasoning of the Lehman case is fully applic-

able to the present. case. Here, as in Lehman, the

“general area traversed * * * is largely the same;

and each carrier offers its own type of service in the

effort to obtain the custom.’’ The passenger business

of Grace is “‘consequential’’ and an ‘‘integral part”

of its operations. Both Grace and Panagra carry a

substantial volume ‘of passenger traffic between the .

' eastern United States and western South America,

and they plainly are competitors for such traffic.

b. There is also actual and potential competition

between Panagra and Grace with respect to cargo

traffic. Carriage of freight and express by air has

expanded rapidly in recent years, and witnesses in

the air cargo business testified that there is active.

competition -between air and water transportation for

the carriage of many commodities (e.g., Tr. 78-81, 108,

135). Contrary to the statement of the district. court

(App. 64a), air shipment is not limited to items for —

which the cost of transportation is relatively insig-

nificant. Even where transportation expense is a

major cost element, air transportation may still be.

competitive with surface transportation because it

avoids multiple handling, overland transportation be-

tween interior points and seaports, expensive pack-

aging and warehousing (Tr. 82-91, 109-113, 135-139,

180-181)."*

* Some of the examples of recent transactions in this type of

cargo, given by witnesses in the air cargo business, were the

transportation of refrigerators and freezers from Indiana to

Barbados and refrigerators and washing machines from Miami

to Venezuela (Pan American, Tr. 88-89, 97); sinks and cab-

inets from: Qhio to Guatemala (Aerovias Sud America, Tr.

25

It is true that the total cargo carried by Panagra

between the United States and South America is only

-about one tenth that carried by Pan American. But

the total carried by Panagra—4;461,000 ton: miles of

freight and express in 1957 (Ex. GS-84)—hardly

deserves the “miniscule’’ character assigned it by

district court’ (App. 64a). Moreover, the record gug-

gests that the weaker position of Panagra vis-a-vis

Pan American in the South American air cargo mar-

ket may well be the result of restraints to which Pa-

nagra has been subjected in the past. Pan American’ ¢

¢éargo sales'manager for the United States testified

that Panagra had not made its best efforts to gen-

erate carriage of air freight ( Tr. 93).

c. The adverse. consequences upon the competitive

development: of. an air line that is subject to the con-

trol of a water carrier serving the same market have

been pointed out by the Civil Aeronauties Board, fhe

expert ageney charged by @ongress with, among other

things, insuring ‘‘TeJompetition to the extent neces-

sary to assure the sound development of an air-trans-

portation system properly adapted to the needs of the

foreign and domestic commerce of the United States,

of the Postal Service, and of the national defense’’

(Section 2(d) of the Civil Aeronauties Act of 1938

and Section 102(d) of the Federal Aviation Act of

1958, 49 U.S.C. 1302(d)). In Additional Service to .

111); fire bricks from St.: Louis to Venezuela, and Bermuda

onions from Chile to New York (Riddle Airlines, Tr. 135-136,

168-169). The last shipment, 500 tons of onions a year, had

previously been carried by water carriers on the Grace route

(Tr. 168-169).

26 —

Latin America, 6 C.A.B. 857, the Board, in denying —

applications by Grace and two other steamship own-

ers for authority to operate air service between New

“ York and Puerto Rico, stated (pp. 903-904): ‘It

would be expecting too much to assume that a trans-

portation company engaged in both air and sea trans-

portation would be-in a position to provide vigorous

competition between its air transportation and its sur-

face transportation on this route.” The resulting

‘inherent conflict of investment interests,’ which is

one of ‘‘the realities of business experience,’’ would

dampen the vigorous competitive development of the

airline. In other regulatory legislation, Congress has

similarly recognized the dangers to the economic

health of our national transportation system if one

mode of transportation is favored at the expense of

a competing mode, See the National Transportation

Policy of the~knterstate Commercé Act, 49 U.S.C.

preceding Section 1; Interstate Commerce Commis-

sion v. Meehling, 330 U.S. 567; Schaffer Transporta-

tion Co. v. United States, 355 U.S. 83.

The history of Grace’s relationship with Panagra

shows that Grace has not hesitated to restrict

Panagra’s business when it posed a competitive threat

to Grace. Thus, in the 1930’s Grace insisted that

Panagra observe rate differentials that favored water

over air transportation,” and told a Panagra official

to “abstain from soliciting effective or potential

Grace Line cargo.” During that period, Panagra .

successfully solicited shipments of gold from Ecuador

18 Exs, G-337-339, G-342, G-343, G-373, G-482.

16 Ex, G-382.

>

al

27

~ to the United States by offering lower rates than the

water carriers. Grace eliminated this competition by

reducing its own rates and ordering Panagra officials

to cease’ offering discounts." The record ’* shows

numerous other instances in which the Grace man-

agement and its employees favored Grace over

Panagra -where the economic interests of the two

carriers conflicted.” eaten :

As long as Grace retains its 50 pereent stock in-

terest in Panagra—an interest which, as soon as Pan

__American is divested of its holdings of Panagra stock,

will give Grace unquestioned control of Panagra—

Grace will always be able to block Panagra from doing

anything that poses a competitive threat to Grace.

The air freight business is still in the developmental

stage, and further substantial expansion of that busi-

ness, as well as of passenger traffic, between the United

States and South America may reasonably be ex-

pected. Both the current competitive situation in the

air transportation business between the United States

and South America, and “the probable development of

_ the industry” (United States v. Columbia Steel Co.,

supra, 334 U.S. at 527), indicate that Grace’s owner-

ship of 50 percent of the stock of Panagra constitutes °

a combination in unreasonable restraint of trade in

violation of Sections 1 and 3 of the Sherman Act.

't Ex, 1121, pp: 9-12, G-354-357, G-359-361, G-363. Grace's

support .for expansion of Panagra developed only after it

recognized (in the late 1930's) that its steamship carriage of

passengers was inevitably declining in favor of the rising air

service. See, e.g. Ex. G-377, G-381, G-H9, G51, G-461.

*See exhibits cited n. 5, supra, and Exs, G-33, G-340,

G-341, G-345,.G-353, G-377, G-424, G-426.

«*

oR

*CONCLUSION

>

The questions presented by this appeal are sub-

stantial and of public ee Probable juris-

diction should be noted.. ©

Respectfully subesiited, 0

o ARCHIBALD Cox,

. Solicitor General.

LEE LoEVINGER, |

Assistant Attorney Dicvisat

LIONEL KESTENBAUM,

; Attorney.

DecEMBER 1961.

~ APPENDIX

Shes FINAL: JUDGMENT

This case having come on for trial and the Court

having filed its Opinion and: Findings of Fact and

_Conelusions of Law on March 8, 1961, now therefore

in accordance with.the Opinion and oe of Fact

and Conclusions of Law,

IT 18 ORDERED; ADJUDGED AND DECREED

_ 1. This action is hereby dismissed*with respect to

defendants W. R. Grace and. Company and Pan

American-Grace Airways, Inc.» |

2. Defendant Pan Atagrican World Airways, Ine.

shall divest itself of ownership of its stock in Pan

American-Grace Airways, Inc. at such time and pur-

suant to such plan of divestment as the Civil Aeronau-

tics Board shall, subject to the approval of ‘this Court,

direct pursuant to the standard prescribed by Section

102 of the Federal Aviation Act. :

3. Pending such time as Pan American World Air-

‘ways, Inc. divests itself of its stock in Pan American-

Grace Airways, Ine. pursuant to paragraph 2 of this

judgment, it is enjoined from taking any action, direct —

or indirect, which would interfere with the filing or

processing of applications before the Civil Aeronautics

Board by Pan American-Grace Airways, Ine. to alter,

amend, modify or extend its routes,

Dated : ” ew York, N.Y., May 8th, 1961.

THomas F. MurRPHY,

United States District Judge.

gd udgment entered May 8, 1961. |

HERBERT A. CHARLSON,

a Clerk.

. (ss

ro