Respondents Brief — Hughes Tool Co. v. Trans World Airlines, Inc.

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ii 2 6 glial Suprente jar Ty he

nN - D

LY J IN THE JUL 28 19/2

eisai Court of the Uni Pfttatea - and

Octoser Term, 1972

No. 71-827

Hucues Too. Company and Raymonp M. Hotuipay,

Petitioners,

—V.—

Trans Worip Arruines, Inc.,

« Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR RESPONDENT

TRANS WORLD AIRLINES, INC.

Duptey B. Tenney

80 Pine Street

New York, New York 10005

Counsel for Respondent

Trans World Airlines, Inc.

Of Counsel:

James Wm. Moore

54 Meadow Street

New Haven, Connecticut 06515

PauL W. WILLIAMS

Raymonp L. Fats, Jr.

IMMANUEL KouNn

Wittum T. Lirtanp

MarsHaLt H. Cox, Jr.

CaHILL, Gorpox, Sonnetr, Remnvet & Onu

80 Pine Street

New York, New York 10005

July 28, 1972

PAGE

| CounTeR-STATEMENT OF QUESTIONS PRESENTED ............-- 2

CounreR-STATEMENT OF THE CasE 4

A. Summary review of proceedings 6

1. Filing of complaint—rulings thereon ............ 6

9, Answers and affirmative defenses—rulings

SAI ce ncoeniiphannenatidsananneiensnnegasiianinernsnonnsinsnaeisoeven 7

3. Pretrial discovery—rulings thereon .............. 8

4. The default judgment—rulings thereon ........ 10

5. The damage award 11

B. The complaint 12

(. The discovery proceedings 16

D. Defendants’ refusal to proceed and the entry of

the default judgment 29

EF. Reasons given for the default 33

F. Evidence available to TWA at the time of

default ...... 39

1. The role of Howard R. Hughes .....:.....--...----- 40

2. The inferences which can be drawn from

what is known about defendants’ activities

in aircraft manufacture and supply ..........-.-- 42

SU SIIINN TI siiicisctitirctnitentencniaecosionebbinryiaton 42

—Prevention of TWA financing .................... 44

—The jet era =

3. The curtain of secrecy surrounding Hughes 56

4. Co-conspirators other than defendants ........ 57

ScmmMaRY OF ARGUMENT ..... . 60

ARGUMENT 68

I-The district court’s pretrial orders were correct,

and defendants’ claim that those orders deprived

them of due process under the Fifth Amendment is

IN Bahasa saicaseenenicincesniincinmnnnneseyniailvaanniiieinensitgisindiatin 68

aeticatattity | Sieiatinns '

A. Defendants had no right, either constitutional

or statutory, to an interlocutory appeal

B. Defendants’ asserted right to indefinite priority

C. The district court properly managed the pre-

trial proceedings ‘

II—The entry of the default judgment and the effect

given to it by the Special Master and the courts

below were both proper and.necessary ; no due proc.

ess question is presented

A. Entry of the default judgment was proper and

necessary .in light of defendants’ refusal to

proceed 91

B.° The default judgment established that defend-

ants’ antitrust violations alleged in the com-

phaiing ImJUTOR EW ie ae iicernennenttien ce 100

IJI—The courts below were correct in ruling that

TWA _ should be permitted to recover the full

amount of the damages to which it is legally entitled 11)

A. The amendment of TWA’s ad damnum clause

was properly granted upon adequate notice

prior to entry of the interlocutory default judg-

ail ete cel

SIGIR» isisciinnsnicncceenedeenrnessincemegninniipatbaginsnicsniiiadiccaiiie lll

5 B. Whenever a defaulting defendant appears and

‘ defends at the damage hearing, the district

$ court has discretion to enter judgment for the

j full amount of damages proved ...0..0.......0....c:cc0000 17

; IV—-The orders of the CAB did not exempt the con-

4 duct complained of from antitrust attack ............ 122

: A. The conduct charged was such that the deci-

4 sions below were compelled by this Court’s

3 rulings on the scope of similar statutory exemp-

3 tions 123

3 B. The authority of the CAB to exempt from the

3 antitrust laws is narrowly limited and does not

j reach this case : 129

3 1. The legislative history m |

2. The Panagra case 133

‘A

PAGE

(, The orders issued by the CAB were not intend-

" od to, and did not, exempt the conduct of which

TWA complains 138

1. The original control orders 140

9, Subsequent modification of the control

OP GING cndcapectn Hireterinicceemnilinastinghesibihainladeiilanapaagtineiee 145

y_Damiages were properly awarded for violation of

the antitrust laws 149

A. Toelco’s stock interest in TWA conferred no

immunity from the antitrust laws 151

to TWA’s purchases : Ab1

2, Defendants’ foreclosure of the TWA market |

was not beyond the reach of the antitrust |

laws ‘156

B. Defendants’ factual defenses to the angitrust,/

claims are inadequate 167

“ 4, Absence of competition is no defense .........., 168

2, The correct legal test was used by the court

Of COU racecosssenemsaceceicnptpnaninniaitinghanninietan 171 \

VI—The Special Master and the courts below found

that TWA, in proving the amount of its damages,

demonstrated that each item recovered flowed from

the allegations of unlawful conduct and resultant

injuries admitted by defendants’ default ........... ee 173

A. TWA proved damages within the rule of “prox-

imate cause” applicable in this defaulted case..... 173

B. Defendants’ attack on the Special Master’s find-

ings of fact to TWA’s damages is refuted by

the record in the damage hearing, and those

findings have been affirmed by the two lower

courts I

1. Size of TWA’s jet fleet oo ae

1. The alleged violations did not relate solely ~~~

RMN IMIR aren TLS Yi ar aer

: <_ P

2. TWA’s ability to finance the additional jets if

ee | nanan ne See ee 19)

C. The Special Master and the courts below

applied well-settled legal principles applicable

to causation and damages in private antitrust

gn =e DT ‘ 195

oOeeweeeccccocccs

ConcLusion . 28

APPENDIX OF STATUTES AND RULES la

TABLE OF AUTHORITIES

Cases

Adkisson vy. Huffman, 469 S.W. 2d 368 (Tenn.

1971) 102n, 108, 110, 196, 200n

Albrecht v. Herald Co., 390 U.S. 145 (1968) 00. 170

Aljassim v. S.S. South Star, 323 F.Supp. 918

(S.D.N.Y. 1971) 103, 115n

Allied Air Freight, Inc. v. Pan American World

Airways, Inc., 393 F.2d 441 (2d Cir.), cert. denied,

393 U.S. 846 (1968) 75n, 135n

Anderson v. Gallman, 99 A.2d 560 (D.C. Ct. App.

1953)

Angel v. Bullington, 330 U.S. 183 (1947) oe. 92n

Austin Burke, Inc. v. Vigilant Ins. Co., 179 So. 2d

600 (Fla. App. 1965) 102

Babcock & Wilcox Co. v. North Carolina Pulp Co.,

25 F.Supp. 596 (D. Del. 1938)

Badenhausen v. Guaranty Trust Co., 145 F.2d 40

(4th Cir. 1944), cert. denied, 323 U.S. 757 (1945) 184

Bail y. Cunningham Bros., Inc., 452 F.2d 182 (7th

r Cir. 1971) 116

j Bales v.Kansas City Star Co., 336 F.2d 439 (8th

a Cir. 1964) 202n

; Baltimore Transit Co. v. Mezzanotti, 227 Md. 8, 174

F A.2d 768 (1961) 108, 109, 196, 200n

y Barclay v. Pickles, 38 Mo. 143 (1866) 198n

SIRS AS SUPT SDA TT SPA NRA Er ORS NE SH writs

; » PAGE

Batchelder v. Bartholomew, 44 Conn. 494 (1877) .... 199

Beall v. Munson, 204 Cal. App. 2d 396, 22 Cal. Rptr.

333 (1st Dist. 1962) 102n, 197n

Becker v. Roothe, 184 Kan. 830, 339 P.2d 292

SOBE) apcSssenenceeconn|ooosodancenndenseesenenornsnenseeeentnenssnsnconggyrrren

oe y. Walter Kidde & Co., 451 F.2d 593 (2d

Cir, 1971), cert. denied, 40 U.S.L.W. 3610 (June

102n

97, 1972) 79n

Bell v. Hood, 327 U.S. 678 (1946) ; 74

Berenyi v. District Director, Immigration & Natu-

ralization Service, 385 U.S. 630 (1967) -.....---.---------- 183n

Berkley v. Newman Realty Co., 33 F.R.D. 516 (W.D.

Mo. 1963) 88n

Bernhard v. Bank of America, 19 Cal.2d 807, 122

P.2d 892 (1942) 92n

Bettcher v. State, 140° Colo. 428, 344 P.2d 969

(1959) 99, 102n

Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251

(1946) © ....--on-scoescoeeeessnessnsteessnesenssenssnnsenseeases 67, 180, 181, 202

Billy Baxter, Inc. v. Coca-Cola Co., 431 F.2d 183 (2d

Cir. 1970), cert. denied, 401 U.S. 923 (1971) -... 80n, 201n

Blonder-Tongue Laboratories, Inc. v. University of

Illinois Foundation, 402 U.S. 313 (1971) ..........------ 92n

Blow v. Joyner, 156 N.C. 140, 72 S.E. 319 (1911) -... 197n

Bonazzi v. Fortney, 94 Vt. 263, 110 A. 439 (1920) .... 102n

Bond Distributing Co. v. Carling Brewing Co., 325

F.2d 158 (4th Cir. 1963) ...........-..sscecercsecsesecseneseonsseens 80n

Boucher v. Paradis, 244 A.2d 69 (Me. 1968) ............ 102n

Boulter v. Chesapeake & Ohio R.R., 442 F.2d 335

(6th Cir, 1971) -.......--cccce-cersonecreesers si . 39n

Brown Shoe Co. v. United States, 370 U.S. 294

Cie pececeemcsneenemeecaniintenconscontmepeoeinanesvnceieenterturone * 159

Calderone Enterprises sCorp. v. United Artists

Theatre Circuit, Inc., 454 F.2d 1292 (2d Cir.

California v. Federal Power Comm'n, 369 U.S. 482

(1962) 126

TRO DS a |

vi ’

PAGE

California Shipping Co. v. Pacific Far East Line,

Inc., 453 F.2d 380 (9th Cir. 1971), cert. denied,

92 S. Ct. 1501 (1972). ..... 19

Carnation Co. v. Pacific Westbound Conference, 383

U.S. 213 (1966) 135

Case-Swayne Co. v. Sunkist peemere Inc., 389 US.

384 (1967) 158

Chapman v. Rudd Paint € Varnish Co., 409 F.2d

ee a IY aistcsessscicininntesrrnmrcnticcrnestade On

_Cohen v. Newsweek, Inc., 374 ‘F.2d 470 (8th Cir.),

cert. denied, 389 U.S. 878 OE) Section 80n

Collins v. New York Central System, 327 F.2d 880

(D.C. Cir. 1963) ...-----neeeessecsnsesecenneettcceeneeenteneein 74

Commonwealth Edison Co. v. Allis-Chalthere Mfg.

Co., 315 F.2d 564 (7th Cir.), cert. dented, 375 US.

834 FINE sesisincceinasesivatenewnen reise isnnnetnebeweysnntnncinaecebe 01n

Conference of. Studio Unions v. Loew’s Inc., 193

F.2d 51 (Sth Cir. 1951), cert. denied, 342 U.S. 919

(195%) < i Sissies bOINe vgn atom sits bade apatciohansemenitanbiainii 201n

‘Continental Ore Co. v. Union Carbide & Carbon

Corp., 370 U S. 690 S ) mentees Tperernret 127, 170, 19

Cosmopolitan Trust Co. v. Golub, 252 Mass. 574, -

147 N.E. 847 (1925)... 102

Cowen v. New York Stock Exc mane 371 F.2d 661

OE CRE: TREY ecccakecticeecscicneentnwe 80n

Cragin vy. Lovell, 109 U.S. 194 (1883) .................. 106, 111

Crane v. Eastern Transportation Line, 48 Conn. 361

OE teeta ccete tence cesencgensocmre ni geenenceecptaiealrgte 1%

Crest Auto Supplies, Inc. v. Ero Mfg. Co., 360 F.2d

896 (7th Cir. 1966)... 80n

Cromwell v. County of Sac, 94 U.S. 351 (1876) ........ 92a

Culetsu v. Dix, 149 Conn. 456, 181 A.2d 116 (1962) 103n

Dahl, Inc. v. Roy Cooper Co., 448 F.2d 17 (9th Cir.

L971) ceesesssssessessssesecceseseeesssecesecessesesesenees 0n

' De Hoff v. Black, 206 N.C. 687, 175 S.1e. 179 (1934)199-200

Diaz v. Southern Drilling Corp., 427 F.2d 1118 (5th

Cir.), cert. denied. sub nom. Trefina, A.G. v.

United States, 400 U.S. 878 (1970) 93

EATER RET GND ET SN NOLEN CRE

smteomienas

COPY BOUND

vii

PAGE

D’Ippolito v. Cities Service Co., 374. F.2d 643 (2d

Re TIF es ertteserecennectera eerie 72

Dr. Miles Medical Co. v. Park & Sons Co., 220 US.

+S C8 5 nner ees eS. en 53n

Doyglas v. Harris, 35 N.J. 270, 173 A.2d 1 (1961) 103n

Durfee v. Duke, 375 U.S. 106 (1963) . . 92n

Ealy v. McGahen, 37 N.M. 246, 21 P.2d 84 (1933) .... 102n

Eastman Kodak Co. v. Southern Photo Materials

Co, FESS. TO CUGAG) acorns svsssvscecsceesceesecescentecsies 202

Electrolytic Chlorine Co. v. Wallace & Tiernan Co.,

328 Mo. 782, 41 S.W.2d 1049 (1931) oo. 197n

Evans v. United States, 319 F.2d 751 (1st Cir. 1963) 184

E.V. Prentice Machinery Co. v. Associated Plywood

Mills, Inc., 252 F.2d 473 (9th Cir.), cert. denied,

356 U.S. 951 (1958) 197n

Fanchon & Marco, Inc. v. Paramount Pictures, Inc.

202 F.2d 731 (2d Cir. 1953) 166

Federal Maritime Comm’n v. Aktiebolaget Svenska

‘Feingold v. Walworth Bros., Inc., 238 N. Y. 446, 144

N.E. 675 (1924) 98n

Fields Productions, Inc. v. United Artists Corp., 318

F.Supp. 87 (S.D.N.Y. 1969), aff’d per curiam, 432

F.2d 1010 (2d Cir. 1970), cert. denied, 401 U.S.

949 (1971) ..... 201n

First National Bank of Arizona v. Cities Service

Co., 391 U.S. 253 (1968) ones eeeeceeeeeee 61, 78, 94

Flintkote Co. v. Lysfjord, 246 F.2d 368 (9th Cir.),

cert. denied, 355 U.S. 835 (1957) 188n

Foman v. Davis, 3871 U.S. 178 (1962) 0.002 .. 114-15

Fong v. United States, 300 F.2d 400 (9th Cir.), cert.

“denicd, 370 U.S. 938 (1962), affirming, 182 F.

Supp. 446 (N.D. Cal. 1959) -............... 93, 103, 115n,

; 118, 119-20

Ford Motor Co. v. ‘United States, 405 U.S. 562

(1972)- ccc.escseasvcccccuesedeseccencececccccncrenesessececceesescenen 159, 161, 168

Fortner Enterprises, Inc. v. United. States Steel

Corp., 394 U.S. 495 (1969) .. 94, 150, 154, 159-60, 162, 171

) CLOSE IN CENTER

Amertka Linien, 390 U.S. 238 (1968) ..................-.-- 126

ean gaan

’

POOLE IES COND 2

PN ey

; P,

Fudim y. Kane, 48 B. I. 155, 136 A. 306 (1927) ... 10,

Funkhouser v. Million, 209 Va. 89, 161 S.E.2d 735

(1968) ... we 102n, 108, 110, 196, 198, 20h

Georgia v. Pennsylvania R.R., 324 U.S. 439 (1945) 195

Gibson y. Elba Exchange Bank, 266 Ala. 426, 96 So,

2d 756 (1957) 102n

Gottesman v. General Motors Corp., 414 F.2d 956 |

MR am TD) acne aes rs emcees 166

Graver Tank & Mfg. Co. v. Linde Air Products Co.,

336 U.S. 271 (1949), adhered to upon rehearing,

339 U.S. 605 (1950) . 173, 183n, 184, 185

Graves v. Cameron, 161 N.C. 549, 77 S.E. 841 (1913) 197n

Haller v. Walczak, 347 Mich. 292, 79 N.W.2d 622

(1956) oecccssesssssssevsssssntesssssssssescosensesseceseceeceneunnssee 102n, 200n

Hallett Construction Co. v. Iowa State oe ae

Comm'n, 261 Towa 290, 154 N.W. 2d 71 (1967)...

197m, sam

Hammond Packing Co. v. Arkansas, 212 U.S. 322

CTI) raigcescensccanscepsertrantvensiaesealaaeeneetcenl 62, 76, 92, 95-97

Harshman v. Knox County, 122 U.S. 306 (1887) ...... 109

Havens v. Hartford & New Haven R.R., 28 Conn.

69 (4859) 199

Hawaii vy. Standard Oil Co. of California, “405 US.

251 (1971): —.... peeaesee eee 01n

Ilewitt-Robbins Inc. v. Eastern Freight-Ways, Inc.,

371 U.S. 84 (1962) 135

Hickman v. Taylor, 329 U.S. 495 (1947) ............... aa. $1

Hiland Dairy, Inc. v. Kroger Co., 402 F.2d 968 (8th

- Cir. 1968), cert. denied, 395 U.S. 961 (1969) -.....155-56

House v. Hewett Studios, Inc., 125 Ga. App. 127, 186

S.E.2d 584 (1971) : 102n

Hovey v. Elliott, 167 U.S. 409 (1897) eee . 96

International Boxing Club of New York, Ine. v.

; United States, 358 U.S. 242 (1959)-. 155n

International Salt Co. v. United States, 332 U.S. 392

(1997) ccccsscecccsssssssssseessececeecccescenenn 157, 158, 193

RII ge RS SEMA EST 2 SNE PE SR PEO A TN BREUER

——

COPY BOUI

PAGE

Line, Lid. v. Sabre Shipping Corp., 407 F.2d

73 (2d Cir.), cert. dented, 395 U.S. 922 (1969) 72

Johanson v. United Truck Lines, 62 Wash.2d 437,

area

ND CLOSE IN CENTER

393 P.2d 512 (1963) 102n

Johnson v. Illini Mutual Ins. Co., 18 Ill.App.2d 211,

151 N.E.2d 634 (1958) 196

Johnson v. Ready Mix Concrete Co., 318 F.Supp. 930

(D.Neb. 1970) 201n

Jones v. Uris Sales Corp., 373 F.2d 644 (2d Cir.

1967) : 92

Kiefer-Stewart Co. v. Joseph E: a & Sons,

340 U.S. 211 (1951) one eeeeececeeeeteeees 157-58, 163 ;

Kirincich v. Standard Dredging Co., 112 F.2d 163 ;

(3d Cir. 1940) 187n :

~ Klinger v. Baltimore & Ohio R.R., 432 F.2d 506 (2d t

Cir. 1970) 187n &

Klor’s, Inc. v. Broadway-Hale Stores, 359 U.S. 207

1) Se ee ee nce eee 162, 169 :

Kogan v. Schenley Industries, Inc., 20 F.R.D. 4 | I

(D.Del. 1956) 166 ;

Local Union No. 189 v. Jewel Tea Co., 381 U.S. 676 f

i: ) nc: co anna sree nn aes etna T eee 74 é

Link v. Wabash R.R., 370 U.S. 626 (1962) enone 104 :

Lorain Journal Co. v. United States, 342 U.S. 143

(1951) : 162

Ludka vy. Athana Corp, 25 Cal.App.3d 316, 101 Cal.

Me. GED C20 TIA, SE citi te 121n

Mandeville Island Farms, Inc. v. American Crystal

Sugar Co., 334 U.S. 219 (1948) 201n

Maywald Trailer Co. v. Perry, 238 S.W.2d 826

(Tex. Civ. Ct. App. 1951) -...22222.------- 200n

McAllister vy. Kuhn, 96 U.S. 87 (1877) .ececssoeeeeeeeoeee 62, 107

McClelland v. Climax Hosiery Mills, 252 N.Y. 347,

169 N.E. 605 (19380) 2. eee ee eeeeeeeeeeeeceee 187n, 199-200

McGinnis v. Beatty, 28 Wyo. 328, 204 P. 340 (1922) 102n

McGuire vy. Columbia Broadcasting System, Inc., 399

F.2d 902 (9th Cir. 1968) SOn

Te LT MO CR TS UTE EIN TE {CIRM Ne: a

McLean Trucking Co. v. United States, 321 U.S. 67 '

(1944) : -

Metric Investment, Inc. v. Patterson, 98 N.J. Super,

130, 286 A.2d 187 (1967), aff'd, 101 N.J. Super.

301, 244 A.2d 311 (App. Div. 1968) 2 . 101

Michigan Window Cleaning Co. v. Martino, 173 F.

2d 466 (6th Cir. 1949) .

Millison v. Ades of Lexington, Inc., 262 Md. 319,

277 A.2d 579 (1971) 102n, 200n

Milwaukee Towne Corp. v. Loew’s Inc., 190 F.2d 561

(7th Cir. 1951), cert. denied, 342 U.S. 909 (1952) 197

Mitchell v. Watson, 58 Wash. 2d 206, 361 P.2d 744

(1961) - 98n

Monson v. Nelson, 145 N.W.2d 892 (N.D. 1966) ...... 102n

Nationwide Auto Appraiser Service Inc. v. Associ-

ation of Cas. & Sur. Cos., 382 F.2d 925 (10th Cir,

TOOL) genic 01n

Nelson Radio & Supply Co. v. Motorola, Inc., 200

F.2d 911 (5th Cir. 1952), cert. denied, 345 U.S,

925 (1953) 1

New York Central R.R. v. Grimstad, 264 F.334 (2d

Cir. 1920) 187n

Norfolk Monument Co. v. Woodlawn Memorial Gar-

dens, Inc., 394 U.S. 700 (1969) 94

Norman v. Young, 422 F.2d 470 (10th Cir. 1970) ... 9

Northern Pacific Ry. v. United States, 356 U.S. 1

GL 5) Enea ee eee ee Im 158, 160, 162

Osborn v. Gibson, 309 S.W. 2d 15 (K.C. Ct. App.

1958)

Package Closure Corp. v. Sealright Co., 141 F.2d

972 (2d Cir. 1944) 196

Pan American World Airways, Inc. v. United

States, 371 U.S. 296 (1963) 64, 130, 133-34, 138)

Peitzman v. City of Illmo, 141 F.2d 956 (8th Cir.),

cert. dented, 323 U.S. 718 (1944) ..

People v. George Henriques & Co., 267 N.Y. 398,

196 N.E. 304 (1935) ........ 98n

—

COPY BOUNC

_—_

Perkins v. Standard Oil Co. of Calsfornia, 395 U.S.

642 (1969) 155n, 158, 201n

Perma Life Muffiers, Inc. v. International Parts

Corp., 392 U.S. 134 (1968) -................. 80n, 110, 154, 158,

163, 170, 194

Pioche Mines Consolidated, Inc. v. Dolman, 333 F.

9d 257 (9th Cir. 1964), cert. denied, 380 U.S. 956

(1965) «8

Poller v. Columbia Broadcasting System, Inc., 368

U.S. 464 (1962) 61, 93, 170

Pope v. United States, 323 U.S. 1 (1944) .............-.. 104-05

Postal Benefit Ins. Co. v. Johnson, 64 Ariz. 25, 165

P.2d 173 (1946) 102n

Potts v. Howser, 267 N.C. 484, 148 S.E. 2d 836

(1966) ea ecto tere essa eens entehaewesyseusdanipiake 197n

Putney v. Du Bois Co., 240 Mo. App. 1075, 226 S.W.

7 YM OL 1 |) Benen anne Sp eee 102n, 197

Radovich v. National Football League, 352 U.S. 445

(1957) 110, 194

Ramsburg v. American Investment Co. of Illinois,

231 F.2d 333 (7th Cir. 1956) 166

Rayco Mfg. Co. v. Dunn, 234 F.Supp. 593 (N. D. Ill.

1964) 201n

Rice v. Kuckenbecker, 170 Minn. 110, 212 N.W. 23

(1927) 102n

Riggs, Ferris & Geer v. Inllibridge, 316 F.2d 60 (2d

Cir. 1963) 118, 120 F

Rogers v. American Can Co., 305 F.2d 297. (3d Cir. t

| 1962) 166 i

Rosden v. Leuthold, 274 F.2d 747 (D.C. Cir. 1960) ..... 120

Ross v. Bernhard, 396 U.S. 531 (1970) 166

Sagebiel’s Inc. v. Sumrall, 358 S.W.2d 251 (Tex. Civ.

Ct. App: 1962) 2.2... -eecscscscscscceseseceseseceeenneeeeeee 102n, 198n

Sanitary Farm Dairies, Inc. v. Gammel, 195 F.2d

106 (Sth Cir. 1952) 20.2... eececcececeeseccecsecseteneeeee 184-85

Sarlie v. E. L. Bruce Co., 265 F. Supp. 371 (S.D.N.Y.

1967) . 103, 118

PAGE

PEC ee

SOP RIE

PIN PE SO NN Ot ROO ENS RR te ERT He

PERLE LONE ONLI ALP LTO LOE L IOR EM LN ALLO TEAS IE! BRE I ORS tlm

CLOSE’ IN CENTER

Scheumann v. Prudential Ins. Co. of America, 146 >

Neb. 173, 19 N.W.2d 48 (1945) non. 10%

Schine Chain Theatres v. United States, 334 US.

110 (1948) :

Schlagenhauf v. Holder, 379 U.S. 104 (1964)

Second National Bank of Robinson v. Scudder, 19

Ind. 283, 6 N.E.2d 955 (1937) - 1022

Sibley v. Weinberg, 116 Wis. 1, 92 N. W. 427 (1902) 103)

Silver v. New York Stock Exchange, 373 U.S. 341

RG) csiciecsserecsnereteneaeecentetsersees ...64, 126-27

Smith v. Concordia Parish School Bd., 445 F.2d 285

(5th Cir. 1971) . 39n

Snow Crest Beverages, Inc. v. Recipe Foods, Inc.,

147 F. Supp. 907 (D. Mass. 1956) Win

Speyer, Inc. v. Humble Oil & Refining Co., 403 F.2d

766 (3d Cir, 1968), cert. denied, 394 U.S. 1015

8!) ne Ace ean ane 1%4

Societe Internationale v. Rogers, 357 U.S. 197 (1958) 97

Standard Oil Co. of California v. United States, 337

—

UB. 293 (1949) ............-..cecccecsseeces 157, 159, 161, 163n, 194

State Automobile Mutual Ins. Co. v. Letst,-24 Ohio

Op. 2d 7, 192 N.E.2d 512 (1962) ... 102n

State ex rel. Nilsen v. Cushing, 253 Ore. 262, 453 P.2d

- 945 (1969) Ten

Story Parchment Co. v. Paterson Co., 989 US. 555

’i |: <5 5 anne enn OCOD CeO 195-96, 202

Sunkist Growers, Inc. v. Winckler & Smith Citrus

Products Co., 370 U.S. 19 (1962), reversing 284

F.2d 1 (9th Cir. 1960) -......--------- n-ne 170, 197n

Surpitski v. Hughes-Keenan Corp., 362 F.2d 254 (ist

Cir. 1966) 74

Taylor v. Johnson, 262 A.2d 803 (D.C. Ct. App.

1970) 102n

Thomson v. Wooster, 114 U.S. 104 (1885)....62, 100-02, 105,

107-08, 110, 196

Thorpe v. National City Bank of Tampa, 274 F. 200

(5th Cir. 1921) 197n

COPY BOUND C

PAGE

Timken Roller Bearing Co. v. United States, 341

U.S. 593 (1951) 157, 163

Trans World Airlines, Inc. v. Civil Aeronautics

Board (Hughes Tool Co., Intervenor ), 339 F.2d 56

(2d Cir. 1964), cert. denied sub nom. Hughes Tool

Co. v. Trans World Airlines, Inc., 382 U.S. 842

(1965) 145

United States v. Arnold, Schwinn & Co., 388 U.S. 365

(1967) 53n, 164n, 169

United States v. Borden Co., 308 U.S. 188 (1939) .... 126

United States v. Columbia Steel Co., 334 U.S. 495

LONG casas ctecncete ie os eaieetnees sot egies 160-61, 163

' United States v. Crescent Amusement Co., 323 U.S.

173 (1944) . 162

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

353 U.S. 586 (1957) ............ 165, 166, 168

United States v. Employing Plasterers. Ass’n, 347

U.S. 186 (1954) > 106

United States v. First National Bank & Trust Co.,

376 U.S. 665 (1964) 160

United States v. General Motors Corp., 12% F.2d 376.

(7th Cir.), cert. denied, 314 U.S. 618 (1941) ........ 155n

United States v. Griffith, 334 U.S. 100 (1948)._....... 153, 162

United States vy. Grinnell. Corp.,.384 US. “Ris 54,

. i 168-69

United States v. Klearflax Linen Looms, Inc., 63 F.

Supp. 32 (D.Minn. 1945) ; 168

United States v. National City Lines, 186 F.2d 562 ©

(7th Cir), cert denied, 341 U.S. 916 (1951) .... 152, 155n

United States v. National Lead Co., 332 U.S. 319

(1947)... ete ecleeae 155n

United States v. Owens-Illinois Glass Co., 25 Fen.

Ruzs Serv. 33.31, Case 1 (N.D.Ohio 1957) -.......... 88n

United States vy. Paramount Pictures, Inc., 334 U.S.

131 (1948) ececccccsssseesseeecscessseeseeeeeesssssteeeseessoessssees 155n, 162

United States v. Parke, Davis & Co., 362 U.S. 29

(1960) ..... 170

United States v.. Philadelphia National Bank, 374

U.S. 321 (1963) 126

SLOSE IN CENTER

RRL FO CGE EO PS OEE RIL IR A OO Vg inte GE Me ee es ee

Xiv

PAGE

United States v. Procter & Gamble Co., 356 U.S.

- 677 (1958) ...

United States v. Richfield Oil Corp., 99 F.Supp. 220

(S.D.Cal. 1951), aff’d per curiam, 343 U.S. 922

(1952) 167, 194

United States v. Ryan, 402 U.S. 530 (1971) _..... _.

United States v. Singer Mfg. Co., 374 U.S. 174

(1963) —~- 1831

United States v. Socom y-Vacuum Ou Co., 310 US.

150 (1940) - 1560

United States vy. Topco Associates, Inc., 405 US.

OU ene tern enpee en e 171

United States v. United Mine Workers of America,

330 U.S. 258 (1947) “14

United States v. Wiseman, 445 F.2d 792 (2d Cir.),

cert. denied, 404 U.S. 967 (1971) 104

United States v. Yellow Cab Co., 332 US. 218

(1947) 149-50, 152, 154-55, 158, 163, 164

United States v. Yellow Cab Co., 80 F.Supp. 936

(N.D. IIL. 1948), aff’d, 338 U.S. 338 (1949) ow. 164

Urquhart v. American-LaF rance F oamite Corp., 144

F.2d 542 (D.C.Cir.), cert. denied, 323 U.S. 783

(1944) 74

Varveris v. United States Lines Co., 141 hitacs

874 (S.D.N.Y. 1956) 116

Volasco Products Co. v. Lloyd A. Fry Roofing Co.,

_ 308 F.2d 383 (6th Cir. 1962), cert. denied, 372 U. S.

907 (1963) ...... 201n .

White Motor Co. v. United States, 372 U.S. 253

Re asc eece cece eecp eens cee eceesneseereteesteneeesteeeens 79n, 169

Winston v. United States,'342 F.2d 715 (9th Cir.

1965) 39n

Wolfe v. National Lead Co., 225 F.2d 427 (9th Cir.),

cert. denied, 350 U.S. 915 (1955) - 188n

Zdanok vy. Glidden Co., 327 F.2d 944 (2d Cir.), cert.

denied, 377 U.S. 934 (1964)

LGD OLR AION ILL EAS LEO LE EINES —_—

——

COPY BOU!

tot 2S Pil YEO ERLE NAL PES BE LI EOE LENE GRADE LARGE PNIPAM Be

PAGE

Zenith Radio Corp. v. Hazeltine Research, Inc., 395

US. 100 (1969) 166, 183-84, 202

Zinnel v. United States Shipping Bd. E. F.Corp., 10

F.2d 47 (2d Cir. 1925) 187n

Statutes and Rules :

[siren SraTes ConstITUTION, FirtH AMENDMENT ........ 2, 68 ;

Act of August 20, 1969, 83 Srar. 103 124n :

(ww Rutes For THE Unitep States Distrricr Court, H

SovrHERN District or New York z

Rule 4 16n, 82n k

(Crayton Act ; '

Section 3, 15 U.S.C. §14 -......... 157, 159,.162, 171, 193, 194 f

Section 4,15 U.S.C. §15 one eee eee 3, 77, 195, 201n ;

Section 7, 15 U.S.C. §18 ....... : - 159, 165

FeperaL AVIATION Act oF 1958 °

(formerly Civil Aeronautics Act of 1938)

Section 102, 49 U.S.C. $1302 ..... 136

- Section 401(e)(4), 49 U.S.C. $1371 (e) (4) -............. 131

Section 407(c), 49 U.S.C. §1377(c¢) ... ...136n, 138n

Section 408, 49 U.S.C. $1378 oe. 64, 123, 124n, 128,

131, 132, 136, 137, 139-40,

. 145&n, 146, 147

Section 408(a) (2), 49 U.S.C. §1378(a) (2) -.......2...--. 138n

Section 408(a) (5), 49 U.S.C. §1378(a) (5) 140 |

Section 408(b), 49 U.S.C. §1378(D) eee 139-40 F

Section 408(e), 49 U.S.C. §1378(e) 140n

Section 409, 49 U.S.C. $1379 ow. 136&n, 140, 145

Section 411, 49 U.S.C. $1381 oo 137-38, 138n

Section 412, 49 U.S.C. §1882 00... 126; 135n, 140, 145

Section 414, 49 U.S.C. §1384 ....3, 8, 64, 123, 124, 126, 128,

140, 145&n

PPLE ELE LACES ELLE LIEN LP LLE Ta an

ID CLOSE IN CENTER

xvl

ee PAGE

Section 416, 49 U.S.C. §1386. 145n, 149)

Section 1106, 49 U.S.C. §1506 132, 138

Feperat Ruwes or Crvm Procepure

Rule 1° 112

Rule 8(a) -. ceoeeesoseeeneceeneenececeneteneteneeenee 1%

Reale S(¢) ———.-...._._--. an . 1

ale O00) 2.2 ee pitectiees _ 0

Bee _ 1217

Rule 12(¢) -........- ms sone g

Rule 15... | 111, 1120

Rule 15(Q) ...-.-.---:-----------nce-cleceseeceesnenceeeedbocnsoneetaee 63, 114, 115,

| 117,12).

Rule 15(b) .......--- ee 63, 120

Rule 16° ........ 9, 23, 59, 61,

76, 77, 86, 87

Rule 26(b) (1) ' 80-81

Rule 26(e) ... | A... 16n, 3561

Rule 26(d) 82, 85

Rule 30(a) ... s a Sx tha

Re OCG), aesiretrne ices a 35,

We SO, acc ee 88n

Rule 34 ..........- sebsuestisceresiuevinseainiendchcraeemteeeee” Ht

Role 35 ...............0--2 Bs waneseeduaestenpecudstiavsisenenstanensetnvcormnenteents 8]

Rule 37 ....... coed cient betes pe tons Haaser coerce 2,%4

* Rule 43(€). ....-.-cesecece-cececnencnsnsssaseenpeenscnseeosennszessesennehinenses 39n

Rule 52( a) ccceeceeceeeeeeeceeeeee ececeeceessccsserssbhehacssoo--. 183, 184, 188

Rule 53 (@) (2) cecsovssesseececssseseseccessessecccsscguneeseeeenee 183, 184, 198

Rule 54(¢) ... a 63, 111, 112n, 114,

| | 115&n, 119, 1208n

Rule 55(€) cececeperceceneeerneeeen | 116

Rule 56(f) 79

—---

COPY BOUN

xvii

* PAGE

Rule 61 ... : 63, 77, 111, 120-21

Form 9 -..- | ; 108

foperaL Ruues or Crvm Procepure |

(in effect prior to July 1, 1963)

Rule 30(b) ----. — 35

GexeraL RULES FOR THE Unitep States District

Court, SouTHERN District or New York

Rule 2 ... , 16

ju. Axx. Stat. ch. 110, §50(4) (Smith-Hurd 1968) ... 103n

JeoiciaL Cope

6 USC.:§ 1292(b) —...-. 10, 71, 72, 73

‘RUS.C. § 2111 ... 63, 111, 121

Suerman ACT .

Section 1, 15 U.S.C. §1 (1970) .......... 156n, 157, 159, 160,

162, 168, 169, 193, 194

Section 2, 15 U.S.C. §2 (1970) ..... — 156n, 159, 162, 168

Special Act of February 27, 1942, 56 Stat. 1122... 104

Congressional and Administrative Materials

192-47, 1949-50, 1953 131n

lication of Trans World Airlines Inc., Order

71-8-91, [1964-1971 - Transfer Binder] CCH

AvL.Rep. § 22,015 (C.A.B. August 19, 1971) .............. 125

15 Conc. Rec. (1969) | ... 125n

Federal Aviation Commission Report, S. Doc. No. 15,

74th Cong., lst Sess. (1935) 130-31

Miscellaneous Authorities

dluse of Process: Sewer Service, 3 Corum. J.L. &

Soc. Pros. 17 (1967) 103

D CLOSE IN CENTER

8 Conc. Rec. (1938) 22. eceeee 131&n, 132, 133n

OPINED UREN NA 4

PATIENT

me sed

PAGE

Apvisory CoMMITTEE NOTES

Rule 37 (March 1938), 28 U.S.C., p. 7799 ......76, 94.95

Rule 26(d) (July 1970), 28 U.S.C., p. 7781 82&n

Concerning Hearing in Damages on Default, or

Demurrer Overruled, 6 Yate L.J. 121 (1897) 199

Annotation, 8 A.L.R. 3d 1070, $6 (1966) -s 2. 103n

47 Am. Jur. 2d Judgments § 1194 (1969) -02 103n

W. Brennan, Pretrial Procedure in New Jersey—A

Demonstration, 28 N.Y.S. Bar Buu. 422 (1956)... 87n

49 C.J.S. Judgments § 201 (1947) 103n

7 Davis, ADMINISTRATIVE Law Treatise (Supp. 1970) 137n

4 Manuva ror CompLex aND Mvtti-District Liriga-

4 MON CGO Scenes veges 83, 84, 85, 86n

4 J. Moorr, Frperan Practice Russ PaMPHiet

e 6 Lf preereen en meern treater mncense eerie teres see eer ae ane 87n

i 2A J. Moore, Feperat Practice (2d ed. 1968)

‘ 18.12 vee 105

3 3 J. Moore, FeperaL Practice (2d ed. 1968)

q CR.) a 115

F 715.13[2] ......... 120

i 6 J . Moorr, FeperaL Practice (2d ed. 1971)

2 954.04[1] 71

} 54.61 (2d CG. 1953) oc cccceceesceeneenetneentnsnentnen 119

3 (0) ) 116

4 9 J. Moorr, FreveraL Practice (2d ed. 1970)

: TLLO06 eee eee ccccceeeeeecceccceneneeee 71

| 11110.22[3] ee . 72

Pomeroy, REMEDIES AND REMEDIAL Ricuts (2d ed.

1883) 105

xix

W. ProssER, HaNDBOOK OF THE Law oF Torts (4th ed.

1971) .------. 195

Symposium on The Practical Operation of Federal

Discovery, 12 F.R.D. 131 (1951) 87n

Willis & Pitofsky, Antitrust Consequences of Using

Corporate Subsidiaries, 43 N.Y.U.L. Rev. 20

(1968) 166

5 Wright & MiLier, Feperat Practice & Pro-

cepuRE: Civit (1969)

§1218 105n, 106n

§ Wricht & Muwer, FeperaL Practice & Pro-

cepuRE: Crvin (1971)

(1471... -_ 115

91473... 115

SC, ( 115

§1528 87

8 WRIGHT & MiLuer, FEDERAL PRACTICE & Pro-

CEDURE: Crvii (1970)

§2167 ...... 88n

J. Wright, Pre-Trial on Trial, 14 La. L. Rev. 391

(1954) 88n

Le ta ABOLITION EIS RE ESE

In THE

Supreme Court of the United States

October TERM, 1972

No. 71-827

Hucues Too. Company and RaymMonp M. Hotumay,

Petitioners, E

. +

—V.—

Trans Wortp Airings, Inc.,

Respondent.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR RESPONDENT

TRANS WORLD AIRLINES, INC.

Respondent Trans World Airlines, Ine. (“TWA”) cannot

agree with the “Questions Presented” and “Statement of

the Case” in defendants’ brief. Both depend upon the

acceptance as fact of defendants’ view of controversies

which were at issue when defendants chose to default, and

thus forestalled a trial. Under these circumstances defend-

ants’ version of the facts is unacceptable—particularly

when they admit that by the default they “gave up their

right to challenge the factual allegations of the complaint”

(Def. br. p. 50).

Sen URS ree TTRcee ASTER ey stNe |

Be ale a te eee eet

Counter-Statement of Questions Presented

1. When defendants have been allowed extensive dis

covery, the complaint has been held to state a Claim for

relief under the antitrust laws, and the pleaded affirmative

defenses have been held insufficient to defeat plaintiff,

claim, is the district court required by the Fifth Amend.

ment to hold a pretrial conference at that Stage for the

purpose of defining the issues for trial or to permit defend.

ants to complete further discovery, or both, before it can

direct defendants to produce documents held to be relevant

and not privileged and permit plaintiff to take an oral

deposition?

2. (a) Is it a violation of defendants’ Fifth Amendment

rights for a court to enter a default judgment in favor of

plaintiff as provided in Fep.R.Crv.P. 37 when defendants

wilfully and deliberately refuse to submit to discovery

essential for the proper presentation of plaintiff's case and

announce that they will not proceed further? (b) In these

circumstances, is it a violation of defendants’ constitutional

rights for the court to rule that that default judgment con.

clusively establishes for the purpose of a subsequent dam.

age hearing the truth of the material, traversable and well.

pleaded allegations of plaintiff’s complaint?

3. (a) May a court, upon actual notice to defendants

who have appeared and are before it, grant a plaintiff's

motion to amend its complaint by increasing the ad damnum

prior to entering an interlocutory default judgment!

(b) Thefeafter, at the close of an evidentiary hearing in

which defendants have availed themselves of full oppor-

tunity to contest the amount of plaintiff’s damages, can the

court enter judgment in the full amount to which plaintiff

is entitled? .

4. Does the immunity from the operations of the anti-

trust laws and other legal restraints provided in Section

414 of the Federal Aviation Act extend to a treble dam-

age action under Section 4 of the Clayton Act brought

by an air carrier against its former controlling stockholder

for acts of that stockholder and others which violated the

antitrust laws and gravely injured the carrier in its busi-

ness and property, when none of such acts was approved

hy the Civil Aeronautics Board, and none was necessary to

any acquisition of control which the Board did approve?

5, and 6.1 (a) Under the antitrust laws are defendants

exempt from liability in damages to a controlled corpora-

tion having over 13,000 (now 38,000) public stockholders for

injuries inflicted upon that corporation by exploiting

it as a captive backstop market for aircraft in further-

ance of a combination and conspiracy to restrain and

monopolize trade in aircraft and an attempt to monopolize

a substantial segment of the market for commercial air-

craft? (b) Are restraint of trade, monopolization and an

attempt to monopolize beyond the reach of the antitrust

laws because defendants, who are dealers in and suppliers

of aircraft and joint venturers with aircraft manufacturers,

contend they do not compete with manufacturers of air-

craft? (c) Can either of these questions be determined

adversely to plaintiff when its complaint concededly states

a legally sufficient claim for relief and it has been deprived

of meaningful discovery by defendants’ refusal to comply

with proper discovery orders?

7. Did the Special Master and the courts below commit

clear error in finding that TWA in proving the amount of

its damages demonstrated that each item recovered flowed

1The propositions covered by these two questions as set out in

defendants’ brief are so closely related that separate consideration is

hardly practicable, as is shown by defendants’ decision to cover both

in their Point V (Def. br. p. 88 et seq.).

mam err macr” IAT PoOoAIMT OCD

ST OR

from the well-pleaded allegations of unlawful conduet and

resultant injuries admitted by defendants’ default?

Counter-Statement of the Case

- In 1964 Chief Judge Lumbard, speaking for a Unanimons

panel of the court of appeals, reviewed the course of this

litigation since the filing of the complaint, and concluded

that Howard R. Hughes and Hughes Tool Company (Tool.

co”) “seemed to ‘look upon the entire discovery proceedings

as some sort of a game, rather than as a means of securing

the just and expeditious settlement of the important mat.

ters in dispute.” Their tactics, the court believed, could

“serve only to frustrate the implementation of the dis.

covery machinery devised by the federal judiciary to ex.

pedite the handling of such complex litigation.” (332 F.2d

at 615, A-352)?

In the following year, 1965, this Court had before it on

certiorari the basic issues of this case, save and except the

quantum of damages. The Court had before it for reviey

the final judgment which had dismissed Tooleco’s counter.

claims against TWA and certain banks and insurance com.

panies for wilful failure to make discovery, and thus the

propriety of entering a sanction that deprived Tooleo of

* Citations with the prefix “A-” are to pages of volumes A-l

through A-VII of the printed Appendix and those with the prefix

“AX-” are to pages of volumes AX-I through AX-VII of the printed

Appendix of Exhibits filed with this Court in Nos. 71-827 and 7]-

830; citations to “Doc.” are to documents in the original record cer-

tified to this Court in Nos. 71-827 and 71-830 and not otherwise

reproduced; citations to “TWA Ex.” are to TWA’s exhibits and

citations to “DX” are to defendants’ exhibits in the damage hearing

before Special Master Brownell which are not reproduced in the

printed Appendix of Exhibits. Citations to “Brownell Report” are

to the Report of the Special Master (Doc. 508), a copy of which is

bound into volume A-V of the printed Appendix following p. A-1966.

Citations to “Def. br.” are to Brief for Petitioners herein.

trial on the merits. At the same time and for the same

wilful failure the district court had entered the interlocu-

tory default judgment in favor of TWA on its complaint.

Qn that phase of the case, this Court had also before it

for review the decisions on the legal sufficiency of TWA’s

complaint and the legal sufficiency of Toolco’s affirmative

defenses of primary jurisdiction and exemption by the

CAB. At that time the Court had the benefit of full brief-

ing and argument by the parties, and a brief amicus filed

on behalf of the CAB which supported the decisions be-

low that Toolco’s affirmative defenses were legally insuffi-

cient. This Court dismissed the writs of certiorari as im-

providently granted. It thus left standing the Second

Cireuit’s 1964 judgment affirming (a) the final judgment

of the district court dismissing Toolco’s counterclaims, and

(b) the interlocutory adjudications which underlay the

interlocutory judgment of default in favor of-TWA. The

case then returned to the district court for the assessment .

of damages under the interlocutory judgment of default.

The resulting award, confirmed by two lower courts, is

now here for review.

In this counter-statement we will first review briefly

the general course of the proceedings to date. Subse-

quent sections will he devoted to a more detailed

treatment of matters particularly relevant to the questions

here raised: the allegations of the complaint; the discovery

proceedings during the year and a _ half following

commencement of the action; the entry of the default judg-

ment; an examination of the reasons given by defendants

for refusing to proceed; and finally, a survey of the eviden-

tiary material that satisfied the Special Master and the

courts below that TWA’s claims were well-founded, how-

ever urgently defendants might assert that they were sham.

A. Summary review of proceedings

1. Filing of complaint—rulings thereon

At the end of 1960 the stock of TWA? then owned by de.

fendant Toolco, amounting to 78 per cent of TWA’s out.

standing stock, was placed in a voting trust. Two of the

three voting trustees were independent of Tooleo—Iryj

S. Olds, former Chairman of the Board of United States

Steel Corporation, and Ernest R. Breech, former Chair.

man of the Board of Ford Motor Company. Defendant

Raymond M. Holliday, a Toolco officer, was the third.

Olds and Breech caused enough of the Tooleo-controlled

directors of TWA to be replaced to obtain an independent

majority. In addition to Breech, who became Chairman of

the Board, the new directors were Clifford F. Hood, former

President of United States Steel Corporation ; Barry 7.

Leithead, President of Cluett, Peabody & Co., Inc. ; Houston

M. McBain, former Chairman of Marshall Field & Co.; and

John A. McCone, former Chairman of the Atomic Energy

Commission. The reconstituted Board brought in from

outside TWA a new president, Charles C. Tillinghast, Jr,

who also became a director. Independent counsel were

retained by the Board (DX 39, p. 12), and on their recom.

mendation this action was brought on June 30, 1961 against

Toolco, Holliday and Hughes, who was Tooleo’s sole stock-

holder and controlling person. Atlas Corporation

(“Atlas”), an investment company of which Hughes was

the largest stockholder, and which controlled another air

carrier, Northeast Airlines, Inc. (“Northeast”), was named

as a co-conspirator.

3 TWA is the third largest domestic air carrier and the second

largest U.S.-flag international air carrier. It is the only U.S.-fag

carrier authorized by the CAB to provide regularly scheduled air

transportation both within the United States and across the Atlantic.

PEI SLI ALL D MG ELS. BLES ERAGE OP RLU SLES AAEM EM

Here, as in the courts below, defendants have intimated

that this action was brought by the new management in

bad faith, with the expectation that an advantageous settle-

ment could be forced by seeking to take the deposition

of Hughes (¢.g., Def. br. pp. 11, 12). This suggestion was

considered and rejected by the court of appeals in 1971:

“Nothing in the record would justify any such finding * * *”

(449 F.2d at 62, A-2755).

The complaint charged a combination and conspiracy by

defendants in restraint of trade and the monopolization and

attempted monopolization by them of a substantial segment

of the market in commercial aircraft, through conduct in-

volving the exploitation by defendants of TWA asa captive

market, all in violation of the antitrust laws. The complaint

is detailed; its principal allegations are summarized at

pp. 12-15 infra. On a motion to dismiss, the district court

held it to be sufficient to state a claim against defendants

under the antitrust laws (214 F. Supp. at 108, A-257-58),

and on the prior interlocutory appeal this decision was

affirmed by the court of appeals (332 F.2d at 610-11,

A-343-44). That the complaint fails to state a claim was

one of the arguments defendants made to this Court in 1965

before certiorari was dismissed as having been improvi-

dently granted (Brief for Petitioners, No. 443, October

Term, 1964, p. 89 et seq.). In their latest brief to this Court,

however, defendants expressly “do not disagree” with the

1964 court of appeals determination that TWA’s complaint

is legally sufficient (Def. br. p. 32).

2. Answers and affirmative defenses—

rulings thereon

Defendants’ answers denied the principal allegations of

the complaint, including the allegations of combination and

conspiracy in restraint of trade and monopolization and

LOSE EELS ARIE LE IOI IE GIR fe PIE ASAE SLIRTES I A SE ED Sa

enn TT eee eee, eae See

SSI RT

PURO N CAH AE Naty Rw pee eRe

attempted monopolization, and the allegations that defend.

ants acted with a specific motive and intent to restrain ang

monopolize. They asserted as affirmative defenses that all

of the conduct charged in the complaint was within the

primary jurisdiction of the CAB and had been exempted

under Section 414 of the Federal Aviation Act (49 U.S.

§ 1384) from the operation of the antitrust laws, and all

other restraints of law, by orders of the CAB. Tooleo also

filed counterclaims against TWA and a number of other

corporations and individuals seeking trebled damages ag.

gregating $366 million, including $135 million in damages,

after trebling, for injuries it alleged had been suffered by

TWA as a result of violations of the antitrust laws,

The sufficiency of the affirmative defenses was presented

to the district court by defendants’ motion to dismiss, which

was treated for this purpose as a motion for judgment on

the pleadings pursuant to Fep.R.C1v.P. 12(c). Each

was held to be insufficient to defeat TWA’s claim (214 F,

Supp. at 108-12, A-258-66). This decision was unanimously

affirmed by the court of appeals in 1964 (332 F.2d at

606-10, A-333-43). This Court dismissed certiorari as im.

providently granted in 1965 (380 U.S. 248, A-2738),

3. Pretrial discovery—rulings thereon

Defendants were allowed “priority” of oral discovery by

deposition under the then customary procedure in the

Southern District of New York. The tortuous course of

discovery during the first year and a half after the com-

plaint was filed is reviewed at pp. 16-29 infra. At the end

* The additional defendants were The Equitable Life Assurance

Society of the United States, Metropolitan Life Insurance Company,

Irving Trust Company, Dillon, Read & Co. Inc., Tillinghast, B

Ben-Fleming Sessel, ‘James F. Oates, Jr. and Harry C. Hagerty.

Sessel, a Senior Vice President of Irving Trust Company, was also

a director of TWA. Oates and Hagerty were officers and directors

of the respective insurance company defendants. .

PWR PH Li ANH We EL hat NCI RT NO NBM eR es RIG ENTE

‘ d

LN PA TH

of that time the district court directed that TWA and the

counterclaim defendants should be allowed to take the oral

deposition of Hughes beginning February 11, 1963, and

again directed defendants to produce documents that they

had been refusing to produce in disobedience of a series of

orders dating from April 17, 1962.

Defendants objected to producing Hughes (a) before they

were allowed to complete all of their proposed depositions,

(b) before TWA was required to answer detailed inter-

rogatories as to the evidence available to it, and (c) before

a proceeding under Fp.R.Crv.P.16 was held to define and

limit issues, at which TWA would be required (among other

things) to identify each of its proposed witnesses and the

substance of the evidence expected to be obtained from each.

The district court overruled these objections, (a) directing

that the deposition of Hughes begin as scheduled, (b)

directing TWA to answer the interrogatories within 60

days after the Hughes deposition, and (c) denying the

motion for an immediate Rule 16 proceeding, without preju-

dice to renewal 30 days after the Hughes deposition (A-122

et seq.). Tooleo’s attempt to secure interlocutory review of

these orders by mandamus, or alternatively by appeal, was

denied by the court of appeals (A-xxiii-xxiv).

The propriety of the district court’s pretrial discovery

orders was considered in detail by the court of appeals on

the 1963-1964 appeal. The court held not only that these

orders were not an abuse of discretion, but that they were

entirely correct because the Hughes deposition was “abso-

lutely essential to the proper conduct of the litigation” (332

F.2d at 615, A-352).

The court of appeals in 1971 reviewed the record once

more, and concluded unanimously that the pretrial orders

were proper and that “the information sought [by TWA]

was more than merely ‘material.’ It was essential” (449

F.2d at 62, A-2756).

—_— Sto

4. The default judgment—rulings thereon

_ The manner in which defendants carried out their dog.

sion to default, announced on February 8, 1963, is described

in detail in both opinions of the court of appeals, Certain

of the special circumstances involved are set out at pp,

29-33 infra.

On February 16, 1963 TWA moved for the ‘entry of an

interlocutory default judgment, pending a hearing to deter.

mine the amount of its damages (A-2692 et seq.). In the

same motion TWA asked leave to amend its complaint

to increase its ad damnum claim, as it had announced jt

would at the outset of the February 8 hearing at which

defendants’ “business decision” to default was placed on

the record. On May 3, 1963 the motion to amend the com.

plaint was granted, and the default judgment was entered

(32 F.R.D. at 607-08, A-321). At the same time, Tooleo’s

counterclaims were dismissed for the same refusal to obey

discovery orders (ibid.; A-323).

Defendants were permitted an interlocutory appeal un.

der 28 U.S.C. § 1292(b) on the questions of jurisdiction and

antitrust exemption pursuant to certification by the dis.

trict court and leave granted by the court of appeals. Tool.

co also appealed from the ‘final judgment dismissing its

counterclaims. In 1964 the court of appeals affirmed Judge —

Metzner’s decision on all matters which were before it, with

an exception not now material. Chief J udge Lumbard

wrote:

. “The sanction of judgment by default for failure to

comply with discovery orders is the most severe

sanction which the court may apply, and its use must

be tempered by the careful exercise of judicial dis-

cretion to assure that its imposition is merited. Hov-

ever, where one party has acted in willful and delib-

erate disregard of reasonable and necessary court

orders and the efficient administration of justice, the

application of even so stringent a sanction is fully

justified and should not be disturbed.” (332 F.2d at

614, A-351-52)

After reviewing the record once more, the panel that

heard defendants’ appeal in 1971 agreed that

“* * * a clearer case for the necessity and propriety

of such a [default] judgment could hardly be ima-

gined.” (449 F.2d at 60, A-2752) :

5. The damage award

The hearing on damages before Special Master Herbert

Brownell extended over a period of two and one-half

years. The transcript of testimony at the damage hearing

totalled almost 11,000 pages, substantially all of it cross-

examination since direct testimony was presented in written

form. Over 60,000 pages of documents were admitted in

the record as exhibits. The Special Master’s 323-page

Report (A-1966) contains a comprehensive review of the

evidence, together with a detailed consideration of the vari-

ous arguinents of the parties. His findings that TWA had

proved damages of $137 million, after trebling, for injuries

specifically alleged in the complaint to have been caused by

defendants’ conduct are meticulously spelled out and re-

lated to the evidence before him. Defendants’ arguments

on the merits, including their arguments as to “proximate

cause,” were considered in detail and rejected.

Defendants filed hundreds of objections with the district

court, both to findings made- by the Special Master and to

his failure to make other findings based on evidence they

had presented or arguments they had made (A-1967 et seq.).

The objections were based largely on factual contentions,

inmany instances virtually indistinguishable from the ver-

sion of the “facts” which defendants present to this Court

with the claim that they “were never in dispute” (see chart

at p. 90 infra). While defendants chose then, as now,

os RT ct man

ENA SS I RARER Soy a

to describe these matters as indisputable, TWA disp

them vigorously, and it was TWA’s view of the facts which

Special Master Brownell accepted.

Defendants’ objections were overruled in & detailed

opinion by the district court (308 F. Supp. 679, A-2097 et

seq.), and the Brownell Report was confirmed. On appeal

the court of appeals concluded that the findings were amply

supported (449 F.2d at 72-78, A-2778-91). The petition for

certiorari did not in terms seek review of these findings

which had been reviewed and affirmed in all respects by the

district court and the court of appeals.

In the following sections of this counter-statement,

certain matters of particular relevance to the questions

presented here are set forth in greater detail.

B. The complaint

The complaint alleges that since approximately 1939

defendants and other persons acting for them (including

Atlas) have engaged in a combination and conspiracy to

restrain trade and monopolize and an attempt to monopolize

with the intent and purpose that Tooleo would take over

the supply of aircraft to one or more substantial markets

and that control over TWA and its business would be

used in advancing this objective. Toolco was to become

the sole supplier of aircraft to TWA, which would there.

after be used as a captive backstop market for aircraft

ordered by Toolco; suppliers of aircraft other than defend.

ants would be boycotted and foreclosed from furnishing

aircraft directly to TWA. (Complaint, pars. 9, 10, A-8-10)

Among the acts alleged to have been committed by de-

fendants pursuant to this conspiracy prior to December

1960 were:

—an arrangement to develop with the Convair

Division of General Dynamics Corporation (“Con-

vair”) a “Model 18” jet aircraft to be manufactured

by Convair and to be supplied by defendants to air .

Pe Be oe RRR ROAR ETE SANE ASS PIBSD Mae LI OH

carriers, including TWA, with the intention that

TWA would be a captive market for such aircraft q

(Complaint, par. 14, A-11-12) ; .

—the development of a plan under which Toolco

would itself commence the manufacture of a “Golden

Arrow” jet aircraft to be furnished to TWA and

other carriers (Complaint, par. 15, A-12) ;

—taking action to prevent TWA from making any

arrangements for the acquisition of jet aircraft from ‘

Boeing Company (“Boeing”) and Douglas Aircraft e

Company, Ine. (“Douglas”) at a time when other Pl

competing carriers were placing orders for such air-

craft (Complaint, pars. 16, 17, A-12-13); :

—after earlier plans for manufacture were aban- t

doned as no longer in the immediate interest of z

defendants and Convair, placing orders for the pur-

chase by Tooleo of 33 Boeing 707 jet aircraft and 30

Convair Model 880 jet aircraft, but refusing to

assign the rights to acquire any of such aircraft to

TWA (Complaint, pars. 17, 18, A-13);

—preventing TWA from acquiring any jet aircraft

itself until the period 1959 to 1960, when defendants

arranged for Toolco to lease a limited and inadequate

number of jet aircraft to TWA on a day-to-day

basis, subject to the condition and understanding

that TWA would not purchase or lease aircraft from

any other potential supplier (Complaint, par. 20,

A-13-14) ;

—by these means and for these purposes fore-

closing all other potential suppliers of jet aircraft

from the TWA market (Complaint, par. 49, A-23-24).

It is further alleged that, pursuant to the combination

and conspiracy and attempt to monopolize, Toolco and the

other defendants, after acquiring control of TWA, con-

tinuously refused to allow equity financing by TWA, except

on terms which would increase Toolco’s equity position

in TWA, and instead caused TWA to obtain funds chiefly

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by means of debt financing (Complaint, par. 23, A-15)

this policy had the purpose and effect of maintaining eon

trol by defendants of the financing of aircraft purchase

by TWA and strengthening defendants’ control over th,

acquisition of aircraft by TWA (Complaint, pars. 23, 94

A-15). By reason of this policy TWA was Prevente

from obtaining the financing necessary for its acquisitio;

of jet aircraft until December 1960, when the prevailing

interest rate for debt financing was approximately 6-64,

per cent, as compared to the 4-434 per cent interest rate

at which other air carriers arranged to borrow in 1955 anc

1956 (Complaint, pars. 26-28, A-16).

Defendants and Atlas sought to compel TWA to enter

into a disadvantageous merger with Northeast for the pur.

pose of enlarging TWA’s requirements for new aircraft,

and for the additional purpose of enabling Atlas and its

stockholders, including Hughes, to obtain stock of TWA on

advantageous terms (Complaint, pars. 21, 47, A-14, A-29.

23). In November 1960 defendants arranged for the lease

by Convair to Northeast of six of the jet aircraft that

Toolco had ordered from Convair, including three which

\ had already been assigned to TWA (Complaint, par. 22

\A-15).

Defendants’ attempts to prevent TWA from acquiring

aircraft directly from manufacturers instead of through

defendants are alleged to have continued after 1960 and

examples are given (Complaint, pars. 36-48, A-19-23),

Thus, during May and June 1961 defendants sought to stop

TWA from purchasing jet aircraft from Boeing and to

compel TWA instead to purchase Convair Model 990 air-

craft from Tooleo (Complaint, pars. 37-39, A-19-20). De-

fendants made threats against TWA, its directors, the

voting trustees, and the financial institutions lending money

to it, including a threat to institute suit; they sought to

disrupt the contractual relationship between TWA and

Boeing by asserting to Boeing that its contract with TWA

RGSS erste eure ese reg ARE ROE i

COPY BOl

was not binding because Toolco had not consented to it

(Complaint, pars. 38, 39, A-19-20). During the same period

defendants also sought to impede TWA’s financing of the

jet aircraft selected by it (Complaint, pars. 40-46, A-20-22).

The injuries caused TWA by this course of conduct are

spelled out (Complaint, pars. 50-54, A-24-27). TWA was

prevented from obtaining jet aircraft and was deprived

of opportunity for adequate use of jet aircraft from 1958

on, with a resultant loss of profits (Complaint, par. 52(a),

4-25). It was also foreclosed from obtaining financing at

lower rates than it ultimately borrowed at in 1960 (Com-

plaint, par. 52(c), A-25). Further specific examples of

injuries alleged include defendants’ diversion of six long-

range Boeing jets to TWA’s principal transatlantic com-

petitor, Pan American World Airways, Inc. (“Pan Ameri-

ean”) (Complaint, par. 18, A-13), the assignment of Convair

880s to Northeast, and the day-to-day leases of jets in 1959

and 1960 on unlawful conditions. Other injuries al-

leged include TWA’s inability to dispose of its used piston

aircraft (because it did not have enough jets) until the

market for such aircraft had dropped considerably, im-

pairment of its ability to secure financing, loss of good

will, and general disruption of its management and busi-

ness (Complaint, pars. 52, 53, A-25-26). Damages were

estimated as in excess of $35,000,000 (Complaint, par. 54,

A-27).

Tooleo’s answer on February 14, 1962 put in issue sub-

stantially all of these averments (A-41 et seq.). It also in-

cluded extensive counterclaims against TWA and nine

others. Holliday’s answer, filed March 26, 1962, adopted in

substance Toolco’s answer, and included averments incor-

porating the principal allegations of Toolco’s counterclaims

(A-99 et seq.).

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C. The discovery proceedings

The history of the year and a half of “discovery” whic

followed the filing of the complaint is a chronicle of & gra

ually developing filibuster by defendants which ultimate}

brought the pretrial process to a complete standstill,

After the complaint was filed, both TWA and Toole

sought to obtain oral discovery by filing notices of depos

tion. Tooleo, however, secured the priority of discover

normally available to a defendant under the practice the

prevailing in the Southern District of New York (A-2077),

a‘priority it was permitted to exploit without any interruyy

tion for depositions by other parties until February 19:

On August 31, 1961, two months after the complaint wa

filed, the Chief Judge assigned the case “for all purposes

to District Judge Charles M. Metzner, pursuant to Genera

Rules 2 of the Southern District (A-33).

Judge Metzner immediately took firm control of the ease

All matters then pending in the case were reviewed at ;

lengthy pretrial hearing on September 6, 1961 (A-2075

et seq.), the first of 19 formal pretrial hearings before hin

(not counting those in chambers of which no transcript wa:

kept). Much of the hearing was devoted to discovery

matters: there was a progress report about TWA’s pro

duction of documents in response to a subpoena that had

been served upon it by Tooleo; TWA expressed its in.

tention to seek documentary discovery from Tooleo, and

consideration was given to scheduling the depositions which

both sides wished to pursue. Tooleo on August 8, 1961 had

filed a motion to dismiss the complaint and for summary

judgment (A-2075-76), and that motion was considered.

Judge Metzner pointed out that, since the motion inclnded

5 This practice has since been completely changed, by Civil Rule 4

of the Southern District of New York effective July 1, 1962 and for

district courts generally by this Court’s amendments to the Federal

Rules of Civil Procedure effective July 1, 1970. See especially

present Rules 26(d) and 30(a).

—

COPY BOU

So AE TPA ITE RUN R ONT

a summary judgment branch, “* * * in view of our deci-

sions here in this circuit, your opponent should have the

opportunity of depositions before your motion is passed

upon” (A-2103). Toolco’s counsel replied: “No objection.”

(Ibid.)

A pretrial order entered the next day directed TWA to :

complete its response to Toolco’s subpoena by October 13,

1961, scheduled another pretrial hearing to consider TWA’s

motion under Fep.R.Civ.P. 34 and various discovery sched-

uling questions, and directed that Toolco’s motion to dis-

miss and for summary judgment “be held in abeyance”

until Toolco notified the court that it wanted the motion

heard (A-2113).

TWA’s motion seeking documents from Toolco was heard

on October 2, 1961 (A-2115 et seqg.). Tooleco argued that

it should he allowed to complete all its discovery before

TWA could have any (A-2118-19) and objected par-

ticularly to being required to produce its tax returns

and other financial data (A-2119-25). Judge Metzner

granted TWA’s motion on December 5, 1961 (A-34-35) and

in a pretrial order on December 18 set out a discovery

schedule to govern the case: Toolco’s previously noticed

depositions of TWA and various witnesses would begin

January 5, 1962, Toolco’s production of documents to TWA

would begin March 15, and TWA’s previously noticed depo-

sitions would begin with Hughes on April 3 (A-2138-39).

Tooleo’s oral discovery of TWA commenced as scheduled

with the deposition of Tillinghast, TWA’s new president

(Doc. 53). After pretrial conferences on January 10 and

January 23 (at which TWA objected that the Tillinghast

deposition was being drawn out unduly), Judge Metzner by

pretrial order dated February 7 appointed former Solicitor

General J. Lee Rankin Special Master “to act in connection

with the depositions and other discovery proceedings”

(A-36-37). Judge Metzner also directed that the Tilling-

hast deposition be continued and the depositions of other

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witnesses “be commenced in accordance with the schedule

annexed,” a schedule that contemplated Toolco’s finish:

all its depositions prior to April 23 when the Hughes depo.

sition was now to begin (A-36, A-39-40).

The case entered a new phase on February 14, 1962 whey

Toolco filed its answer and counterclaims against TWA ang

numerous new parties termed “additional defendants”

(Tooleo answer, par. 42 et seq., A-51 et seq.; A-xv). The

effect on the case of adding these new parties was ep.

sidered at a pretrial conference on February 23, 1969

(A-2141 et seg.). TWA asked that the Tillinghast deposi-

tion be terminated because Toolco was using it simply to

delay proceedings® and to discover information about its

counterclaims (A-2157-58). The additional defendants

asserted that they were entitled to priority of discovery as

against Toolco on the counterclaims (A-2142).

In a pretrial order on March 5, 1962 (Doe. 81) Judge

Metzner ordered Toolco to limit its depositions “to evidence

which bears” on TWA’s claims against it, but refused at

that time either to terminate the Tillinghast deposition or

to alter the order of depositions. He did warn, however,

that what he described as the “normal rule of priority” was

not

“e © * rigid in [its] application and must yield in uw.

usual circumstances to the ultimate goal of prompt,

orderly and fair disposition of the litigation. Further

more, the plaintiff who instituted the litigation must

not be lost sight of in the maze that has resulted from

the pleadings.” (Doe. 81, pp. 3-4)

®A minor but revealing episode occurred at the February 14

deposition session. Special Master Rankin suggested that it might

be desirable to suspend the deposition of Tillinghast, who had been

TWA’s president for only about two months at the time the com-

plaint was filed, to permit an early deposition of Charles Thomas,

who had been TWA’s president from July 1958 to July 1960 (Doc.

210, p. 1032). The suggestion was immediately and successfully

resisted by Toolco, which filed a motion the next day objecting to any

intrusion upon its discovery program (A-2140).

_ 19

On March 15 Tooleo began producing documents pur-

suant to the district court’s December 18, 1961 order. The

production took place at the same time in Houston and at

two locations in Los Angeles; it was far from complete,

however. Many documents were produced only after mask-

tape had been applied to screen out portions of them

(e.g., AX-676-77, AX-680 --81, AX-708-11). In addition from

what was produced it became apparent that other relevant

documents had not been produced. The reason given was

that they had been destroyed prior to service of TWA’s

demand (Doc. 215, pp. 3412-13, 3452-56; Doc. 306, pp. 2-5;

Doc. 307, pp. 5-8). After examining the masked documents,

the Special Master on April 6, 1962 directed defendants to

reproduce the greater part with the masking removed (Doc.

217, pp. 4159-60). As it developed, this was the last dis-

covery order that defendants would see fit to obey.

TWA was aware that defendants used attorneys as busi-

ness agents and negotiators in all important matters. If

Tooleo were allowed to withhold documents dealing with

what was done by attorneys acting in a business, not

legal, capacity, some of the most significant documentary

evidence of defendants’ aircraft and financing activities

would be unavailable. When Toolco’s documentary pro-

duction included nothing that touched upon the important

areas in which these agents were known to have functioned,

TWA and the additional defendants sought to obtain such

documents. They asserted that Toolco had waived any

possible attorney-client privilege with respect to the docu-

ments: Tooleo had pleaded advice of counsel as a defense

in this action (Tooleo answer, par. 40, A-51) and had used

affidavits of these attorneys as to matters of fact in an

unrelated proceeding before the CAB involving Northeast

(A-2177).

After extensive briefing and argument the Special Master

on April 17, 1962 ruled that Toolco must produce the docu-

ments (A-2176 et seq.). Tooleo appealed to Judge Metzner.

Briefs were submitted and after oral argument on May 17

RS eR eee ON TNT

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(A-2206 et seq.), Judge Metzner on July 24 affirmed the

ruling that Tooleo had waived its privilege (A-2268-69),

Toolco ignored this decision.

Meanwhile, since shortly after filing its complaint, TWA

had been engaged in an international search in an ungye.

cessful effort to serve Hughes with process or a subpoena,

After all efforts failed, TWA applied to the Special Master

for permission to serve limited interrogatories asking

Tooleo where Hughes could be found (Doe. 283)

Tooleo vigorously opposed TWA’s right to serve the ip.

terrogatories, but on April 17 the Special Master granteq

TWA’s application, directed that any appeal by Tooleo be

taken within 10 days and specified that the interogatories

be served on May 2, 1962." No appeal was taken by Tooleo,

On May 2 TWA served its interrogatories, requesting

Tooleo to answer by May 17 (A-2197-205). Tooleo

then objected both to the form of the interrogatories and to

TWAY’s right to serve them at all. The Special Master took

further briefs and heard additional oral argument but on

June 4 ordered Toolco to answer no later than June 20, 196?

(A-2233). Three days later Toolco appealed to Judge

7 “T will sustain the motions to propound and have answered the

limited interrogatories about the location of Mr. Howard R. Hughes.

In so doing I want to make it very clear that this interference with

the right of the Tool Company to proceed with its discovery is not a

precedent for any other such interference, but is granted in recogni-

tron, in the first place, that much of the documentary evidence that

the Special Master has ruled is not privileged and must be produced

by the Tool Company with relation to its outside counsel, demon-

strates a very active participation by Mr. Hughes on behalf of the

fool Company, and it is not realistic to assume from such materials

that there were not common interests between the Tool Company

and Mr. Hughes throughout the period involved in this litigation—a

common interest which went beyond that of the ordinary stockholder,

and panes important business decisions.

“I am unwilling to preside as Special Master and permit the day

to come when the parties would be entitled to take the deposition of

Mr. Hughes, and then be unable to do so because they have been

unable to locate him.” (A-2195-96)

Metzner, but placed no return date on its papers (Doc

95). On June 11 it attempted to reargue the point before

the Special Master (A-2299). On June 14 that attempt

was rejected (A-2300).

Although not relieved by either the Special Master or

Judge Metzner from meeting the June 20 deadline, Toolco

neither answered the interrogatories nor took any other

action with respect to them.

On June 25, 1962 TWA again moved to.terminate the

Tillinghast deposition, still in progress with no end yet

in sight (A-2234 et seq.). On July 12 another hearing was

held before Judge Metzner to determine whether the

Tillinghast deposition should be terminated, whether depo-

sitions should be alternated so that TWA could commence

its discovery without further delay while Tooleo exhausted

all its discovery possibilities, and whether Tooleo had to

answer the interrogatories asking the whereabouts of

Hughes which it had previously been directed to answer no

later than June 20, 1962 (A-2245 et seq.). Judge Metzner

now ordered that the Tillinghast deposition be terminated

no later than July 25. He also modified and affirmed the

Special Master’s ruling as to the interrogatories seeking the

location of Hughes, directing that they be answered by July

%. But he rejected the proposal for alternating deposi-

tions, with leave to renew the application in September

(A-116-17).

On July 18, 1962 Tooleo moved to clarify and limit the

order with respect to the interrogatories (Doc. 103). That

motion was-denied on July 23 (A-2267). On July 26 (the

return date) Tooleo applied to Judge Metzner for addi-

tional time to answer the interrogatories and was given

until August 27 (Doce. 105).

Tooleo never answered them. Instead, on September 6,

pursuant to what Tooleo stated was specific and adequate

authorization from Hughes, its counsel accepted a subpoena

on Hughes’s behalf, providing for his deposition to be taken

in Los Angeles beginning September 24, 1962 (A-2309),

TWA promptly moved before the Special Master to en,

firm that date (Doc. 324). On September 15 the Special

Master denied TWA’s application to take Hughes’s deposi.

tion beginning September 24, but said:

“I feel that there is such a close connection by.

tween Mr. Hughes, as evidenced by some of the

documents that I have seen, and the fact that he is

the sole owner of the Hughes Tool Company, that

the Hughes Tool Company is responsible for Mr.

Hughes with regard to this subpoena * * ¢»

(A-2384)

«“e © * T am piercing the corporate veil as to the

Hughes Tool Company, and I am bringing what |

hope is clear notice of very substantial sanctions, not

against Mr. Hughes, but against the Hughes Tool

Company, in case there should be at some later date

a claim of lack of authorization or failure to respond

to the subpoena * * *.” (A-2390)

Counsel for Toolco later stated with respect to this ruling

of the Special Master:

«“* * * the Tool Company did not seek a review of

those rulings of the Special Master by the Court and

accepted in effect the responsibility placed upon it by

that ruling.” (A-274)

At the same time Toolco sought to reargue its position

vis-a-vis the assertedly privileged documents (Doe. 323)

—none of which had yet been produced despite the district

court’s July 24, 1962 pretrial order (A-2268-69). The

Special Master on September 15 again ordered Tooleo to

produce them (Doc. 236, pp. 164-67). Toolco again ap.

pealed.

Sh nif ATES SAI TIFIED ETAL IE SPE AEE AERA

After a hearing on September 19 (A-2391 et seq.), Judge

Metzner entered a pretrial order on September 21:

“The Special Master stated for reasons set forth

in the record that unless Howard R. Hughes com-

municated with him by today, Friday, September

2ist, 1962 he would consider that Mr. Hughes has

acquiesced in this interpretation and that if Mr. :

Hughes subsequently either attacked the validity of y

the subpoena or failed to appear pursuant to that

subpoena on September 24th, 1962, or at any future ,

time that the court might direct for the taking of the t

;

deposition of Mr. Hughes pursuant to that subpoena,

he, the Special Master, would consider the imposition

of sanctions upon the Tool Company, and that he /

would entertain a motion to strike the answer of the }

Tool Company and enter judgment against it. i

“Without passing upon the power of the Special

Master to grant the entry of such judgment, the court 5

adopts the interpretation and conditions expressed ;

by the Special Master. Any determination by the

Special Master on an application for a default judg-

ment would, of course, be reviewable upon appeal to

the court.” (A-120)

In that order Judge Metzner also rescheduled the Hughes

deposition to begin on October 29 (A-121).

Tooleo’s deposition proceedings, meanwhile, went ahead

slowly, and two additional TWA officers and one former

officer were partially examined. By the time discovery

proceedings were halted by Tooleo in February 1963,

Toolco had spent an entire year in the process and 13,000

pages of deposition transcript had been compiled. The re-

sult was one deposition completed, ofie ordered halted after

months of delay and two started but still unfinished.

On September 25, 1962 Tooleo moved for a pretrial con-

ference under Frp.R.Crv.P. 16 to define and narrow the

issues (Doc. 123)—a course which had been suggested by

the Special Master in response to Toolco’s repeated com-

plaint that its deposition of Tillinghast had not produced

eee ALOE REEL APY LN IL ATEIEEN | PINE YE TRIE: cil

evidence supporting TWA’s principal allegations.® Tooleo’s

motion demanded that T'WA be required to specify all faet,

which it contended would support the allegations of its com.

plaint, to name each witness which it proposed to call tg

support each allegation, and to state the substance of th

evidence which that witness was expected to give—all this

at a time when TWA had yet to take a single deposition

and when its documentary discovery was being frustrated

by Toolco’s non-compliance with court orders, J

Metzner’s refusal to grant this motion at that stage is 4

principal element of what defendants now claim to haye

been such an abuse of discretion as to have denied them

due process of law. To set this claim in clearer perspec.

tive, the papers before Judge Metzner deserve some

examination.

—TWA and all of the additionah defendants resisted the

motion, expressly stating that they had no objection to 2

“Rule 16 conference” after they had an opportunity to con.

duct their own discovery (A-2403-04, A-2421; Does. 327,

412-14).

—TWA submitted a marked copy of the complaint, with

the allegations admitted by defendants underlined in blue,

those denied by defendants underlined in red, and those as

to which defendants denied knowledge or information, thus

8 This was manifestly not true with respect to allegations of the

complaint as to defendants’ conduct during the only period of which

Tillinghast could have been expected to have had knowledge, that is

the events following his employment in April 1961. Tillinghast's

testimony with respect to these allegations was comprehensive and

detailed. For example, defendants’ efforts in 1961 to prevent TWA

from buying Boeing jets and their related efforts to interfere with

TWA’s public financing (Complaint, pars, 37, 39-42, A-19-21) were

described by Tillinghast on several occasions, of which pp. A-2957-

3000 are illustrative. The May 19, 1961 letter from Toolco’s counsel

to the SEC, referred to at the outset of this passage, appears at pp.

A-3222-41. It is one of a substantial selection of letters and telegrams

compiled and introduced into the record early in the Tillinghast depo-

sition as examples of defendants’ attempts to prevent the purchase of

Boeings. (A-3220-96). See also narrative outlines of the Tillinghast

deposition (Doc. 167A).

putting TWA to its proof, underlined in yellow. TWA

pointed out that on all of the most critical issues the impor-

tant evidence was in the control of defendants, and TWA

could develop its proof only through the discovery process.

(Doe. 327)

_A selection of telephone “call sheets,” operating mem-

oranda and correspondence obtained from the Los An-

geles message center in Toolco’s March production was

supplied (A-2337-81) demonstrating that Hughes personal-

ly handled virtually every important business transac-

tion involving the purchase, sale or financing of aircraft,

and that the most critical information could be obtained

only from him.

—A selection of papers was supplied which had been

submitted by Tooleo to the CAB in a proceeding involving

Northeast, including memoranda to Hughes from Tool-

co’s counsel reporting on their negotiations with Northeast

and Atlas—vividly showing how important it was that Tool-

eo’s attempt to withhold similar documents from TWA on

the ground of attorney-client privilege should not succeed

(A-2327-36).

—Large portions of the transcript of the pretrial hear-

ings to date were submitted; Judge Metzner, of course, had

already held numerous pretrial conferences and was fully

familiar with the posture of the litigation and the conflicting

contentions of the parties.

While this “Rule 16” motion was sub judice, other devel-

opments occurred which required rulings.

On October 11, 1962 Tooleo served on TWA its first

massive set of interrogatories, consisting of thousands of

interrelated questions. A second equally massive set was

served on November 13. TWA objected, both on the

ground of excessive burden, and on the ground that most

of the important questions were unanswerable until TWA

had had deposition discovery from defendants. (Docs.

329, 333, 334, 138)

Pies oe reine campos issn maeinn onestin tyne dates MPM BEEN DME

Sarna ee 4

On October 22 Toolco again moved to adjourn Hughes's

deposition, then scheduled for October 29 (Doe. 328) : on

October 25 the Special Master set February 11, (1963 as

the definitive date on which that deposition would begin

(Judge Metzner having previously authorized such

postponement if the Special Master considered it war.

ranted). In setting that date, the Special Master expressly

noted that he was giving Toolco time to present whatever

motions it wished to Judge Metzner (A-2434-35), Although

Tooleo was cautioned that any appeal from the Special

Master’s ruling should be taken within 10 days, Tooleo

did not appeal.

On December 4, 1962 Tooleo moved to depose additional

defendants Dillon Read, Sessel and Irving Trust Company

prior to any deposition of Hughes (A-2461). The Special

Master denied the motion on December 28 (A-2519), noting

that he considered the February 11, 1963 date for Hughes’

deposition a firm one and wished “that there’ may be no

valid basis for misunderstanding it” (A-2517). Tooleo

appealed.

All of these pending matters were reviewed at a lengthy

pretrial hearing on January 9, 1963 (A-2523 et seq.). The

next day Judge Metzner entered a pretrial order that

—affirmed the Special Master’s decision denying

Tooleo’s motion to depose Dillon Read, Sessel and

Irving Trust Company prior to Hughes’s deposition

(A-122) ;

—denied Tooleo’s Rule 16 motion, but with leave to

renew 30 days after the deposition of Hughes (A-

124) ;

—directed that TWA answer Tooleo’s interoga-

tories within 60 days after completion by TWA of

the deposition of Hughes (A-126) ; and

—affirmed (once more) the ruling of the Special

Master as to the non-privileged lawyers’ documents

and ordered Tooleo to produce them by noon, Jan-

uary 14, 1963 (A-124-26).

LLL DERSLER LL

Oe ELT DEF Se eA LR Bind fe Oe kok

AINE UE Trade CAH SENT BIDE ee CRS rer Meee Sra

As to the Hughes deposition, Judge Metzner stated:

“The deposition of Howard R. Hughes by the plain-

tiff and the additional defendants should now go

forward. This deposition was originally scheduled

for September 24th, 1962 and then adjourned to

October 29th, 1962. It has now been adjourned to

February 11th, 1963 and this date will be adhered to

in the absence of extraordinary circumstances.”

(A-123)

None of this checked Toolco’s efforts to escape discovery.

The documents were not produced. When a formal demand

for compliance was made at 12 noon on January 14, Toolco’s

eounsel exhibited a package said to contain the documents,

but refused to turn them over (A-2571-72).

On January 14, 1963 Tooleo moved “in the alternative”

to hold Hughes’s deposition on written interrogatories or

fnally to bring on its motion (pending since August 8,

1961) to dismiss the complaint or for summary judgment

(4-2574-75). After a pretrial hearing on January 17 (A-

%76 et seq.) Judge Metzner in his January 19 order denied

the motion to depose Hughes on written interrogatories (A-

130) but agreed to hear Toolco’s 1961 motion (A-131). He

fxed a briefing schedule designed to afford Toolco the

maximum possible time to prepare its papers without —

jeopardizing the February 11 date for the commencement

of TWA’s deposition discovery (ibid.). Tooleo was also

instructed to advise TWA and the additional defendants

by January 22, 1963 if it wished them to conduct the Hughes

deposition at a location other than the Federal Courthouse

in Los Angeles as specified in TWA’s notice (A-132). No

uch advice was given, and extensive preparations were

wade to conduct the examination in Los Angeles (Doce. 435).

On January 22 Toolco applied to the court of appeals for

awrit of mandamus (or, alternatively, for leave to appeal)

to review all the orders of the district court and for a stay

‘

PEE EAE OU SNM TEIE SIRS SEER TST a

EIRENE BR WAIL Ne IE AE FON TANT RRR 6 Ge OP RIE RSET KEL WARY

of proceedings (A-xxiii). On January 23, after the submis.

sion of papers and a hearing, the court denied Tooleg’;

application (A-xxiv).

In preparation for the Hughes deposition TWA and

the additional defendants sought discovery of additiona|

documentary material, particularly accountants’ work.

sheets and similar back-up materials to clarify the bare.

bones financial and tax records which Toolco had produced!

Although plainly included within the court order of Decem.

ber 18, 1961, such material had never been produced by

Tooleo. These documents fell into 23 classified categories,

and Toolco’s counsel later admitted that at least nine boxes

of documents in those categories had been collected (A-2649.

43).

The Special Master, after argument, ruled on January

22, 1963 that these documents should be produced (A-133.

42). They were not produced. After a hearing on January

28 (A-2616 et seq.) Judge Metzner on February 1 affirmed

the Special Master’s ruling and ordered production to start _

immediately (A-254). Toolco still refused to produce both

those documents and the non-privileged lawyers’ documents

notwithstanding the intervening refusal of the court of

appeals to review earlier production orders on an extraor.

dinary writ.

On February 1, 1963 Toolco served its papers on its

motion to dismiss, withdrawing its summary judgment

motion which had been pending for a year and a half

(Doe. 162, p. 3). TWA served its answering papers

the next day. On February 6 oral argument was had, and

Toolco’s motion was denied (A-2654), with a formal opinion

issuing on February 7 (214 F. Supp. 106, A-255 et $eq.).

In response to Toolco’s request at the close of the oral

arguinent for a further opportunity to seek interim relief

® These documents came to be identified by counsel and the court

by the shorthand label “tax documents,” and they are often so alluded

to in the record, although they are much broader in scope.

——

COPY BOU

by application to the court of appeals (A-2654), Judge

Metzner stayed all discovery proceedings until 5 p.m. on

February 8, 1963 (A-2655).

Tooleo made no such application. It chose instead to

default.

D. Defendants’ refusal to proceed and

the entry of the default judgment

After expiration of the stay of discovery proceedings

it appeared that there could be no further excuse to avoid

turning over the “tax documents” and non-privileged

lawyers’ documents which Toolco had been withhold-

ing. The Hughes deposition was to commence on Mon-

day morning, February 11._ Arrangements had been made

with the Chief Judge of the Southern District of California

for a courtroom, the ‘Special Master had arranged to be

present, court reporters had been hired, and TWA and the

additional defendants had leased office space in Los Angeles

and moved in the necessary personnel*and files.

During the day on Friday, February 8, however, Toolco

served on the parties and delivered to the district court a

document entitled “Notice of Position.” It declared that

“Tooleco hereby elects * * * to rest on the merits of its posi-

tions as heretofore taken so that it may avoid the burdens

and expenses involved in further pre-trial and trial pro-

ceedings” (A-268-69).

At TWA’s request, Judge Metzner, who was at trial on

another matter, called a hearing at 5 p.m. that day to con-

sider the resulting situation (A-270 et seq.). The function

of the hearing was to clarify Toolco’s election: if it was, as

it appeared to be, a flat refusal to proceed further, the

nature, extent and purpose of such a default had to be

defined on the record and the legal consequences spelled

out. In addition, as counsel for TWA stated at the

very outset of the hearing, TWA’s investigations had led it

to the conclusion that its damages were not less than $45

Sate NEUF f > BieE. ae Re AEA AE

million, as had been alleged by Toolco in its counterclaims

Before any proposal by Toolco to note a default was cop.

sidered, TWA wanted to amend its complaint to increase

its prayer for damages accordingly. (A-270-71)

Counsel for Tooleo made it plain that Toolco’s intention

was to default, and that this decision had been reached after

careful consideration and with full knowledge of the sane.

tions expected to be imposed. Toolco’s responsibility for

the appearance of Hughes as a witness was specifically

acknowledged. (A-271-74) Production of the “tax pa

ments” and the non-privileged lawyers’ documents pur.

suant to prior discovery orders was explicitly refused (A-

304-06). As to the expected consequences, Toolco’s counsel

said that Toolco realized that if defendants were proved to

be wrong on “the legal questions which have been decided

to date * * * as a consequence they may be deprived of

further defending on the#merits, other than on the question

of damages” (A-276).

TWA expressed dissatisfaction with the developing situ.

ation because of its fear that, without an opportunity to

develop the facts fully, its effort to establish and recover

for the full extent of its injuries would be handicapped.

TWA/’s counsel said:

“This is, as TWA sees it, another stall or

attempted stall. It is an attempt to bait us away

from getting at the merits of the controversy by

offering us some phony maneuver for a partial

default judgment, unlimited [stc—and limited] dam.

ages. The damages I think we will collect in this

case are $135 million. That is the amount that they

alleged we were hurt, tripled, and we will prove it.”

(A-295) (Emphasis added.)

Defendants’ counsel responded:

“T do not understand what remedy it is that the

TWA is seeking when it has the opportunity to

COPY BOUN!

eae 2 EY Fr re ae

rove these damages that you claim you can estab-

lish against the Tool Company, and I don’t under-

stand the statement and what the purpose is of

TWA saying that it does not want to proceed in that

manner.

“My purpose of course is to obtain something

which will enable me to get a review on the law as to

whether or not you are entitled to be here in the

first place. And then I am prepared, if I am wrong

in that regard, to pay the consequences to the extent

to which you are able to prove damages.” (A-297)

(Emphasis added.)

The district court summarized this aspect of the discus-

sion as follows:

“] think the plaintiff, in so far as his complaint is

eoncerned, is amply protected by the record made

here this afternoon, and you may then move for

your default judgment.” (A-299-300)

At the conclusion of this hearing held to record and define

the default, defendants’ counsel explicitly agreed that on

the basis of this record a default judgment could and should

he entered. Counsel for TWA had stated repeatedly

throughout the hearing that, in the absence of a default

judgment agreed to be effective to establish the merits of

TWA’s claim, TWA should still be allowed to depose

Hughes (who had personally expressed no objection to testi-

fying). This led the district court, at defendants’ instance,

to expressly stay TWA from taking that deposition (A-

307). So that TWA would not suffer by this decision, the

following formal statement of positions was made by the

parties and the court:

“The Court: * * * In other words, the understand-

ing of the Court is that you have now an anticipatory

default for failure to appear which will ripen at 10

o’clock Monday, February 11th, on consent of Hughes

Tool Company, the only defendant here with the

pemeee

JND CLOSE IN CENTER

POET ips

ARETE get cy ONY

Wi Pe Moapes ee

. i

responsibility, I assume, to answer in [money] dam.

ages to your claim. And then you are free to move

for a dismissal—I mean for a judgment on yoy

claim.

“Mr. Sonnett: If Mr. Davis accepts what your

Honor has just said, I have no problem about Mon.

day [when the Hughes deposition was scheduled to

begin in Los Angeles]. I wish he would say yes

or no to that.

“The Court: Do you understand what I just said,

Mr. Davis?

“Mr. Davis: I understood what you said, your

Honor, a long time ago, and I thought I made myself

quite clear on the record, and I don’t understand how

Mr. Sonnett wants to take testimony—

“The Court: Now, Mr. Davis, we have a simple

question, yes or no?

“Mr. Davis: I understand everything you said,

your Honor.

“The Court: And the answer is yes?

“Mr. Davis: That’s correct, your Honor.

“Mr. Sonnett: Thank you.

“The Court: All right.” (A-307-08)

With that established, the hearing ended.

On February 21, 1963 Holliday formally elected to asso¢i-

ate himself with Tooleo’s position and abide by its conse.

quences (A-2713).

On May 3, 1963 TWA’s motion to amend its complaint

was granted and the default judgment was entered (32

F.R.D. at 607-08, A-321). At the same time, Tooleo’s

counterclaims were dismissed on the same grounds (A-323).

Judge Metzner recounted the principal events of the liti-

gation to that point, and made a number of express

findings of fact, all of which were subsequently affirmed by

the court of appeals. Those findings included the following:

“Tooleo owns 78% of the stock of TWA and

Howard R. Hughes owns all of the stock of Tooleo.”

(32 F.R.D. at 606, A-317)

ong OO Se

ta, “Ss, a ea

fC" NED V OMIirainm

“It is clear that during all of the times covered by

the complaint the management of TWA was con-

trolled by Hughes personally.” (Jbid.)

“It is clear that the deposition of Hughes is essen-

tial for the proper presentation of TWA’s case.”

(32 F.RD. at 607, A-320-21)

“It is also clear that the failure of Hughes to

appear on February 11th for his deposition was the

result of a clear and studied determination by Toolco

after all efforts to postpone the appearance of

Hughes had failed. The default was deliberate and

willful * * *.” (Ibid., A-321)

“Embraced within the refusal to proceed with the

deposition of Hughes is the refusal to obey the

orders of the court directing Tooleo to produce the

documents referred to above [1.e., the non-privileged

lawyers’ documents and the ‘tax documents’].” (Jbid.,

A-320)

The district court’s opinion and orders of May 3 included

the certifications necessary to permit immediate review of

both branches of his decision (32 F.R.D. at 608, A-322;

4-323). The court of appeals limited the scope of its re-

view of the interlocutory judgment on TWA’s complaint to

jurisdictional matters (A-2736), but both appeals—from

the interlocutory judgment on TWA’s complaint and from

the final judginent on Toolco’s counterclaims—were briefed

and argued together, and a single decision resulted (332

F.2d 602, A-328 et seq.).

E. Reasons given for the default

The extraordinary nature of defendants’ decision “not to

proceed any further with respect to discovery proceedings”

(A-274) compelled the most careful attention from the

courts helow. Both the district court and the two panels of

the court of appeals were careful to ascertain that there

had been neither any misunderstanding by defendans of

what was involved in their actions nor any element of per-

71h anse tee epee. “§

sonal oppression or injustice which might have made the

decision something other than the free election deseribed

in the Notice of Position—or the voluntary “business deci.

sion” it was called by defendants’ chief counsel at the hear.

ing on February 8, 1963 (A-280).

At that hearing defendants’ counsel explained that the

decision had been made by Toolco after careful considera.

tion of his advice as to the sanctions which defendants were

inviting by their actions (A-274). The election was pur.

portedly based on confidence in “the merits of [Tooleo’s]

positions as heretofore taken” (A-268).

The risk that Toolco’s positions would be held to he with.

out any merit at all was obviously great, especially after

TWA had stated in open court that it expected to be able

to prove actual damages of not less than $45 million. In.

deed, the overall amounts put at risk were even greater,

since the refusal to proceed applied also to Tooleo’s own

counterclaims asking damages of $366 million. Against the’

backdrop of these figures, Toolco’s claim that, after it had

already taken depositions for over a year, the burden-and

expense of submitting Hughes to a deposition would be

too great from a business standpoint is inherently ridiev.

lous. Not only has the $5 million figure that defendants

now assert to be the cost of this single deposition quin-

tupled between petitions for certiorari,!° but the argument

~ 10 This $5 million figure, repeated no less than six times in defend-

ants’ brief (pp. 6, 15. 29, 40 & n. 12. 41), has the most dubious pos-

sible provenance. It was mentioned for the first and last time (until

the petition for certiorari herein) at the February 8, 1963 hearing,

when Toolco’s counsel described it as an estimate arrived at by Tooleo.

which he most pointedly did not himself endorse, of “the amount

of expenses that would be incurred. assuming that we continued with

the trial on the merits, both in pretrial proceedings as contemplated

and at the trial ***” (A-279-80). TW4A’s counsel said at the time

that the argument that defendants’ refusal to participate in discovery

proceedings was justified because of the expenses of the litigation was

made “with tongue in cheek” and was “obviously absurd” (A-293).

This particular $5 million figure did not again surface until Decem-

pased on that inflated and unexplained estimate also com-

pletely ignores the protection against undue expense always

available under the Rules. If the deposition had commenced

and had become unduly prolonged or otherwise improperly

burdensome or oppressive, Tooleo could have had relief

under Fep.R.Civ.P. 30(b) (now Fep.R.Civ.P. 26(c) and

30(d)). When Tooleo’s examination of TWA’s president

Tillinghast, begun in January 1962, was still in progress in

July, TWA sought such relief and obtained it; the Tilling-

hast deposition was terminated on July 30, 1962 pursuant to

court order (Doe. 222, p. 6675A).

A more plausible explanation of defendants’ behavior

than the one they give is that they knew they could not pre-

vail on the merits if TWA was permitted full discovery.

They could not afford therefore to have the truth come out.

This is the only hypothesis which can explain the persistent

refusal to make documentary discovery.

There was, however, an alternative possibility that re-

quired consideration—that the default as to the Hughes

deposition (although hardly as to the documents) was

triggered by some inability of Hughes to testify or by

his unwillingness, for some justifiable reason, to testify

under the particular circumstances of a public hearing.

Defendants’ position as to these matters has been strik-

ingly different at different stages of the action, obviously

depending on which position appeared at the time most

advantageous.

ber 23, 1971; it played no part in the various proceedings before the

district court or the court of appeals, or in the presentations made to

this Court in connection with the prior appeal. On the contrary, the

only figure ever mentioned by defendants’ counsel at the time as one

which he could support was much less—a figure of $1 million was

estimated as covering not only Toolco’s expenses but also 78% of

those of TWA (Doc. 145, p. 10). In their 1964 petition for certio-

rari in No. 501, October Term, 1964, defendants similarly said the

deposition was “estimated as costing over $1,000,000” (p. 44a), a

formulation that had also been used in their June 14, 1964 petition for

rehearing to the court of appeals (p. 14n).

PEPPER

tr ap ee pea eee

The election to default, described on February 8, 1963 us

the result of a business judgment that Toolco would be

better off financially, is similarly described before this

Court. Although there is some suggestion that the com.

plaint was brought in bad faith for purposes of oppression

(e.g., Def. br. pp. 11, 12), the main thrust is a reiteration

that Toolco’s decision resulted from careful consideration

of the odds—that it was a responsible decision which would

not even have been influenced by the actual appearance of

Hughes, in response to the subpoena he had accepted, on

the day set for his deposition (Def. br. p. 29). The courts

below are accused of having misunderstood this position

(Def. br. pp. 28-29, 60, 146).

If there is confusion, it is defendants’ own, for they ar.

gued exactly the contrary to the district court in 1965 and

to the court of appeals on their latest appeal. On December

30, 1965 James V. Hayes, then defendants’ lead counsel, was

arguing a motion for, in effect, summary judgment in

Tooleo’s favor based on affidavits of counsel and CAB

records. Judge Metzner, who later denied the motion (A-

422-23), asked the following question:

“* * * Mr. Hayes, I am going to stop you because

you have been going for forty-five minutes.

“T have listened very carefully to you, and the only

question going through my mind is why was there a

default? Why didn’t you go into court and get a

judgment on the merits?” (A-416)

And received the fellowing response:

“Mr. Hayes: This is not in the record, but it is

well known.

“The default took place because of the failure of

Mr. Hughes to appear for a deposition primarily.

“The Court: As a result of a deliberate business

judgment.

“Mr. Hayes: Right, correct.

PERE FEEL SRE RE EEE NE ELITE GILLIE NET ITS

Py Ciel AA AA ANNALS SALON OLA OF

“Mr. Sonnett: With two other instances.

“Mr. Hayes: Yes, I know. I said primarily. ;

Everybody knows Mr. Hughes’ passion for privacy,

whether we like it or not.” (A-417)

A substantially similar argument was made in defendants’ E

principal brief to the court of appeals in 1970."

In 1963, however, when defendants were objecting to dis- 3

covery and before they defaulted rather than submit to it,

this possibility had been very much in Judge Metzner’s

mind and steps were then taken to make sure that there was

no substance to it. A pretrial hearing was held in chambers

on January 16, 1963. At defendants’ request no transcri pt ,

was made, and attendance was limited to chief counsel and é

a single associate for each party. An affidavit was filed by é

defendants of which the pertinent portions were, at their

rest, sealed (Doc. 145, pp. 6-8). While those papers

have never been unsealed, when the matter arose before the

court of appeals at oral argument in 1963 TW.A’s counsel,

John F. Sonnett, who had been present, stated on the record

—without denial from counsel for defendants—that at the

conference in chambers the question was put to Mr. Davis,

defendants’ chief counsel : :

“‘Are you saying that there is any medical reason

or any reason of that type why this man can’t testify,

because if you are the record before me is deficient.’

“Mr. Davis specifically and flatly answered the

question by saying, ‘No.’ He was not making any such

“Tf a settlement could be blackjacked by forcing Hughes to

give a deposition at the cost of defaulting if he did not appear, why

bother with Holliday, why bother with interrogatories? The essen-

tiality of Hughes had only one basis that guided TWA’s tactics.

Exploit his passion for privacy, force him to testify and, at the

same time, carefully refrain from identifying a single fact to support

its sham complaint.” (Defendants’ brief to the court of appeals,

November 16, 1970, pp. 182-83; see also pp. 186, 191.)

sbi

IUND CLOSE IN CENTER

contention.” (Transcript of oral argument, Novem.

ber 13, 1963, pp. 122-23)

When two years later Mr. Hayes, in the passage quoted

at pp. 36-37 supra, tried to ascribe the default to Hughes's

“passion for privacy,” Judge Metzner responded ag fol.

lows:

“The Court: Well, beyond that, Mr. Hayes, |

offered in an off-the-record discussion to provide for

protecting Mr. Hughes’ passion for anonymity by

having the deposition taken any place he wanted, as

secret as he wanted it to be, and then I was asked not

to publish it, so I never published it, but that is a fact,

“Mr. Hayes: I am aware of this, your Honor.”

(A-417)

It was therefore to defendants’ “blackjack” argument (see

p. 37n. 11 supra) that the court of appeals had reference

when it ruled:

“Tooleo intimates that throughout the litigation

TWA sought in bad faith to win a fabricated case by

exploiting Hughes’s known craving for solitude.

Nothing in the record would justify any such finding,

and in any event the district court did offer to permit

the deposition to be taken in as much privacy and m-

der any other conditions that might suit Hughes's

aversion to public appearance.” (449 F.2d at 62,

A-2755-56)

After February 8, 1963 there were several occassions on

which, if defendants had desired to request an opportunity

to remedy their default, to produce the evidence withheld

and proceed with discovery and a trial on the merits, it

was plainly incumbent upon them to do so. During the

February 21, 1963 hearing on TWA’s motion for entry of

an interlocutory default judgment against Toolco, the court

said to Toolco’s counsel: “Mr. Davis, you are leading

right back to directing Mr. Hughes to appear for examina-

tion. Is that where you want to go?”—to which Mr. Davis

ee ee ee ek ee

: responded: “No, your Honor” (A-2722). At the oral argu-

ment on Noveinber 13, 1963 Circuit Judge Kaufman several

; times directly asked counsel for defendants whether, if

4 the case were remanded to permit reopening of the default,

defendants would be prepared to go ahead with pretrial t

diseovery—including the deposition of Hughes. Each time

counsel for defendants responded that he was not. (Tran- ¢

zript of oral argument, November 13, 1963, pp. 41, 50-51,

136)

After the 1964 decision of the court of appeals affirming

Judge Metzner’s orders, and the dismissal by this Court

of certiorari as having been improvidently granted, and

following remand to the district court for the damage hear-

ing, no application was made to reopen the default.

F. Evidence available to TWA at the time of default

Defendants’ repeated charge that TW.A’s case—and the

decisions of the Special Master, the district court and the

court of appeals—were based on “mere assumptions,”

“possibilities” and “hypothetical events” (e.g., Def. br.

pp. 18, 21, 109, 111, 116, 117, 136, 138) ignores the critical

fact of this case—that defendants, because of a “business

decision” that they would be better off, deprived not only

TWA, but the courts below, of access to the truth. Hav-

ing been deprived of the information within defendants’

sole control as to what they in fact did, and why, TWA

could not be expected to prove definitively the truth of

the allegations of its complaint.

At the damage hearing defendants did not offer a single

fact witness.’* Their attack on the complaint, below as

2 Even if the Special Master would have been required to hear it,

defendants cannot now claim that he, or the district court, erred in

not considering testimony that defendants never proffered. See Smith

¥. Concordia Parish School Bd., 445 F. 2d 285, 286 (Sth Cir. 1971);

Winston v. United States, 342 F. 2d 715, 724 (9th Cir. 1965). Cf.

Fep.R.Civ.P. 43(c); Boulter v. Chesapeake & Ohio R.R., 442 F.2d

335, 336 (6th Cir. 1971).

ee PIS BECP I ILIAC LF eV OP SE IRN AD PLR SS AEB HM ee i |

~_scsoo se cs mame ifs eat rene er,

here, was based alternately on innuendo and on flat agger.

tions as fact of matters which are, at best, questionable

inferences from the documentary record. The courts beloy

held that those innuendoes and inferences were completely

inadequate to establish the untruth of TWA’s allegations

On the contrary, the record, even in its truncated

amply showed that TWA could have developed evidence to

support its allegations, if it had been given the chance.

1. The role of Howard R. Hughes

In evaluating the evidence relating to the allegations of

the complaint, it is necessary to keep in mind the effeet of

the unavailability of Hughes to testify.

Hughes was the central figure in the tapestry. He was

never an officer or director of TWA, but he arrogated to

himself all power of decision on TWA’s aircraft procure.

ment programs (A-699-700). He gave strict instructions

to TWA’s presidents Burgess and Thomas to stay out of

equipment matters altogether (A-704, A-706-07, A-944). In

the crucial period of jet exploration and ordering, Damon,

then TWA’s president, was left by Hughes’s orders com.

pletely uninformed (A-733-35; cf. A-1049). Examples of

Hughes’s practice of imposing secrecy and keeping TWA’s

management ignorant of his actions can be found in

his negotiations with AVRO (A-1807) and De Havilland

(A-1814), in the YB-60 project (A-643), in the plan to man-

ufacture Caravelles under license (A-1818-20) and in every

aspect of the procurement of TWA’s ultimate jet fleet. -

These are all matters on which TWA’s witness, Robert

W. Rummel, thé only person in TWA’s management that

Hughes allowed to participate in procurement matters, had

some information. What else went on, that Rummel was

not told about, remains terra incognita.

One illuminating episode illustrates how difficult it is to

ascertain from the outside what Hughes was trying to do.

Late in December 1954, to the dismay of TWA’s manage-

ment, Hughes decided that orders had to be placed at once

for 25 Lockheed Constellation 1449A aircraft, which Toolco

would buy and which TWA would buy from Tooleo when

Toolco required it to. At this time and for this particular

generation of piston aircraft, TWA’s management (in-

_ eluding Rummel) preferred the Douglas DC-7C (A-1843-45,

A-1848-49). It was, however, apparently one of the times

when Hughes’s orders were that “we did not work with

Douglas” (A-1806).

Despite repeated protests that the proposed airplane

was uneconomical, that its specifications were far from

complete and indeed “not sufficiently complete to be suitable

for use as a contractual instrument * ° *,” that the price

would be excessive, and that TWA management believed

the airplane as proposed to be “an unsound project,”

Hughes “flatly rejected” TWA’s views “on the basis that

he felt he must wind the deal up right away °° *” (A-213-

18). And he did (A-218).

In the preceding month, Boeing had formally announced

to the airline industry that it was ready to negotiate the

commercial sale of its new jet transport (AX-1584 et seq.).

The Boeing transport had been flying since July 1954 in a

prototype version (ibid.), while the Lockheed 1449A (then

conceived as a turboprop, and later regressed with the

changed designation 1649A to one of the last and probably

the least successful large piston aircraft ever built) had

never flown. That Hughes and Lockheed had had secret

negotiations from which TWA had been entirely excluded

seems clear from Rummel’s memorandum of the telephone .

conversation in which Hughes announced his decision

(A-213-18).

" . *

MARAE RR I Ee OTR PRE eT Re: | *

2. The inferences which can be drawn from

what is known about defendants’ activities

in aircraft manufacture and supply

Tooleo was and is a substantial manufacturer of heli.

copter aircraft through its Aircraft Division, and a

major supplier of aircraft parts and components. Defen.

dants’ brief discounts Tooleo’s activity on the grounds that

helicopters and commercial jets are “vastly different pro-

ducts,” and that there are “problems inherent in a change.

over from defense-related production to commercial opera.

tions” (pp. 112-13). But the products are clearly related,

and the changeover had been made by such manufacturers

as Boeing and Convair.

In addition to Tovlco’s Aircraft Division, the Hughes Air.

craft Corporation, an affiliated corporation also controlled

by Hughes, is recognized as one of the largest aerospace

manufacturers in the United States, specializing in sophis.

ticated electronics and space vehicle development and

production. |

Hughes personally had specialized knowledge and status

in the industry, apart from that inherent in his wealth. In

the 1930’s he set the then world speed record for land-

based planes, in an aircraft of his own design (the Hughes

Racer), built in his own facilities,

The court of appeals concluded that

“ee @

it is clear that Tooleo throughout the relevant

period had the technical capability and sophisticated

‘know-how,’ to enter the commercial market without

untoward delay if it had so chosen.” (449 F.2d at

67, A-2767-68)

The piston era—At least twice in the piston period

Hughes and Tooleo took steps toward establishing Tooleo

as a major supplier of commercial transport aircraft.

As a result of Hughes’s partnership with Lockheed in the

development of the Constellation aircraft, Tooleo acquired

———a

COPY BOUND

LPR as.

rights te the first 40 aircraft to be built (6 C.A.B. at 155,

A-3300). In the much smaller market which existed before

World War HL, this constituted a large number of planes.

TWA’s total fleet as a relatively small domestic carrier in

late 1940 consisted of 40 aircraft, only five of them with

more than two engines, and it was expected that TWA

would absorb 15 Constellations. The other 25 would be

available for sale to other airlines. (Ibid., A-3301 ; 449 F.2d

at 67, A-2768). With TWA as a captive market and a tech-

nologically advanced product attractive to airlines gen-

erally, Hughes and Tooleo could logically expect at a single

jump to move through Lockheed into a very strong position

in the field of commercial aircraft manufacture and supply.

This first, highly promising attempt with aircraft manu-

factured by Lockheed was frustrated by the outbreak of

war when all aireraft output was taken over by the

United States Government. By the end of the war, aircraft

development had taken great steps forward, and the early

Constellation, wlfle still an effective airplane, no longer

represented a significant technological advance over its

competition.

During and after the war it appears that Hughes’s prin-

cipal interest was in the HK-1, the 700-passenger plywood

flying boat which he was developing under Government

contract (449 F.2d at 67, A-2768); TWA looked into the

plane from a commercial viewpoint (A-1798). This extraor-

dinarily ambitious undertaking, if it had been successful,

would have antedated by over 20 years the development in

the late 1960's of aircraft capable of carrying comparable

numbers of passengers over very long distances. It was

a direct manufacturing venture by Toolco, assisted in this

instance by public funds under military contracts.

This attempt failed; technology of the period was insuf-

ficient for Hughes to produce a workable aircraft to the

designed specifications, although work on the aircraft con-

tinued off and on for many years. A greater commercial

) CLOSE IN CENTER

SOR PIL St ET Te

opportunity was to come with the introduction of jet air.

craft for commercial purposes, and Hughes’s planning for

this foreseeable development began in the 194)’s (AX45).

In the meantime, as one result of TWA’s post-war sue.

cess in obtaining transatlantic routes, TWA was very

greatly enlarged as an aircraft market. Hughes and Tool.

co tightened and perfected their control over TWA’s air.

craft procurement. Orders were placed by Toolco or on its

instructions, with consultations with TWA consisting pri.

marily of studies made by TWA’s technical staff for

Hughes’s use. Except for the personal association between

Hughes and Rummel, in which Rummel! worked direct)

under Hughes’s instructions and transmitted Hughes's er.

ders to others in TWA when told to do so, TWA’s

ment had very little part in these activities ( A-682-85, A-

704, A-706-07, A-733-35, A-737, A-944, A-1807, A-1814, A-

1818-20).

Rummel im this period thought that all of these activities

were intended for TWA’s benefit, and even in 1955, when

he became convinced that TWA was being seriously, per-

haps irretrievably, injured by Hughes’s refusal to allow

TWA to negotiate for or order jets, he still thought

Hughes’s motivation was to benefit TWA. It was not until

- later that it became obvious this charitable view was mis.

taken.'%

Prevention of TWA financing—While other airlines in

this period engaged in major public financing to establish

the necessary equity base for the much larger scale of air-

line operations that was coming into being (e.9., AX-889-90,

AX-891-92), this formed no part of defendants’ plans for

TWA. If TWA were to establish itself as financially inde-

13 Defendants point to Rummel’s testimony as evidence of

Hughes’s and Toolco’s benevolent motives (Def. br. p. 13), but it is

plain that Rummel’s answers were confined to what he then thought,

and he expressly stated that he could not know what Hughes’s motiva-

tions really were, nor did Hughes generally give him any explanations

of his actions (e.g., A-470, A-506, A-515, A-1802).

COPY BOU

5K RE IEE ET NN CE Se Se 2.0 ew Peet 08 =.

pendent, able on its own account to deal with and meet its

obligations to independent airplane manufacturers, it would

have been difficult for defendants when the time came, to

use TWA’s aircraft needs as a lever to help in establishing

a broad commercial position as suppliers of jet aircraft.

In the late 1940’s defendants took steps to prevent this by

reducing TWA to financial impotence.

Until 1947 the president and a majority of the board of

directors of TWA were independent. The finance commit-

tee established by the independent directors on September

12, 1945 formally recommended a public sale by TWA of

common stock to raise $20 million and consideration of a

sale of preferred stock to raise an additional $25 million

(AX-925-29). In the course of the next nine months the

market price of TWA common stock ranged between a low

of $47 and a high of $79 per share (AX-930; TWA Ex.

99614). Both Pan American and American carried out

major public stock financings in this favorable market

(AX-889-92).

Hughes and Tooleo, however, blocked TWA’s every

effort to carry out such a program. Finally, in despera-

tion, TWA’s board called a special stockholders’ meeting.

in December 1946 to approve an increase in authorized

stock which would permit the public sale by TWA of con-

vertible preferred stock, the time for a successful issue of

common stock having already passed (AX-931-34). By the

device of withholding its proxies Tooleo prevented a quo-

4TWA Ex. 296, which is reproduced following p. 46, is a

chart showing monthly prices of TWA common stock during the

period 1939 through 1966 on which are set out Toolco’s various

transactions in TWA’s common stock and related securities. TWA

Ex. 296 was admitted into evidence bv Special Master Brownell at

the damage hearing (Doc. 554, pp. 7379-80). It shows, inter alia,

that Toolco was able to sell its stock interest in TWA in 1966 at

the net price of $83 a share, for total net proceeds of $545,814,771.

Toolco’s cost basis for that stock was $94 million. Its capital gain

was therefore approximately $452 million. (308 F. Supp. at 693,

A-2052) ‘

rum at that meeting, and at three successive adjournment

of it, the last on January 6, 1947, so that no action could

be taken (AX-935 et seq.). By thus preventing TWA from |

selling stock publicly when it could have done so at high

prices, Toolco produced a situation in early 1947 in which

TWA could meet its financial commitments only by accept.

ing financing on Toolco’s terms.

Those terms proved to be the dissolution of the independ.

ent finance committee, the appointment of enough Tooley

nominees to the board to constitute a majority, and the

issuance to Tooleco of demand notes in the amount of $10

million, convertible at Toolco’s option into common stock

at the average of the closing market prices for the ten days

preceding the day of Toolco’s election to convert (AX-963.

64). A year later Tooleo required the new board to

approve conversion of the notes at $10 per share, at a time

when the price computed on the basis of actual market

prices, as provided in the notes, would have heen $15.80 per _

share (AX-991; TWA Ex. 296).

By this transaction Tooleo acquired an additional —

1,034,423 shares of TWA common stock (TWA Ex. 296)— |

more than the total amount of TWA common stock previ- |

ously outstanding (986,018 shares)—and increased its stock

interest in TWA from 46 per cent to 73.6 per cent (TWA

Ex. 292, p. 2; TWA Ex. 296).!° By this naked application

of corporate and economic force defendants succeeded in

making TWA completely dependent upon them for finane-

ing, and cemented their dominance over the supply of air.

craft to TWA, precisely as charged in paragraphs 10, 2%,

24 and 51 of the complaint (A-9-10, A-15, A-25). Such was

the situation as the jet era app

15 Tf the original conversion formula had been adhered to, Toolco |

would have received only 654,699 shares }of TWA common stock

upon conversion (TWA Ex. 296). Meashired by the then market

price, the additional 379,724 shares that} Toolco acquired at no

additional cost had a market value of some!$6 million. After a 10%

stock dividend in 1952, upon the sale of these shares in 1966 Toolco PE

realized more than $34 million for the shares which it had obtained =

in excess of the contractual formula (ibid.).

—_——

i ae ell lc tll eer Oa Oe |,

ind Sources: Prospectuses, Annual Reports, C.A.B. Reports,

a e Finance Committee Minutes, New vey neg

Standard & Poor's Annual Dividend ord,

K, Bank and Quotation Record 9/12/45: TWA's Finance Committee

— i anaeh mee nee recommended sale of up to $20MM

mn days Common Stock and consideration

X99. 65 of sale of up to $25 Preferred

ard to Stock

. 60

& time |

market 55

1.80 per | |

50 a )

litional : | :

296)— ? 3

8 stock FE

(TWA 35 * :

ieati i

teation | Ss

i 30 1 —

ded in March 1940: Toolco bought 119,154 }

finane- 25 shares directly from TWA at $14/share

of air i

aT tin

+] 1! By 12/31/42 Toolco owned 440,050 3

T+ shares of TWA Common Stock; as of &

6/1/48 Toolco owned 452, 100 shares

(about 46% of TWA's outstanding a

Common Stock ) H

hl 12 4s yi; ke

Nee Se

BOD ee A ole? Male G GERLD DEA AI BAR BUOS GBA m

SRG ESE ZS HEE

Pa hi ees

Path ign ead Pere gr oe

TRANS WORLD AIRLI

Chart of Monthly Stock Prices (

1939-1966, inclusi

Showing Transactions by Hughes

Common Stock and Related Secu

. Pa

Between 1/9/47 and 5/29/47: Toolco bought $10“ 11/20/52:%

of 2 3/4% Sub Conv Notes (convertible at higher of of 353,82

35 or average of closing prices 10 days before 1-for-7

$16/share

conversion)

4/48: T rted $10MM 2 3/4%

Sub Conv Notes (plus accrued interest)

into 1,034,423 shares at $10/share,

increasing its interest in TWA.to 73.6%

(as originally provided by agreement of

proportionate 176, 363 shares and

bought an additional 25,725 shares

(raising its interest to TWA to

74.4%) of TWA's l-for-10 offering

to stockholders at S21 1/2/share

1/9/47 conversion price would have 4

$15.80 and Toolco would have received —

654,699 shares if it chose to convert )

2/18/49: Toolco subscribed for its

proportionate 297,304 shares of a

l-for-5 underwritten offering to

stockholders at ¢$10/share

dividend payable

of record 12/15/54

10/30/52: TWA <y

5s 4g 50 51 92 33

ET ELIS Ge OOO SG EE CIO PE TR Fe SEP OBERT TIL SIE IS BI ee ai

AEM EIE REEL No EARL OLE PO A Ec EET ONE th EGIL, GE LPPAEE DNB LAL DM ALEPPO ig OPAL AE oo LV pin CEO A RM AE ae

TRANS WORLD AIRLINES, INC,

rt of Monthly Stock Prices (High-Low -Close)

’ 1939-1966, inclusive

ing Transactions by Hughes Tool Company in

mon Stock and Related Securities of TWA

11/20/52: Toolco bought 263,110 shares

of 353,822 shares sold by TWA in its

l-for-7 offering to stockholders at

$16/share

6/17/57: Toolco subscribed for its

Proportionate 2,476,142 shares,

bought in the open market and

TEP PEED Ltr iet topper tspetoraate pet prap papabotg apcted opepepanog

subscribed for its

6, 353 shares and exercised ‘rights for 170,900 shares ‘

onal 25,725 shares and took up 45,917 additional 5/25/61: Of $100MM

erest to TWA to shares in TWA's l-for-1l offering Income Debs w/wts t

i-for-10 offering to stockholders of 3, 337,036 shares Toolco bought $80,<

at S21 1/2/share | rf at $13/share = its interest buy 2,185,976.7 she

' in TWA to 77.5%) 6/1/65 and $22/shm

j { 7

‘ ad

t 1 ‘th 7 Wath

Ltn {I tl / tthe Et E

[ T i t

| eri l mae pH thee

a bert mt , terete ttl Hy

T 4

10/30/52: TWA declared 10% stock E

dividend payable 1/15/53 to holders Between 6/17/57 and 2/1/58: Toolco bought 52,200 L

of record 12/15/52 (sold ex-dividend shares of TWA Common Stock from third parties, a

on NYSE 12/10/52) increasing its interest in TWA to 78.2% o!

52 53 54 55 56 57 58 59 of!

QuETERT Fane fOr PAGE

ROMA Dag RRR EET ANSTO ENE cia A een OS Ly aS NS RAT ON TE 2 NE ERIE DP eSNG SAE A RCE RE ER

5/3/66: Toolco sold 6,584,937 shares

at $86/share for $566, 304,582 (with

net proceeds to Toolco of $545,814, 771)

4/8/66: Toolco announced plans

to sell all of its TWA shares

(4/7/66 closing price was

$60 3/8)

3/30/55: 1,363,636 shares issued

to Toolco upon conversion of 530MM

of 5 3/4% Conv Sub Debs which TWA r

had called for redemption

10/21/63: Toolco bought $30MM of

5 3/4% Conv Sub Debs (conv into

Common Stock at $22/share through

10/1/83) ,

: | |

8 )

: Of $LOOMM of TWA's 6:°1/2% Sub

Debs w/wts sold to stockholders

bought $80,962,100 (with wts to

85,976.7 shares at $20/share to :

and $22/share to 12/1/73)

\ . >

11/13/63: Toolco sold $80,962,000

of 6 1/2¢ Sub Income Debs w/wts

| for $99, 583,260 (123%)(with net

| | proceeds to Toolco of $94, 347, 540)

12/30/60: Toolco bought TWA's $100MM Interim

Sub Prom Note which was then paid with proceeds

of 5/25/61 sale of 6 1/2% Sub Income Debs w/wts

60 61 = & 63 64 65 66

a ee a se ee ee ec ee ee aun Ra NCSA A

—

a | RB RS GR ODRAROROORESRARDERRRSESLUCESOUOLODLOLECEoEo® Dosa sooo es co cec cae ee nunay Tey

The jet era—The development of large military jet air-

craft was quickly followed by the introduction of the

British-made Comet, the first commercial jet aircraft (A-

1809). As the time approachedwhen American manufac-

turers would be prepared to produce jet transports for

airlines, defendants resumed their active efforts to estab-

lish Tooleo as a source of aircraft.

Hughes and Toolco had two principal approaches to con-

sider. Toolco itself might assume responsibility for the

assembly of aircraft (in which case a technological partner-

ship with an established manufacturer would be useful), or

it might make arrangements for the assembly to be carried

out by an established manufacturer under circumstances in

which it would have special rights to the output (in which

case defendants’ technological participation in the design

stage might be of major importance in establishing their

partnership position). Under either approach defendants

could participate in the manufacture or supply of impor-

tant components. What was important was the power to

control the output.

Hughes moved along both roads.

Manufacture in association with AVRO of Canada was

actively considered from 1954 to 1956 (A-471, A-1807,

4-1839). Manufacture of Caravelles, as North American

licensee for Sud Aviacion of France, was being actively

and very secretly considered as late as 1957 (A-1818-22).

Even after the failure of its earlier attempts and the rapid

“progress of Boeing and Douglas had compelled Tooleo to

place jet orders with Boeing, defendants were most relue-

tant to give up the hope of Tooleo’s engaging directly in

manufacturing. Project “Greenland” appears to have been

the code name given to some highly secret plans for direct

manufacture of jet aireraft by Tooleo about which Rummel

was given very little information (A-475-6, A-1839). Other

TWA officers were given none. TWA was caused to file an

eae

Shea ao tte chee

application with the CAB in this connection in 1956, which

was not abandoned until two years later (AX-21

AX-2425-26). The project was far enough advanced before

abandonment so that land acquisition had been commenced

in Florida for the necessary facilities (A-476).

As the court of appeals points out (449 F.2d at 67-48

A-2768), the ordering by Toolco of no fewer than 300 Pratt

& Whitney jet engines in 1956, at a time when such engines |

were in short supply, could well have been a prepara.

tory step towards Toolco’s manufacturing jet aircraft

(A-470-72, A-178-90). By this purchase alone defend.

ants acquired rights to enough jet engines for original in. |

stallation in 75 commercial jet transports, far beyond any

conceivable need of TWA for spare engines, and effectively

cornered the jet engine market. Later, when direct manu-

facturing plans were suspended, Toolco exploited its corner

by the sale of most of the engines to Boeing and to Pan

American, in direct competition with Pratt & Whitney,!*

and at a substantial profit (A-178-79, A-189; Doc. 494, Exs,

S, 7, 3).

While direct manufacturing was explored, so also was

the avenue of establishing a partnership position with an

established manufacturer through joint development activi-

ties. Hughes’s statement to Boeing in 1955 that he was

only interested in Boeing jets if he could have the first

16 The President of United Aircraft (Pratt & Whitney’s parent

corporation) expressed his opinion vigorously in a letter to Toolco

dated April 5, 1957:

“Tt has, of course, been our practice when a customer has in

his possession more Pratt & Whitney Aircraft engines than he

requires, to do all possible in assisting such a customer in their

sale.. However, in your case, you do not now possess more

engines than you need, but rather you have on order some 200

more engines than you require for TWA. There is no neces-

sity of your taking delivery of these engines * * *.

* * * a7 .

“Now you apparently are contemplating going through with

this rather large order and marketing these engines in competi-

tion to Pratt & Whitney Aircraft.” (A-178-79)

_ ——

50 produced indicates the type of control over output that

he was hoping to get (A-1023, A-1051, A-1208). This was

essentially the arrangement he had had with Lockheed in

the ease of the early Constellations. However, the major

effort on this front consisted of extended work with Con-

yair!? which commenced at the very beginning of 1955 and

continued (through the collapse of the Model 18 and the

subsequent work on Models 19 and 20) until the end of

Yovember 1955, a period during which TWA—the captive

backstop market on the availability of which much might

depend—was forbidden to negotiate with other manufac-

turers for the jet aircraft which it would need (Complaint,

pars. 14, 16, 17, A-11-13; A-1799-1800, A-1802-06).

In the piston period Tooleo had dealt in aircraft to a not ;

insignificant extent. Tooleo purchased and sold to TWA

33 new and eight used Constellations, not counting a con-

siderable number more as to which it held a security title 3

for a substantial period, and it conceded in the court of ;

appeals below that it purchased and rebuilt at least 14 4

(-47s, apparently for sale to other airlines (Defendants’

brief of November 16, 1970, pp. 32-39). The jets now offered

a more important opportunity—the 63-plane jet fleet that

Tooleo had ordered and that TWA had been allowed to

hope and expect would ultimately be made available to it.

EE TT AREER RY ae

TWA soon discovered that defendants would not permit

themselves to be bound to turn over any of the aircraft

to TWA. As the complaint alleges, Tooleo repeatedly re-

fused to assign them (Complaint, par. 18, A-13). For in-

stance, late in 1957 in answer to a letter from Burgess,

Tooleo explained :

Seo ntye Mag aug titre ese

Poot Naat

“Tt is possible that a similar arrangement was also explored in

1954-1955 with Lockheed, primarily in terms of turboprops in

which Hughes was personally very interested, but little is known of

the personal contacts which Hughes was making with manufacturers

and financiers in that period. The indications in a memorandum of

Rummel’s telephone conversation with him about the L-1449A deal

late in 1954 are suggestive (A-213 et seq.).

LIDIA ARE OSS I SN PANE el HEM

“For various reasons Hughes Tool Company cap

not yet commit itself to TWA with respect to these |

aircraft, either as to type or number; but, on a basis

to be determined later, it is expected that some jet

aircraft will be made available to TWA.” (A-194)

(Emphasis added.)

About a year later Toolco representatives “pointed out that

Hughes Tool has not yet agreed to furnish jet planes to

TWA” (A-193) and that

“e * * Hughes Tool Co. had NO intention of selling

or leasing their stuff (jet planes implied) to TWA

* * *.” (Ibid.) (Emphasis and parenthetical phrase

in original.)

TWA’s annual reports and prospectuses of the period

reflect this attitude on the part of defendants (e.g,

AX-887; AX-853, note 5 to financials; AX-840, note 7 to

financials) .18

The inescapable inference is that Toolco wished to become

a supplier of jets to other airlines. The application which

Tooleo had caused TWA to file with the CAB in 1956, to

amend the original control order to permit TWA to buy up

to 25 jets to be manufactured by Tooleo under a program

that no one in TWA was allowed any knowledge of, was not

withdrawn until 1958 (AX-2145-46, AX-2425-26). Tooleo

was plainly interested in establishing and maintaining a

commercial presence for itself as a corporation to which—

as a manufacturer, lessor or supplier—airlines might turn

as a source of aircraft.

Selling or leasing jets to other airlines offered sufficient

advantages so that opportunities to do so were actively pur-

sued over an extended period—commencing before anyone

in TWA was told that its fleet would be cut back.

18 While the jet engine purchases from Pratt. & Whitney in 1956

were probably related to the proposed manufacturing programs, the

fact that a larger number of spare engines would be useful if the

63-plane fleet were to be split among two or more airlines was also ,

a consideration (A-1841-42).

EB EMME LINE ASS SE ELS LIF URE CE IOS SIDE PEGGLE LANE BEN Sa id ab ners ae

at ae a a ae

——_ Sp. A PAB CP ILE ROG LATA, ONL ELLE SA EEA EBA ALE BE ASA BLED A

—As early as March 1958 Hughes was negotiating

to lease Viscount turboprops to Northeast through a

“buyer” (A-146-47), perhaps the proposed subsid-

| iary of Toolco known as “HACO” or “HALCO.”?®

—As early as January 1959 Toolco was attempt-

ing to sell some of its Convair 880s to Capital Air-

lines (Doe. 494, Ex. 2). This was well before anyone

in TWA was told that TWA would not get all 30.

Convair regarded these negotiations as being in

direct competition with its own sales efforts (A-905-

06; A-149).

—Toolco was attempting to sell Convair 880s to

Northeast in July 1959—a full year before the 1960

merger proposals. The negotiations went right up

to the contract stage. (A-150-57) Hughes was per-

sonally an important stockholder of Atlas, which the

complaint charges was a co-conspirator. Atlas in

turn controlled Northeast. (Complaint, par. 6, A-

2-3) It seems probable that, without TWA’s knowl-

edge, discussions of one sort or another involving

the supply of aircraft by Tooleo to Northeast con-

tinued throughout 1959 and 1960.

—At one point Toolco was on record as trying to

sell seven Convair 880s to National Airlines—and

another seven to the United States Government (A-

169-71).

—The diversion of six of TWA’s B-331 long-range

aircraft to its principal transatlantic competitor,

Pan American, is charged in the complaint and is a

major element of TWA’s damage claims and award.

The record is clear that this was regarded by all of

194 subsidiary with the former acronym, Hughes Aircraft Com-

pany (not to be confused either with Hughes Aircraft Corporation

or the Aircraft Division of Hughes Tool Company, both of which

ae manufacturers rather than operators), now owns and operates

the regional carrier Air West, acquired shortly after Toolco sold the

controlling interest in Northeast which it had purchased in 1962 from

its co-conspirator Atlas.

wets a

the parties as a sale by Toolco.”” Toolco made a gph,

stantial profit on the sale.?!

—During 1960 Hughes discussed with the Bank of

America plans to sell to American Airlines all 15

of the B-131s which Toolco was then leasing to TWA

(A-203).

Defendants insist that they could not compete with other

suppliers of aircraft because of contract clauses preventing

assignment of “the right to receive the aircraft” without the

consent of Boeing and Convair (Def. br. pp. 19, 96, 102n, 45,

115n. 62). But these clauses were in pont of fact com.

20 As Pan American’s Annual Report for 1959 puts it:

“Six long-range Intercontinentals were purchased from Hughes

Tool Company during the year at a cost of $40,000,000.” (Ax.

868) (Emphasis added.)

Referring to the same transaction, John B. Connelly, Boeing’s vice

president, testified:

“Well, in particular I recall that when this question was

asked—of course, as you know, this involved the sale of siz

airplanes by Hughes Tool Company to Pan American.” (A-

1178) (Emphasis added. )

4 The ratification by TWA’s then captive board of directors is found

in the minutes under the heading “Consent to Sale of Six Boeing

Model 707 Aircraft by Hughes Tool Company” (AX-1408) (empha-

sis added).

*1 Although TWA had no discovery by which it could inquire

into Toolco’s profits from the Pan American deal, a Toolco financial

statement dated July 16, 1959 (Doc. 494, Ex. 5) indicates that its

total cost basis for aircraft, engines and spares which went to Pan

American was $8,367,325.90, or $1,143,303.38 less than Pan

American paid Toolco to get the planes and engines (id., Exs. 6, 7).

Toolco’s 1959 federal income tax return reflected an otherwise unex-

plained gain of $955,600.10 from disposition of interests in contracts

(Doc. 495).

The arrangement by which Toolco diverted the six Convair 880s

to Northeast (Complaint, par. 22, A-15) also resulted in a hand-

some profit to Toolco. itl en D of Toolco’s 1960 federal income

Mi Re RR a eee Cee

AW ES Ke

Sioa

AR Ses

tax return reports a capital” of $1,208,424, and its 1960 finan-

cial statement audited by Haskins & Sells confirms that a gain in the

net amount of $1,208,424 was realized in this transaction (Doc. 495).

“™ ~ erdy atesi

re tae se eo ae

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pletely ineffective. Such aircraft contracts as Toolco chose

to assign, it assigned, and Boeing’s vice president Connelly

testified that Boeing felt it had .no choice but to con-

sent (A-1181).22 As to TWA’s consent, its availability

was so obvious that it was never a subject of concern.

The documents involved in the Boeing sales were signed

before the possibility was even communicated to TWA’s

board of directors, and in the Convair transaction in

1960, the formality of obtaining TWA’s consent to the

assignments was never even bothered with—in spite of

the fact that three of the aircraft in question had al-

ready been specifically assigned by identification number

to TWA, early in May 1960 (AX-10, AX-64 e¢ seq.). Strik-

ingly, the specific B-331s transferred to Pan American by

Tooleo included four of the first nine delivery positions for

which Tooleo had contracted (AX-51-52) — although the

competitive importance of early delivery of such advanced

aircraft was so great that it had led to the most vigorous

efforts in the 1955-1956 period for the earliest possible

delivery positions.

This does not complete by any means the story of Tool-

co’s equipment ventures. Late in 1959, for example, when

TWA’s jet fleet (according to defendants’ contentions then

and now) had heen completely provided for, Hughes was

negotiating with Lockheed for the purchase of a large num-

ber of Klectra turboprops. TWA, at least, did not want

Electras, although it was very much afraid that they might

be put to it if Tooleo had no other customers. Thomas,

nominal president of the captive market at the time, did not

dare follow the advice he was given to tell Hughes person-

ally that TWA would not take Electras (A-198). The

Electras would have been replacements—at least until they

“There could not legally be any obstacle to the resale of the

aircraft after purchase. United States v. Arnold, Schwinn & C =

388 U. S. 365, 379 (1967); Dr. Miles Medical Co. v. John D. Park

& Sons Co., 220 U. S. 373, 408-09 (1911).

LEP LSIORLML I GI SLO A, OES LIL IT OES ELEM MESSY ENS E MED

themselves were sold—for the B-131s on lease to TWA

that Hughes tried to sell to American (A-203). The use.

fulness of a captive market for inventory purposes is ap.

parent.

On May 13, 1960 Toolco contracted to purchase seven

Convair 880Ms built to the specifications of Capital Air.

lines.22 Hughes gave orders to Rummel and his assistants,

then supervising the construction by Convair of the 20 CV.

880s destined for TWA, to stay away from the CV-880Ms,

and that TWA was to have nothing to do with them (A-162-

63, A-715-17). As Hughes told Holliday:

ately as to the possibility of obtaining financing for

the purchase of these aircraft independent of any

possible disposition to TWA.” (AX-657) (Emphasis

added. )

At about the same time, Toolco ordered Convair 990 air.

craft (also designated as CV-600)—a total of 13 of them in

1960 and 1961 (Doc. 495, Tooleo 1960 financial statement,

note 3). All 13 were to be built in American Airlines’

configuration. (AX-644 et seq.) American was a customer

in which Hughes was very interested. Defendants them-

selves emphasize the significance of such a choice of con-

figuration (Def. br. p. 102n. 45).

Defendants argue that these aircraft were ordered inde-

pendently by Capital and American, and suggest that when

Tooleo acquired the right to purchase them they were in-

tended by Toolco solely for TWA (Def. br. p. 115).

While the CV-880Ms had been originally ordered by Capi-

tal, none of the 13 CV-990s ordered by Toolco had ever been

~ 23°The CV-880Ms (also designated as CV-22Ms), are not to be

confused with the CV-880s Toolco attempted to sell to Capital (p. 51

supra). The CV-880Ms contained “leading edge devices” (A-1829),

the very change which Rummel wanted on TWA’s CV-880s (Doc.

226, pp. 992-97) and which defendants refused to permit (Complaint,

par. 19, A-13).

—_—_

part of any American order, as defendants are well aware.

The evidence is convincing that none of these Convair air-

craft was originally intended for TWA. In addition to the

Hughes statement to Holliday about the Convair 880Ms

quoted supra, Rummel testified that Hughes personally

ordered him to have nothing to do with the Convair 990:

“The instructions were that I should not partici-

pate or allow the participation in either contract or

specification development activities, that we should

not inspect any 990 parts or components at the Con-

vair facility, and that we should not discuss the 990

with Convair.” (A-1802; see also A-715-17)

J. William Bew, the TWA employee who was Toolco’s Spe-

cial Representative at Convair, recalls:

“* * * T received strict instructions not to inspect,

discuss or even recognize the fact that they were on

the production line.” (A-252)

Hughes later tried to force the CV-990s upon TWA to keep

it from buying Boeings on its own account, but that was

after the captive market had escaped his control (Com-

plaint, pars. 35, 37-39, 41-42, A-18-21).%

Sketchy as it necessarily is, the foregoing outline of

events does show that defendants’ involvement in the activ-

ities described in the complaint as the “development, manu-

facture and acquisition * * * and sale and lease” of aircraft

(Complaint, par. 3, A-2) was extensive throughout the

*4Hughes’s point of view during the later period is illuminated

by his blunt words to Holliday, to be repeated to Convair:

“It is not up to Convair to decide whether TWA will ac-

cept the so-called 97% of the airplanes. This has never been

a matter for discussion. However | obtain TWA’s acceptance

to this is my own problems; most likely HTCO will control

TWA when that matter comes up.” (A-199)

Hughes’s confidence in February 1961 that he could regain control

so quickly is particularly interesting since he had placed his stock in a

ten-year voting trust less than two months before.

;

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period covered by the complaint. And what is known is

surely not all. It is impossible to guess what other actiy.

ities might have been discovered if TWA had been able tp

proceed with the discovery guaranteed it under the Federal

Rules of Civil Procedure.

3. The curtain of secrecy surrounding Hughes

There has probably never been an industrial or commer.

cial operation as to which such total and totally effective

secrecy has been maintained as is maintained over all of

Hughes’s affairs. As Rummel observed, it was routine “to

deal quietly, so to speak, in dealing in matters in which Mr.

Hughes was interested” (A-1815). There is no record

known to exist of the great bulk of his personal contacts

with financiers and industrialists.2> Typically, indeed, those

with whom he was in contact were instructed to maintain

no written record (A-1832, A-1843). Since no such restric.

tion was ever placed on Hughes himself, the existence at

the time of the default of critically important documentary

material under his personal control was very likely.

The extent of his holdings is equally mysterious. Fasci-

nating indications appear in the public press from time to

time—mining lands here, islands there, hundreds of thou.

sands of acres elsewhere, hotels, airports, a television net.

work, banks, factories. Secret agreements with manufac.

turers that TWA does not presently even suspect are not

just possible—they are, given defendants’ known methods

of operation, a probability.?¢

25 The few “call sheets” preserved in Toolco’s ‘sétret message cen-

‘ ter in Los Angeles and: produced during pretrial discovery record

only messages left with the telephone room; when direct telephone

contact was made, the notation “They talked” or “Omit. They

talked” is all that survives (AX-665-728 passim: e.g., AX-669,

AX-673, AX-691, AX-694).

*6 For example, Hughes at one time offered to Colonel Henry

Crown, a major stockholder of General Dynamics Corporation, to

purchase all his future aircraft from General Dynamics in return for

financial assistance from Crown (A-174). ;

cate 3 SALE A LOUD Ge eT kA) ‘ Oe - vow

4. Co-conspirators other than defendants

TWA alleged in its complaint that “defendants, Atlas

and other persons acting for each of them” had engaged in

the combination and conspiracy to restrain and monopolize

charged (Complaint, par. 9, A-8-9). Atlas was alleged to

have joined the conspiracy prior to May 1960 (Complaint,

par. 21, A-14). Defendants, in support of their contention

that the “conspiracy charge also fails for want of the

needed kinds of conspirators” (Def. br. p. 104), pretend that

Atlas was connected to the combination and conspiracy

alleged in the complaint only through the proposed North-

east merger (Def. br. p. 105). Yet the collaboration of

Hughes and Atlas went far beyond this merger proposal—

or even the provision by Toolco of aircraft to Northeast.

(In addition to the six CV-880s referred to in paragraph 22

of the complaint (A-15), examples of the latter include both

the Viscounts which were the subject of negotiations in 1958

(A-146-47) and the four CV-880s leased directly from

Tooleo in 1962.)

Evidence was available to TWA that the chief executive

oficer of Atlas, Floyd Odlum, was one of the central group

of individuals who decided what defendants should do with

respect to TWA during the critical period in early 1961

when they were still attempting to control TWA’s aircraft

acquisitions (Complaint, pars. 36-39, A-19-20) and were

attempting to disrupt TWA’s efforts to obtain financing in

May of that year (Complaint, pars. 40-46, A-20-22). On

March 9, 1961 Holliday reported to Hughes in an “operating

memorandum” on a secret meeting which he had at Odlum’s

ranch (A-2370-71). This meeting had been arranged by

Hughes, and it is apparent that Holliday had detailed in-

structions from Hughes as to matters to be discussed

(A-2353). One subject was which of two CV-880 aircraft

available for early delivery should be assigned to TWA to

’ comply with Tooleo’s firm commitment made at the end of

PRET BNA ALY BE WALA LOME DEAE ALE AIRE IO VE A LOD MET AI DOS APR LBL ERED PELE TELE -

i Ba TS |

+ 58 ‘|

1960 to assign a total of 20 such aircraft to TWA. By this

date TWA had received only nine (AX-145). Odlum’s ad.

vice was that both of the aircraft discussed should be

assigned, or if not both, the earlier of the two, and he went

on to advise Hughes that it would be a serious mistake to

seek to use “the last 20 TWA planes as a ‘quid pro quo’ for

* * * an indemnity” against a possible lawsuit (A-2370),

The meeting at Odlum’s ranch occurred before. TWA re.

tained independent counsel, but the directors had already

authorized an investigation (DX 39, p. 12), and it is

apparent from this and other documents -that the defend.

ants and Odlum were seriously concerned that this investi-

gation would result in a major lawsuit.

Holliday’s memorandum goes on to report Odlum’s sug-

gestion that Tooleo make an offer to induce TWA “to have

the investigation sufficiently thorough to prevent a derivi-

tive suit [sic], but cursory enough so that only a small

umount of money would be involved.” Holliday recom-

; mended that Hughes call Odlum to “discuss the over-all

problem.” (Ibid.)

In May of the same year, when defendants were attempt-

_ ing ‘to block TWA’s efforts to issue and sell publicly $100

million of debentures (Complaint, pars. 40-45, A-20-22; AX-

877), Holliday appears to have been the recipient of a

steady stream of instructions on the subject from Hughes.

A few cryptic notes were produced of the instructions given

by telephone (A-2357-62). These “call sheets” refer to 19

“memos” during the period (?bid.). Hughes’s instruction to

Holliday at 7 a.m. on Wednesday, May 17, 1961 was “Please

follow carefully the recommendations of Mr. Odlem and

Mr. Davis” (A-2361). On May 30, 1961 at 10:15 p.m. Holli-

day was instructed to “Please tell Mr. Davis to be sure that

Mr. Odlum, or any body, does not give to the N Y Stock

Exchange any decision in this matter until T communicate

~ with Mr. Davis” (A-2362). At 5:35 a.m. on June 5 Hughes

PRAGH

DARI L BAS ASR scree |

aM at

left a message for Holliday concerning a press release

about the financing—“I want to put forth for Mr. Davis’,

Mr. Holliday’s and Mr. Odlum’s consideration my reasons

for feeling as I do” (zbid.). Telephone conversations

directly between Hughes and Odlum during this period

are noted in other call sheets, plainly indicating Odluin’s

important participation in the activities then going on.in an

effort to block TWA’s financing *(A-2338-39). The conclu-

sion is ineseapable that the collaboration between Toolco

and Atlas, Hughes and Odlum, was as close in this aspect of .

defendants’ dealings concerning TWA as it was in connec-

tion with the proposed Northeast merger. In the damage

hearing the extent of Atlas’s and Odlum’s. participation

was not relevant, but TWA furnished this material to Judge

Metzner in September 1962 in connection with Toolco’s

motion for a Rule 16 conference, to show the need for fur-

ther discovery before such a conference could be fruitful.

After ‘ts own review, the court of appeals summarized the

evidence in the record; defendants chose to replace the

underlined words with ellipses when quoting this passage as

“illustrative” (Def. br. p. 106n. 48) :

“\foreover the documents described above, while

(if their contents were accepted as true) showing

that Tooleo was not a major force as a supplier of

aircraft other than to TWA, hardly negative the

possibility that Tooleo possessed independent eco-

nomic significance, apart from its role as supplier to

“ TWA. sufficient to support. proof of any or all

the antitrust theories limned by TWA’s complaint.

There is evidence in the record of activities by Tool-

co or Hughes that suggest significant movement by

Tooleo and Hughes toward actual or potential com-

mereial manufacture or dealership in airplanes,

especially jets, and their parts. We cannot say that

proof at a trial—prevented by Toolco’s conduct—

REET Re AORN ETING BON oe AERTS S TTI INA HEED FE Nn TENN a

that Tooleo was more than a conduit for TWA but

rather possessed independent competitive signif.

cance with respect to the commercial aircraft market,

would be insufficient, if combined with appropriate

related proof of the intent, attempt, collusion, tying

arrangements, boycotts, and monopolization alleged

in the complaint, to support an antitrust judgment

for TWA.” (449 F.2d at 67, A-2767)

SUMMARY OF ARGUMENT

This case was at issue when defendants chose to bar

discovery and foreclose a trial of the facts. They have

insisted ever since, however, that the issues should be

decided without accepting the truth of the basic charges

made by TWA in the complaint. Having successfully

frustrated discovery, defendants lay claim to a judgment

on the merits of “not proven.”

The keystone to that claim is defendants’ assertion of the

right to refuse to make discovery. The information they

withheld, the court of appeals found, “was more than

merely ‘material.’ It was essential” (p. 9 supra). It went

to every issue, since all inquiry into defendants’ conduct

was blocked. Whether defendants’ actual conduct might be

immunized from the antitrust laws because it came within

the scope of CAB orders approving Toolco’s acquisition of

control over TWA; whether, as they insist, defendants were

innocent of any intent to restrain trade and did nothing to

injure competition; and whether their conduct did or did

not directly injure TWA—all these were factual questions

which would have been determined at trial except for

defendants’ refusal to proceed. Evidence available only

from defendants was indispensable as to each.

- -

2D NS PAAR ae RAR ERAN AE NII LE REN TB Mee) a

Fae

I. The discovery issue. Defendants’ due process claims

are frivolous. They concede that the complaint is legally

sufficient, and therefore TWA was entitled to discovery as

a matter of law and to the process of the court in aid of

discovery. Defendants’ explanation for their refusal to

comply with the orderly process established by the Federal

Rules of Civil Procedure that it was necessary to avoid an

expense of $5 million in taking Hughes’s deposition is not

only inherently ridiculous and five times the estimate

made to this Court in 1964, but it ignores the fact that

courts can and do issue protective orders under

Fep.R.Civ.P. 26(¢) and 30(d) when abuse of discovery can

be shown.

Defendants claim the prerogative to require answers to

detailed interrogatories or the holding of a pretrial con-

ference under Frp.R.Crv.P. 16, to facilitate a motion for

summary judgment, before they could be required to pro-

duee critical documents and before TWA was permitted

to take the deposition which the court of appeals has since

twice held essential. This turns the matter on its head.

Both the district court and the court of appeals recognized

that discovery was crucial to TWA’s case. Judge Metzner

held that the discovery which TWA was to be allowed would

both facilitate consideration of answers to the interroga-

tories and the application for a Rule 16 conference, and

advance the date when defendants’ summary judgment

motion could he meaningfully entertained (A-123). Under

these circumstances, the order of discovery (always a

matter for the discretion of the trial judge) could hardly

have been determined differently, and the correctness of the

district court’s decision is plain. Defendants could not

have prevailed on a motion for summary judgment before

TWA had essential discovery. First National City Bank

of Arizona vy. Cities Service Co., 391 U.S. 253 (1968);

Poller v. Columbia Broadcasting System, 368 U.S. 464

(1962).

Defendants say they wished to test their legal position,

But they did so. Their motion to dismiss, treated as one

for judgment on the pleadings, was carefully considered

and denied (214 F. Supp. 106, A-255 et seq.). They had no

right under the Judicial Code, let alone under the Constitn.

tion, to an interlocutory appeal, although they ultimately

succeeded in getting one by their tactic of default. They

cannot complain about the procedure because the decisions

went against them on the merits.

II. The default issue. Defendants’ “business decision”

was not simply to refuse specific information ; it was to pro-

ceed no further in the case. All discovery was blocked, and

not just TWA, but the courts below, were deprived of ac-

cess to the facts. Under these circumstances, a default

judgment was inevitable, and defendants plainly invited it.

The lower courts correctly ruled that TWA was not re-

quired to prove the well-pleaded allegations of the com-

plaint, except with respect to damages. Defendants argue

that the default does not admit “legal conclusions,” and

label as “conclusions” such allegations as that their conduct

specified in the complaint was pursuant to a combination

and conspiracy to restrain trade and mongpolize a segment

of the market, and that this conduct rgsulted in specific

injuries to TWA. The contention that these are conclusions

and not admitted misreads the rule of Thomson v. Wooster,

114 U.S. 104 (1885). The correct rule is that a default

admits all well-pleaded allegations, including allegations of

“ultimate facts,” which are material and traversable and

F which would upon denial put the plaintiff to his proof.

: McAllister v. Kuhn, 96 U.S. 87 (1877). When the default

judgment results from a deliberate and wilful refusal to

comply with lawful discovery orders, giving that judgment

3 its full effect of establishing the truth of plaintiff’s allega-

; tions is particularly appropriate. Hammond Packing Co.

5 v. Arkansas, 212 U.S. 322 (1909).

. — . . seek SP ge

TERE SEL PPT EE LE RE INE RS SRE EE EE ET oe STN ta Sa Se

_ as

Defendants understood the consequences of the default.

When they noted their default, they stated on the record

that if they were wrong about whether TWA was entitled

to be before the court, they were prepared to “pay the con-

sequences to the extent to which you are able to prove dam-

ages” (p. 31 supra).

III. The amendment issue. In now seeking to confine

TWA to less than the full amount of damages it proved,

defendants rely on a provision of Frep.R.Cr1v.P. 54(c) meant

to apply to a different type of case. Before defendants

formalized their business decision to default, they had no-

tice that TWA intended to seek all damages to which it

was legally entitled. The district court plainly had discre-

tion to grant TWA’s requested amendment before the in- 2

terlocutory default judgment was entered since Fep.R.C1v.P.

15(a) directs that leave to amend shall be freely given “if

~ justice so requires.”

Defendants made a business judgment that they risked

less by restricting TWA to a trial on damages without

meaningful discovery than in a trial on the merits after

discovery. They had nearly three months during which

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