United States v. Phelps Dodge Industries, Inc.

Citation589 F. Supp. 1340
Decision Date14 June 1984
Docket NumberNo. 78 Civ. 4479 (ADS).,78 Civ. 4479 (ADS).
PartiesUNITED STATES of America, Plaintiff, v. PHELPS DODGE INDUSTRIES, INC., General Cable Corporation, the Okonite Company and the Anaconda Company, Defendants.
CourtU.S. District Court — Southern District of New York

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Benjamin P. Schoen, Lawrence G. McDade, Consumer Affairs Section, Antitrust Div., Dept. of Justice, Selig S. Merber, R. Scott Wynn, Bureau of Competition, F.T.C., Washington, D.C., for plaintiff.

Simpson, Thacher & Bartlett, New York City, for defendant GK Technologies, Inc.; Charles E. Koob, John F. Cambria, Morgan F. Kelly, New York City, of counsel.

Debevoise & Plimpton, New York City, for defendant Phelps Dodge Industries, Inc.; Robert L. King, Michael E. Wiles, New York City, of counsel.

CORRECTED OPINION AND ORDER

SOFAER, District Judge:

The United States brought this civil action in September 1978 for monetary penalties and injunctive relief, pursuant to section 5(l) of the Federal Trade Commission Act, 15 U.S.C. § 45(l), against defendants Phelps Dodge Industries, Inc., a successor to Phelps Dodge Copper Products Corporation; General Cable Corporation, now known as GK Technologies, Inc. ("GK"); the Okonite Company; and the Anaconda Company. The complaint charges that the defendants violated a 1936 Federal Trade Commission cease-and-desist order ("the Order"), which prohibited price fixing and coordination in the paper cable industry. In November 1979 a final judgment providing for a civil penalty of $300,000 and injunctive relief was entered against Okonite by consent. In January 1980 the remaining defendants unsuccessfully moved to dismiss the complaint on the ground that it failed to state a claim upon which relief could be granted, and extensive discovery ensued. In January 1982 a final judgment providing for a civil penalty of $100,000 and injunctive relief was entered by consent against Anaconda. In January 1983 the remaining parties agreed to submit the entire cause for final judgment on an agreed record.

The Order which the government argues the companies' conduct violated originated in an administrative proceeding instituted by the FTC on September 26, 1935, against defendants or their predecessors, and other companies no longer in the industry. The Order has remained in force since it became final in May 1938. The government charges that Phelps Dodge, GK, Okonite, and Anaconda violated the first, second, and fourth decretal paragraphs of that Order, which prohibit competitors from conspiring to fix or maintain prices, to adhere to prices in price sheets circulated among them, or to conduct investigations to ferret out and discourage deviations from such prices.1 The findings and conclusions that follow establish that defendants violated the 1936 Order by conspiring to fix and maintain prices in the paper cable industry. Civil penalties are assessed against Phelps Dodge and GK in the amounts of $517,500, and $552,000, respectively.

I. Findings of Fact
A. The Paper Cable Industry, Market, and Price Book.

Impregnated paper cable is electrical cable used for the transmission of high voltage electricity from a generation point to a distribution point. Order ¶ 2. It is generally made to specifications set by the purchaser from strands of copper or aluminum sheathed with a paper insulation. During the period between 1970 and 1975, the four defendants originally named in this action made over ninety percent of the paper cable sold in this country. Their products were essentially fungible, and their customers primarily public and private utilities.

For some time paper cable pricing has been based on data in a price book, an "historical formula which people have used in the industry as a basis for pricing their products." Priesing at 98. The price book formula in the 1970s reflected costs of labor, materials, and manufacturing, as well as a margin of contribution, for given industry specifications of paper cable. Priesing at 98-103. Book pricing was simply a shorthand method of determining the cost of a product generally manufactured to customer specification. Cowles at 40, 165-67. The price book contained a base price for specifications of paper cable, as well as a series of price sheets listing the adjustments to that price because of such factors as the cost of metal and other product components.

Three paper cable price sheets are most important in this litigation: the quantity discount sheet, which specified percentage discounts for various quantities of cable; the freight adder sheet, by which shipping charges were calculated; and the jacket adders, which listed the prices of the coverings, or jackets, for the paper cable, and which varied according to the type and thickness of paper insulation used. The price book served to simplify paper cable pricing by providing a means of separately pricing product components. The 1936 Order described the price sheets then in circulation, however, as "exceedingly complex and detailed." In re National Electrical Manufacturers Assn., Findings of Fact ¶ 4(a) (No. 2565 Dec. 29, 1936). Generally, no more than a handful of people in any paper cable company were capable of calculating the book price for a given order. Cowles at 206, 209.

Occasionally, one of the four major domestic producers would issue a revised price sheet and send it to its three major competitors, who typically would revise their own price sheets to conform to the new standard. This practice caused the companies' price books to remain identical: the list price for any given order generally would not vary from company to company. But the companies did not always charge the book price. When market conditions demanded, the companies would bid "off-book," either by discounting the book price by some percentage, Jackson at 111; by utilizing cost-plus pricing from individual component costs, Penhale at 25-26; Jackson at 25-26, 128-32; or by employing some combination of book and cost-plus pricing, Jackson at 129-30; Penhale at 28; Kedzierski at 107. Each of these methods was responsive to competitive pressures; manufacturers could at any time reduce or increase the discount from book, or adjust their profit above (or loss below) cost. Employed in this manner, the price book enabled manufacturers to base their prices on identical data, but still engage in competitive pricing.

Until around 1970 "the book was pretty much the golden rule," from which paper cable companies derived quotations "without exception." Jackson at 110. After 1970 the fortunes of the paper cable industry fluctuated widely, and so did the industry's adherence to the book. For most of 1973 pricing went off-book, but during the first half of 1974 demand was so strong that at times quotes went above book. Penhale at 29-30; Schell at 39. Beginning in 1975, while quotes remained on-book, considerable discounting took place. By late 1975 the industry was in a serious downturn. Pricing went entirely off-book, Penhale at 29-30; Schell at 38; Viggiano at 60; Cowles at 92-93, and occasionally even went below cost, Kedzierski at 107; see Brooks at 70. Costs escalated so rapidly that historical data on which the price book was premised no longer accurately reflected the market, and low demand made book-price increases untenable. Phelps Dodge explored the possibility of a total overhaul of the pricing system, Cowles at 94; Priesing at 103, but the price book proved superior to any other method contemplated, Cowles at 183; Priesing at 156. GK also considered alternative pricing strategies to increase the profitability of paper cable, but none was implemented because the market was believed incapable of supporting higher prices. Brooks at 73, 76, 78-79. Against this gloomy background in the paper cable industry, certain contacts occurred between officials of the defendant companies named Trotter, Kedzierski, and Penhale.

B. Contacts Between Trotter, Kedzierski, and Penhale.

In April 1976, when demand for paper cable had been falling for some eighteen months, James Trotter was Product Manager for paper cable at Phelps Dodge and Leo Kedzierski held the same position with GK. Robert Flood, then of Phelps Dodge but formerly of GK, phoned Kedzierski to arrange a meeting between him and Trotter at the Hilton Hotel in Tarrytown, New York. Flood claims he arranged the meeting solely because he knew that Trotter's job at Phelps Dodge was in jeopardy and wished to introduce Trotter to someone at GK in case he might want to seek employment there. Flood at 70, 132, 137-38. He admitted, however, that he did not mention this purpose to Kedzierski during their phone conversation or during his brief appearance to introduce them when they met. Instead, amidst "general comments about the state of the industry," Flood indicated to Kedzierski only that the two men should meet because "Jim Trotter was involved in paper cable pricing." Flood at 75. Kedzierski testified, moreover, that Flood, relating a discussion at Phelps Dodge at which the participants were lamenting the plight of paper cable, suggested that "it didn't have to be like that." Kedzierski at 102-03. Flood termed Kedzierski's account of the conversation "a little dramatic," but he conceded that he had spoken of the poor state of the paper cable product line and that Kedzierski might reasonably have construed the discussion as an invitation to cooperate. Flood at 72. At their initial meeting, Trotter and Kedzierski discussed Trotter's insecurity about his job with Phelps Dodge, which he thought hard times in the paper cable industry had put in jeopardy. Trotter at 352; Kedzierski at 262. But they also discussed the ailing state of the market for paper cable, book pricing, and ways to shore up the price. Kedzierski at 31; Trotter at 74-77.

Later in April, Kedzierski and Harry Penhale, then Vice-President for Quotations for...

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