637 F.2d 573 (9th Cir. 1980), 78-1757, Boise Cascade Corp. v. F.T.C.

Docket Nº:78-1757, 78-1764.
Citation:637 F.2d 573
Party Name:BOISE CASCADE CORPORATION, Champion International Corp., Georgia-Pacific Corp., Weyerhaeuser Co., and Willamette Industries, Inc., Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.
Case Date:May 09, 1980
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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637 F.2d 573 (9th Cir. 1980)

BOISE CASCADE CORPORATION, Champion International Corp.,

Georgia-Pacific Corp., Weyerhaeuser Co., and

Willamette Industries, Inc., Petitioners,

v.

FEDERAL TRADE COMMISSION, Respondent.

Nos. 78-1757, 78-1764.

United States Court of Appeals, Ninth Circuit

May 9, 1980

James H. Schink, Robert T. Johnson, Jr., Bell, Boyd, Lloyd, Haddad & Burns, Chicago, Ill., argued for petitioners; John T. Loughlin, John B. Greene, Boise, Idaho, Hammond E. Chaffetz, Chicago, Ill., on brief.

Ernest J. Isenstadt, Federal Trade Commission, Washington, D.C., for respondent.

Petition to Review a Decision of the Federal Trade Commission.

Before WALLACE and KENNEDY, Circuit Judges, and BARTELS, [*] District Judge.

WALLACE, Circuit Judge:

Petitioners in these consolidated actions seek reversal of a Federal Trade Commission (Commission) order finding that each violated section 5 of the Federal Trade Commission Act (FTCA), 15 U.S.C. § 45, by adopting and maintaining a system of delivered pricing which utilized the computation of rail freight charges from the Pacific Northwest in determining the price of southern plywood. Boise Cascade Corp., 91 F.T.C. 1 (1978). We decline to enforce the order.

I

Petitioners are manufacturers of softwood plywood with mills located in the southern part of the United States. Until 1947 all plywood was manufactured from Douglas Fir and was produced in the states of Washington and Oregon. By 1963, technological

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advances had made possible the fabrication of plywood from various species of southern pine, leading to the development of the southern plywood industry. By 1974 the South produced 32.3 percent of all plywood marketed in the United States and 45.7 percent of plywood sheathing, the subject of this controversy. Petitioners accounted for more than 50 percent of southern production of plywood sheathing.

Because the product is considered to be fungible, price is the main factor of competition in the marketing of southern plywood sheathing. Prior to the development of the southern plywood industry, West Coast plywood manufacturers typically quoted a "delivered price," which consisted of a "mill price" plus the amount for rail freight from the West Coast (West Coast freight). This freight factor was computed by reference to concentric bands or freight zones running from north to south and radiating eastward from a Portland, Oregon zone. Although the rate for shipping plywood increases as a shipment enters new freight zones going east, freight rates are identical within any given zone.

The southern plywood industry has from its inception used West Coast freight in calculating and quoting prices to buyers across the country. The parties agree that this practice was a natural development and reflected the fact that in the early years of southern production, western mills remained the dominant supplier of plywood even in the South. Since southern plywood was widely viewed as inferior in quality to western plywood, it was necessary to sell southern plywood at a slightly lower price. The use of West Coast freight made possible ready comparison between western and southern plywood prices, 1 encouraged expansion of southern mills, and probably prevented southern prices from dropping so low as to create a disincentive to ship western plywood into the South at a time when southern mills lacked the capacity to meet southern needs.

The Commission found, however, that these original justifications dissipated as the southern plywood industry developed to the point where southern and western plywood no longer competed in the South. It concluded that the industry-wide practice of continuing to utilize West Coast freight has had the tendency and effect of inhibiting competition over the freight factor in the price of southern plywood. On the other hand, petitioners contend that use of the West Coast freight factor is merely a matter of form that has no effect on price in the "highly competitive" plywood industry, and that West Coast freight is justified as a convenience to buyers when comparing the price of plywood in regions where there is western and southern plywood competition. 2

II.

The hallmark of challenged delivered pricing systems has been the industry-wide use of an artificial freight factor as a "freight equalizer." Since in many industries freight is one of the important variables in the price-setting process, there is a natural tendency toward price cutting based on locational advantages, especially when production capacity exceeds demand. One way of eliminating such price competition is to create a pricing system that eliminates freight differentials as a bargaining subject. See Turner, The Definition of

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Agreement under the Sherman Act: Conscious Parallelism and Refusals to Deal, 75 Harv.L.Rev. 655, 674-75 (1962) (hereinafter cited as Agreement under the Sherman Act ); Adelman, Effective Competition and the Antitrust Laws, 61 Harv.L.Rev. 1289, 1327-47 (1948); Comment, Price Systems and Competition: The Basing-Point Issues, 58 Yale L.J. 426, 430-34 (1949) (hereinafter cited as The Basing-Point Issues ). Typical of such systems are so-called basing-point pricing systems, 3 in which one or more locations are established as centers for the computing of a delivered price. A non-basing-point producer calculates his freight charge as though his plant were located at the basing point, either "absorbing" or gaining the difference between his basing-point freight charge and the actual freight charge. While various differences in operation might be described, "the multiple and single (basing-point pricing) systems function in the same general manner and produce the same consequences identity of prices and diversity of net returns." FTC v. Cement Institute, 333 U.S. 683, 699, 68 S.Ct. 793, 802, 92 L.Ed. 1010 (1948).

Petitioners' West Coast freight is not a true basing-point pricing system. 4 Nevertheless, being a delivered pricing system, it has the same potential to stabilize prices as basing-point systems. When combined with the standardization of delivery methods, service extras, and discounts, any delivered pricing system can become a potent tool for assuring that competitors are able to match prices and avoid the rigors of price competition. The Commission typically has challenged delivered pricing systems under a theory of conspiracy to eliminate price competition by adherence to a formula which has the effect of making their prices identical. Frequently the finding of concerted action has been based on direct evidence of explicit agreement, e. g., American Chain & Cable Co. v. FTC, 139 F.2d 622 (4th Cir. 1944), or, as in the Cement Institute case, on circumstantial evidence of "collective methods" used to assure compliance with the pricing formula including boycotts, discharge of employees, retaliatory price-cutting against recalcitrants, and preparation and distribution of freight rate books. Cement Institute v. FTC, supra, 333 U.S. at 710, 68 S.Ct. at 807. In addition, reviewing courts and the commission have relied in varying degrees on the inferences to be drawn from identical prices, particularly when independent evidence suggests that the identities are unusually rigid and that the price structure as a whole is unusually stable (as when demand is falling). See Bond Crown & Cork Co. v. FTC, 176 F.2d 974, 978-79 (4th Cir. 1949) (price identity and rigidity); Cement Institute v. FTC, supra, 333 U.S. at 715-16, 68 S.Ct. at 810-811 (uniform pricing); Triangle Conduit & Cable Co. v. FTC, 168 F.2d 175, 180 (7th Cir. 1948), aff'd by an equally divided Supreme Court sub nom., Clayton Mark & Co. v. FTC, 336 U.S. 956, 69 S.Ct. 888, 93 L.Ed. 1110 (1949) (matching prices and inability of local buyers to obtain better prices); United States Maltsters Ass'n v. FTC, 152 F.2d 161, 164 (7th Cir. 1945) (identical prices).

The tension in the law of delivered pricing stems from the fact that, notwithstanding their potential for abuse as a price-fixing device, Congress has repeatedly refused to require the exclusive use of f. o. b. pricing or to prohibit freight equalization. Cement Institute v. FTC, supra, 333 U.S. at 737-38 & n. 11, 68 S.Ct. at 821-822 (Burton, J., dissenting). Thus, there appears to be

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little doubt that the independent decision of an individual seller to absorb freight in order to match a distant competitor's price is legal under the antitrust laws. Federal Trade Commission, Notice to the Staff: In re: Commission Policy Toward Geographic Pricing Practices, Oct. 12, 1948, at 3 (hereinafter cited as Commission Policy Statement).

A more doubtful issue concerns the legal status of the industry-wide use of an artificial freight factor under circumstances which provide no ready evidence of any actual collusion. At least as of 1948, the Commission adopted the view that the "conscious...

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