Reid Bros. Logging Co. v. Ketchikan Pulp Co.

• Decision Date: 01 March 1983
• Docket Number: 81-3448,Nos. 81-3444,s. 81-3444
• Citation: 699 F.2d 1292
• Parties: 1983-1 Trade Cases 65,246, 12 Fed. R. Evid. Serv. 1179 REID BROTHERS LOGGING COMPANY, an Alaska corporation, Plaintiff-Appellee, v. KETCHIKAN PULP COMPANY, a Washington corporation, and Alaska Lumber and Pulp Company, an Alaska corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1292

699 F.2d 1292

1983-1 Trade Cases 65,246, 12 Fed. R. Evid. Serv. 1179

REID BROTHERS LOGGING COMPANY, an Alaska corporation, Plaintiff-Appellee, v. KETCHIKAN PULP COMPANY, a Washington corporation, and Alaska

Lumber and Pulp Company, an Alaska corporation,

Defendants-Appellants.

Nos. 81-3444, 81-3448.

United States Court of Appeals, Ninth Circuit.

Submitted Sept. 9, 1982.

Decided March 1, 1983.

Peter J. Pfister, Morrison & Foerster, San Francisco, Cal., Richard S. White, Seattle, Wash., Robert D. Raven, San Francisco, Cal., for defendants-appellants.

William L. Dwyer, Seattle, Wash., for Reid Bros.

Appeal from the United States District Court for the Western District of Washington.

Before BROWNING, TUTTLE, ^* and REINHARDT, Circuit Judges.

TUTTLE, Circuit Judge:

The defendants-appellants, Ketchikan Pulp Company ("KPC") and Alaska Lumber and Pulp Company ("ALP") come before this Court alleging errors by the district court in finding a conspiracy between the defendants in violation of Secs. 1 and 2 of the Sherman Act. 15 U.S.C.A. Secs. 1, 2. The appellants also challenge the district court's award of damages to the plaintiff-appellee, Reid Brothers Logging Company ("RBLC"). After a careful review of the extensive record, we find that the district court's holdings are substantially supported by the evidence.

I. THE CONSPIRACY

A. Background

The alleged conspiracy aimed its tentacles at the timberland of the Tongass National Forest in southeast Alaska. ¹ These woodlands, like many national forests, may be logged by private enterprises under contract from the United States Forest Service ("USFS"). The areas eligible for such harvesting, known as "sales," are advertised in advance by the USFS. A minimum bid is fixed by the USFS, and sealed bids are submitted. All bids are on the basis of a certain number of dollars per thousand board feet (MBF). Parties submitting qualifying sealed bids commonly engage in oral auctions; the high bidder receives the so-called "stumpage rights" to log sales subject to USFS regulations.

KPC and ALP established operations in Alaska in the 1950's. As part of a program to promote the development of the Alaskan timber industry, the USFS entered into long-term contracts allotting specific logging areas to each defendant for a fifty-year period. This guarantee of a long-term timber supply was necessary to offset the risks of establishing processing facilities such as pulp plants and sawmills in an untested market. ² It was not anticipated that these allotments would satisfy all of the defendants' needs, and KPC and ALP were expected to supplement their timber supply through the normal bidding process.

The district court found three other product markets in the southeast Alaska logging industry besides the sale of standing timber. First, the sale of logs by independent "purchase loggers" who acquire timber rights at USFS sales and sell the harvested logs to mills for processing. Second, the sale of logging services by "contract loggers" who harvest timber under contract to a party owning the stumpage rights. The final product market is the processing of logs by pulp plants and sawmills.

The district court found a broad conspiracy by the defendants to dominate all segments of the southeast Alaska timber industry. The conspiracy was manifested by the defendants' 1) refusal to compete with each other for timber sales offered by the USFS, 2) exclusion and destruction of independent mills which would compete for the limited standing timber and log supply, and 3) elimination of purchase loggers and control of contract loggers through the payment of artificially low prices for timber.

B. Section 1 of the Sherman Act ³

1. Introduction

Certain joint conduct by business entities constitutes a per se violation of Sec. 1 of the Sherman Act. This category of conduct includes price-fixing (United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223, 60 S.Ct. 811, 844, 84 L.Ed. 1129 (1940)) and horizontal territorial division (United States v. Topco Associates, 405 U.S. 596, 608, 92 S.Ct. 1126, 1133, 31 L.Ed.2d 515 (1972)). When this type of behavior is proved, a court is blocked from inquiring into the "reasonableness" of the defendants' actions.

Absent a showing of a per se violation, a court must apply a rule of reason analysis. Under this test, the elements of a cause of action for an unreasonable restraint of trade in violation of Sec. 1 of the Sherman Act are:

(1) An agreement among two or more persons or distinct business entities;

(2) which is intended to harm or unreasonably restrain competition; and

(3) which actually causes injury to competition.

Ernest W. Hahn, Inc. v. Codding, 615 F.2d 830, 844 (9th Cir.1980); Kaplan v. Burroughs Corp., 611 F.2d 286, 290 (9th Cir.1979), cert. denied 447 U.S. 924, 100 S.Ct. 3016, 65 L.Ed.2d 1116 (1980).

We find that the evidence as a whole establishes the existence of a conspiracy between the defendants and that certain acts committed in furtherance of that conspiracy comprised both per se and rule of reason violations of Sec. 1 of the Sherman Act.

2. The refusal to compete

The refusal of the defendants to compete for timber sales offered by the USFS or logs marketed by independent loggers was part of a general scheme to reduce the costs of timber acquisition and thereby increase the spread between costs to the defendants and the prices received for end products. This refusal to compete continued from 1959-1975 despite a chronic shortage of timber that persisted throughout that entire period.

The illicit relationship between the defendants dates from the earliest years of their joint presence in Alaska. As early as March 6, 1959, shortly after ALP's establishment of a mill in the Tongass National Forest, A.M. Brooks, KPC's timber manager, sent a letter to Archie Byers, his counterpart at ALP, disclosing information on log prices and log purchase agreements. In that letter, Brooks urged Byers to keep the information "strictly confidential."

By 1969, the defendants had created a geographic border dividing the Tongass National Forest into spheres of influence. In an April 7, 1969, letter to Brooks, George A. Schmidbauer, the general manager of the Crawford Division of Georgia-Pacific Corporation, KPC's parent corporation, wrote that KPC should "bid sales out of [the] K.P.C. area where A.L.P. has dropped out of active bidding."

A 1974 KPC memorandum labeled "CONFIDENTIAL" constitutes irrefutable evidence of a geographical market division. In that memo, D.L. Finney, Brooks' successor at KPC, notes that "it would be most beneficial to ALP and ourselves to realign the operations so that KPC had the West Coast." The document discusses the benefits to each defendant of a geographic redistricting and proposes an "exchange" of certain areas. The memorandum concludes:

I cannot stress too hard, my feeling about the beenfits (sic) of towing, administration and log transfers and sorting if we can get the best geographical division between ALP and ourselves. It would also strengthen both of us in a competitive position for any outside interest (U.S. Ply or whoever) who tries to compete for sales with us at a later date.

This division of the market, sustained by an uninterrupted pattern of communications up through 1975, resulted in a remarkable record of bidding restraint by the de fendants. From 1959 1975, ALP and KPC, the two giants of the southeast Alaska lumber industry, bid against each other only three times out of 143 sales by the USFS. ⁴

3. The elimination and exclusion of competing mills

The defendants' conspiracy extended beyond the refusal to compete between themselves. The evidence clearly shows a well-orchestrated and successful effort by KPC and ALP to eliminate existing independent mills and prevent the establishment of new operations through control of the timber supply. By frustrating the efforts of potential entrants into the market, the defendants were able to minimize competition and keep stumpage rates and payments to purchase loggers at artificially depressed levels.

The fate of the Alaska Prince mill provides a well-documented example of the defendants' tactics. After failing in his efforts to prevent the Oji Paper Company of Japan from constructing the mill, KPC's Brooks informed Alaska Prince and all independent loggers supplying KPC that loggers wishing to supply Alaska Prince must be prepared to repay immediately in cash all indebtedness to KPC. In a May 27, 1969, letter to Schmidbauer, Brooks noted that Alaska Prince was "desperately in need of timber" and that Alaska Prince was "beginning to cause [KPC] trouble among the so-called independent loggers" by offering higher prices for logs. Brooks' letter discussed the upcoming Devil's Club No. 2 sale and suggested that KPC "run [the bidding] up on [Alaska Prince] to the point it will really hurt." Brooks noted, however, that KPC must beware of "the danger of making one bid too many."

Less than a month after this letter, Alaska Prince capitulated. On June 24, Brooks wrote Schmidbauer that Alaska Prince had agreed to cease offering higher prices to loggers if KPC would provide it with a log supply. But when Alaska Prince failed to outbid Ed Head, another independent mill operator, for the Devil's Club No. 2 sale, KPC retaliated by refusing to sell Alaska Prince any logs.

On July 17, 1969, Schmidbauer wrote Dave Murdey of KPC:

Don Finney [KPC timber manager] has expressed some concern about bidding all sales regardless of the desirability of the sale and the location in the south Tongass.

As I see the situation, we should bid all sales to keep Ed Head, Alaska Prince Corporation, or Fuji out. If we should decide to let them buy timber on the south Tongass we are going to have to live with them from now on and there is not enough timber for that.

In the fall of 1970, unable to acquire a timber supply, Alaska Prince offered its mill to KPC. KPC acquired the...