Atlantic City Electric Company v. General Electric Company

• Decision Date: 28 January 1964
• Citation: 226 F. Supp. 59
• Parties: ATLANTIC CITY ELECTRIC COMPANY et al., Plaintiffs, v. GENERAL ELECTRIC COMPANY et al., Defendants.
• Court: U.S. District Court — Southern District of New York

226 F. Supp. 59

ATLANTIC CITY ELECTRIC COMPANY et al., Plaintiffs, v. GENERAL ELECTRIC COMPANY et al., Defendants.

United States District Court S. D. New York.

January 28, 1964.

Kaye, Scholer, Fierman, Hays & Handler, New York City, Milton Handler, James B. Henry, Jr., David Klingsberg, Michael Malina, New York City, of counsel, for plaintiffs Atlantic City Electric Co. et al.

Webster Sheffield Fleischmann Hitchcock & Chrystie, New York City, Bethuel M. Webster, New York City, of counsel, for plaintiffs Atlantic City Electric Co. et al.

Winthrop, Stimson, Putnam & Roberts, New York City, Merrell E. Clark, Jr., James T. Boorsch, B. Brooks Thomas, New York City, of counsel, for plaintiffs Consumers Power Co. et al.

LeBoeuf, Lamb & Leiby, New York City, Taylor R. Briggs, New York City, of counsel, for plaintiffs Consolidated Edison Co. et al.

Isham, Lincoln & Beale, Chicago, Ill., Thomas L. Nicholson, Chicago, Ill., of counsel, for plaintiffs Commonwealth Edison Co. et al.

Louis J. Lefkowitz, New York City, Mathias Lloyd Spiegel, Albany, N. Y., of counsel, for plaintiff People of the State of New York et al.

White & Case, New York City, Green, Hennings, Henry, Evans & Arnold, St. Louis, Mo., Edgar Barton, Edward Wolfe, New York City, Lewis C. Green, St. Louis, Mo., of counsel, for defendant General Electric Co.

Cravath, Swaine & Moore, New York City, Olwine, Connelly, Chase, O'Donnell & Weyher, New York City, Albert R. Connelly, Richard F. DeLima, New York City, of counsel, for defendant Westinghouse Electric Corporation.

Davis, Polk, Wardwell, Sunderland & Kiendl, New York City, Robert B. Fiske, Jr., New York City, of counsel, for defendant Allis-Chalmers Manufacturing Co.

Hughes, Hubbard, Blair & Reed, New York City, Robert J. Sisk, New York City, of counsel, for defendant Allen-Bradley Co.

FEINBERG, District Judge.

Plaintiff utility companies object to the interrogatories of defendant electrical equipment manufacturers and thereby question the validity of the so-called passing-on doctrine in treble damage antitrust suits. Under that doctrine, a purchaser from one who has violated the antitrust laws cannot recover an unlawful overcharge to the extent that the purchaser took into account his increased cost in setting the price to his own customers.

These cases are among the large number of private actions that followed the criminal and civil injunctive proceedings brought by the United States Government against electrical equipment manufacturers in 1960 in the Eastern District of Pennsylvania. The complaints allege a combination and conspiracy by defendant manufacturers to fix prices and rig bids with respect to the sale of specified electrical equipment. Plaintiffs seek to recover treble damages under Section 4 of the Clayton Act, 15 U.S.C. § 15, in the amount of the difference between prices paid for the electrical equipment bought from defendants and the prices that would have prevailed had there been no conspiracy.

As part of a program of national discovery, defendants General Electric Company, Westinghouse Electric Corporation, and Allis-Chalmers Manufacturing Company have served plaintiffs in this District in one of the product lines involved in these suits¹ with twenty-three interrogatories. These are directed to the economic structure of plaintiffs' companies, with particular emphasis upon rate bases and rates of return thereon. Defendants maintain that the interrogatories are relevant to the issue of damages. Their theory is that the amount of recovery should be reduced to the extent that plaintiffs have passed on any overcharge to their customers by using the cost of electrical equipment "as a determinant of the prices rates charged" for their product (electricity).² This is the manner in which excess costs would have been passed on since plaintiffs apparently purchased the equipment not for resale, but only for use in generating electricity.³ Plaintiffs maintain that they are entitled to recover from defendants the entire amount of an illegal overcharge regardless of whether any such increased costs were passed on to consumers, and that any evidence of such passing on would be immaterial and inadmissible as a matter of law.⁴ For purposes of this motion only, it will be assumed that plaintiffs were overcharged as a result of price fixing and that they passed on all or part of their increased costs.

Traditionally, a party suing to recover treble damages for a violation of the antitrust laws has been permitted to recover for: (1) loss of profits that could have been earned in a freely competitive market;⁵ (2) increased costs of business actually transacted;⁶ or (3) decrease in value of investment in tangible or intangible property.⁷ It is said that no two categories of injury are necessarily mutually exclusive and that recovery may be had for all three types of damages provided sufficient evidence is introduced to support each claim.⁸ It is important to recognize that, as a practical matter, recognition of the passing-on doctrine is tantamount to a repudiation of the "increased costs" measure of damages and a limitation of the extent of recovery primarily to lost profits. See Hale & Hale, Market Power: Size and Shape Under the Sherman Act 387 (1958); Note, 61 Yale L.J. 1010, 1023 (1952).⁹

A clear distinction between the increased costs theory of damages in an antitrust case and the loss of profits theory was made in Straus v. Victor Talking Mach. Co., 297 F. 791 (2 Cir. 1924). In that case, plaintiffs were unable to obtain phonograph records at dealers' discounts because they had refused to participate in restrictive licensing arrangements and were compelled to purchase records at retail prices in order to meet the demands of their customers. In a treble damage action, plaintiffs were permitted to recover the amount of "the difference between the established reasonable price and the amounts plaintiffs were compelled to pay * * *." 297 F. at 803. The Court of Appeals for this Circuit made clear that when damages are sought under the overcharge theory, it is irrelevant whether plaintiff's profit margin increased or decreased during the period of the defendant's unlawful activity (Ibid.):

"Plaintiffs contend, and rightly, that they were not forced to sue for damages for loss of profits, and thus run the risk of no recovery, because, plainly, the restrictive arrangement prior to May 1, 1914, furnished no standard of comparison with sales made, or profits increased or lost, by plaintiffs during the period thereafter, when they could sell as they pleased. They contended for a rule of damage which seeks the proximate cause of damage and the proximate result occasioned by that cause. * * * Whether * * * plaintiffs sold to their customers at a profit or loss becomes immaterial in this case. They were entitled to goods at the reasonable price thereof. Through no legal fault of theirs, but because of defendants' wrong, they were deprived of their right * * *. It is thus unnecessary to `go beyond' this `first step.'" (Emphasis added.)¹⁰

Although the Court did not refer to the doctrine of passing-on, as such, the clear import of its holding is that passing on of an illegal overcharge is no bar to recovery.¹¹ The Court of Appeals cited as authority for its conclusions two Supreme Court cases upon which plaintiffs in this case principally rely. Chattanooga Foundry & Pipe Works v. City of Atlanta, 203 U.S. 390, 27 S.Ct. 65, 51 L.Ed. 241 (1906) and Southern Pac. Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 38 S. Ct. 186, 62 L.Ed. 451 (1918).

Chattanooga was a suit by the City of Atlanta to recover overcharges in the purchase of iron water pipe used in its waterworks. The Supreme Court affirmed a verdict "for the difference between the price paid and the market or fair price that the city would have had to pay" in the absence of the unlawful combination. 203 U.S. at 396, 27 S.Ct. at 66. The Court held, in an opinion written by Mr. Justice Holmes, that the City had been injured in its property within the meaning of Section 7 of the Sherman Act¹² (203 U.S. at 396, 27 S.Ct. at 66):

"The City of Atlanta was injured in its property, at least, if not in its business of furnishing water, by being led to pay more than the worth of the pipe. A person whose property is diminished by a payment of money wrongfully induced is injured in his property."

The situation in Chattanooga was substantially identical to the one before this Court. Both the present plaintiffs and the City of Atlanta operated utilities and sold their services to the public. Both were overcharged in the purchase of equipment necessary to produce their product (electricity and water, respectively). The Supreme Court in Chattanooga held that a verdict for the City in the amount of the overcharge was proper on proof of the illegal conspiracy and the overcharge.

Defendants attempt to minimize the effect of Chattanooga, pointing out that the passing-on issue was not there briefed or argued.¹³ However, Mr. Justice Holmes later made explicit what was implicit in his opinion in Chattanooga. Twelve years later, the Supreme Court specifically rejected the passing-on defense in Darnell-Taenzer. This was a suit brought to recover freight rate overcharges from defendant railroads under the Interstate Commerce Act. The trial judge initially had directed a verdict for defendants on the ground that plaintiffs had not been damaged. The judgment was reversed by the Court of Appeals for the Sixth Circuit¹⁴ and remanded for a new trial, at which the jury was instructed that if they found the rate charged unreasonable, and that prescribed by the Interstate Commerce Commission reasonable, they should find for the plaintiffs in accordance with the award made by the Commission. The award was in the amount of the difference between the freight rate to which plaintiffs were entitled and the rate they were compelled to pay.¹⁵ The jury found for plaintiffs and...