Barry Wright Corp. v. ITT Grinnell Corp.

Decision Date29 December 1983
Docket NumberNo. 83-1292,83-1292
Citation724 F.2d 227
Parties1984-1 Trade Cases 65,787 BARRY WRIGHT CORPORATION, Plaintiff, Appellant, v. ITT GRINNELL CORPORATION, et al., Defendants, Appellees.
CourtU.S. Court of Appeals — First Circuit

Donald B. Gould, Boston, Mass., with whom Kenneth A. Cohen, Jonathan P. Feltner, Andrew S. Hogeland, and Goodwin, Procter & Hoar, Boston, Mass., were on brief, for appellant.

Joseph J. O'Malley, Los Angeles, with whom Norman A. Dupont, Paul, Hastings, Janofsky & Walker, Los Angeles, John A. Nadas, and Choate, Hall & Stewart, Boston, Mass., were on brief, for appellee Pacific Scientific Co.

Before CAMPBELL, Chief Judge, SKELTON, * Senior Circuit Judge, and BREYER, Circuit Judge.

BREYER, Circuit Judge.

The question that this case presents is whether defendant Pacific Scientific Company ("Pacific") engaged in "exclusionary practices" in violation of the anti-monopoly law, Sherman Act Sec. 2, 15 U.S.C. Sec. 2. The practices at issue are embodied in agreements between Pacific and ITT Grinnell ("Grinnell"), under which Pacific agreed to sell its product (mechanical snubbers) to Grinnell at a specially low price and Grinnell agreed to take nearly all its snubber requirements from Pacific. The district court, 555 F.Supp. 1264, found that the relevant contract provisions did not violate the antitrust laws. We agree with the district court on this matter, and on others less important; and we affirm its judgment.

I

On appeal from a judgment in defendant's favor, we must, of course, accept the district court's findings insofar as they determine, or rest upon, the facts, unless they are "clearly erroneous." Fed.R.Civ.P. 52(a). Our reading of the record, in light of this standard, suggests the following somewhat simplified account of the most important factual matters:

Pacific produces mechanical snubbers; they are shock absorbers used in building pipe systems for nuclear power plants. No other domestic firm makes mechanical snubbers; foreign mechanical snubbers do not satisfy Nuclear Regulatory Commission standards; and snubber users have found the closest substitute, namely, hydraulic snubbers, to be less reliable than the mechanical version. Thus, in 1976, Pacific's sales accounted for 47 percent of all snubbers sold; in 1977, 83 percent; in 1978, 84 percent, and in 1979, 94 percent.

Grinnell makes and installs nuclear plant pipe systems; it is a major snubber user. Its snubber purchases accounted for 51 percent of all mechanical snubbers and related hardware sold domestically in 1977; 52 percent in 1978; and 43 percent in 1979. By 1976, most of Grinnell's pipe system customers were requiring Grinnell to use mechanical snubbers. Recognizing Pacific's strong market position, Grinnell sought to develop an alternate mechanical snubber source. Hence, it entered into a contract with Barry Wright Corporation ("Barry"), the plaintiff here, under which it would help Barry develop a full mechanical snubber line. Grinnell agreed to contribute to Barry's development costs. It also agreed to use Barry as an exclusive source of supply between 1977 and 1979, promising to buy between $9 million and $15 million worth of snubbers during that period. Barry was to have its full line of six snubber sizes in production by the first quarter of 1977.

While waiting for Barry, Grinnell satisfied its current needs by buying mechanical snubbers from Pacific at Pacific's ordinary "discount" price--20 percent below list. Pacific noticed that Grinnell's orders seemed small in relation to its likely needs. And, by September, 1976, Pacific realized that Grinnell was trying to develop its own supply source through Barry. In August, 1976, Pacific offered Grinnell a special price break--a 30 percent discount from list for small snubbers, 25 percent for larger ones--in return for a large $5.7 million order that would have met Grinnell's snubber needs through 1977. Grinnell, after tentatively accepting this proposal, consulted with Barry and then rejected Pacific's offer. Instead, it placed a smaller $1 million order at the standard 20 percent discount.

Barry could not meet the required January, 1977 production schedule. By mid-January, 1977, it told Grinnell that it would not be able to produce small snubbers until August, 1977 nor large ones until February, 1978. Grinnell then met with Pacific and (at the end of January, 1977) negotiated a $4.3 million snubber contract--enough snubbers to meet Grinnell's estimated needs for the next twelve months. Pacific gave Grinnell the large 30 percent/25 percent discounts. It also gave Grinnell an option--open until July, 1977--to buy its 1978 requirements at the same prices (as long as Grinnell agreed to buy as much as in 1977). Grinnell, in turn, agreed to a non-cancellation clause that would have made it especially onerous for Grinnell to break the agreement.

Grinnell then told Barry that its production delays were unacceptable and that Barry had breached its development contract. Grinnell wanted Barry to continue its efforts, but it would not promise to buy more than $3.6 million worth of snubbers through 1979. Barry said this modification of the development contract was unjustified. It continued to try to develop snubbers. The extent of its progress is in dispute, but there is considerable evidence that it fell further behind its production schedules.

At the end of May, 1977, Grinnell and Pacific agreed further that Grinnell would buy $6.9 million worth of Pacific's snubbers for 1978 and $5 million for 1979. Grinnell predicted snubber "needs" of $6.9 million for each of the two years. On July 5, 1977 and July 14, 1977, Grinnell finalized the agreements for 1978 and 1979 by issuing purchase orders in these amounts. Pacific granted the special 30 percent/25 percent price discounts; and the contracts contained the special cancellation clause.

In June, 1977, Grinnell told Barry that their collaboration was at an end. Barry looked for other potential snubber buyers and then abandoned its snubber efforts. Subsequently, Barry brought this lawsuit against Pacific (and against Grinnell, as well, although Barry and Grinnell have reached a settlement). Barry charged that Pacific's efforts to sell snubbers to Grinnell and the terms of its contracts violated Sections 1 and 2 of the Sherman Act, 15 U.S.C. Secs. 1, 2, and Section 3 of the Clayton Act, 15 U.S.C. Sec. 14. It added a claim that Pacific had tortiously interfered with Barry's snubber-development contract with Grinnell.

The district court found that Barry failed to establish that Pacific's conduct was improper. The court also found that Barry had breached its contract with Grinnell before Grinnell placed its 1977 order with Pacific (in late January, 1977). And, it found that Barry would not have been capable of supplying Grinnell in 1977-79 regardless. Barry appeals all these findings. We need not consider the latter two, however, for we find the district court's conclusion about the lawfulness of Pacific's behavior adequately supported. And that conclusion is dispositive.

II

Barry's central claim is that Pacific's conduct violates Sherman Act Sec. 2, which makes it unlawful to "monopolize ... any part of the trade or commerce among the several States." 15 U.S.C. Sec. 2. Monopolization has two elements: first, the "possession of monopoly power in the relevant market" and, second, the "acquisition or maintenance of that power" by other than such legitimate means as patents, "superior product, business acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1703-04, 16 L.Ed.2d 778 (1966). On this appeal, the parties do not dispute Pacific's monopoly power in the relevant market, which the district court identified as the domestic market for snubbers (whether mechanical or hydraulic). Nor do they dispute the legitimacy of Pacific's acquisition of this power. Whether its acquisition rested upon the fact that Pacific possessed an important mechanical snubber patent, upon a "superior product," or upon the "historic accident" that users began to find hydraulic snubbers unsatisfactory, no one alleges that Pacific acted unlawfully in acquiring its dominant position. Accepting these two assumptions, we turn to the issue that is in dispute, whether Pacific maintained its monopoly position against the threat of Barry's entry through improper means.

In this context, a practice, a method, a means, is "improper" if it is "exclusionary." United States v. United Shoe Machinery Corp., 110 F.Supp. 295, 342 (D.Mass.1953), aff'd per curiam, 347 U.S. 521, 74 S.Ct. 699, 98 L.Ed. 910 (1954). To decide whether Pacific's conduct was exclusionary, we should ask whether its dealings with Grinnell went beyond the needs of ordinary business dealings, beyond the ambit of ordinary business skill, and "unnecessarily excluded competition" from the snubber market. Greyhound Computer Corp. v. International Business Machines Corp., 559 F.2d 488, 498 (9th Cir.1977), cert. denied, 434 U.S. 1040, 98 S.Ct. 782, 54 L.Ed.2d 790 (1978). Professors Areeda and Turner have put the matter nicely: " 'Exclusionary' conduct is conduct, other than competition on the merits or restraints reasonably 'necessary' to competition on the merits, that reasonably appears capable of making a significant contribution to creating or maintaining monopoly power." 3 P. Areeda and D. Turner, Antitrust Law p 626 at 83 (1978). Was Pacific's conduct reasonable in light of its business needs or did it unreasonably restrict competition? California Computer Products, Inc. v. International Business Machines Corp., 613 F.2d 727, 735-36 (9th Cir.1979). Barry points to three specific aspects of Pacific's conduct--its offer of special discounts to Grinnell, its insistence on a long-term large-volume contract, and its inclusion of the special non-cancellation clause--which it claims show that Pacific acted in an...

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