Chillicothe Sand & Gravel Co. v. Martin Marietta Corp., 79-1729

• Decision Date: 21 February 1980
• Docket Number: No. 79-1729,79-1729
• Parties: 1980-1 Trade Cases 63,155 CHILLICOTHE SAND & GRAVEL COMPANY, a Delaware Corporation, Plaintiff-Appellant, v. MARTIN MARIETTA CORPORATION, a Maryland Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 427

615 F.2d 427

1980-1 Trade Cases 63,155

CHILLICOTHE SAND & GRAVEL COMPANY, a Delaware Corporation Plaintiff-Appellant, v. MARTIN MARIETTA CORPORATION, a Maryland Corporation Defendant-Appellee.

No. 79-1729.

United States Court of Appeals Seventh Circuit.

Argued Nov. 27, 1979.

Decided Jan. 23, 1980.

As Amended Feb. 5, 1980.

Rehearing Denied Feb. 21, 1980.

Hamilton Smith, Chicago, Ill., for plaintiff-appellant.

Keith F. Bode, Jenner & Block, Chicago, Ill., for defendant-appellee.

Before CASTLE, Senior Circuit Judge, and PELL and WOOD, Circuit Judges.

CASTLE, Senior Circuit Judge.

The issue presented for review is whether plaintiff-appellant Chillicothe Sand & Gravel Corp., (CS&G) established a prima-facie violation of Section 2 of the Sherman Act, 15 U.S.C. § 2. The district court granted defendant-appellee Martin Marietta's motion for a directed verdict at the close of CS&G's evidence and CS&G appeals. We affirm.

I.

Martin Marietta is a large, diversified company with holdings in various fields including the production of sand and gravel (aggregates). It has aggregates holdings in fifteen states, including five facilities in Illinois (Chillicothe, Spring Bay, Pekin North, Pekin South and Lincoln). It entered the aggregates field in Central Illinois in 1964. Due to transportation costs the aggregates business is essentially a local one and producers are able to compete effectively only in a limited area around their sources.

The practices of Martin Marietta's Chillicothe location are the subject of this suit. Chillicothe is the only Martin Marietta facility with which CS&G considers itself to be competing and is in close proximity to CS&G's sole facility. Therefore, the geographic market involved in this case is limited to the area serviced by these two locations. The scope of this suit is further narrowed by the consensus among the parties that this case only involved competition in the sale of CA-6 road gravel. ¹

CS&G began competing with Martin Marietta's Chillicothe facility in the production of CA-6 in Spring, 1973. CS&G's founders, William and James Taylor, operated a sewer and water main construction business and decided that road gravel sales would be a natural adjunct to their construction business. Moreover, they were encouraged to enter the road gravel business by the developer of a project for which the Taylors were constructing the water mains. The developer, American Central Corporation, was not satisfied with the gravel it was receiving from its supplier, sought another source of gravel, and agreed to purchase CA-6 from the Taylors. An additional factor was the ease of entry into the field. The Taylors began CS&G with an investment of $65,000, of which $40,000 was borrowed. This amount covered both the purchase of the equipment necessary to operate a CA-6 plant and the rental of the land needed; the land was rented for a $750 minimum annual royalty. Although the equipment had to be replaced in September, 1976 for $235,000, CS&G's ability to enter the market and compete vigorously with Martin Marietta for $65,000 is significant.

CS&G's entry into the CA-6 market marked the beginning of a fierce competitive war between CS&G and Martin Marietta. The fierceness of the competition was due, in part, to the nature of the CA-6 market. The major purchasers of CA-6 are awarded jobs on the basis of competitive bidding. Accordingly, price is a major concern of CA-6 purchasers and they actively promote competition among sellers by informing one seller of a competitor's price and demanding a lower price. Sellers must attempt to ascertain their competitors' prices (purchasers aren't always truthful in their efforts to play sellers off against each other) and the price at which they can obtain business and yet make a profit.

The conflict between CS&G and Martin Marietta contains numerous instances of price cuts, customers gained, additional price cuts, and customers lost. CS&G views the facts as demonstrating that it fairly priced its product and won customers from Martin Marietta and that Martin Marietta responded by unfairly price-cutting and illegally taking customers away from CS&G. Martin Marietta views the facts as demonstrating that CS&G undercut Martin Marietta's price, that Martin Marietta stood by passively and watched its market share and CA-6 sales slip, that Martin Marietta then fought back with vigorous competition, that in late 1977 CS&G made two business decisions which adversely affected its sales of CA-6, ² and that when the dust had settled CS&G was the loser in a fair battle for the CA-6 market. ³

This Court need not adopt either of these views. Instead, it is our task to determine whether there is substantial evidence to support CS&G's claim and upon which evidence a jury could properly have found in favor of CS&G. See, e. g., Gunning v. Cooley, 281 U.S. 90, 50 S.Ct. 231, 74 L.Ed. 720 (1930), Hohmann v. Packard Instrument Co., Inc., 471 F.2d 815 (7th Cir. 1973). This standard, which requires this Court to view all of the evidence in the light most favorable to CS&G, applies to treble damage suits under the antitrust laws as well as to other types of suits. Continental Co. v. Union Carbide, 370 U.S. 690 n. 6, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962). See also Cal. Computer Products v. IBM Corp., 1979-1 Trade Cases P 62,713 (9th Cir.).

II.

CS&G claims that Martin Marietta monopolized or attempted to monopolize in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2. ⁴ To prove monopolization one must show: "(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1704, 16 L.Ed.2d 778 (1966). The elements of attempt to monopolize are: "(1) specific intent to control prices or destroy competition with respect to a part of commerce, (2) predatory or anticompetitive conduct directed to accomplishing the unlawful purpose, and (3) a dangerous probability of success." Gough v. Rossmoor Corp., 585 F.2d 381, 390 (9th Cir. 1978), cert. denied, 440 U.S. 936, 99 S.Ct. 1280, 59 L.Ed.2d 494 (1979). See also American Tobacco Co. v. United States, 328 U.S. 781, 785, 66 S.Ct. 1125, 90 L.Ed. 1575 (1946). CS&G uses the same evidence in its efforts to establish both its claims of monopolization and of attempt to monopolize. However the evidence is inadequate to raise a jury question as to either claim.

CS&G's evidence falls short of the mark in that it fails to present a prima facie case that Martin Marietta engaged in "predatory conduct." CS&G claimed that Martin Marietta had engaged in such conduct and, by so engaging, had violated the second element of monopolization, the acquisition of monopoly power by means other than superior product or business acumen. Proof of predatory conduct is also necessary to CS&G's claim of attempt to monopolize; CS&G relied on its allegations of predatory conduct to support claims that Martin Marietta violated both the first and second elements of attempt to monopolize.

The cornerstone of CS&G's efforts to demonstrate the presence of predatory conduct is Martin Marietta's pricing policy. CS&G views Martin Marietta's pricing policy as predatory in nature and as an attempt to illegally drive CS&G out of business. However, CS&G views Martin Marietta's pricing policy in light of its effect on a competitor rather than its effect on competition. The antitrust laws do not accept this view. Anheuser-Busch, Inc. v. F.T.C., 289 F.2d 835, 840 (7th Cir. 1961). Rather, it is necessary to view Martin Marietta's price policy in light of its effects on the proper functioning of a competitive market for CA-6.

The question of when a competitor's pricing policy should be considered predatory is the subject of ongoing debate. Professors Areeda and Turner maintain that prices at or above marginal cost should be conclusively presumed non-predatory. Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697, 733 (1975). Marginal costs are defined as "the increment to total cost that results from producing an additional increment of output." Id. at 700. ⁵ Areeda and Turner also feel that average variable costs should serve as a surrogate for marginal costs and, accordingly, that "(a) price at or above reasonably anticipated average variable costs (even if below average costs) should be conclusively presumed lawful." Id. at 733. They go on to conclude that "(a) price below reasonably anticipated average variable cost should be conclusively presumed unlawful." Id.

Areeda and Turner cite four major reasons in support of their proposition, stating that:

First, predatory pricing rules must take into account the proclivity of competitors to challenge a rival's price cuts, particularly when the rival is a larger firm. The threat of litigation may therefore deter legitimate competitive pricing. Second, pricing at SRMC (short run marginal cost) is the result in competitive markets, and has the social welfare virtue of avoiding wasteful idling of current productive resources. Third, rules requiring price floors higher than SRMC will tend to preserve inefficient rivals or attract inefficient entry. Fourth, elimination or exclusion of rivals may in some instances cause long-run welfare losses that exceed the short-run gains from fuller use of capacity, but such long-run consequences cannot feasibly be incorporated into legal rules because they are intrinsically speculative and indeterminate.

Areeda & Turner, Williamson on Predatory Pricing, 87 Yale L.J. 1337, 1339 (1978). These reasons have convinced many; several circuits have adopted Areeda & Turner's position and have stated that proof of below marginal cost-pricing is a requisite element of a prima facie case of...