Gottesman v. General Motors Corporation

• Court: U.S. District Court — Southern District of New York
• Writing for the Court: METZNER
• Citation: Gottesman v. General Motors Corporation, 279 F.Supp. 361 (S.D. N.Y. 1967)
• Decision Date: 13 December 1967
• Docket Number: No. Civ. 121-251.,Civ. 121-251.
• Parties: Callman GOTTESMAN et al., Plaintiffs, v. GENERAL MOTORS CORPORATION and E. I. du Pont de Nemours & Company, Defendants.

279 F. Supp. 361

Callman GOTTESMAN et al., Plaintiffs, v. GENERAL MOTORS CORPORATION and E. I. du Pont de Nemours & Company, Defendants.

No. Civ. 121-251.

United States District Court S. D. New York.

December 13, 1967.

COPYRIGHT MATERIAL OMITTED

O'Connor & Farber, Gordon, Brady, Caffrey & Keller and Netter, Netter, Dowd, Fox & Ness, New York City, for plaintiffs; David Brady, Leo Brady, Clendon H. Lee, Arthur B. Netter, Henry L. Bayles and Abbott Gould, New York City, of counsel.

Edward B. Wallace, New York City, and Henry M. Hogan, Detroit, Mich., for defendant General Motors Corporation; William A. Grier and John J. Higgins, New York City, John R. Anderson and Aloysius F. Power, Detroit, Mich., of counsel.

Covington & Burling, Washington, D. C., and Littauer, Gordon, Ullman & Riseman, New York City, for defendant E. I. du Pont de Nemours & Company; Hugh B. Cox, Daniel M. Gribbon and Harris Weinstein, Washington, D. C., Frank H. Gordon, New York City, and Irving S. Shapiro, Wilmington, Del., of counsel.

METZNER, District Judge.

This is a derivative action brought by minority stockholders of General Motors Corporation (General Motors) against E. I. du Pont de Nemours & Company (du Pont) claiming damages flowing from alleged violations of §§ 1 and 2 of the Sherman Act¹ (15 U.S.C. §§ 1, 2) and breach of common law fiduciary duty.² It is alleged that, by reason of du Pont's stock interest in General Motors, it dominated and controlled the latter in the purchase of du Pont products. The court has jurisdiction of the subject matter of the action and of the parties.³

The case at bar, by stipulation of counsel, has dealt only with the question of liability on the claims pertaining to automotive fabrics and finishes used in the manufacture of passenger cars.⁴ Some 10,000 pages of testimony have been taken and 1,000 exhibits admitted into evidence.

The primary issues here are whether du Pont after May 4, 1950 controlled General Motors to the extent that it entrenched itself as the primary supplier to the latter of automotive fabrics and finishes, that it insulated the General Motors market from free competition in these products, and that as the result of such activity it caused injury to General Motors.

An essential part of the background of this lawsuit is the first Supreme Court opinion in an antitrust action brought by the United States against du Pont, General Motors et al. See United States v. E. I. Du Pont De Nemours & Co., 353 U.S. 586, 77 S.Ct. 872, 1 L.Ed. 2d 1057 (1957).⁵ The Government, in that action, alleged violations of § 7 of the Clayton Act⁶ (15 U.S.C. § 18) and §§ 1 and 2 of the Sherman Act. The Court found that § 7 of the Clayton Act had been violated; it did not pass upon the claimed violations of Sherman 1 and 2,⁷ and the district court judgment dismissing those claims was vacated.⁸ The Court found that at the time of the suit, June 30, 1949, the stock ownership acquired in 1917 had a "reasonable probability to contain a threat that it may lead to a restraint of commerce or tend to create a monopoly of a line of commerce."⁹ 353 U.S. at 597, 77 S.Ct. 872. In arriving at this conclusion, the Court noted that

"du Pont purposely employed its stock to pry open the General Motors market to entrench itself as the primary supplier of General Motors' requirements for automotive finishes and fabrics." 353 U.S. at 606, 77 S.Ct. at 884.

Both the majority and dissenting opinions agreed that to find a violation of § 7 it need not be shown that restraint or monopoly was intended, nor that actual anticompetitive effects flowed from the acquisition. The Court stated that:

"The fact that all concerned in high executive posts in both companies acted honorably and fairly, each in the honest conviction that his actions were in the best interests of his own company and without any design to overreach anyone, including du Pont's competitors, does not defeat the Government's right to relief. It is not requisite to the proof of a violation of § 7 to show that restraint or monopoly was intended." 353 U.S. at 607, 77 S.Ct. at 884.

There was no finding of private injury either to the competitors of du Pont or to General Motors itself. The thrust of the opinion was directed to show the probability of public injury based on events quite far removed from the time period with which we are concerned herein. Recently the Court indicated that a finding of control was not necessary for its decision in the du Pont case. Denver & R. G. W. R. R. v. United States, 387 U.S. 485, 501, 87 S.Ct. 1754, 18 L.Ed. 2d 905 (1967). All of this leads to the conclusion that the Court's language about entrenchment is not entitled to great weight as prima facie evidence in this case.

Liability on both the antitrust claims and common law claims is limited to the period commencing with May 4, 1950 (28 F.R.D. 325). As indicated, the Government suit speaks as of June 30, 1949. The time period encompassed in the Government suit has been deemed relevant in this trial, however, to place the facts in dispute here in historical perspective.

The Relationship Between the Corporations

The history of the relationship between du Pont and General Motors covers a period of 45 years, going back to 1914 when Pierre S. du Pont, Irenee du Pont and John J. Raskob individually purchased shares in General Motors. In 1917, on Raskob's recommendation (he was treasurer of du Pont), the du Pont Company decided to acquire $25,000,000 worth of the common stock of General Motors, which amounted to approximately 23% of the outstanding issue. Subsequent transactions first increased and then decreased the percentage of stock owned by du Pont. By 1939 it was back to 23% and remained at that figure through the period covered by this lawsuit.

Raskob's report to the Finance Committee of du Pont in 1917, which was the basis for the decision to purchase General Motors stock, gave several reasons, in addition to the investment potential, to justify the purchase. They were:

"1. With Mr. Durant we will have joint control of the companies.

* * * * * *

"5. Our interest in the General Motors Company will undoubtedly secure for us the entire Fabrikoid, Pyralin, paint and varnish business of those companies, which is a substantial factor."

William C. Durant at the time controlled just over 50% of General Motors stock.

By 1917 du Pont had already acquired the Fabrikoid Company (1910), the largest manufacturer of artificial leather in the country; the Arlington Company (1915), one of the two largest manufacturers of celluloid in the country; the Fairfield Rubber Company (1916), a manufacturer of rubber-coated fabrics for automobiles, whose principal customer was the Ford Motor Company; the Harrison Brothers & Company, Inc. (1917), the Beckton Chemical Company (1917), and the Bridgeport Wood Finishing Company (1917). The three latter companies manufactured paints and varnishes.

In 1918, after the acquisition of the General Motors stock, du Pont purchased the controlling interest in Flint Varnish & Chemical Works, which had been supplying almost all the paint requirements of Buick, Oakland, Olds and Chevrolet, components of General Motors. Flint also sold to other automobile manufacturers. By 1920 the Flint company could not meet the demand of General Motors and its other customers, and business was being lost to competitors of du Pont. In order to enlarge its paint product capacity, du Pont purchased the majority interest in the Chicago Varnish Company.

By reason of du Pont's purchase of the original 23% stock interest, it nominated six members of the 20-member Board of Directors of General Motors. During the period 1920 to 1923 the number of directors was increased to 31, but the number of du Pont nominees remained at six. During the same period the committees of the board of General Motors consisted of the Finance Committee and the Executive Committee, both of which were controlled by du Pont nominees.

In 1920, because of personal financial difficulties, Durant was forced to liquidate his interest in General Motors. As a result du Pont increased its holdings in General Motors to 38% of the common stock. Pierre du Pont became president of General Motors in order to more closely supervise its financial operations. He resigned in 1923 when he felt this objective had been achieved. During his tenure as president of General Motors he was also chairman of the Board of Directors of both General Motors and du Pont.

In 1921 Raskob indicated that point one of his 1917 memorandum was more than achieved with Durant's departure. In a report to the directors of du Pont on its investment in General Motors, he stated: "As the Directors know we are now in control of the company and are completely responsible for its politics and management * * *." I find that, up to the time in 1923 when Pierre du Pont resigned as president of General Motors, du Pont had active control of General Motors.

With the election of Alfred P. Sloan as president of General Motors in 1923, a distinct change took place. He had been a member of the Board of Directors of General Motors since 1918, when a corporation of which he was president was purchased by General Motors. Sloan proved to be an outstanding executive. He developed the top management of the corporation into two distinct groups, financial and operational. The Board of Directors maintained its over-all jurisdiction of management, but the basic work was done by two of its committees —Executive and Finance. The Executive Committee concerned itself with operations and management of the business. The Finance Committee dealt with the availability and allocation of capital for operating the business, review of earnings for the purposes of recommending dividend policy, and administration of the bonus plan. The make-up of these committees will be discussed below.

Sloan was subsequently elected a member of the Board of Directors of du Pont, but he attended...