Grumman Corp. v. LTV Corp.

• Decision Date: 14 October 1981
• Docket Number: No. CV 81 3156.,CV 81 3156.
• Citation: 527 F. Supp. 86
• Parties: GRUMMAN CORPORATION, Plaintiff, v. The LTV CORPORATION, CKH Corporation, Jones & Laughlin Industries, Inc., and Vought Corporation, Defendants.
• Court: U.S. District Court — Eastern District of New York

527 F. Supp. 86

GRUMMAN CORPORATION, Plaintiff, v. The LTV CORPORATION, CKH Corporation, Jones & Laughlin Industries, Inc., and Vought Corporation, Defendants.

No. CV 81 3156.

United States District Court, E. D. New York.

October 14, 1981.

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Cahill Gordon & Reindel, New York City, for plaintiff; Raymond L. Falls, Jr., David R. Hyde, Immanuel Kohn, William T. Lifland, Dudley B. Tenney, New York City, of counsel.

Davis, Polk & Wardwell, New York City, for defendants; Henry L. King, Bartlett H. McGuire, Arthur F. Golden, Paul R. Koepff, Andrew C. Jacobs, William L. Rosoff, David W. Ferguson, New York City, of counsel.

Memorandum of Decision

MISHLER, District Judge.

Plaintiff Grumman Corporation ("Grumman") instituted this action on September 28, 1981 to enjoin, inter alia, its acquisition by CKH Corporation, an indirect wholly-owned subsidiary of the LTV Corporation, which had four days earlier commenced a tender offer for the common stock, convertible preferred stock and convertible subordinated debentures of Grumman representing or convertible into an aggregate of 70% of Grumman's outstanding voting shares. The proration date and the date upon which withdrawal rights expire is 12:01 a. m., October 16, 1981.

Plaintiff moved for a preliminary injunction which this court made returnable on October 6, 1981. Based upon the evidence adduced through the testimony offered at the two-day hearing, the affidavits, the depositions and the exhibits offered in conjunction therewith, plaintiff attempted to establish its right to preliminary relief based upon Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Sections 14(d) and 14(e) of the 1934 Act, 15 U.S.C. §§ 78n(d) and 78n(e), and the rules and regulations promulgated thereunder. Because we believe that plaintiff has satisfied the standards for a preliminary injunction, its motion must be granted.

I. The Parties

Grumman is a New York corporation, and, as is pertinent to the instant antitrust claim, is engaged in the business of designing and producing military aircraft, space systems and commercial aircraft component subassemblies.¹ The LTV Corporation ("LTV") is a Delaware corporation as is its subsidiary, Vought Corporation ("Vought"), through which LTV is engaged in business in the aerospace industry. In the past twenty years Vought and Grumman have been formidable competitors in the design, development and production of military aircraft, commercial aircraft components and subassemblies as well as other aerospace products.

II. The Antitrust Claim

The initial question for consideration is whether the acquisition by LTV (through its subsidiary CKH Corporation) of the stock of Grumman "may be substantially to lessen competition, or tend to create a monopoly" in the design, production and sale of various aerospace products within the meaning of Section 7 of the Clayton Act. That statute, which was "designed to arrest in its incipiency ... the substantial lessening of competition" due to the takeover of one company by another, United States v. E. I. duPont de Nemours & Co., 353 U.S. 586, 589, 77 S.Ct. 872, 875, 1 L.Ed.2d 1057 (1957) (emphasis added), provides:

No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital ... of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.

The first inquiry made in any Section 7 case is, of course, into market definition, i. e., the determination of the relevant lines of commerce. See United States v. Aluminum Company of America, 377 U.S. 271, 273, 84 S.Ct. 1283, 1285, 12 L.Ed.2d 314 (1964). Only after defining the scope of the market can the court determine which parties are competitors and whether competition might be lessened. We lament only that our task is not so easy as our understanding of what our task is.

A. Relevant Markets

The antitrust claims involve alleged horizontal competition in three claimed separately cognizable markets for purposes of Section 7: carrier-based aircraft sold to the United States Navy,² airframe subassembly contracting and nacelles (the structure and the hydraulic fuel and electrical systems that surround and enclose aircraft engines). LTV takes the position that none of the aforementioned product categories constitute relevant markets or submarkets. Instead, LTV appears to suggest that only two markets are appropriate for our present purposes: military aircraft and commercial aircraft.

The factors generally used for the determination of relevant product markets were identified by the Supreme Court in Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). We believe the indicia of separate submarkets as outlined in Brown Shoe are also sensibly applied here.

The Supreme Court has instructed us that although "the outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it," that market may be composed of various well-defined submarkets for antitrust purposes. Brown Shoe Co. v. United States, 370 U.S. at 325, 82 S.Ct. at 1523-24. Prior to suggesting how those submarkets should be identified, the Court noted that a merger "must be functionally viewed in the context of its particular industry." Id. at 322, 82 S.Ct. at 1522. It is with this perspective that we set out in our effort to define the relevant market(s) with the aid of the various "practical indicia" identified by the Court: "industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes and specialized vendors." Id. at 325, 82 S.Ct. at 1524.

1. Carrier-Based Aircraft

We note at the outset that another court has recently found that comparable models of land-based aircraft and carrier-based aircraft constitute different submarkets. See Northrop v. McDonnell Douglas Corp., 498 F.Supp. 1112, 1122 (C.D.Cal.1980). After considering each of the Brown Shoe factors we come to the same conclusion.

a. Products' Peculiar Characteristics

The cross-elasticity of demand between the two products for use on an aircraft carrier is nonexistent. Relative to land-based aircraft, the carrier-based aircraft must have superior handling characteristics at low speeds, must be able to withstand greater landing impact and longitudinal stress, and must be able to endure more severe weather conditions. While other differences do exist, we need not address them since it is clear that land-based aircraft are not suited for the same uses as carrier-based aircraft.

b. Industry and Navy Recognition of the Submarket as a Separate Economic Entity

Evidence presented at the hearing established that the aerospace industry distinguishes between the two types of aircraft in terms of the products and their producers, i. e., the industry recognizes an aircraft is not carrier-suitable unless manufactured by a company with experience in manufacturing carrier-based aircraft. Such recognition derives from the Navy's unwillingness to award contracts to manufacturers without such experience or without the assistance of a manufacturer having such experience. The evidence on this point was overwhelming and included testimony given by William Thayer, Chief Executive Officer of LTV, who, though he disputed the basis for such a posture, acknowledged that the Navy only considers an aircraft carrier-suitable if manufactured by a company that has, or is associated with a manufacturer that has, such experience.

Clearly, even more important than that industry recognition in this instance is consumer recognition. The Navy defines the market for carrier-suitable aircraft. As stated by Judge Real in Northrop v. McDonnell Douglas Corp., 498 F.Supp. at 1123:

"The United States Government is the market concerned with production and distribution of weapons systems for governmental military establishments. As such, this differs from the basic thrust of antitrust laws applicable to governmental procurement practices in competition with consumer enterprises buying goods generally available in the marketplace. The United States Government also makes the world market. No single group of producers has any power to expand a market share beyond that considered by the United States Government in the implementation of domestic defense and foreign policy which is in the best interest of its citizens."

(emphasis supplied in original).

The Navy's perception of competent producers as consisting only of those with carrier-based aircraft experience, or those having the benefit of the advice of such manufacturers, is most significant in defining the market. Whether the Navy's perception is justified is irrelevant.

Each of the other Brown Shoe indicia also point to a finding of a separately cognizable submarket in carrier-based aircraft which we find to be a relevant market.

2. Major Airframe Subassemblies

Plaintiff produced impressive evidence at the hearing on the existence of a submarket in the subcontracting of major airframe assemblies for large civil aircraft in the form of testimony from Mr. R. Dixon Speas, an aviation consultant for thirty years. Without offering any expert testimony to the contrary, LTV asserts that since subcontractors simply perform the work that prime contractors choose not to perform, but could perform and sometimes do perform, the relevant market is composed of both subcontractors and prime contractors.³ However, the expert testimony was to the effect that the primes are not capable of...