United States Steel Corporation v. Fortner Enterprises, Inc
| Decision Date | 22 February 1977 |
| Docket Number | No. 75-853,75-853 |
| Citation | 97 S.Ct. 861,51 L.Ed.2d 80,429 U.S. 610 |
| Parties | UNITED STATES STEEL CORPORATION et al., Petitioners, v. FORTNER ENTERPRISES, INC |
| Court | U.S. Supreme Court |
In exchange for respondent real estate development corporation's promise to purchase prefabricated houses to be erected on certain land, petitioner United States Steel Corp.'s Home Division (the manufacturer of the houses) and petitioner Credit Corp., a wholly owned subsidiary that provides financing to the Home Division's customers, agreed to finance respondent's cost of acquiring and developing the land. After difficulties arose while the development was in progress, respondent brought a treble-damages action against petitioners, alleging that the transaction was a tying arrangement forbidden by the Sherman Act, because the competition for prefabricated houses (the tied product) was restrained by petitioners' abuse of power over credit (the tying product). After this Court, in a prior review of the case upon reversing a summary judgment in petitioners' favor, held that the agreement affected a "not insubstantial" amount of commerce in the tied product and that respondent was entitled to an opportunity to prove that petitioners possessed "appreciable economic power" in the market for the tying product, the District Court ultimately held that the evidence justified the conclusion that petitioners did have sufficient economic power in the credit market to make the tying arrangement unlawful, and the Court of Appeals affirmed. That evidence related to four propositions: (1) petitioner Credit Corp. and the Home Division were owned by one of the Nation's largest corporations; (2) petitioners entered into tying arrangements with a significant number of customers in addition to respondent; (3) the Home Division charged respondent a noncompetitive price for its prefabricated houses; and (4) the financing provided to respondent was "unique," primarily because it covered 100% of respondent's acquisition and development costs. Held: The record does not support the conclusion that petitioners had appreciable economic power in the market for credit, the tying product. Where the record merely shows that the credit terms are unique because the seller was willing to accept a lesser profit or to incur greater risks than its competitors, such uniqueness does not give rise to any inference of economic power in the credit market. The unusual credit bargain offered to respondent proves nothing more than a willingness to provide cheap financing in order to sell expensive houses, and without any evidence that the Credit Corp. had some cost advantage over its competitors or could offer a form of financing that was significantly differentiated from that which other lenders could offer if they so elected the unique character of its financing does not support the lower courts' conclusion that petitioners had the kind of economic power that respondent had the burden of proving in order to prevail. Pp. 614-622.
523 F.2d 961, reversed.
Macdonald Flinn, New York City, for petitioners.
Kenneth L. Anderson, Louisville, Ky., for respondent.
In exchange for respondent's promise to purchase prefabricated houses to be erected on land near Louisville, Ky., petitioners agreed to finance the cost of acquiring and developing the land. Difficulties arose while the development was in progress, and respondent (Fortner) commenced this treble-damages action, claiming that the transaction was a tying arrangement forbidden by the Sherman Act. Fortner alleged that competition for prefabricated houses (the tied product) was restrained by petitioners' abuse of power over credit (the tying product). A summary judgment in favor of petitioners was reversed by this Court. Fortner Enterprises v. United States Steel Co., 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (Fortner I ). We held that the agreement affected a "not insubstantial" amount of commerce in the tied product and that Fortner was entitled to an opportunity to prove that petitioners possessed "appreci- able economic power" in the market for the tying product. The question now presented is whether the record supports the conclusion that petitioners had such power in the credit market.1
The conclusion that a violation of § 1 of the Sherman Act 2 had been proved was only reached after two trials. At the first trial following our remand, the District Court directed a verdict in favor of Fortner on the issue of liability, and submitted only the issue of damages to the jury. The jury assessed damages, before trebling, of $93,200. The Court of Appeals reversed the directed verdict and remanded for a new trial on liability. 452 F.2d 1095 (CA6 1971), cert. denied, 406 U.S. 919, 92 S.Ct. 1773, 32 L.Ed.2d 119. The parties then waived the jury; the trial judge heard additional evidence, and entered extensive findings of fact which were affirmed on appeal. 523 F.2d 961 (6 Cir. 1975). Both courts held that the findings justified the conclusion that petitioners had sufficient economic power in the credit market to make the tying arrangement unlawful.
Before explaining why we disagree with the ultimate conclusion of the courts below, we first describe the tying arrangement and then summarize the findings on the economic-power issue.
Only the essential features of the arrangement between the parties need be described. Fortner is a corporation which was activated by an experienced real estate developer for the purpose of buying and improving residential lots. One petitioner, United States Steel Corp., operates a "Home Division" which manufactures and assembles components of prefabricated houses; the second petitioner, the "Credit Corp.," is a wholly owned subsidiary, which provides financing to customers of the Home Division in order to promote sales. Although their common ownership and control make it appropriate to regard the two as a single seller, they sell two separate products prefabricated houses and credit. The credit extended to Fortner was not merely for the price of the homes. Petitioners agreed to lend Fortner over $2,000,000 in exchange for Fortner's promise to purchase the components of 210 homes for about $689,000. The additional borrowed funds were intended to cover Fortner's cost of acquiring and developing the vacant real estate, and the cost of erecting the houses.
The impact of the agreement on the market for the tied product (prefabricated houses) is not in dispute. On the one hand, there is no claim nor could there be that the Home Division had any dominance in the prefabricated housing business. The record indicates that it was only moderately successful, and that its sales represented a small fraction of the industry total.3 On the other hand, we have already held that the dollar value of the sales to respondent was sufficient to meet the "not insubstantial" test described in earlier cases. See 394 U.S., at 501-502, 89 S.Ct. at 1257-58. We therefore confine our attention to the source of the tying arrangement petitioners' "economic power" in the credit market.
The evidence supporting the conclusion that the Credit Corp. had appreciable economic power in the credit market relates to four propositions: (1) petitioner Credit Corp. and the Home Division were owned by one of the Nation's largest corporations; (2) petitioners entered into tying arrangements with a significant number of customers in addition to Fortner; (3) the Home Division charged respondent a noncompetitive price for its prefabricated homes; and (4) the financing provided to Fortner was "unique," primarily because it covered 100% of Fortner's acquisition and development costs.
The Credit Corp. was established in 1954 to provide financing for customers of the Home Division. The United States Steel Corp. not only provided the equity capital, but also allowed the Credit Corp. to use its credit in order to borrow money from banks at the prime rate. Thus, although the Credit Corp. itself was not a particularly large company, it was supported by a corporate parent with great financial strength.
The Credit Corp.'s loan policies were primarily intended to help the Home Division sell its products.4 It extended credit only to customers of the Home Division, and over two-thirds of the Home Division customers obtained such financing. With few exceptions, all the loan agreements contained a tying clause comparable to the one challenged in this case. Petitioner's home sales in 1960 amounted to $6,747,353. Since over $4,600,000 of these sales were tied to financing provided by the Credit Corp.,5 it is apparent that the tying arrangement was used with a number of customers in addition to Fortner.
The least expensive house package that Fortner purchased from the Home Division cost about $3,150. One witness testified that the Home Division's price was $455 higher than the price of comparable components in a conventional home; another witness, to whom the District Court made no reference in its findings, testified that the Home Division's price was $443 higher than a comparable prefabricated product. Whether the price differential was as great as 15% is not entirely clear, but the record does support the conclusion that the contract required Fortner to pay a noncompetitive price for the Home Division's houses.
The finding that the credit extended to Fortner was unique was based on factors emphasized in the testimony of Fortner's expert witness, Dr. Masten, a professor with special knowledge of lending practices in the Kentucky area. Dr. Masten testified that mortgage loans equal to 100% of the acquisition and development cost of real estate were not otherwise available in the Kentucky area; that even though Fortner had a deficit of $16,000, its loan was not guaranteed by a shareholder, officer, or other person interested in its business; and that the interest rate of 6% represented a low...
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