United States v. Masonite Corporation

• Decision Date: 06 August 1941
• Citation: 40 F. Supp. 852
• Parties: UNITED STATES v. MASONITE CORPORATION et al.
• Court: U.S. District Court — Southern District of New York

40 F. Supp. 852

UNITED STATES v. MASONITE CORPORATION et al.

District Court, S. D. New York.

August 6, 1941.

Thurman Arnold, Asst. Atty. Gen. (Hugh B. Cox and Samuel S. Isseks, Sp. Assts. to Atty. Gen., and Marcus A. Hollabaugh and Robert C. Barnard, Sp. Attys., both of Washington, D. C., of counsel), for plaintiff.

Breed, Abbott & Morgan, of New York City (Charles H. Tuttle, of New York City, Louis Quarles, of Milwaukee, Wis., Fletcher Lewis, of Chicago, Ill., Herbert H. Dyke, of Laurel, Miss., Thomas E. Kerwin, of New York City, and John M. Coates, of Chicago, Ill., of counsel), for Masonite Corporation.

LeBoeuf, Machold & Lamb, of New York City (Walter F. Kaufman, of Lancaster, Pa., and Horace R. Lamb and Craigh Leonard, both of New York City, of counsel), for Armstrong Cork Co.

Cravath, DeGersdorff, Swaine & Wood, of New York City (Andrew J. Dallstream, of Chicago, Ill., and T. A. Halleran, of New York City, of counsel), for Celotex Corporation.

Hughes, Richards, Hubbard & Ewing, of New York City (Oscar R. Ewing and William T. Gossett, both of New York City, of counsel), for Certain-Teed Products Corporation.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (Porter R. Chandler and Taggart Whipple, both of New York City, of counsel), for Johns-Manville Sales Corporation.

Sullivan & Cromwell, of New York City (Allen W. Dulles and William Piel, Jr., both of New York City, of counsel), for Flintkote Co.

Milbank, Tweed & Hope, of New York City (Timothy N. Pfeiffer and Grenville S. Sewall, both of New York City, of counsel), for Insulite Co.

Elmer E. Finck, of Buffalo, N. Y. (Elmer E. Finck, of Buffalo, N. Y., and Henry K. Urion, of New York City, of counsel), for National Gypsum Co.

Lawrence C. Hull, Jr., of New York City (Lawrence C. Hull, Jr., of New York City, and Charles W. Briggs, of St. Paul, Minn., of counsel), for Dant & Russell, Inc., and Wood Conversion Co.

COXE, District Judge.

This is a suit by the United States to enjoin Masonite Corporation, Celotex Corporation and eight other corporations from further alleged violations of the Sherman and Clayton anti-trust laws, 15 U.S.C.A. §§ 1, 2 & 14.

The complaint charges that in the manufacture and distribution of "hardboard", a synthetic wood product, the defendants have been, and still are, engaged in a conspiracy (1) to restrain trade in violation of Section 1 of the Sherman Act, 15 U.S.C.A. § 1; and (2) to monopolize trade in violation of Section 2 of the same Act, 15 U.S.C.A. § 2. It is also charged that various agreements between the defendants are in violation of Section 3 of the Clayton Act, 15 U.S.C.A. § 14.

The case was tried largely on agreed facts. These were supplemented by some oral and some stipulated testimony. There is, however, no serious dispute with respect to any of the essential facts.

The principal attack of the Government concerns the alleged violation by the defendants of Section 1 of the Sherman Act, 15 U.S.C.A. § 1.

The term "hardboard" is widely understood to mean the patented product manufactured by Masonite Corporation under the basic Mason patent, No. 1,663,505, issued March 20, 1928; this product is to be distinguished from insulation board, which is a softer board produced in different ways by various manufacturers, and not directly involved in the present litigation.

Hardboard is a homogeneous, hard, dense, grainless fiber board product made from wood or woody material. It is used in the building industry as wall board, for decorative panelling, for exterior covering, for waterproof panelling in kitchens and bathrooms, for flooring and sub-flooring, for ceilings, and for forms into which concrete is poured; in addition, it has found increasing use in other industries, such as the furniture, toy, advertising, pleasure boat, automobile and motion picture industries.

In 1925, Mason, the inventor of hardboard, was instrumental in organizing the Masonite Corporation (then called Mason Fibre Company) to exploit the invention. This corporation established a manufacturing plant at Laurel, Mississippi, and it was there that the first commercial production of hardboard took place in 1926. Since then, the annual production at the Laurel plant has greatly increased the net dollar volume in 1940 amounting to $7,821,797.55.

The Celotex Company (predecessor of the present defendant Celotex Corporation) was, as far back as 1920, a pioneer in the development of structural insulation; it had a large plant at Marrero, Louisiana, where its insulation products and other building materials were manufactured, and it distributed these products through a vast number of local lumber dealers throughout the country.

In or about 1929, the Celotex Company started the manufacture at its Marrero plant of a hard panel board made from bagasse, a sugar cane fiber, which it proceeded to sell in competition with the Masonite hardboard. The Masonite Corporation at once charged the Celotex Company with infringement of a number of its patents, including patent No. 1,663,505, and in 1931 instituted suit against the Celotex Company in the District Court in Delaware for infringement of patent No. 1,663,505. This suit was bitterly contested by the Celotex Company, and resulted in a decision by the Circuit Court of Appeals for the Third Circuit on July 6, 1933, holding two product and four process claims of the patent valid and infringed. Masonite Corporation v. Celotex Co., 66 F.2d 451. The Masonite Corporation was thus left with a final decision adjudicating the validity of a number of basic claims of the patent, and construing these claims with a sufficient breadth to cover the Celotex product made from bagasse.

While the infringement suit was pending, the Celotex Company went into the hands of receivers, and the business was still being conducted by the receivers when the decision of the Circuit Court of Appeals came down on July 6, 1933. The problem then confronting the Celotex receivers was a serious one, for it was realized that if the decision stood, the Celotex Company would be cut off from a supply of hard panel board to round out its line of building products, and it would have to face a large claim by the Masonite Corporation for damages and profits. It was also felt that there was little chance that the decision would be reviewed by the Supreme Court because of the absence of conflicting rulings in different circuits. See Triplett v. Lowell, 297 U.S. 638, 644, 56 S.Ct. 645, 80 L.Ed. 949.

The problem for the Masonite Corporation was likewise a difficult one even though it had succeeded in the patent litigation; the credit of the company was seriously impaired, the operations at the Laurel plant were almost at a complete standstill, and urgent measures were required to keep the business alive. What the company particularly needed was a larger national distribution of its products, and it was realized that this could only be obtained by securing a much greater number of dealer contacts than the company possessed. Celotex had these contacts, and it was thought that some settlement of existing differences between the two companies might be worked out by which the Celotex dealer contacts would be made available to the Masonite Corporation in the distribution of hardboard products. It was with this mainly in view that negotiations looking to a settlement were opened with the Celotex receivers, and, after considerable discussion, the terms of an agreement were arrived at, which, in effect, accepted the decision of the Circuit Court of Appeals with respect to the patent, released the Celotex Company from any claims of the Masonite Corporation for damages or profits, and constituted the Celotex Company an agent of the Masonite Corporation to sell Masonite hardboard products.

The agreement between the two companies was signed on October 10, 1933; it was executed by one of the Celotex receivers acting under court authority, and on the conclusion of the reorganization proceedings relating to the Celotex Company in 1935, the agreement was assumed by the new Celotex Corporation, one of the present defendants. Similar agency agreements were subsequently executed in 1933 by Masonite Corporation with National Gypsum Company, Johns-Manville Sales Corporation, Armstrong-Newport Company (a subsidiary of Armstrong Cork Company), and Hawaiian Cane Products Ltd. Each of these corporations was engaged in manufacturing and selling building products, and all needed the Masonite patented hardboard to complete their respective selling lines. The remaining defendants (other than the Masonite Corporation) later executed agency agreements with the Masonite Corporation containing terms substantially identical with those of the agreements in force at the time with the other selling agents.

In the operation of the first agency agreements there were minor controversies between the Masonite Corporation and the various agents with respect to the meaning of certain provisions of the agreements, and on Oct. 29, 1936, supplemental agreements were executed with all of the then existing agents clarifying the language on the disputed points. These supplemental agreements did not in any way change the agency relationships created by the earlier agreements, and continued to be operative until after the present suit was started, when an effort was made to remove from the agreements a number of provisions which had been criticised by the Government. This resulted in the preparation of an entirely new agency agreement, which was executed separately by all of the agents, dated March 20, 1941, but which did not actually become effective until April 1, 1941.

The Government insists that these various agency agreements, executed from time to time by the defendants, are not true agency agreements; that they are illegal under the anti-trust laws because they regulate the prices at which hardboard products may be sold by the different agents; and that further operations...