UNITED STATES v. PENN-OLIN CO.

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Argument of Archibald Cox

Chief Justice Earl Warren: Number 503, United States, Appellant, versus Penn-Olin Chemical Company, et al.

Mr. Solicitor General.

Mr. Archibald Cox: Mr. Chief Justice, may it please the Court.

This case here on appeal from the District of Delaware raises a novel and an unusually interesting question under the antitrust laws.

It's novel also in that the facts are essentially very simple.

Two of the appellees, Pennsalt and Olin Mathieson, each a large well equipped firm, actively interested in entering an important market on its own, although not fully committed to the venture, agreed to combine forces and to enter the market jointly, thereby, foreclosing any possibility of competition between the two in that market, either immediately or sometime in the longer run in the future.

The ultimate question here is whether that combination violated, which was accomplished through a subsidiary corporation whose stock they acquired, violated either Section 7 of the Clayton Act or Section 1 of the Sherman Act.

The question -- neither the question nor any question like it has been before this Court previously.

The District Court prepared a careful and independent-minded opinion, which not only establishes the facts, but which I think offers the best avenue for coming to grips with the legal issues in the case.

The Court found that in the southeastern United States, there's an important market for sodium hydrochloride, a chemical that is used in the pulp and paper industry for the purposes of bleaching.

Sodium hydro -- hydrochloride is the, agreed to be, the line of commerce in the case and the southeastern United States are agreed to be the relevant section of the country.

In 1959, there were three suppliers in that market.

Hooker was a plant in Mississippi, which sold 49% of the market, American Potash, also, was a plant in Mississippi, which sold 41% and Pennsalt, which sold just under 9%.

I should say that Pennsalt's ability to compete in the market with its existing plants was distinctly limited by the fact that the only plant in existence was way out on the west coast, so that for all practical purposes, you had only two suppliers.

During the 1950s, the southeastern market for sodium hydrochloride became more and more attractive to new investors.

Olin Mathieson and Pennsalt, each gave long and careful consideration to building its own sodium hydrochloride plant in the southeast.

The District Court expressly found on page 1574, that's in volume 2 of the record, that Pennsalt and Olin, right at the top of the page, "Each had had extensive background in sodium chloride," skipping, "That a suitable location for a plant was available to each company and then, in short, that Pennsalt and Olin, each possessed the resources and general capability needed to build its own plant in the southeast and to compete with Hooker and Am-Pot, American Potash, in that market.

"The Court also discussed the deliberations of each individual management about individual entry and concluded back on page 1573, at the bottom of the text and above the footnote, the possibility of individual entry into the southeastern market had not been completely rejected by either Pennsalt or Olin before they decided upon the joint venture.

I ought to pause here to call attention to page 16 of the appellees' brief where they quote an excerpt from the testimony of Olin's president intended to indicate that Olin had not -- had decided not to build the plant on its own even if there were no joint venture.

Now, that argument was made to the District Court and the District Court squarely rejected it when it found that the possibility of individual entry had not been completely rejected by either before they decide it upon the joint venture.

Furthermore, that finding, as a footnote to the opinion, immediately below the quotation, the opinion shows, was based upon the statement of Olin's own president in his deposition which was introduced in evidence.

The reference unhappily is not there and we neglected to print the deposition but, of course, it's here in the Court.

The reference as to plaintiff's Exhibit 402, unprinted in full, pages 28 and 29 of the original exhibit and there, the president stated as quoted, "That the question had never reached the point of final decision".

Furthermore, the testimony quoted by counsel, as they also overlook, was qualified on cross-examination and it was substantially inconsistent with testimony by one of Olin's vice president, both in his deposition and also as given at the trial.

So that, I think that the findings so amply supportive were certainly entitled to take it as a fact in this Court that Olin, like Pennsalt, had not turned its back on the possibility of individual entry.

I now come to the crux of the matter, both in the opinion and in our analysis of the case.

On page 1575, after finding at the start of the first full paragraph, that Olin and Pennsalt, each had the capability of building a plant and competing individually.

The District Court ruled "that those facts were important,"skipping a few lines, "only -- only as a factor in determining whether, as a matter of probability, both companies would have entered the market as individual competitors if Penn and Olin had not been formed.

Only in this event", the Court said "would potential competition between the two companies have been foreclosed by the joint venture.

" He then went on to say that there was no evidence to support a finding that there was a probability that both companies would've simultaneously entered the bargain and he held that if we fail to prove that, we were entitled to judgment only if we showed that Penn-Olin, the subsidiary combination, would be a less effective competitor than Olin alone or Pennsalt alone.

Well, of course, we made no such claim, could make no such claim and the District Court, thereupon, entered judgment for the defendants and the complaint was dismissed.

Now, our first contention in this Court is that the District Court erred in holding that the United States, in order to prove a violation of Section 7, was required to demonstrate a probability that both Olin and Pennsalt would've shortly built hydrochloride markets -- hydrochloride plants in the absence of Penn-Olin.

Our view is that if one company would've entered the market and the other would've remained in the wings as a potential competitor available to enter, if the commercial opportunities became sufficiently attractive, then the foreclosure of that future potential competition by the combination rendered it one which may substantially lessen competition within the meaning of Section 7.

The defect in the reasoning of the District Court, it seems to us, is that it took much too short-range of view of the matter and it, therefore, completely overlooked the benefit to the market of having one firm in it and an additional strong firm fully capable of entering the market, sitting on the sidelines, able to become a supplier if the price situation should warrant, if demand should outrun supply or if there were opportunities for technical innovation or other reasons to go in.

There's no reason to suppose, of course, that Penn-Olin would be any weaker than either of the individual firms and indeed, there's no reason to suppose that it was stronger than either of the individual firms.

If one looked only at the immediate future and supposed that there would be only one entering, then it wouldn't matter at all whether it was Penn-Olin that went in, Olin went in or the third one went in, but the difference is that you can't take so short-range of view.

The Clayton Act, like businessmen, is concerned with projecting ahead, 5, 10, 15 years of prophylactic measure and the difference between -- if Olin went in alone, you would've still had Pennsalt there.

If Pennsalt went in alone, you would've still had Olin there, but when you have Penn-Olin go in, you have neither available as a prospective future entry.

And the existence, as I need hardly argue, of a prospective future entry, especially where there is a concentration of economic power as there was in this market, only two present firms, it's only new -- one new and apparently going in, is extremely important because it fixes a limit, not as good as existing competitors but nevertheless, some limit upon the market power, the monopoly or oligopolistic power of those who are present.

Justice John M. Harlan: (Inaudible)

Mr. Archibald Cox: I'm -- I'm not -- you mean, what was the state of that market?

There were two firms in the market before the joint venture was embarked upon.

One firm had 49% and the other firm had 41%.

Pennsalt was able to ship a little from the west coast but I can't claim on the findings that that shipment was particularly important.

So, there were only two at the time of the joint venture.

The joint venture went in.

Later, Pittsburgh Plate Glass went in but it had not announced at the time of the joint venture.

And indeed, it's going in, we think, confirms our view that there were still further opportunities which one of these companies might have taken up.

The antitrust laws have long recognized that potential competition helps to set a limit upon the market power of the producers already in the field.

That potential entrants are rarely, perhaps, never as good as actual competitors there, still isn't a reason for not preserving the protection to the consumer on the public of the prospective entry.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, I think there -- I think we ultimately come to that, Mr. Justice.

My argument, in a sense, has two aspects and maybe I should've taken the time to lay them out at the start.

The first branch of it is that the District Court erred in saying that we could recover only if we prove that both would then and there have gone in.

When I say would, I mean a probability that both would then and there have gone in.

Now, we say at the very minimum that that was wrong.

That if we show the probability that one would go in while the other remained a potential competitor, then, at least, we were entitled to judgment and it's really to that point that I'm addressing myself at the moment that we're entitled to the chance to show that, then we do go on.

We wouldn't be content with that, but I wanted to make that point first.

After discussing that a little farther, then I shall go on and argue, as we've argued in our brief, that we were entitled to judgment on the findings of the District Court plus a few other specific facts and that what we say, I'll elaborate it later, but what we say essentially is that given the conditions that existed in this case, and I shall generalize them because we would say given the same conditions in any case, then the probabilities that either would go in or both would go in are high enough so that the public is better protected relying on the free interplay of the market than it is by allowing these two people to interfere with the operation of the basic forces that are the foundation of our theory of a free enterprise economy.

Now, I've -- I hope I've said enough to carry us ahead.

I shall, of course, have to discuss the problem of probabilities in much more detail as I go along, but at the moment as I say, I'd say that at worst, we were at least entitled to show that here, there was a probability that one would've gone in because while that would've been the same situation as if Olin -- as if Penn-Olin went in, you still would have the additional advantage of the additional competitor -- the additional potential competitor.

Justice Potter Stewart: You -- you were allowed to show that, weren't you?

You were allowed --

Mr. Archibald Cox: Well, the judge refused --

Justice Potter Stewart: -- you weren't (Voice Overlap) proof.

Mr. Archibald Cox: -- I perhaps shouldn't have said allowed to show.

There was no finding upon the point.

Justice Potter Stewart: Now, you said the best postulate that's --

Mr. Archibald Cox: Well, I don't -- I doubt that we're entitled to claim that that was a finding in our favor.

If it was, then I think I'm home, but I take it that what he really was doing was making an assumption and saying that this is the --

Justice Potter Stewart: Most of it could possibly be argued.

Mr. Archibald Cox: I think that's all I could -- can fairly claim with that.

Perhaps, he would've found it.

This was an unusual opinion in one respect because instead of deciding who was going to win and then finding all the facts against the other party, the judge seems really to have faced the fact and tried to apply the law to them.

It makes the case a lot easier to discuss even if he was wrong.

Justice Byron R. White: Understanding the findings of the District Court, I suppose it's important to know what the theory of the Government was in the District Court.

Did the Government urge this theory, the theory urged in here?

Mr. Archibald Cox: Well, I haven't read the briefs.

It certainly urged it in essence, I think.

Justice Byron R. White: I thought the Government's position in the trial court was what competition was furnished by the -- by the joint venture is wholly irrelevant.

It shouldn't even be considered by the District Court.

Mr. Archibald Cox: Well, you mean by -- by the --

Justice Byron R. White: I mean -- I mean that (Voice Overlap) --

Mr. Archibald Cox: -- any interference with --

Justice Byron R. White: -- it was irrelevant to compare that -- the competition between the joint venture and what would've been true without it, that just the mere making of a joint venture was the -- was the point.

Mr. Archibald Cox: If it went that far, we certainly don't press the position now that any joint venture is a violation of Section 7 or Section 1.

Justice Byron R. White: (Inaudible) to do with whether or not the Government even attempted to prove what the situation would be absent the joint venture.

Mr. Archibald Cox: Well, it -- it put in a great deal of evidence on that point because the record is filled with evidence bearing upon the probability, we said, that these companies would either or both have gone into this market.

Justice Potter Stewart: But your case in the District Court is very close, asking for a per se rule that the two competitors can't go into a joint venture into a new market.

Mr. Archibald Cox: Well, there's certainly some things --

Justice Potter Stewart: Isn't that right?

Mr. Archibald Cox: -- that suggested that but we wouldn't say, for example, that two weak companies here, each unqualified to go in and compete alone in this market and demonstrably so, would be a violation of Section 7 and Section 1.

We think there must be some further examination than that.

Jumping -- jumping ahead a little bit once more, we suggest that where four -- barely, three, I suppose, though I list them as four conditions are met, then at least, I don't -- I say this is a minimum standard, not the full requirement, then at least, Section 7 and Section 1 forbid the combination.

I would say first, an expanding attractive market in which there are few competitors.

Second, that each company will be engaged in that line of commerce or a closely related line and that it'd be fully equipped in terms of financial resources, technological qualifications, commercial context and experience to go into it.

Third, that if each has demonstrated some sign of interest in going into it, then the probabilities on the average that either both will go in or that one will go in while the other remains on the sideline, are sufficiently great under the ordinary operation of market forces that these laws that are intended to prevent people from interfering with the operation of market forces come into play and it should be found that the combination may substantially lessen competition.

That's the full range of our argument.

As I say, I was back on the smaller point that they -- they really both go along together.

Let me direct myself for a little bit longer to the matter of the importance, all other things being equal, of insisting upon the arrangement where there is one potential entrant, Olin or Pennsalt, still on the sidelines, if the other goes in as Penn-Olin did.

A few examples, I think, make it quite clear that the elimination of such potential competition is an improper lessening of competition.

But suppose that in this case, for example, that Olin had gone to Pennsalt and said, “Well, you're thinking of building in the southeast.

We're thinking of building in the southeast.

We should both go in," that would be murder.

"You go in and build your plant.

"Olin goes to Pennsalt, “Build your plant at Calvert City and we'll agree to stay out for 50 years and let's have an end to the matter or if you'd like it the other way, we'll build our plant at Chattanooga and you'll agree to stay out for 50 years and that's the end of the matter.

"I take it that such an arrangement, if entered into, perfectly, plainly would be one which may lessen competition and which would violate the Sherman Act.

And I take that nobody would say, "Well, you've got to show what are the chances that both would go in next year or the year after.

"That that wouldn't even be a legitimate subject of inquiry nor that you'd appraise the relative merits of the two competing.

Well, here, the arrangement has exactly that same effect on potential future competition.

It eliminates the additional possible entry, not this year, but 5 years ahead, 10 years ahead, whenever it may come about or take a second case.

Suppose we -- we hear a good deal of talk down about the possibility of a turbine motor in an automobile.

Let's suppose that putting such a car on the market for widespread use would involve the construction of a new plant in a radical redesigning of the chassis and body, can there be any question but that if Ford and General Motors combine to set up a subsidiary to enter that market, that it would be a violation of Section 7 and also Section 1?

I think not.

Well, now, you may say that's not entering a geographical market but suppose that -- to take one last illustration, suppose that Atlantic Swimming Pool Company had a new prefabricated swimming pool that it started marketing in the east and was gradually spreading to the west but hadn't yet entered the Mississippi Valley, and that Pacific Swimming Pool Company, an independent concern with its own prefabricated swimming pool, is doing the same thing for the west coast.

I take it's perfectly plain that they couldn't divide the Pacific Valley or that one couldn't agree to go in while the other stayed out or that they couldn't set up a joint subsidiary to go into that geographical matter as long as each was, at least one each, was equipped to do it by itself and had an interest in doing it by itself.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, of course, they don't -- they don't meet some of the conditions I stated and therefore, I -- that would be a harder case and I take it if neither is presently in the line of commerce or that the likelihood that they would go in independently may not, I hesitate to commend myself too categorically but may not be sufficient.

I would think it quite plain if two much smaller steel companies, Mr. Justice, got together for the purpose of entering the market and leaving out, I now see good reason for the caution, leaving out problems of vertical integration preempting possible outlets for steel and such that I don't think anything I'm now saying would be opposed to that.

No, I think there has to be -- we -- we say there must be some distinctions here.

We do say that the distinctions should be based on objective events.

And my argument with respect to these narrow first objective conditions, I should say, rather than events, my argument on this first narrow point, let me conclude it and then go on, is that this case is essentially the same as the hypothetical illustrations that I have put.

Justice Potter Stewart: Well, your hypothetical illustrations all implied a monopolistic situation and as Mr. -- Mr. Justice Goldberg's question revealed, we don't have that in this case as the (Voice Overlap) --

Mr. Archibald Cox: Oh, it seems to me, we -- we don't -- it seems to me that we have, except for my geographical one, at least as narrow as if an -- if not a narrower market.

Justice Potter Stewart: You mean, if -- if (Voice Overlap) --

Mr. Archibald Cox: You can only have two companies in the southeast.

Justice Potter Stewart: You have in there.

You have competition.

Mr. Archibald Cox: Well, just two --

Justice Potter Stewart: And now, additional --

Mr. Archibald Cox: -- I'd call that a duopoly.

I wouldn't call that adequate company.

Justice Potter Stewart: And now, additional competition but if -- if General Motors and Ford have to go in together to build a turbine motor, then you -- that -- that implies a monopoly.

Mr. Archibald Cox: If I would say the same thing --

Justice Potter Stewart: On a different kind of a case on (Voice Overlap) --

Mr. Archibald Cox: -- and expect the Court to say the same thing, if there were two -- if there were two turbine motor manufacturers in the motor, I wouldn't ---

Justice Potter Stewart: (Voice Overlap) --

Mr. Archibald Cox: -- think would it -- I wouldn't think it would affect it yet.

Justice Byron R. White: But the trouble is that the line of commerce met, for example, is an automobile, I suppose and he --

Mr. Archibald Cox: Well, I don't know whether that doesn't make the example less objectionable than this because --

Justice Byron R. White: But I wouldn't think so.

Mr. Archibald Cox: -- there at least, there would be the --

Justice Byron R. White: I wouldn't think so because they've been in competition before this in the -- in -- in automobiles.

In this case, neither Olin nor Pennsalt have been in competition.

Mr. Archibald Cox: Well, they would still, if the line of commerce is automobiles, they would still be in competition with auto -- in automobiles.

Justice Byron R. White: Exactly.

I would --

Mr. Archibald Cox: And if that is objectionable --

Justice Byron R. White: -- I would agree with you, that would be bad but here, neither party has been -- neither party has been engaged in competition with each other and only one of them has ever been in the line of commerce that -- that you admit is the line of commerce.

Mr. Archibald Cox: But Olin has been found fully equipped and --

Justice Byron R. White: Yes, but it's never been engaged in this line of commerce.

Mr. Archibald Cox: It has never sold sodium chlorate.

Justice Byron R. White: The trial court so-found.

Mr. Archibald Cox: But it had been selling many related lines.

It had had vast experience.

Indeed, it had developed a process for the use of this sodium chlorate.

Its chemical division reported to management that sale of sodium chlorate is an essential integral part of this company's business.

Justice Byron R. White: It's so well equipped that when they made the joint venture, they left the other company to run it.

Mr. Archibald Cox: They had to -- they've decided that they should divide it some way.

Indeed, one of the -- one of the misfortunes here is that Olin had been carrying on experimental work on a new type of electrolytic cell which it was expected would reduce the cost of manufacture below anything now known and as soon as the merger came about, they issued instructions to drop that further experiment and development.

I think that while it's true, they weren't, either to a large extent, selling sodium chlorate in the southeast, they both were found on overwhelming testimony to be well equipped to do it and it was plainly a natural development of their existing business.

I don't think you could just take the line of commerce and then say, "We're going to shut our eyes to everything else that surrounds that line of commerce or to everything else that company is doing.

"It seems to me that this is -- be very different from a steel company coming in and doing what Olin did here.

Let me go on to the point I've already mentioned that we think we're entitled to judgment on these facts and try and explain the reasoning in a little more detail.

Justice Hugo L. Black: Do you mean on the facts or on the findings?

Mr. Archibald Cox: On the findings, on the findings.

We take plus one or two facts which aren't and can't be controverted but essentially, Mr. Justice, on the findings.

As I suggested, we think that where there is or where there are two firms available to enter an expanding market in which there are few sellers and attractive opportunities and where those firms are both fully equipped to enter the market interested in doing so as an extension of an existing line of business, that then, any combination between them violates Section 7 and Section 1 because it forecloses too good a prospect that both might enter, then or in the very near future or that one might enter while the other remained a potential or -- while the other remained a potential and perhaps, later, an actual entrant into the field.

Now, the way that I reasoned it out is -- is this.

Given such a situation, as has been suggested by several members of the Court, there are several possibilities.

You could add variations but it seems to me that there are four main possibilities.

One is that both companies will enter the market in the near future.

The second is that one will enter while the other remains a potential entrant if conditions ever warrant.

The third is that the two may combine to enter and the fourth is that nobody may enter at all.

Now, obviously, the desirability of those possibilities ranked in the order in which I've stated it.

From the standpoint of a competitive economy, the best would be the first.

It would be a good deal, better than the second.

The second, as I have been arguing, would be a great deal better than the third and the third is better than the fourth.

Indeed, the fourth is best only if none of the others will come about.

Justice Potter Stewart: The second is better than the third because there would be one waiting in the wings, so that --

Mr. Archibald Cox: There would be one waiting in the wings and in this case, and I mean to emphasize and carry through everything I say in the qualifications, in this case, either was fully equipped to go in alone.

You get an entirely different problem if one or both of the two that combined isn't equipped to do it alone but that's not the fact here.

Now, of course --

Justice Potter Stewart: You -- but you -- I suppose you'd have a different problem or there's a matter of degree as to how many others were waiting in the wings potentially.

Mr. Archibald Cox: The -- yes, the record doesn't show much about that.

Of course, that bears on all these probabilities because if there are others waiting in the wings, there's even less to be said for the joint venture because you're not going to be left with this duopoly.

I mean, it bears on that one as well as on the other.

The record doesn't show much about this.

So far as I can judge, those actually in the wings at the time that this was being considered were these two, plus Pittsburgh Plate Glass, which is usually identified in the record by its subsidiary as Columbia Southern but they are the two -- one and the same, as I understand.

Justice Potter Stewart: And which now has gone in?

Mr. Archibald Cox: Which now has built the plant and then, there was Virginia Chemical or Virginia something Company that I find talked about in some of the documents.

There must have been other companies that could.

We argued in the District Court that there were rumors that there were a number of others but we never were able to prove it, so that I don't purport to be stating anything precise but just as to suggest the general outline of the picture.

Now, of course, we can't always have our (Inaudible) and nobody can control which of these four possibilities will be the one that eventuate.

I suppose that ideally then, what one would have to do would be to estimate in every case the statistical degree of probability, then apply that statistical degree of probability to whatever value we put on the -- each of the various possibilities and strike a balance as to which was the wisest course to follow.

As a matter of fact in this everyday world, however, we have to get along with the tools we have.

There's no way that you can measure with statistical accuracy the degree of probability in each case and there's no way that you can put a mathematical value on each of the potentialities in order to apply the mathematical probability to it.

Certainly, testimony after the event is not in general, likely to be very helpful.

For one thing, it would obviously be self-serving.

There will have been a combination and with the best of goodwill, the corporate officials will be testifying in defense of what they've already done in that.

It would also be highly speculative because the decision that the corporate officer normally faces isn't whether he will go in alone or stay out alone.

He also has, overhanging all the consideration, the possibility of the combined ventures.

This is very clearly shown by the fact that Pennsalt kept saying, "Well, it seems unlikely that we'll go in alone but it'll be awfully good if we could get Olin to go along with us.

"And then nothing would come into going along together and they'd talk about going back and going it alone.

The District Judge took note of this and said that in fact, the officer doesn't face the question, which we're trying to estimate probabilities on here, because he considers all three and he always will in the case, where one is challenging a combination.

So it seems to us that under these circumstances, that's what is needed is some statement of the objective market conditions under which the probabilities that both will go in or either will go in while one remains on the sidelines, are good enough to say that the combination may substantially lessen competition.

And it's that that brings me to saying at least as a minimum rule, that where you have the conditions that I have stated, then at least, Section 7 and, I think, Section 1 is violated.

And those conditions, you will recall, are first, a new or expanding market with attractive commercial opportunity.

Second, that there'd be -- that the two firms that ultimately combine will be engaged in that line of business or -- and be well equipped financially, technologically, in terms of commercial experience and so forth to enter the market.

Third, that they have expressed some interest in the market.

And fourth, of course, one needs a combination in order to have anything to complain about even though that doesn't bear on the degree of probability.

Now, I don't mean to suggest that all those conditions are indispensable.

It may be that the Government would advocate a stricter rule but we do -- they're satisfied here quite plainly and we do say that at least when they exist, either in this industry or in any other, that then there -- the combination destroys such a, I don't care what they call it, a probability, a likelihood, a possibility but a good enough prospect that you will have competition between the two firms or competition with one -- between -- with one in the market and the other a potential competitor to warrant finding that they may substantially lessen competition.

I would like to emphasize that the policy of the law after all is against the combination of firms able to stand on their own feet and to compete with rivals including each other, Section 7 being prophylactic looks ahead.

It deals not with the immediate present but with the structure of the market, so with the review -- with respect to what may happen in the future.

And I can't help noting in this sequence of Section 7 cases that we've been having that this is the way that companies look at it.

And it seems to me that the law, in order to deal with realities, must also be careful to project itself and not think -- simply to think today or tomorrow and it would seem that where those four conditions are met, then there is a sufficiently high degree of probability that nobody cannot say just what it is, that the market wouldn't get nothing and that, therefore, the combination may substantially lessen competition.

Now, here, the conditions were met.

The southeastern market for sodium hydrochloride was exceedingly attractive for new investment.

Between 1950 and 1960, the national consumption of sodium chloride had quadrupled.

Justice Potter Stewart: Used primarily in the paper industry?

Mr. Archibald Cox: It's used primarily in the paper industry as a bleaching agent.

It has some agricultural uses.

Pennsalt's Sales Department or Commercial Development Department had been experimenting with the notion of using it in the -- for textile bleaching and it's rather interesting.

You'll find in our brief that we've quoted some excerpts from the sales manager saying, "Well, let's not go too fast on this until we find who's going to do the selling here.

If Olin is going to do the selling, there's no use our -- docking ourselves out trying to develop it.”

Justice Hugo L. Black: When did the agent thought it -- is it a -- when -- when did it enter the market?

Mr. Archibald Cox: I couldn't tell you, Mr. Justice.

When it first entered the market, it has become important during the 1950s and the projections are for a constantly growing market.

In fact, the projections for the demand in 1964 as projected in the late 1950s were 9000 tons in advance of what the -- in excess of what the capacity now is.

Chief Justice Earl Warren: We'll recess now.

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Argument of Archibald Cox

Mr. Archibald Cox: -- colleagues tell me that I spent 42 minutes arguing about the wrong chemical.

The situation isn't quite as bad as that sounds.

I spoke, apparently, on several occasions about sodium hydrochloride.

The chemical we're concerned with is sodium chlorate.

Whether there is any such thing as a sodium hydrochloride, I don't know.

I couldn't possibly tell them apart.

I should have said sodium chlorate on all those occasions.

Justice Byron R. White: How does that (Inaudible)

Mr. Archibald Cox: Well, I leave you to interpret that observation, Your Honor.[Attempt to Laughter]

Second, I would like, in an effort to pull together what I've been saying thus far, to stand off a little and examine from a distance this problem of what should the antitrust rule be, what is the application of the statute where two firms are thinking of entering a market in which neither of them has previously been engaged and then they combine for the purpose of entering it, and I'm thinking of two firms who could clearly go it alone.

Now, one possibility is to say, well, neither of them was there.

Any entry is no competition and we'll let them do as they please.

This seems to me to turnover to businessmen the opportunity to determine for themselves how far the normal economic laws governing a free enterprise economy will be permitted to operate in new geographic or new technological markets and, I suggest that it would come very close to meaning that, while we might keep what competition we have with respect to old products, in old geographical areas, we really would have very little opportunity of preserving a free market in -- where new technologies develop.

Justice Potter Stewart: What relief did you ask for in this case?

Mr. Archibald Cox: The question of the relief was put to one side, the ultimate -- the first request was for temporary injunction and, ultimately, it would've been to require some kind of disposal of this, but there was no evidence offered.

There was, apparently -- as I read the record, there was, apparently, some kind of a stipulation that neither side would put in testimony on that point.

Justice Potter Stewart: What -- what relief do you think would be appropriate?

Mr. Archibald Cox: Well, I would think that -- I would think there were a number of possibilities.

One would be to require one company to buy out the other, leaving it to them which did the buying.

Justice Tom C. Clark: Clearly, that's a job, was it?

Mr. Archibald Cox: Yes, yes.

Justice Stewart said what I think were the possibilities.

I said one was to let -- require either to buy out the other or to let them sell off the property to a third or, conceivably, in some other fashion, dispose of the shares of Pennsalt.

Justice Byron R. White: And, I suppose, just the--

Mr. Archibald Cox: Penn-Olin.

Justice Potter Stewart: The solution would be exactly wrong here.

Mr. Archibald Cox: Well, the plants there and we certainly -- I assume we would hate to see the plant torn down.

Justice Potter Stewart: Exactly.

Mr. Archibald Cox: But, it seems to me, there are plenty of ways to free at least one of these companies to come into the market later if it wishes, which is the important thing.

Now, I was attempting, as I say, to stand off and to suggest what are the possibilities here but one is to leave the whole matter to private agreement wherever you have a new geographical or technological area.

The second, which seem to me to be -- to attempt to estimate these probabilities in every individual case and to apply some general adjective deprivable enough and then tell district courts to make a finding on that because no finding was made on it here.

The third, which I was trying to suggest, was that whenever the conditions that I stated exist, as they plainly do in this case, although I haven't devoted myself much to the fact, then the prospect that more active competition will be foreclosed by the combination are truly very real.

I don't suggest that anybody can measure the probabilities accurately.

But, in most cases, given an attractive market, given few suppliers, and I wouldn't call this a competitive market, it's just two companies, given few suppliers, that two other companies engaged in substantially that kind of business, interested and well equipped to enter then, you have a significant chance, perhaps not a probability, the district judge found not a probability here, but a significant chance they'll both go in.

After all, there were two new entrants in this market, one, the combination and, the other, Pittsburgh Plate Glass.

Justice Tom C. Clark: Mr. Solicitor, are you saying that Pennsalt had 9% of the market?

Mr. Archibald Cox: Had what?

Justice Tom C. Clark: Had 9% of the market before?

Mr. Archibald Cox: Yes.

It was marketed -- I was somewhat elliptical.

It was -- part of that was marketed through Olin.

They had a marketing agreement.

Pennsalt manufactured on the west coast and Olin marketed, not all, but I think some of that before --

Justice Hugo L. Black: This is prior to the joint venture?

Mr. Archibald Cox: Just prior to the joint venture, yes.

And, of course, Pennsalt was making this chemical on the west coast.

It had 50% of the west coast market.

Justice William J. Brennan: How much did Penn-Olin pick up in the market?

More than 9 (Inaudible)

Mr. Archibald Cox: I don't -- I don't recall the figure.

I'm sorry.

The market has continued to expand and Penn-Olin, I feel very sure in saying, has some-tens of thousands of tons, but I don't really know.

While you have -- may have a significant chance that both will go in, that certainly shouldn't be disregarded, you have a much greater chance, I would think, that it was merely always a probability that one would go in and having a very few companies in the market, the potential competition is all the more important.

Now, of course, the argument that you have in these probabilities rests upon the basic theory of a competitive economy that potential suppliers will come forward to meet the demand when the price, other market conditions offer an opportunity for profit, provided only that combinations and restraints of trade are eliminated.

The combination of two companies in a condition such as this interferes with the operation of those normal market forces.

The theory of Section 7 is that the forces will work out.

Here, given the postulated conditions, there is a very great likelihood that they will work out and it follows, we submit, that any combination involving an inter-corporate stock acquisition should, therefore, be found under those conditions to -- to be one which may substantially lessen competition within the meaning of Section 7.

The other point that is raised by way of defense, one that the District Court didn't consider, is the argument that, since Penn-Olin was a brand new company and since Section 7 applies to acquisitions of stock of companies engaged in commerce, Penn-Olin was brand new and wasn't engaged in commerce at the time of the acquisition and, therefore, there is no violation.

We've dealt with that in our brief.

We submit that "engaged in commerce" is simply an adjective intended to describe those corporations that are subject to federal, as opposed to state jurisdiction and that any effort to make this depend on the twinkling of an eye with relation to the exact moment of the acquisition of the stock and the exact moment when you make your first shipment in any interstate commerce would defeat the purpose of the statute.

Chief Justice Earl Warren: Mr. DeLone.

Argument of H. Francis Delone

Mr. H. Francis Delone: Mr. Chief Justice, Your Honors please.

I represent Pennsalt Chemicals Company and Albert Connelly, who represents Olin, will divide the argument for the appellees with me.

I shall deal sincerely, and what might seem to be somewhat illogically at first, with the facts and how they relate to whether or not there has been a violation of Section 7 of the Clayton Act.

In other words, assuming, for purposes of my discussion, the applicability of Section 7 to this type of transaction because that discussion -- the facts and that question are so intimately related, they don't lend themselves to any division and, with the Court's indulgence, Mr. Connelly will then take up the point last mentioned by the Solicitor General, whether Section 7, in any event, has any application to a transaction such as this and, if not, whether Section 1 of the Sherman Act has been violated in this case.

Prior to the argument which I've just heard, I thought we were all pretty much in agreement, both, the Government, the appellees in the court below about the issue in this case.

The Government stated the issue in its jurisdictional statement at page 16, saying, "The District Court properly recognized that the lessening of competition standard," that is, the lessening competition standard under Section 7 of the Clayton Act, "Lessening of competition standard requires a comparison between the competitive situation brought about by the chairman of transaction and the situation which, with reasonable probability, would have existed had the transaction not occurred.

This appears again in the Government's brief now at page 28 and, in effect, the Government, the court below, and indeed, all of us have thought up to now, that what was involved in order to decide this case was a comparison between the competitive situation which existed in the southeastern sodium chlorate market prior to Penn-Olin and the situation which existed or came into being after Penn-Olin.

So that, if Penn-Olin brought about a more competitive situation, enhanced competition to a greater degree than would've been the case if the joint venture had not been formed, then there's no violation of Section 7 because competition has not been lessened.

Justice Potter Stewart: It's not to prolong discussion of chemistry.

But what is sodium perchlorate, which also sneaks under this case?

Mr. H. Francis Delone: Ammonium perchlorate is the product.

Justice Potter Stewart: Ammonium perchlorate.

Mr. H. Francis Delone: That is a product made from sodium chlorate which is used in connection with -- well, it has various classified uses, as a matter of fact, sir.

I'm not able to explain them competently in any of it (Voice Overlap) --

Justice Potter Stewart: There's a higher profit in that, is there not?

Mr. H. Francis Delone: There is -- there may be a higher profit, depending on what the Government, which is the chief customer, pays for the profit.

Justice Potter Stewart: I see.

Mr. H. Francis Delone: This involves some, first of all, getting on a phrase -- just what the profit might be.

Justice Potter Stewart: Well, I didn't --

Mr. H. Francis Delone: Yes.

Now, this is, however, essentially, I think we all agree, a decision which rests on undisputed facts and which must be made, both sides agree, accepting the findings of the court below.

Mr. Cox did not devote too much time to the facts because on his argument, it seems to me, the facts become relatively unimportant.

But if one is going to make the type of analysis of whether there really was a lessening of competition in this case because of this joint venture, it seems to me, it is necessary to pause to look at the facts, at least briefly.

The situation prior to the formation of Penn-Olin, it was formed by Pennsalt and Olin Mathieson in the early part of 1960.

Prior to that time, in the southeastern sodium chlorate market, which is admittedly the relevant market and the relevant product in this case, no dispute between us, the situation had been that for almost a decade, there had been no new entrants into that market.

Prices had been stable.

There had been no innovations and Hooker Chemical Company and American Potash, often referred to in this record as Am-Pot, had -- they dominated the market.

The Solicitor General has mentioned what the figures were.

They held some 91-- a little over 91% of the market in the year 1960.

9% -- to come to -- Mr. Justice Clark's question, 9% did -- had been shipped in that year, that is 1960, the year when these statistics -- to which these statistics apply, had been shipped from Tacoma -- from Pennsalt Tacoma, Washington Plant into the southeast under a temporary arrangement between Pennsalt and Olin aimed at exploring the possibility of the joint venture which did, ultimately, materialize.

These sales have been going on for a period of three years.

Prior to 1960, only one-third as much had been sold by Olin, as was sold in the year 1960 when the joint venture was announced.

In other words, once it was announced that the joint venture was coming in, then, Olin was enable to sell more of this product in anticipation of the joint venture and --

Justice William J. Brennan: When did Olin (Inaudible)

Mr. H. Francis Delone: Olin got it for two years prior to that time in quantities of 2000 tons -- or a little over 1000 tons a year from Pennsalt Company.

Justice William J. Brennan: And what's that amount to in terms of market percentages?

Mr. H. Francis Delone: There are not figures of the exact percentages in those earlier years --

Justice William J. Brennan: Well, I gather--

Mr. H. Francis Delone: As I recall it, sir.

Justice William O. Douglas: -- what the percentage is that Am-Pot (Inaudible) and when -- they really have a 100% of this market, do they not?

Mr. H. Francis Delone: Well, virtually, Your Honor.

There was one customer who preferred to buy from Pennsalt because he could -- his freight car could move to the west coast and back with various allowances which made it the desirable to him actually to buy it from a distance, but this was a matter of 400 or 500 tons.

Justice Byron R. White: How much -- how much was Pennsalt in position to sale in the southeast just as a matter of plant capacity and things like that?

Mr. H. Francis Delone: It --

Justice Byron R. White: I suppose that it had to absorbed freight to sell what it did in -- in the southeast.

Mr. H. Francis Delone: In the year 1960, the court found that it lost $80,000 on the sales that it made to the southeast.

The freight differential -- the freight, we should have to absorb but some, I think, was $25 a ton.

I'm not certain of that figure.

It is in Judge Steele's opinion.

Justice Byron R. White: What they were selling down there is what they didn't need in their profitable --

Mr. H. Francis Delone: Yes and --

Justice Byron R. White: -- market area.

Mr. H. Francis Delone: -- by 1960, they did need it in their west coast operation because they'd expanded in 1957 and, by 1960, their -- their whole capacity was able to be consumed in the west coast so, obviously, they didn't want to continue to ship it into the east, and they did --

Justice Byron R. White: So that, as a practical matter, it had reached its -- the peak as far as penetration of the southeastern marketed.

Mr. H. Francis Delone: That's correct.

It really had exceeded it solely for purpose of getting into the market in the joint venture.

It was not a realistic transaction at 9% in the year 1960.

Justice Hugo L. Black: When did they build the plant?

Mr. H. Francis Delone: The plant was built beginning in 1961.

Production commenced in September of 1961, and this case was tried in November of 1961.

Justice Tom C. Clark: At beginning of fruitful increase in their side to the market as just found (Inaudible)

Mr. H. Francis Delone: The -- the Court summarized this in its opinion at page 1579 with a chart.

If I think I have Your Honor's correct -- question correctly, which lists the capacities of the various southeastern plants in 1959 and then in 1962.

And you will see that Hooker, the largest, had a capacity of 29,000 in 1959, a capacity of 32,000 in 1962, Am-pot, 12,000 in 1959, 22,500 in 1962.

Pennsalt -- Penn-Olin's plant, 26,500, it came in with a substantial plant much larger than the one which either had been considering, which put it on more equal footing with the existing competition.

And, PPG, by this time, had also announced -- it announced in July of 1961 and it then comes into the picture as a new entrant with a 15,000-ton plant.

So, the capacity in this market had gone from 41,000 to 96,000 between the year 15 -- 1959 and the year our plant was in fact built, 1961, the projection for 1962 as I've just stated.

Justice William J. Brennan: Is that market now or --

Mr. H. Francis Delone: Sir?

Justice William J. Brennan: (Voice Overlap) with that market will absorb this increase, the 41,000 to 96,000?

Mr. H. Francis Delone: The Court found that, by 1960, Judge Steele found that the southeast was no longer a deficit area.

I think this is as close as one can come to what it would absorb.

Because of the date of trial, we do not in fact have in this record, figures as to what each company is today selling in the market, although I would be in a position to state them so far as Penn-Olin is concerned.

It's not in the record.

In fact, we are not selling at capacity today.

As soon as Penn-Olin was announced, there was marked increased competitive activity on the part of both Hooker and Am-pot in this market.

They went around to their customers and offered five-year contracts with a guarantee of no price increase.

They took on technical service and increased their sales efforts.

The Government offered no evidence below from consumers or competitors, all of whom had been interviewed by the Government, as the trial judge pointed out.

No evidence whatsoever that competition had been lessened by Penn-Olin.

The Government called the sales manager of American Potash, a Mr. Derksen, and Mr. Derksen testified to the contrary that competition continued vigorous and had not been lessened by Penn-Olin.

The Court, therefore, found that the advent of Penn-Olin and, later, PPG will in all likelihood increase the competition which theretofore existed and will bring to buyers of sodium chlorate and to the public the benefits which normally result there from.

Now, the Government, I take it, doesn't really contest that there was enhancement of competition, but they really are saying it would've been even better to keep these possibilities or probabilities that have been talked about.

Mr. Cox indicates there were four possibilities.

One, the possibility that but-for Penn-Olin, both Pennsalt and Olin would've entered the market.

Two, that one would've entered and one would have stayed in the wings.

Three; that they would have gone into a joint venture and four that neither would have entered.

He overlooks one but which there was discussion by the trial judge, the possibility that one would have entered and, after that one had entered, the other would have lost interest.

This is really a fifth possibility which was dealt with by the court below, and the court below pointed out with reference to that possibility that at least Pennsalt, prior to the time that Penn-Olin was formed, Pennsalt had formulated the judgment that the market could stand only one additional competitor.

So that, if you assume that Olin might, otherwise, have gone in, this, under that view, would've meant that Pennsalt would have been -- been eliminated, no longer in the wings, if you will, I think what its purpose.

Justice Potter Stewart: In all fairness to the Solicitor General's argument, he might concede that that would be true for the short term, but he asked us to look at the long term and --

Mr. H. Francis Delone: He did --

Justice Potter Stewart: -- for the possibility of it changing in the --

Mr. H. Francis Delone: He did indeed.

Justice Potter Stewart: -- standing market.

Mr. H. Francis Delone: I agree with you. He did ask you to look at the long term.

The difficulty here --

Justice Potter Stewart: Or to look at because you can't look at it (Voice Overlap) --

Mr. H. Francis Delone: It's a little hard to look at and no evidence was adduced.

He seems to be urging now that the kind of very careful consideration which he concedes was given to this case by the court below should not be given in any Section 7 case.

That, instead, you would pose a general rule which would automatically apply and, I think, in its logical extension, would really outlaw every merger without the court coming to grips with whether there was any lessening of competition.

It seems to me that that's where his argument takes him.

Chief Justice Earl Warren: Does any other company come into the business after this joint venture?

Mr. H. Francis Delone: Yes, sir.

Pittsburgh Plate Glass, through its chemical division known as Columbia Southern, entered the market in July of 1961.

This was over the actual entry and announcement of it was after Penn-Olin had been announced and shortly before our plant was on stream.

So, for practical purposes, they came into the market with a 15,000-ton plant following the formation and the beginning of the construction of the Penn-Olin plant.

Chief Justice Earl Warren: Wouldn't -- wouldn't that negate the fifth point that you made just a moment ago that the joint project here would absorb the market?

Mr. H. Francis Delone: It would -- it would negate it from -- so far as PPG is concerned perhaps, but not from the standpoint of the decision making process of the two companies, Pennsalt and Olin.

This was Pennsalt's conclusion.

If I understand Your Honor’s question, not only one additional company could come in.

Now, of course, if two come in, it makes the likelihood that Pennsalt at some future date would enter even more remote.

It makes it more an ephemeral possibility, if you will, to use the words I think was the Brown Shoe case.

If you look at the record and the findings in the court below, you will see that the Pennsalt management had considered this problem beginning back as early as 1951, that they want to this southeastern market.

They'd studied it and restudied it.

They'd contemplated plants of various sizes.

They'd had various projections made.

Each time that they actually came to grips with making a decision, they decided against going forward.

The record at page 692 appears the exhibit which, I think, most accurately reflects what was going on within Pennsalt.

This was in 1957, some-six years after they started to think about this.

Mr. Drake, the President of Pennsalt asked the management crew, "Do we agree that it is unlikely in view of the capital requirements and relatively low return on investments that we alone would approve construction of an eastern chlorate plant?"

Second, "Would Olin Mathieson be a logical partner?"

The answer to both questions was yes.

So that, almost in the words of the statute there, the Pennsalt management faced the question of whether it would enter this market and decided it was unlikely that it would.

Never thereafter was Pennsalt satisfied from a business standpoint with the prospects of an adequate return on a plant in the neighborhood of 15,000 tons which it was considering.

Olin turned to its consideration at the management level only in 1958, really after Pennsalt had crossed the bridge or -- now, I don't say that the possibility was fully eliminated.

I want to make that clear now.

We don't say that the lower court found that it wasn't completely eliminated.

He said we had not found the return attractive but he couldn't find it was -- we completely eliminated the chance of going in.

In any event, Olin had considered the matter first in 1958 and then quite casually, except for in the -- for laboratory studies, for research and development.

And then in 1959, the Chemical Division of Olin had recommended its entry into the southeastern sodium chlorate market with a 15,000-ton plant and the management had, at that time, rejected as not being sufficiently attractive.

Again, we do not contend that Olin had finally and forever crossed out the possibility.

So, we concede there was always a possibility that these companies, which were able, could have entered the market.

But, this does not, it seemed to -- seems to us, answer the question.

The question is would they have entered the market, and this is what the lower court struggled with.

It found first that they would not simultaneously have entered the market and this, Your Honors will see on, well reason, indeed, that point was not seriously contested by the Government.

Justice Byron R. White: Or even probably, I suppose, would satisfy the statute, wouldn't it?

Mr. H. Francis Delone: Even probable, yes, sir.

There is no question, reasoned by a reasonable probability to use the correct language.

But, the court went beyond just determining whether both would've gone in simultaneously.

The court said that it had no evidence by which to judge whether if one had gone in, the other would've continued, the other would've entered.

This simply wasn't dealt with.

The Government didn't adduce any testimony to deal with that situation in the court below.

Indeed, in its jurisdictional statement, the Government agreed with the language of the court below that it would be sheer speculation to decide what one would have done after the other had entered.

Neither company had really faced that situation and, the Government point -- seems to agree, or did at that time, with Judge Steele who found just that in the court below.

Justice Byron R. White: Where is that reference?

Mr. H. Francis Delone: That reference is at record page 1576, so far as the opinion is concerned sir, and the jurisdictional statement at page 17 quotes from Judge Steele's opinion at page 1576.

So that, essentially, I think in fairness to Judge Steele --

Justice Byron R. White: Where was the --

Mr. H. Francis Delone: I beg your pardon, sir?

Justice Byron R. White: Where was it that the Government actually said that, in argument or in the District Court?

Mr. H. Francis Delone: No, in its jurisdictional statement to this Court, Your Honor.

Justice Byron R. White: What page is that?

Mr. H. Francis Delone: At page 17.

Justice Byron R. White: But Judge Steele referred to it in his opinion --

Mr. H. Francis Delone: Oh --

Justice Byron R. White: -- and that was referring to some statement made by counsel, I suppose.

Mr. H. Francis Delone: No, I don't think so, Your Honor.

This was what Judge Steele said "On the basis of the evidence, it would be sheer speculation to try to say what would've happened had one of these companies entered, and then -- then you had no clue in the record" is the language he used, and "It would be sheer speculation to say what the other would've done.

"This is not a reasonable probability.

In other words, there was no reasonable probability developed before Judge Steele and, the Government, before this Court, in its jurisdictional statement seemed to accept and endorse that very language.

The net result then, it seems to us, is that Penn-Olin took two companies, neither of which was at all committed to going into this market.

Indeed, the fact they had studied it for some time and rejected it suggests they never would.

And, it combined Pennsalt's manufacturing experience, which sold and derived in the west coast, and the fact that Olin was well equipped to make sales in this market, it put those two together in order to bring to this market a third competitor.

This was the benefit which Judge Steele found flowed from this transaction.

The Government has talked at considerable length about the best postulate or that best possible postulate which appears in Judge Steele's opinion at page 1576 and this is the postulate that, at best, one company might have gone in while the other continued to ponder, which is the language of Judge Steele's opinion.

And Judge Steele, I think, reading his opinion fairly, finds that, on this record, the Government offered no evidence and the court had no basis by which he could compare the level of competition which would have pertained under that best postulate, not a finding but a postulate, but there's no basis for the comparison.

The very comparison which, initially, the Government conceded should be made.

How do you compare the before and after?

The "but-for Penn-Olin" situation, this is what Judge Steele found lacking in this record and he said at page 1576 of his opinion, "The Government argues that any such comparison to-- with the comparison between competition before Penn-Olin and -- I'm sorry, the competition but for Penn-Olin and the competition with them, any such comparison -- the Government argues that any such comparison is irrelevant in a determination that Olin or Pennsalt would have built its own plant but for Penn-Olin automatically condemns the joint venture.

"Such an interpretation would cut the heart out of Section 7.

And, Your Honors will see in the footnote at page -- to that portion of the transcript, his opinion at page 1576, Judge Steele copied in there the transcript of the argument where the Government, in effect, told Judge Steele that such a comparison should not and would not be made.

Therefore, the fact is that the Government didn't offer any evidence to permit a comparison of the benefits to competition which flowed from the formation of Penn-Olin versus what the condition of competition would've been but-for Penn-Olin.

And, that is essentially what brings the Government to the position which has been urged before Your Honors which is that, automatically, without any careful determination, such as was made here, without any careful consideration of the evidence, if four conditions prevail, any transaction such as this should be condemned.

Indeed, it's really three conditions, as I understand Mr. Cox's argument.

First, he says if there's an expanding market, and I've indicated the judge said this was no longer a deficit area in 1960.

Second, each company was in that line of business, and just what he means by that condition, I'm not clear.

Olin had never made this product commercially.

Pennsalt was not an effective competitor in this market, as the lower court found.

So that, whether either was -- was in that line is uncertain to me.

That each was fully equipped, and we do not quarrel with the fact that these companies had the ability financially and resource-wise to go into the business.

They could have gone into it.

And --

Justice William J. Brennan: Of course Pennsalt -- of course Olin was in the -- was in the sense to post --

Mr. H. Francis Delone: In the limited sense of selling 2000, but not producing.

They were not producing.

This was --

Justice William J. Brennan: No, they weren't producing but it was -- it was marketing for Pennsalt --

Mr. H. Francis Delone: That's right.

Justice William J. Brennan: -- and, in the 1960, to the extend of --

Mr. H. Francis Delone: To the extent of some-3000 tons sold after Penn-Olin had been announced.

Previously, they had never sold more than about 1500 tons which is a very drop in the bucket, maybe 2%, 3%.

I don't -- because we don't -- I don't have those figures readily available, for those years, I can't give you precise percentages.

Justice William J. Brennan: (Voice Overlap) companies with their interest in -- demonstrated interest, at least trying to make up their mind whether to get into the market (Inaudible).

Mr. H. Francis Delone: That --

Justice William J. Brennan: It is enough to indicate that, indeed, they were business.

Mr. H. Francis Delone: Not -- not in the business of manufacturing and selling in the southeast.

This --

Justice William J. Brennan: There's also finding (Inaudible) to be a holding to make it.

Mr. H. Francis Delone: They -- well, they didn't have existing capacity.

They had the technological ability to either -- or they could've bought technology presumably with which to construct their plant and enter this business.

They've never made the product and the record is quite full of reservations on the part of their management as to their ability to be an efficient and effective producer.

Pennsalt had no concern on this score because we've made the product in the west coast.

Olin had a concern as to whether it could do a good job.

It had not had any manufacturing experience and necessarily, this made projections for them, on the manufacturing side, much more hazardous than for Pennsalt.

On our side, the difficulty was how to predict an ability to make sales in sufficient volume to give an attractive return of the company.

Justice Byron R. White: At least that these two companies had never been in competition with one another in this line -- line of commerce.

Mr. H. Francis Delone: That is fairly true and -- and I want to make entirely clear also that this little -- this small sale of some thousand 1500 tons began only in 1957.

It began after Pennsalt had decided -- I'm sorry it began at the beginning of 1958, after Pennsalt's management have decided they would not go in alone in the passage that I read to you earlier and then, it decided Olin would be a logical partner.

In other words, it was exploratory to what ultimately came about.

It gave them both the chance to test the market and it was not a transaction that it went into for the -- for the profit which could be derived in those years.

This was looking to what ultimately came about in this case.

There are, it seems to me, under the Government's argument, a number of shadings of the meaning of the word "potential competitor.

" This Court has recently considered potential competition in the El Paso case, although whether that is properly regarded as potential competition or actual competition might be a subject of considerable discussion.

Mr. Justice Douglas recognized, in any event, that in that case, Pacific Northwest was a substantial factor in the California market.

And, its -- and it referred to its position, has a competitive factor in that market and commented that it actually had been in the market bidding for business.

Now, we're not confronted under the decision below, in this case, with a comparable situation of potential -- potentiality.

We are confronted purely and simply with capability plus some interest, but not active participation in that market.

Now, I think it's important to note when the Government dwells on the benefit to competition of having someone in the wings, rather than on stage, as Penn-Olin is, it's important to note that, in the 10-year-period prior to the formation of this joint venture, there were in the wings Pennsalt and during some of the time, Olin, and Allied Chemical which was selling -- was a sales agent for American Potash and was also one of those rumored to be contemplating entry as the Government proved in the court below or offered evidence in the court below.

Also, Wyandotte Chemical, another substantial chemical company rumored to be considering entry, as well as Virginia Chemical & Smelting.

Now, the Government in the court below said, "All these companies were cogitating.

"I forgot to mention PPG, too, because it, of course, was another company in the wings and yet, in this decade, as the Government complains in its brief, competition was stagnant.

There were two companies that had the whole market, that dominated it, they were entrenched.

So, what -- where is the value of the evidence in this case of a company in the wings?

No value can be discerned from this evidence, so far as those companies were concerned.

They didn't contribute.

They didn't liven up the market.

They didn't have any effect on the market and yet, the court -- the Government would ask this Court to strike down this transaction which brings new competition into this static market, strike this down for this possibility which is, really, it seems to me, all the Government urges, the possibility which it could derive from the fact questionable here of an expanding market from the interest and the capability of these companies.

It says that, "Given that situation, you should look no further.

Just apply the touchstone and trike -- strike the transaction down.

"This, it seems to us, is not what Congress contemplated when it referred in Section 7 to the substantial lessening of competition.

The ephemeral possibilities of what might have happened someday, sometime.

This can become to grip -- we can come to grips with it as and when it does but, as of now, there has been no showing on this record, after very careful consideration by the court below, that competition has been lessened.

It's -- to use an analogy that I think was used during the argument in the El Paso case, the horse race analogy.

This situation is one where neither Pennsalt nor Olin were entered in the race.

Indeed, they were at a different track and the fact that they were at a different track didn't add any competition to the race between Hooker and Am-Pot in the southeastern track.

The -- I suppose the simpler way to phrase it is simply that the Penn-Olin burden have this word "competitively" the two in the bush.

The court below concluded, after careful review of the evidence, that Penn-Olin was the means by which the strength of two companies was joined, not for the purpose of further preempting a market which they already occupied, but to break into a market to challenge the supremacy of two companies which were dominating it.

Congress, in amending Section 7 of the Clayton Act, recognized that all combinations were not anticompetitive and that, in some -- some instances, combinations may have the effect of stimulating competition, citing of the Brown Shoe case and one might think of many others that follow this line.

He concluded the probabilities are that Penn-Olin will have that effect to what the effect of stimulating competition.

He made the determination required of him under Section 7 of the Clayton Act.

Under that determination, there was, in fact, no lessening of competition in this case.

Justice Potter Stewart: Where does the court conclude that conclusion report?

Mr. H. Francis Delone: The conclusion --

Justice Potter Stewart: Did the Court get it?

Mr. H. Francis Delone: Is at record 1579.

The earlier comment about joining the strength of the two companies is at page 27 and 28 (a), I do not have the -- of the opinion as printed in jurisdictional statement.

I'm sorry, sir.

Justice Potter Stewart: Alright.

Mr. H. Francis Delone: I don't have the precise language elsewhere.

Justice Arthur J. Goldberg: (Inaudible) El Paso here, completely decided.

I assume that it existed and therefore it's correctly in the argument and I read the -- the El Paso case and the Pacific Northwest (Inaudible), investor, Pacific Northwest (Inaudible) to compete with El Paso (Inaudible)

Mr. H. Francis Delone: I think that's true, sir.

Justice Arthur J. Goldberg: (Inaudible)

Mr. H. Francis Delone: Yes, yes.

I should like --

Justice Byron R. White: Would you --

Mr. H. Francis Delone: I should like to say about --

Justice Byron R. White: You wouldn't --

Mr. H. Francis Delone: About El Paso one further point.

That, in that case, this Court was confronted with just one question.

Was the lessening there involved a substantial lessening?

There was no -- there could be no suggestion that competition had been -- been enhanced, as it has been found to have been enhanced here.

There was no new competition brought to the California market.

The only question was whether competition in that market was substantially lessened by the elimination of a competitor, whether you treat it as an actual or potential competitor.

Justice Byron R. White: So your argument doesn't have to -- that you make doesn't reach that case.

Mr. H. Francis Delone: It doesn't reach El Paso, no, sir.

Justice Byron R. White: And you wouldn't suggest, under your argument, that -- that such a joint venture would be legal.

Mr. H. Francis Delone: That such a joint venture would be.

No, I would not, under --

Justice Byron R. White: But how about this case?

Assuming that Mathieson -- Olin Mathieson had been engaged in making this product, say, in the Midwest and the -- Pennsalt had been engaged in making it and distributing it in the Farwest, and then they both -- both substan -- they were -- have both been in this line of commerce and then they had -- but not in competition with another, and then they had both entered into the southeastern market.

Your -- your approach does cover that situation, I would take it.

Mr. H. Francis Delone: I think, sir, that is quite a different situation and one which the Court here --

Justice Byron R. White: You would put that aside.

Mr. H. Francis Delone: That -- for some later market extension case, Your Honor, yes.

Justice Byron R. White: Or, and you would put aside where two competitors for majority joint venture to develop new technology (Voice Overlap) --

Mr. H. Francis Delone: I don't think we're really faced at all here, sir, with General Motors and Ford.

Justice Byron R. White: Yes.

Mr. H. Francis Delone: I think, for the reasons I have endeavored to explain, we contend there was no violation of Section 7 even were it applicable here but, against the possibility that I might not have persuaded Your Honors to this effect, Mr. Connelly will deal with the fact that, in any event, Section 7 does not apply to this type of transaction and if Section 7 does not apply, it could not be condemned under Section 1 of the Sherman Act.

Chief Justice Earl Warren: Mr. Connelly.

Argument of Albert R. Connelly

Mr. Albert R. Connelly: Your Honors, I shall address myself to these two points very briefly.

I'd like to start with the observation that Section 7 of the Clayton Act does not purport to cover all acquisitions.

It does not cover, for example, any non-corporate acquisitions and in the case of corporate acquisitions, its application is limited to situations where the acquired corporation is engaged in commerce.

With reference to Penn-Olin, the parties here are in entire agreement that a new corporation is not engaged in commerce at the moment of its incorporation.

We're also in agreement that, therefore, Section 7, in this respect, is not to be literally construed but that provision must be interpreted.

Where we differ is in the interpretation.

The Government would say that the test to be applied in the case of a new corporation is the subjective intent of its incorporators.

If the incorporators desire or intend to have it at some point get into interstate commerce, that that is sufficient to bring it within the language of the Act.

In my view, that ignores the historical purpose of Section 7 which was aimed specifically at the elimination of existing enterprises in actual or potential competition.

That is to say, dealing with assets which were then engaged in commerce initially, of course, with ref -- by reference to the acquisition of stock control and then by the 1950 Amendment dealing with the acquisition of the assets themselves.

And, as this Court pointed out in the Brown Shoe case, the dominant theme of the 1950 Amendment of Section 7 was a fear of what was considered to be a rising tide of economic concentration in the American economy.

So far as we know, there has not been any decision dealing with the precise point that I am now presenting to Your Honors.

The only cases which have dealt with the acquisition of stock in a newly formed company are entirely consistent with the view that I have expressed.

They each involved an element of concentration by the elimination of the independence of assets then engaged in commerce.

As, for example, in the Alcoa case where a new corporation was formed to takeover the existing business of a competitor, Cleveland Metal Products Company, a producer of aluminum sheets and in the old New England Fish Exchange case, by the formation of a series of new companies to takeover the existing wholesale fish business of companies then in existence.

The text writers have taken the same view.

I would like to call Your Honors' attention if I may, to one which is not cited in our brief but should've been perhaps, that's Kingman Brewster's Text on Antitrust and American Business Abroad, published in 1958.

At pages 206 and 207, Professor Brewster dealt with the subject of joint ventures and I would like to read to Your Honors just a brief quotation, if I may.

"We assume that Section 7 of the Clayton Act will not be applicable to most joint ventures since, prior to the joining, the venture was not engaged in commerce.

However, it should be noted that, in form, financing of a joint venture may involved the purchase by one company of the stock of a paper subsidiary of another which was formed for the purpose of bringing into being an active industrial or extractive enterprise.

If jointness is achieved by partial acquisition of a preexisting enterprise, we assume Clayton Act standards would apply.

"Although the argument is not fully articulated, there is a suggestion made in the Government's brief that, perhaps, Penn-Olin was formed to takeover Pennsalt's existing business.

That, I think, has been dealt with by -- dealt with already in the argument today to indicate that, in fact, Pennsalt did not have any existing business and that the only shipments that it made, apart from the Penn-Olin exploratory venture, the only shipments it made into this territory were by virtue of special customer relationships.

But, I should like to call Your Honors' attention to the fact that, if it were true that Penn-Olin had been formed to takeover an existing business of Pennsalt, then that would bring into play the third paragraph of Section 7, under which, the test of the legality is not the probability but the actuality of lessening competition.

Your Honors have that paragraph in mind, the one which deals with nothing shall prevent a corporation engaged in commerce from causing the formation of subsidiary corporations, etcetera, where the effect of such formation is not to substantially lessen competition.

The fact is that, apart from these exploratory activities with Olin, Penn-Olin was not in the market at all and made no attempt to sell there.

It's a completely new enterprise.

It was not formed to take over any existing facilities or assets that had been devoted to interstate commerce.

There is no element of concentration involved in Penn-Olin, so far as the chlorate industry is concerned.

On the contrary, it added new production and new sales to a market up to then dominated by Hooker and American Potash.

Justice Byron R. White: Well, Mr. Connelly, I gather that your argument would cover the one or two examples I chatted with your colleague about, where two existing competitors form a new company together, like Penn-Olin to -- to enter a new market, your argument would apply.

Mr. Albert R. Connelly: Yes, sir.

Justice Byron R. White: And, similarly, in -- between -- in agreement between two competitors to use such instrumentality to develop new technology in this.

Mr. Albert R. Connelly: Well, that's a -- that's a rather broad statement about developing new technology.

If it's within the line --

Justice Byron R. White: To develop a new product.

Mr. Albert R. Connelly: With -- if it were within the existing -- an existing line of commerce, of course it would.

I can conceive of -- of some hypothetical situation where there might be something so novel that its attempt by two companies which were actually engaged themselves in a related field might, nevertheless, be justified.

But, I just don't want to answer your question --

Justice Byron R. White: Yes.

Mr. Albert R. Connelly: -- too broadly on that.

Turning now to the Sherman Act argument of the Government, first, Your Honors will have in mind that it's a very limited argument that they make in this connection.

They say Sherman Act only if Section 7 is held not applicable because here, the acquired company was not in fact engaged in interstate commerce.

The substance of their argument involves two steps.

First, a paraphrase of the statement made by this Court in Time-Picayune to the effect that the specific standards of the Clayton Act may be looked at to illuminate the general policy of the Sherman Act.

Then, secondly, I should like to put this in appellant's own words.

The fact that an acquisition would violate the substantive provisions of Section 7, if the jurisdictional prerequisite had been satisfied, should be given great weight in determining whether it amounts to an unreasonable restraint of trade in violation of the Sherman Act.

Now, there are two fallacies in that argument.

In the first place, the point that's being made here is not a jurisdictional objection.

There's no difficulty, jurisdictionally speaking, from having Section 7 apply to corporations -- to the acquisition of assets not theretofore engaged in commerce.

It is just as substantive as the limitation of Section 7 which prevents it from applying to the acquisition of partnership assets by way of illustration, but more importantly, the reliance upon that statement suggests a confusion between those provisions of the Clayton Act which may properly be regarded as specifics relating to types of practices specified, and those provisions of the Clayton Act which relate to the standards of illegality.

So far as the former is concerned, we have no question.

We don't quarrel with the proposition that, of course, we can look at the Clayton Act, its provisions with reference to exclusive dealing arrangements, its provisions with reference to the acquisition of stock or assets as a description of practices that may properly be looked at in terms of the application of the Sherman Act.

But, when we get to the question of the provisions of the two Acts relating to the test of illegality, the situation is entirely reversed.

There is nothing specific and, indeed, I can envisage nothing more general than the test of the Clayton Act where the effect may be substantially to lessen competition, a test which was designed specifically to cover situations that had not yet become restraints of trade reachable under the Sherman Act.

And therefore, there cannot be a substitution of the probability test of the Clayton Act for the actuality test of restraints of trade under the Sherman Act.

So far as I know, in every case in which an acquisition has been held to be violative of the Sherman Act, it involved a situation where the acquiring company was then a major factor in the market and where the acquisition has eliminated a competitor, actual or potential.

And, of course those were recently reviewed in the bank cases and the old railroad cases.

Here, neither company was a factor in the market.

The purpose and effect of Penn-Olin was not to eliminate any competition but to provide new competition for the two companies then dominating the market.

Now, appellant says that the fact of a joint venture, the fact of Penn-Olin is a joint venture doesn't limit the applicability of the Sherman Act.

Well, of course it doesn't.

We don't make any contention that it does, but the fact that the venture is joint, by the same token doesn't involve any per se illegality.

The joint venture took place here only because the parties, having considered separate entry, had decided or had not reached the decision to move forward and had decided that the returns were not sufficiently attractive.

Putting together the two activities, taking the benefit of -- of Pennsalt's production experience in which Olin was deficient, and taking advantage of Olin's sales position in the market and other chemicals being sold to the same paper producers created a situation which did make it sufficiently attractive for the two companies to move forward.

The significant part of the term "joint venture" in this context is not the word "joint," but it's the word "venture," the introduction of an entirely new competitive factor and taking away nothing.

Your Honors will recall that, in the du Pont Cellophane case, the du Pont Cellophane Company was established as a joint venture between the du Pont Company and the French Company.

The Government, here, argued with reference to an agreement -- an alleged agreement between the two to divide markets that there was illegality there.

But, so far as the finding of the District Court, neither the Government nor this Court challenged that finding that the joint venture itself was entirely lawful, that the organization of the new company and the continued ownership was lawful, and the Court there said, "It is not the purpose of the Sherman Act or the common law of restraints of trade to discourage establishment of a new business in a new territory.

"In any view of its case, therefore, we submit that the judgment below was right and should be affirmed.

Chief Justice Earl Warren: Mr. Solicitor General.

Rebuttal of Archibald Cox

Mr. Archibald Cox: Mr. Chief Justice, may it please the Court.

Counsel, at the beginning of their argument, stated that it had been their understanding that the issue is clearly drawn in the lower court and in this Court up until the oral argument today that, previously, they had understood it to be that what must be compared was the competitive situation as it existed before the combination with the competitive situation as it existed after the combination.

Now, we agree that that is the question.

Indeed, I think that I have been addressing myself to that question all along.

The problem is to be sure what one means about competitive situation.

By "competitive situation," the District Judge and Mr. DeLone apparently mean to look only to the companies who are actually then in the market selling the product.

Whereas, by "competitive situation," we mean not only those facts, but also the possibility or degree of probability or likelihood, as the case may be, that other companies who are interested in this field and capable of entering it may now or in the future, become competitors in the market.

It seems to us that that is very clearly an important part of the administration of both Section 7 and of the Sherman Act.

Not that I'm right in what I say with respect to the District Court's view, it appears very clearly on page 1576 of the opinion, just below the middle of the page, Judge Steele says the most favorable assumption that could be made from the Government's standpoint is that either Pennsalt or Olin, but not both, would have entered the market as an independent competitor.

But, even this hypothesized situation affords no basis for concluding that Penn-Olin had the effect of substantially lessening competition.

Whether or not it did, depends upon the competitive impact which Penn-Olin would have had -- will have as against that which might have resulted if Pennsalt or Olin had been an individual market entrant.

The Government argues that such comparison, that is the effectiveness of one of those in the market as against the other party in the market is irrelevant.

Well, we agree that that's irrelevant.

One is good as the other.

Justice Potter Stewart: You mean you -- they say you argue that.

Mr. Archibald Cox: The Government argues that any such comparison that is between Penn-Olin and the market, or Penn and the market, or Olin and the market --

Justice Potter Stewart: You do not mean concession --

Mr. Archibald Cox: -- is irrelevant.

Justice Potter Stewart: You're agreeing with your own argument, in other words.

Mr. Archibald Cox: I'm saying that we haven't gone back on that.

Justice Potter Stewart: Yes.

Mr. Archibald Cox: Yes, that we -- that we quite agree with that, but that what the judge left something wholly out of a count.

He left it out of a count that, with Olin in the market, you'd have Pennsalt available to go in at any time and that with Pennsalt and you'd have Olin available to go in at any time, but this way, you have, in effect, the covenant by Pennsalt and by Olin that neither of them will go in.

Justice Byron R. White: Mr. Solicitor General, would you agree that having your -- if Olin went in just the fact that Pennsalt is on the sidelines is rather a neutral fact --

Mr. Archibald Cox: I think --

Justice Byron R. White: -- to characterize it in some way that it probably would've gone in or possibly would've gone in --

Mr. Archibald Cox: I think that --

Justice Byron R. White: -- or would've gone in.

Mr. Archibald Cox: I think the fact that they were there -- would be there ever ready to go in, in the event that the conduct of the limited number of firms in a concentrated industry should ever raise prices or otherwise create traditions that made it desirable to go in, gives them a -- puts a limiting factor on the economic power of those concentrated firms.

Justice Byron R. White: But their ever readiness that you do -- you must deduce from certain other facts that --

Mr. Archibald Cox: Partly, we do --

Justice Byron R. White: -- that are in the record, certain numbers --

Mr. Archibald Cox: And we think --

Justice Byron R. White: -- the evidence that was addressed specifically to that issue is -- isn't very favorable.

Mr. Archibald Cox: I should think the -- I would disagree on that.

I would think that the evidence take Pennsalt first.

Here is a company, an established manufacturer of sodium chlorate.

Justice Byron R. White: But these are these other facts argued.

Mr. Archibald Cox: These are the other facts.

Here's a company that, for 10 years, has been studying this.

Now, Mr. DeLone says "Well, the market had been stagnant for 10 years, so apparently, potential competition doesn’t amount to anything."

Of course, the market had been stagnant and then there was a sudden change.

Why?

Because there was a great due process suddenly developed.

There was a demand quadrupled in that 10-year-period.

The projected demand doesn't project the same rate of increase but Olin, in 1958, projected that the market would be 77 -- the -- other than captive market would be 77,000 in 1960 and 105,000 in 1964.

That's a 40% increase almost in five years.

What had happened was this new oxidizing process for the pulp and paper bill.

Justice William J. Brennan: That's forecast in (Inaudible)

Mr. Archibald Cox: That is a forecast all in made in 1957 or 1958.

Justice William J. Brennan: Well, is that 104,000 figures from sales 96,000 figures for capacity?

Mr. Archibald Cox: I think so, but I'm not entirely sure.

The record reference is 874.

Justice William J. Brennan: I can't find it, Mr. Solicitor General, but did the trial judge (Inaudible) say something about presently it's a deficit market?

Mr. Archibald Cox: He said that, in 1960, it was not a deficit market, but of course, what he was comparing was the added capacity of these new firms without making any of the projected inquiries and for the projected inquiries, we rely first on the fact that it had been growing so and second, upon these projections by Olin's and others like Arthur D. Little Company who were advising Pennsalt and Olin on the advisability of going in.

Now, I would like to address myself to this further point.

It was suggested that our argument results in an automatic rule that would condemn all combinations to enter in the market.

I suggest that the Shoe is on the other foot.

I heard no qualifications in Mr. DeLone's argument.

It would indicate when firms couldn't combine to enter a market in which neither had previously been selling.

Whereas, I think our standards recognized the need for some selection and that they do require a careful examination of the fact.

True, not as subjective intention of what was going in, in somebody's mind, but a fact you can take hold off, of the capabilities of these companies, of the -- of the activities that they had been engaged in, their size and independent qualification, and of the degree of their interest.

And it's worth noting that Pennsalt, which had constantly been studying this, one of the last minutes of the corporate directors' meeting recites that if we don't go on the joint venture then Dr. Somebody who was in charge of projecting their new plant will report again on the possibility.

And Olin, too, had this, the Chemical Division, pressing hard with a new variant proposed of their plant.

They were going to put in there with the reports for 1960 which never came forward because the merger had the combination that they had agreed upon.

But, we do look at those four facts and we do think this permits a discrimination which would permit companies that can't go in alone to combine and enter a new market but which would prevent those who can go in alone, at least in these circumstances, from combining and thus, covenanting that each of them will stay out, impliedly covenanting, so as not to compete with their subsidiary.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, I would be very suspicious of any such fixed corporate policies.

As this record here, the fixed corporate policy of these companies is not -- was not to go in unless you have a certain estimated rate of return.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: And never made any exceptions?

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, I would think that this might bear on something akin to capability.

I hear the words.

They said they had some policies but I also noted that it was suggested by one of the divisions that, well, maybe they'll make an exception.

They weren't giving up upon the strength of the policy here.

I would be a little hesitant to say that any such declaration of policy, standing by itself, were conclusive.

I think not.

I would think it might bear on the question, which won't always be easy, of capability and that it would bear, Mr. Justice Goldberg, on the question of interest.

Now of course, here, we have clear evidence of interest.

As fixed a policy as you seem to envisage, might mean that you excluded interest from the case and under those circumstances, it would be different from the case we have at bar.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, I -- I hesitate to go any farther.

Chief Justice Earl Warren: Very well.