UNITED STATES v. ITT CONTINENTAL BAKING CO.

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Argument of Friedman

Chief Justice Warren E. Burger: We'll hear arguments next in United States against ITT Continental Baking company.

Mr. Friedman you may proceed whenever you are ready.

Mr. Friedman: Mr. Chief Justice, and may it please the Court.

The Clayton and the Federal Trade Commission Acts provide a civil penalty of up to $5,000 for any violation of an order of the Federal Trade Commission.

The statutes further provide that, where the violation consists of a continuing refusal or neglect to obey the order of the Commission, then each day for which the violation continues is a separate offense.

The question in this case, which is here on the writ of certiorari to the Court of Appeals for the Tenth Circuit is whether where a respondent under a Commission order, prohibiting certain acquisitions without the prior approval of the Commission, makes those acquisitions in violation of the order, each day that the respondent continues to hold the illegally acquired property is a separate offense, or whether as the Court of Appeals held in this case in conflict with a decision of the Eight Circuit, there is only a single offense committed in each of those situations, that is the single act of acquisition and what happened in this case for these acquisitions only single penalties of the maximum of $5,000 was imposed.

In 1960, the Federal Trade Commission issued an administrative complaint against the respondent's predecessor, the Continental Baking Company, in which it charged that since 1952 Continental, which was one of the largest baking companies in the country, had engaged in what it described as the continuous practice of acquiring bakeries throughout the country.

The complaint alleged that seven specific acquisitions of bakeries made by Continental, violated Section VII of the Clayton Act, and it also alleged that various practices committed by Continental, violated, constituted unfair acts and practices in violation of Section 5 of the Federal Trade Commission.

After some hearings were held before an examiner, the case was settled in 1962, through the entry of a consent order.

They ordered the two things basically.

First it directed Continental to divest itself of a principle acquisition challenged in the complaint, a firm called Armour Bakeries, which it was believed was the eighth largest bakery in the United States.

And secondly, it imposed a prohibition upon Continental for ten years, against making certain acquisitions without the authority previously given by the Commission.

Justice Harry A. Blackmun: Mr. Friedman, do you think that, that provision indicates that the court felt the holding of the other acquisitions was not improper, when it so specifically spelled out Armour?

Mr. Friedman: I am sorry Mr. Chief Justice this is in the Commission complaint.

Justice Harry A. Blackmun: Alright.

Mr. Friedman: I don't think that there was let me say, there was, at the time that they entered into the consent order, there was also an appendix that the parties signed which they said would provide a basis upon which the Commission could determine whether it was in the public interest to enter this order.

And in the course of that's which was, it was the part of the agreement to settle the case on consent, and in that agreement with respect to at least two of these acquisitions they concluded that there was not a violation of the act.

But I don't think the fact that the Commission limited the divestiture to Armour could be fairly viewed as any indication that it concluded that the rest of the acquisitions were not illegal, this was a consent order, and this was a settlement.

They agreed to give up the major acquisition they've made in return for which the Commission allowed them to keep some of the others and that they both agreed to include this ten-year ban on further acquisitions.

Now that provision is set out at pages 88–89 of the record, and what it says, directed the respondent to cease and desist for ten years without the prior approval of the Commission from acquiring directly or indirectly, through subsidiaries or otherwise, the whole or any part of the stock, share capital, or assets of any concern, corporate, or non-corporate engaged in any state of the United States in the production of the sale of bread and bread-type rolls.

Now, as I've indicated, the agreement which the party signed consenting to this order stated two things.

First, it stated that in construing this order, any of the parties could properly, the Commission and the parties could properly refer to the complaint itself.

And in two provisions of the complaint, that we think are significant in determining the purpose of this ban on acquisitions for ten years without prior Commission approval.

One of the allegations was, that as result of these acquisitions Continental had eliminated these acquired bakeries as independent competitive factors.

The other thing that the complaint referred to, was there was a substantial trend to industry wide concentration in the baking business.

These two allegations are set forth at pages 67-68 of the appendix.

Now, in addition there were certain things stated in the appendix which was made a part of the agreement on the consent order, which bore on what the Commission was thinking when it approved this order.

The reason for that is the parties stipulated, that these were factors that the Commission could consider in determining whether it would be the public interest to adopt this consent order.

And at pages -- page 84, which is the end of the appendix, I would like to read just two sentences at the -- just before the first full paragraph.

The parties said that, if this order is adopted by the Commission, the respondent's alleged continuous practice of acquiring companies baking and selling bread and bread-type rolls will be brought to a halt and the major acquisition forming the gravamen of the complaint will be undone.

Competition may be restored essentially as it existed before the accusation of Armour Inc. and the public interest will be well served.

Now, it seems to us that rather clearly, what the parties intended this order to do is two things.

One, to bring to a halt the alleged practice of Continental of increasing concentration by acquiring one bakery after another and secondly, to undo one of the principal adverse effects on competition resulting from these acquisitions by requiring divestiture of the major accusation, the Armour bakeries.

This order was approved by the Commission in May, of 1962, and in 1966 the Commission undertook an investigation to determine whether certain conduct by Continental violated the order.

Specifically, it looked into three transactions which formed the violations involved in this case.

The transactions are substantially similar.

In each case, there was an independent bakery which previously had both produced bread and roll, and distributed it and in each case the independent bakery agreed in effect with Continental, that it would give up its production of the bakery products, and would instead distribute to its previous existing customers, the products that were made by Continental.

In other words Continental in effect, took over, took over the routes and provided the bread for these customers that had previously been the property of the independent customers.

The stipulated facts in this case, on the basis of which the district court decided it, are that the independent bakery distributed these products of Continental exclusively under Continental's name over the routes and to the same customers that it had hitherto distributed its own product.

And since -- there's a question here as to what, whether this was an acquisition of assets, I think it's not insignificant that each of the written agreements under which Continental took this over, are captioned sales agreement.

After investigation of these, nine of these transactions, in 1968 the Federal Trade Commission certified the case in accordance with the statute to the Attorney General asking that penalties be sort for these three violations of the order.

In the interim, and the complaint was filed in December 1968, in the interim in September 1968, Continental Baking was acquired by the present respondent ITT Continental, a wholly on subsidy area of International Telephone and Telegraph.

The government's theory upon which it sought these penalties, was that these transactions violated the ban and the order against acquiring directly or indirectly the whole or any part of the assets of a bakery firm.

The District Court held that two of the violations violated the order but that the third one didn't.

The Court of Appeals affirmed the findings of two violations but disagreed with the court of -- with the District Court as to the third and held that all three of them violated the order.

I think the rationale of these holdings is well set forth in the District Court's finding that it said, this is at page 14 (A) of the appendix to our petition.

It said particularly in businesses where route salesman are involved, customer lists have a peculiar value and that they frequently represent the principal asset of a business.

And it said that in connection with these transactions, the most important assets that Continental acquired were the sales routes and sales volume and in reversing the one transaction that the District Court had held did not violate the order, the court.

Court of Appeals said that the market, that is the customers and the volume, the business of distributing the bread was acquired and this was a principle asset of the bakery.

This determination reflected one of the facts stipulated in the District Court which is at page 31 of the appendix that route books and customer lists are asset of any person, firm or corporation engaged in the distribution and sale of bakery products.

The complaint in this case sought penalties of $1,000 a day for each of these three acquisitions, for each day that they held them from the time of the acquisitions and the transactions until the filing of the complaint.

The District Court rejected this claim ruling that this was not a continuing violation within the meaning of the penalty provision, but was merely a single violation and necessed a penalty for each of the two violations, the maximum statutory penalty of $5,000.

What the court said is that the order prescribes only the active acquisition not any retention and it said once these two acquisitions were accomplished, the violations were completed.

And the Court of Appeals of the Tenth Circuit confirmed that holding saying that the -- once again the order does not bar the retention of assets illegally acquired but only the acquisition itself.

Now subsequent to the decision of the Tenth Circuit in this case, in a case which is now pending on certiorari called Beatrice Foods v. United States, the Eighth Circuit reach the contrary conclusion.

It held in a very similar situation involving a dairy however and not a bread company but it was a continuing violation and it accordingly approved in the Beatrice Foods case, the assessment of daily penalties of $200 a day from the date that Beatrice Foods took over the supplying of milk to the dairy, to the point that the complaint was filed, the total violation that was approved in the Beatrice -- I am sorry that was approved in the Beatrice Foods case, was $156,000 and in --

Justice Potter Stewart: How many dollars would have been involved here if the government -- if the District Court and the Court of Appeals had watched your claim completely?

Mr. Friedman: Well, if the court gave us the $1,000 a day for which we asked it would have come to better than $1 million, but of course we don't know what penalty would have been -- the penalty would have been if the court had give $200 a day --

Justice Potter Stewart: But you asked for a 1,000?

Mr. Friedman: We ask for a 1,000 --

Justice Potter Stewart: And did you ask for a 1,000 for each one of these acquisitions?

Mr. Friedman: Yes we asked, there were three counts each count --

Justice Potter Stewart: So that's a $6,000 a day for the --

Mr. Friedman: $3,000 a day there.

Justice Potter Stewart: Yeah, I beg your pardon.

Mr. Friedman: $3,000 a day for a period from 1965 to 1966 up to the filing of the complaint in 1970.

It would be a very substantial penalty --

Justice Potter Stewart: Well over a million dollar.

Mr. Friedman: Well over a million dollars, but we do think Mr. Justice, that that's what Congress intended in the penalty provision.

Justice Potter Stewart: And as you point out, of course to the Court, the $1,000 is a maximum.

Mr. Friedman: Well, the $1,000 is the maximum, that's all we ask, but $5,000 is the maximum and not infrequently the courts when they do access penalties give less than the government asks for.

Justice Potter Stewart: Thousand would have been a maximum in this case.

Mr. Friedman: In this case, yes.

That was all we asked for.

Justice Lewis F. Powell: Mr. Friedman, has the Federal Trade Commission imposing daily penalties for comparable infringements as uses of orders consent decrees of this kind over the past years?

Mr. Friedman: Well, fortunately Mr. Justice, this is a relatively infringement of commerce, the violations.

There have been very few cases in which continuing penalties were sought.

I think the reason, the reason is that in most instances, these orders merely bar acquisitions without getting the approval of the Commission.

In most instances, what happens is the people come in and seek the Commission's approval.

If the Commission's turns them down, they don't go ahead with the transaction.

If the Commission gives them approval, they do go ahead, so it's been a relatively infrequent situation.

Justice Lewis F. Powell: In this case, it was Eighth Circuit --

Mr. Friedman: I don't know which came first but they were relatively simultaneous, I don't know exactly when the Eighth Circuit case --

Justice Lewis F. Powell: So far as you know, these are the only two cases?

Mr. Friedman: As far as I know, these are the only cases involving daily penalties with respect to these acquisition type orders.

There maybe other cases involving daily penalties.

Justice Lewis F. Powell: Is there any regulation under Commission or any other means by which authority might be notified that the Commission took this interpretation of the statue, that is that daily penalties were appropriate when an acquisition was made?

Mr. Friedman: The Commission's position, the Commission does not give ordinarily give notice to parties of this fact and I think the theory of it is Mr. Justice is that the parties are subject to the order.

They know they are prohibited from making acquisitions without getting the approval of the Commission and the Commission assumes that these parties, if they have a transaction which is at all dubious, we will come in.

Of course, in this case, the Commission did make inquiries of these people and there was an extensive investigation before the penalty suit was sought, but the Commission does not follow the practice of giving notice.

The theory and I am supposing the assumption say that the theory is that the order itself is notice to them that they cannot acquire directly or indirectly the whole or any part of the assets that the firm engaged in manufacturing and sale of bakery product.

Justice Lewis F. Powell: I understand that but it does seem to me as evidence by the fact that we are here today that it's arguable whether the statute means what the Commission says it means.

That being so, I was wondering whether there had been any sort of regulation or notice given in any other way?

Mr. Friedman: No, there is no regulation.

I would suggest Mr. Justice that this is a factor that the District Court might properly take into consideration in determining the size of the penalty to be assessed.

This Court has of course discretion to decide how large a penalty to be assessed.

I just like to refer to one thing that the Court of Appeals said in the Beatrice Foods case when it indicated its disagreement with the judgment of the Tenth Circuit in this case.

It said that the such a limited construction of the order is barring only acquisitions and not retention ignores the crucial effect of an acquisition and would render non-acquisition orders virtually meaningless.

Justice Harry A. Blackmun: That would indicate that the Tenth Circuit case came first, if it's --

Mr. Friedman: Oh yes, the Court of Appeals decision in the Tenth Circuit came first.

But I wasn't -- in answer to Mr. Justice Powell's question, I couldn't say which suit was filed first.

Now there are --

Justice Byron R. White: Well, it wouldn't make it meaningless, wouldn't make the acquisition order meaningless because I take it that divestiture is an appropriate remedy for a violation of an acquisition order?

Mr. Friedman: I would think so Mr. Justice and since this case, the Federal Trade Commission Act has been amended specifically to provide for equitable remedies in penalty suits.

But meaningless I think what the court was meaningless in terms of accomplishing the purpose of the firm, in terms of accomplishing the purpose of these penalties to provide enough of the penalty --

Justice Byron R. White: Define penalty?

Mr. Friedman: Define penalty, yes and of course, divestiture isn't a penalty, divestiture is merely from needs --

Justice Byron R. White: But it hurts.

Mr. Friedman: It hurts, yes but I don't think that the fact that someone is subject --

Justice Byron R. White: Well, one of the theory of that divestiture for violation of an order; is it because continuing it, and to hold it violates the order?

Mr. Friedman: It seems to me, it must be Mr. Justice, it must be because what you are trying to do is undo the violation.

The violation was the acquisition and the retention and the way you want to do it is to divest the illegally acquired asset.

Justice Byron R. White: Because holding is continuous to violate the order?

Mr. Friedman: I would think so, I would think so.

I think implicit, implicit in an order prohibiting an acquisition is that if you make the acquisition in violation of the order, that is a continuing violation.

It's all part of one thing.

Justice Byron R. White: But suppose if all of it's taken and changing a couple of words in your consent decree, is then to make it clear --

Mr. Friedman: Well --

Justice Byron R. White: -- now on --

Mr. Friedman: Well, there's a problem with that Mr. Justice from now on --

Justice Byron R. White: That they won't consent.

Mr. Friedman: They won't consent, and there are 67 of them.

There are 67 of these orders --

Justice Byron R. White: But since now that they know what your position is they shouldn't consent anyway.

Mr. Friedman: [Attempt to Laughter] And some of -- by the way, some of these orders are not consent orders, there are numbers we have set up in our Appendix, 10 or 12 of them that were orders ended in trial and litigation.

Chief Justice Warren E. Burger: But your view of the matter Mr. Friedman is that it's something like a Contempt Order of $1000 a day and you give the contemptnor the opportunity to terminate it whenever he wants to.

Mr. Friedman: Yes, I think the Second Circuit --

Chief Justice Warren E. Burger: But everybody understands that in a contempt order, without any ambiguity, isn't that not so?

Mr. Friedman: Yes, the Commission's position, the Commission is not included in these orders, the words or retention.

It has limited these orders both the consent orders and the litigated orders to the word acquisition --

Justice Byron R. White: Well, I think the issue here is whether it's continuing violation.

Mr. Friedman: Yes.

Justice Byron R. White: Because if it is a continuing violation of a statute is perfectly clear that each day is a separate violation?

Mr. Friedman: Yes, that's the question, that's the question in this case.

And the reason we think, it is a continuing violation is because of the purpose of the order, that is there's nothing wrong with the acquisition itself.

The reason, the acquisition is prohibited is because of the consequences of the acquisition.

The acquisition is the means by which a firm acquires a share of the market, and makes a change in the structure of the market and what is intended to be prevented it seems to us by both underlying Section 7 of the Clayton Act and by an order of this type is to prevent the kind of changes in the structure of the market that result from acquisitions.

Now, it just seems to us that it doesn't make much sense to say, yes, the order prohibits the acquisition and there's a penalty for that.

But once the order is violated and the acquisition is made, at that point, that's the end of it, that's the end of it.

Once you have acquired it, in effect you can continue to acquire it because the defendant theory seems to be, it's not a continuing violation.

Justice Byron R. White: But the judge on the other hand could accept to his theory and still fairly, flatly defended on to this, I think may give $5 a day.

Mr. Friedman: That might be an abusive discretion, I don't know Mr. Justice, but certainly, the judge has considerable discretion and all we are saying, all we are saying is that the judge should exercise that discretion, should not attempt to limit, not attempt to limit the penalties to the single $5000 and view just the acquisition as the offense.

Now, this case we think is a very different case from the Armour decision, on which the courts below relied and upon which respondent heavily relies in this case.

Armour, we think, involved a different situation, a very different situation than this one.

In Armour the question was whether the Greyhound Company would have violated the Meatpackers consent decree by acquiring Armour.

The judgment prohibited Armour from acquiring an interest in a food company.

Greyhound, according the Government's theory, was in a food company, and the Government's theory was that even though the language of the decree only prohibited Armour from having an interest in the food packing company, more broadly the purpose was to effect a separation between the Meatpackers and the food companies, that the decree was concerned with a relationship and this Court rejected that reading.

This Court said no, we think what that consent judgment meant, what that consent judgment meant was that it banned certain action by Armour, taken by Armour and did not ban action taken against Armour by Greyhound.

And it's in that context that this Court used the words which are relied on by our components and by lower courts that the meaning of a consent decree must be discerned within it's four corners and the consent judgment must be interpreted as written.

In Armour of course, the question basically was whether what Greyhound was proposing to do, violated the consent judgment.

In this case, that's not the question.

The courts below held that what Continental Baking had done, did violate the consent order.

The question in this case, is whether, after the violation took place, whether the continued holding of the assets, whether the continued holding of the assets constituted a continuing violation.

Justice Potter Stewart: Yes, whether the continued holding violated the consent order?

Mr. Friedman: That's right.

Justice Potter Stewart: The courts below held no, it didn't.

Mr. Friedman: That's right.

Justice William H. Rehnquist: But Mr. Friedman, supposing I commit the offense of robbery and take $100 from you.

Now, you wouldn't say that each day I keep your $100 I am committing events of robbery, would you?

Mr. Friedman: No, Mr. Justice, but I think that's a different situation, I think.

Justice William H. Rehnquist: Well, and the court could require me to make restitution just as you in answer to Justice White said that divestiture can be regarded, even though robbery is a one time offense?

Mr. Friedman: Yes, but the restitution it seems to me, that's a different thing.

That's to make hold the victim of the robbery, but here we are dealing with an order, which it seems to me, is not designed merely to protect one individual against the theft of his property.

Here the purpose of the order is to deal with competition in the bakery business and we think that's a very different situation.

Justice William H. Rehnquist: It dealt with it in terms of acquisitions?

Mr. Friedman: It dealt with it in terms of acquisition, but we think, inherent in the ban on acquisition is a further ban upon retaining any assets acquired in violation of that prohibition, that's what we think it is.

I should add two other distinctions, if I may, between this case and Armour.

In Armour all that you could go on, basically was the consent judgment.

Here what we have, it is the agreement of the parties, the complaint can be referred to and also this Appendix which the Commission had before it in dealing, in deciding to adapt the order.

Secondly, all that was involved in Armour was the interpretation of the judgment.

In this case, we have to interpret the consent order in the light of the statute specifically dealing and providing penalties for continuing offenses and we think that the Armour case does not support the decision below.

Chief Justice Warren E. Burger: Did I understand you correctly, in answer in response to Mr. Justice White, that this consent decree could have been made so clear and unambiguous that there wouldn't be any question to litigate?

Mr. Friedman: Well I --

Chief Justice Warren E. Burger: Except the amount?

Mr. Friedman: Well, it could have been.

That is the Commission could instead of using the word acquisition, it could have used the word acquisition and retention.

It has not done that Mr. Chief Justice and it hasn't done it I think because it felt it was unnecessary.

Over the years, and it's a large number of these orders containing the same thing.

Chief Justice Warren E. Burger: But did you not give some intimation or it was that from other some other source, I got the intimation that if it was made that clear, you wouldn't get consent decrees and --

Mr. Friedman: No, I did not say, I did not --

Chief Justice Warren E. Burger: You did not intimate that?

Mr. Friedman: I think, perhaps Mr. Justice White suggested that defendants might not consent, but we think that this is what this order means.

We think the notion that someone would say, I will not consent to an order, that tells me that if despite the ban I violated and retained the assets, I am only -- I am not subject to divestiture or subject to penalties.

I find it hard to believe that the parties to these orders didn't understand, didn't understand, that what these orders prohibit is certain acquisitions and an awareness of the fact that if they make the acquisitions and they keep the acquisitions they prohibited from making, they are acting illegally.

Chief Justice Warren E. Burger: Do we have an issue here about the construction of the document according to the authorship?

Mr. Friedman: I don't think so, Mr. Justice.

Chief Justice Warren E. Burger: The only consent decrees I ever had to deal with, except for the Government, were drafted and all of them had to do with, both for government and otherwise were drafted by the government much like a union contracts submitted?

Mr. Friedman: I don't know how this was drafted but I suspect as is true in most of these judgments, there was a great deal of give and take.

But, I think we gained --

Chief Justice Warren E. Burger: But on this part of the decree?

Mr. Friedman: No, I don't think there was any dispute.

I think this was kind of what it's always been assumed.

This is what had been done.

There are 67 of these outstanding, all of which say ban acquisition and there is no reference to retention and I think, it was just the Commission and I am sure assumed that --

Chief Justice Warren E. Burger: But in any event your point is there is no ambiguity to resolve?

Mr. Friedman: That's right, we think fairly read the word acquisition includes retention.

I just want to say one other thing before reserving the rest of my time for rebuttal.

The respondent makes three other arguments which it says it before the court.

They are offered allegedly as basis for affirmance of the judgment of the Court of Appeals.

Two of them, we have dealt with them extensively in our reply brief, we don't think they are properly before the Court because of the respondents' failure to file a cross petition, two of them don't relate to the question of whether or not, hence multiple penalties are available but only to the period for which the penalties would run, that is whether the multiple penalties could continue after ITT took over continental baking or for the period after which the Commission had concluded that there was a violation.

The third contention is that the actions of ITT in this case, the Continental in this case, this transaction didn't violate the order at all.

That issue was resolved against the respondent by the Court of Appeals, but it now appears to be saying as well somehow we should be permitted to argue in support of the judgment that no penalty should have been attached, therefore you shouldn't attach higher penalties.

We think that that is not a permissible method of affirming the judgment, that contention does not seek affirmance of the judgment but in effect seeks reversal of the judgment.

We think the decisions of this Court have made it very clear that respondents can argue points, the effect of which would be to support the ruling below, that is you can support the decision of the lower court on grounds not given by the Court of Appeals, but you can't come in and say we support on the grounds that it's wrong.

That is not supporting it, that is seeking to a return.

Justice Harry A. Blackmun: Mr. Friedman, isn't that precisely what the government did in the Audi case the last session?

Mr. Friedman: As I recollect Mr. Justice in the Audi case, it was contended that the question presented was broad enough to cover the various points that the government made, that was my recollection.

Chief Justice Warren E. Burger: That was the contention.

Justice Harry A. Blackmun: As I am sure your opposition is contending here.

Chief Justice Warren E. Burger: Mr. Schafer.

Argument of John H. Schafer

Mr. John H. Schafer: Mr. Chief Justice, may it please the Court.

What this case involves is an attempt by the government to secure a retroactive rewriting of a consent decree which prevents only acquisitions, so as to permit the imposition of daily penalties in addition to those that already have been imposed, for something that's not barred by that consent decree, that is the retention of acquisition of access required.

The government's position flies directly in a face in our judgment of the Armour decision of this Court, the Hughes decision, the Atlantic Refining decision.

And our case I believe is a fortiori to those cases because contrary to those cases which arose basically in terms of a construction of those consent decrees, here we are dealing with a penalty action in which the government is seeking as I say, retroactively to interpret this consent decree so as to impose multi-millions of dollars of penalties on ITT Continental Baking Company.

So the underlying rationale of this Court's decisions prevent that and I think that if that rationale is ever to be applied, it should be applied in this kind of a case where we are dealing not with a prospective interpretation of the consent decree, what does it mean, what we are dealing instead as I say a penalty action.

The government's position and our position would substantially weaken the anti-trust, another enforcement activity because as we all know, much of anti-trust enforcement is conducted by way of consent decrees and consent judgments as true with the STC and other agencies as well.

If regarding to now as the government urges you to do to import into consent decrees, vague concepts of purpose, purpose of the underlying Statutes, purpose of the consent decrees, you are going to instead of resolving litigation through consent judgments, you are going to foster litigation.

Chief Justice Warren E. Burger: Just how do you separate the purpose and objective of the consent decree from the underlying statutes on which it would --

Mr. John H. Schafer: Well Mr. Chief Justice, what Armour teaches, what Atlantic Refining teaches and what Hughes teaches, is that you look at the document and as written, it's a contract composed between two opposing parties designed to do nothing but to eliminate the litigation.

It doesn't have by itself any purpose and if there is a statutory purpose, that's irrelevant.

What we are dealing with is a construction -- excuse me.

Chief Justice Warren E. Burger: Even when you construe contracts, even if the lawyer, the draftsman haven't been careful enough to put in all the necessary desirable preambles, it doesn't stop the court from looking at the totality to interpret the language of the contract, does it?

Mr. John H. Schafer: If there is ambiguity Mr. Chief Justice in a contract, that's true of course under Standard Contract Law, it is permissible for the court to look at the background of the negotiations.

The government doesn't claim any ambiguity here.

It simply wants you because of what it says as the purposes of this consent decree to add some words to it.

It wants you to say the consent decree doesn't proscribe acquiring, that it proscribes acquiring and holding or acquiring and owning or any other language you want to say.

Justice Byron R. White: Are you suggesting that fair reading the consent decree by defendant would be that you can make an acquisition, violate the order and at the maximum it will cost you $5000.

Mr. John H. Schafer: On this decree, that's the fair reading --

Justice Byron R. White: Sole price for violating the decree.

Mr. John H. Schafer: No, not the sole price, because as you pointed out, divestiture is a very real price.

Justice Byron R. White: As far as the fine is concerned, it's $5000 price, that's all for violation?

Mr. John H. Schafer: That would be true, that would be true.

The government can avoid that by writing a different consent decree, but that's true.

The sole penalty price would be the 5000, that's true, now 10,000 under the new statute, but you do have divestiture.

Justice Byron R. White: I take it, you would probably also argue that if both of you had known this is what the decree was supposed to mean, the government would have written it that way in the first place, they would have --

Mr. John H. Schafer: Unless they're trying to play tricks on us, I would assume that they would write it that way, yes.

As I say, the government in its brief, it didn't do it today but in its brief it argues that unless you construe this decree our way it's going to be a toothless, unenforceable decree and that's not so.

Not only is the penalty involved, but that's really seems to me tantamount to arguing that Section 7 of the Clayton Act is toothless and unenforceable.

The only belief there is divestiture.

No one to my mind has ever suggested that Section 7 of the Clayton Act is unenforceable.

Justice Byron R. White: (Inaudible)

Mr. John H. Schafer: It was denied, the government did not make assuring warning divestiture in the judgment of this Court.

Justice William J. Brennan: Could the government do that again in this very case, and now make a better shot and go back?

Justice Byron R. White: Can they bring an independent action?

Mr. John H. Schafer: Oh, surely they can charge these with the Section 7 violations, no question about that, yes.

Justice Byron R. White: And theoretically they can make a difference?

Mr. John H. Schafer: That's quite right and they are arguing and been sustained in the courts below that they don't even have to bring Section 7 in order to ask for divestiture.

Justice Byron R. White: Why can't they try that over again, I guess they tried out the -- that doesn't your matter, it's important to do.

Mr. John H. Schafer: Well, I don't know if you really would say Mr. Justice White that they really tried it out, they claim they were denied but they never made -- in the District Court's judgment they never made a showing on divestiture, they had it in their complaint.

Justice Byron R. White: They got a Section 7 (Inaudible)

Mr. John H. Schafer: I haven't thought it through, but I think that you would have different issues, I think you would have different issues.

Now, I should say -- let me go if I may to the factual framework of these so called acquisitions.

These are simply supply contracts.

These are contracts by which Continental agreed to supply these former producers of bread and rolls that Continental would supply them their requirements of bread and rolls, that those foreign producers would distribute those bread and rolls in there trading areas.

They were pure requirements contracts or distribution agreements whatever you want to call them.

Mr. Friedman expresses some -- they're called sales agreements.

Well they are sales agreements, they are agreements to buy and sell bread, that's all they are.

Justice William H. Rehnquist: But the bakeries acquired, agreed not to bake anything more of their own, didn't they?

Mr. John H. Schafer: Mr. Justice Rehnquist, that comes out of a stipulation we agreed, the lawyers brought up stipulation to resolve this dispute and we agreed to stipulate that it was the understanding of both sides that those former producers would stop selling and what that simply meant was that we knew when we took on the obligations to supply them that they were no longer going to supply themselves.

We did not bargain for that.

Justice William H. Rehnquist: It was a better deal for them to get it from you then to keep making the --

Mr. John H. Schafer: The economics of this industry are that the small producer is increasingly non competitive.

These three companies in the Missoula, Montana, in Cheyenne, Wyoming and in Durango, Colorado concluded independently and for their own reasons as stated in the appendix to cease the production of bread.

They did however want to stay in the bread business.

So, they agreed with Continental to purchase Continental bread and to sell it in their trade areas.

They remained independent, competitive entities.

Justice William H. Rehnquist: Where does Continental make the bread that it supplies to Missoula and Durango and Cheyenne?

Mr. John H. Schafer: The Missoula bread came out at Spokane bakery, Spokane, Washington, the bread for Durango and Cheyenne came out of it's Denver bakery.

These companies remained independent, the sole-owned companies.

They own their own assets.

They own their own trucks, they hire their own personnel, they own their own sales roots.

Their customer lists -- there are number, they owned all their assets, they were not acquired by Continental.

There is nothing here, but a distribution agreement, a requirements contract, a sales agreemnt, whatever you want to call it.

Justice Lewis F. Powell: Mr. John H. Schafer, did the agreements with Continental prohibit these three smaller companies from producing bread in the future?

Mr. John H. Schafer: No, it did not Mr. Justice Powell.

Justice Lewis F. Powell: They were free to do that, isn't it?

Mr. John H. Schafer: They were free to do that, yes.

The fact is that Shepherd Baking Company, after this record closed, Shepherd Baking Company in Durango, for its own independent reasons concluded to switch suppliers, so that Continental no longer supplies Shepherd in Durango.

Justice Byron R. White: You did stipulate that the understanding was that the companies would not continue to produce?

Mr. John H. Schafer: Yeah, we knew they were no longer going to be producing, they told us that.

Justice Byron R. White: And that was the understanding -- the fact it may not have been explicit?

Mr. John H. Schafer: It was not an understanding in a contract bargained for sense Mr. Justice White.

It was simply our understanding that as a matter of fact, these companies were no longer, for their own independent reasons, going to bake bread.

Justice Byron R. White: You had – if you would have thought they were -- if you had it -- unless you had thought, they were not going to make bread, you thought (Inaudible)

Mr. John H. Schafer: They would have never had no interest whatever in buying Continental bread if they are going to bake their own bread.

Justice William H. Rehnquist: Would a resumption of production on their part been actionable so far as Continental was concerned?

Mr. John H. Schafer: Not at all, not at all.

Justice Lewis F. Powell: Mr. Schafer --

Chief Justice Warren E. Burger: Did Continental agree to supply all their requirements?

Mr. John H. Schafer: It did agree to supply all their requirements.

They were free to purchase bread from other -- items from other bakeries, but Continental had the right to approve that, and the record shows that on some occasions, application was made to purchase other products from other bakeries and that approval was granted.

Justice Lewis F. Powell: Mr. Schafer, you have mentioned the economics of the bread business. One of these companies had sales of $300,000 a year.

What would the profit margin among the sales of that magnitude be in the bread business?

Mr. John H. Schafer: Well, today it would be a substantial loss.

I don't if the record reflects that, that's not high volume.

Justice Lewis F. Powell: I understand.

Mr. John H. Schafer: And it would depend upon the economies of scale that he could achieve in his producing plan.

Now with that kind of volume, he probably had production costs running something like 75% of his total wholesale prices and you are not competitive at that level.

You have got to be producing the bread, it's something like 45-50% of the total price that you sell it for and the rest of your, and then your distribution costs account for another 40% or so and then you are looking at the maximum or 50% profit.

But a small volume baker is running very high production costs, and for that reason, these bakers, as I say independently concluded to withdraw from the production end of the business, but to engage as independent companies in the sale of the bread.

Justice Harry A. Blackmun: Mr. Schafer do you think the Eighth Circuit's Beatrice Food case is at all distinguishable from your case?

Mr. John H. Schafer: I think that the underlying issue of violation is much – is clear, relatively clear there Mr. Justice Blackmun.

We contend we did not violate the order; I don't know, I don't make that contention as to Beatrice.

I think there was an acquisition there.

We are contenting there was not, but the continuing penalty question is not distinguishable in our judgment.

Justice Potter Stewart: -- that issue.

Mr. John H. Schafer: It's a clear conflict Mr. Justice Stewart on that issue.

The Beatrice Court adopted in toto the arguments being urged upon this Court in this case and that were urged on the court in the Tenth Circuit case.

They adopted in toto the government's argument that to enforce the purpose of this consent decree, you have got to construe this transaction, this consent order in the way we want you to.

And as I say, that in our judgment is contrary to all of the decisions that this Court has rendered on the matter.

Now we also contend that the government, even if you were to look to purposes, even if you contrary to Armour and the other cases, if you were to agree with the government that you could look at purposes, it doesn't help the government here at all, because this was a complaint directed against the act of acquisitions.

The Section 7, the Clayton Act, under which the complaint was filed, of course reads on acquisitions.

You are concerned about concentration and what not, is completely handled by a ban against acquisitions.

The retention argument just doesn't make in our judgment any sense; you don't need that.

If I acquire my competitor or if I acquire my competitor's supplier, or my competitor's customer, that act of acquisition is what Section 7 reads on, and if there is any adverse impact on competition, it's that act.

It doesn't matter whether I scrap that acquisition and sell it to the junk man, or whether I retain it.

If I buy my competitor, he is out of business who is no longer in competition.

So it's the acquisition that the --

Justice Byron R. White: If you don't sell it to the junk man and don't scrap it, and you continue to hold it and operate, I suppose that you might be entitled and maybe forced to divest?

Mr. John H. Schafer: That's true, that's true.

Justice Byron R. White: On the theory that you are -- at the time of the divestiture, you are still injuring competition.

Mr. John H. Schafer: In the penalty action, you mean we are not in Section 7 case.

Justice Byron R. White: I mean Section 7.

Mr. John H. Schafer: Yes, I think that's right, you are still injuring because the act that you committed back in 1917, if you will, the act that you committed at the time of suit can be said to be causing an adverse impact on competition.

Justice Byron R. White: Divestiture is normally not ordered if at the time of the order, there's the -- nobody is being hurt?

Mr. John H. Schafer: Well, I suppose there is no violation.

Justice Byron R. White: Well, my question is what's the theory on which a divestiture is ordered?

Mr. John H. Schafer: As I understand the theory which comes of course out of this Court's decisions that divestiture is almost mandatory, where a violation of Section 7 is found, divestiture is virtually mandatory, because that's the only hope you have of reconstituting the industry before the illegal act occurred.

Justice Potter Stewart: And the divestiture is the antonym of acquisition, that's the way you unring the bell of acquisition is by divestiture?

Mr. John H. Schafer: That's the good word, yes, that's my understanding of the concept.

Justice Byron R. White: But you don't order divestiture at the time the remedy question comes up, there is no longer an injury to competition?

Mr. John H. Schafer: That may be, I am having hard time understanding how that could then be a violation Mr. Justice White, if there is no --

Justice Byron R. White: Well it was at the time?

Mr. John H. Schafer: Well, at the time of suit.

The question is whether or not at time of suit, there was adverse impact on competition.

If they were none, I take that there'd be no violation of Section 7.

If there were, the routine solution is divestiture to put the industry back to where it was before.

Now, in our judgment the government position here, as I guess I have suggested violates the two basic principles of consent decree construction, settled by Armour, settled by Hughes and other cases.

One is that the language is to be construed as it's written, it's like a contract.

And this language is the government really admits in its oral argument, and in its briefs, this language has to be changed in order to support this claim for daily penalties.

It has to be changed to read beyond acquisition, it has to incorporate the concept of holding and retention, and that is not construing then the consent decree as it was written is construing in a different way.

The second tenant of construction is that this Court's decisions instruct us that you don't as I say look to the purposes underlying the statute or the purposes so called underlined the consent decrees.

As I have said that the government's position simply doesn't support its claim that you look to our concentration.

You saw when you concerned about concentration by banning the act of acquisition, that's what this order did.

There is no basis in this record certainly for a so called concern on the part of the government, that if you don't construe this consent order to afford the basis for daily penalties that you are going to have flagrant violations of these consent decrees.

As Mr. Friedman admitted, as far as everybody knows there is only been two situations like this come up in all of the years of Clayton Act enforcement.

Section 7 as I have said, seems to me to be self enforcing even though the only remedy there is divestiture, And anyway such fears in enforceability or un-enforceability of consent decrees are really irrelevant to how you construe a consent decree. As we struck the bargain in 1962, we labored over it.

The government wanted the 20-year ban, we wanted the 5-year ban, we ended up with a 10-year ban.

The government wanted to proscribe acquisitions of any companies engaged either in the production or the sale of bread and we didn't want that, because we wanted to be free to buy, acquire companies without violating the order, that were engaged only in the sale of bread, because of that time there were many such independent little companies strung around the country, who were basically one man shows, and who from time to time came to Continental and wanted to be acquired because they were getting old or something.

So we bargained for that and we changed the word production or sale in the order to production and sale.

So these are very important words that we bargained of.

As the District Court found this, there was a reasonable basis for reading the order the way we read it, not to ban these transactions.

There is no basis here to say that this was a flagrant violation of this order.

As I have said there had been no record except for the Beatrice case of any other situation like this coming up.

And moreover these so called fears of the government about flagrant violations continuing can surely be amply accommodated by changing the outstanding orders they have through proper procedures with proper hearings, and by writing new orders which read on the situation as they want this one to read.

As I have said that in our judgment, the government's argument here is short sighted.

Consent negotiations, consent decrees, and consent judgments are extremely important to the antitrust enforcement program.

They are important to the -- I know the SEC and to other government agencies, and if we are going to now import all kinds of vague concepts of purpose into these consent decrees, we are not going to -- we are going to certainly chew any enthusiasm, anybody might have for disposing a litigation and abandoning the right to trial by coming up with a consent disposition of a case.

The government, turning if I may briefly to the question raised by the government as to whether or not we are permitted or may should be permitted to raise the other issues that we have raised in this case, for many years, at least up through the American Express decision this Court routinely held as consistent with appellate practice, that a party can present any argument in support of the judgment below.

The government now claims this Court has gone away from that standard and has adopted new standards.

Government now claims that we may not without cross-petition for certiorari, may not raise an issue where the logical impact of that issue would be to secure reversal below even though the party isn't asking for it.

We have cited the Court to Mr. Stern's article in Harvard Law Review on this matter of practice.

It says virtually everything there is to say.

Justice William H. Rehnquist: But it says our Strunk opinion is wrong too, doesn't it?

Mr. John H. Schafer: It says the Strunk opinion and others can be read in a number of ways.

It says they can be read, so as not to bar a party from raising issues in support of judgments below and Mr. Stern of course urges this Court to make that clear.

He does point out the tremendous burden that would be imposed upon this Court, and upon the Solicitor General's Office, and upon parties if they were required to file what really be useless anticipatory petitions for certiorari.

In this case isn't a good example.

We do not know that government was going to petition for certiorari until after the period of time expired in which we could petition, because the government, as is not unusual got it an extension of time at the last minute.

We got notice of that in the mail after the time had run.

So we didn't have an extension they did, and they filed a petition.

Now to protect ourselves, we would have been, under the government's interpretation we would have to file a precautionary petition for cert with this Court.

I don't see any real reason to require that.

There is no policy judgment that I can figure out that would warrant that because in our response to the government's petition we listed in our brief in opposition, the points that we would raise or feel were relevant, in the event the case came up.

The government thereby was not prejudiced when they prepared this brief on the merits, it knows all the issues that we planned to present, it can address itself to it.

So I don't think that there is any reason to insist upon these -- really what, without a strict rule of practice would be unnecessary petition for certiorari.

Justice William H. Rehnquist: How about our control of our own docket.

Now when we grant a petition for certiorari we know that the issue is going to be limited to one or two issues.

Now we could have a cross-petition and deny that, thereby indicating we just don't want to consider those issues.

You are suggesting I take it, that if a cross-petition is filed it would be automatically granted.

Mr. John H. Schafer: No, I am not Mr. Justice Rehnquist.

I said that it seems to me the proper practice is as we did here to list in our brief in opposition to the Cert Petition, those issues which we feel the Court should reach if it gets into the case.

Now the Court at that time could easily say in its grant, we are limiting this grant to these issues.

The Court is informed in other words and the Government is informed in other words without a labeled petition for Certiorari, the Court and the Government are informed that the issues sought to be presented and the Court can at that time or later on control its own jurisdiction by concluding that the issues that one seeks to present are not cert worthy issues on their own.

I think these issues are clearly cert worthy that we are trying to present.

The underlying issue of whether there was a violation here or distributorship arrangements, requirements contracts normally --

Justice Byron R. White: [Inaudible]

Mr. John H. Schafer: Well, they are important -- the question is Mr. Justice White, whether or not a --

Justice Byron R. White: [Inaudible] you decide it on your own --

Mr. John H. Schafer: Oh yes!

We were content to leave the case where it was, it didn't warrant to coming up here for that penalty, that's true and the order had expired, order has long since expired.

There was no continuing dispute here that warranted our seeking this Court's attention.

As I say that the issues we are seeking to present in our judgment are cert worthy.

It is a requirements contract normally thought of if at all under Section 3 of the Clayton Act, is that an acquisition of the sort that Section 7 of Clayton Act reads on.

Is the commission permitted to reach a conclusion that a party is incurring daily penalties of up to ten thousand, in this case thirty thousand dollars per day because the statute has been amended, is it permitted to do that without putting the party, the respondent on notice that it is in jeopardy.

I think that is a very serious issue.

Several District Courts have agreed with us on that.

I think it's clearly an important issue for this Court to reach.

If it disagrees with us that daily penalties may be imposed here, if the Court doesn't -- if the Court in other words adheres to Armour and adheres to Hughes and Atlantic Refining and the others, of course these issue are not reached.

It's only if the Court should disagree with us and conclude that daily penalties may be asserted, then we feel that the question has to be reached that was there a violation here, is the Commission permitted simply the stand lightly by and let a respondent pile up penalties.

And thirdly, is ITT Continental Baking Company a successor of Continental where there is in the consent order no successors and assigns language.

Armour of course flatly says, that where there is no successors and assigns language in a consent decree, the decree is not binding on successors and assigns.

I would think that would be dispositive of this --

Justice Lewis F. Powell: Mr. Schafer is there any difference between you and Mr. Friedman as to the maximum amount of the possible penalty on the Government's theory?

Mr. John H. Schafer: In their complaint they asked for thousand dollars a day, Mr. Justice Powell.

The Court, for reasons that were not stated assigned to penalty of five thousand a day for one days violation for two different transactions, without an amendment to the complaint.

We did not oppose that.

I think, frankly I think the government could have put in a proforma complaint amendment and cured that.

The statute now permits ten thousands dollars per day, it's been amended since.

Now, if that amended provision is applicable to this case and I suppose it is retroactive, you are looking at a possible penalty claim of upwards of twenty millions of dollars in this case.

Thank you very much.

Chief Justice Warren E. Burger: Thank you Mr. Schafer.

Thank you Mr. Friedman.

The case is submitted.