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UNITED STATES v. PULLMAN CO.

DISTRICT COURT, E.D. PENNSYLVANIA


April 20, 1943

UNITED STATES
v.
PULLMAN CO. et al.

The opinion of the court was delivered by: GOODRICH

Before BIGGS, MARIS, and GOODRICH, Circuit Judges, sitting pursuant to the Expediting Act, Act of Feb. 11, 1903, as amended, 36 Stat. 854, 1167, 15 U.S.C.A. § 28.

GOODRICH, Circuit Judge.

This is a proceeding brought by the United States to restrain alleged violations of §§ 1 and 2 of the Sherman Act and § 3 of the Clayton Act. *fn1" The principal corporate defendants are the Pullman Company, the Pullman-Standard Car Manufacturing Company and Pullman, Inc. A description of the corporate defendants and the relation of the individual defendants therewith are found in the stipulation of facts entered into between the parties, found as facts by the Court. They need not be repeated here.

 The Pullman Company is today, and has been since 1900, except for railroads which have performed their own sleeping car service, the only person or company in the United States engaged in the business of furnishing sleeping car service to the railroads of the United States. Plaintiff does not contend that the mere fact that one engages in an interstate commerce business in which he has no competitors makes him a violator of the Sherman Act. It contends rather that Pullman is the sole entrepreneur because of the successful completion of a plan formed in the early days of the company's history to eliminate its competitors and its successful arrangement of affairs with contracting railroads to the end that no one else can now get into a position to compete either in manufacturing, furnishing or operating of sleeping cars.

 George M. Pullman was the founder of the business which still bears his name. That name has become synonymous with sleeping car transportation in the United States. In 1858 Mr. Pullman arranged with a predecessor of the Alton Railroad to remodel two of its day coaches into sleepers. In 1863 he and Benjamin Field constructed an entirely new sleeping car, the famous "Pioneer", the success of which laid the foundation for the general introduction of sleeping car transportation in America. The Pullman business was incorporated as Pullman's Palace Car Company in 1867.

 It serves no useful purpose to detail in this opinion the facts concerning the development of the sleeping car business from 1858 to 1900 already appearing in the findings of fact made by the Court upon the testimony and exhibits or settled by stipulation of the parties. Numerous companies and individuals entered the field. Varying types of arrangements were made between sleeping car companies, including Pullman, and the railroads. Sometimes the furnishing of sleeping car service was a joint affair with the railroad and the sleeping car company both participating. Sometimes it was an out and out contract to provide a service in sleeping cars. Our findings of fact state that there was competition to some extent between sleeping car companies for the business of the traveling public at one time. While the Wagner Palace Car Company's sleeping cars were used on what are now known as the New York Central lines and the Pullman Company's sleepers were used on the Pennsylvania lines, obviously the passenger from New York to Chicago had his choice of competing sleeping car services.

 More important was the competition, or possibility of competition, among sleeping car companies for the business of supplying the various railroads with sleeping cars and sleeping car service. There was such competition. Officers of the Pullman Company stated this as a fact before the Interstate Commerce Commission. Pullman at one time or another lost the business of the Central Vermont, the Chicago & Northwestern, the Chicago, St. Paul, Minneapolis & Omaha, the Missouri, Kansas & Texas, the Michigan Central and the New York, Ontario & Western to Wagner. At other times it had lost its business on the Richmond & Danville and on a portion of the Central Railroad of New Jersey to the Union, Mann and Woodruff companies. It is true that not all of the various sleeping car companies competed with each other for the business of all the railroads. In some instances, their operations were non-competitive, one's operation beginning at the geographical point where the other's service ceased. But there was some competition and always the possibility of more, depending upon the aggressiveness of the management of the various companies, where several sought the sleeping car business of the railroads.

 At an adjourned special meeting of the stockholders of Pullman held on January 31, 1870, the following entry, inter alia, appears in the minutes of the meeting: "Whereas, -- It appears to the Stockholders, upon full consideration of the subject, that the importance and value of the Business conducted by this Company very largely depends upon forming continuous lines of Sleeping Car communication, and also upon the absorption of Sleeping Car facilities upon as many Trunk Lines of Railway as possible thereby preventing useless competition; --"

 Again, on April 3, 1873, at a meeting ratifying the acquisition of control of the Erie and Atlantic Sleeping Coach Company, the minutes state: "Whereas -- It is deemed expedient to embrace in our system as far as practicable all the through lines between Chicago and New York, * * *."

 The plaintiff stresses the importance of these recitals; the defendants minimize them. We think they are competent evidence to show defendants' state of mind at the time. The time, of course, was a good while ago, long before the Sherman Act. But if such declarations point in the direction of a path which has been followed continuously since their adoption, it is not unfair to take them as the initiation of a consistent Pullman policy. Standard Oil Company of New Jersey v. United States, 1911, 221 U.S. 1, 46, 47, 75, 76, 31 S. Ct. 502, 55 L. Ed. 619, 34 L.R.A., N.S., 834, Ann.Cas.1912D, 734; United States v. Reading Company, 1920, 253 U.S. 26, 43-45, 40 S. Ct. 425, 64 L. Ed. 760.

 Between 1867 and 1900 the Pullman Company acquired every other sleeping car concern in the United States which had not theretofore gone out of business or had not been acquired by other companies subsequently absorbed by the Pullman Company or by the Wagner Palace Car Company. The last purchase was that of the Wagner Palace Car Company which was acquired in 1899. This was the only acquisition which was shown to have occurred after the passage of the Sherman Act. We heard a great deal in the evidence concerning the surrounding circumstances of these acquisitions and especially that relating to the Wagner Company. Defendants point out, and the plaintiff concedes, that in no case was the acquisition by Pullman the result of predatory practices such as misrepresentation, temporary price cutting to kill a competitor, or the like. Pullman further says that the price paid in each instance was reasonable and that the overtures which resulted in the acquisition were made by the seller and not Pullman as buyer. Plaintiff disputes the reasonableness of the price paid in some instances, especially in the cases of Central Transportation Company and the Wagner Company.

 We do not think that the issue whether defendants have violated the Sherman Act turns upon who initiated negotiations for purchase or whether the price paid by Pullman was high or low. Pullman did buy and whatever the price paid was, it was not too much from Pullman's point of view for it built the units secured into an integrated and successfully operated whole. Competitors were all absorbed. *fn2"

 If this were all we had in the case we should face the difficult question whether a violation of the Sherman Act is involved where a business enterprise, admittedly engaging in interstate commerce, has acquired the sole possession of the field by absorption, in non-predatory fashion, of all of its competitors. Defendants say that to answer this question in the affirmative is to maintain that one in business competition may do everything except succeed. The plaintiff's position on the point is categorically taken with an affirmative answer to the question. It says that mere possession of exclusive control over a commodity or service constitutes monopolization; a fortiori there is monopolization when such power is obtained by acquisition of competitors. For this conclusion it cites Standard Oil Company of New Jersey v. United States, 1911, 221 U.S. 1, 31 S. Ct. 502, 55 L. Ed. 619, 34 L.R.A., NS., 834, Ann.Cas.1912D, 734; United States of America v. American Tobacco Company, 1911, 221 U.S. 106, 31 S. Ct. 632, 55 L. Ed. 663; United States v. Reading Company, 1920, 253 U.S. 26, 40 S. Ct. 425, 64 L. Ed. 760; United States v. Great Lakes Towing Co., D.C.N.D.Ohio, 1913, 208 F. 733. However, the Court does not feel compelled to rest the decision of this case on the fact of a company acquiring all its competitors by purchase, the last acquisition being forty-three years ago. While the doctrine of laches does not apply against the United States *fn3" we should approach the question of equitable relief with great hesitancy in a case where the last operative fact was nearly half a century old.

 The plaintiff's case, however, is not presented in such a closed volume. The contention is that not only did the Pullman Company engross the market through the acquisition of all competitors, but that it has maintained itself since as the sole proprietor of the business of furnishing sleeping car service by devices which have continued and entrenched its exclusive position. Further, it is urged, the business practices of the defendants right up to the time of this law suit are such that only an organization with complete monopolization of the market which it serves could follow them. Such a domination, declares the plaintiff, is the clearest possible example of the practice which the Sherman Act was designed to prevent.

 Do the facts show that the defendants are not only the sole proprietors in the sleeping car business, but that their control is such that no one else can enter it? It is not that the Pullman Company or its manufacturing associate, Pullman-Standard, have any exclusive legal rights in the manufacture of sleeping cars. The parties stipulate that there are no basic patents standing in the way and that there are several manufacturers in the country ready, able and willing to make sleeping cars if called upon to do so. Nor has the Pullman Company any legal standing to operate sleeping cars on railroad lines without permission of the railroad. In its relation with the traveling public, Pullman is subject to regulation by the Interstate Commerce Commission; its relations with its railroad customers are a matter of contract. And the business about which this suit centers is not that of furnishing sleeping cars to the public, but that of supplying such cars and the service incident to their operation to the railroads of the country. It is in this business that the government contends that the defendants have violated the Sherman Act.

 The next step is, then, to examine the evidence bearing upon how the defendants, sole operators in the sleeping car business since 1900, are alleged to have so fortified their position as to repel all possible attempts at competition. The alleged means are various.

 The exclusive dealing feature. A standard provision appearing in most of the contracts offered in evidence, is that Pullman shall have the exclusive right to furnish all the sleeping cars to the railroads. In some contracts, particularly the recent ones, Pullman is expressly given the exclusive right to furnish "the usual service" in such cars. However, it is clear that it has that right under all these contracts. In the early days of the sleeping car business, this was not always so; contracts were made by Pullman for service on a segment of some railroad's lines where another sleeping car company had a similar contract for service on some other portion. Even now there remain a few instances where railroads continue to furnish their own sleeping car service upon some of their lines. The Canadian Pacific, which runs into United States territory, has a Pullman contract for part only of its sleeping car service. But, with only minor exceptions the country-wide network of sleeping car service is supplied by Pullman Company cars and service and the contracts provide for exclusive Pullman service in the furnishing and operating of sleeping cars.

 These facts, in the large not a subject of dispute, have significance in the whole legal picture, though we do not need to draw any conclusion from them alone. No doubt the sole laundry in a town may agree to devote all of its facilities to the service of the local hotel for a year, and the hotel proprietor agree to deal exclusively with that laundry for the contract period. A monopolization and a restraint of trade are involved. In the ordinary case, they are too slight to invoke legal consequences. But when the one rendering the service makes an exclusive service contract with the many others in the whole nation who have need of such services, the question is certainly different and the answer may conceivably be so too. Admittedly the difference is one of degree but we all understand by now that it is none the worse for that. But no conclusion need be drawn until we look at all the figures in the picture.

 Service from Pullman's cars only. That it is Pullman's policy and practice to furnish sleeping car service only with cars owned by it is undisputed. "The Pullman Company has never held itself out to perform service in sleeping cars owned by others and is not and never has been engaged in such business * * *. The Pullman Company has stated upon inquiries from railroads that its responsibilities in the performance of its sleeping and parlor car services will be discharged only with equipment and organization of its own choice." *fn4" In other words, the position of the Pullman Company is that if a railroad wishes to avail itself of Pullman sleeping car service, it may have it with such cars as Pullman chooses to provide. That choice is the cars owned by Pullman and for the most part either manufactured by it or its associate Pullman-Standard. "Since 1900, either Pullman Company or Standard has manufactured all new sleeping cars acquired by Pullman Company." *fn5" Some used cars have been acquired by it in taking over sleeping car service on railroads which formerly furnished their own service with their own cars.

 There have been a few exceptions to this practice. The Denver & Rio Grande Western has four specially built cars, two of which are sleepers and buffet lounges which are railroad owned and Pullman serviced. *fn6" The Santa Fe and the Burlington each bought some lightweight sleeping cars which, after considerable discussion, were finally leased to Pullman and operated by it on the respective lines. This incident will be mentioned later. Despite minor exceptions, the general policy of Pullman is perfectly clear and has been consistently maintained. Pullman sleeping car service is to be had in Pullman owned sleeping cars only and Pullman is to make the choice of what kind of cars they are to be and where they are to be obtained.

 Defendants say that this is but an instance of a contractor employed upon another's premises stipulating for the use of his own tools in doing the work. Here again, we must guard against a generalization which concludes that because an arrangement is legal for one degree, it is equally so for the whole three hundred sixty. The problem as to the exclusive furnishing of cars is not essentially different from that of exclusive dealing with the supplier described above. We are dealing here not with one contractor and one landowner but a contractor who has an arrangement to supply its own choice of sleeping cars to every railroad in the United States. That Pullman in fact controls the furnishing and servicing of sleeping cars is clear, whatever the legal consequence of such control may be. Here again, as with the exclusive dealing arrangement, consideration of the problem of law presented may be deferred until the picture is filled in.

 Timing of contracts. Two points were developed in this connection:

 One has to do with the term for which Pullman railroad contracts are drawn. The fact is settled by stipulation. Between 1890 and 1920 the term of most of the contracts was from 15 to 25 years. Between 1920 and 1932 the term of most of such contracts was 15 years, and since 1932 the term of most of such contracts has been five years. It is not covered by the stipulation but we think it clear that the reason for the short term contracts since 1932 was Pullman's fear of finding itself obligated under a long term contract in the face of rising costs and decreasing business. *fn7"

  As a competition killer the long term contract is an effective weapon. One could hardly have a more favored service contract than an agreement for exclusive dealing, equipment of one's own choosing and a quarter century of time to elapse before one need to be concerned with new terms. Even a patentee is not so secure against the passage of time. Multiply the advantage by the number of railroads with whom Pullman secured service contracts and its position, for the years covered, was impregnable.

 The security in long time contracts has been buttressed further by staggered expiration dates. No evidence was shown us that Pullman officers and directors discussed the subject and determined upon a policy of arranging railroad service contracts so that they would expire at dates well separated from each other. The advantage in bargaining position of Pullman if it could deal with one railroad at a time is too obvious, however, to require discussion either in corporate board meeting or court decision. There is nothing new in the adage: Divide and Conquer. In any event, the contracts through the years did end at different times for different roads, with advantage to Pullman's bargaining position. When Pullman was faced, for one reason or another with joint or simultaneous negotiation with a group of roads, it experienced additional difficulties and inter-office correspondence among its officers speaks with weariness of the tendency of the roads to "gang with" others in their demands. *fn8"

  Feasibility of alternatives open to railroads. Pullman calls attention to one point very strongly.After all, it tells us, no railroad need use Pullman service unless it wants to do so. Pullman has no legal right to set foot on railroad property without the owner's permission. It is the railroad, not Pullman, which has the public duty to provide passengers on trains a place to sleep. If any railroad does not want Pullman's service in meeting this obligation, the argument continues, it is perfectly free at the expiration of any contract period, to hire someone else to perform the service, or do the job itself, as it pleases.

 To this the plaintiff responds that while the argument sounds plausible, no other course but use of Pullman cars and service on such terms as it can get is a practicable one for the railroads. We think that this response is correct in point of fact though the considerations which lead to the conclusion vary among the different roads. The point is important and merits some discussion. The alternative at the present time is not that the railroad may turn to some service company other than Pullman to do the job. There have been no others in the field since Pullman bought out Wagner more than forty years ago. The alternative is, rather, that the railroads either separately or together, urn their won sleeping car service. If a railroad is to do its own sleeping car business it must, of course, have sleeping cars. If new cars are to be furnished they will as a matter of commercial necessity be the lightweight type. Pullman itself has not built or purchased any of the older type heavyweight cars since 1931. New lightweight cars cost, at the beginning of the war, about $80,000 each. It is highly unlikely that they, or new cars of any kind, can be manufactured or purchased during the war emergency. It is possible that if lightweight cars were to be produced after the war in large numbers, the unit price would be considerably reduced. Even at $60,000, to provide an all new lightweight car fleet for any railroad would demand an enormous flow of capital into that industry. The Boston & Maine system, for example, uses in non-peak periods approximately from 54 to 74 cars daily; the Chesapeake & Ohio from 46 to 69; the Missouri, Kansas & Texas from 49 to 55. In the case of larger roads, such as the Pennsylvania and New York Central, the minimum requirements are considerably larger. On the Pennsylvania alone, Pullman has put in operation in the past five years 142 lightweight cars, at an estimated average cost of $80,000 per car, the contract calling for 200 such cars. The situation with respect to the New York Central is similar. The necessary investment at $60,000 per car for non-peak service for the smaller roads mentioned would be: Boston & Maine Railroad $ 3,240,000-$ 4,440,000 Chesapeake & Ohio Railway Company $ 2,760,000-$ 4,140,000 Missouri, Kansas & Texas Railway Company $ 2,940,000-$ 3,300,000

19430420

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