units, the degree of corrosiveness of the fuel being used in the boiler, and the durability of the material used in the element. (Stip. PP 10, 11).
22. Replacement element is essentially steel sheet corrugated to certain configurations and cut to fit into the many pie-shaped frames (called "baskets") which are contained in the rotor part of the Ljungstrom air preheater. (Wheeler N.T. 154-156; Def. Ex. 312, pp. 10-13).
23. Given the configuration of the corrugation of the steel and the dimensions of the elements in the original air preheater, any skillful metal fabricator can manufacture replacement element. (Wheeler N.T. 168).
24. Moreover, the capital investment required to manufacture replacement element is not large. (Wheeler N.T. 168-169).
25. On the average, the heating element represents about 60% of the total weight of a Ljungstrom and somewhat less than 50% of the cost of manufacture. (Jamieson N.T. 37).
The Relevant Markets.
26. The two largest fossil-fueled boiler manufacturers are defendant Combustion Engineering and Babcock & Wilcox, with Foster Wheeler and Riley Stoker the next in size. Each of these purchases Ljungstrom air preheaters for installation with various boilers sold by it (Stip. P 12).
27. The principal purchasers of boilers equipped with a Ljungstrom air preheater are the utilities, but large industrial concerns which operate their own power plants (which are typically smaller than the power plants of utilities) also sometimes purchase boilers equipped with a Ljungstrom air preheater. From time to time these boiler users purchase replacement elements. (Stip. P 13).
28. In the first 10 months of 1971, the four major boiler manufacturing companies had the following percentages of the boiler business booked: Combustion had 39%, B & W had 37.4%, Foster Wheeler had 13.2% and Riley Stoker had 10.4%. (Pl. Ex. 174).
29. In recent years, Air Preheater's Ljungstrom has had about 90% of the preheater business in the utility market. The tubular heater, the lamiflow, and the Rothemuhle have the remaining 10%. The utilities use about 95% of these preheaters with the remainder used in large industrial boilers. (Pl. Ex. 162, McKee N.T. 237-38, Jamieson N.T. 35-36).
30. There is a nationwide market, which also includes Puerto Rico, for the Ljungstrom air heater and its replacement elements. (E.g. Pl. Exs. 231, 21, 28).
31. There is no factual basis for plaintiffs' claim that original element and replacement element constitute a single product market. The relevant product market to be used in testing the plaintiffs' claim in this lawsuit is replacement element for use in Ljungstrom air preheaters.
Description of the Parties and their Personnel.
32. Defendant Combustion Engineering in 1971 had assets of approximately $721,500,000 and sales of approximately $1,066,000,000. It has 7 divisions, among them its Combustion Division which fabricates nuclear and conventional steam equipment and marine boilers. Defendant Air Preheater is a wholly-owned subsidiary of Combustion, and it is primarily in the business of manufacturing and selling Ljungstrom air preheaters and associated equipment. (Stip. P 14).
33. Max Wheeler was a skilled machinist who had started his own machine shop in 1954. He had had no prior experience with either air preheaters or replacement element when he organized PRI in 1963 and entered the replacement element business with a capital investment of $35,000. (Wheeler N.T. 168-169).
34. Plaintiff PRI in 1963 started to manufacture and sell replacement element in competition with Air Preheater from a plant in Costa Mesa, California, near Los Angeles. Plaintiff PRC was started in 1966. It manufactures and sells replacement elements in competition with Air Preheater from a plant in Montgomeryville, Pennsylvania. Max Wheeler is the president and chief stockholder of both companies. He works out of Costa Mesa. James D. Jamieson, an ex-employee of Air Preheater, heads up the Montgomeryville operation. (Stip. P 15).
35. The Air Preheater executive who from before 1963 to date has had the most immediate responsibility for Air Preheater sales of replacement elements is John E. Baker, Manager of Air Preheater's Maintenance Sales Department. He has held that job since 1952. As of 1/1/64, Baker reported to E. G. Devine, Manager of Marketing, who in turn reported to T. R. Halstead, Vice President of Sales, who reported to J. L. Kelehan, President of Air Preheater. Also reporting to Halstead was B. S. Kelley, who was then General Sales Manager in charge of field sales. Effective September 1965 Baker began to report to General Sales Manager Kelley, who in turn reported to J. W. Garrick, Director of Sales (later named Vice President of Sales), who had replaced Halstead. Garrick in turn reported to W. R. McKee, President, who had replaced Kelehan. Beginning January 1969, Baker began to report to I. R. Eldridge, in charge of staff functions (later Manager of Marketing), who in turn reported to Kelley (General Sales Manager and then Vice President of Sales) who had replaced Garrick. Kelley reported to McKee. In August 1970 T. L. Woolard replaced McKee as President of Air Preheater, and McKee moved up to Combustion Engineering. In that position 5 subsidiaries, including Air Preheater, report to him. (Stip. P 16).
36. Halstead left Air Preheater on December 13, 1964. He was employed by Power Replacements on March 29, 1965, as their sales manager and mid-west representative and remained with Power Replacements about 11 months. (Stip. P 17).
Development of Competition Between Plaintiffs and Defendants.
37. In 1963, Air Preheater had a complete monopoly of the replacement element business, and enjoyed very high profits. It was making around 60% gross profit
on hot and intermediate element and around 50% on cold. (Pl. Ex. 67). The gross profit on all its spare parts business was around 51%. (Pl. Ex. 65). The high profitability of this business created conditions for competitive entry, particularly on the West Coast where the freight charged by Air Preheater for shipment from its plant in Wellsville, New York, added close to an extra 10% to the price that the customer had to pay. (Pl. Ex. 67). And the spare parts business was a rapidly growing one. (Pl. Ex. 17, McKee Dep. 34-22 to 36-8).
38. Thus on May 17, 1963, Devine, Manager of Marketing, in commissioning a review of spare part pricing wrote:
"There are a number of factors that are involved. Of particular interest is recent correspondence from the West Coast reporting on independent shops pirating our spare parts seal replacements. This happens to be one of the items that carries fairly high profit margin." (Pl. Ex. 64).
39. Some customers, among them Southern California Edison, West Penn Power, and American Electric Power, criticized Air Preheater for the prices it was charging. (Pl. Exs. 3, 65, 66). But Air Preheater continued as the only manufacturer, and everybody who needed replacement element had to pay Air Preheater's list price plus freight from Wellsville to the customer's plant.
40. In late 1963, Southern California Edison, the biggest user of heating element on the West Coast, began to look for an alternate source of supply of replacement elements. It turned to Max Wheeler, who operated Clark & Wheeler Engineering, a custom machining operation. Wheeler went into the replacement element business, using initially the facilities of Clark & Wheeler. Shortly after this operation got on stream, plaintiff Power Replacements, Inc. was set up separately for this purpose. (Pl. Ex. 21, 11/68; Pl. Ex. 151; Wheeler N.T. 154-56).
41. In reporting on the activities of Power Replacements to headquarters in Wellsville, Brow, the Air Preheater regional sales manager in Los Angeles, whose sales were most immediately affected by Power Replacements competition, reported as follows:
"Mr. Wheeler has recently formed a new company, to be known as Power Replacements, Inc. He is confident that he will be doing much business with utilities in the areas of Arizona, Nevada, and California in supplying spare parts for major plant items. For example; air heater surfaces, boiler burner parts, pulverizing castings, and many other items. His general attitude is that the utilities are free to buy spare parts wherever they please, and that the original manufacturers have had this lucrative business to themselves for many years at the expense of the customers."
Brow also noted that Combustion itself had already felt directly the results of Wheeler's efforts in making burner box castings for Combustion tangential burners, which orders had previously gone to Combustion, and Brow reported that he had discussed this with Combustion. (Pl. Ex. 24). There were also internal discussions in Air Preheater around 1963 to the effect that Wheeler's competition would hurt boiler manufacturers, especially Combustion, on boiler parts. (Baker Dep. 37-13 to 39-6).
42. With Power Replacement's entry, Air Preheater began to give immediate attention to pricing strategy. For example, on December 13, 1963, Devine wrote:
"In addition to correspondence we have had conversations concerning pricing of maintenance sales items. This is an item that bears regular review. However, the need for a review at this time has a certain urgency attached to it due to reports from our Los Angeles Office of competition for both heating element and seal." (Pl. Ex. 3).