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February 27, 1973

Power Replacements Corp.
Air Preheater Co., Inc. and Combustion Engineering, Inc. Power Replacements, Inc. v. Air Preheater Co., Inc. and Combustion Engineering, Inc.

Masterson, D.J.

The opinion of the court was delivered by: MASTERSON



 The Parties and the Court's Jurisdiction.

 1. These are two separate antitrust actions which were consolidated for trial, pursaunt to, F.R.C.P. 42(a) by order dated December 8, 1970.

 2. The plaintiff in Civil Action No. 70-3481 is Power Replacements, Inc., a California corporation incorporated in 1963 (hereafter "PRI"). PRI's production facilities have at all times been located in Costa Mesa, California. (Stipulation of Uncontested Facts in Final Pretrial Order (hereafter "Stip.") PP 2, 15).

 3. The plaintiff in Civil Action No. 43604 is Power Replacements Corp., a Pennsylvania corporation incorporated in 1966 (hereafter "PRC"). PRC's production facilities have at all times been located in Montgomeryville, Pennsylvania. (Stip. PP 1, 15).

 4. PRC was incorporated when the decision was made by PRI to build a plant in Pennsylvania to service the business in the East. The reason for having two separate corporations was to permit employees of the two different operations to own stock in the business for which they were working. (Wheeler N.T. 182).

 5. From the time when PRC was incorporated in 1966 PRI and PRC have had separate production facilities, separate books and records, different officers and employees, they have generally operated in different parts of the country and they have filed separate tax returns. The two plaintiff corporations have used different internal pricing sheets in figuring out their bids and the costs of production and selling costs of the two corporations are different. (Jamieson N.T. 95-97; Def. Exs. 105-108, 200-206, 220; Pl. Ex. 148).

 6. Defendant The Air Preheater Company, Inc. (hereafter "Air Preheater") is a Delaware corporation which manufactures and sells throughout the United States, among other products, a device known as an air preheater, together with replacement parts for the air preheater including a replacement part referred to as replacement element. (Stip. P 3).

 7. Defendant Combustion Engineering, Inc. is a Delaware corporation which owns all of the stock of defendant Air Preheater. (Stip. P 3).

 8. All of the parties are engaged in commerce among the several states. (Stip. P 5).

 9. This Court has jurisdiction over both of the consolidated actions by virtue of 15 U.S.C. §§ 15 and 26, the court has jurisdiction over both defendants and venue is proper in this Court. (Stip. P 6).

 The Product Involved.

 10. The two plaintiffs have alleged that the defendants violated Sections 1 and 2 of the Sherman Act (15 U.S.C. Sections 1 and 2) and Section 2a of the Robinson-Patman Act (15 U.S.C. Section 13(a), in connection with the sales of replacement element for installation in air preheaters. Neither complaint herein makes any allegations of unlawful activity in the manufacture or sale of air preheaters themselves.

 12. For an understanding of the issues involved in this case, however, a description of the air preheater is necessary. An air preheater is an auxiliary device used in connection with a fossil-fueled steam generating boiler -- i.e., one which uses coal, natural gas or oil as its fuel. The basic function of an air preheater is to reclaim a portion of the heat which would otherwise be lost up the boiler exhaust stack and utilize that heat to raise the temperature of the air entering the boiler for the combustion process. (Stip. P 7, Def. Ex. 312).

 13. The original air preheater was a tubular device, of a type generically referred to as a recuperative air preheater. The hot exhaust gasses passed through a huge bundle of stationary tubes and the cold incoming air passed over these tubes and absorbed the heat transmitted through the wall of the tubes. (Kelley Dep. 35-37; Jamieson N.T. 36).

 14. A different type of air preheater, the Ljungstrom, was invented in 1925 and was patented. It was generically a regenerative air preheater. (McKee N.T. 202).

 15. The Ljungstrom air preheater is manufactured and sold in various sizes and with various specifications. Its main parts are a rotor which contains the heating element, the rotor housing, the rotor drive mechanism, and various supporting and connecting structures. The heating element itself consists of corrugated strips of steel, welded in honeycomb fashion and built into pie-shaped sections for insertion into the rotor, where they are arranged in several layers. The honeycomb arrangement provides a very large surface within a relatively small space for the efficient transfer of heat. (Stip. P 9).

 16. In the Ljungstrom air preheater the rotor, containing the heating elements, rotates slowly first through the exhaust gas and then through the incoming air. The heating element absorbs heat from the exhaust gas as it passes through that field and then the incoming air is heated when it passes over the hot heating element as the element rotates slowly through the incoming air field. (Def. Ex. 312; McKee N.T. 251).

 17. Defendant Air Preheater acquired the U.S. patent rights for this Ljungstrom air preheater, but those basic patents expired several decades ago. (N.T. 4-5).

 18. Over the years the regenerative type air preheater has increasingly replaced the recuperative type air preheater in customer preference to the point where the regenerative type now accounts for around 90% of the preheater business. This is apparently the result of a greater efficiency of the regenerative type. This greater efficiency results in a greater saving of fuel over the life of the boiler. (McKee N.T. 225-228).

 19. Air Preheater is still the only company in the U.S. making and selling the Ljungstrom regenerative-type air preheater. Other substantial companies with extensive experience in the boiler business, including Babcock & Wilcox and Foster Wheeler, have tried to market regenerative-type air preheaters, but Air Preheater nevertheless sells around 90% of all the regenerative-type air preheaters sold in the U.S. (McKee N.T. 237-238).

 20. Plaintiffs have specifically disclaimed having any evidence that the commanding position of Air Preheater in the air preheater market was unlawfully achieved. (N.T. 4).

 21. The focal point of these consolidated lawsuits is competition in the sale of replacement element for use in Ljungstrom air preheaters. The heating element of a preheater has to be replaced after some years of operation. The service life of the element depends on a variety of factors. Among these are the design and workmanship of the 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 ...

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