UNITED STATES DISTRICT COURT, MIDDLE DISTRICT OF PENNSYLVANIA
September 11, 1981
R.S.E., INC., d/b/a Harrisburg Asphalt Company and d/b/a Wellsboro Asphalt Co., Plaintiff,
PENNSY SUPPLY, INC., Union Quarries, Inc., Hempt Bros., Inc., Silver Springs Construction Co., Kimbob, Inc., Robert M. Mumma, Robert M. Mumma, II, Max C. Hempt, Gerald L. Hempt, George F. Hempt, Bobali Corporation and 441 Corporation, Defendants
The opinion of the court was delivered by: RAMBO
To relate the history of this case in toto would require a Herculian effort on the part of the court, which is neither required nor warranted in this instance. Hence, this condensed, but satisfactory, version follows.
On August 2, 1977, plaintiff filed its complaint, alleging various violations of the antitrust laws and tortious interference with business relationships. Answers were timely filed thereto. An amended complaint was filed on November 14, 1977, and again answers were timely filed thereto. On June 8, 1978, after receiving approval by the court, plaintiff filed a second amended complaint, adding additional defendants. Protracted discovery and pre-trial motions ensued for the next year and a half. On December 7, 1979, the court ordered that discovery be completed by February 22, 1980 and dispositive motions be filed by March 7, 1980. Pursuant to a request for extension of discovery period by plaintiff, the court, on February 22, 1980, extended the discovery deadline until March 22, 1980, with dispositive motions to be filed by March 31, 1980. On March 3, 1980, at the request of plaintiff, the date for filing of dispositive motions was again extended until April 4, 1980. A final extension requested by plaintiff was granted on May 1, 1980, giving plaintiff until June 5, 1980 to file dispositive motions and establishing the dates for response and reply briefs.
All of the defendants filed motions for summary judgment prior to the commencement of trial, which was June 2, 1980. On April 14, 1980, the court granted partial summary judgment in favor of defendants on the plaintiff's claims under sections 2(a) and 2(e) of the Clayton Act, as amended by the Robinson Patman Act, 15 U.S.C. §§ 13(a) and (e). 489 F. Supp. 1227. The counterclaims filed by various defendants were severed and a separate trial ordered thereon, by order dated May 28, 1980. On May 30, 1980, the court granted the motion for summary judgment by defendant Locust Point Quarries in regard to all claims under the antitrust statutes and dismissed, without prejudice, all state claims asserted against them. In addition, the court granted in part and denied in part, defendants' motions for summary judgment.
On June 2, 1980, the selection of the jury commenced and the trial opened on June 4, 1980. It proceeded at a snailspace through the months of June, July, August and September, with several motions by plaintiff to alter the witness list, add additional witnesses, and conduct allegedly limited discovery with respect to the Joseph Ciccone Co., an allegedly comparable firm. On September 12, 1980, plaintiff was ordered to proceed with calling his witnesses in the order listed in plaintiff's August 12, 1980 witness list.
By late September 1980, plaintiff was foundering in its attempt to present a viable study on damages as a result of stone overcharges and requested an opportunity to revise its lost profit damage study. Plaintiff was given until September 25, 1980 to submit a revised study. Voir dire of the damage study disclosed several major errors in plaintiff's damage model and plaintiff was again permitted to make revisions. Permission to file several additional revisions was requested by plaintiff and granted by the court, with the final ruling by the court on a lost profit damage model being made on November 14, 1980. Plaintiff rested its case in chief on December 5, 1980. Both plaintiff and defendants moved for a directed verdict at the close of plaintiff's case; defendant Bethlehem Mines' motion was granted on all claims, the remainder of defendants' motions were granted in part and denied in part, and plaintiff's motion was denied.
Defendants began to present their case in defense on January 19, 1981 and concluded their defense on February 19, 1981. Plaintiff commenced its rebuttal testimony on February 20, 1981 and closed its case on March 13, 1981. Motions for directed verdict were reasserted by both plaintiff and defendants at the conclusion of all the evidence. The jury was charged on March 21, 1981 and returned a hung verdict on all but one claim on March 31, 1981.
Motions for judgment notwithstanding jury's failure to reach a verdict (hereinafter referred to as n. o. v.) were filed by both plaintiff and defendants as per the court's instructions and an expanded briefing schedule was established, which afforded all parties more than adequate time to present their respective arguments. Appropriate response and reply briefs have been filed and the court is now in a position to decide the respective motions for judgment n. o. v.
It is undisputed that in ruling on Rule 50(b) motions, the court "must consider the record as a whole and in the light most favorable to the non-moving party, drawing all reasonable inferences to support its contentions." Edward J. Sweeney & Sons, Inc. v. Texaco, 637 F.2d 105, 115 (3d Cir. 1980); Columbia Metal Culvert Co., Inc. v. Kaiser Aluminum & Chemical Corp., 579 F.2d 20, 25 (3d Cir.), cert. denied, 439 U.S. 876, 99 S. Ct. 214, 58 L. Ed. 2d 190 (1979). A corollary to that holding is the fact that in order to find in favor of the plaintiff on a motion for judgment n. o. v., plaintiff must prove all of the elements of the offense, whereas a defendant may prevail on a motion for judgment n. o. v. if it can prove any element has not occurred.
Plaintiff's Motion for Judgment n. o. v.
In its brief in support of its motion for judgment n. o. v., plaintiff addresses the following:
1. The joint sales agency between
a. Pennsy Supply, Inc. (hereinafter Pennsy) and Union Quarries, Inc. (hereinafter Union); and
b. Pennsy and 441 Corporation (hereinafter 441).
2. Price fixing on stone between Pennsy and Hempt Brothers, Inc. (hereinafter Hempt).
3. Concerted refusal to deal by all defendants.
4. Attempted monopoly of blacktop and stone aggregate by Pennsy and Hempt individually.
5. Conspiracy to monopolize the production of blacktop and stone aggregate between Pennsy, Hempt and Union.
The court will briefly address each of these claims seriatim, in light of plaintiff's burden to show all of the elements required to prove each claim.
Joint Sales Agency
Plaintiff's key premise in this allegation is that the joint sales agency between Pennsy and Union and Pennsy and 441 constituted a price fixing technique and was a per se violation of § 1 of the Sherman Act. In support of classifying the joint sales agency as a per se offense, plaintiff cites L. Sullivan, Handbook of the Law of Antitrust (1977), which states:
An arrangement involving a partial integration of functions, which may achieve significant economies of scale among competitors, also may escape per se treatment, even though it eliminates price competition between the firms that participate in it. To qualify for the application of the rule of reason, the arrangement must have the following two characteristics: first, the elimination of price competition between the participating firms must result directly from the partial integration of their functions; second, this elimination of price competition must not appear to significantly reduce market-wide competition. When these two conditions are met, the arrangement is not characterized as a price restraint and its legality is determined only after a full analysis to determine the extent of any reduction in competition and the extent to which integration benefits may be obtained. Id. at 206.
Plaintiff contends these two conditions are not met in the instant case and therefore the joint sales agency should be classified as a per se offense.
With this the court cannot agree. There is no question that any elimination of price competition was a direct result of the partial integration of functions of the respective firms. Further, the potential elimination of price competition did not have a significant reduction in market-wide competition because of the number and size of other competitors, who would gladly have underbid Pennsy, Union, or 441 if their bids became uncompetitive. For these reasons, the court is compelled to evaluate the joint sales agency under a rule of reason approach.
The court does not agree with defendants Pennsy, Union, and 441 that the "intraenterprise conspiracy doctrine" applies in the instant case. However, as discussed below, plaintiff's claim fails under the rule of reason test for another reason. In analyzing a restraint under the rule of reason, the court must determine whether the relevant markets, defined as both geographic and product market, are unreasonably affected. This can be accomplished by applying a percentage test or by analysis of the market structure. 1 Von Kalinowski, Antitrust Laws and Trade Regulation § 6.02(4)(c)(i) (1981). Plaintiff adduced no competent evidence to show that the relevant geographical market, which was defined by the jury as something larger than the "yellow blotch" proffered by plaintiff, was unreasonably affected. The figures from the Coopers and Lybrand study, specifically Exhibit IV (designated as R5177.2) do not bear out plaintiff's assertion that defendants Pennsy, Union, and 441 had nearly half of the relevant geographic market because the study did not cover only the area designated by the jury as the relevant market and no other data existed to determine the effect on the relevant market. Without competent evidence to show what effect would have resulted in the relevant geographic market, plaintiff could not prove that the joint sales agency was a violation of § 1 of the Sherman Act when viewed by the rule of reason test. See, 1 Von Kalinowski, Antitrust Laws and Trade Regulation § 6.02(4)(c)(i) and (ii) (1981). For these reasons, plaintiff's motion for judgment n. o. v. on the joint sales agency issue will be denied.
Price Fixing of Stone
Plaintiff's allegations that Pennsy and Hempt engaged in price fixing is initially supported by plaintiff by pointing to the testimony of Ms. Romayne Horne. Plaintiff contends that Ms. Horne's testimony is unrebutted and clearly proves a conspiracy to fix prices existed between Pennsy and Hempt. Taken at best, all that Ms. Horne's testimony proves is that published price lists were exchanged by Pennsy and Hempt, which Hempt used in forming its own price lists, and that officials from Pennsy and Hempt had conversations on an infrequent but regular basis.
Defendants Pennsy and Hempt countered this testimony with that of Mr. Hempt and Mr. Mumma who testified that they never entered into a conspiracy to fix prices, that they did have telephone conversations concerning the price of stone but that these related to legitimate sales between Pennsy and Hempt, and that because each were customers of the other on occasion, published price lists were sent out. Taken in the light most favorable to defendants, Ms. Horne's testimony clearly does not support the granting of a judgment n. o. v. on price fixing for plaintiff.
Plaintiff next contends that the testimony of Dan Grove shows there was a conspiracy to fix prices on behalf of Pennsy and Hempt. This contention is best addressed by subsequent testimony of Dan Grove which reads as follows:
Q. Mr. Grove, do you remember depositions of September 13, 1978. At that time you told me, did you not, that you had no knowledge or information concerning the price fixing of stone. Isn't that correct?
A. That's true.
Q. And you had no knowledge or information concerning the price fixing of cement concrete, isn't that correct?
Q. And you had no knowledge or information concerning price fixing of asphaltic concrete, isn't that correct?
Q. Do you remember at that deposition you testified that you had no knowledge or information concerning any improper acts of Max Hempt. Is that correct?
(Transcript, Vol. 11, p. 1638-39.)
The totality of Mr. Dan Grove's testimony cannot support the granting of judgment n. o. v. for plaintiff on its price fixing claim as it is conflicting at best.
Plaintiff also argues that the discussion of stone prices by the Hempts and Mummas at the board of directors meetings of Union establishes a price fix. Plaintiff contends this shows the explicit exchange of pricing data by officials of defendant companies. This argument is perhaps the most convincing one presented by plaintiff and the one that is most perplexing to the court. To rebut this testimony, defendants proffer the testimony of Wally Lewis, the fifth director of Union, who testified that Union's prices were set strictly on its costs and that neither Hempt's nor Pennsy's prices were discussed at these meetings. Defendants contend this is just more of the "opportunity" evidence and that such evidence, even when coupled with parallel business conduct, is not necessarily probative evidence, citing Weit v. Continental Illinois National Bank & Trust Co., 641 F.2d 457 (7th Cir. 1981).
While the court does not agree with defendants that such testimony could not be the basis for a decision in favor of plaintiff by a jury, it cannot say that a jury could not reasonably conclude otherwise, which is what the court must find if it is to grant plaintiff's judgment n. o. v. Because it is a jury question and because there is conflicting evidence, the court cannot grant plaintiff's motion on that basis.
Plaintiff's final contentions are that Pennsy and Hempt submitted identical or very similar bids and had very similar price lists. Taking into consideration the testimony of Ronald Nye, wherein he explained why the small differential in the bids of certain townships (Transcript Vol. 25, pp. 18-26), and the fact that the goods in question were fungible goods which are conducive to comparable if not identical prices, the court again cannot determine factual questions where material facts remain in dispute. Such determinations are undeniably in the sole province of the jury.
Accordingly, plaintiff's motion for judgment n. o. v. for price fixing of stone between Pennsy and Hempt must be denied.
Concerted Refusal To Deal
One of the key elements that must be proven in a concerted refusal to deal is the agreement or conspiracy of those allegedly refusing to deal. Plaintiff has proffered no direct testimony of a concerted refusal to deal or to deal only on discriminatory terms. Likewise, plaintiff has failed to provide circumstantial evidence sufficient to prove the existence of parallel conduct, a concept often used to assist plaintiff in its burden of showing concerted action. In Schoenkopf v. Brown & Williamson Tobacco Corp., 637 F.2d 205 (3d Cir. 1981), the court addressed the concept of parallel behavior, stating
To establish consciously parallel behavior, a plaintiff must show (1) that the defendants' business behavior was parallel, and (2) that the defendants were conscious of each other's conduct and that their awareness was an element in their decisional process. Id. at 208.
Plaintiff has failed to prove that the defendants' conduct was in fact parallel.
Assuming, arguendo, that plaintiff had proven defendants' conduct to be parallel, that standing alone does not prove concerted refusal to deal. Courts have held time and again that parallel business behavior, without more, does not prove concerted activity. Schoenkopf, supra; Weit, supra; Venzie Corp. v. U.S. Mineral Products Co., 521 F.2d 1309 (3d Cir. 1975). In Schoenkopf, supra, the court specifically held that, "Absent such additional evidence a directed verdict or a judgment notwithstanding the verdict should be granted." Id. at 208.
Further, plaintiff's own brief establishes a material fact in dispute, albeit unintentionally. Plaintiff states
There is no controversy concerning (sic) that substantial business relationships existed between RSE, Inc. and Hempt and Pennsy prior to the general knowledge that plaintiff was going to erect a blacktop plant. These included the sale and hauling of asphaltic cement, subcontracting of motopaving services, and trucking services. Similarly, there is no controversy concerning the curtailment of all such business relationships. (Plaintiff's brief in support of judgment n.o.v. at pp. 24-25.)
Plaintiff implies that prior to Pennsy and Hempt gaining knowledge that plaintiff would directly compete with them they were willing to provide services to plaintiff. Subsequent to learning of plaintiff's intentions, the business relationships were curtailed. As defendants have pointed out, they need not subsidize a direct competitor. Defendants' actions were at least as probative of sound independent business reaction as they were of concerted refusal to deal.
Plaintiff's motion for judgment n.o.v. on the issue of concerted refusal to deal will be denied.
Conspiracy to Monopolize
Plaintiff's claim of conspiracy to monopolize suffers from the same deficiency as its claim for concerted refusal to deal, namely no unrebutted proof of concerted behavior. (See Refusal to Deal section, supra.)
Last and least impressive is plaintiff's argument that Pennsy and Hempt attempted to monopolize and that Pennsy, Hempt and Union conspired to monopolize the sale and use of stone aggregate and the production of blacktop in the Harrisburg area.
As correctly pointed out by defendants, a § 2 claim for attempted monopolization requires a showing of a specific intent to monopolize and sufficient market power to come dangerously close to success. Harold Friedman, Inc. v. Kroger Co., 581 F.2d 1068 (3d Cir. 1978). Essential to the proof of the second element is the showing of the market shares in the relevant market. As pointed out by the court previously, plaintiff's documentation as to market share relates to the Harrisburg area, which was originally defined as a 25 mile radius from downtown Harrisburg. Plaintiff then proffered the "yellow blotch" as the relevant market, without making a showing of the respective percentage shares of competitors in that market. The jury, however, established as the relevant market, an area larger than but including the "yellow blotch." It is inconceivable to the court how plaintiff can seriously move for a judgment n.o.v. on the issue of attempted monopoly when absolutely no competent evidence was proffered for the jury to consider regarding the shares in the relevant market as found by the jury.
Accordingly, plaintiff's motion for judgment n.o.v. on the claims of attempted monopoly and conspiracy to monopolize will be denied. For the reasons set forth more specifically in the preceding sections, plaintiff's motion for judgment n.o.v. will denied in toto.
Defendants' Motion for Judgment n.o.v.
Having come to the conclusion that plaintiff's motion for judgment n.o.v. is not warranted in regard to any of the claims advanced by the plaintiff, the court must now address whether defendants' motion for judgment n.o.v. has merit with regard to any claims.
In their motion for judgment n.o.v. filed on April 9, 1981, defendants moved, in paragraph 1, for "judgment on all plaintiff's claims under Sections 1 and 2 of the Sherman Act on the ground that plaintiff failed to present evidence from which a jury could determine, without speculation, the injury, if any, suffered as a result of the alleged violations. In paragraphs 2 and 3, defendants challenged the evidence to support a finding for plaintiff on the Section 2 attempted monopoly charge and the Section 1 refusal to deal claims, respectively. Paragraph 4 contained defendants' motion for judgment n.o.v. on the state law claims, challenging liability and damages. Plaintiff argues that some of these issues, namely those in paragraphs 2 and 3, were not raised in defendants' motion for directed verdict at the close of all evidence, therefore cannot be considered pursuant to Rule 50(b) and the applicable case law of this circuit. Lowenstein v. Pepsi-Cola Bottling Co., 536 F.2d 9 (3d Cir. 1976); Beebe v. Highland Tank & Manufacturing Co., 373 F.2d 886 (3d Cir.), cert. denied sub nom. National Molasses Co. v. Beebe, 388 U.S. 911, 87 S. Ct. 2115, 18 L. Ed. 2d 1350 (1967). Plaintiff also challenges defendants' ability to raise the issues of "whether there was the fact of damage" and "whether the damage evidence besides the Wilcox report was sufficient to provide reasonable damage estimates."
Because the court did not consider the issues raised in paragraphs 2 and 3 of defendants' motion for judgment n.o.v., whether defendants could properly raise them becomes moot. With regard to the other issues, the court disagrees with plaintiff's contention that these were not raised by defendants in a motion for directed verdict at the close of all the evidence. Plaintiff's damage studies, whether they be referred to specifically as the Wilcox damage model, reference schedules, beachhead models, or whatever, were repeatedly and hotly contested by defendants at every opportunity, including the close of plaintiff's case, the close of all evidence, and on motion for judgment n.o.v. The only possible exception being a challenge to plaintiff's damages resulting from stone overcharges, which will be addressed later in this memorandum.
Defendants, in their memorandum in support of their motion for judgment n.o.v., argue that plaintiff has failed to present a reasonable damage model or reasonable damage data so that the jury could not arrive at a reasoned damage award, assuming that liability is established. Instead, the defendants contend, the jury would have had to rely on guesswork and speculation. Plaintiff argues in its memorandum in opposition, that it need not show the exact losses caused by defendants' alleged illegal activity but that the jury may make a reasonable and just estimate of damages based upon relevant data. This question of proof regarding damages must be placed in its proper perspective.
There appears to be some confusion regarding the degree of specificity and exactness required to be proven by a plaintiff in a private antitrust action for damages. A major cause of that confusion is that distinctions are not properly drawn and maintained between proof of the fact of damage, proof of the cause or causes of damage, and proof of the amount of damage. This distinction was pointed out by the Supreme Court in Story Parchment Co. v. Paterson Co., 282 U.S. 555, 51 S. Ct. 248, 75 L. Ed. 544 (1931). In that case, the Court combined the proof of fact of damage and the proof of causation of damage into one category (presumably assuming that damages did in fact occur), placing the proof of amount of damages in another category. The Court then held that the measure of proof required for the two categories varied, stating
... there is a clear distinction between the measure of proof necessary to establish the fact that petitioner had sustained some damage, and the measure of proof necessary to enable the jury to fix the amount. The rule which precludes the recovery of uncertain damages applies to such as are not the certain result of the wrong, not to those damages which are definitely attributable to the wrong and only uncertain in respect of their amount. Id. at 562, 51 S. Ct. at 250. (Citation omitted.)
In Story, the Court established that a lesser measure of proof is required to prove the amount of damages, once damage in fact and causation are clearly established. The fact that a lesser degree of precision is needed to establish the amount of damages was articulated by the court in Van Dyk Research Corp. v. Xerox Corp., 631 F.2d 251 (3d Cir. 1980), wherein the court held
It also is necessary to bear in mind that the evidence linking illegality and injury must be more precise than that needed to establish the amount of damages. Rea v. Ford Motor Co., (497 F.2d 577 (3d Cir.)) supra. In the latter context, the Supreme Court has held that the fact finder is allowed to act upon probable and inferential, as well as direct and positive proof. Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 562-66, 51 S. Ct. 248, 250-51, 75 L. Ed. 544 (1931); Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 263-65, 66 S. Ct. 574, 579-580, 90 L. Ed. 652 (1946); see Zenith Radio Corp. v. Hazeltine Research, Inc. supra, 395 U.S. (100) at 123-25, 89 S. Ct. (1562) at 1576-77 (23 L. Ed. 2d 129 (1969)). Although the district court also found that the plaintiff failed to meet the more lenient test in proving the amount of damages, we confine our review to the issue of fact of injury. Id. at 255. (Footnote omitted.)
Several other cases decided by the Court have added further refinements to this distinction.
In Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 66 S. Ct. 574, 90 L. Ed. 652 (1946), the Court, in addressing the measure of proof required to show the amount of damages, once damage in fact and causation have been determined, held that the factfinder may
... conclude as a matter of just and reasonable inference from the proof of defendants' wrongful acts and their tendency to injure plaintiffs' business, and from evidence in the decline of prices, profits and values, not shown to be attributable to other causes, that defendants' wrongful acts had caused damage to the plaintiff. Id. at 264, 66 S. Ct. at 579. (Emphasis added.)
It is clear from this statement that the "just and reasonable inferences" may be used to establish the amount of damages only when the damage is caused by defendants' wrongful acts and not from some other cause. The Court in Bigelow, supra, then went on to give the following caveat:
... even where the defendant by his own wrong has prevented a more precise computation, the jury may not render a verdict based on speculation or guesswork. But the jury may make a just and reasonable estimate of the damage based on relevant data, and render its verdict accordingly. Id. at 264, 66 S. Ct. at 579-80.
This rationale was reiterated again by the Court in Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123-24, 89 S. Ct. 1562, 1576-77, 23 L. Ed. 2d 129 (1969).
In this case, defendants do not contest the fact that plaintiff did suffer damages. What they do contest is the causation of the damages (i. e. that the cause of plaintiff's damages was not defendants' alleged unlawful activities in violation of the antitrust statutes, but that plaintiff's losses were caused by plaintiff's mismanagement, adverse economic conditions and lawful competition) and the amount of damages (i. e. whether plaintiff could have achieved 25% of the blacktop market and sustained a 25% net profit figure while doing so in a market that was undergoing severe contractions). In applying the applicable case law as set forth by the Supreme Court to the facts of the instant case, the court, then, must address the issues of proof of causation of the damages and the proof of amount of damages, applying the respective measures of proof to each.
In attacking plaintiff's lost profit damage model, defendants assert the following arguments:
1. The overall results are incredible, not based upon reason.
a. Plaintiff did not use the best year ever but fragmented the business to use the best in each segment.
b. Plaintiff unrealistically projected it would obtain 25% of the road construction market in a market that decreased nearly 25% from 1973-1977.
c. Plaintiff, without any credible or comparable data, projected a 25% net profit from its overall operations.
2. Plaintiff ignored economic and competitive factors completely.
a. Plaintiff's damage model failed to account for changed economic conditions from 1974 to 1977.
b. Plaintiff's damage model fails to consider the effect lawful competition would have had on the amount of damages.
c. Plaintiff's damage model fails to consider the institution of the Skid Resistance Level (SRL) stone in 1975 by Pennsylvania Department of Transportation.
d. Plaintiff's damage model does not account for the demise of Cumberland Construction Company in 1974.
3. Plaintiff's damage model failed to provide an alternative basis for a damage award.
a. Plaintiff encouraged the jury to speculate by presenting a large but unrealistic damage model.
b. Plaintiff presented no raw data that the jury could formulate damages on a reasoned basis on its own.
Applying the law as defined by the Court in Story and its progeny, it is apparent that the arguments made by defendants in paragraph 2 above attack the causation of damages, not amount of damages, and therefore require a higher measure of proof. For that reason, the court will address the arguments raised in paragraph 2 first.
Causation of Damages
In private antitrust actions, the burden is placed upon the plaintiff to show that the damage claimed was in fact caused by the unlawful acts of the defendant and did not result from some other factor, such as management problems, a recession in the economy or lawful competition by the defendant. Van Dyk Research Corp. v. Xerox Corp., 631 F.2d 251 (3d Cir. 1980); ILC Peripherals Leasing Corp. v. IBM Corp., 458 F. Supp. 423, 435 (N.D.Cal.1978), aff'd, Memorex Corp. v. I.B.M. Corp., 636 F.2d 1188 (9th Cir. 1980). The Court of Appeals of this circuit, as well as others, has specifically held that where a plaintiff's projections fail to consider the probable effects of lawful competition and changed economic conditions, a jury cannot rationally reduce the damage estimate to reflect these changes and therefore any amount they may award would be based upon speculation and guesswork. Coleman Motor Co. v. Chrysler Corp., 525 F.2d 1338 (3d Cir. 1975); Murphy Tugboat Co. v. Shipowners & Merchants Towboat Co., 467 F. Supp. 841 (N.D.Cal.1979), aff'd, 658 F.2d 1256 (9th Cir. 1981); ILC Peripherals Leasing Corp. v. IBM Corp., 458 F. Supp. 423 (N.D.Cal.1978), aff'd, Memorex Corp. v. I.B.M. Corp., 636 F.2d 1188 (9th Cir. 1980).
Defendants argue that plaintiff failed to consider the drastically changed economic conditions surrounding the blacktop production and road construction markets in the Harrisburg area during the period from 1974 to 1977, which were immediately following the beachhead years used by plaintiff in its damage model. Defendants further allege that here, as in Van Dyk, Murphy and ILC, the plaintiff failed to account for any lawful competition that may have been spawned by plaintiff's intention to capture 25% of a declining market.
Plaintiff argues that the damage study was a well prepared document calling on the expertise of three CPA's and a lawyer-economist who specialized in industrial organization economics and antitrust matters. Plaintiff further asserts that the damage model was based upon actual share of the market for blacktop production and therefore would reflect the decrease in the amount of blacktop production from 1974 through 1978. Plaintiff did not address the effect lawful competition may have had upon its damage model, choosing instead to throw the ball back in defendants' court by citing Story Parchment for the proposition that damage estimates need not be perfect.
To begin with, plaintiff's reliance on Story Parchment is totally inappropriate since the issue raised is causation of damages, not amount of damages. Moving to plaintiff's allegations that the damage model was painstakingly prepared by experts and professionals, one need only look at what these individuals used for their basic premises to see that this factor did not assure changed economic conditions were considered. For instance, Mr. Wilcox, after whom the damage study was named, testified that it was Mr. Robert Rimmer's idea to use 1973 as the base year for road paving but 1974 as the basis for blacktop production. Mr. Wilcox testified as follows:
A. My role as an accountant, I take certain assumptions and I am saying that Mr. Bob Rimmer could explain why he gave me that assumption to work with.
Q. So, this is an assumption that was given to you by Bob Rimmer, is that right?
A. That's right.
Q. So, you didn't express any independent opinion on the validity of this assumption, is that correct?
A. I do have personal knowledge of why it was chosen, because I discussed it with him.
Q. I want to know, do you have any independent opinion, have you analyzed this situation yourself?
A. Yes, sir.
Q. Thoroughly enough so that you think 1973 is the right base year for the road paving projection but 1974 is the right year for the right base year for the projection for hot mix?
A. No, I couldn't go into that much detail.
(Transcript Vol. 53, pp. 11041-42.)
Mr. Lovett, the lawyer-economist, was not qualified as an expert for road construction or blacktop production, let alone someone knowledgable about the Harrisburg area market. Therefore plaintiff's assertion that because these experts prepared the model it must have allowed for changed economic conditions is without foundation.
Likewise, plaintiff's contention that because the damage model used plaintiff's actual share of the blacktop production in the Harrisburg area the damage model automatically accounted for changed economic conditions is meritless. While the share of the blacktop production market may have been accurately reflected, the net profit derived from that production made no compensation for a depressed market but was calculated for a "boom" year.
Certainly, plaintiff does not seriously contend that no change in per unit net profit is encountered when one moves from a "boom year" to a market constricted by at least 25%. The American car manufacturers can readily attest to the fallacy of that assumption.
Perhaps the most blatant defect in plaintiff's damage model for lost profits is its failure to account for any lawful competition. Surely plaintiff cannot have expected the defendants to sit idly by while it proceeded to grasp 25% of the road construction market and maintain its roughly 12% of the blacktop production market, when each market began to dry up. As defendants point out, they were well integrated, established firms in the area. To postulate damages on the assumption that they would not individually react by reducing their prices and therefore require plaintiff to further reduce its price, thus reducing its net profit, is absurd. Nor did plaintiff present any evidence from which the jury could, without speculation, determine what the affect of lawful competition would have been and reduce the damages accordingly.
In short, the court concludes that plaintiff's damage model for lost profits was defective in that it made no provision for the effects of lawful competition, did not properly allow for the changed economic conditions of the relevant markets, and did not "assure to a reasonable degree that its (plaintiff's) alleged damages, ... did not result from factors other than the alleged illegal acts of Xerox (defendant)." VanDyk Research Corp. v. Xerox Corp., 478 F. Supp. 1268, 1327-8 (D.N.J.1979), aff'd. on other grounds, 631 F.2d 251 (3d Cir. 1980), citing Coleman, supra; Murphy, supra ; and ILC Peripheral, supra.
Amount of Damages
Even assuming, arguendo, that plaintiff's lost profit damage model correctly allowed for changed economic conditions and lawful competition, defendants contend that the model could not withstand even the lesser test applied to the measure of proof of amount of damages as set forth in Story Parchment, Bigelow, and VanDyk. In fact, the major thrust of defendants' judgment n.o.v. is aimed at the unreasonableness of the amount of damages claimed in plaintiff's lost profit damage model.
Defendant describes the overall results of plaintiff's damage model as incredible and not based upon reason in that it did not choose the best year for both of plaintiff's segments of its business but chose the best year for the blacktop production and the best year for road construction; it projected an unattained and unrealistic 25% of the declining road construction market and it applied, without justification, an unheralded 25% net profit ratio. Plaintiff argues that the selection of different base years for different segments of its business is justified and reasonable; that the projection of 25% of the road construction market was realistic and did not exceed the bounds of proper estimation as defined in Bigelow, supra, and C. Albert Sauter Co., Inc. v. Richard S. Sauter Co., Inc., 368 F. Supp. 501 (E.D.Pa.1973); and that defendants' reference to 25% of the road construction market is misplaced, that the real issue is road construction revenues, of which plaintiff projected only 12%.
Using Different Base Years
At first blush, plaintiff's reasons for selecting 1973 as the base year for the road construction segment of its business and 1974 as the base year for blacktop production appears reasonable. Karl Wilcox, plaintiff's expert witness, testified they were the appropriate years and Robert Rimmer and Walter Rimmer both testified as to the reasons why different years should be used. However, upon closer scrutiny, the generalizations lose their credibility and the justification disappears. Mr. Wilcox testified that he feels the use of split years is appropriate, this was based upon the explanations given to him by Robert Rimmer and did not stem from an objective or independent accounting or economic evaluation. (Transcript Vol. 56, p. 11,621.) In essence then, the justification for using the different years hinges upon the testimony of Mr. Robert Rimmer.
Mr. Robert Rimmer indicated on direct examination that the reason for using 1973 for road construction was because that was their first year in actually putting down the asphaltic concrete (Transcript Vol. 53, pp. 11,803-4) and that in 1974 RSE met "hard competition," (Transcript Vol. 53, p. 11,089).
To justify the use of 1974 as the base year for profits in the blacktop production, Mr. Rimmer testified as follows.
Q. Let's move to the hot mix market. Why did you use the year 1974 as the beachhead year in this study?
A. Well, I didn't want when I went back over it, I didn't want to use "71, back over history. I didn't want to use "71, because "71 we just started up towards the end of the year ran enough tons to come up with formulas for the asphalt plant.
1972 was tied up with the Jones job and we were feeling our way along.
1973 we went into the market, being our own best customer.
By 1974, I thought we had our feet on the ground and a good source of supply with our stone from Bethlehem Mines, had our formulas all approved and we had worked out the bugs.
Q. In 1975, why did you not use 1975 as part of your hot mix beachhead year?
A. "75 was when we started experiencing trouble obtaining stone from Bethlehem and I could not bid the townships and the State the way that I had done in 1974.
(Transcript Vol. 53, pp. 11,089-91.)
The court, upon reflection, is of the opinion that just because RSE met "hard competition" in 1974 in the road construction business is not a reasonable justification to select 1973 instead of 1974. In addition, on cross-examination, Mr. Rimmer contradicted his statement that in 1973, RSE actually "laid down" a substantial portion of asphaltic concrete, indicating he had not made an analysis to determine the percentage "laid down" by RSE in 1973 as opposed to the percentage "laid down" by Cumberland Construction, a forerunner to RSE.
MR. FRANCH: I'm trying to establish, Your Honor, that this witness cannot possibly tell us today the extent to which Cumberland was a subcontractor for R.S.E. to do road paving work in 1973, the year that they chose, that Mr. Rimmer chose as the model year.
MR. KOERNER: I think it is irrelevant.
MR. FRANCH: All right. Let me withdraw that question.
MR. CARTER: How is the exact percentage relevant as
THE COURT: He's withdrawn the question.
MR. FRANCH: Let me withdraw the question.
BY MR. FRANCH:
Q. Have you made any attempt to determine the extent to which Cumberland was a subcontractor to R.S.E. for lay down work during the year 1973?
A. I didn't have to when I made up my mind about that. I knew exactly what I charged or Cumberland charged me for the lay down.
Q. Did you do it? Did you make the analysis? That is all I want to know.
A. As to what percentage Cumberland laid down, no, I did not.
(Transcript Vol. 53, p. 11,102.)
As to Mr. Rimmer's explanation for the use of 1974 as a base year for blacktop production, there is no reason why 1973 would not have been just as desirable because RSE was established in the market, even if they were their own best customer.
Perhaps the most convincing argument why the use of 1973 as a base year for road paving and 1974 as a base year for blacktop production is not reasonable is shown by the following graphic illustration.
1973 1974 Total
Road Paving $101,741 [294,545) [192,804)
Hot Mix (2,411) 191,693 189,282
Total $ 99,330 [102,852) $ (3,522)
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