The opinion of the court was delivered by: WEINER
Plaintiff, Double H Products, Inc. ("Double H"), brings this action against defendant, Sonoco Products Company ("Sonoco"), alleging violations of Section 2 of the Sherman Act, 15 U.S.C. § 2;
Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, 15 U.S.C. § 13(a) (1973) (hereinafter referred to as Section 2(a) of the Robinson-Patman Act
); and Commonwealth of Pennsylvania common law, in particular, intentional interference with plaintiff's prospective business relations.
The plaintiff claims that Sonoco engaged in predatory pricing and other anticompetitive conduct to drive Double H out of business. It is also Double H's contention that Sonoco has sold certain products to National Cash Register ("NCR") below cost levels as part of a "strategy of monopolizing the business machine core market by discouraging paper core users from shifting to plastic before Sonoco has completed its conquest of Double H, its only serious competition in plastic." (Plaintiff's Post-Trial Memorandum, p. 25). Plaintiff seeks damages and injunctive relief. The case was tried to the court sitting without a jury.
Business machine cores, the product on which Double H's claims are based,
are cylinders around which rolls of paper are wrapped. They are made of either plastic or fiber.
Business machine cores are sold to paper converters who wind paper around the cores to produce finished paper rolls for such business machines as cash registers and adding machines.
Sonoco manufactures both plastic and paper cores. It has long been in the business of manufacturing fiber cores, competing mainly with Crescent Paper Tube Co. ("Crescent") of Kentucky. Sonoco went into the production of plastic cores in January, 1980.
The plastic business machine core business is relatively new. Double H is a primary force in that business, a company founded in 1974 by Mr. Harry Harp who, along with his wife, owns all of the stock in Double H. Prior to plaintiff's entry into the manufacturing of plastic business machine cores, paper cores were the leading type of cores sold. However, the availability of plastic cores was attractive to some customers of paper cores. Customers preferred plastic cores because they were lighter in weight, dust free and sold at a favorable price.
Sonoco began to lose a large number of its paper core customers to Double H. To continue in the machine core business, Sonoco had two alternatives. It could either acquire Double H or it could enter the plastic core business itself. In 1978 Sonoco personnel contacted Mr. Harp for the purpose of acquiring Double H and negotiations went on throughout the year. In early 1979 Mr. Harp ultimately rejected Sonoco's offer.
When Sonoco began selling plastic business machine cores, it shared the market with Double H and two other companies, Vulcan Corporation ("Vulcan") of Cincinnati, Ohio and Southern Metals & Plastics ("Southern") of Memphis, Tennessee. Sonoco's initial list price was $7.80 per thousand for 2 1/4" cores.
At that time, Double H's list price for those cores was $7.50 per thousand. Southern's list price was $8.21 with frequent off-list sales at lower prices and Vulcan had a list price at $7.95 effective February 1, 1980.
In March, 1980, Sonoco introduced a 5% discount for truckload orders, bringing its price to $7.41 for such orders. In July, 1980, it announced a price increase, telling its sales agents that the cost of the necessary raw material, polystyrene, had increased from $.28/lb. in January, 1979
to a current price of $.50/lb. It sought a 10% price increase with the expectation that its chief competitor, Double H, would also increase its price. When informed by customers that its price was too high and that Double H did not raise its price, Sonoco chose not only to rescind its increase but to reduce the price. On September 2, 1980, Sonoco wrote to its customers announcing a new reduced price of $7.15 per thousand. It eliminated its truckload discount at that time.
On October 23, 1980, Double H began offering a 5% truckload price, after receiving feedback from its customers concerning Sonoco's prices, thereby reducing its price to $7.12 per thousand for a truckload. Approximately 25% of Double H's customers received the truckload price. At that time, Double H used independent salesmen who carried its product as well as other companies' products. They received a 5% commission until the truckload discount went into effect at which time their commission was cut to 2 1/2%. Double H, which until this time had had to make little effort to obtain customers, began advertising, for the first time, in a trade magazine.
In February, 1981, Sonoco again considered a price increase. An approach to one of its customers concerning that possibility resulted in a warning by the customer that it would give all of its business to Double H if Double H promised it a six month price protection. Nevertheless, Sonoco announced a price increase in March, 1981, to become effective in May, with the explanation that the increase was necessitated by raw material increases. In monitoring customers' reactions to the increase, Sonoco determined that it was risking the loss of a number of customers if Double H held its price. After postponing the increase, Sonoco was advised by at least two customers that the proposed increase would have caused them to give their business to Double H. Sonoco then announced that it would not increase its prices "until further notice." (Defendant's Exhibit 275).
Although until now Double H appeared to be Sonoco's sole serious competitor, Southern began competing in its pricing and, at times, undersold both Sonoco and Double H throughout 1981 as well as 1982.
II. LEGAL ANALYSIS: SHERMAN 2
The elements of attempting to monopolize under Section 2 of the Sherman Act have been established in the Third Circuit. The plaintiff has the burden of proving: (1) the relevant market; (2) that "the actor has the specific intent to monopolize the relevant market"; and (3) that "the actor has sufficient market power to come dangerously close to success." Coleman Motor Co. v. Chrysler Corp., 525 F.2d 1338, 1348 (3d Cir. 1975). Additionally, the plaintiff is required to show that the defendant engaged in "predatory or anticompetitive conduct directed to accomplishing the unlawful purpose." Chillicothe Sand & Gravel v. Martin Marietta Corp., 615 F.2d 427, 430 (7th Cir. 1980).
The plaintiff is also required to show that defendant's unlawful conduct proximately caused plaintiff's injury. Clayton Act § 4, 15 U.S.C. § 15 (1973).
In the present case, plaintiff relies on defendant's pricing practices to prove the requisite anticompetitive conduct and specific intent. Specifically, it argues that Sonoco engaged in predatory pricing. Double H also argues that Sonoco's announced price increases for plastic cores, followed by rescissions of the increases, were executed with the hope and expectation Double H would follow suit. Sonoco's motive, plaintiff argues, was to "enforce price obedience by Double H as part of its efforts to control the business machine core market." (Post-Trial Memorandum of Plaintiff, p. 22).
Predatory pricing is below cost pricing wherein there is a "deliberate sacrifice of present revenues for the purpose of driving rivals out of the market and then recouping the losses through higher profits earned in the absence of competition." Areeda and Turner, Predatory Pricing and Related Practices under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697, 698 (1975). To determine "cost" for purposes of finding below cost pricing, the generally accepted standard is "average variable cost,"
rather than "marginal cost."
O. Hommel Co. v. Ferro Corp., 659 F.2d 340, 349 (3d Cir. 1981), cert. denied, 455 U.S. 1017, 102 S. Ct. 1711, 72 L. Ed. 2d 134 (1982); Sunshine Books Ltd. v. Temple University, 524 F. Supp. 479, 481 (E.D. Pa. 1981). Predatory pricing, then, is pricing below the average variable cost of manufacturing and selling a company's product. The inference that can be drawn from predatory pricing is that the defendant is acting with anticompetitive intent.
The Third Circuit has indicated that it favors the Areeda and Turner analysis as set forth in their 1975 law review article but, as yet, has not fully embraced it. O. Hommel Co., 659 F.2d at 352.
Other circuits, however, have accepted the average variable cost standard. See, William Inglis & Sons Baking Co. v. ITT Continental Baking Co., Inc., 668 F.2d 1014 (9th Cir. 1981), cert. denied, 459 U.S. 825, 103 S. Ct. 57, 74 L. Ed. 2d 61, 51 U.S.L.W. 3254 (1982); Chillicothe Sand & Gravel v. Martin Marietta, 615 F.2d 427 (7th Cir. 1980); International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714 (5th Cir. 1975), cert. denied, 424 U.S. 943, 47 L. Ed. 2d 349, 96 S. Ct. 1411 (1976).
"Predatory pricing is difficult to distinguish from vigorous price competition. Inadvertently condemning such competition as an instance of predation will undoubtedly chill the very behavior the antitrust laws seek to promote." Northeastern Telephone Company v. American Telephone and Telegraph Company, 651 F.2d 76, 88 (2d Cir. 1981). It is for this reason that a court should be prudent in reading the evidence, in its determination that predatory pricing has, in fact, occurred and that it implies anticompetitive intent. The proof of predatory pricing raises a rebuttable presumption that the offending company intended, at the time it set its price, to presently forego profit so as to eliminate competition. William Inglis, 668 F.2d at 1034. Because it is proof of specific intent that is at issue, this court must ...