CHEMICAL & ENGINEERING
NEWS
J U N E 2 9,
1964
Supreme Court Reopens Penn-Olin Case Court says lower court "erred" in dismissing antitrust charges against joint venture In a momentous and far-reaching decision, the U.S. Supreme Court last week nullified a federal district court's dismissal of antitrust charges in the Penn-Olin joint venture. It sent the case back to the lower court for further consideration. The Supreme Court's ruling in the case is certain to cause some chemical executives to revise their thinking on the use of the currently popular joint venture route for entering new markets. The court ruled that the Penn-Olin joint venture is subject to Section 7 of the Clayton Act. While agreeing with the lower court that "on the present record there is no violation of Section 1 of the Sherman Act," it says that the trial court "erred" in dismissing the complaints "as to Section 7 of the Clayton Act." "This is the first case reaching this court and on which we have written that directly involves the validity of Section 7 of the joint participation of two corporations in the creation of a third as a new domestic producing organization," the court noted. Section 7 of the Clayton Act bars an acquisition "where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly." Section 1 of the Sherman Act makes illegal: " . . . every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states." Formation. Penn-Olin-a 50/50 joint venture of Pennsalt Chemicals and Olin Mathieson—was set up in February 1960 to make and market sodium chlorate in the Southeast. Prior to that time, Pennsalt was producing sodium chlorate in Oregon; Olin was acting as Pennsalt's principal sales agent for sodium chlorate in the Southeast. In 1960, Hooker Chemical
and American Potash—both with production facilities in the Southeast—together supplied more than 90% of the area's sodium chlorate requirements. For several years before deciding to form Penn-Olin, each of the parent companies had given serious consideration to entering the market on its own with a plant in the Southeast. The District Court found that neither one had rejected the possibility before their decision to form Penn-Olin. Early in 1961, the Justice Department started civil action in U.S. District Court for the District of Delaware to dissolve the joint venture. Justice contended that the joint venture was illegal because it eliminated potential competition between the two parent companies, both of which had the desire and the over-all capabilities to enter the market alone. But in upholding the legality of Penn-Olin last spring, Federal Judge Edwin D. Steele attacked this line of reasoning (C&EN, May 13, 1963, page 22). He said that whether or not Pennsalt and Olin could have entered the market independently if they chose was of no significance "except as a factor in determining whether as a matter of probability both companies would have entered the market as individual competitors if Penn-Olin had not been formed." Only in this event, he said, would potential competition between the two companies have been foreclosed by the joint venture. He held that the Government failed to prove that it was likely that both companies would have entered the market independently. Sole Test. In reopening the case, the Supreme Court said the District Court was wrong in making the sole test the probability that both companies would have entered the market had it not been for the formation of Penn-Olin. In the Supreme Court's
opinion, the trial court should have considered also the probability of one of the two companies' entering the market alone while the other one continued to watch developments closely from the sidelines and continually threatened to enter the market. "Just as a merger eliminates actual competition, this joint venture may well foreclose any prospect of competition between Olin and Pennsalt in the relevant sodium chlorate market," the Supreme Court holds. It believes that potential competition, as a substitute for actual competition, may restrain producers from overcharging their customers or underpaying their suppliers. "Potential competition insofar as the threat survives (as it would have here in the absence of Penn-Olin), may compensate in part for the imperfection characteristic of actual competition in the great majority of competitive markets," the court feels. In its opinion, "the existence of an aggressive, well-equipped, and wellfinanced corporation engaged in the same or related lines of commerce waiting anxiously to enter an oligopolistic market would be a substantial incentive to competition which cannot be underestimated." In support of this position, it points to the expansion undertaken by Hooker and American Potash as soon as they heard of the interest of Olin and Pennsalt in the Southeast. It feels this same situation might well have come about had either Olin or Pennsalt entered the market alone and the other remained "aloof" watching developments. The court feels that the array of evidence presented as to the probability of one or the other company's entering the market "certainly reaches the prima facie stage." To require more, it says, "would be to read the statutory requirement of reasonable probability into a requirement of certainty." However, "despite these strong circumstances," the Supreme Court said it was "not disposed" to disturb the lower court's finding that there was not a reasonable probability that both Pennsalt and Olin would build a plant in the relevant market area. But, it adds, "We have concluded that a finding should have been made as to the reasonable probability that either one of the corporations would have entered the market by building a plant, while the other would have remained a significant potential competitor." JUNE
2 9, 1 9 6 4
C&EN
25
