The opinion of the court was delivered by: GASCH
In this action, the Federal Trade Commission (FTC) claims that Lukens Steel Company (Lukens) and the United States Steel Corporation (U.S. Steel) violated the cease and desist order issued by the FTC in American Iron & Steel Institute, 48 F.T.C. 150 (1951). The FTC requests, pursuant to sections 5(l), 5(m), and 16(b) of the Federal Trade Commission Act (FTC Act), 15 U.S.C. §§ 45(l), 45(m), and 56(b) (1976), equitable relief and civil penalties
for violations of the order. This matter having been tried to the Court on October 13-27, 1977, the Court makes the following findings of fact and conclusions of law in accordance with Fed. R. Civ. P. 52(a).
The order in American Iron & Steel Institute, 48 F.T.C. 150 (1951), was issued on August 10, 1951 in settlement of a complaint filed by the FTC against over one hundred steel producers, including Lukens and U.S. Steel. The FTC alleged in the complaint that the steel producers fixed prices through, inter alia, the collusive use of a basing point pricing system and the American Iron and Steel Institute's compilation of pricing factors. The order, in pertinent part, prohibits the steel companies from:
(1) Adopting, establishing, fixing, or maintaining prices or any element thereof at which steel products shall be quoted or sold, including but not limited to base prices, the extras which shall be added to, or the deductions which shall be made from, any base price for any specified characteristic, or loading charge or delivery charge or terms of discount, credit, or other conditions of sale.
(2) Collecting, compiling, circulating, or exchanging between or among respondents, or any of them, a list or lists of base prices or of prices by any other designation, or extra charges thereto or deductions therefrom for any specified characteristic or quantity of steel products or services connected therewith used or to be used in computing prices or price quotations of steel products; or using, directly or indirectly, as a factor in computing price quotations or in making, quoting, or charging prices any such list or lists so collected, compiled, circulated, or exchanged.
(4) Formulating, devising, adopting, establishing, fixing, or maintaining methods or practices of quoting and selling steel products to railroads or other particular classes of customers.
(5) Quoting or selling steel products at prices calculated or determined pursuant to, or in accordance with, any system or formula which produces identical price quotations or prices or delivered costs, or which establishes a fixed relationship among price quotations or prices or delivered costs, or which prevents purchasers from securing any advantage in price in dealing with one or more of the respondents as against any of the other respondents.
II. . . . . acting, individually or otherwise, so as knowingly to contribute to the maintenance or operation of any planned common course of action, understanding or agreement between and among any two or more of the respondents or between any one or more of them and others not parties hereto through the commission of any of the acts, practices or things prohibited by subparagraphs (1) through (6) of paragraph I of this order.
However, the order explicitly exempted certain types of conduct from its terms. It specifically provided that "evidence of uniformity of prices or any element thereof of two or more sellers at any destination or destinations alone and without more" would be insufficient to establish a violation of the order. 48 FTC at 154, III(1). The order also stated that the "Federal Trade Commission is not acting to prohibit or interfere with delivered pricing or freight absorption as such when innocently or independently pursued, regularly or otherwise, with the result of promoting competition." 48 FTC at 154, III(3).
On June 18, 1974, the FTC filed this action against Lukens and U.S. Steel. Plaintiff claims that for at least the five years prior to the date the complaint was filed:
Defendants, in connection with the offering for sale, sale and distribution in interstate commerce of HY-80 and HY-100, have been continuously, for each day of the aforementioned period, engaged in a planned common course of action, understanding or agreement with each other, with each other and with Newport, or each with Newport, to establish, fix, or maintain prices, including elements thereof such as delivery charges or other conditions of sale. Each defendant has also cooperated in, carried out, and contributed to the maintenance or operation of a planned common course of action, understanding or agreement, with each other, with each other and with Newport, or each with Newport, to establish, fix or maintain prices, delivery charges, or other conditions of sale, in a manner prohibited by the Federal Trade Commission's order in Docket 5508.
Complaint para. 9. Plaintiff contends that defendants' behavior in connection with the submission of bids to Newport News Shipbuilding and Dry Dock Company for the sale of HY-80 and HY-100 steel plates specifically violated Paragraphs I(1), (2), (4), (5), and II of the order.
C. HY-80 and HY-100 Steel Plate Industry.
The alleged violations of the order arose solely in connection with the submission of bids by Lukens and U.S. Steel for the sale of HY-80 and HY-100 steel plates to Newport News Shipbuilding and Dry Dock Company, a prime contractor of the Government. HY-80 and HY-100 steel plates (HY-steel plates) are highly specialized, special treatment premium quality alloy steel plates used primarily in the construction of combat vessels for the United States Navy.
HY-steel plates are produced according to specifications established by the Navy, and only steel producers certified by the Navy are permitted to produce HY-steel plates for use in Navy vessels. U.S. Steel, Lukens, Armco Steel Corporation (Armco), and Bethlehem Steel Corporation (Bethlehem) were qualified producers during the period of the alleged violations.
Newport News Shipbuilding and Dry Dock Corporation (Newport News), a Virginia corporation with principal offices, place of business, and shipyards in Newport News, Virginia, is engaged in the construction of combat vessels for the Navy. During the period relevant to this case, Newport News subcontracted with both Lukens and U.S. Steel for HY-steel plates for use in ship construction pursuant to prime contracts with the Navy. Newport News purchased substantial quantities of HY-steel plates from Lukens and U.S. Steel during this period,
of which a significant amount was used in the construction of the U.S.S. Nimitz and U.S.S. Eisenhower, two nuclear powered aircraft carriers.
The Navy and Newport News entered into fixed price incentive contracts during this period. It is important to note that under this type of contract, the Navy assumed the entire target or projected cost. If the total cost exceeded the target cost, then the additional cost was allocated between the Navy and the prime contractor according to a formula specified in each contract. If the total cost exceeded the target cost but not the ceiling price, the Navy bore the major portion of the cost; the prime contractor would be responsible for the entire amount by which the final cost exceeded the ceiling price. However, if the final cost was less than the target cost, a percentage of the difference between the two costs would be awarded to the prime contractor as additional profit. See, e.g., Exh. 11A, at 49.
In awarding subcontracts, Newport News utilized a competitive bidding system. It solicited bids for HY-steel plates by sending invitations to bid, which set forth the sizes, shapes, and quantities of steel to be purchased, to Lukens, U.S. Steel, and, at times, to Armco and Bethlehem. In response, each interested bidder would submit a bid to Newport News. Newport News awarded purchase orders on the basis of the bids received; thus, the bids were crucial to the determination of the award of the contract. It was the practice of Newport News to award the bid to the lowest bidder. Indeed, if Newport News did award a contract to a supplier other than the lowest bidder, it would risk the possibility that the Navy might not reimburse it for the cost of the steel.
Several provisions in the prime contract as well as in the procurement regulations gave the Navy authority to review Newport News' procurement system and individual contracts and otherwise regulate Newport News' subcontracting practices. In particular, the "consent to subcontracts" clause in the prime contract specifically provided the Navy's Supervisor of Shipbuilding with authority to approve individual purchases and to evaluate the overall procurement system. See, e.g., Exhs. 11A, at 102-04; 11B, at 31-32. Price competition was one of the factors the supervisor was required to consider. He was also required to consider cost and pricing data if there was inadequate evidence of, inter alia, competition among the suppliers bidding on the subcontract or an established commercial position for the sale price of the product. The prime contracts obligated Newport News to provide cost and pricing data to the Navy.
See, e.g., Exhs. 11A, at 115-16; 11B, at 32. In addition, a "competition in subcontracting" clause required Newport News to employ a competitive bidding procedure for subcontracts. See Exhs. 11C, at 49; 11D, at 43; 10 U.S.C. § 2304 (1970).
On June 30, 1976, United States Magistrate Lawrence S. Margolis, acting as a Special Master pursuant to Fed. R. Civ. P. 53 and this Court's order of April 25, 1975, set forth Findings of Fact and Conclusions of Law on the threshold issue of whether the FTC's order in American Iron and Steel Institute, 48 F.T.C. 150 (1951), covered HY-steel plates. The Special Master concluded that the HY-steel plates were "alloy steel plates" within the meaning of the order. The Court adopted the findings and conclusions of the Magistrate on February 17, 1977, and set the case for trial.
A. Plaintiff's Allegations.
The FTC claims that the evidence, when viewed as a whole, reveals a "planned common course of action" in violation of the order between defendants, among defendants and Newport News, and between Newport News and each defendant. The FTC relies on the following facts to support its claim: (1) Between 1968 and 1971, the bids submitted by U.S. Steel and Lukens to Newport News were identical most of the time when freight to Newport News was added. (2) Newport News divided the awards of HY-steel bids between U.S. Steel and Lukens on approximately a 55 to 45 percentage basis. (3) Newport News did not award Bethlehem any HY-steel orders, even though Bethlehem, at times, submitted identical bids. (4) A contracting officer for the Navy at Newport News withheld consent on several proposed bid awards. (5) On twenty-three occasions during the five-year period, Newport News, after U.S. Steel and Lukens had submitted bids, telephoned each defendant on the price of several different items in the bid, and defendants subsequently revised their prices, with the result that defendants' bids were identical when freight to Newport News was added. (6) U.S. Steel's quotations to Newport News were derived from an internal price schedule which was intended to be competitive with Lukens' published prices and specification components price list. (7) Lukens generally followed the price changes of U.S. Steel. (8) Newport News provided U.S. Steel with information concerning Lukens' bidding. (9) Newport News, at times, advised one defendant of the other's price changes. (10) Newport News advised each defendant on a number of occasions that it must remain competitive in order to participate in the HY-steel business at Newport News. (11) When Armco submitted low bids, each defendant attempted to determine their expected participation rate.
Upon the basis of these and other facts, plaintiff requests the Court to draw the following inferences:
(1) Newport News facilitated price identicality at Newport News through a variety of communications with defendants. (2) When Newport News informed defendants that they must remain competitive and defendants responded that they intended to remain competitive, competitive meant the same price. (3) U.S. Steel used Lukens' price list as a formula from which it prepared bids to Newport News. (4) Each defendant participated in the bidding at Newport News with the understanding that each would receive a fixed percentage of the awards. (5) When invited to submit lower prices in exchange for increased participation at Newport News, the defendants declined, even though contrary to their own business interests, and continued to submit identical bids.
The legal standard to be applied in this case is set forth in the order, which prohibits the ...