[Federal Register Volume 63, Number 42 (Wednesday, March 4, 1998)] [Notices] [Pages 10628-10631] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-5535] ----------------------------------------------------------------------- FEDERAL TRADE COMMISSION [File No. 951-0006] Stone Container Corp.; Analysis to Aid Public Comment AGENCY: Federal Trade Commission. ACTION: Proposed consent agreement. ----------------------------------------------------------------------- SUMMARY: The consent agreement in this matter settles alleged violations of federal law prohibiting unfair or deceptive acts or practices or unfair methods of competition. The attached Analysis to Aid Public Comment describes both the allegations in the draft complaint that accompanies the consent agreement and the terms of the consent order--embodied in the consent agreement--that would settle these allegations. DATES: Comments must be received on or before May 4, 1998. ADDRESSES: Comments should be directed to: FTC/Office of the Secretary, Room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580. FOR FURTHER INFORMATION CONTACT: Michael Antalics, FTC/S-2627, Washington, DC 20580. (202) 326-2821. SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the Commission's rules of practice (16 CFR 2.34), notice is hereby given that the above-captioned consent agreement containing a consent order to cease and desist, having been filed with the accepted, subject to final approval, by the Commission, has been placed on the public record for a period of sixty (60) days. The following Analysis to Aid Public Comment describes the terms of the consent agreement, and the allegations in the complaint. An electronic copy of the full text of the consent agreement package can be obtained from the FTC Home Page (for February 25, 1998), on the World Wide Web, at ``http:// www.ftc.gov/os/actions/htm.'' A paper copy can be obtained from the FTC Public Reference Room, Room H-130, Sixth Street and Pennsylvania Avenue, NW., Washington, DC 20580, either in person or by calling (202) 326-3627. Public comment is invited. Such comments or views will be considered by the Commission and will be available for inspection and copying at its principal office in accordance with Sec. 4.9(b)(6)(ii) of the Commission's rules of practice (16 CFR 4.9(b)(6)(ii)). Analysis of Proposed Consent Order to Aid Public Comment The Federal Trade Commission has accepted an agreement to a proposed consent order from Stone Container Corporation (``Stone Container''), the largest manufacturer of linerboard in the United States. Stone Container maintains its principal place of business at 150 N. Michigan Avenue, Chicago, Illinois 60601.\1\ --------------------------------------------------------------------------- \1\ Stone Container operates linerboard mills in seven states. Stone Container also operates more than sixty box plants, which convert linerboard (together with corrugating medium) into corrugated containers. Linerboard is used as the inner and outer facing or liner of a corrugated box, and corrugating medium is the fluted inner material. --------------------------------------------------------------------------- The proposed consent order has been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the agreement and the comments received, and will decide whether it should [[Page 10629]] withdraw from the agreement or make final the agreement's proposed order. The complaint alleges that during 1993 Stone Container engaged in acts and practices that, collectively and in the prevailing business environment, constituted an invitation from Stone Container to competing linerboard manufacturers to join a coordinated price increase. This invitation to collude is an unfair method of competition, and violates Section 5 of the Federal Trade Commission Act. In January 1993, Stone Container announced a $30 per ton price increase for all grades of linerboard, to take effect the following March. As of March 1993, several major linerboard manufacturers had failed to announce an equivalent price move, and Stone Container was forced to withdraw its price increase. Stone Container concluded that its proposed price increase had failed to garner the requisite competitor support, in significant part because Stone Container and other firms in the industry held excess inventory. A firm that holds unwanted inventory will be tempted to shade prices in order to increase sales volume (or in any event, rivals may be concerned about this prospect). Excess inventory therefore acts as a constraint on prices and impedes coordinated interaction.\2\ --------------------------------------------------------------------------- \2\ See United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940); FTC v. Elders Grain, Inc., 868 F.2d 901, 906 (7th Cir. 1989); F. Scherer and D. Ross, Industrial Market Structure and Economic Performance at 268-73 (3d ed. 1990). --------------------------------------------------------------------------- Stone Container developed and implemented a strategy to invite its competitors to increase the price of linerboard. This invitation, if accepted by Stone Container's competitors, was likely to result in higher linerboard prices, reduced output, and injury to consumers. The centerpiece of this strategy was Stone Container's decision to suspend production (take ``downtime'') at five of its nine North American linerboard mills, and simultaneously to arrange to purchase excess inventory from several of its competitors. These unusual and costly actions to reduce and reallocate industry inventory were undertaken in full view of competing linerboard manufacturers, and with the intent of securing their support for a price increase. During late June and early July 1993, Stone Container conducted a telephone survey of major U.S. linerboard manufacturers, asking competitors how much linerboard was available for purchase and at what price. Based upon its survey, Stone Container decided to reduce its linerboard production by approximately 187,000 tons.\3\ This was the single largest voluntary reduction in output in the history of the U.S. linerboard industry. During the term of the mill downtime, Stone Container planned to purchase approximately 100,000 tons of linerboard from competitors, and to reduce its own linerboard inventories by approximately 87,000 tons. --------------------------------------------------------------------------- \3\ During the third quarter of 1993, Stone Container took downtime at four linerboard mills in the United States and one in Canada for periods ranging from two weeks to two months. --------------------------------------------------------------------------- Stone Container subsequently communicated to competitors its intention to take mill downtime and to draw down industry inventory levels, and its belief that these actions would support a price increase. The methods of communication included public statements-- press releases and published interviews. Stone Container also communicated its scheme through direct, private conversations with high level executives of its competitors that were outside of the ordinary course of business. Senior officers of Stone Container contacted their counterparts at competing linerboard manufacturers to inform them of the extraordinary planned downtime and Stone Container's plan to make substantial linerboard purchases from its competitors. In the course of these communications, Stone Container arranged and agreed to purchase a significant volume of linerboard from each of several competitors. Stone Container's intent was to coordinate an industry-wide price increase; there was no independent legitimate business justification for the company's actions. The unprecedented mill downtime was not a response to the company's own inventory build-up. Further, it would have been less costly for the company to self-manufacture linerboard (at its idled mills) than to purchase inventory from its competitors. Mill downtime and linerboard acquisitions were mechanisms that enabled Stone Container to be seen by competitors as incurring significant costs in order to manipulate industry supply conditions. These, together with other public and private communications, were a signal to rival firms to join in a coordinated price increase. The Chairman and Chief Executive Officer of Stone Container has stated that the cost to the company of taking massive mill downtime was approximately $26 million, but that this investment was beneficial for the company and the linerboard industry. He has characterized the company's strategy as an ``unqualified success'' that helped to ``jump start'' an industry-wide price increase in October of 1993. Invitations to collude have been judged unlawful under section 2 of the Sherman Act (attempted monopolization),\4\ and under the federal wire and mail fraud statutes.\5\ In addition, in recent years the Commission has entered into several consent agreements in cases alleging that an invitation to collude violates section 5 of the FTC Act. Precision Moulding Co., C-3682 (1996); YKK (U.S.A.) Inc., C-3345 (1993); A.E. Clevite, Inc., C-3429 (1993); Quality Trailer Products Corp., C-3403 (1992). --------------------------------------------------------------------------- \4\ United States v. American Airlines, 743 F.2d 1114 (5th Cir. 1984), cert. dismissed, 474 U.S. 1001 (1985). \5\ United States v. Ames Sintering Co., 927 F.2d 232 (6th Cir. 1990). --------------------------------------------------------------------------- These cases illustrate that an invitation to collude may be communicated in explicit fashion. E.g., American Airlines, 743 F.2d at 1116 (``I have a suggestion for you. Raise your goddamn fares twenty percent. I'll raise mine the next morning.''). Alternatively, the invitation may be implicit in the respondent's words and deeds.\6\ E.g., Precision Moulding Co. (alleging that during an uninvited visit to the headquarters of a competitor, respondent informed competitor that its prices were ``ridiculously low'' and that the competitor did not have to ``give the product away'').\7\ Whether explicitly or implicitly, the respondent communicates its request that the competitor increase its prices, together with the assurance that respondent will follow--and not seek to undercut--upward price leadership. --------------------------------------------------------------------------- \6\ See P. Areeda and H. Hovenkamp, Antitrust Law para. 1419.1d1 (1997 Supp.) (``To demand utter clarity . . . would unrealistically ignore the diverse and often veiled language of would-be conspirators.''). \7\ See also United States v. General Electric Co., 1977-2 Trade Cas. (CCH) para. 61,659 (E.D. Pa. 1977) (General Electric adopted a price protection policy under which, if it offered a discount to a customer, it obligated itself to give the same discount retroactively to all other customers that bought the product within the previous six months. The district court recognized that, in effect, the company was offering its competitor assurances that General Electric would not engage in price discounting because of the substantial self-imposed penalty involved). --------------------------------------------------------------------------- In the present case, it is alleged that Stone Container's course of conduct implicitly invited competing linerboard manufacturers to joint a coordinated price increase. As noted above, senior officers of Stone Container allegedly communicated to competitors Stone Container's intention to reduce its linerboard production, to draw down its inventory, and simultaneously to purchase competitors' unneeded [[Page 10630]] inventories. The complaint identifies additional factors that support the characterization of these actions as an invitation to collude: the mill downtime and the linerboard acquisitions were outside of the ordinary course of business; the high-level communications initiated by Stone Container were likewise extraordinary; and the entire scheme was undertaken with the purpose of securing an industry-wide price increase and without an independent legitimate business justification. Stone Container has signed a consent agreement containing the proposed consent order. Stone Container would be enjoined from requesting, suggesting, urging, or advocating that any manufacturer or seller of linerboard raise, fix, or stabilize prices or price levels. The proposed consent order also prohibits Stone Container from entering into, adhering to, or maintaining any combination, conspiracy, agreement, understanding, plan or program with any manufacturer or seller of linerboard to fix, raise, establish, maintain, or stabilize prices or price levels. The purpose of this analysis is to facilitate public comment on the proposed order, and it is not intended to constitute an official interpretation of the agreement and proposed order or to modify in any way their terms. Donald S. Clark, Secretary . Concurring Statement of Commissioners Robert Pitofsky, Sheila F. Anthony and Mozelle W. Thompson In the Matter of: Stone Container Corporation, File No. 951 0006. The Commission recognizes that in invitation to collude cases, a fundamental question is whether the alleged ``invitation'' was merely legitimate business conduct. Our colleague, Commissioner Orson Swindle, dissents in this matter on grounds that Stone Container Corporation's behavior in curtailing its own production, and simultaneously purchasing excess inventory from its competitors, was conduct that did not clearly lack an ``independent legitimate business reason.'' As the Analysis To Aid Public Comment emphasizes, however, it would have been more economical for Stone Container to keep its plants open than to purchase inventory from competitors, and competitors would have recognized that fact. This conduct and other statements by Stone Container made clear that its goal was to manipulate industry supply conditions to invite a coordinated price increase. It is for these reasons that we accept the consent agreement for public comment. While there may be some difference of view on the facts in this matter, we agree with Commissioner Swindle that there can be no implied invitation to collude when the actions that amount to the invitation are justified by business considerations. Dissenting Statement of Commissioner Orson Swindle In the Matter of: Stone Container Corporation, File No. 951 0006. I have voted against the Commission's acceptance of a consent agreement in this case because I do not believe that the facts unearthed and presented in the investigation support the allegation that Stone Container (``Stone'') invited its competitors ``to join a coordinated price increase.'' The Commission's proposed complaint alleges that Stone took several actions in the second half of 1993 that amounted to an invitation to collude on linerboard prices. According to the complaint, Stone's invitation-to-collude strategy consisted at the outset of a plan ``to take downtime as its plants, to reduce its production by approximately 187,000 tons, and contemporaneously to purchase 100,000 tons of linerboard from competitors and to reduce Stone Container's inventory by 87,000 tons.'' To carry out this plan, Stone allegedly'' conducted a telephone survey of major U.S. linerboard manufacturers, asking competitors how much linerboard was available for purchase and at what price.'' Pursuant to its scheme, Stone's ``[s]enior officers''--whose role in this regard is alleged to have been ``outside the ordinary course of business''--``contacted their counterparts at competing linerboard manufacturers to inform them of the extraordinary planned downtime and linerboard purchases.'' Stone ``arranged and agreed to purchase a significant volume of linerboard from each of several competitors'' and is alleged to have ``communicated to competitors''--both in private conversations and through public statements--``its intention to take mill downtime and to draw down industry inventory levels, and its belief that these actions would support a price increase.'' The complaint asserts that Stone's communications with its competitors on these subjects were made with ``[t]he specific intent . . . to coordinate an industry wide price increase'' and that Stone's actions ``were undertaken with anticompetitive intent and without an independent legitimate business reason'' (emphasis added). I have quoted at length from the proposed complaint because it (together with the Analysis To Aid Public Comment) is the document in which the Commission sets forth its theory of violation and, to the extent permissible, the evidence underlying that theory. As I see it, the acts and communications of Stone alleged in the complaint, as well as other evidence in this case, do not sufficiently support the Commission's theory of violation. As 1993 approached, Stone and other firms in the linerboard industry had been and were experiencing financial difficulties, including excess production capacity, alleged excess inventory, and depressed price levels. It should hardly be surprising that Stone chose mill downtime and inventory reductions as a normal competitive response to general industry conditions. ``Extraordinary'' as Stone's downtime and inventory purchases may have been, it is difficult to second-guess the rationality of those actions from a business perspective. The assertion in the complaint that Stone's actions ``were undertaken with anticompetitive intent and without an independent legitimate business reason'' is a considerable stretch.1 If senior officials of Stone had been more circumspect in their statements--particularly their public statements--about Stone's reasons for its own downtime and purchase decisions, I doubt that the Commission would have considered this matter a worthy target of our scarce resources. --------------------------------------------------------------------------- \1\ In their Concurring Statement, my colleagues rely on the Analysis To Aid Public Comment in this case for the proposition that ``it would have been more economical for Stone Container to keep its plants open than to purchae inventory from competitors . . .'' With all due respect, it is precisely the truth of that assertion that I find insufficiently supported by the evidence. --------------------------------------------------------------------------- The Commission's Analysis To Aid Public Comment discusses explicit and implicit invitations to collude and places the present situation in the latter category. I agree with that categorization as far as it goes, since no one from Stone is alleged to have contacted a competitor and baldly suggested a price increase or an output reduction (and thus this case is not a replay of American Airlines). Instead, it is the totality of Stone's conduct--when judged against the backdrop of Stone's remarks concerning low prices, excess capacity, and possibly inventory overhang--that has led the Commission to conclude that Stone implicitly invited its competitors to collusively raise prices.2 I am unable to place on [[Page 10631]] Stone's actions (and its explanations of them) the sinister characterization that would permit me to condemn its otherwise justifiable actions. I am concerned that the Commission's decision in this case may deter corporate officials from making useful public statements (e.g., in speeches to investors or presentations to securities analysts) that candidly address industry conditions, individual firms' financial situations, and other important subjects. --------------------------------------------------------------------------- \2\ The Analysis To Aid Public Comment cites Precision Moulding Co., Inc., Docket No. C-3682, as an example of an implicit invitation to collude. According to the Analysis, Precision Moulding ``informed [its] competitor that its prices were `ridiculously low' and that the competitor did not have to `give' the product away.' '' I do not consider Stone's conduct and language to have communicated a message nearly as pointed as that conveyed by Precision Moulding. --------------------------------------------------------------------------- I respectfully dissent. [FR Doc. 98-5535 Filed 3-3-98; 8:45 am] BILLING CODE 6750-01-M