[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]


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FEDERAL TRADE COMMISSION

[File No. 951-0006]


Stone Container Corp.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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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\
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    \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.
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    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\
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    \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).
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    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.
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    \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.
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    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).
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    \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).
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    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.
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    \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).
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    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.
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    \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.
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    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.
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    \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.
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    I respectfully dissent.
[FR Doc. 98-5535 Filed 3-3-98; 8:45 am]
BILLING CODE 6750-01-M