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UNITED STATES v. R. J. REYNOLDS TOBACCO CO.

June 3, 1966

United States, Plaintiff,
v.
R. J. Reynolds Tobacco Co., Defendant


Coolahan, District Judge.


The opinion of the court was delivered by: COOLAHAN

I. This action was brought by the United States under the Anti-trust Laws to challenge the merger of R. J. Reynolds Tobacco Co. [Reynolds], and Penick & Ford, Ltd., Inc. [Penick] The amended complaint alleges the combination is an unlawful restraint upon commerce in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1; and also that Reynolds' acquisition of Penick's assets violates Section 7 of the Clayton Act, 15 U.S.C. § 18, in that it may substantially lessen competition in the sale of starch to paper and packaging materials manufacturers throughout the United States. The Government seeks divestiture. *fn1"

 On November 8, 1965 plaintiff moved under Rule 34, F.R.Civ.P. for the production and inspection of certain documents. Thereafter, having learned that numerous documents from Penick relevant to the reciprocity practices discussed below, were gathered in the office of defendant's counsel, the Government filed a supplemental motion under Rule 34 on February 7, 1966 requesting those documents. *fn2"

 Defendant Reynolds objects to both motions for production on several related grounds.

 First, Reynolds claims the Government has failed to show "good cause" since the information sought is either irrelevant, or unnecessary for a determination of the remaining issues, or already within the Government's possession or knowledge. Specifically, Reynolds contends that:

 
1) Copies of some requested documents already have been supplied to the Justice Department,
 
2) Many requests cover a period dealt with by prior investigations of the starch industry,
 
3) Many requests are not relevant to the sole issue which Reynolds maintain is before the Court,
 
4) Since the hearing on the preliminary injunction was practically a full trial on the merits, little further litigation, and hence little further discovery, is necessary.

 Second, Reynolds claims that the categories of documents requested are not spelled out with sufficient particularity.

 Third, Reynolds urges that any possible value which the documents might have at this juncture would be far outweighed by the unreasonably burdensome task of determining what is demanded and collecting it.

 In reply, the Government claims that this Court's opinion denying preliminary relief indicated further evidence was needed to carry plaintiff's burden of proof. It maintains that the requested documents are directed to that evidence, are adequately described, and are not unduly burdensome in view of their importance to a full and fair trial of the issues.

 The Court has considered each disputed request in light of the particular nature of this case and the present posture of its litigation. On that basis, the Court is of the opinion that the plaintiff's motions for production should be granted with certain prescribed limitations hereinafter discussed.

 II. The difficulties peculiar to Anti-trust discovery have been detailed fully elsewhere. *fn3" It suffices to note that in regard to questions of relevancy, necessity, and reasonableness, ample support can be found in the "leading cases" for either a permissive or a restrictive approach to such discovery. Indeed some decisions contain equally eloquent statements both of the proponent's right to full disclosure and of his opponent's right to refuse unreasonable demands and harassment.

 In actions involving the structure and dynamics of large industries, almost every facet of their business may be relevant in some way. The issues subject to proof are complex and wide-ranging; in short, protracted litigation is inherently burdensome on both sides. Nevertheless, a line must be drawn. Discovery must be kept in bounds by weighing the burdens of production against the importance of the information sought. In the final analysis, this is what the numerous cited decisions really teach.

 III. In the present matter, the issues have been more fully explored and sharply defined than usual by virtue of the hearing on preliminary relief.

 Reynolds correctly states the ultimate issue before the Court.

 
"[Whether] the acquisition of Penick by Reynolds will aggravate reciprocity in sales of starch by Penick to the paper trade sufficient to create the probability of a substantial lessening of competition." Defendant's Brief, pg. 2.

 Penick's two main areas of endeavor are starch and related derivatives and grocery products. Reynolds, a leader in all facets of the tobacco industry, also has diversified into food products [Hawaiin Division] and packaging [Archer]. In denying preliminary relief, the Court stated that "the sale of cornstarch to the paper industry is the particular sub-line of commerce which the Government argues will be effected by this acquisition." United States v. Penick, 242 F. Supp. 518. Moreover, the Court found that reciprocity - the use of buying power to secure sales - pervaded the trade relations of starch producers and paper packaging manufacturers. Id. at 523.

 From this, Reynolds concludes that the practices of Penick's non-starch divisions are irrelevant to the issue of impaired competition in starch sales to the paper companies. It further contends that since Reynolds was not in the starch business at all before the merger, its own activities are a fortiori irrelevant to this issue.

 The Court always welcomes efforts to contain the litigation within manageable proportions. However, Reynolds confuses the ultimate legal issue with the scope of relevant discovery. The subline of commerce in which competition will allegedly suffer is one thing; the range of activities outside that subline which may affect competition within it - or which indicate it will be affected - is another matter.

 Reynolds continually refers to the " corn-starch-paper axis", but Penick's use of reciprocity to sell starch was not limited to the buying power of its starch division; a significant role was played by the paper packaging purchases of its food and grocery divisions both directly and through secondary reciprocity involving intermediary transactions. *fn4" The business practices of Penick's non-starch divisions clearly tended to reduce competition in the sale of starch to paper companies. They might do so in the future. Records of their past and present purchasing policies are therefore relevant.

 Since the nature and extent of Penick's reciprocity practices has been explored at length at the hearing for preliminary relief, the Court sees less need for discovery in this area than in regard to Reynolds. But this is not to say that the Government, upon reconsideration of its case, is precluded from presenting a fuller analysis of the potential power which Reynolds acquired if such can be obtained without undue burden. See Note 7, infra.

 REYNOLDS

 As for Reynolds, its trade practices before and after the merger are relevant in two distinct ways: As an indication of Reynolds' general policy on reciprocity, and as a measure of Reynolds' potential leverage on starch sales.

 In essence, this Court denied a preliminary injunction because it believed Reynolds' claim that it had never used reciprocity nor intended to use it in the future. *fn5"

 The Government's theory, then as now, was that Reynolds' great buying power will aggravate the use of reciprocity to obtain starch business for Penick. In addition to showing the existence of reciprocity in the starch industry and the opportunity to increase it created by the merger, the Government must also show a likelihood that Reynolds will utilize the opportunity. A Section 7 complaint requires a reasonable probability that competition will be substantially lessened; the Government showed only the mere possibility. United States v. Penick, at 523. [And cases cited].

 Admitting this initial failure of proof, the Government is unwilling to accept Reynolds' disavowal and maintains its right to disprove it through adequate discovery of Reynolds' records. *fn6" Obviously Reynolds past records will not aid the Government if they in fact did avoid reciprocity. But the Court's denial of preliminary relief was not a final adjudication of the issue. That opinion made clear that litigation was not necessarily complete despite the extensive hearing. *fn7"

 Section 7 actions inherently require prognosis, so post-acquisition behavior is significant - though not as much as defendant urges in the present case. *fn8" But Reynolds' past policy and practice also indicate its likely course of action, and by virtue of Reynolds' defensive assertions they are still at issue.

 Moreover, the past practices of Reynolds' divisions are relevant in this regard even for units which cannot exert significant pressure on starch buyers. To borrow defendant's metaphor, examining Reynolds' purchase and sales correlation is less a matter of unearthing "ancient archeology" than of learning the mores of the natives.

 Reynolds' records are relevant in a second way. To the extent its divisions and subsidiaries can exert substantial purchasing pressure on starch customers, Penick's reciprocity power is increased. *fn9" If the reciprocity potential of these divisions has been considered in regard to starch, this bears on Reynolds motives for the merger; *fn10" and if any steps have been taken to implement such opportunities since the merger, the records would be doubly relevant.

 IV. However, to reject Reynolds' definition of which matters are still relevant, is not to accept the Government's view that it is entitled to every single document embraced by the sweeping language of its November 8th Motion. [The Supplemental otion of February 7th is a special case discussed below].

 Necessity, as well as relevance, is an element of "good cause" under Rule 34. United States v. Continental Can, supra, 22 F.R.D. at 236.

 The Government insists it seeks only "reciprocity documents": documents demonstrative either of Penick's and Reynolds' reciprocity policies and practices or of their plans to utilize it after the merger. But the actual requests, in terms, are not so limited.

 The Government's characterization is predicated on the assumption that Reynolds explored and/or practiced reciprocity. What the Government really is saying, is this: If Reynolds did practice reciprocity or explore its possibilities - especially concerning Penick - before the merger, then all the requested documents are precisely the kind ...


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