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In re Sulfuric Acid Antitrust Litigation

September 24, 2010

IN RE SULFURIC ACID ANTITRUST LITIGATION


The opinion of the court was delivered by: Honorable David H. Coar

MDL Docket No. 1536

This Document Relates to: ALL RELATED ACTIONS

MEMORANDUM OPINION AND ORDER

Plaintiffs have filed suit on behalf of a class of sulfuric acid consumers against several producers of the commodity (collectively "Defendants") for violations of § 1 of the Sherman Act, 15 U.S.C. § 1. Plaintiffs allege that Defendants engaged in anticompetitive behavior by conspiring to reduce the output and fix the price of sulfuric acid in Canada and the United States. In furtherance of the conspiracy, American Defendants GAC Chemical Corporation ("GAC"),*fn1 Boliden Intertrade Holdings, Inc. ("Boliden"), Pressure Vessel Services, Inc. ("PVS"),*fn2 Koch Industries Inc. ("Koch"), E.I. du Pont de Nemours and Company ("DuPont"), Marsulex, Inc., ("Marsulex"), and Chemtrade Logistics, Inc. ("Chemtrade")allegedly shut down or curtailed production in their respective facilities in favor of purchasing acid from Canadian Defendants Noranda, Inc. ("Noranda") or Falconbridge Ltd. ("Falconbridge"). Plaintiffs also allege that Defendants Noranda, Falconbridge, and DuPont operated an illegal price fixing and output restriction agreement under the label of Noranda DuPont, LLC (now "Norfalco"), a joint venture.

Plaintiffs' cases were consolidated and transferred to this Court by the Multidistrict Litigation Panel on July 1, 2003. The Court certified Plaintiffs' class on March 21, 2007.

Before this Court are motions for summary judgment brought by Defendants GAC [413], Noranda [418], Boliden [422], Falconbridge [426], PVS [430], Norfalco [433], and Koch [439]. All Defendants join in each other' s motions. For the reasons stated below, the motions of Defendants Noranda, Boliden, PVS, Norfalco, and Koch are DENIED. Defendant Falconbridge's motion is DENIED in part and GRANTED in part. The Court GRANTS Defendant GAC' s motion for summary judgment.

FACTS*fn3

The instant action centers on allegedly anticompetitive behavior that took place in the sulfuric acid market in Canada and the United States from 1988 through 2001.

A. Parties

1. The named Plaintiffs are Ohio Chemical Services, inc., Independent Chemical Corporation, National Alum Corporation, Producers Chemical Company, Old Bridge Chemicals, Inc., and AG RX. Each claims to have purchased sulfuric acid directly from one or more of the Defendants or their alleged co-conspirators.

2. The Defendants are Norfalco, Noranda, Falconbridge, PVS, GAC, and Koch. Defendants Noranda and Falconbridge, both located in Canada, were at all relevant times in the mining business, and were involuntary producers of sulfuric acid as a consequence of their metal smelting activities. The other Defendants were at various times in the business of manufacturing, marketing, selling, or distributing sulfuric acid in the United States.

3. Defendants who have already reached settlement with Plaintiffs include DuPont, Marsulex, and Chemtrade.

B. Jurisdiction

4. This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1337 and Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15, 26.

5. Plaintiffs also allege that personal jurisdiction over the defendants comports with the United States Constitution. Plaintiffs allege that venue is proper in this District pursuant to Sections 4 and 12 of the Clayton Act, 15 U.S.C. § 15(a) and 22, and 28 U.S.C. § 1391(b), (c) and (d) based upon their allegations that Defendants resided, transacted business, were found or had agents in this District and because of their allegations that a substantial part of the events giving rise to their claims occurred, and a substantial portion of the allegedly affected interstate trade and commerce was carried out, in this District.

C. Procedural History

6. Sulfuric acid consumers filed a variety of suits in United States federal courts, many of which were consolidated and transferred to this court by the Multidistrict Litigation Panel on July 1, 2003. On motion of the Plaintiffs, this Court certified a class on March 21, 2007, made up of:

All persons (excluding federal, state, and local governmental entities and political subdivisions, the Defendants, and their respective parents, subsidiaries and affiliates) who purchased sulfuric acid in the United States directly from one or more of the Defendants or their parents, subsidiaries, affiliates, or joint ventures during the period January 1, 1988 through January 16, 2003.

7. Plaintiffs allege they purchased sulfuric acid directly from one or more of the defendants in this case.

D. Sulfuric Acid Industry Generally

8. Sulfuric acid is an extremely corrosive chemical used in many industrial processes. The largest use of sulfuric acid in North America is to manufacture fertilizer, which is made by combining acid with phosphates. Sulfuric acid is also an input in numerous industrial products and manufacturing processes. For example, it is used in kraft pulp bleaching to make chlorine dioxide, a bleaching agent, and to make titanium dioxide. (Falconbridge Rule 56.1 Statement of Facts ("SOF") ¶¶ 4, 13, 14

9. Sulfuric acid is generally produced in one of two ways: voluntarily, in a process of burning elemental sulfur, or involuntarily, as a by-product from the smelting of ores into metals such as copper and zinc. (Noranda SOF ¶ 4.)

10. The marginal cost to a voluntary producer of sulfuric acid is generally the cost of the sulfur and the cost of operating the plant, net of a credit for any by-product energy generated during the manufacturing process. (Noranda SOF ¶ 7.)

11. The process of smelting ores into metals generates sulfur-containing gases, which environmental laws require to be recaptured, resulting in the "involuntary" production of sulfuric acid. There is a dispute as to how to characterize the marginal cost to smelters of producing involuntary sulfuric acid. (Pl. Response, Noranda SOF ¶ 8.)

12. Because there are no commercially viable methods for disposing of or storing sulfuric acid, smelting operations producing acid have no reasonable alternative to selling it. A smelter runs the risk of a forced shut down of its smelting operations if it is unable to sell enough sulfuric acid to avoid exceeding its storage capacity. (Falconbridge SOF ¶¶ 7, 8, 10.)

13. The costs of shutting down a smelter are quite high. (Falconbridge SOF ¶ 11.)

14. The cost of transporting sulfuric acid is large compared to its value. (Falconbridge SOF ¶ 12.)

15. The demand for sulfuric acid is driven for the most part by the demand for the products in which it is used as an input. There are frequently no close substitutes for acid in these products. (Falconbridge SOF ¶¶ 15, 16.)

16. However, the demand for acid is not always responsive to the price of acid. Also, the value of sulfuric acid in relation to the value of the product in which it serves as an input is small. (Falconbridge SOF ¶¶ 16, 17.)

17. In the 1980s, environmental legislation designed to prevent acid rain forced smelting companies to capture an increased amount of sulfuric acid as a result of their smelting processes. (GAC SOF ¶ 21.)

18. Acid pricing eroded in the early 1990s due to the abundance of smelter acid in the market. (GAC SOF ¶ 46.)

E. Noranda' s Sulfuric Acid

19. Noranda' s core smelting operations produce base metals, such as nickel, copper, or zinc. Sulfuric acid is not part of Noranda' s core business. (Noranda SOF ¶ 9, 18, 20.)

20. During the 1980s, Noranda had to deal with an increased amount of sulfuric acid from its smelting processes, due in part to stricter environmental regulations for the prevention of acid rain. Regulations required the recapture of sulfur-containing gases from the smelting process, which were converted to sulfuric acid. (Falconbridge SOF ¶ 18.)

21. In the mid-1980s, Noranda made plans for a new sulfuric acid plant at its Horne smelter, designed to produce hundreds of thousands of additional tons of sulfuric acid per year. (Noranda SOF ¶ 16.)

22. The supply of acid in Eastern Canada, where Noranda' s smelters were located, was greater than the local demand. (Falconbridge SOF ¶ 19.)

23. Noranda retained an outside consultant to investigate the market opportunities for the new sulfuric acid recovery system to be built at its Horne smelter. The result was a June 1985 report by Manderson Associates, Inc., entitled Sulphur & Sulphuric Acid: Long Range Outlook for World and Regional Supply, Demand, Costs, and Prices with Emphasis on the Market Opportunities for By-Product Sulphuric Acid that May be Produced at Noranda's Smelter at Noranda, Quebec. (Noranda Ex. 6 ("Manderson Report").)

24. The Manderson Report noted that, because of freight costs, the netback price from the sale of sulfuric acid from Noranda's new Horne sulfuric acid recovery plant to the U.S. market would be lower than the netbacks of "most (and possibly all) other locations that produce and market smelter acid in the U.S." (Manderson Report at 182.)

25. As used in the industry, the term "netback" or "Net Back" refers to the return on a sale net of freight costs.

26. The Report also stated that the likelihood of low net-backs from sales to the United States "suggests that Noranda would, at best, be only temporarily successful by cutting prices to gain market entry, especially against other producers of non-discretionary sulphuric acid. Moreover, there is the added danger that predatory pricing of Canadian acid would cause U.S. producers to lodge a complaint of dumping, which (if sustained) could trigger the assessment of an import tariff or other restrictions on acid movements from Canada into the U.S." (Id. at 182-83.)

27. The Report concluded that "the most prudent marketing approach would be for Noranda to work with existing U.S. producers of discretionary (sulphur-based) acid who, because of declining margins or other reasons, are willing to shut or throttle down their existing acid production in exchange for purchasing smelter acid. DuPont recently followed this tactic in the Chicago market- - by closing its local plant in Chicago Heights and becoming a marketer of smelter acid from Arizona. Such a move helps to preserve the existing price structure, because the existing local marketer(s) would continue not only to maintain contact with the customer(s) but also to provide delivery and related services." (Id. at 183.)

28. In estimating the sales prospects in the United States for Noranda's new Horne sulfuric acid plant, the Manderson Report "assumed that Noranda would pursue a sales philosophy of working with local acid marketers-producers, who would supplement part or all of their acid requirements through outside purchase. Their idled plants would therefore serve as standby, if disruptions in supply of smelter acid take place."Id. at 16. The Report noted the Midwest and North Central U.S. as potentially attractive areas for the sale of acid. (Id. at 183.)

29. On October 18, 1985, the Canadian federal government solicited a meeting with Noranda to discuss a variety of topics with Noranda and the author of the Manderson Report. The topics included Noranda's "marketing strategy" for sulfuric acid, and whether there were "producers-sellers" that were "likely candidates" for the arrangements discussed in the report. (Noranda SOF ¶ 30.)

F. Noranda' s entrance into US markets

30. U.S. trade laws sanction imports that compete with American products if the American producers can make a case that prices are too low, a condition called "dumping." (Noranda SOF ¶ 31.)

31. Noranda was concerned that selling its acid directly to end-user consumers in the United States would put it at risk of an anti-dumping action brought by voluntary producers of sulfuric acid. (Noranda SOF ¶ 31.)

32. Noranda knew that certain voluntary producers in the U.S. had old and inefficient production facilities. As of the mid-1980s, "[m]ost of the acid plant capacity outside of the southeastern U.S. [was] from units which [were] fifteen years or older."(Manderson Report at 12.)

33. Noranda Sales Corporation, Noranda' s wholly-owned sales and marketing subsidiary, proposed a strategy called "displacement by agreement," whereby Noranda would sell sulfuric acid to voluntary producers at a price lower than the costs of manufacturing the acid. (Def. Response, Pl. SOF ¶ 12.)

34. There is significant dispute as to promises and understandings beyond the face of Defendants'sales contracts. The primary dispute among the parties is whether Noranda required producers to shut down or curtail acid production as a condition of entering these agreements, and whether the purpose of these agreements was to stabilize prices, control industry output, and prevent competition.

35. During the relevant time, Noranda also sold through resellers and to end-user customers in the United States. (Noranda SOF ¶ 41.)

G. PVS Involvement

36. Plaintiffs allege that Noranda and PVS entered into agreements to shut down PVS's sulfuric acid production facilities in Copley, Ohio, and Bay City, Michigan, thereby reducing the total amount of acid in the marketplace by 100,000 metric tons annually. (Compl. ¶¶ 38, 44.)

37. PVS operated a sulfur burner in Copley, Ohio, that had been built in the early 1970s. (Pl. Response, PVS SOF ¶ 16.)

38. In 1987, PVS conducted a make-or-buy analysis to determine whether to continue producing sulfuric acid at Copley or obtain its requirements from another source. (PVS SOF ¶ 20.) In addition to Noranda, PVS considered Phelps Dodge, Kennecott, Monaca, and Asarco as potential suppliers. (PVS SOF ¶ 25.)

39. PVS ultimately determined that it would shut down the Copley plant's sulfuric acid manufacturing process and purchase the sulfuric acid it needed to service its customers. (PVS SOF ¶ 26.)

40. PVS executive, Donald Sosnoski, wrote regarding the prospect of a distribution contract with Noranda: "As I understand the market circumstances in Ohio, our choices are not between running the plant or proceeding with the unit train proposal. Rather, they are apparently between proceeding with the unit train proposal or gradually shutting down the plant and getting out of the sulfuric acid market in Ohio. Apparently, the Noranda acid is destined for the Ohio market, and if we don't control it, someone else will. The latter would apparently result in depressed prices and make it uneconomical to operate the plant." Noranda Ex. 36 (3/1/88 Sosnoski Mem.) at 3.

41. PVS and Noranda entered into a contract whereby PVS agreed to purchase an estimated 60,000 tons of sulfuric acid annually from Noranda. (PVS SOF ¶ 40.)

42. The agreement between Noranda and PVS-Copley includes a revenue sharing provision. (PVS Ex. 31, Copley Contract at ¶ 13.)

43. PVS acquired its Bay City, Michigan sulfuric acid plant on or around April 30, 1976, in order to supply one principal customer, Dow Chemical, in Midland, Michigan. The plant was built many years before then. (PVS SOF ¶ 42.)

44. After the loss of Dow Chemical as a customer, the Bay City sulfuric acid facility principally supplied PVS in Detroit, Michigan. (PVS SOF ¶ 44.)

45. The additional freight costs of transporting acid over more than 100 miles to Detroit, combined with the plant' s old age and inefficiency, made the Bay City operations economically unsound. (PVS SOF ¶¶ 44, 45.)

46. At some point, PVS considered purchasing its sulfuric acid requirements from smelting companies, rather than continuing to manufacture acid at Bay City. (PVS SOF ¶ 47.)

47. PVS assessed the possibility of purchasing acid from Phelps Dodge, Asarco, Kennecott, Inco, Noranda, or Falconbridge. (PVS SOF ¶ 47.)

48. A formal analysis conducted in June 1990 favored purchasing acid from Noranda. (PVS SOF ¶¶ 47, 48.)

49. On August 1, 1990, PVS entered into a contract with Noranda for the sale and delivery of PVS' s sulfuric acid requirements to its Detroit facility, in the amount of 40,000 tons of acid annually. (PVS SOF ¶ 54.)

50. The Bay City plant shut down in 1990. (PVS SOF ¶ 52.)

H. GAC Involvement

51. Plaintiff alleges that Delta Chemicals, Inc. ("Delta") coordinated with Noranda to shut down its sulfuric acid plants. The shutdowns allegedly removed 60,000 to 70,000 tons of annual capacity from the sulfuric acid market. (Compl. ¶ 40.)

52. Delta operated two acid plants at its Searsport facility from which it manufactured acid for sale to customers. (GAC SOF ¶ 7.)

53. At some point in the 1980s, when sales of sulfuric acid began to outpace Delta' s manufacturing ability, the company began purchasing acid from third parties like Noranda to satisfy customer demand (GAC SOF ¶ 9, 28.)

54. Delta had environmental problems at the Searsport sulfuric acid facility starting as early as 1977. (GAC SOF ¶¶ 10, 11.)

55. In light of the costs required for environmental compliance, Delta performed a make-or-buy analysis to determine whether it would be more economical to continue producing sulfuric acid at Searsport, or instead buy 100% of Delta' s acid requirements from a third party. (GAC SOF ¶ 15.)

56. Negotiations began between Delta and Noranda over the purchase of Delta's acid requirements. (GAC SOF ¶ 12.) On October 6, 1989, the companies entered into a contract for the sale by Noranda to Delta of "the total requirement of sulphuric acid by internal consumption at and sales from [Delta' s] Searsport facility." (GAC SOF ¶ 39, 40; GAC Ex. 23 at p. 2.)

57. The Delta Contract stated that purchases would begin "no later than November 1, 1989, and continue to December 31, 1996, and thereafter from year after year subject to the right of termination. . . ." (GAC Ex. 23 at p. 6.)

58. The "revenue sharing" provision between Noranda and Delta provides that "any increase or decrease in Gross Margin [on Delta's sales to its customers]. . . shall be shared equally" by Noranda and Delta.

59. By their terms, the revenue-sharing agreements relate only to the distribution of Noranda' s product.

60. Delta shut down of the Searsport facility in 1988. (GAC SOF ¶ 42.)

61. On or about March 8, 1994, GAC purchased the assets of Delta for $8.02 million, subject to certain adjustments, pursuant to an Asset Purchase Agreement of that date. (GAC Ex. 26.)

62. Delta and GAC survived as separate entities. (GAC Ex. 26 ¶ 1.2, 1.3, 2.2, 11.1, 11.2.)

63. Paragraph 2.2 of the Asset Purchase Agreement provides that, except for certain specific "Assumed Liabilities," GAC "shall in no event assume or be responsible for any liabilities, liens, security interests, claims, obligations, or encumbrances of [Delta]." (GAC Ex. 26 ¶ 2.2.)

64. When GAC acquired Delta's assets, the Searsport facility was not valued in or considered as part of the acquisition. Delta' s Searsport plants were inoperable and incapable of producing sulfuric acid. Many of its components had rusted or were missing. (GAC SOF ¶ 54, 55.)

65. On or about March 19, 1995, Noranda and GAC agreed to revise the pricing for the balance of their 1995 sales, as well as develop a long-term, post-1995 contract. (GAC SOF ¶ 59.)

66. On March 1, 1996, GAC entered into a new sulfuric acid supply contract with Noranda. (GAC SOF ¶ 60; GAC Ex. 28.)

67. The GAC Contract does not have any "revenue sharing" provisions, customer allocation provisions, or territorial restriction provisions. (GAC SOF ¶ 61; GAC Ex. 28.)

68. At some point, GAC later contracted with the Noranda DuPont Joint Venture for the supply of sulfuric acid. Pl. SOF ¶ 38.

I. Koch Involvement

69. Plaintiffs allege that, pursuant to agreements with Noranda, Koch Sulfur Products Company or Koch Sulfur Products Company, LLC (collectively "Koch") closed or scaled back production its sulfuric acid plants, thus removing supply from the market. (Compl. ¶ 41.)

70. Koch operated various sulfuric acid production facilities until 2002, when it completed its exit from the sulfuric acid business. Koch also marketed another company's sulfuric acid by-product and operated terminals for the receipt and storage of acid purchased for resale or produced internally. (Koch SOF ¶¶ 7, 8.)

71. Koch operated at a relatively small scale compared to the total amount of U.S. sales of sulfuric acid. (Koch SOF ¶ 13.) Its production of sulfuric acid fluctuated every year at each of its facilities. (Koch SOF ¶ 9.)

72. From 1988 to 1990, Koch sought to expand its sulfuric acid trading business. It was able to do so by purchasing additional sulfuric acid from other sources (both voluntary producers and involuntary smelter producers, including those located in Europe) and reselling it in the marketplace. (Koch SOF ¶¶ 10, 23.)

73. Koch closed two sulfuric acid plants during the 15-year putative class period. (Koch SOF ¶ 17.)

74. Koch purchased the Acme, North Carolina plant in 1990 and closed it in 1991. (Koch SOF ¶ 18.)

75. Koch leased the DeSoto, Kansas facility from the United States Army. The DeSoto plant ceased manufacturing sulfuric acid at in June 1999. (Koch SOF ¶¶ 20, 21, 29.)

76. At some point, Koch internally discussed and compared its cost of production to its cost of purchasing sulfuric acid from others, including Noranda. (Koch SOF ¶ 24.)

77. Discussions took place in 1998 and 1999 between Koch and the Noranda DuPont Joint Venture, in which Koch negotiated to buy sulfuric acid from the joint venture. (Koch SOF ¶ 27.)

78. The explicit terms of any of Koch's agreements with Noranda or Noranda DuPont never included revenue sharing provisions, territorial allocations, customer restrictions, conditions that Koch purchase all its requirements from the seller, or any restrictions on what Koch would charge in the event it resold the acid it purchased. (Koch SOF ¶ 14.)

J. Noranda/Falconbridge Ownership

79. Falconbridge's core products were nickel and copper, not sulfuric acid. (Noranda SOF ¶ 19.)

80. Alex Balogh, previously of Noranda Copper, became President of Falconbridge in 1989. ...


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