Earl Warren: Number 23, Pan American World Airways, Incorporated, Appellant, versus United States and Number 47, United States, Appellant, versus Pan American World Airways, Incorporated, et al. Mr. Solicitor General.
Archibald Cox: Mr. Chief Justice, may it please the Court. These two appeals bring before the Court a major government antitrust case involving air transportation between continental United States, the Canal Zone, and South America. The defendants are three. First, Pan American Airways which is the largest international air carrier in the world, its route extend over most of the globe, but for the purposes of this case it's enough to note that Pan American is the dominant air carrier between the United States, the Caribbean, and Central and South America. Somewhere from 66% to 85% of all passenger traffic to East and South American is carried by Pan American. It carries 50% of all the traffic to South America either alone or with the baggage. Pan American's view is always been, that it should be the only U.S. foreign air carrier, the chosen instrument and presumably it still adheres to that aspiration. The second defendant, W.R. Grace and Company, is a holding company with very diversified interest, but for present purposes, it's enough to note that it owns the Grace Line, the dominant steamship company between the United States and the west coast of South America, and has a large number of agencies itself along the west coast of South America. It carries today and has for most of the period of this suit I believe, carried simply from 81% to 94% of the steamship passenger traffic between the Eastern United States and Western South America. And it carried more than 50% of the freight. The third defendant is Pan American-Grace Airways, an airline whose routes as I shall show in more detail in a moment, extend from the Canal Zone along the west coast of South America, Panagra was formed by combination of Grace and Pan American, each owns 50% of the stock. And Panagra carries 50% to 75% of the passenger traffic flying under the U.S. flag from the United States to western South America.
Potter Stewart: I want to be sure I have the link to each share -- it's Grace Lines which owns --
Archibald Cox: No, it's W.R. Grace and Company which owns Grace Lines.
Potter Stewart: Grace Lines.
Archibald Cox: These are two subsidiaries.
Potter Stewart: I see. It's a Grace -- W.R. Grace and Company owns 50% of Panagra and Pan Am owns --
Archibald Cox: That's correct and Pan Am the other.
Potter Stewart: And that Grace Line is a separate subsidiary of W.R. Grace --
Archibald Cox: Fully owned, I believe. The heart of the Government's case is the charge that the combination in 1928 and 1929 of the emerging dominant air carrier between the United States and South America, with the company that controlled the dominant steamship lines to the west South America, along with certain ancillary understanding. And particularly in view of the 50th division of control which gave either the power to block acts by Panagra was in its inception and in its subsequent operation an illegal combination in restraint of trade. Most of the facts, I'm not disputed although some of the inferences are and in stating them in somewhat more detail, I think it would be helpful if the Court had in front of it the small map that is in a folder in the back of our brief. This shows the airline routes as they are today but it's useful to explain them as they were earlier. In 19 -- the late 1920s and early 1930s, where the first period of rapid growth in air transportation, especially foreign air transportation and largely under subsidies from the Post Office for carrying mail. The success of the U.S. flag carriers in south Latin America was regarded as having great diplomatic and commercial importance. Late in 1927, Pan American began to plan the establishment of a complete system of air transportation, serving the Caribbean and Central and South America. It started at Miami and then began to push south to Cuba, Puerto Rico, Barbados and Trinidad, and there it later extended its routes along the north and east coast of South America. It acquired its only competitor, only U.S. competitor for air mail contracts with the approval of the Post Office Department and the qualified approval of the Department of Justice. By qualified, it's approved. It said, we can give you now guarantees as the future. It was on approval as of that time.
Potter Stewart: Of course, this long before the days of the CAB?
Archibald Cox: This was long before the days of the CAB which was established in 1938.
Potter Stewart: 1938.
Archibald Cox: Gradually, Pan American pushed its route south to Buenos Aires so that it came for our purposes to be a carrier from Florida to the Canal Zone and to the Caribbean Islands and then along the east coast of South America. It's shown in the map in blue, as I said earlier, as it is today, but this will give you the picture. At the same time, Pan American was interested in exploiting the west coast of South America. In 1927 and 1928, it was negotiating with foreign governments to secure landing and operating rights in the west coast countries, either directly or through subsidiaries. And the district judge found that at this time, Pan American was far ahead of any potential competitors in planning know how in the ordering of equipment. At the same time, Grace, which is I have explained had extensive agencies of steamship interest on the west coast of South America, was beginning to explore the possibilities of west coast air transportation. She commissioned the study of the routes, engaged in discussions with the Post Office Department about possible air mail contracts. And then in August and September of 1928, Pan American and Grace agreed to pull their interest. The basic letters, out of which the combination emerged, appear in our brief at pages 8 to 10 in a footnote and they're also set forth in full in the District Court's opinion. The initial step that's the letters describing, was for Grace and Pan American to for -- agreed to form a subsidiary to undertake airplane transportation in Peru under certain privileges that it'd been secured there and it was to contribute half of the stock. Then it was also agreed in those letters, that Pan American or a holding company which at that time controls Pan American, was attempting to secure an air mail contract from our Post Office Department, to fly from the Canal Zone down to Santiago. And it was agreed on the letter that if they got the contract and if Grace desired to come in, then Grace could come in on the 50/50 basis. The contract was awarded to the holding company that controlled Pan American. Grace did elect to come in and Panagra was formed with Grace and Pan American, each holding 50% of the stock, and it proceeded to take over their contract and to establish what has become the dominant airline on the west coast of South America. You'll see that its routes are set forth in the -- shown on the map in the pink lines, whereas Pan American is the blue line, with Panagra, confined pretty much the west coast and south of the Canal Zone and Pan American on the east coast but going on north of the Canal Zone to bases in the United States. The yellow line, I should say, while the -- where we have the map in front of us, is the routes that Braniff now flies. Braniff is certificated to fly from the United States to those points in South America. It secured its certificate in 1946, so that up until 1946 and later as it developed, you had only the two, the red and blue, as shown on the map.
William O. Douglas: Does the President still have to approve these overseas --
Archibald Cox: A transfer or issuance of a certificate involving overseas air carrier, yes.
William O. Douglas: What was that -- what is the case where we hear -- the Court held I think I just --
Archibald Cox: Chicago and Southern --
William O. Douglas: That that actually the President does not review it.
Archibald Cox: It was not reviewable and that there was no -- as I remember it, it was no jurisdiction to --
William O. Douglas: Do we have underlying in this case that presidential decision that this --
Archibald Cox: No, because this --
William O. Douglas: (Voice Overlap) this territory shall be divided up.
Archibald Cox: No, there's no presidential decision here except the decision that Braniff should be certificated. Because these events all took place long before the Civil Aeronautic Act and of course nothing that comes out of this case --
William J. Brennan, Jr.: Well, some of the extensions of Panagra I think took place afterwards, didn't they?
Archibald Cox: But I don't think those would have to be some of the extensions (Voice Overlap) it might have been approved by the Civil Aeronautics Board but that wouldn't, as I understand it, require presidential action.
Byron R. White: What the (Inaudible)
Archibald Cox: No, they had grandfather rights.
Byron R. White: Well, does the grandfather rights require that or --
Archibald Cox: That was automatic.
Speaker: (Inaudible)
Archibald Cox: No presidential approval is required. And equally of course, no action will be required as a result of this decision that would in any way foreclose later action by the CAB or the President with respect to certificates if appropriate applications were made either. So I don't think there's any question of interfering with the decision of either agency.
Hugo L. Black: Do you mean by that if it were held that the Antitrust Act had been violated, President decided to give their certificate as it was involved here, that under the other case -- how was that been referred in the other case? In other -- the other case he could do that?
Archibald Cox: Well, I suppose to try and put it as precisely as I have been able to in my own thinking. I suppose that if the decree that we seek here, ordering Pan American and Grace, both to divest themselves of any interest in Panagra. It appears that -- then Panagra withhold the certificate. The start would in some way be distributed.
Byron R. White: Then I suppose they couldn't have.
Archibald Cox: Yes, that's right. Then let us suppose that it were to be -- that Pan American were subsequently to come in and say, “Well now, we would like to buy up the stock from X.” We think that's desirable and we want CAB approved. I presume that the final decree would not foreclose that possibility that if the reason I give is that the Board has authority to authorize exemptions from the antitrust laws and I presume any decree ordering Pan American to divest and would imply an obligation to stay out so long as it -- the antitrust laws required it but if the CAB 15 years later, I should say it was consistent with national policy that under the Federal Aviation Act and its authority to approve acquisitions of control and give exemptions, it could do it.
Hugo L. Black: Mr. Cox, I hope before you finish, you'll discuss that phase on this standpoint. It's disturbing for me to finish it. This Court has gone along to decide a case of controversy which could later -- its judgment could later be frustrated by the President or an agency executive or any other kind. That would seem to raise questions on the old cases at the beginning of the history of the country as to what duties can be opposed on this Court, would it not?
Archibald Cox: Right. It would seem to me that here, Mr. Justice Black there is no reason to suppose. Indeed the Department of Justice was asked by the CAB to bring this action as I've explained when I get back to the fact. There is no reason to suppose that any such application will be made to the Board or to the President or that it will be approved.
Hugo L. Black: Or that would --
Archibald Cox: But if no events (Voice Overlap) --
Hugo L. Black: -- as far as we're concerned, that wouldn't prevent the -- that would quite answer the question, would it, that our decree could be upset by the President or by the executive agency?
Archibald Cox: Well, it -- isn't it frequently true that new events may develop. New legislation may be passed which in the course of time results in a different arrangement, then it would result under the decision of the Court. The executive agency isn't required here either to carry out nor is there any suggestion that it can disapprove the Court's decree. The Court's decree would certainly require the divestiture of itself and it would -- that would be binding, subject to null frustration or review by anything. Now, if new events take place, the -- in that upshot 25 or 50 years later, as in many, many cases. Maybe, that something that develops that is different from what the Court ordered pending the change in the event. It does seem to me that that is like old cases dealing with advisory opinions or requiring the executive department's approval of being -- order for instance of the Court of Claims, is that (Voice Overlap) --
Hugo L. Black: And I want to (Voice Overlap) further just to say this that it seems to me that if the other case stand at this time, that the President himself could do precisely what we are being asked to do here, could these people ask for permission to do it and that if he can, we should --
Archibald Cox: There is this major difference, Mr. Justice and that is neither the Board nor the President has any authority to deal with this combination as it now stands. And it is the cases here in this Court because this combination has -- I'm getting a little ahead of myself of that fact in the middle of my (Voice Overlap) --
Hugo L. Black: I'm sorry.
Archibald Cox: But basically, the reason we are here is that this combination stand as an obstacle to the sound development of American aviation in relation to South America in two respects. In the first place, it has brought together interest which shouldn't be competitive, the dominant steamship and the dominant west coast airline interest and has therefore prevented the development of real competition between them which is certainly inconsistent with the general policy that the CAB has adhered to. Second, it has prevented the development of a west coast company which is genuinely competitive with Pan America, especially the development of a west coast country that might be competitive with Pan American on flights from the Canal Zone to the United States. And the combination is we think illegal in that brief, also, it would be for either as in the law but because it has done both of those.
Arthur J. Goldberg: General, is it correct to say that the cases here because Panagra has been unable to pursue an application before the CAB and before the President because Pan American's 50% interest prevented a proceeding to proceed before the CAB?
Archibald Cox: That is certainly -- that is certainly one of the reasons to come back to the facts. Prior to 1938, the policy of the Post Office Department was to subsidize only one line so that no parallel policy at this Court. And the result I think is that there was no likelihood but prior to 1938 that Panagra or anyone else could have gotten a route paralleling Pan American's route, north of the Canal Zone. But in 1938, the policy changed with the passage of the creation of the Civil Aeronautics Board. And at that time, Grace began to be anxious and so that was cutoff at the Canal Zone to get its own routes to the United States and it proposed Pan American that it'd be make an application. Pan American rejected the proposal and refused to vote to permit an application. It took the position that this is -- it would not be in the best interest of our stockholders to authorize a Panagra application to extend north in competition with Pan American. Grace then filed the Grace half of Panagra then filed an application. Because of the war, there was a considerable delay. After the war, the CAB dismissed the application on the ground that it did not have power to order a carrier to make so an extensive change in its business as to start flying from the mainland to the Canal Zone in addition to what had there before have been a South American enterprise. That case was carried up to the Second Circuit, the Second Circuit reversed and this Court issued certiorari. Meanwhile, following a presidential decision, Braniff had been certificated to go to South America and to the west coast. And the result was that Panagra was faced with no through route, it was dependent on connections of the Canal Zone. And it had a competitor who had a right to fly through planes in a through route. And where that litigation would end up that was then pending in this Court, no one could tell. Faced with that condition, Panagra entered into a “through flight agreement” with Pan American. Whereby Panagra planes, they now go on to New York through an agreement with the national, Panagra planes are flown to the U.S. mainland by Pan American pilots. Pan American controls the operations, issues, tickets, handling of baggage and gets a considerable part of the revenue. But at least there is a through claim. And at this stage of Panagra settled the business dispute on those terms and did not press any further to litigation at that time. The CAB in 1947 and again in 1953, requested the Department of Justice to institute this litigation and it was instituted about 1953 pursuant to that request. The District Court made two main rulings. First, it held that the combination of Pan American and Grace informing Panagra and the subsequent division of territory, the east-west coast, were not illegal. So it ruled against us on that point. It went on to hold that Pan American subsequent use of its control of 50% of the stock of Panagra, to block Panagra's extension of its route to the United States in competition with Pan American. A constituted monopolization in violation of Section 2 of the Sherman Act, so it ruled and following that ruling, it added an order on requiring Pan American to divest itself of its 50% of the Panagra stock. But otherwise, it dismissed the complaint so that Grace was left free to retain its 50%. The United States and Pan American have both appealed. I plan in my argument because there are more issues here than what can possibly cover in the time permitted to direct myself to our fundamental contention that this combination of the dominant steamship interest and the dominant air interest to form a controlled airline in the west coast of South America, was itself in its inception and subsequent operation, an illegal combination in restraint occurred. That of course would -- if I -- we are right in that, that would not only sustain the case so far as the order against Pan American goes but would require reversal so far as the order in favor of Grace goes.
Byron R. White: Mr. Solicitor --
Archibald Cox: The --
Byron R. White: -- General, do you (Inaudible)
Archibald Cox: Well, doing it simply because it seems it makes the heart of the case the most effective argument.
Byron R. White: (Inaudible) to say if it was not illegal and (Inaudible)
Archibald Cox: Well certainly, it can be argued that Pan American's subsequent acts were and are illegal. I see no difference in what Grace is doing today from what it was doing at the beginning. It has been the same from the beginning. The intent was shown in the beginning and the subsequent events simply carried forward.
Byron R. White: Well aside from the facts, the facts or otherwise -- do you think legally it makes a difference whether it was a violation of the antitrust laws at the inception?
Archibald Cox: Well, it certainly could become illegal at a subsequent stage, yes.
Byron R. White: You're arguing it here because you think the facts justify it.
Archibald Cox: I think the facts justify it and I see no real difference in the court below.
Byron R. White: But if the court held that it was not illegal at the inception, that doesn't necessarily finish (Voice Overlap) --
Archibald Cox: Well, there might have been subsequent developments which turned to what had been legal into an illegal combination. I was about to say that the -- with respect to the monopolization aspect of the case and some of the subsidiary claims that those that we will have to submit on the opinion of the District Court and on our brief where they are thoroughly covered. Now there are two preliminary points that I must mention. First is the jurisdiction of this Court. In the order putting the case on the calendar, the Court asked counsel to reque -- to discuss the question of jurisdiction. That was done after the Brown Shoe case had been argued orally and prior to the decision in the Brown Shoe case, and in our view, indeed the view of all the counsel, the Brown Shoe case is decisive here because this order does either dismiss the Government's case or order divestiture unqualifiedly and therefore it seems to us -- to be exactly likely question presented and decided in Brown Shoe. The other preliminary question that I should note is the question whether this action should have been in court at all or whether it was a proceeding that should have been brought before the Civil Aeronautics Board. Pan American suggests somewhat faintly that the Federal Aviation Act gives air carriers a blanket immunity and that they are no longer subject to prosecution under any circumstances under the Sherman Act. We think that's quite plainly wrong for three reasons. In the first place, this is not so detailed a system of regulation that one could find and -- an intention impliedly to repeal all earlier statutes and they could mean applicable. For example, with respect to foreign air carriers, there's no regulation of rates. Second, the Federal Aviation Act does contain or authorize two specific kinds of exemptions from the antitrust law. And the specification for those -- of those specific exemptions it seems to us to imply as it's been held in other cases involving other Regulatory Acts indicate that no general blanket immunity is intended.
William O. Douglas: Could you point specifically to those two?
Archibald Cox: One of them has to do with mergers and the other has to do with agreements between carriers relating to pulling some things of that kind. I think 412 is the section I believe.
William O. Douglas: Thank you.
Potter Stewart: It always wasn't, the Federal Aviation Act is apparently new enactment, isn't it but the --
Archibald Cox: The Federal Aviation Act is compare -- yes, there was an intervening law.
Potter Stewart: Yes, but the -- but since 1938, I think those two antitrust extensions have been in this (Voice Overlap) --
Archibald Cox: I think so too, yes sir. I was referring to the present law. Next, we submit that the case is not within the primary jurisdiction of the Civil Aeronautics Board, because the Board had no power to deal with the basically unlawful combination which is attacked by the Government's case. The Civil Aeronautics Board can't determine the legality of a combination formed in 1928. It has no power to grant the relief that we seek here. And in addition, there is nothing in the decree which we seek here, which would anyway interfere with its power to issue certificates or make decisions concerning routes.
Earl Warren: We'll recess now.
Archibald Cox: -- in this case, to where that the combination of Pan American and Grace to form Panagra, each holding 50% of the stock together with the division of territory and other related arrangements. Both was in the beginning and in its subsequent operation continued to be, an illegal combination in restraint of trade. The findings of the District Court, it seemed to us to make it plain, that the combination was put together partly for a business purpose but also with an intent of avoiding true competition and protecting the interest of Grace on the one hand, the other interest of Grace on the one hand and Pan American. The District Court opinion appears in Volume 11 of the record. And at page 5388, where you can find the judge saying, Grace was aware of the competitive potential of air transportation with its large steamship investments, so as Pan American aware of potential competition. And then over on the next page, by joining with each other in a joint venture on the west coast, Grace on the one hand would be assured against the entry of an independent American airline competitor into its west coast demand and gain time to get experience. Pan American on the other hand, would be substantially free from American flag competition in the rest of South America. Their method of organization of the joint company appears calculated to give each negative control of the company in order to assure against possible treachery of the other to expand the operations of the company in competition with their respective independent line. Pan American has never denied as I understand it, that it was their intention that Panagra should not furnish competition with Pan American's own lines. Grace in its argument here protest that Grace had no intention but to set up being a -- going business, but that seems to me hardly to have been the intention of its offices as they declared it at the time the combination was formed. For example, Iglehart then the President of the Grace -- of Grace have wrote to one of his close associates in 1930, this was just a few years later. I've got Volume 2 -- 3, page 966 of the record. We went into this business because we felt that in view of our big investment in steamers, we should become a party to this new branch of transportation which will yearly become more important. And in 10 years, will be a real competitor of our steamers over a 968, a memorandum written a month later. He again says to an associate, “We went into the business because we felt that in 10 years from now, air transport would be a -- an important competitor of steamer transport in which we have so large investment.” As I say, I think the aim was both to control potential competition but we do not mean to say that Grace was not anxious to have the airline investment succeed once it went into them. But to where it wished the two to progress is pretty well revealed in another letter which was written -- which appears on 969, a memorandum written by Iglehart to some of the subordinate officers of the company. I'm anxious as I know you are anxious to see the traffic airplanes built up in a very aggressive way. Then it goes on into some details. Further down, why not talk over the idea with Mann, Carter and Young who are all here now and see whether you can get a practical suggestion, get hold of a man who would not only build up the air traffic but would build it up in a way which would not necessarily draw traffic from our steamship line. Then skipping a bit, I appreciate the fact that steamer and air traffic are competitors but I believe that by handling the whole matter as I've indicated, we may avoid the prejudice of competition. His notion of what was meant by avoid the prejudice of competition appears in a letter written in 1933, again to a company official, where he suggest you check up but I think you'll see that from a particular instance, I'm on 977 now, air rates are getting too low in comparison with steamship rates. In other words, build them up but not so there's any real competition. I think you might wish to have pushed, put all the facts before you, and see whether your Panagra rates now actually got too low. And whether or not, there is in some way jacking them up, that suddenly or in a radical way gradually we know that these things can be done gradually without calling attention or creating any opposition, whereas they have done too quickly and they're likely to attract opposition. Compete but don't compete too vigorously and lets us control both where there could be more vigorous competition if the agents who are handling it were not subject to divided loyalties. The --
Arthur J. Goldberg: Mr. Solicitor General, at the time (Inaudible)
Archibald Cox: I think there are two points in answer to that Mr. Justice Goldberg and I am going to now show how the intent was -- became real, if I may put it that way. How competition was actually restrained by this potentially restrictive arrangement. First and between steamship and airline, between Grace and Panagra and then second, I will turn to the Pan American aspect of it. Now the district judge, I really am coming to your question, the district judge said that this allegedly unlawful combination of airline and steamship interest, was not an unlawful combination because these two weren't competing in the same market. That conclusion seems to us not only to be plainly erroneous on the evidence but also to be based essentially on a misconception of the applicable legal standard. Airlines and steamships are alternative and therefore we say, competing methods for carrying passengers. The airline's share of passenger traffic has risen from a very small percentage, so that today -- and so did 1957, it was 84%. Now bearing in mind that shift and bearing it in mind that there are 250,000 travelers a year between the United States and South America, it seems to us that it defies common sense to suppose that there aren't a considerable number of those travelers, because of these travels are for pleasure, whose choice will not be affected by considerations balancing comfort, convenience, rates, time and other factors throwing them all into the pot, by the way, we all know that -- we and our friends do when you decide which way to go to Europe. But this is not just speculation. There's ample evidence of current competition, Mr. Justice. My first answer is that even with respect to passenger traffic, there's ample evidence of competition. My second answer to your question and second submission with respect to this aspect of the case is that we want to be sure that the same thing doesn't happen with air freight with cargo in the day of cargo which is growing, that happened in the 1930s with respect to passenger. So that it may be that most of the incidents with respect to passengers are in a sense path. We think that that evidence is important with respect to the current competition for passenger but even more important because it shows the impossibility where you have a steamship company and an airline company for the same people to act for those conflicting interest the same way that independent agents or officers would represent those interests. And there is as I shall show in the moment, a great opportunity, with respect to cargo where it's particularly important that this should not occur. Now, the evidence of competition with respect to passengers is the testimony of various witnesses. Ferguson, the treasure of Pan Ameri -- Pan American was asked, “Does Pan American engaged in publicity efforts to sell passengers on the idea that an air trip is more pleasant than a sea trip?” “Oh I'm sure we do.” After some omissions, “do you consider that Pan American is in competition with the steamship lines?” “Very definitely, we are both trying to get the same market.” In addition, you will find many comments in the internal Grace correspondence cited in our reply brief, showing that the agents were all too aware of the competition that Panagra officers were frustrated because they felt that the agents were more loyal to the steamships than they were to the airlines. There was even one instance of a prospective passenger who went into in Grace Agency and he wanted to make a trip in a hurry. How's the fastest way I can get to the United States? And the agent got out all the folders for the steamship company and figured out to sailings and so forth and the man said, well, there's an airline. Oh yes, but that's not as safe as a steamship but that was the -- this was inevitable in the Senate. Now, the Panagra officials -- many of them protested against it but I think the inherent part of the -- unavoidable part of the arrangement. Second, we say that the --
Potter Stewart: The -- doesn't the record indicate that as of now, the Grace Company thinks that the future transportation in this area lies on the airline business rather than the shipping business?
Archibald Cox: Well, I think that the -- I'm not sure what Your Honor has reference to --
Potter Stewart: No, I'm not sure (Voice Overlap) --
Archibald Cox: I think that it is -- as I've said (Voice Overlap) I don't want to overstate my case, I think it's quite true that there have been many Grace officials who wanted this airline to succeed and I realize their interest in it. But -- and I don't think that I can make a case except for some instances like that letter from Mr. Iglehart where there was a deliberate instructions to suppress it. But there was an inherent recognition especially down the line that if this shipment go or this passenger goes by water, Grace gets a hundred percent. If he goes by air, Grace gets a much smaller percent. And there was a problem of which commission would the agent get whether it goes one way or another. And this it seems to us still exists as shown by the testimony from Ferguson. Now, with respect to cargo, the gross of air freight bids fair to become spectacular during the next three decades as the growth of passenger traffic was in the past.
Arthur J. Goldberg: Mr. General (Inaudible)
Archibald Cox: For the purposes of the present case Mr. Justice, we can fully agree that if Grace had built up this airline by itself on the west coast, a hundred percent, that there would be no violation of the antitrust laws. There is some authority to the contrary of that and I simply without making any concessions lay it to one side, I do not pitch my case upon it. Indeed, we've waived it in effect, our argument is that even though a company may go in and do this by itself, there are many things that you may do by yourself that you cannot go and do by combination. And here, Grace got together with Pan American but Grace might or might not have been so successful doing it alone. Pan American might have gotten in there ahead of Grace so they might both have been there. So that our case rests on the doing by combination, and of course this combination between the steamship and airline interest is only one aspect of it, the highly important one but only one aspect as the wholly illegal combination. I was about to point out the potentialities of air cargo in 19 -- taking all airlines, in 1945, there were only 9 million revenue ton miles. In 1961, a decade and a half later, there were 308 million revenue ton miles of air freight, a 30-fold, 34-fold increase. Furthermore, the kinds of freight carried by airplane have -- it must be realized become very fair. The record shows here that the freight carried by airplane to South America has included -- with South America has included such things as cattle, industrial machinery, automobiles, refrigerators, wearing apparel, bricks, onions and so forth. It is a diverse service today. Finally, I should emphasize this part of the background that relative transportation cost which we'll realize of course when you stop the think are not to be determined simply by looking at the rates, the cost of handling, transshipment, warehousing, different forms of packaging and so forth, so that what is superficially non-competitive in the case of the rates, being in truth the competitive in that pressure. Now here, Grace's insistence that all airlines can't really compete for freight with steamships if -- which is its litigating position, if that is the company's commercial position, it seems to be -- us to be the best evidence in the world of the anti-competitive dangers of putting the same company in control of both steamers and airlines. Because the record has a great deal of testimony in it, about the competition that airlines can offer steamship transportations. Conwell, a cargo sales manager for Pan American was asked, “From your point of observation, would you say there is an active area of competition in the North America and South America trade between air carriers and ships?” Well yes, I believe there is an active area of competition between surface and air at the present time. Carl Michael, the President and general manager of an oil cargo carrier serving the Caribbean and South America was asked whether there was an area of competition. Well, our particular face of operations I consider most definitely competitive. And he went on to list specific instances of competition between himself and the steamers. Riddle, the President of the Riddle Airline which does not serve Latin America apparently but which nevertheless is one of the biggest freight carriers testified too of his ability to compete and frequent competition with steamer transportation. And we set forth in our brief, references to gold and platinum shipments as specific illustrations of instances in which Panagra, for example got some gold shipments that had previously gone by Grace. There was intercompany correspondents pointing out that if only they'd gone by water, Grace would have got a hundred percent of the revenue whereas going by air of Pan American got some and some U.S. domestic carrier got some. So that there's ample testimony of instances in which there are competition. Now, Grace says to this, as the district judge did, that while looking at the whole picture, the two really aren't competitive. In the case of passengers, there are great many people short of time and they'll only go by airline, water obviously isn't competitive as to that. And he might have said and did say in effect that the shipments of grain, fertilizers, ores and so forth and of course the airlines don't cover to carry those. And the result is that if you'd assume that all passengers once are interchangeable and that all freight is fungible, then you do find only a small part of the passengers going by water and only a very small part of the freight going by air relatively speaking. But it seems to us that there are number of fallacies in this contention. In the first place, percentage figures based on the total freight or total passengers are meaningless because they're made up of all different kinds of freight. And to talk about the way petroleum is carried and how much petroleum or grain isn't carried by air, doesn't bear on the extent of competition that there is for other kinds of traffic. So too, the total volume of traffic is to which there is a competition is not small indeed. Panagra carried 8 million revenue ton miles and had gross merit revenues of two and a half million from freight or cargo carriers during 1961. And if it's two and a half million that it carry, there must be a great deal more as to which there was a competition if it had been vigorously pressed. The fundamental legal fallacy I think in counsel's argument is in attempting to focus attention at the extremes of a wide range of different kinds of cargo or different kinds of passengers. Undoubtedly, at one end of the range, there is cargo that will travel only by water and that the other end of the range is cargo or passengers that will travel only by air. Now, if we were dealing with a situation and which there had been a number of competitive steamship -- number of competitive steamship company, and they were being merged into a unit. And the question was whether that was a combination in restraint of trade. It would not be an answer if they monopolize -- they combined a large part of the steamship market to say, oh well you might ship your grain or oil by airplane because for some purposes, the steamer market is the only one reasonably available to a lot of people. But if you -- our concern with putting the -- what already is the dominant steamship company, together with the dominant airline and you ask is this kind of result in a lessening of competition. True, it may not directly lessen the competition with respect to the people who could travel only by water or the people who can travel only by air, or the cargo that can travel only one way or only the other. But there's this band in the middle where they are interchangeable and this makes it proper to let -- to that band in the middle and say, is this a substantial restraint of interstate of foreign commerce. And in this instance, we think quite plainly that we have shown that it is. I should emphasize that the view that competing forms of transportation ought not to be under common control, is very deeply embedded in our national policy. One finds it in the Panama Canal Act applicable to all rail and water carriers. One finds it in the Motor Carrier Act applicable to railroad and motor carriers. One finds it in the Federal Aviation Act applicable to the acquisition of control of an air carrier by a form of surface transportation. And the Courts Of Appeals in approving Civil Aeronautics Board orders have frequently noted that there is competition between the two. Indeed, the Civil Aeronautics Board itself once refused Grace authority to establish an airline to the Caribbean on the ground that it would be expecting too much to assume that in that -- that that transportation company would be in a position to provide vigorous competition for its steamship interest. Now, turning to the other half of the combination, we think that there was equally plainly an inherent tendency to restrain and an actual restraint of competition with respect to air transportation itself. First, the combination inclined and resulted in a division of territory with Pan American receiving the east coast of South America, you'll remember all the blue was down that side of the map, and Panagra receiving the west coast of South America.
William O. Douglas: Is there anything in this record Mr. Solicitor General that tells us what the overall competitive picture is with airlines like Killeen -- as I remember Killeen?
Archibald Cox: Yes. The figures -- the figures with respect to passengers carried --
William O. Douglas: Yes.
Archibald Cox: -- are set forth in our brief in a considerable detail, both in the statement of facts and then in a later argument as showing the dominance of the companies. For -- I can give you --
William O. Douglas: Don't stop to read it -- just tell me where it is, I was looking for it.
Archibald Cox: Well, some of them --
William O. Douglas: The foreign carriers --
Archibald Cox: The foreign carriers aren't broken down but there are in the brief -- well, you will find 63 and 64 but there are some references. These companies -- these two companies carry half of all the traffic and 75% to 83% of the U.S. flag traffic, the foreign carriers are not broken down by company but the mark -- rest of the market is divided among 15 or 16, each of which has a very small part.
William O. Douglas: Thank you.
Archibald Cox: I've referred to the division of territory between Panagra and Pan American, it suggested in the briefs for Grace that -- well this came to an end in 1938, but we find a number of references following 1938 where Grace and Grace officials were still speaking in terms of a division of territory between Pan American and Panagra. Those are cited and quoted at some length in our reply brief which develops this evidence and rather than take the time, I would simply refer the Court to it.
Byron R. White: Mr. Solicitor General, what they say of determining whether the sort of business territory (Inaudible)
Archibald Cox: Well, as I understand their argument, it is -- it's this. Yes of course, there was a division of territory up to 1938 because you couldn't get competing air mail contract. It's -- and after that, it could, well I'm not sure that that really applies to all these points that they divided.
Byron R. White: What the territory implies (Inaudible)
Archibald Cox: That's very -- it's -- in all honesty, very hard to tell. There are telegrams and letters speaking of an agreement so that when they speak of an -- in expressed terms of what the agreement is. On the other hand, it would seem to me that in all probability that this agreement was simply inherent in the basic original setup. That's one of the vices of the basic original setup.
Byron R. White: It could be in effect a combination of (Inaudible)
Archibald Cox: That's --
Byron R. White: (Inaudible)
Archibald Cox: That has gone -- that is my basic point and that it doesn't stand on some expressed terms in -- but this inherent in the -- unavoidable in the set up. Now, the second place where a restraint in air competition was inherent in the setup and therefore unavoidable is in the commerce with Buenos Aires. Both airlines, Panagra and Pan American, run down the Buenos Aires. The shorter route by air miles is the Panagra route. But we find a number of instances in which Panagra, a number of ways in which Panagra was kept from competing vigorously with respect to those flights. It couldn't have its own offices. The maps that were put out in publicity by Pan American ostensibly for both a distortedly map showed the distance wrongly. Agents were even instructed on occasion to sell Pan American routing unless the travelers expressly requested Panagra. Again, I'm not relying on these specific violations if I could call them that, but rather on the fact that this was an inescapable consequence of the basic and continuing arrangement. Now, it is plain I think that in both its steamship and airline aspect that the combination tended to inhibit and did inhibit competition. And the critical question I suppose becomes whether the combination is saved from illegality by its business success. Our answer or answers very briefly to that, they're developed in the brief are these. First, neither the court nor an agency can excuse a violation of the Sherman Act on the argument, well this is really been a good thing for the country. Second, this combination plainly contemplated and accomplished a division of territory and the division of territory is a perceived violation of the Sherman Act. Now, it said here, well this was a new enterprise and was an area which neither of us served before. But if the two companies or three companies, selling a new product in the Mississippi Valley were to say when you go and exploit the east coast and I'll go and exploit the west coast and neither of us will compete with the other perfectly or plainly even so it was a new product, that would be a combination or agreement in restraint of trade under the Sherman Act. Third, we point out that no combination of such dominant firms as Pan American and Grace has ever been held justifiable under the Rule of Reason. And fourth, we say even if the Rule of Reason does apply, even if one must weigh the business gains against the costs, still this combination must be condemned. Now, it must be remembered that whatever Post Office policy or the commercial necessity might have required in 1928, it certainly didn't require putting the dominant steamship interest in 50% control of what was to be the air carrier. And it certainly didn't require of combining the dominant steamship interest with the dominant airline interest. And still is, we submit, did it require setting up an arrangement which would project this control way into the future. And then all of those three counts, this went way beyond Post Office policy and way beyond anything that could be justified. Now, I would like in my last minute or two, to go back to the question raised by Justice Black at the beginning of the argument. It does seem to me here Mr. Justice, that this Court's decree and only this Court's decree can break up this illicit combination and there's no other agency that can deal with it. That is why the case is here. It is also true that if divestiture is ordered, nothing can or will frustrate unless Congress changes the law. That decree, there will have to be divestiture. And then the Civil Aeronautics Board and the President will get a fresh start so that the Court's decree to that extent would accomplish something that only a court decree can do and there's no question of its being set aside by anybody.
Hugo L. Black: What could they do -- what could they do after that fresh start?
Archibald Cox: After that fresh start, the number of things might develop. The Civil Aeronautics Board had said that the best thing that could happen in its tentative judgment is that to be a single U.S. airline on the west coast of South America. Another thing that could happen after that fresh start is that Panagra might become an independent company or Grace might acquire all of it. Conceivably, Pan American might acquire all of it. The one thing that we could be sure that would not have because the CAB and everyone concerned has found it intolerable is that this particular arrangement that nothing but a court decree can resolve would ever come back again. Indeed, I think the parties will agree that that will never be brought back to any agency again.
Hugo L. Black: I've just been reading -- I'd like that --
Archibald Cox: Yes, excuse me.
Hugo L. Black: I read the case again Mr. Justice Jackson's court went pretty far holding number one that no order could be reviewed under the enactment of foreign aviation until the President had acted, so it's not a mature judgment. And after the President acts then they can't act at all. And he calls attention to the old policy of this Court not passing -- refusing to pass on matters where some other agency could undo what they have done. Now, the problem in my mind gets down to this, if -- so far as that question is concerned, suppose these people should go -- we should -- we could render a decree, the Court does, says they shall not -- they shall be separated and that they be allowed to be together. They then go in and petitioned because they will be allowed to go to get together. Why -- what could we do about that if the President -- CAB decided it could and the President approved it?(Voice Overlap)
Archibald Cox: I don't think that in the first place sir -- if they came back 20 years later.
Hugo L. Black: Oh no, come back right away.
Archibald Cox: Well, I don't think anything could happen to frustrate the order of divestiture. Even then, there would have been a basic change in the circumstances. This Court would have cleared the desk and created an arrangement whereby the CAB and the President can pass on whatever applications maybe submitted to it.
Hugo L. Black: Suppose they offer the -- a request applied to do precisely, form precisely the combination that is here today.
Archibald Cox: Suppose -- may I answer that --
Hugo L. Black: Yes.
Archibald Cox: -- by putting an illustration. Suppose that you are trespassing everyday over my land, or at least I think you are. And you assert that you have some right of prescription or lost grant that gave you the power to do it. And I went in before the judge and said, I want an injunction to restrain this trespasser from going over my land. And the judge said, well I know, you're a soft-hearted fellow in any way you appear before Mr. Justice Black all the time. Even if I grant the injunction, you're likely to give him a license, my reply would be, well at least, I will then have the opportunity to decide whether I want him doing it or not, which is something that I don't have now. In fact, I don't want him doing it now but he's persisting in doing it. And I don't think the judge would say, well this means you're likely to frustrate my decree and therefore I will not grant you the injunction.
Hugo L. Black: Well then, you referred two sources of power for the President. One of them being a social -- one of them being a social power which according to the Court's judgment from which I dissented, which I have a question here, the President can do what he see is fit in this field. That's the substance of what the Court held. If that's -- and then therefore we said, we had no jurisdiction. We could never even do it at all.
Archibald Cox: Well I -- of course, I take it that what was really in a -- the mind of the majority at that stage and the decision has been much criticized by teachers and administrative law and others but I take it that was -- what was in -- as what supports Justice Jackson's reasoning was the theory that the President's decision will be based not only on matters in the record but on a lot of other matters in considerations which aren't properly subject to traditional cognizant. There's no suggestion here that anything we based on anything other than the record that is before the Court. And there's no -- the President has no power with respect to this combination to step in and say, I want you to do thus or so. Indeed, he has no power in the future to step in and say, I want you to do thus and so. The very most that he could do, would be to act on some application that these gentlemen might file and believe me, there's no chance if they will file an application for the setup they now have.
Arthur J. Goldberg: Solicitor General, the Court ordered them to divest and with usual language in the decree, this character, could they file an application before the CAB without going back to the Court in saying circumstances have changed and you would like to (Voice Overlap) --
Archibald Cox: I think they would have to do -- I think they would have to divest.
Arthur J. Goldberg: And then having divested, could they reacquire in any way without getting the Court to say that they had a right to do it?
Archibald Cox: I think too, one would have to go back to the Court and get it approved, yes. The only (Voice Overlap) -- the only contention if I might just answer that question. The only contention that I hesitate in honestly to make is that they might get that permission and I think they might well and I don't want to -- but I think you -- one would have to go back to the Court. The point I think is again, to what the court (Voice Overlap) --
Arthur J. Goldberg: So that if we order -- if we order -- sustain the order and use Justice Black's illustration, then in effect and send it back to the District Court to administer. Then in effect, this Court would say to the District Court that the time is now right for you to make another application, would that be correct?
Archibald Cox: If I understood you, yes. Excuse me, Justice Black.
Hugo L. Black: That still leave me -- and now, this case goes to the full extent of saying that the President -- not ours (Voice Overlap) --
Archibald Cox: And to review --
Hugo L. Black: -- as to what could be done with reference to aviation in foreign fields.
Archibald Cox: Oh, it seems to me it's much far limited than that. But it said that the case holds that there is no jurisdiction to order -- to review a CAB order which is subject to the President's review and that there would be no jurisdiction to review it after the President had acted the point which has -- even that point hasn't been squarely decided. There are many people who think that when the time comes, the case should be decided contrary to the dicta.
Hugo L. Black: But did they --
Archibald Cox: But in any event, all of that case deals with surely, is the review of an order of the Civil Aeronautics Board. It doesn't purport to say that the whole field of foreign air commerce is set aside as one of executive discretion. The courts can't intervene and it can't even intervene into it with respect to a matter as to which the President plainly has no authority, this case.
Hugo L. Black: I hope you are right on the way this case would be later construed when the matter comes up. But this case rests on the -- on one of the -- is that the President is commander-in-chief of the army. He's in control of our foreign affairs and that this -- the courts have no jurisdiction to anything as I understand this -- the thrust of it, which would contradict his desire with reference to who shall have this carriage, how it should be done.
Archibald Cox: If I may say just one sentence.
Hugo L. Black: Yes.
Archibald Cox: It would seem to me that the Court's opinion must be confined to matters over which the President and the CAB have some jurisdiction.
Hugo L. Black: From what source though?
Archibald Cox: Under the Civil Aeronautics Act.
Hugo L. Black: But no -- no, it's not limited to that as I read it.
Archibald Cox: But the facts were limited to that.
Hugo L. Black: That's right, the facts but the scope of the holding if one judgment of it all by the opinion here, President has powers, commander-in-chief. By reason of it being the President, control of foreign affairs to determine these things, we can't look at it at all.
Archibald Cox: I'm afraid I can't add to what I've already said.
Hugo L. Black: I hope that you are right in what you say at least to the point --
Archibald Cox: Thank you.
Hugo L. Black: -- which you'll be limited.
Earl Warren: Judge Peck.
David W. Peck: May it please the Court. I think that to get true insight into and perspective on this case. One has to relate the complaint, the course of the trial and the result reached by the decree rendered. First, the complaint. This complaint, not only in essence but its in entirety, was a claim that the two defendants were engaged in an illegal combination to restrain and monopolize trade. While Section 2 of the Sherman Act was mentioned, it is perfectly clear in the Government's briefs here, make it clear, that basically fundamentally to use the words of the Solicitor General and I say entirely, this is a Section 1 and 3 combination case as set forth in the complaint and that's all the Government's case ever was and as I read the Government's brief, all the Government's case is today. And that naturally follows from what the Solicitor General has told the Court, as to how this proceeding started. It started at the request of the Civil Aeronautics Board who ordered to divest both of these owners, at the same time and equally. And not only that, but in furtherance of a program that the CAB had in response to its responsibility for formulating the air pattern of American flag carriers and that was pursuant to a declaration of policy, going back many years and reiterated as recently as last year, that the traffic in the South America is too thin to support more than two American flag carriers. And therefore, the most fundamental preset of the CAB in this area of its jurisdiction is to say that there must be only two American flag carriers. There must not be three because to quote the CAB, to have more than two would be either a waste of public funds or private investment. And therefore --
Potter Stewart: And yet when there were only two, they granted the -- they granted a certificate to a third one, didn't they?
David W. Peck: No, I think -- let me get that straight Mr. Justice Stewart. The CAB has always considered that since granting a certificate to Braniff in 1946, that there are only two American flag carriers in the South America. Because to quote the CAB --
Potter Stewart: They (Voice Overlap) Panagra.
David W. Peck: -- they have always regarded Panagra as a part --
Potter Stewart: As a part.
David W. Peck: -- of the Pan American system. And therefore their program was, that when these two owners were divested as the CAB hoped they would be, that the purchaser of the stock, and they would have considerable leverage in that matter, should be Braniff, the other airline carrier into South America so that then what you would have would be one airline Braniff pretty much going down one side, one airline Pan American pretty much going down the other. And then there might be any adjustments of routes that the CAB desired in between but there would be only two carriers. Now, there has been no suggestion, not a suggestion in this complaint, not a suggestion by the Government at the trial and I still do not find any suggestion from the Government, that there has been any unilateral restraint by Pan American alone in violation of Section 2 independently standing by itself. Or any desire upon anybody's part at any time, the CAB or the Government, even now, that Pan American alone should be divested. Now, the course of this case --
Potter Stewart: (Inaudible) Judge Peck, certainly that's just what the District Court did.
David W. Peck: That's what the District Court did.
Potter Stewart: On the basis of finding that there was a violation of Section 2.
David W. Peck: And I -- my second point after I cover why the District Court was right in the first part of its decision, is why it was all wrong in the second part of its decision.
Potter Stewart: But then the theory was that the -- that Pan American was exercising monopoly power in excluding this competitor from going into the United States (Voice Overlap) --
David W. Peck: I do not take it that that was the Government theory. I can't find anything (Voice Overlap) --
Potter Stewart: Was that the District Court's theory?
David W. Peck: -- anything of that kind in the complaint.
Potter Stewart: Was that the District Court's theory?
David W. Peck: It was Grace's theory. I come now to the course of the trial.What happened at the trial? The Court permitted Grace to assume the role of a private plaintiff of its own right in this Government antitrust suit and allowed Grace to bring into the case the argument that the only violation here was a unilateral violation by Pan American alone. And the way the Court regarded this case can be noted from its opening sentence, very significant, I submit. The Court said this is only nominally an antitrust case. Actually, the Court said, this is a better family court. And then the Court proceeded to make the major of what I think is its many errors here, of treating this case really as if it were a divorce proceeding brought by Grace against Pan American and the issue is the custody of their child, Panagra. And of what resulted? A finding that there has been no illegal combination here that the formation of Panagra, its organization, its joint ownership, that everything that these two defendants did jointly was perfectly alright. But in one single respect, when it came to exercising what the Government acknowledges to be, the exercise of the normal incidence of ownership of Pan American's 50% ownership of the stock on the question of whether or not this joint venture should be extended to the United States. In voting though, that Pan American was cast in the role of a unilateral Section 2 violation. Now, I submit that this is not only grossly unfair to Pan American as I shall develop at the end of my argument, but more significant, an absolute and complete defeat of national policy in air transportation, international air transportation, as declared by the CAB, the agency of the Government with a responsibility for that air pact.
Arthur J. Goldberg: Judge, may I interrupt you for a moment --
David W. Peck: Yes, Mr. Justice.
Arthur J. Goldberg: -- but did not the Government charge this as one of the elements in the Government's complaint?
David W. Peck: The Government, I will hope from their brief, they say that what Pan American did in respect to this route extension supported in part, that's the language of their brief, supported in part the illegal combination. Evidentiary, I take it really evidentiary.
Arthur J. Goldberg: What about the complaint that the Government (Voice Overlap) --
David W. Peck: The complaint --
Arthur J. Goldberg: -- substantive allegation of the complaint?
David W. Peck: There -- I again regard it as evidentiary. I --
Arthur J. Goldberg: Did they charge the Section 2 violation in the complaint?
David W. Peck: But only in the combination. I'm sure Mr. Justice Goldberg that when you read that complaint, you'll agree with me completely.
Arthur J. Goldberg: Well, I -- I was reading the statement from it and one of the statements was that Pan American use this 50% --
David W. Peck: That's right.
Arthur J. Goldberg: -- full --
David W. Peck: That's right.
Arthur J. Goldberg: -- to prevent Panagra from securing authorities from the Civil Aeronautics Board.
David W. Peck: What they say is supporting in part this whole illegal combination but they say it all stems from the illegality of the combination in the setup in the beginning of this joint ownership and joint organization. Now --
Potter Stewart: At that point in the -- in that episode and throughout the history of this thing, this was hardly a combination. It was a fight between two antagonists, was it not?
David W. Peck: It became such beginning about the year 1938 --
Potter Stewart: And certainly with reference to getting a certificate to --
David W. Peck: Yes.
Potter Stewart: -- United States.
David W. Peck: Yes. May I -- and I'm going to develop that fully. I just like to complete this one point that the result here is a decree which makes Panagra the very thing that the CAB says, we must not have. If this decree stands, there will be Pan American, there will Braniff and there will be Panagra as a third independent air carrier in the South America. So we have ended up after all what the result which is the very antithesis of what the responsible agency of the Government says we must have and this result, if it pleases the Court, is only symptomatic and illustrative of the basic usurpation here by the Court of the primary jurisdiction of the Civil Aeronautics Board in entertaining this case to begin with. And particularly after the District Court came to the conclusion that what the CAB had asked him to do should not be done that they both should not be divested in order that the CAB could carry out its program. After the Court came to that conclusion, then certainly, it should not have gone on with a case which is essentially a route matter and fall squarely within the decision of the Court of Appeals for the Second Circuit in Grace versus the Civil Aeronautics Board referred to at some length in our briefs, in which the Court of Appeals said that this very subject of whether or not Panagra should be extended to the United States, and whether or not Pan American was justified in voting its stock the way it did on that subject, was a matter within the special expertise and responsibility of the CAB not merely primary but exclusive according to what this Court of Appeals specifically said in that case. Now, I'm going to come to the formation of Panagra, very briefly the conditions at the time. The Solicitor General speaks about the joinder at this time of a dominant air carrier and the dominant steamship carrier. Now, I will concede that Grace was the dominant steamship carrier at that time and since --
Byron R. White: (Inaudible)
David W. Peck: There was at that time, Mr. Justice White, no American airline industry in South America at all.
Byron R. White: I agree with that but for purposes of nominal trade (Inaudible)
David W. Peck: On the -- oh yes, yes, yes. On the west coast, quite, quite. These two parties were coming together in the most pioneering of pioneering venture. There was no industry. They were starting an entirely new field to talk about this in the terms of a joinder of competitors in some kind of a combination to restrain trade is just as far from the reality as you could get. This was a joinder of people to create something. And they had a third partner in it, they weren't the only partners. The United States Government was the third partner because to use the phrase appropriate to the airline industry, this company couldn't have gotten off the ground if the Government hadn't come along with a mail contract issued by the Post Office Department which paid their expenses, their revenues for years worth didn't amount to a quarter of what it cost to operate this airline. And consequently, as the District Court found, this was a three-way operation of the Government as much as them. And then the question why Pan American and Grace here, why Pan American is perfectly obvious, Pan American was an airline, a beginning airline as the District Court found, it had plans to have an air system throughout all of Latin America. It projected an airline down the east coast. It had already established one from the United States to the Canal Zone and had a mail contract for that. It was going down the west coast of South America, and the only thing that happened, and of course I think this probably turned up to be its mistake in hindsight. But the only thing that happened is that instead of doing it alone as they originally intended to do on the west coast of South America, it joined with Grace. And the reason Grace, because in this difficult situation of getting this new industry started, Grace had business houses all along the west coast of South America, steamship lines for rescue operations and the like, and they made as the Court has observed and the Post Office Department observed at that time, a perfect combination to get American industry started in this area. If I may, let me just quote that Postmaster General which puts this matter in perspective. He said, I would repeat that the contracting question, and this is the contract granted to Panagra and he went on to spell out why it was granted to Panagra. It was granted to Panagra despite the fact that there was a lower bidder, the Postmaster General said, it was granted to Panagra because Panagra represented the joinder of Pan American and Grace and their combined facilities were just what the country needed to get this airline started. Then they quote the Postmaster General, I would repeat, “That the contract in question is for a route most difficult to serve, at the same time a very great and far reaching importance, not only to the public but to the whole future of transportation by it. Failure would be a serious blow to the prestige of American aeronautical enterprise.”
Hugo L. Black: When was that report made?
David W. Peck: This was in 1928, when Panagra started. Now, they had an agreement. I say express, because their letters of agreement certainly expressly and explicitly said that this airline must operate from the Canal Zone south down the west coast of South America and they used the word ‘ultimately', that that's what it was to do ultimately. Aside from being expressive, the word express I agree entirely with the Solicitor General there would have been implicit and inherent that these two airlines were not to parallel each others routes. Indeed, that was compelled by the facts at that time, the economic impossibility of competition which all of us recognized and a policy defined, acknowledged, that the Post Office Department not to grant a mail contract or to subsidize more than one airline on one route.
Potter Stewart: Whole history that you've given us shows that there was an airline, an existing airline in the east coast of South America and they are creating one for the west coast, isn't that right?
David W. Peck: The east and west coast were -- started almost simultaneously.
Potter Stewart: They were.
David W. Peck: Almost simultaneous.
Potter Stewart: Pan American has not been operating?
David W. Peck: No, no.
Potter Stewart: It was operating where? Over in the --
David W. Peck: If it just gotten its mail contract from the United States to the Canal Zone. That came in 1928, just before this agreement between Pan American and Grace.
Potter Stewart: I see. So these were simultaneous --
David W. Peck: All -- all -- all already together. As I say it, so far as Pan American was concerned, all part of a single picture and it just took Grace as a partner in this part. Now, from the facts which I stated to the Court, I submit that the legality of this arrangement follows. And that the District Court was entirely correct in that part of its decision in which it said that this joinder of these parties was a lawful combination with a legitimate end, that the division of territories understanding and I quote the District Court as to what understanding was, it was not to parallel each other's routes, was not unreasonable under the circumstances that the blending of these resources with the financial and diplomatic assistance of the Government pull to facilitate success of Panagra, the American entry on the west coast of South America that this was a sound arrangement for the establishment and development of American commercial aviation on the west coast useful to the community and consistent with the best interest of the country. Now, I come only briefly to what the Solicitor General's argument as I understand it comes down to. I have expressed it to the Court why I think obviously it cannot rest upon the premise that this was a joinder of dominant carriers. Certainly, there was no dominant airline. There was no airline industry at all at that time. On what the Government says in its brief, a more accurate picture of the argument and one more realistic and fair, although I think entirely untenable, is that, while these two companies were not competitors, that they were potential competitors. That Pan American might have gotten this airline alone, that's true, that Grace might have established the airline alone, I doubt that. But then as much as both of them might have done it, that that was a joinder of potential competitors and therefore, competition potentially was frustrated at the outset. Now in a word, why I think that argument cannot possibly be regarded as sound is that the logical, the full, the inevitable scope of it is, that there could never be any kind of a joint venture at any time. Because any joint venture represents a joinder of potential competitors, it represents two people who want to go in to the business. Speculative, psychologically speculative as to whether they might both go into it separately if they didn't go into it in partnership. But I know of no case that holds or suggests that two people joining together to create a business. Now, as distinguished from two competitors, existing competitors joining together to create a joint venture which of course can be an instrumentality of monopoly. But I know of no case that lends any support to the suggestion that two people starting in on a brand new venture have got to do it along upon the risk that if they go into partnership and the business becomes successful that government will say you have to divest yourselves because you might have done it alone and therefore your joinder in the beginning was a joinder of potential competitors. I need not remind the Court that in this day and age of a vast investment nor enterprise that's required to start many new enterprises, the whole world of the underdeveloped countries for example, the necessity of partnerships to have the resources to start a business. I can't imagine anymore anti-enterprise or anti-endeavor of proposition and then the Government suggest as the predicate for its argument in this case. Now, I'm going to move to where I submit the District Court went terribly wrong. In taking up, in deciding a case that was not brought, my first submission is that everything that the District Court found on the legality of this arrangement in the beginning, the legality of the joint formation, the joint ownership and the joint operation of Panagra in and of itself compelled a conclusion that there was nothing illegal in Pan American doing what the Government has acknowledge to be, the mere exercise of the normal incidence of its half ownership on the question of whether or not this joint venture should be extended. Now, I will try to state quite briefly what this controversy is that the District Court seized upon to make the basis of its finding against Pan American. It is a controversy that started in 1938 by Grace suggesting that Panagra be extended with a route of its own between the United States and the Canal Zone. Let me state the consequence of that right off so that the Court will understand the importance that I'm going to develop this argument in a more detail later. But the consequence of what they were talking about was not competition between Panagra and Pan American. The suggestion in substance was that Panagra replaced Pan American on this route and put Pan American out of business and let the joint venture taken over. And the reason I say that is the suggestion perfectly clear is because the uncontradicted evidence in this case and indeed the finding of the District Court is in accord with. That if Panagra had this route, it would get all the business, practically all the business that went over the Pan American line. For this obvious reason, that is, unless, and I emphasize unless, at the same time that Panagra got a route between the Canal and the United States, Pan American got a route from the Canal down the west coast of South America.
Arthur J. Goldberg: It would get the business that having from the west coast but not the east coast --
David W. Peck: Oh no, I'm -- you're quite right, Mr. Justice Goldberg. Now, I'm only talking about coming down from the United States down the west coast. Because the facts of life, perfectly clear, considered that all of the through traffic would then go over to Panagra which is two-thirds of it and by reason of the scheduling of flights and the handling of the relative loads of traffic, the result would be the two-thirds of the rest of them would go to Panagra. So what this joint venture --
Arthur J. Goldberg: Why do you come to that conclusion? I follow you -- I follow you on the through flights, if someone starts on the west coast you might want to continue (Voice Overlap) --
David W. Peck: Because they would be able to have so many more airplanes carrying the through traffic.
Arthur J. Goldberg: More than Pan American would with its big east coast traffic?
David W. Peck: Yes, because the east coast traffic doesn't go that way. It goes from New York directly down the east coast of South America. You see, the Pan American and Panagra are connecting in complimentary carriers. That's the way they were setup, that's basic. Pan American had the route from the United States down to the Canal Zone where it connected with Panagra and took the traffic down the west coast of South America. If Panagra had the whole route, broke the connection and have the whole route to itself, it would take for all intents and purposes, all of that traffic that goes by Pan American either. Certainly, all of it from the United States down the west coast of South America and indeed most of it that goes from the United States down to the Canal Zone. So what this partner was suggesting to its partner Pan American was, let's extend this joint venture to put you out of the business that you would start it first and which was the predicate of this whole venture. Now, Pan American naturally said no. And then in 1939, they reached an understanding, Grace at that time was complaining about the connecting service. They reached an understanding that if according to arbitrators, the connection wasn't sound then Pan American would consent to an application for a route of Panagra zone. Two years later, without any suggestion of anything being wrong with the connection, without any willingness to go to arbitration, Grace started agitating again. This is after -- as a concession from Pan American they had a man of their own elected president and general manager of the company, despite the fact that the agreement between the parties in the beginning was that Pan American was to run this airline and Grace was to supply the agencies in the west coast of South America. And in breach of the first agreement and that of the second agreement, in 1941, Grace filed this application of its own nominally in behalf of Panagra for this route and that ended in litigation by the decision of the Second Circuit in Grace versus the CAB, in which the Second Circuit said that. The CAB had jurisdiction to entertain this application by Grace in behalf of Panagra. And if it were found by the CAB, that Pan American's opposition to this extension was actuated by fraud and illegality then the CAB upon that finding could issue a certificate to Panagra on Grace's application. And it was in that connection, in which it said that the issues presented there which are precisely the issues presented in this case if there is going to be any Section 2 case against Pan American law, precisely the issues which Grace have raised in this case, the Court of Appeals for the Second Circuit said in that case, came within the exclusive jurisdiction of the CAB. Well then, I move ahead quickly to 1946, the Solicitor General said this matter in the litigation from -- for quite a while. And in 1946, Grace and Pan American and Panagra got together in what is perfectly clearly a settlement of this controversy in which it was finally agreed and approved by the CAB something which Pan American had been suggesting for years that Panagra planes on through flights fly over Pan American's routes as well as the Grace route. And that was approved by the CAB with a finding that no monopoly would thereby be involved in clear settlement of the controversies so everyone understood at that time. And without enlarging upon the argument, I want to tell the Court with emphasis despite the brevity that in our submission, the approval of that agreement by the CAB gave Pan American immunity under Section 414 of the Civil Aeronautics Act, not from all antitrust charges, not antitrust immunity as the Solicitor General said. But immunity from its opposition to the extension of Panagra to the United States which is the only issue involved on this appeal. Now the decision of the District Court against Pan American was based on the following claim. First, that Pan American had excluded Panagra from the United States Canal Zone market. Second, that it was not justified in doing so because the territorial agreement between the parties not to parallel each others routes, only run east and west and didn't run north and south. And third, it was not justified because Panagra was not a subsidiary of Pan American. The Court said that 1% would make all the difference in this case, that if they had 51%, the Court indicated it would have been alright to do what they did. But that having only 50%, they couldn't do it. I'm not going to enlarge upon that argument, I simply can't follow. I merely stated it. And finally, and most importantly, that this exclusion of Panagra from this segment between the United States and the Canal Zone, gave Pan American a monopoly on that segment and in turn therefore a monopoly position in the United States South American traffic. And I emphasize that and I'm going to read from the Government's brief on this because this is what the District Court's finding comes down to. I read from page 8 of the Government's response in this appeal that said, this holding, that is the holding against Pan American, was based upon findings of Pan American has been since 1928, the dominant air carrier on the Canal Zone United States segment of commerce with South America. That by using its 50% stock ownership in Panagra, Pan American prevented Panagra from entering that segment of commerce, that's all, and thereby -- thereby, maintained its dominance not only over air transportation between the United States and the Canal Zone but also between the United States and South America as a whole. Now, as briefly as I can and I hope time will allow, I will tell the Court why I think the District Court's decision was erroneous on each and everyone of those points. First, we say that there was no exclusion of Panagra from this segment that Pan American came on to the segment and these flying Panagra planes are flying over Pan American routes by virtue of the through flight agreement ever since 1946 pursuant to a recommendation made by Pan American going back to 1939.
Byron R. White: Are those from Pan Am crew?
David W. Peck: No, they're Panagra crew. Secondly, there was no power to exclude Panagra from this segment by virtue of the Second Circuit's decision in CAB versus Grace, in which the Court of Appeals said, it is up to the CAB to determine the legality and the propriety of what Pan American is doing there. And unless the CAB held that they were justified in doing it, they couldn't do it and an application by Grace would be considered an application by Panagra. So we say that Pan American didn't have the power to exclude Panagra.
Potter Stewart: And then certiorari was granted and then later (Voice Overlap) --
David W. Peck: Certiorari was granted, the case was dismissed as moot upon --
Potter Stewart: Agreement.
David W. Peck: -- the through flight -- the establishment of the through flight agreement which is the best evidence that the whole controversy was settled. Thirdly, about this agreement being on the east-west which had been the claim of Grace in the finding of the District Court inconsistently, the District Court says the agreement was that they should not parallel each other's routes. It said that their half ownership was setup so that this joint company would not enter into competition would be independent lines of the two parents. And yet, unaccountably, I can only say utterly unaccountably, the District Court finding following the suggestion of Grace says, the division, their understanding only run east and west, it didn't run north and south. Now, perfectly obviously I say, it ran north and south. Every consideration, every single consideration for this non-paralleling agreement applied equally to the north and south as to the east and west, if anything more so because Panagra was established to be a connecting and complimentary carrier with Pan American. Pan American already had this route down to the Canal Zone. Its only interest in joining with Grace was in an airline, which was their agreement said, ultimately would go from the Canal Zone down the west coast.
Hugo L. Black: May I ask you if in this argument you are challenging the finding of the judge?
David W. Peck: I'm challenging the finding of the judge which is wholly an inference. I'm challenging the finding of the judge as being clearly erroneous, Mr. Justice Black, thoroughly erroneous.
Hugo L. Black: Is that true with reference to some of the other arguments that you've made?
David W. Peck: I think that you can all -- we say this that all one has to do is read the decision of the District Court and know that it's an error.
Hugo L. Black: To that finding, and I know you're challenging others, is there any place in your brief where you have set out the findings that you challenge -- I've been a little confused because I couldn't -- didn't understand which.
David W. Peck: Not in the -- not in the sense that you would approach a case and say, here's finding number one, number two and number three, we don't agree with that. I'm taking that some total of these findings, breaking them up into their various parts and saying that this holding can't hold of anyone of its joints, it has many joints and not one of them hold.
Byron R. White: This issue is an effect of the remand (Inaudible)
David W. Peck: I would say it -- yes. I would say it was a purely factual issue but I stand upon the proposition that it's perfectly clear that you can't possibly reach any other conclusion. For all the reasons that was stated by the District, for all the reasons that are argued by both the Government and the Grace -- and Grace, as to the existence of the reason for the justification of the east-west division, every single argument fits like a glove the north-south and compels the conclusion.
Byron R. White: (Inaudible)
David W. Peck: I agree with that observation Mr. Justice White, yes indeed. Now, let me -- I have mentioned the fact that the whole design of Panagra was to be a connecting and a complementary carrier with Pan American, not a competitive one. And let me quote from the Grace memorandum to the District Court, this goes back to the time because it explains a good deal. Grace hadn't the faintest notion of ever having such an extension or have ever having this airline do anything but run south of the Canal because perfectly clearly and the District Court says this, that was Grace's only interest. And as Grace said in its memorandum to the District Court, Grace was not interested in the “hazardous water crossing of the Caribbean or the alternative of the difficult land group through Central America but was only interested in a route starting from the Canal which was a focal point” I'm quoting, “for a large number of steamship companies serving South America from the United States such as the Grace Line and from Europe.”
Potter Stewart: You got -- back in 1928, this is describing Grace's frame of mind back in 1928.
David W. Peck: Now -- I'm sorry that I'm -- I have to go -- then I'll have to just say this, if the Court please. I want to say two things. If the Court assumes, contrary to all that I've argued up to now, that there was exclusion of Panagra here, that the exclusion was not justified, this case founders fatally upon the key-finding that I read to you from the Government's brief that the exclusion gave Pan American a monopoly on this segment in which it was dominant. There is no evidence whatever, I repeat it, there is no evidence whatever of this suggestion of dominance of Pan American upon this route. The only evidence, the totality of evidence on this subject is that there are eight airlines that compete for this traffic. There is nothing in the record as to the division of the traffic between them as to the share of the traffic, this record is bare as to anything about competitive conditions on this segment except the single significant fact that eight airlines compete for the traffic which navigates in itself this suggestion of dominance. Now, the reason that the evidence isn't here is just the significance of the fact that it isn't here. And that is the Government never suggested, never thought, never advanced the idea that Pan American was dominant on this segment and that its exclusion of Panagra gave it to monopoly. And furthermore, equally significant, is the reason or the way in which the District Court came to its conclusion of dominance, it was a mistake of law, pure and simple. As stated by the District Court, the District Court was under the impression that this traffic between these two points was overseas traffic instead of foreign traffic and hence that the only ones who could compete for it were American airlines. What he didn't realize, no such issue was presented or would have been clarified that ever since 1949, when since the Panama -- since the airbase -- airfield for the Canal Zone has been in Panama, it has been foreign traffic not overseas traffic, and there are eight lines competing from it, so the whole finding of the District on this subject has no support in fact and is based entirely of Panama's state of law. Now finally in a gallop, may it please the Court, I want to say a word about divestiture. If one were to assume that I have been wrong about everything that I've stated to the Court so far, I would still say that this remedy of divestiture is inadmissible. It's unnecessary, it's unwarranted and it's unjustified. In -- it's only suggestion of sustaining it, the District Court cites the -- Solicitor General cites one case, the DuPont case, which holds a divestiture as a proper remedy where the heart of the illegality is in the intercorporate combination. Now, that is exactly what this case isn't upon the decision of the District Court. There is no illegality in the intercorporate combination and therefore, divestiture cannot be rested upon that ground. Obviously, we submit, the legal remedy of injunctions such as incorporated in this decree would be sufficient, which is that Pan American should do what the District Court said it should have done in the first place and all that the District Court said that it should have done, is to permit an application to be made to the CAB and then go and argue it out before the CAB as the Court of Appeals for the Second Circuit said it was proper as to whether it should be granted or not. So a simple remedy of injunction would be sufficient. The other tragedy of divestiture as far as Pan American is concerned, would be that it couldn't possibly realize for the stock, anything that it ought to realize for something that it created and build up from nothing. I can leave it to the Court for judicial notice that no one is going to buy into this airline 50% of the stock and become a partner with Grace. And finally, as I pointed out in the beginning, this decree of divestiture flies fairly in the face of what the CAB has said should happen here, it would result in projecting Panagra as a third airline into an area where the CAB says there must only be two because to have more than two would be either a waste of public funds or private investment.
Arthur J. Goldberg: Before you leave, you refer to the Court of Appeals decision in the Second Circuit, and in fact said, that the injunction would be adequate under the antitrust laws because under that opinion, that could have been achieved through the CAB. But didn't the Court of Appeals in concluding its opinion in that case, say in effect that was not disposing to the antitrust issues even by permitting this to be done.
David W. Peck: It obviously was not doing that because that wasn't the --
Arthur J. Goldberg: Wasn't the --
David W. Peck: -- wasn't the case. But --
Arthur J. Goldberg: So that even the proceeding that they have permitted would not have affect through the antitrust (Voice Overlap) --
David W. Peck: I readily agree as a legal finding but I'm saying that what it said in its process of reasoning in the rightness thereof, applies very squarely here. And further in response, may I say, that if there should be any antitrust proceeding in the Court here, it should only come after the CAB has wrestled with this case and decided that what ought to be done along the lines of the Second Circuit lead, and if at that time, the CAB says that the thing to do is to divest both of these people, then it could come to court in an implementary way in which the District Court would be in the frame of implementing the body that has the responsibility and not going off on an independent attack which defeats the jurisdiction and the responsibility of the agency that has the responsibility.
Byron R. White: One more questions Judge --
David W. Peck: Yes, Your Honor? So long as I'm not in my own time anymore.
Byron R. White: I understand that you agree with the District Court's conclusion that it's the legality of this combination. I gather that the district judge -- thought the time to judge the legality was at the outset or the inception of the combination, is that your position once legal or illegal on the combination?
David W. Peck: That certain -- it certainly is my position in this case. I see nothing that has happened since 1928 to make the joint ownership legal then, illegal since. And certainly, there's no suggestion of that in the District Court's opinion.
Byron R. White: Well, you said that part of your argument as to why it was legal was that there weren't airlines there at all. There wasn't anything to restrain that certainly -- it's a combination that's going to be successful. Inevitably, there's going to be an airline industry. And there is an airline market down there at all.
David W. Peck: There is now because these people created it (Voice Overlap) and I think having created something commendably and legally, they're entitled to keep it unless they've abused it in some way and certainly Pan American in my opinion, our submission hasn't abused it in any way. I say the situation essentially is no different than the Pan American had done here, what it intended to do in the first place has established this west coast airline on its own and taking a partner didn't make any difference.
Earl Warren: Mr. Mckay.
Lawrence J. Mckay: Mr. Chief Justice, members of the Court, may it please the Court. I would at the very outset, like to make crystal clear what the Government's objective has been and is against my client W.R. Grace. It is as the court below observed, an effort by the Civil Aeronautics Board and by the Department of Justice to compel a merger of two American competing airlines. Indeed, the only two American lines competing on this route. This is, as I submit, diametrically opposed to the customary efforts of the Department of Justice which is to prevent horizontal mergers, not to coerce them. The Government has plainly stated that it brought this suit at the behest of the Civil Aeronautics Board. Now, the Board had two reasons for urging the Department of Justice to bring this suit. First, the Board as had Grace and claimed for 20 years by Pan American's continued refusal to permit Panagra to even apply to the Civil Aeronautics Board for the right to come through to the United States in competition with Pan American.
William O. Douglas: But didn't you win that case in the Court of Appeals for the Second Circuit?
Lawrence J. Mckay: Mr. Justice Black, the --
William O. Douglas: Douglas was the name.
Lawrence J. Mckay: Oh I'm sorry, Mr. Justice Douglas. Judge Frank did rule in our favor and said that the Civil Aeronautics Board could inquire into whether or not the Pan American Board of Directors and their stockholders were voting in fraud of the rights of Panagra and Grace. They took a petition for certiorari, this Court granted certiorari. At the same time, the Civil Aeronautics Board put Braniff in as our competitor with access to the United States. Grace at that time was faced with continued litigation, doubtful outcome and a competitor who is right through for the United States.
William O. Douglas: So the case was dismissed here, I think.
Lawrence J. Mckay: Pan American after the matter was entered into one of the through flight moved and had it dismissed on the grounds of mootness and it was dismissed. The second reason that the Board had for urging the Department of Justice to institute this suit, was that it recognized that it was an error in 1946, when it certificated Braniff on the expectation that there would be sufficient traffic to support two carriers. This turned out not to be the fact and the Civil Aeronautics Board was desirous of alleviating the burden of subsidizing the loss of two carriers. So they decided that these two carriers should merge. And the suggestion has been made repeatedly by the Civil Aeronautics Board that Braniff, the joining company lately should not merge into Panagra but Panagra should merge into Braniff and permit Braniff to be this surviving carrier solely because it wanted to get rid of this bitter impasse that had resulted from Pan American's continued rejection of Grace's attempts to extend Panagra into the United States which the Board itself had repeatedly and urgently solicited the partners to cooperate in so doing. I submit that insofar as this case is based upon the desire of the Civil Aeronautics Board and the Department of Justice, to compel Grace to divest itself, it is improperly found. The Government, may it please the Court, on the eve of trial in 1959, entered into a consent decree with Pan American and submitted the same to the Court for its approval. Under this decree, Pan American agreed to divest itself of its entire interest in Braniff -- in Panagra in favor of Braniff, provided for reasons best known to itself that Grace could be persuaded or compelled to divest itself of its interest in Panagra. Grace objected that District Court disapproved -- refused to approved. Among the reasons that Grace objected to the approval of the decree was number one, it felt in its opinion that it would not give immediate and effective relief to Panagra, to Grace and to the traveling public. Further, Grace felt that as a pioneer here, that is one of the people who have fought vigorously for the rights of Panagra, it should not be requested, directed or ruined to give up its interest in the facility that it had created along with Pan American but the only one of the two partners who had fought for its rights continuously since its organization. I submit that the grandfather provisions of the Civil Aeronautics Act, now the Federal Aviation Act, which confirms two pioneer carriers that were operating at the time of the passage of the Act that they shall have the right to continue to operate under the certificate from the Board prevents, precludes any such attempted compulsion of a merger. The air transport -- the air transportation policy of the United States might or might not be served by such a merger. What I submit is surely clear is that there is nothing in the antitrust laws upon which this case is necessarily based which can order Grace to divest itself in favor of a particular person, Braniff or anyone else. I submit further the -- may it please the Court, that insofar as this case is based upon Pan American's continued refusal to permit Panagra to come through to the United States that it has properly founded and ought to prevail. This refusal hasn't been impeded competition, this restraint was found by the Court as an attempt by Pan American to monopolize the segment of the transportation field and it does warrant an antitrust remedy. The question is, what should the remedy be and against whom should it be granted, I submit that the District Court properly found that it should be Pan American that should be divested or the case should be dismissed as to Grace. The District Court in so finding and directing Pan American's dive -- divestiture, clearly found that there was never any agreement between any of the parties or among any of the parties that prevented Panagra from applying coming to the United States and restricting it to routes south of the Canal Zone. Rather the District Court found that Pan American unilaterally imposed these unlawful restraints upon Panagra in its attempt to maintain enacting or obtain a monopoly. Pan American itself has admitted this when Grace for the first time in 1938 proposed to Pan American that Panagra apply to the Civil Aeronautics Board, the matter was discussed at a Pan American Board meeting. And it's in the record and the minutes clearly show that Pan American there determined that such an expansion would not be in the interest of our stockholders, namely the stockholders of Pan American, not of Panagra, to have Panagra come north in competition, in further competition with Pan American and they have consistently maintained that position until today.
Potter Stewart: But I gather that you don't consider the interchange agreement in any way even close to an equivalent of -- about the certificate for Panagra.
Lawrence J. Mckay: Civil Aeronautics Board and I believe all the air carriers were all in agreement but an interchange is a very poor substitute for one zone route. I think Mr. Justice Stewart, you might point out here that Panagra is the only American flag carrier that has on its own terminal in the United States. It comes with the Canal Zone. It is dependent on Pan American, through flight going out with Pan American's route into Miami and to Miami to New York on an interchange where its pilots and its crew were taken off into New York on the national airline.
Potter Stewart: And it also suggested that far from a monopoly, the route from the United States to the Canal Zone is very competitive that there are some eight other carriers and that this is an international operation now because of the geographical location of the airport in Panama rather than in the Canal Zone.
Lawrence J. Mckay: Yes, Mr. Justice Stewart. And that is somewhat contradictory of what Judge Peck pointed out. He was relying on witnesses presented by Pan American at the trial that if Panagra was permitted to compete with Pan American between the Canal Zone and Miami, Pan American would go out of business because Panagra would get all the traffic. How would then can it be explained these eight other carriers that are competing with Pan American. Why is Pan American still living? I respectfully submit that the horror presented by Pan American's witness at the trial, this would not have come about. Pan American competes through the world with other carriers and I'm sure that she could compete with Panagra.
Potter Stewart: Is there -- maybe they're really talking about different things. I mean, is there only one route from New York to the Canal Zone, only one carrier maybe six from Miami to the Canal Zone or what?
Lawrence J. Mckay: There's a number from Miami and Pan American flies down from Miami, New York-Miami and into the Canal Zone.
Potter Stewart: But they all (Voice Overlap) --
Lawrence J. Mckay: (Voice Overlap) international carriers carrying that local traffic that they would be carrying to the west coast. They would not be going down the west coast if that's Panagra's. Your Honor, in an effort to achieve its objective here against Grace, the Government has disingenuously devised a number of arguments. Now, in so doing, they not only cast an antitrust language but they find themselves in a number of contradiction. They argue on the one hand that Grace agreed with Pan American that Panagra should not compete with Pan American and that Pan American shouldn't compete with Panagra. If the District Court found the Government does not deny and in fact admits, that Grace was the only one of the two partners that fought and fought vigorously for Panagra's extension in competition with Pan American. Another contradiction that the Government finds itself in is that they say that the affiliation of Grace -- Grace Line with Panagra, restrained the development of Panagra. Yet on the other hand, they attest to the fact that Panagra is one of the leading airlines on the west coast of South America. They say that its air cargo had been vigorously developed within the past years. Who did that? Only Grace is operating Panagra under the management of agreement they entered into, certainly Pan American is not interested in developing Panagra, they have done everything to restrain it as the record clearly shows and as the Court found. It is difficult for me to see how the Government can continue to argue this case and support both theories, Grace restrained Panagra in favor of the Grace line, yet Grace vigorously fought for Panagra. And Panagra had as the Government claims maintain and ascertain a dominant position. Turning now to the first argument that the Government advances in this understanding of agreement between Grace and Pan American, which they referred to as this division of territories in the east-west, the Government complains that Grace and Pan American agreed to limit this fear of Pan American and Panagra. Now, I state that this argument found is on two grounds. First, that it's clear from the record and I say that the Court so found that this agreement terminated over a quarter of a century ago and that since that time, Grace has neither attempted to enforce it or indeed has even recognize it as an existing agreement. Now, this I say is evident from Grace's consistent course of action for the past 25 years. In answer, I believe to Mr. Justice White's question, the Solicitor General said that the actions of the parties then were the same as they are now in connection with why was he attacking the combination at its creation. And he pointed and referred to the fact, Pan American was still continuing to restrain. I think it's interesting to note that he had no point mentioned anything that Grace was doing since 1938 and even prior to 1938, this agreement ,I submit, was perfectly valid as the District Court found. Prior to the enactment of the Civil Aeronautics Act in 1938, as I believe it has been pointed out, these independent airlines depended on air mail contract. Without them, you could not operate. People tried it and they were losing at the rate of $40,000 a month, which even those days, was a lot of money. These contracts were at the periods of 10 year. The Post Office Department and the State Department clearly defined, lays down as the Government admits, enforced the policy of a no parallel operating carrier. In other words, the Post Office Department would not support and the State Department would not assist two carriers for the same route. And this continued up until 1938, it was during this period that Pan American and Grace recognizing the economic impossibility of competition as the District Court found that they did not move into the other territory. Number one, they couldn't because there would be no air mail contract for them. Two, they would not have the assistance of the State Department. And it is this agreement upon which the Government is resting its case and saying that it continued as far as Grace is concerned, it never continued. Immediately in 1938, with the passage of the Civil Aeronautics Act, Grace pressed for an expansion of Panagra. We not only pressed that its route be extended coming north. We pressed that they'd be extended going east. We asked Pan American to agree to permit Panagra to go into Rio and Sao Polo, they refused. They have recognized this agreement. They have maintained that it continues to exist. And we state, it terminated in 1938 when its validity terminated as the Government itself said in a jurisdictional statement filed in this Court, the agreement ceased to be valid no later than 1938.
Byron R. White: The Government said that --
Lawrence J. Mckay: Yes, in the jurisdictional statement, Mr. Justice White.
Speaker: (Inaudible)
Lawrence J. Mckay: I'll give you today --
Potter Stewart: Well, it's kind of ambiguous, does the Government mean that the agreement -- while continuing in existence became illegal at least as early as 1938.
Lawrence J. Mckay: That is correct, Mr. Justice Stewart.
Potter Stewart: That's -- that's the --
Lawrence J. Mckay: In other words, the Government contends the agreement is continuing.
Potter Stewart: But is the --
Lawrence J. Mckay: But --
Potter Stewart: -- illegal at least since 1938?
Lawrence J. Mckay: That is correct. They --
Arthur J. Goldberg: Mr. McKay, you speak about illegal agreement of the illegal agreement why this Pan American to be divested of its part of Panagra?
Lawrence J. Mckay: Because --
Arthur J. Goldberg: How do you make that argument?
Lawrence J. Mckay: I make the argument, Mr. Justice Goldberg, that this agreement was legal and lawful while competition was economically impossible. That was up to 1938. Since 1938, Pan American has persistently refused to commit Panagra to extend its routes in competition with Pan American.
Arthur J. Goldberg: Well couldn't that be solved by an order of the CAB which presumably was available in the Second Circuit decision case now to get your route extended, why does it require a divestiture of Pan American of its interest in Panagra?
Lawrence J. Mckay: Well, I respectfully submit, Mr. Justice Goldberg, that the record here is replete with instances that Pan American has shown itself to be such a persistent and consistent violator of the law, of the antitrust laws here. Despite the fact that the Civil Aeronautics Board on at least four or five occasions, requested Pan American to permit Panagra to even apply. They have refused. And it's so clear Mr. Justice Goldberg, from the record from their own minutes that they will never permit Panagra to become an effective competitor with Pan American as long as they're in there. I think it is the only -- I agree with the District Court that it is the only really effective relief that can be granted for a persistent violator -- a violator of the antitrust laws which has continued since 1938.
Arthur J. Goldberg: Will you preclude it from going back to the CAB in any way after 1946, where it precluded by the agreement you made on the through route?
Lawrence J. Mckay: No. The testimony Mr. Justice Goldberg, before the Civil Aeronautics Board by the general counsel and vice-president of Pan American, by the president of Panagra, under oath, they both testified and they assisted in the drafting of that that there was no agreement in the through flight agreement which prevented either Panagra or Grace requesting an extension of Panagra's routes north.
Arthur J. Goldberg: Then what prevented you from going before the CAB?
Lawrence J. Mckay: Mr. Justice Goldberg, in 1948, we worked under the through flight agreement. The matters were in a period of suspense. We were looking at the matter. We made additional applications for it. In fact, we have, Mr. Justice Goldberg, I think about three applications pending now for Panagra. We refiled an application on behalf of Panagra, we asked Pan American again to join in. I think it was 1950 but it's within the -- or maybe 1954. We applied on behalf of Panagra, Pan American again refusing. We filed with the CAB a petition asking the CAB to look into the fraud and illegality of Pan American in accordance with the Second Circuit decision. That matter has been pending as the Latin American route case until this case comes to a final decision.
Arthur J. Goldberg: In other words, there are proceedings --
Lawrence J. Mckay: There are --
Arthur J. Goldberg: -- before the CAB but the CAB has not proceeded with them, is that what you're saying?
Lawrence J. Mckay: That is correct. They have been pending now for I believe five or six years. This case started I believe it was in January or February 1954. Your Honor, I -- Your Honors, I respectfully submit that the Government here has not sustained its case against Grace. When it's relying upon an agreement that went out of existence, a quarter of a century ago, the record shows that Grace has not recognized or attempted to enforce in the past 25 years ever since the enactment of the Civil Aeronautics Act and when during the period of its existence, I submit, it was valid. That is the Government's case against Grace, as far as this agreement is concerned, this division of territory.
Potter Stewart: No, I think that the Government has certainly -- the Government's brief and the Solicitor General this morning spent a good deal of time trying to persuade us that Grace's ownership stifles or competition between -- I'm coming to that ocean service travel and air travel, both in passengers and freight.
Lawrence J. Mckay: I'm coming to that Mr. Justice Stewart, I wasn't referring that this was the Government's case against Grace on the division of territory argument. I'm coming now to their other argument that there was something inherent, unlawful of Grace owning a hundred percent of a steamship company to go into the air business and take a 50% interest. Now, I respectfully submit that the District Court was absolutely correct when it found that in this particular case, Panagra and the Grace line did not comprise part of the same market. This is -- I think it's obvious from a mere appreciation of what is Panagra and what is Grace Line. Pangara is essentially a carrier of passengers, whereas this is the most insignificant part of Grace Line's business. Even more important, is that the few passengers that Grace Line carries are not prospective customers of Panagra. And I think this is evident from these two pieces of thought which we find in the record and they relate to the time consumed and the cost of the travel. Prior to the institution of getting the service, it took a passenger on Panagra from New York to Santiago 21 hours, on the Grace Line, 21 days. Taking another point, New York to Panama, it took 10 hours by Panagra, six to seven days on the Grace line. Now, the record shows that there're equally rate differences in the course. On Panagra, the tourist fare from New York to Santiago was $414. On Grace Line, the minimum fare during the winter season is $645, on the off season, $595 and down to $545. So you have these differences of cost. You have 21 hours as the record shows against 21 days. Now, if one is much quicker and cheaper than the other mean, why is it that anyone goes on the Grace Line? I submit that the only answer is that they want the experience and perhaps the relaxation of a notion voyage. That is something that Panagra does not and cannot offer. The Government takes the position that well, vacation may be torn between flying down to the Argentina and spending six weeks there as against taking six weeks sea voyage. But I submit if that is what to -- we are to regard as compromising the same market, you have to put in this very market, hotels in the Caribbean, lodges up in and out because the vacation -- he's looking at that, he's looking at everything in his vacation folder. Turning quickly Your Honor to the manner of the freight that the Solicitor General argued at such great length, again, it's important I think to consider how much does Grace Line carry as against Panagra. In 1958, Grace Line carried almost 1 million tons, Panagra, 3000 tons. The fact that Panagra's service needs that the steamship company cannot meet. I think there's evidence from the comparison of the rates. The general commodity rate on Panagra for 2000 pounds moving from New York to Santiago is $1660; on the Grace Line, $90. Now, it's obvious that even if there were some fluctuation in the prices here, they could not by any means get close enough together whether it'd be a matter of difference to a shipper as to whether head ship on the Grace line or on Panagra. And I submit that it's unlikely that these rates will change to any large degree because the rates are based largely on the cost involved. And the record will show that the cost of carrying freight on Panagra or cargo service, from July 1957 to January 1959 was $35.06 per ton mile, while in the 1958, on the Grace line, it was only 6 tenths to 7 tenths of 1 cent per ton mile. Now, with that great difference in cost, one cannot expect that there's going to be any change in rate, at least any significant change to make the $1660 charge somewhat compatible with a $90 charge on the Grace Line. The Solicitor General during the course of his argument relied upon the testimony of a few witnesses presented by Pan American as to whether they compete with steamship companies. I could have told Your Honors what the testimony would have been before the gentleman talked. Because Pan American has usually referred to the Grace people as they both have. They have no love for their partner who had put them in this difficult situation by asking that Panagra be extended in competition with them. But I think perhaps the best witness to rely upon, is the Government's own witness which the Solicitor General did not quote, and he testified as follows. Bear with me just a moment. The vast majority of export freight, tons in ton miles would have commodities that could not possibly have been carried by airplane. And he further testified, steamship rates on quantity movement are far below attainable cost for moving freight by air in the foreseeable future. Your Honor, I see that my time is running out but I do want to refer to the Solicitor General reading from various isolated documents in the record. Wholly with age back in the early 1930s, these believe me were selected documents. We have filed a reply and you will find that document from Grace officials attesting to the fact, instructing the employees down the line that they are to be completely impartial. In fact, there was one letter cited by the Government which was answered and contradicted that that was not in their brief. We have pointed it out in our brief. In conclusion, Your Honors, I would like to say that here, we have a clear picture of W.R. Grace who has attempted to promote and in fact has promoted the interest of Panagra. It has met with the opposition of Pan American. The District Court has ordered the divestiture. In fact, the District Court has permitted Grace to file an additional application on its own that we are in the burden that if Pan American is not divested that is reversed, that application must be withdrawn. We do have our other applications pending as I mentioned to Mr. Justice Goldberg (Voice Overlap) on the fraud and illegality point.
Potter Stewart: Under the decree -- did you purchase the stock of Panagra known by --
Lawrence J. Mckay: That would be subject to CAB --
Potter Stewart: -- Pan American?
Lawrence J. Mckay: -- approval Mr. Justice Stewart, because of the acquisition of additional control if we went out on quite additional fact over and beyond 50. We can only do it if the CAB determined that it was in the public interest. Well, I respectfully submit to the Court that in view of Grace's conduct throughout which has been consistent, not deny, subject to findings of the Court that it alone has promoted the interest of Panagra that this paper case the Government attempts to make out of us -- out against us on the basis of a few isolated documents, some 30 years ago, over 30 years ago should not prevail and the evidence against Pan American is clear, uncontradicted, in fact admitted. And that they should be divested on the case, dismissed against Grace. Thank you.