This is the first half of a long review of some of the recent events in the history of Brunswick, the corporate owners of Boston Whaler boats. This article describes the background of events and circumstances which lead to a trial by jury that found Brunswick liable for significant damages for illegal and anticompetive behavior.. A second article describes the appeal of that verdict and the ultimate judgement.
When Brunswick purchased Boston Whaler from Meridian in May of 1996, (see the article on Whaler company history for more details), Brunswick was already a large recreational conglomerate whose marine divisions consisted of two principal businesses, making boats and making engines to power them. The boat-making operations included Bayliner (and Trophy), Sea Ray, Maxum, Baja, and Robalo. The engine operations included Mercury outboards and MerCruiser stern drives.
Concurrent with these events, the Brunswick corporation was embroiled in litigation with a large group of competing boat manufacturers. In a lawsuit filed in 1995, twenty four boat builders (see Note 1 at the end for a list) and a buying cooperative alleged that Brunswick had engaged in illegal activity in violation of anti-trust law. The "boat builders," as we shall call them, alleged that Brunswick's dominant market share of stern drive sales was achieved by illegal tactics, and that Brunswick ownership of so many boat companies was anti-competitive. The plaintiffs sought damages in the tens of millions of dollars range, which would be automatically trebled by law, potentially costing Brunswick as much as $150-million or more if they were to be found guilty. Further, the boat builder plaintiffs also sought to force Brunswick to divest its two largest boat companies, Bayliner and Sea Ray.
In response to the action, Brunswick filed a counter suit, claiming the litigants themselves were guilty of anti-trust violations by their actions in forming a buying cooperative and boycotting MerCruiser engines. Brunswick also undertook a vigorous defense.
Initial filings in the case (and there were hundreds of them) were heard before Judge Susan Webber-Wright, a federal jurist who would gain some notoriety of her own in matters involving the sordid proceedings of one William Jefferson Clinton, President of the United States. Ultimately the case was transferred to the docket of Judge James M. Moody. After three years of preparation the dispute came to trial in June of 1998 before a jury in Federal District Court for the Eastern District of Arkansas. The plaintiffs were represented by attorneys from the Rose Law Firm, now famous (or perhaps infamous) because of its associations with former First Lady Hillary Clinton. Also representing the plaintiffs were lawyers from the Minneapolis firm of Winthrop & Weinstine. The trial lasted ten weeks, and included a great deal of testimony and evidence. Over 800 exhibits were presented, including voluminous economic data, charts, graphs, internal business memoranda, reports from consultants, testimony taken at depositions, and, in the words of the Appellate Court, "much more." The boat builders presented over thirty witnesses, including owners of the various companies in the lawsuit, as well as current and former employees of Brunswick. Some of these witnesses testified by videotape presentations.
In its defense, Brunswick retained another Little Rock law firm, Friday, Eldridge & Clark, as well as counsel of some Yankee lawyers from the Chicago area firm of Mayer, Brown & Platt. They called over fifteen witnesses, including dealers, Brunswick employees, and even owners of other boat companies.
The case focused on the market for stern drive propulsion, which had become dominated by Brunswick's MerCruiser line. During the period examined, MerCruiser market share had been as high as 78%. From testimony in the case, the history of the stern drive market was nicely documented.
The evidence showed that the relevant market whose monopoly was being litigated ("stern drive engines") was that of inboard and stern drive engines. This market was really comprised of two groups. There were inboard manufacturers PCM, Indmar, Crusader, Volvo, Marine Power, MTU, Caterpillar, Detroit Diesel, Cummins, and Toyota, who marinized automobile engines, and there were stern drive manufacturers Brunswick, Outboard Marine Corporation (OMC), Volvo Penta of the Americas (Volvo), and Yamaha, who equipped inboard engines with a drive system and sold them to boat builders. The court observed that "stern drive engines are used primarily in recreational power boats known as runabouts, which are typical water skiing boats, and in cruising boats, which are larger and more expensive boats and usually have cabins. Runabouts and cruising boats together make up about 40% of all recreational power boats."
Brunswick's division MerCruiser had a long history of being a market leader. Evidence showed that in 1983 it had a 75% market share. The proceedings also revealed that in 1982 MerCruiser hired a consultant (McKinsey & Company) to suggest ways in which Brunswick might increase the sales of its engine products.
Apparently based on the advise of their consultants, in 1984 MerCruiser began to offers its customers "market share discount" incentives for using MerCruiser stern drives on certain minimum percentage of the boats they built or sold. Over a certain period of time, dealers or boat builders would agree to equip a certain percentages of the boats they sold with MerCruiser propulsion, and in exchange they would receive a certain percentage discount off of the usual price for the engine. Other makers besides Brunswick offered similar incentives, including Volvo and OMC.
From 1985 until 1995, Brunswick's "market share discount" was structured like this: buy 80% of your engines from MerCruiser and receive a 3% discount; buy 70% and receive 2 % discount; buy 60% and receive a 1% discount.
From 1995 to 1997, Brunswick enhanced the market share discount program so that dealers and builders could obtain a 3% discount with only 70% share, a 2% discount with 65% share, and a 1% with 60% share.
While these incentives were being offered, after 1989 an additional discount of 1% to 2% was available to customers who signed up for market share agreements over two or three year periods. Finally, additional discounts of up to 5% were available depending on the volume (not the share) of engines purchased by a dealer or builder.
Four boat builders who were hurting financially signed long-term agreements with Brunswick to supply engines in return for financial assistance from Brunswick during this period. These contracts were for a minimum of three years and in some cases longer than five years. Boat builders Baja and Fountain agreed to buy 100% of their engines from Brunswick. Builder Porter had to buy 99% of their engines from Brunswick, while high volume maker Pro-Line had to buy at least 50%. The testimony of the boat builder's expert witnesses assigned these four companies with at least 5% of the total boat market.
In 1994 Brunswick began a campaign it called the "Industry Growth Program" which tried to push the market share levels to 95%, but this met with considerable backlash from the customers and was not successful. Eventually, in mid-1997, all market share incentives were dropped.
In assessing the effect of these market share arrangements, it should be noted that there was nothing in them which prevented builders and dealers from buying engines elsewhere if they choose. They could even buy as much as 40% of their engines from competitors and still receive a discount from Brunswick. In fact, some dealers and builders bought more than the minimum share of their engines needed to qualify for a discount; some bought 95% to 100% of their engines from Brunswick.
In 1986, just one year after it began its discount program, Brunswick's principal domestic competitor, OMC, introduced a new product to the market, the Cobra stern drive. Introduction of the Cobra drive was coincident with the expiration of certain patent rights licensed to or owned by Volvo-Penta. The Cobra drive was initially very successful and produced strong sales for OMC at the expense of Brunswick, whose market share dipped to approximately 50%. Brunswick studied the situation and in December of 1986 responding by purchasing two of the largest American makers of boats, U.S. Marine (Bayliner) and Ray Industries (Sea Ray). Becoming vertically integrated would permit Brunswick to deliver better quality boats and engines at a lower price.
In 1987 Brunswick bought a stake in BMW Marine diesel, mainly hoping to gain a presence in Europe and to compete there with native Volvo.
Brunswick market share tended to increase, helped along by some mistakes from its competitors. OMC's Cobra drive experienced problems with its shift cable. The initial reaction of OMC to this problem was not very supportive of its customers or dealers; OMC tended to blame them for the problem. Eventually the situation worsened to the point that a recall in 1989 of all Cobra engines was necessary. This resulted in a significant shift of market away from OMC.
In 1990 Brunswick purchased Keikhaefer AeroMarine, a small maker of high performance and racing stern drives which had originally been part of the Keikhaefer/Mercury company.
In 1993 competitors OMC and Volvo merged their stern drive products, but the joint operation was not as successful as hoped, and consumer confidence in their products decreased. In 1994 competitor Yamaha left the stern drive market entirely, leaving additional market share available for Brunswick to acquire.
In 1995 Brunswick bought Baja Cruisers, which represented about 2% of the stern drive market.
During this period, the price of a stern drive engine from Brunswick increased to $4,984 in 1997 from $4,775 in 1986. The price had fluctuated both up and down in the intervening eleven years.
The Plaintiffs in this litigation, the boat builders, had an unusual relationship with Brunswick. They were both customers and competitors of Brunswick at the same time. As boat builders they purchased stern drive engines from MerCruiser, and as boat builders they were also in competition to sell those boats with Brunswick's boat companies like Sea-Ray and Bayliner. The heart of their case was their contention that Brunswick illegally foreclosed competition in the marketplace by offering discounts on engine prices and by acquiring their own boat building companies.
The legal foundation of the boat builders' case was principally built upon the testimony of their sole expert witness who presented his assessment of the effects Brunswick's market share discounts and vertical integration had upon the market. Robert Hall, Ph.D. and Professor of Economics at Stanford University, testified that Brunswick had monopoly power in the stern drive market and used its market share discounts to impose a "tax" on builders and buyers who choose to purchase engines from other manufacturers. He further testified that the discount program in combination with ownership of captive builders Bayliner and Sea-Ray enabled Brunswick to gain 78% of the stern drive engine market. According to Dr. Hall, this prevented other manufacturers from entering the market.
After the boat builders presented their case, Brunswick moved for a judgement in their favor as a matter of law. The Court declined to rule at that time and Brunswick presented their defense.
Among its witnesses, Brunswick called two experts to refute Dr. Hall. Dr. Frederick Warren-Boulton, former chief economist for the Antitrust Division of the United State Department of Justice, testified that the disputed "market share discount" program served the market's goal of efficiency by improving the predictability of demand and keeping manufacturing costs to a minimum. In his opinion, the discounts actually encouraged competition in the boat building industry because they provided a means for small builders to qualify for reduced prices that would otherwise only be available to high-volume customers.
To further refute Dr. Hall, Brunswick presented the testimony of Dr. Richard Rapp, an economist who is president of the Nation Economic Research Associates. He stated there was no rational basis by which Dr. Hall's model could identify alleged overcharges by Brunswick to its customers. In fact, on his analysis, the formula presented by Hall reduced to a single independent variable, market share. Anytime Brunswick's market share exceeded 50% it was guilty of overcharging according to Hall's analysis.
After years of preparation, millions of dollars in legal fees, ten weeks of trial, and testimony from over 45 witnesses, the decision was left to the jury. The panel of citizens from Arkansas took only a day and a half to find Brunswick guilty as charged of illegal monopoly and restraint of trade beginning December 7, 1991 and running until June 19, 1998, the date of the verdict. The jury awarded the boat builders $44-million in damages. On a separate issue of fraudulent concealment, the jury found Brunswick not guilty. On Brunswick's counter charge that the boat builders had been guilty of unreasonable restraint of trade (by their organized boycott of MerCruiser engines), the jury did not agree and found for the boat builders. When it came to making a decision, the jury apparently had believed Dr. Hall.
It was a stunning verdict. In less than two days, the jury had turned the entire recreational marine business on its ends.
Both Brunswick and the boat builders filed post trial motions. Brunswick moved for judgement as a matter of law that the boat builders had engaged in an unlawful conspiracy by organizing their boycott. The Federal District Court agreed with Brunswick, and granted their motion, finding the boat builders guilty of a per se violation of the Sherman Anti-Trust Act, but because of a failure of proof, Brunswick was awarded only $1 in damages.
Brunswick also filed additional motions for renewed judgement as a matter of law on the anti-trust verdict against them, citing the jury's apparent adoption of Dr. Hall's opinion which they claimed had no basis in economic reality. Motions to overturn based on timeliness issues were also filed. (Anti-trust laws provide only four years from the time of the illegal action in which a lawsuit can be filed.) In both these issues the court turned down Brunswick's requests.
The boat builders filed a post trial motion asking the court to order Brunswick to divest itself of Bayliner and Sea-Ray, but the court declined to grant their request for a number of reasons, including that it would be such a broad and imprecise injunction that it would potentially prevent Brunswick from engaging in legitimate business activity.
Finally, as provided in the law, the Court trebled the damage award made by the jury and added to it $7.7-million in attorney fees and $1.2-million in costs. The final judgement against Brunswick totaled $142,165,931.12.
Following the trial, the unfavorable verdict, and unfavorable rulings from the District Court, Brunswick tried to maintain its decorum. It issued immediate statements, like this from Chairman and Chief Executive Officer Peter N. Larson:
"In our view, both the decision and the damage award are in error, and we will vigorously pursue all available avenues of appeal. We believe that the appellate process will reach the conclusion that Brunswick should not be held liable for competing successfully and fairly in the marketplace."
Investors were not as confident. Shares of Brunswick, which had traded as high as $36 less than a year earlier, slid to under $24, driven downward by news of lower than anticipated earnings and perhaps the unfavorable outcome of the trial.
The story of the appeal of this decision and the ultimate verdict is told in a second article.
Written by Jim Hebert, April 15, 2001, from various sources but principally from the actual findings of the court and associated documents.
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