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IN THE UNITED STATES DISTRICT COURT
UNITED STATES' PROPOSED FINDINGS OF FACT
AND CONCLUSIONS OF LAW
UNITED STATES' PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW
On July 27, 1999, the United States filed Petitions with this Court asking that Smith International, Inc. and Schlumberger Ltd. be found in civil and criminal contempt of violating the Final Judgment entered by this Court in United States v. Baroid Corporation, et al. in April of 1994 and modified in September of 1996. The petitions were tried jointly on November 17-19 and 22-24, 1999, with the Honorable Stanley Sporkin presiding. Pursuant to the Court's directions, the United States hereby submits its proposed findings of fact and conclusions of law.(1)
1. This Court has jurisdiction over the civil contempt petition because of its inherent power to enforce compliance with its orders. McComb v. Jacksonville Paper Co., 336 U.S. 187, 193 (1949); United States v. United Mine Workers, 330 U.S. 258, 303-04, 330-31 (1947); Leman v. Krentler-Arnold Hinge Last Co., 284 U.S. 448, 454-55 (1932); see 28 U.S.C. § 1651.
2. This Court has jurisdiction over the criminal contempt petition based on 18 U.S.C. § 401(3), which provides in relevant part:
A court of the United States shall have the power to punish by fine or imprisonment, at its discretion, such contempt of its authority, and none other, as --
See alsoMcComb v. Jacksonville Paper Co., 336 U.S. at 193.
3. This Court also has jurisdiction over the civil and criminal contempt petitions based on Paragraph XIV of the Final Judgment, which provides:
4. Respondents have admitted that this Court has jurisdiction to enforce the Final Judgment and jurisdiction to determine whether the joint venture consummated on July 14, 1999 violates the Final Judgment. GX 42, Admissions 44 and 45.
5. This Court has the power to hold Smith and Schlumberger in civil and criminal contempt. This power is based both on the Court's inherent power to enforce its orders and its authority under Paragraph XIV of the Final Judgment to punish violations of the decree.
6. Federal Rule of Civil Procedure 65(d) states that an injunction binds "the parties to the action, their officers, agents, servants, employees, and attorneys, and . . . those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise." Although Smith was not a party to the original action filed in 1993, it agreed to be bound when it purchased the divested drilling fluid business in 1994. GX 42, Admission 10. Moreover, in 1996, Smith went to the Court seeking modification of the decree to allow it to purchase Anchor. When the Court approved the modification, it made Smith a party to the modified decree -- the decree that was violated. GX 8. Thus, Smith should be treated as a party for purposes of Rule 65(d).
7. Under Rule 65(d), Schlumberger, because it had actual notice and acted in concert with Smith, may be held in contempt for violation of the decree. The power to bind non-parties in circumstances such as this has a long and venerable history, seeAlemite Mfg. Corp. v. Staff, 42 F.2d 832, 832 (2d Cir. 1930) (Hand, J.) ("[A] person who knowingly assists a defendant in violating an injunction subjects himself to civil as well as criminal penalties for contempt. This is well settled law."), and is based on the common-sense recognition "that the objectives of an injunction may be thwarted by the conduct of parties not specifically named in its text." Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 91 F.3d 914, 920 (7th Cir. 1996); see alsoUnited States v. Hall, 472 F.2d 261, 267 (5th Cir. 1972) ("[I]n the circumstances of this case third parties such as Hall were in a position to upset the court's adjudication.").
8. The instant case is even easier, because Schlumberger was specifically named in the Court's order. Schlumberger is Smith's partner in the joint venture, and received notice that the Department of Justice regarded the transaction as a clear violation of the Judgment. GX 42, Admissions 35-37. Indeed, but for the active participation of Schlumberger in consummating the transaction leading to the formation of the joint venture, no violation of the decree would have occurred. SeeAlemite Mfg. Corp. v. Staff, 42 F.2d 832, 832 (2d Cir. 1930). The Court also has the power under Rule 65 to hold Smith and Schlumberger in criminal contempt for wilfully violating the decree -- Smith for violating an order to which it is subject and Schlumberger for aiding and abetting Smith. Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 91 F.3d 914, 919 (7th Cir. 1996).
1. Smith is a corporation organized and existing under the laws of the State of Delaware with its principal place of business at 16740 Hardy St., Houston, Texas 77205. GX 42, Admission 1.
2. Smith is a worldwide supplier of products and services to the oil and gas exploration and production industry, the petrochemical industry and other industrial markets. As of 1998, the company employed approximately 8,000 people and had annual revenues of approximately $2.1 billion. GX 38 at SIIX 00029-30. Smith's 1998 revenues from its worldwide drilling fluid operations exceeded $850 million. Id. at SIIX 00047.
3. Smith pleaded guilty in the United States District Court for the Southern District of Texas in 1993 to fixing the price of drill bits in violation of the Sherman Antitrust Act, 15 U.S.C. § 1. It was fined approximately $700,000 and settled private damage suits for approximately $19 million. Tr., 11/22/99, at 194:9-195:23 (Rock).
4. Smith produces and sells drilling fluids through M-I L.L.C. (formerly M-I Drilling Fluids and hereinafter referred to as M-I). M-I accounts for approximately 29% of U.S. and worldwide drilling fluid sales. GX 36, Exhibit A; GX 37 at SI-MCKD-02351.
5. Smith acquired a 64 percent interest in M-I from Dresser Industries, Inc. in 1994 pursuant to the Final Judgment entered that year by this Court in United States v. Baroid Corporation, et al. Smith acquired the remaining 36 percent interest in M-I in August of 1998 from Halliburton Company. GX 42, Admission 9; Tr., 11/22/99, at 139:13 (Rock).
6. Smith has inhouse counsel. Its General Counsel is Neal Sutton, who is also Senior Vice President of Administration. Mr. Sutton has been in the oilfield service industry as General Counsel since 1977. Tr., 11/24/99, at 58:11-58:24 (Sutton).
7. Schlumberger is a corporation organized and existing under the laws of Netherlands Antilles with its principal place of business in the United States at 277 Park Avenue, New York City, New York 10172. GX 42, Admission 2. Respondent Schlumberger is the same company as the Schlumberger Ltd. referred to in Paragraph IV.F. of the Final Judgment. GX 42, Admission 4.
8. Schlumberger is a worldwide supplier of oil field services and products through numerous subsidiaries. Grijalva Dep. at 9:9-10:13 (Tr., 11/18/99 at 73:18-74:14). Schlumberger's total revenues for 1998 were approximately $11.8 billion, of which Schlumberger's oil field services constituted nearly $8.9 billion. GX 39 at SL(MI) 100280 & 100287. Schlumberger operates in about 100 countries and has more than 50,000 employees. GX 34 at 1.
9. Schlumberger entered the drilling fluid business outside of the United States when it acquired IDF in September of 1993. Tr, 11/23/99, at 6:18-22, 8:16-9:2 (Grijalva). Although it generated marginal revenues in the United States from drilling fluid sales to onshore drilling projects in 1993, Schlumberger began to compete in the United States drilling fluids business for offshore drilling projects in 1994. RX 9 at SL (MI) 000749. Schlumberger's drilling fluids business was conducted by its Dowell division. Tr., 11/23/99, at 61:24-62:5 (Grijalva)
10. Schlumberger has inhouse counsel. Since January of 1999 , its General Counsel has been James Gunderson, who had been Schlumberger's Deputy General Counsel for four years prior to January of 1999 and had been part of Schlumberger's inhouse counsel group for 16 years in all. Prior to January of 1999, Schlumberger's General Counsel for 23 years was David Browning. Even though he was no longer Schlumberger's General Counsel, Mr. Browning served an advisory role to Schlumberger in its decision to proceed with the transaction on July 14, 1999. As General Counsel, Mr. Gunderson supervises a staff of approximately 130 lawyers around the world. Mr. Gunderson is also Schlumberger's Secretary. Tr., 11/23/99, at 129:12-24, 151:8-153:8 (Gunderson). Part of Schlumberger's inhouse counsel group is Gary Wilson, who is General Counsel of Schlumberger's Oilfield Services operations. He has been with III. The Court's Decree
11. The provision of this Court's Final Judgment most pertinent to this proceeding is Paragraph IV.F. GX 1 at 11. That paragraph, as modified by this Court in 1996, reads as follows:
GX 1 at 11; GX 8 at 1-2.
12. The Final Judgment settled a civil antitrust complaint under Section 7 of the Clayton Act filed on December 23, 1993 by the United States to block the merger of Dresser Industries, Inc. ("Dresser") and Baroid Corporation ("Baroid"). GX 2 at 2; GX 42, Admission 12. The Complaint alleged that the transaction would substantially lessen competition in the diamond drill bit and drilling fluid markets. Id.
13. Drilling fluids are a mixture of natural and synthetic compounds used at oil and gas drilling sites to cool and lubricate the drill bit, clean the hole bottom, carry cuttings to the surface, seal porous well formations, control downhole pressure, and improve the function of the drill string and tools in the hole. GX 42, Admission 16.
14. At the time the Complaint was filed, Dresser competed in the drilling fluid business through its 64 percent interest in M-I Drilling Fluids; Baroid competed through its subsidiary Baroid Drilling Fluids. GX 2 at 3-4; GX 42, Admission 13. The Complaint alleged that the U.S. drilling fluid market was dominated by three firms -- M-I, Baroid, and Baker Hughes, Inc. ("Baker Hughes"), which together accounted for at least two-thirds of domestic drilling fluid revenues. GX 2 at 6.
15. The United States filed the proposed Final Judgment on December 23, 1993, the same date that the Complaint was filed. GX 42, Admission 14; GX 1. Paragraph IV.A. of the Final Judgment ordered Dresser to divest the "drilling fluid business," which was defined as either Dresser's 64 percent interest in M-I or "all assets of Baroid Drilling and any other assets that Baroid owns or has an interest in that are used to research, develop, test, produce, manufacture, service, or market domestically or internationally drilling fluids." GX 1 at 7 & 9; GX 42, Admission 15. Both M-I and Baroid Drilling were international drilling fluid companies. GX 3 at 5.
16. The Final Judgment barred Dresser and Baroid from divesting the drilling fluid business to Baker Hughes, Schlumberger, or Anchor Drilling Fluids ("Anchor"). GX 1 at 11. The Final Judgment also barred the purchaser of the divested drilling fluid business from selling that business to, or combining that business with the drilling fluid operations of Dresser, Baker Hughes, Schlumberger, or Anchor. GX 1 at 11.
17. The public was given an opportunity to file comments on the Final Judgment prior to entry, pursuant to the Tunney Act. GX 42, Admission 5. Schlumberger had actual notice that it was named in the consent decree before the comment period expired. GX 4 at 1; GX 42, Admission 18.
18. The Court entered the Final Judgment on April 12, 1994. GX 42, Admission 6. The Final Judgment had a term of ten years. GX 1 at 32; GX 42, Admission 7.
19. Dresser satisfied the divestiture requirement of Paragraph IV.A. of the Final Judgment by divesting its 64 percent interest in M-I to Smith in 1994. GX 42, Admission 7.
20. Paragraph III.B. of the Final Judgment required the defendants, Dresser and Baroid, to require the acquiring party to agree to be bound by the Final Judgment. GX 1 at 8. Respondent Smith is the "purchaser" of the divested drilling fluid business referred to in Paragraph IV.F. of the Final Judgment. GX 42, Admission 3. Pursuant to Paragraph III.B., Smith, as the purchaser of the divested drilling fluid business, agreed to be bound by the provisions of the Final Judgment. GX 1 at 8; GX 5 at 3; GX 9 at 2; GX 42, Admission 3; GX 42, Admission 10.
21. In 1996, Smith asked the Department of Justice to consent to modification of Paragraph IV.F. of the Final Judgment to permit it to acquire Anchor Drilling Fluids, a Norwegian drilling fluids company with a U.S. subsidiary. After an investigation, the Department agreed to the modification, provided that Smith divested the United States drilling fluid assets of Anchor, along with a five year supply contract for crude barite ore, a key ingredient in drilling fluids, which the purchaser of the Anchor assets could extend five additional years, and the right to technical support equivalent to the Technical Service Agreement between Anchor Drilling Fluids USA and Anchor Drilling Fluids AS (of Norway). GX 6 at 5-6; GX 42, Admission 19. The modification did not change the prohibition on transactions with Schlumberger. GX1 at 11; GX 8.
22. This Court entered an Order on September 19, 1996 approving the modification. GX 8 at 1; GX 42, Admission 20. The Order also extended the period during which Smith would be prohibited from selling to or combining with Schlumberger until the tenth anniversary of the modification order -- September 19, 2006. GX 8 at 2; GX 42, Admission 21. As a result of the 1996 modification, Smith became a party to the Final Judgment. See GX 8; GX 5 (first line of the Memorandum).
23. There are no documents contemporary with the Anchor modification, whether they are pleadings filed with this Court or internal Smith documents, stating that Paragraph IV.F. only prohibited a transaction between Smith and Anchor that included Anchor's U.S. assets. GX 5, 6, 7, 8 & 9.
24. Both Smith and Schlumberger had notice of this Court's September 19, 1996 modification prior to July 14, 1999. GX 42, Admission 22.
25. In February of 1998, Victor Grijalva, Vice-Chairman of Schlumberger, contacted Douglas Rock, CEO and Chairman of Smith, and proposed combining Schlumberger's and Smith's drilling fluid businesses. RX 27 at 2. Following some preliminary discussions, Smith and Schlumberger began negotiating a joint venture of their drilling fluids businesses in mid-August of 1998. RX 27 at 4. In September, they informed the Justice Department of the negotiations and asked that the Department consent to a modification of Paragraph IV.F. of the Final Judgment to permit the transaction to proceed. Id. at 5; GX 42, Admission 24. The Department of Justice opened an investigation. GX 42, Admission 26.
26. On October 21, 1999, Respondents entered into a Memorandum of Understanding outlining a proposed joint venture that would combine M-I with Schlumberger's drilling fluid operations; on February 5, 1999 they executed a formal joint venture agreement (hereinafter referred to as the Initial Joint Venture). RX 17; GX 42, Admission 25.
27. Smith and Schlumberger knew they could not lawfully consummate the Initial Joint Venture without modification of the Final Judgment. GX 10 at 72 (Paragraph 8.5).
28. In March of 1999, Sean Boland, of Collier, Shannon, Rill & Scott and outside counsel for Smith, and Rufus Oliver of Baker and Botts and outside counsel for Schlumberger, learned that the Department of Justice staff was "leaning towards" recommending against modification of the Final Judgment to allow the proposed joint venture between Smith and Schlumberger to proceed. GX 11 at page 1 of the attached memorandum; RX 35 at 1; Tr., 11/19/99, 105:10-105:23 (Boland). Both Neal Sutton, General Counsel for Smith, and Gary Wilson, General Counsel for Schlumberger's Oilfield Services operations, asked their respective outside counsels to outline the options available to the companies if the staff's final recommendation was against modification. Tr., 11/22/99, at 205:1-206:3 (Rock); Tr., 11/24/99, at 6:25-8:3 (Wilson). Mr. Wilson received a memorandum from Baker & Botts setting forth options; Mr. Sutton was provided information about options by Smith's outside counsel, Sean Boland, in a telephone conversation. GX 11, 12.
29. During the April time period, Rufus Oliver, outside counsel for Schlumberger, kept Sean Boland, outside counsel for Smith, informed about the financial condition of Schlumberger. Tr., 11/22/99, 49:11-23, 62:13-65:12 (Boland).
30. On April 7, 1999, Bruce McDonald, a partner at Baker & Botts, sent a memorandum to Gary Wilson, General Counsel of Schlumberger's oilfield services division. GX 11.
31. In April 1999, Neal Sutton, General Counsel of Smith, spoke with Sean Boland, Smith's outside counsel, about the options available to Smith if the staff recommended against modification and took notes of their conversation. Sutton Dep. at 110:10-111:15; 115:17-115:21 (Tr., 11/18/99, at 116:1-117:1, 121:2-121:6); GX 12 at 1.
32. Smith's CEO, Douglas Rock, knew at least as early as April 1999 that Smith could seek modification of the Final Judgment from the Court without the support of the Department of Justice. Tr., 11/22/99, at 205:1-8 (Rock).
33. Also in April 1999, Collier, Shannon, Rill & Scott sent Neal Sutton, General Counsel for Smith, a "draft" memorandum written by Markus Meier, a senior associate at the firm, with an extensive background in antitrust law. GX 13 at 1-2; Tr., 11/19/99, 135:5-135:10 (Boland).
34. Until late June 1999, Smith and Schlumberger continued seeking the consent of the Department of Justice to modify the Judgment so that the Initial Joint Venture could proceed.
35. Smith had hoped to consummate the Initial Joint Venture by March 31, 1999. Smith had planned to use the $280 million Schlumberger had agreed to pay for an interest in the joint venture that would include M-I to pay off a note that was due at the end of April. When the Initial Joint Venture was not consummated, Smith arranged for a bridge loan. The interest payments on this loan were approximately $5 million. Smith's Chairman and CEO was concerned that if prices on the stock market were to decline, Smith's stock price might fall disproportionately because Smith was carrying extra finance charges. Tr., 11/22/99, at 208:8-209:16 (Rock).
36. On June 3, 1999, Gary Wilson, General Counsel of Schlumberger's Oilfield Services operations, sent an e-mail to James Gunderson, Schlumberger's General Counsel, relating to the "DOJ action plan." GX 15 at 1; see also Grijalva Dep. at 141:24-142:13 (Tr., 11/18/99, at 134:23-135:7). A number of Schlumberger employees were copied on the e-mail, including Victor Grijalva, Schlumberger's Vice-Chairman.
37. On June 16, 1999, several Smith and Schlumberger executives and the companies' outside counsel met with representatives of the Department of Justice, including Deputy Assistant Attorney General John Nannes and Constance Robinson, Director of Merger Enforcement. Tr., 11/19/99, at 120:20-121:8 (Boland).
38. On June 21, 1999, Bruce McDonald of Baker & Botts, author of the April 7 memorandum and outside counsel for Schlumberger, sent to Gary Wilson, General Counsel for Schlumberger's oilfield services division, an e-mail again discussing options available to Schlumberger if Smith filed a request for modification with the Court and the Department of Justice opposed the request. GX 16 at 1. Mr. Wilson received and read this e-mail. Tr., 11/24/99, at 22:16-22:21, 23:5-23:6, 23:20-23:23 (Wilson).
39. On June 22 and 23 of 1999, Gary Wilson, General Counsel of Schlumberger's oilfield services division, and James Gunderson, General Counsel of Schlumberger, exchanged a series of e-mails. GX 17 at 1-3.
40. On June 28, 1999, Schlumberger informed the Justice Department that it had decided to discontinue its U.S. drilling fluids business. Tr., 11/23/99, at 79:24-80:1 (Grijalva); GX 21 at 1. This was the same month in which Schlumberger's Gulf Coast Drilling Fluids Manager, Don Williamson, prepared a memorandum analyzing how the company could restructure its Gulf Coast drilling fluids business and continue to compete. GX 14. Mr. Williamson stated that Schlumberger was "presently in the best position in recent history to move the DF [drilling fluids] group into profitability. There are several new products with which we have been quite successful, several command high margins allowing us to significantly reduce our product cost from historical levels." GX 14 at SL (MI) 100393. Mr. Williamson is still employed by Schlumberger in its Houston offices. Schlumberger hopes to have him "play a coordination and communication role between Schlumberger's Product Centers and M-I because he is about the only person in [Schlumberger] who knows what drilling fluids are about." Tr., 11/24/99, at 56:14-57:15 (Wilson).
41. On June 29, 1999, Bruce McDonald of Baker and Botts sent another e-mail to Gary Wilson, General Counsel of Schlumberger's Oilfield Services operations discussing once again Smith's and Schlumberger's options. GX 19.
42. On June 30, 1999, Gary Wilson sent an e-mail to his superior Jim Gunderson, Schlumberger General Counsel and Secretary, once again reviewing the options available to Smith and Schlumberger. A number of individuals were copied on the e-mail, including Schlumberger's Vice-Chairman, Victor Grijalva. GX 20.
43. On July 1, 1999, Rufus Oliver, outside counsel for Schlumberger, sent Deputy Assistant Attorney General John Nannes a letter outlining the reasons why Smith and Schlumberger believed that the Final Judgment would not apply to a joint venture between Smith and Schlumberger when Schlumberger had announced that it was shutting down its U.S. drilling fluids operations and excluded Schlumberger's U.S. drilling fluids assets from the joint venture. GX 21.
44. In approximately late June or early July, Schlumberger lost a major drilling fluids contract with Statoil in the North Sea to M-I. GX 22. In a July 3, 1999 e-mail relaying this news to Jim Gunderson, Schlumberger's General Counsel, and Gary Wilson, General Counsel of Schlumberger Oilfield Services operations, Andrew Gould, an Executive Vice-President in Schlumberger's Oilfield Services operations, reported that "[t]he M-I people in Norway have been telling Statoil that the deal will go through. We have several other bidding situations where we cannot exclude the possibility that Dowell will continue to lose market share. I think we need to tell M-I that we cannot continue with this process if they do not tell their people to act as if the outcome of the deal is unknown." Id.
45. On July 4, 1999, John Yearwood sent an e-mail to Andrew Gould and Chad Deaton, both Executive Vice Presidents in Schlumberger's Oilfield Services operations, saying that Schlumberger's drilling fluids business was deteriorating rapidly. GX 23.
46. Subject to approval of its Board of Directors, Smith had decided by July 8, 1999, to proceed with the revised joint venture with or without the support of the Justice Department. Tr., 11/24/99, at 76:1-76:15 (Sutton); Rock Dep. at 184:18-185:2 (Tr., 11/18/99, at 157:8-157:15); Sutton Dep. at 167:12-167:15 (Tr., 11/18/99, at 162:17-162:20). Smith knew that it had the option of coming to the Court and that doing so would eliminate any risk of being found in violation of the Final Judgment. Tr., 11/24/99, at 76:1-76:15 (Sutton); Sutton Dep. at 168:19-169:3, 171:8-172:3 (Tr., 11/18/99, at 162:22-163:25); Tr., 11/24/99, at 82:5-85:2 (Sutton).
47. On July 8, 1999, Sean Boland, outside counsel for Smith, wrote Deputy Assistant Attorney General Nannes that Smith and Schlumberger had decided to consummate a joint venture that excluded Schlumberger's U.S. drilling fluids assets (hereinafter referred to as the Revised Joint Venture) and had targeted July 14 as the consummation date. He agreed to provide the Department with 48 hours notice before the companies proceeded. GX 24.
48. On July 12, 1999, Sean Boland provided the 48 hours notice and wrote to Deputy Assistant Attorney General Nannes that the parties intended to complete the transaction on Wednesday, July 14. GX 12; GX 42, Admission 29.
49. On July 13, 1999, the Smith Board of Directors convened at 2:00 p.m. central time for a special telephonic meeting to vote on whether to give approval to Smith proceeding with the Revised Joint Venture. GX 26 at 1.
50. On July 13, 1999, John Nannes, Deputy Assistant Attorney General for the Antitrust Division, sent by facsimile a letter to Sean Boland, outside counsel for Smith, with a copy to Rufus Oliver, outside counsel for Schlumberger. GX 27; GX 42, Admissions 30, 31, 32, 33.
51. Smith received the letter from DAAG Nannes before the transaction with Schlumberger was consummated.
52. Schlumberger received the warning letter from DAAG Nannes before the transaction with Smith was consummated. GX 42, Admissions 30, 32-35, 37-38.
53. On July 14, 1999, at approximately noon Central Daylight Savings Time, Smith and Schlumberger consummated the joint venture. Tr., 11/24/99, at 19:5-16 (Wilson); GX 31; GX 32; GX 42, Admission 39. Mr. Wilson transferred the funds from Schlumberger to Smith shortly before noon Central Daylight Savings Time on July 14. Tr., 11/24/99, at 19:5-16 (Wilson).
54. The Revised Joint Venture agreement provides that, with certain limited exceptions, Smith and Schlumberger will not compete with the joint venture. GX 32 at 69, ¶9.6; GX 42, Admission 40. The Revised Joint Venture agreement also gave Schlumberger six months to wind down its U.S. operations. GX 42, Admission 41. Once Schlumberger's U.S. operations were shut down, Schlumberger had covenanted not to compete in the United States in the drilling fluid business independent of the joint venture. GX 42, Admission 42. Even though Schlumberger had advised the Department of Justice that it had shut down its U.S. drilling fluids business, it continued to provide drilling fluids for U.S. drilling projects until September 15, 1999. GX 42, Admission 43.
55. The joint venture includes four technology centers. The centers in Houston, Norway, and Latin America were part of M-I before the joint venture was formed. The fourth center, in St. Austell, England, was part of Schlumberger's drilling fluid operations. The St. Austell facility provided support to Schlumberger's U.S. drilling fluid business. Tr., 11/22/99, at 198:21-200:9 (Rock); Tr., 11/23/99, at 110:12-23 (Grijalva).
56. One Schlumberger executive who now works for the joint venture is John Oliver. Mr. Oliver was the worldwide marketing manager for Schlumberger's drilling fluid business, including its business in the United States. Tr., 11/24/99, at 50:10-21 (Wilson).
57. In order for Smith and Schlumberger to be found in criminal contempt under 18 U.S.C. § 401(3), the United States must prove beyond a reasonable doubt that: (1) a clear and reasonably specific order of the court existed; (2) Smith and Schlumberger each had knowledge of that order, (3) they violated the order, and (3) the violation by each of them was willful. SeeUnited States v. NYNEX Corp., 8 F.3d 52, 54 (D.C. Cir. 1993); see alsoUnited States v. Twentieth Century Fox Film Corp., 882 F.2d 656, 659 (2d Cir. 1989), cert. denied, 493 U.S. 1021 (1990); Chapman v. Pacific Tel. & Tel. Co., 613 F.2d 193, 195 (9th Cir. 1979); In re Economou, 645 F. Supp. 1055, 1057 (S.D.N.Y. 1986), aff'd sub nom.SEC v. American Bd. of Trade, Inc., 830 F.2d 431, 439-40 (2d Cir. 1987), cert. denied, 485 U.S. 938 (1988). The United States has met its burden in this case with respect to each of the elements of criminal contempt and with respect to both Smith and Schlumberger.
58. To make the determination of whether the actions in question violated the Final Judgment, this Court must construe the language of the Final Judgment. A consent decree is read essentially as a contract. United States v. ITT Continental Baking Co., 420 U.S. 223, 236-37 (1975); United States v. Western Elec. Co., 894 F.2d 1387, 1390 (D.C. Cir. 1990). Thus, the Court should look first to the "plain meaning of the Decree's language." Western Elec., 894 F.2d at 1394; seeUnited States v. Armour & Co., 402 U.S. 673, 678 (1971). Under Armour, the scope of a consent decree "must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it." Id. At 682. Moreover, " . . . the instrument must be construed as it is written, and not as it might have been written. . . ." Id.
59. The plain language of Paragraph IV.F. of the Final Judgment states that "[t]he purchaser of the divested drilling fluid business [Smith] shall not sell the drilling fluid business to, or combine that business, with the drilling fluid operations of . . . Schlumberger Ltd., or any of [its] affiliates or subsidiaries during the life of this decree."
60. The Final Judgment's restriction on transactions that Smith may enter is simple and straightforward: Smith is barred from selling its 64 percent interest in M-I to Schlumberger and from combining that business with Schlumberger's drilling fluid operations. The evidence in this case demonstrates beyond a reasonable doubt that the Final Judgment was sufficiently clear and specific to inform Smith and Schlumberger that the joint venture they consummated was prohibited by Paragraph IV.F. of the Judgment.
61. The second element of criminal contempt, that Smith and Schlumberger had knowledge of the decree, is not in dispute in this case. Both Smith and Schlumberger have admitted that they had knowledge of the decree before the joint venture was formed on July 14, 1999, and knew that it was a lawful order of this Court. GX 42, Admissions 8, 10, 11, 18, 22.
62. Key executives of Smith and Schlumberger, including Smith's Chairman and CEO and its General Counsel, and Schlumberger's Vice-Chairman and its General Counsel specifically had knowledge of the prohibitions set forth in Paragraph IV.F. of the Judgment before they consummated the joint venture on July 14, 1999. Findings of Fact 51 & 52.
63. The third element of criminal contempt, that Smith and Schlumberger violated this Court's decree, has also been proven beyond a reasonable doubt. In forming the joint venture, Smith and Schlumberger violated the Final Judgment's clear and unambiguous prohibitions on both selling the drilling fluid business to Schlumberger and combining the divested "drilling fluid business" with the drilling fluid operations of Schlumberger. Prior to formation of the joint venture, Smith owned 100 percent of M-I (the 64 percent interest it acquired from Dresser and the 36 percent interest it acquired from Halliburton). In consummating the joint venture, Smith sold to Schlumberger for $280 million a 40 percent interest in a joint venture that includes M-I, thereby selling a portion of the original 64 percent Dresser interest -- the divested "drilling fluid business." Smith's action thus violated the decree's prohibition against selling the drilling fluid business to Schlumberger.
64. Also, in consummating the joint venture, Smith combined M-I (including the original 64 percent interest) and most of Schlumberger's drilling fluid operations. Smith's action thus violated the Final Judgment's prohibition on combining the divested "drilling fluid business" with the drilling fluid operations of Schlumberger.
65. Smith and Schlumberger's claim that Paragraph IV.F.'s prohibitions only bar transactions that include Schlumberger's U.S. drilling fluid assets is meritless. No such limitation is included in the paragraph. To the contrary, the language is quite broad -- barring sales to or combinations with the drilling fluid operations of Schlumberger or any of its affiliates or subsidiaries.
66. Respondents' cites to the definition of geographic market in the Complaint and Competitive Impact Statement that originated the action provide no basis for limiting the clear language of Paragraph IV.F. Respondents have ignored the fact that the divestiture required by the Final Judgment was international in scope although the alleged geographic market being protected by the decree provision was limited to the United States. The 1996 modification of the Judgment likewise provides no basis for inferring a limitation on the plain language of Paragraph IV.F. Respondents incorrectly claim that the divestiture required as part of the 1996 modification was limited to U.S. assets. It was not. Included with Anchor's U.S. assets was a five year supply contract for crude barite ore, a key ingredient in drilling fluids, which the purchaser of the Anchor assets could extend five additional years and the right to technical support equivalent to the Technical Service Agreement between Anchor Drilling Fluids USA and Anchor Drilling Fluids AS. GX 6 at 5-6. But even if the divestiture required in 1996 had been limited to Anchor's U.S. assets, the scope of the divestiture that was part of the 1996 modification did not interpret, define or limit the language of Paragraph IV.F.
67. Although the prohibitions in Paragraph IV.F. of the Final Judgment are not limited to transactions that include Schlumberger's U.S. drilling fluid operations, the transaction consummated by Smith and Schlumberger on July 14, 1999 affected U.S. commerce. The joint venture was intended to compete, and is competing, in the United States. The joint venture agreement bars Schlumberger from competing against the joint venture in the United States. Schlumberger contributed to the joint venture a research and engineering facility that supported its U.S. drilling fluid operations.
68. The fourth, and final, element of criminal contempt, that Smith and Schlumberger's violation was willful, has been proven beyond a reasonable doubt. Willfulness can be inferred from conduct that evidences a reckless disregard of a court order. In re Holloway, 995 F.2d 1080, 1082 (D.C. Cir. 1993), cert. denied, 511 U.S. 1030 (1994); Sykes v. United States, 444 F.2d 928, 930 (D.C. Cir. 1971). The Court may find that Respondents acted with reckless disregard for the Final Judgment if (a) they understood the decree and ignored it, or (b) they acted in reckless disregard of the plain language of the decree. SeeRapone, 131 F.3d at 195 (proof that the contempt defendant "was well aware" of the order, had warnings to comply with the order, and continued to violate the order was adequate to demonstrate intent); United States v. Schafer, 600 F.2d 1251, 1253 (9th Cir. 1979) (evidence that the defendant had helped negotiate the order and admitted violations of the order was adequate to demonstrate intent).
69. Here the language of the decree plainly barred the transaction. The decision makers at both companies knew of this Court's Order. In fact, both Smith and Schlumberger had full knowledge of the plain language of the Court's order. The clear applicability of the Order to the transaction the companies completed on July 14 was brought directly to the attention of both companies by the Department of Justice with the admonition that consummation of the joint venture would violate the Decree. Further, Neal Sutton, General Counsel for Smith, had read the Decree -- for general information when Smith acquired the divested drilling fluid business and later with regard to this specific joint venture. Schlumberger's General Counsel was aware of the company's inclusion in the Decree in 1994, and the General Counsel of its oil field services division reviewed Paragraph IV.F. of the decree in 1998 in connection with the joint venture with Smith. Being aware of the plain language of the decree, and advising their companies on the prohibitions of the Court's Order, was directly within the scope of both General Counsels' authority. The knowledge of Smith's and Schlumberger's General Counsel must be imputed to the corporation, seeNew York Central & Hudson R.R. v. United States, 212 U.S. 481, 494-95 (1909), following the general rule that a corporation is criminally liable "for the acts of its managerial agents 'done on behalf of and to the benefit of the corporation and directly related to the performance of the duties the employee has authority to perform.'" United States v. Koppers Co., 652 F.2d 290, 298 (2d Cir. 1981) (quoting jury instruction given by district court).
70. That other officials of Smith and Schlumberger may not have read the Final Judgment cannot save Respondents from contempt sanctions. Indeed, maintaining a "studied ignorance" of the terms of the Final Judgment is the very definition of reckless disregard. See United States v. McMahon, 104 F.3d 638, 644-45 (8th Cir. 1997) ("If McMahon truly remained ignorant of the sequestration order, it was indeed a 'studied ignorance.'"). As the Second Circuit noted: "[A] party to an action is not permitted to maintain a studied ignorance of the terms of a decree in order to postpone compliance and preclude a finding of contempt." Perfect Fit Indus. v. Acme Quilting Co., 646 F.2d 800, 808 (2d Cir. 1981). Both Smith and Schlumberger had full knowledge of the plain language of the Court's order. The clear applicability of the Order to the transaction the companies completed on July 14 was brought directly to the attention of both companies by the Department of Justice with the admonition that consummation of the joint venture would violate the Decree. Their counsel had told them so in April of this year, and the Department of Justice told them so before they proceeded.
71. Smith and Schlumberger proceeded with the transaction even though:
72. Respondents' only basis for claiming they had a good faith belief that proceeding would not violate the decree is advice from their outside counsel. But advice of outside counsel will not insulate Respondents from criminal liability here. It was not objectively reasonable for Respondents to rely on their counsels' advice. SeeUnited States v. Benson, 941 F.2d 598, 614 (7th Cir. 1991), amended in part, 957 F.2d 301 (7th Cir. 1992) (Benson I); see generally Hawes & Sherrard, supra, at 19-37. "[T]he reasonableness of a belief is a factor which bears upon whether the belief was in fact held in good faith." United States v. Benson, 67 F.3d 641, 649 (7th Cir. 1995) (Benson II). Reliance on advice of counsel is "not a safe harbor if a reasonable man would know that the opinion does not reflect a prudent lawyer's serious efforts to ascertain the applicable law." Mitchell v. Pidcock, 299 F.2d 281, 287 (5th Cir. 1962).
73. Where the defendants are sophisticated corporations like Smith and Schlumberger, the reasonableness standard is heightened. SeeJohn Hopkins Univ. v. CellPro, 978 F. Supp. 184, 190, 194 (D. Del. 1997) (holding that a corporation with in-house counsel had a heightened obligation to investigate opinions from outside counsel); Mitchell, 299 F.2d at 286 (holding that an experienced businessman had a heightened responsibility to be aware of shoddy lawyering in producing a legal opinion); cf.SEC v. Sorrell, 679 F.2d 1323, 1327 (9th Cir. 1982) (holding a securities broker to a higher standard when assessing the reasonableness of reliance on counsel); Schafer, 600 F.2d at 1253 (holding that a counseled businessman with experience in the relevant field of business was more likely to be aware of the obligations imposed by a court order); In re Muscatell, 113 B.R. 72, 75 (Bankr. M.D. Fla. 1990) (rejecting the advice of counsel defense in part relying on "the fact that the Debtor is a sophisticated and experienced businessman").
74. Measured against objective indicia of reasonableness, Smith's and Schlumberger's reliance on advice of counsel falls far short. Respondents disregarded the clear and plain meaning of the Order; they adopted counsels' tortured reading; they ignored the warning letter from the Department of Justice; they failed to seek clarification from the Court; they elevated business expedience over legal obligations; and they embraced legal advice that the Court lacked authority to enforce the Order. In these circumstances, Respondents' reliance on an advice of counsel defense is so disingenuous in nature that it itself serves as evidence of reckless disregard for this Court's Order. SeeJohns Hopkins Univ., 978 F. Supp. at 193 ("Ironically, CellPro almost proved plaintiffs' case for them, with its weak and disingenuous defense of alleged good-faith reliance on the advice of counsel.").
75. The very clarity of this Court's decree makes unreasonable any reliance on outside counsel's twisted and tortured interpretation. The "advice of counsel" defense requires that Smith and Schlumberger sought the advice of outside counsel in good faith, seeUnited States v. Cheek, 3 F.3d 1057, 1061 (7th Cir. 1993) (Cheek II), which in turn requires that some legitimate question exist as to whether this Court's Order proscribed the joint venture. Where a decree is as clear as the Court's Final Judgment in this case, the only possible value for the legal opinion would be for use "in a cynical effort to try to confuse or mislead." SeeJohns Hopkins Univ., 978 F. Supp. at 193.
76. That counsel devised an interpretation that disregarded the Order's plain language does not protect Respondents. The courts have rejected attempts to hide behind interpretations clearly at odds with the plain meaning of orders, whether the interpretations come from the defendant itself, seeUnited States v. Greyhound, 508 F.2d 529, 533 (7th Cir. 1974) ("Greyhound's explanation of its failure to comply with this provision consists of strained and twisted interpretations of the order. . . . These interpretations of the order are patently unreasonable."), or from counsel. SeeMitchell, 299 F.2d at 285-86, (where the court refused to accord weight to the defendant's advice of counsel defense because "it stretch[ed] the imagination beyond the breaking point to believe that the opinion was the result of serious research."); Muscatell, 113 B.R. at 75 (holding reliance on advice of counsel that certain assets need not be listed in a bankruptcy petition to be unreasonable in light of the "plain and clear" requirements of the law); Musser v. State, 124 S.W.2d 372, 375 (Tex. Crim. App. 1939) (distinguishing between an "obscure and confusing" law, where advice of counsel was a defense to willfulness, and a plain statute, where the defense was not available). Faced with an Order that, in plain terms, prohibited precisely what Smith and Schlumberger did, Smith and Schlumberger could not have reasonably relied on counsel's advice that the joint venture was not prohibited by the Final Judgment.
77. Respondents acted despite a warning from the Department of Justice that the joint venture violated the Final Judgment. The Respondents' unquestioning reliance on outside counsel's interpretation of the Court's Order is even more unreasonable in light of the warning they received from the Department of Justice. On July 13, 1999, respondents received a letter from Deputy Assistant Attorney General John Nannes informing them of the United States' position that their proposed joint venture violated the Court's Order. Yet, after receiving notice that the United States read the Final Judgment to mean precisely what it said, Smith and Schlumberger continued to rely on their counsels' twisted and tortured interpretation and proceeded to consummate the joint venture on July 14.
78. Ignoring a warning of the illegality of a proposed course of conduct is the kind of unreasonable conduct that will defeat the advice of counsel defense. SeeBenson I, 941 F.2d at 614 ("If a person is told by his attorney that a contemplated course of action is legal but subsequently discovers the advice is wrong or discovers reason to doubt the advice, he cannot hide behind counsel's advice to escape the consequences of his violation."). In Lindquist & Vennum v. FDIC, 103 F.3d 1409 (8th Cir. 1997), the defendants sought to escape civil liability under the Change in Banking Control Act ("CBCA") -- which, like criminal contempt, carries an intent element -- by relying on their counsel's advice that their actions did not violate the CBCA. Id. at 1414. The FDIC had warned the defendants that their proposed conduct would violate the CBCA. Id. at 1414-15. Ignoring this warning defeated the defendants' attempt to rely on counsel's advice to escape liability. Id. SeeUnited States v. Michaud, 928 F.2d 13, 16 (1st Cir. 1991) (defendant who asserted a misunderstanding of its obligation to pay a fine no longer had an excuse "at least as of the date that the government notified [defendant] that it was seeking payment").
79. Following receipt of the warning from the Department, Respondents took no new steps to reconsider or try to reconfirm their position. Instead, anxious to close the joint venture transaction, they sought and received perfunctory oral confirmation from counsel of prior advice that the decree did not mean what it said. In such circumstances, advice of counsel cannot form a good faith basis for ignoring the Final Judgment. SeeUnited States v. Cable News Network, Inc., 865 F. Supp. 1549, 1559 (S.D. Fla. 1994)(CNN) ("advice fitted to accommodate" defendant's wishes is "weak on protection" against contempt sanctions).
80. In light of the obvious threat that the United States would seek contempt sanctions, it is also probative of the reasonableness of Respondents' reliance on counsel that neither company ever sought a written opinion reflecting the advice they claim to have relied upon. Indeed, the only written, reasoned memoranda produced by Respondents' counsel regarding the applicability of the Final Judgment conclude that the joint venture is prohibited. Contemporaneous documents provide "cinematographic photographs" of a defendant's thoughts when written, and contradictory testimony only casts doubt on the witness's credibility. United States v. Corn Products Refining Co., 234 F. 964, 978 (S.D.N.Y. 1916) (Hand, J.); seealsoUnited States v. United States Gypsum Co., 333 U.S. 364, 396 (1948).
81. Smith and Schlumberger chose not to avail themselves of procedures for obtaining clarification. Respondents' failure to seek clarification, even after receiving the warning letter from the Department of Justice, is particularly probative of their lack of good faith. Both Smith and Schlumberger were well aware of the available procedures to obtain clarification of the Order. But they chose not to do so, making a calculated decision to risk neither delay nor a negative decision from the Court in their haste to consummate.
82. Failure to seek clarification while relying on a questionable interpretation of an order is the kind of unreasonable conduct that precludes a good-faith defense to criminal contempt. SeeIn re Grand Jury Proceedings, 875 F.2d 927, 934 (1st Cir. 1989); Greyhound, 508 F.2d at 532. In In re Grand Jury Proceedings, the defendant's failure to seek clarification prevented him from claiming to misunderstand the order. 875 F.2d at 934. In Greyhound, the court noted that the defendant was not required to seek clarification, but the failure to do so made more obvious the defendant's bad faith in relying on a twisted interpretation. 508 F.2d at 534. That Respondents chose not to test their legal interpretations in Court is further evidence of their lack of good faith in relying on their counsels' arguments.
83. Belief that the Court lacked jurisdiction or that the Order was invalid will not excuse an intentional violation. Respondents also contend that they did not willfully violate the Final Judgment because they were advised by outside counsel that the Court's Order was invalid as applied to the joint venture or that the Court lacked jurisdiction to punish a violation. These jurisdictional arguments have no basis in law or fact. Even if they did, however, reliance on counsel's advice to violate a court order does not constitute a defense to the specific intent element of a crime. SeeCheek v. United States, 498 U.S. 192, 206 (1991) (rejecting the defendant's claim of a good faith belief that the underlying law was invalid); United States v. Armstrong, 781 F.2d 700, 706 & n.4 (9th Cir. 1986). No matter how genuine Respondents' belief that the Order was invalid, it will not preclude a finding of a willful violation of the Order. SeeCNN, 865 F. Supp. at 1560-61.
84. Even if Smith and Schlumberger believed that the Final Judgment was invalid, they were obliged to obey it or to seek a modification with the Court. "'It is for the court of first instance to determine the question of the validity of the law, and until its decision is reversed for error by orderly review, either by itself or by a higher court, its orders based on its decision are to be respected, and disobedience of them is contempt of its lawful authority, to be punished.'" Walker v. City of Birmingham, 388 U.S. 307, 314 (1967) (quoting Howat v. State of Kansas, 258 U.S. 181, 189-90 (1922)).
85. Under facts far more sympathetic than those in the instant case, the Supreme Court affirmed criminal contempt sanctions against Dr. Martin Luther King and other civil rights protesters for violating a state-court injunction against demonstrating without a permit in Birmingham, Alabama. Walker v. City of Birmingham, 388 U.S. 307, 321 (1967). The Court said: "[I]n the fair administration of justice no man can be a judge in his own case, however exalted his station, however righteous his motives . . . . [R]espect for judicial process is a small price to pay for the civilizing hand of law . . . ." In Walker, the decree in question was highly suspect as a constitutional matter. 388 U.S. at 316-17. However, the defendants "did not even attempt to apply to the Alabama courts for an authoritative construction" of the decree. "This Court cannot hold that the petitioners were . . . free to ignore all the procedures of the law . . . ." Id. at 316, 321.
86. In the instant case, by contrast, the decree is admittedly valid and lawful. GX #42, Admission #11. Smith's and Schlumberger's obligation to obey the Court's order cannot be questioned. Walker's admonition that one must abide by an injunction until it is overturned carries all the more force where the injunction is unquestionably valid.
87. This rule also applies to violating a court order in reliance on counsel's advice that the Court lacked jurisdiction to enforce the Decree. In United States v. Revie, 834 F.2d 1198 (5th Cir. 1987), the contempt defendant's apparent good faith belief that an order was beyond the court's authority to issue did not defeat a conviction for criminal contempt. Id. at 1205-06. Likewise, in In re Novak, 932 F.2d 1397 (11th Cir. 1991), the court did not question the validity of the contempt defendant's belief that the court lacked personal jurisdiction over him when affirming the conviction for criminal contempt. Id. at 1409. A good faith belief that a court lacks jurisdiction does not provide a defense for a person who willingly engages in conduct falling within the prohibitions contained in the order. Even if Smith and Schlumberger genuinely believed this Court lacked jurisdiction over their joint venture, they nonetheless acted with intent to violate the language of the Final Judgment and cannot advance a good-faith defense to criminal contempt.
88. In sum, although Smith and Schlumberger may claim that they relied in good faith on advice of counsel, the objective evidence shows beyond a reasonable doubt that Respondents acted with reckless disregard and willfully violated the Court's Order.
89. The evidence proves beyond a reasonable doubt that Smith willfully violated the consent decree.
90. In the only written legal advice that Smith received from Collier, Shannon, Rill & Scott and the only oral advice the law firm provided Smith for which there is a written record, Smith was told that the decree would apply to the joint venture even if Schlumberger shut down its U.S. drilling fluids operations ( GX 13 at 20) and that the decree covered both international and domestic assets (GX 12 at 2 (read by author at Sutton Dep. at 112:20-112:21 (Tr., 11/18/99, at 119:19-119:20)). The April memorandum concluded that, assuming that Schlumberger had shut down its U.S. operations, "should a court decide that it has subject matter jurisdiction, we should anticipate that the court also would find that the joint venture is (or likely is) subject to the Baroid consent decree." GX 13 at 5, 20.
91. At the July 13, 1999 special meeting of the Smith Board of Directors, Smith's own outside counsel told Smith that the Justice Department might file civil and criminal contempt charges if Smith consummated the joint venture. Tr., 11/24/99, at 60:17-61:15 (Wilson); Tr., 11/22/99, at 182:24-184:16 (Rock).
92. On July 13, 1999, before Smith and Schlumberger consummated the revised joint venture, Smith received a letter from Deputy Assistant Attorney General John Nannes telling Smith that in the view of the Justice Department, consummating the joint venture "would clearly violate the Final Judgment." GX 27; Rock Dep. at 200:18-200:22 (Tr., 11/19/99, at 6:7-10); Sutton Dep. at 226:16-227:1 (Tr., 11/19/99, at 7:21-8:5); see also Tr., 11/22/99, at 214:25-215:2. Smith knew that in the view of the Justice Department, Smith and Schlumberger would violate the Final Judgment if they consummated the joint venture. Tr., 11/22/99, 216:14-216:17; Sutton Dep. at 230:1-231:7, 302:20-303:8 (Tr., 11/19/99, at 8:5-9:19). Smith also understood from the letter that the Justice Department would more likely than not take them to court if Smith and Schlumberger consummated the joint venture. Tr., 11/24/99, at 65:1-67:5 (Wilson).
93. Smith never sought modification or clarification of the Final Judgment, even though they knew they could. Tr., 11/22/99, at 205:1-205:8; GX 12 at 2 (read by author at Sutton Dep. at 113:7-113:9 (Tr., 11/18/99, at 120:5-120:6)). Smith did not seek a meeting with Mr. Nannes or Mr. Klein after receiving the July 13 letter from Mr. Nannes. Tr., 11/22/99, at 218:2-218:7 (Rock). Smith did not seek a "second opinion" from another law firm on the legality of consummating the transaction without first seeking modification. Tr., 11/22/99, at 217:18-218:1 (Rock).
94. Smith's General Counsel abdicated his responsibility to render sound legal advice to the corporation. When Smith decided to proceed with the joint venture, Mr. Sutton, Smith's General Counsel, stated that he "wasn't exercising [his] independent judgment in any way." Tr., 11/24/99, at 70:16-71:5 (Wilson).
95. Smith chose to proceed with the transaction because of business considerations. It wanted the money from Schlumberger to pay off an expensive bridge loan. It was concerned that Schlumberger might abandon the transaction because it was losing North Sea drilling fluid contracts. In the short run, Schlumberger's problems might result in additional drilling fluid business for Smith; in the long run, Smith felt that its interests were served by a joint venture with Schlumberger.
96. In 1993, Smith pleaded guilty to price fixing, and paid criminal fines of approximately $700,000 and approximately $19 million. Tr., 1/22/99, at 194:9-195:23 (Rock). The Supreme Court has indicated that in the antitrust arena evidence of prior behavior is probative of the likelihood of similar conduct occurring in the future. SeeUnited States v. ALCOA, 377 U.S. 271, 277 (1964); Brown Shoe Co. v. United States, 370 U.S. 294, 332 (1961); see alsoUnited States v. General Dynamics Corp., 258 F. Supp. 36, 62-63 (S.D.N.Y. 1966). Smith's prior conviction is indicative of the corporation's disregard of its obligations under the law. Even now, Smith's General Counsel expressed an surprisingly cavalier view of violations of criminal law by the corporation. To Mr. Sutton a finding of civil liability can be more serious than a violation of federal criminal law, if the resulting damages award is high enough. Sutton Dep. at 187:3-187:18 (Tr., 11/18/99, at 169:9-169:22).
97. The United States has proven beyond a reasonable doubt that Smith is guilty of criminal contempt in violation of 18 U.S.C. § 401(3).
98. The evidence proves beyond a reasonable doubt that Schlumberger willfully violated the consent decree.
99. The only written legal advice that Schlumberger received from outside counsel said that the Final Judgment would apply to the joint venture even if Schlumberger shut down its U.S. drilling fluids operations. The April 7, 1999 Bruce McDonald memorandum to Gary Wilson stated that "[t]he decree prohibits the combination of Smith's original 64% M-I interest with the drilling fluids operations of Schlumberger. It is not limited to M-I or Schlumberger only in the U.S., but apparently applies to their assets worldwide." GX 11 at 3. The memorandum also noted that the "DOJ has a good argument that a consent decree gives a court jurisdiction to impose prohibitions that it could not have imposed otherwise, and therefore that the court may enforce the decree to stop even an outside-the-U.S. transaction." Id.
100. Gary Wilson had also been told in a June 21 e-mail from Bruce McDonald of Baker & Botts that "[t]he consent decree prohibits Smith from combining M-I with the drilling fluids business of SL, and the decree does not distinguish between the U.S. and the non-U.S. businesses of M-I and SL." GX 16 at 1. The e-mail stated that Schlumberger could argue that a transaction not involving the U.S. businesses of Smith and Schlumberger would be outside the Court's jurisdiction, but then went on to note that "DOJ's counter-argument is that, in the consent decree, Smith agreed to the non-U.S. prohibition and that the decree itself gives the Court jurisdiction, even if the Court would not otherwise have had jurisdiction." GX 16
101. Finally, Mr. Wilson stated in an e-mail sent to Jim Gunderson, General Counsel of Schlumberger, that if Schlumberger closed its U.S. drilling fluids business and consummated the joint venture with Smith on a worldwide basis -- the very transaction consummated by Smith and Schlumberger on July 14, 1999 -- "DOJ could oppose this and argue that it violates the Consent Decree which purports to apply to US and non US." GX 17 at 2-3.
102. Schlumberger has produced nothing in writing that contradicts the legal advice set out in these three documents.
103. On July 13, 1999, before Smith and Schlumberger consummated the revised joint venture, Smith received a letter from Deputy Assistant Attorney General John Nannes telling Smith that in the view of the Justice Department, consummating the joint venture "would clearly violate the Final Judgment." GX 27; Grijalva Dep. at 218:3-218:21 (Tr., 11/19/99, at 10:7-19); Tr., 11/23/99, at 42:7-42:16, 82:11-86:17 (Grijalva); GX 28. Schlumberger knew that in the view of the Justice Department, Smith and Schlumberger would violate the Final Judgment if they consummated the joint venture. Grijalva Dep. at 218:22-219:12 (Tr., 11/19/9, at 10:20-11:6). Schlumberger also knew that the letter meant that the Justice Department would take some kind of action against Schlumberger if it proceeded with the transaction. Tr., 11/24/99, at 34:13-39:1 (Wilson); GX 29.
104. Schlumberger never sought modification or clarification of the Final Judgment before consummating the joint venture, even though they knew they could. GX 11 at 2; GX 15 at 1; GX 16 at 1; GX 17 at 2; GX 19 at 1; Tr., 11/23/99, 91:18-92:22 (Grijalva), 154:6-154:23 (Gunderson).
105. Schlumberger's General Counsel abdicated his responsibility to render sound legal advice to the corporation. Jim Gunderson, General Counsel for Schlumberger, never undertook an independent review of whether the revised joint venture was prohibited under the Final Judgment. Tr., 11/23/99, at 144:7-145:14, 146:11-146:19, 148:22-148:25 (Gunderson); Gunderson Dep. at 90:11-92:12, 93:9-93:20 (Tr., 11/19/99, at 12:22-14:7). He failed to do this even in light of the fact that he knew that the key legal instrument in determining whether Smith and Schlumberger could consummate the revised joint venture was the Final Judgment. Gunderson Dep. at 95:21-97:11. When shown Paragraph IV.F. at his deposition, Mr. Gunderson was not sure he had ever read the provision before seeing it in the Government's contempt pleadings. Gunderson Dep. at 90:11-92:12, 93:9-20, 95:21-97:11 (Tr., 11/19/99, at 12:22-15:12).
106. As a further sign of Schlumberger's reckless disregard of this Court's Final Judgment, despite the clear warning from the Justice Department and the clarity of the language of the Final Judgment, Schlumberger chose to proceed based on business considerations. Schlumberger was losing significant business in the North Sea. GX 22. Schlumberger believed that Smith was unfairly telling customers that the joint venture between Smith and Schlumberger would go through, and that these customers were therefore giving Smith business under the assumption that Smith would ultimately be managing the drilling fluids contract. GX 22; GX 23. Schlumberger needed to consummate the transaction, or else Schlumberger "[w]ithin a couple of weeks [would] have very little to contribute to the JV," and Smith might "ask for more money or try to back out of the deal." GX 23.
107. The United States has proven beyond a reasonable doubt that Schlumberger aided and abetted Smith in committing criminal contempt and is therefore guilty of criminal contempt in violation of 18 U.S.C. §401(3).
108. The United States has proven by a preponderance of the evidence that Smith and Schlumberger are in civil contempt of this Court's order. Civil contempt "is a sanction to enforce compliance with an order of the court or to compensate for losses or damages sustained by reason of noncompliance." McComb, 336 U.S. at 191. "The measure of the court's power in civil contempt proceedings is determined by the requirements of full remedial relief." Id. at 193. The equity power of the courts includes the authority to order rescission where that remedy is appropriate. SeeJ.I. Case Co. v. Borak, 377 U.S. 426, 433-34 (1964); United States v. Coca-Cola Bottling Co., 575 F.2d 222, 228-30 (9th Cir. 1978).
109. Respondents have violated the clear and unambiguous provisions of the Court's order and continue to profit from their violation every day that the joint venture continues. SeeITT Continental Baking, 420 U.S. at 240 (violation of consent decree by making prohibited acquisition "continues until the assets obtained are disgorged"). Rescission of the transaction is the only remedy that would effectively restore the status quo ante and protect the integrity of the Court's order. Coca-Cola, 575 F.2d at 228. Respondents fully understood that recission was a possible remedy for contempt. Sutton Dep. at 201:24-202:8 (Tr., 11/18/99, at 170:9-170:17). Having ignored the Final Judgment to form the joint venture, Respondents cannot now avoid recission by arguing it would be burdensome or costly to undo the transaction. Any hardship resulting from recission is of Respondents' own making.
110. In addition to ordering recission, the Court may order a fine to coerce Respondents into compliance with the Court's order. SeeShakman v. Democratic Organization of Cook County, 533 F.2d 344, 349 n.9 (7th Cir. 1976). In determining the amount of the coercive fine, it is proper to take into account the contemnor's financial resources and ability to pay. See, e.g., United States v. International Bus. Mach. Corp., 60 F.R.D. 658, 667 (S.D.N.Y. 1973). If the Court determines that a daily coercive fine is appropriate in this case, it should take into account both the large size of Smith and Schlumberger and the profits they are reaping from their illicit joint venture.
111. In addition to ordering recission, the Court should order Respondents to disgorge all profits from the joint venture from July 14,1999, to the date that the transaction is rescinded or Respondents otherwise cease to be in contempt. SeeSEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307 (2d Cir. 1971). The profits reaped from Smith and Schlumberger's illegal joint venture provides a surrogate measure of compensatory damages, because, in this case, no method exists to calculate the harm to antitrust enforcement from Respondent's violation of the Court's decree. In re General Motors Corp., 110 F.3d 1003, 1018 n.16 (4th Cir. 1997); Manhattan Indus., Inc. v. Sweater Bee by Banff, Ltd., 885 F.2d 1, 6 (2d Cir. 1989) ("Such profits are 'an equivalent or a substitute for legal damages . . . .'"); Connolly v. J.T. Ventures, 851 F.2d 930, 934 (7th Cir. 1988). "'[U]nder a theory of unjust enrichment, a contempt plaintiff is entitled to defendant's profits without submitting direct proof of injury, much less proof that any such injury 'approximated in amount the defendant's profits . . . .'" Manhattan Indus., 885 F.2d at 6 (quoting Monsanto Chem. Co. v. Perfect Fit Prods. Mfg. Co., 349 F.2d 389, 395 (2d Cir. 1965)).
112. The evidence at trial demonstrated that Smith and Schlumberger were driven by their bottom lines, despite knowing of legal limitations on their conduct. No remedy but recission or disgorgement would prevent their conduct from being financially beneficial -- and therefore worth repeating. The amount to be disgorged should include the profits realized by the joint venture during the period of the contempt, and the United States is entitled to those profits as a measure by which Respondents were "unjustly enriched." Id.; see alsoFTC v. Gem Merchandising Corp., 87 F.3d 466, 470 (11th Cir. 1996) (the United States Treasury is the appropriate recipient of the disgorged funds).
113. Because this Court's broad equitable powers permit the disgorgement remedy and because, in the absence of recission, disgorgement is the only way to ensure that Smith and Schlumberger do not realize pecuniary benefit from their violation of the Court's order, the Court should order an accounting and disgorgement of all profits derived from the Smith/Schlumberger joint venture from its inception on July 14, 1999. In addition, the Court should order Respondents to pay the United States' costs in pursuing this contempt action.
1. The trial transcript will be cited in this memorandum as "Tr." followed by the date, page and line numbers, and name of the witness. Government exhibits will be cited as "GX" followed by the exhibit number and, where appropriate, a page designation, or in the case of GX 42, an admission number. The Respondents' exhibits similarly will be cited as "RX" followed by an exhibit number. Depositions taken by Department of Justice attorneys will be cited as "Dep." preceded by the last name of the witness and followed by page and line numbers and the trial transcript reference.