author: MORAN, District Judge.

text:
    JAYS FOODS, INC., a corporation, Plaintiff, v. FRITO-LAY, INC., a corporation, Defendant.
    No. 78 C 4352.
    United States District Court, N.D. Illinois, E.D.
    Aug. 1, 1985.

      Francis J. McConnell, McConnell, Ruberry & Jansen, Anthony S. DiVincenzo, Campbell & DiVincenzo, John Brezina, David Brezina, Burton, Ehrlich, Brezina & Buckingham, Chicago, Ill., for plaintiff.
    Jeffrey Dorman, Kenneth H. Hoch, Earl E. Pollock, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, Ill., for defendant.
   MEMORANDUM AND ORDER

MORAN, District Judge.

This action, in which plaintiff Jays Foods (Jays) alleges that it was a victim of predatory pricing, comes before this court ten years after the seminal article by Professors Areeda and Turner which outlined a cost-based definition of predatory pricing. Areeda and Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975). Defendant Frito-Lay’s (Frito-Lay) motion for summary judgment on Count I requires this court to determine what fealty to give cost-based tests of predatory pricing in light of a decade of judicial responses to the article and its progeny. It also comes in the wake of full and complete discovery. The question, therefore, is whether there is sufficient evidence to create triable issues.

I.

Frito-Lay is a national producer of a full range of salty snack foods such as potato chips and pretzels. Its competitors include regional suppliers of a more limited range of snack foods. Jays is one of these regional competitors. Its primary product is potato chips and its market consists of parts of Illinois, Wisconsin, Michigan and Indiana.

In an antitrust ease plaintiff has the burden of establishing the relevant product and geographic markets. See L.A. Draper & Son v. Wheelabrator-Frye Co., 735 F.2d 414 (11th Cir.1984). While Jays’ complaint covers several products and geographic markets, for purposes of the motion for summary judgment the relevant geographic market is the Chicago area and the relevant product is potato chips. The summary judgment motion is further focused on the sale of potato chips in supermarkets. Supermarket sales account for over 60 per cent of the total sales of snack foods. The Chicago market is presumably the center of Frito-Lay’s allegedly illegal competitive practices, and is the largest market served by Jays.

Potato chip sale levels are related to the amount of supermarket shelf space available to a supplier. Sales levels are also related to promotional incentives given stores and their customers. Sufficient shelf space is also required to introduce new products. Stores allocate shelf space to suppliers on the basis of the sales of each supplier’s products.

There seems to be little doubt that in the day-to-day commercial warfare between snack food suppliers the key battle is over shelf space. Frito-Lay believed that the company with the greatest share of potato chip business would control the entire salty snack sections of the supermarkets. Because potato chip sales were the core of the regional competitors’ strength, Frito-Lay especially sought to increase its market share of potato chips. In its complaint Jays alleges that Frito-Lay provided misleading and inaccurate market studies to major retailer chains in order to increase its share of shelf space at the expense of other competitors. Frito-Lay also allegedly engaged in advertising and promotional practices which helped it to secure additional shelf space. Finally, Frito-Lay allegedly used its dominance in the corn chip market as leverage to induce stores to provide additional shelf space for its other products.

During the 1974-1980 period which is the subject of this lawsuit, Jays was the larger of the two potato chip suppliers in the Chicago area. During the same period Jays was apparently attempting to expand into other salty food product lines and become a supplier of a full range of snack products. Both companies’ sales grew during this period. In 1974 Frito-Lay’s Chicago division had total sales of $7,559,630 and showed a loss of $35,329. By 1980 its sales had .nearly doubled to $13,545,170 and its profits had reached $1,057,830. The record does not contain figures for Jays’ performance in the Chicago market. Jays’ total net sales grew from $22,970,172 in 1974 to $44,352,969 in 1980. Jays’ pretax profits rose from $139,749 in 1974 to $2,319,620 in 1977, before tapering off to $948,557 in 1980. The record does not indicate what shifts occurred in each company’s share of the Chicago potato chip market.

The record makes clear that Chicago was one of the “problem” markets for Frito-Lay. Frito-Lay faced strong local competition in potato chip sales and its performance lagged relative to other markets. Consequently, Frito-Lay devoted extra promotional and advertising resources to the Chicago market. These promotions included substantial price discounts, some of which were unauthorized, and a strong emphasis on potato chips in the supermarket display shelves (“overfacing”).

The record suggests that Frito-Lay set its prices with an eye towards competitive conditions. A summary of Frito-Lay’s pricing objectives identified three approaches to pricing based on market conditions. In high-growth product categories, where Frito-Lay had market leadership, prices were to be set “most aggressively.” In low-growth categories, where Frito-Lay had shared market leadership, prices were to be less aggressive. Finally, in “low-growth categories where we do not dominate we will price competitively (e.g. potato chips).”

What is also evident from the record is that Frito-Lay’s guide in setting prices was its corporate financial goals. Its pricing decisions were “designed to maintain total corporate gross margin at target level of 50%."

According to Jays, Frito-Lay also sold potato chips in Chicago for a lower profit in order to increase its market share. Frito-Lay purportedly was willing to lower its profit in Chicago and other problem markets because it could subsidize these lower profits with the higher profits earned in markets where it faced little or no competition. Frito-Lay’s prices for identical products varied from market to market, at least in part because Frito-Lay took over regional companies with established price patterns. Regional price variations also resulted from the different competitive conditions faced by Frito-Lay in various markets. Frito-Lay prices for some potato chip products in the Chicago market were lower for significant periods than prices for the same products in other markets.

Jays’ first amended complaint contains three counts. Count I alleges that Frito-Lay has engaged in predatory pricing in violation of Section 2 of the Sherman Act. Count II is brought under Section 2 of the Clayton Act and alleges that Frito-Lay has engaged in illegal price discrimination. Count III contains pendent claims brought under the deceptive trade practices laws of the states served by Jays and alleges that Frito-Lay engaged in anti-competitive conduct. Jays claims that it sustained a loss totalling $4,311,806.73 for fiscal years 1975-1981, because of its inability to increase prices to reach a 6% pre-tax rate of return as a result of Frito-Lay’s anticompetitive conduct.

II.

In Count I Jays claims that Frito-Lay attempted to monopolize the Chicago market for potato chips in violation of Section 2 of the Sherman Act. 15 U.S.C. § 2. The elements of an attempt to monopolize are (1) intent to control prices or destroy competition with respect to a part of commerce; (2) predatory or anticompetitive conduct directed at accomplishing the unlawful purpose; and (3) a dangerous probability of success. Chillicothe Sand & Gravel Co. v. Martin Marietta Corp., 615 F.2d 427, 430 (7th Cir.1980).

The parties agree on the definition of predatory pricing as the dominant firm’s deliberate sacrifice of current revenues through lower prices for the purpose of driving rivals out of the market. Once it has vanquished its rivals, the dominant firm can more than recoup its short-term losses through higher profits earned in the absence of competition. MCI Communications Corp. v. American Telephone & Telegraph Co., 708 F.2d 1081, 1112 (7th Cir.), cert. denied, — U.S.-, 104 S.Ct. 234, 78 L.Ed.2d 226 (1983). The parties disagree on the proper test for predation, namely, the sufficiency of cost-based measures of predation and the relevance of non-cost indicia of predatory intent.

The modern era of predatory pricing analysis was ushered in by Professors Areeda and Turner. Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975). They argued that prices at or above marginal cost, even if not profit-maximizing, generally should be presumed to be non-predatory. Id. at 711. Marginal cost is the “increment to total cost that results from producing an additional increment of output.” Because marginal costs are difficult to determine, Areeda and Turner advanced average variable cost as an acceptable surrogate for marginal cost. Id. at 716-718. Variable costs are costs which vary in a short run with changes in output. Such costs include items such as materials, labor, fuel, use depreciation, and a return on investment needed to attract enough working capital to pay for variable costs. Average variable cost is total variable cost divided by output. Fixed costs, in contrast, are costs which in the short run do not vary with changes in output. Fixed costs include such items as management expenses, interest on bonded debts and other items of irreducible overhead. Total cost is the sum of fixed and variable costs and average total cost is the total cost divided by output. See generally Northeastern Telephone Co. v. American Telephone & Telegraph Co., 651 F.2d 76 (2d Cir.1981).

The Areeda & Turner formula has won wide if cautious acceptance by the courts. Some courts have hewed closely to average variable cost as the conclusive test of predatory pricing. See e.g. Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir.1983); Northeastern Telephone, supra. Most courts have recognized the central importance of a cost-based test of predatory pricing, but have noted that in unusual circumstances special market characteristics, such as high entry barriers, might permit a finding of predatory pricing even if prices were above average variable cost but below average total cost. See e.g. Chillicothe Sand & Gravel, 615 F.2d at 431-32; Pacific Engineering & Production Co. v. Kerr McGee Corp., 551 F.2d 790, 797 (10th Cir.), cert. denied, 434 U.S. 879, 98 S.Ct. 234, 54 L.Ed.2d 160 (1977); International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714, 723-25 (5th Cir.1975), cert. denied, 424 U.S. 943, 96 S.Ct. 1411, 47 L.Ed.2d 349 (1976). The Ninth Circuit has strayed most from sole reliance on a cost-based test of predation. See Transamerica Computer Co., Inc. v. IBM Corp., 698 F.2d 1377 (9th Cir.1983). See also D.E. Rogers Associates, Inc. v. Gardner-Denver Co., 718 F.2d 1431 (6th Cir.1983), cert. denied — U.S. -, 104 S.Ct. 3513, 82 L.Ed.2d 822 (1984). In Transamerica the court held that by reference to non-cost factors a plaintiff could show that a defendant engaged in predatory pricing even if its prices were above average total cost. Id. at 1386-88.

In Chillicothe Sand & Gravel the Seventh Circuit recognized the centrality of the average variable cost test in the analysis of a predatory pricing claim. It cautioned, however, that non-cost factors were not to be neglected when determining whether a defendant’s pricing policy was predatory:

[W]hile we accept the use of marginal or average variable cost as both a relevant and an extremely useful factor in determining the presence of predatory conduct we are willing to consider the presence of other factors in our evaluation of whether or not plaintiff has made out a prima facie case of monopolizing or attempt to monopolize.

615 F.2d at 432. Indeed, after concluding that defendant’s prices were above average variable cost, the Chillicothe court went on to consider and ultimately to reject a variety of non-cost factors which plaintiff had argued revealed defendant’s predatory intent. Id. at 432-34.

In MCI Communications Corp. v. American Telephone & Telegraph Co., 708 F.2d 1081 (7th Cir.), cert. denied, — U.S. -, 104 S.Ct. 234, 78 L.Ed.2d 226 (1983), the Seventh Circuit confronted allegations that AT & T had engaged in predatory pricing of two of its services for long distance business communications. MCI, 708 F.2d at 1111. The issue at MCI was not the validity of the Areeda and Turner average variable cost test; neither party ever argued for application of a short run cost standard. 708 F.2d at 1115. While MCI noted some of the shortcomings of the average variable cost test, id. at 1115-16, the decision cannot be read as a repudiation of that test. In fact, the court expressly stated that “pricing below average variable cost is normally one of the most relevant indications of predatory pricing.” Id. at 1120, n. 55.

Perhaps the strongest and most repeated criticism of the average variable cost test of predatory pricing is its focus on short term rather than long term costs. See e.g. Scherer, Predatory Pricing and the Sherman Act: A Comment, 89 Harv.L.Rev. 869, 890 (1976). Then Professor Posner, for example, recognized the usefulness of the Areeda and Turner average variable cost formula, but concluded that predatory pricing also exists when a company sells its product below its long-run marginal cost with the intent to exclude a competitor. R. Posner, Antitrust Law, at 189. Long-run marginal costs are costs that must be recovered in order for a business to survive into the indefinite future. Id. Because all costs are variable in the long run, long-run marginal costs include both the fixed and variable components of short-term costs.

In MCI the court adopted the long-run incremental cost of providing the two long distance services as the standard by which to determine if AT & T’s prices were predatory. The long-run incremental cost of producing a product is total company cost minus what the total cost of the company would be in the absence of manufacturing the product, divided by the quantity of product being manufactured. See Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 Yale L.J. 1, 9, n. 26 (1979). Long-run incremental cost includes fixed as well as variable cost of both capital and operating items. Unlike measures of fully distributed cost, long-run incremental cost is calculated with reference to current and anticipated cost, rather than historical or imbedded cost. MCI, 708 F.2d at 1116-18. The long-run incremental cost test, in short, measures the costs caused by the production of a product. Id. at 1116. Other courts have been slow to adopt the long-run incremental cost approach.

MCI is also important for its discussion of the role of non-cost factors in the analysis of predatory pricing. The court’s most complete statement on the issue was:

We do not intend to imply that in all cases and in all circumstances we would only examine the price-cost relationship of a product or service. Our test merely suggests that a judge and jury may not infer predatory intent unless price is below long-run incremental cost____ [However,] a strong presumption of lawfulness must attach when price is shown in a case like this one to be an appropriately derived measure of incremental cost.

708 F.2d at 1123, n. 59 (emphasis in original).

The legacy of Chillicothe and MCI is clear but incomplete. There are two cost-based tests for predatory pricing. The average variable cost test focuses on short-term cost. The long-run incremental cost test measures the long-term cost caused by the production of product. While non-cost factors are important adjuncts to the cost-based tests, the cost tests play the central role in the analysis of predatory pricing. The Seventh Circuit has not indicated if it will follow the Ninth Circuit in holding that prices above short-run total cost may in some circumstances be predatory. It reasonably can be implied from MCI and Chillicothe, however, that prices above average variable cost but below average total cost might be predatory in light of striking non-cost indicia of predation or unusual market conditions.

III.

For a predatory pricing action of this magnitude, the data on prices and costs are disconcertingly meager (Ex. 41). Plaintiff concludes that “since Frito-Lay does not regularly isolate total cost for any division, including Chicago, these [cost] records do not permit the determination of costs for potato chips sold in Chicago.” In its brief plaintiff devotes six pages demonstrating that the cost data are incomplete and capable of various interpretations. Plaintiff’s position is that as a matter of law it need not show that Frito-Lay priced potato chips below applicable cost levels or, alternatively, that the inadequacy of the cost data precludes summary judgment. Defendant argues that it is entitled to summary judgment because the plaintiff has not marshalled cost data in acceptable form and because the existing data indicates that its prices were not predatory.

The key piece of cost data is a “total cost study” covering the years 1974-1980, which plaintiff prepared for use in cross-examining the defendant’s expert. The study shows that Frito-Lay’s total costs were generally under its revenues. Plaintiff explains that the cost study is inaccurate because it relies upon overly conservative methodological assumptions. Plaintiff stated that it intended to provide better and presumably more favorable cost data at a later date, though it has provided relatively little in the many months during which Frito-Lay’s motion has languished.

The cost study purports to show the total cost of manufacturing, promoting and selling potato chips in Frito-Lay’s Chicago division. The total cost figures includes the amounts expended upon (1) manufacturing, (2) selling and freight, (3) advertising and merchandising, and (4) general and administrative expenses. The study, which is broken down into four-week periods, reveals that Frito-Lay lost $459,275 in 1974 and $292,521 in 1975, and showed profits of $75,819, $7,022, $303,787, $186,524 and $1,057,830 in the years 1976 to 1980, respectively.

A. Average Variable Cost

The cost study is flawed as an indicator of average variable cost. For example, it does not differentiate between the fixed and variable components of total cost. On its face, however, the study suggests that Frito-Lay’s average variable cost did not regularly exceed its per unit prices. First, because average variable cost is but a part of total cost, Frito-Lay could not have been selling above variable cost in the years (1976-1980) in which its sales revenue exceeded its total cost. Second, the 3% difference between sales revenue and total cost in 1975 would almost certainly be substantially less than the percentage of total costs which were fixed.

Plaintiff has undertaken its own analysis of average variable cost for a single four-week period in 1976 (Ex. 68). It determined that average variable cost exceeded sales revenue by $3,559 during the period. When viewed in context, this finding actually supports defendant’s position. First, plaintiff considered 99% of total manufacturing cost and 98% of total non-manufacturing cost during the period to be variable, surely an over-estimation given the short time span. Second, according to the total cost study, Frito-Lay’s loss during this four-week period was its third worst of the 91 periods covered by the study. Frito-Lay’s loss during this period fell under the 1974 profit/loss average by $42,571. Corresponding figures for the years 1975 through 1980 were $58,856, $153,719, $84,-922, $100,977, $169,227 and $236,196, respectively. That Frito-Lay’s revenues fell below average variable cost by only $3,559 in such an abysmal performance period, and that this figure is based upon questionable methodological assumptions, can only mean that Frito-Lay’s prices were above average variable cost in almost all other periods.

Plaintiff appears to suggest that it is entitled at a minimum to recover treble damages for each four-week period in which Frito-Lay’s potato chip revenues fell below its total cost for the same period. Average variable cost and not total cost is, however, the short-run cost measure. Even assuming that Frito-Lay’s average variable cost was above its revenue during some four-week periods — a questionable assumption given plaintiff’s designation of all but a miniscule percentage of cost as variable — it is doubtful whether plaintiff is entitled to base its recovery on such short-term perturbations. It is unclear from the cost study what degree of correspondence there is between the revenue derived from sales during the period and the costs allocated to that period. More importantly, given the relatively long periods between Frito-Lay’s price changes (Ex. 5), and the short-run fluctuations in costs shown in the cost study, it is not evident that Frito-Lay priced below its reasonably anticipated average variable cost. See Areeda & Turner, Antitrust Law, If 715(d) at p. 174.

While marginal cost generally is below average total cost, at high levels of production where production facilities are operating beyond optimum capacity marginal costs may be above average total cost. Areeda & Turner, Antitrust Law (1982 Supp.) 11715.4(c) at p. 155. In rare cases a defendant who operates a plant well beyond its optimum capacity may be engaged in predatory pricing even while earning significant profits. Id. at 156.

Plaintiff suggests that Frito-Lay’s production facilities were being utilized at the level well over optimum capacity during the relevant period. The evidence is far from conclusive in this regard. Plaintiff has produced evidence which indicates that Frito-Lay officials were concerned about expanding snack food production facilities nationwide to keep pace with growing demand. The record also shows that there were spot shortages of Frito-Lay products in some areas due to strikes, poor materials, bad weather, and, on occasion, capacity constraints due to spurts in demand caused by promotions. The existence of spot shortages does not necessarily indicate that production facilities were over-utilized. In fact, Frito-Lay could well have decided to have spot shortages rather than to utilize production facilities uneconomically at well over optimum capacity.

The only hard evidence of the utilization of Frito-Lay’s potato chip production facilities nationwide does not indicate sustained production at over-capacity levels. Records from 1979 show that Frito-Lay operated its potato chip production facilities at over 100% of capacity for only two weeks and production levels during these weeks never exceeded 105% of capacity. The running average for capacity utilization for the year never exceeded 90%. Capacity utilization records for the first half of 1980 show only one big jump during a single week to 100% capacity utilization. Capacity utilization over the six four-week periods averaged only 77.4%.

This data is of limited use because of its nationwide scope. The only information about production levels at the Allen Park plant, the largest supplier of potato chips for the Chicago market, suggests that in 1979 and 1980 capacity well exceeded demand. In 1979 capacity was 5900 units, while demand was projected to be 2,731 units. In 1980 capacity was unchanged and demand was expected to rise to 3,085 units. Projected demand was well under capacity of the Allen Park plant through 1983.

While establishing that Frito-Lay was concerned about maintaining adequate capacity in the face of rising demand and that a variety of circumstances led on occasion to spot shortages, plaintiff has done no more than establish that in three out of seventy-six weeks Frito-Lay’s plants nationwide were operating at over 100% but under 110% of capacity. During a good portion of the same period demand was apparently less than 50% of capacity at the plant which supplied most of the potato chips to the Chicago market. Even assuming that marginal costs did exceed average total costs during several weeks — a questionable assumption given the slight extent of the production over capacity — and assuming that the Allen Park plant was over-utilized — a fact for which there is no support — this court would be reluctant to base liability on such short-term periods of production over capacity levels. Such an approach would be inconsistent with the purpose of the antitrust laws. Companies would be reluctant to engage in vigorous price competition if they faced treble damages for each period, no matter how short, that their prices happened to fall below their marginal cost because of unusually high production levels. Cf Barry Wright Corp., 724 F.2d at 234 (arguing against too rigid an adherence to economic principles in antitrust analysis).

The shortcomings of plaintiffs position might be overcome by three factors. First, there is no evidence in the record as to the utilization of Frito-Lay’s potato chip plants during much of the period covered by the lawsuit. Perhaps capacity constraints were greater from 1974 through 1978. Second, not all the potato chips for the Chicago market were produced at the Allen Park plant. Conceivably, production levels at the other plants supplying Chicago were substantially above capacity. Third, the optimum capacity of the Frito-Lay plants could have been below the full capacity level established by Frito-Lay. The existing plant utilization data thus might understate the extent to which production exceeded optimum capacity. Yet, after extensive discovery, plaintiff has not been able to advance evidence in support of any of these suppositions.

B. Long-Run Incremental Cost

The data is even more unsatisfactory with respect to long-run incremental cost. Both parties agree that plaintiff’s cost study is a measure of fully distributed costs. The Seventh Circuit has rejected fully distributed cost as a standard with which to examine a company’s long-term pricing policy. MCI, 708 F.2d at 1119-23. In some circumstances fully distributed costs may be an acceptable proxy for long-run incremental costs. See MCI, 708 F.2d at 1116, n. 47. For example, the average balance sheet cost of a single product enterprise in a stable economy may provide an acceptable proxy for long-run incremental cost. Id. Frito-Lay, however, produces numerous products. During the period covered by the lawsuit the economy was not stable. The potato chip market itself was dynamic and Frito-Lay was making significant capital expenditures in new plants in order to meet rising demand.

One can draw suppositions from the data in favor of both parties. For example, in its supplemental memorandum Jays presents a revised cost study which adds the costs of attracting investment capital to the tally of total costs. Capital costs are properly included in the calculation of long-run incremental cost. MCI, 708 F.2d at 1118. As revised, plaintiff’s cost study shows that Frito-Lay’s total cost of producing potato chips for the Chicago market exceeded its revenues. Moreover, plaintiff’s cost study may understate the actual and anticipated costs from which the long-run incremental cost figure is derived.

On the other hand, as defendant points out, the total cost study may significantly overstate the costs attributable to the production of potato chips for the Chicago market. Long-run incremental costs include only those costs attributable to the production of a particular product. Apparently, not all of the costs which Frito-Lay would have incurred even if it were not producing potato chips have been deducted from the total cost study. For example, the administrative expenses which Frito-Lay would have incurred in the absence of supermarket potato chip lines might not have been significantly different than the amount of administration expenses shown in the total cost study. If so, the figures for administrative expenses are substantially inflated for purposes of a measure of long-run incremental cost. In sum, the data is so fragmentary that no meaningful judgment can be made as to whether Frito-Lay priced its supermarket potato chips beneath its long-run incremental cost.

IV.

Jays’ position is that non-cost factors alone can be determinative of Frito-Lay’s liability. Chillicothe and MCI cast substantial doubt on this position, at least in the usual predatory pricing case. Yet, the decisions do require consideration of non-cost factors in conjunction with the application of cost-based measures of predation.

A. Profit Cross-Subsidization

Jays has assembled evidence that Frito-Lay set prices on a regional basis. In regions where Frito-Lay had relatively little competition, prices were set higher than in regions like Chicago, where Frito-Lay faced vigorous competition. Jays , argues that Frito-Lay compensated for the lower profits it earned in Chicago by charging higher prices elsewhere. According to Jays, Frito-Lay’s lower prices in Chicago were predatory. In MCI the Seventh Circuit considered and rejected an identical profit cross-subsidization theory. The court stated that the so-called subsidization of low prices in competitive markets by higher prices in less competitive markets was actually a chimera, as long as the price in the competitive market exceeded long-run incremental cost in that market:

When a multiproduet firm prices a competitive service above its long-run incremental cost, no cross-subsidy can occur because the additional revenues produced exceed all additional cost associated with the competitive service and provide a contribution to the unallocable common cost otherwise borne by the firm’s existing customers.

MCI, 708 F.2d at 1124. Assuming that Frito-Lay's potato chip prices in Chicago were set above long-range incremental cost, no cross-subsidization occurred for which liability could attach on a monopolization theory.

B. Profit Maximization

In a position related to the theory of price cross-subsidization, Jays argues that Frito-Lay’s purported failure to maximize its profits in Chicago was conclusive evidence of predatory pricing. The MCI court left no doubt of its rejection of the profit maximization theory:

[W]e must reject such “profit maximization” theory as incompatible with the basic principles of antitrust. The ultimate danger of monopoly power is that prices will be too high, not too low. A rule of predation based on the failure to maximize profits would rob consumers of the benefits of any price reductions by dominant firms facing new competition. Such a rule would tend to freeze the prices of dominant firms at the monopoly levels and would prevent many pro-competitive price cuts beneficial to consumers in other purchases.... It is in the interests of competition to permit dominant firms to engage in vigorous competition, including price competition. We therefore reject MCI’s “profit maximization” theory and reaffirm this circuit’s holding that liability for predatory pricing must be based upon proof of pricing below cost.

MCI, 708 F.2d at 1114 (footnote and citations omitted). In this case Frito-Lay was not even the largest supplier of potato chips for the Chicago market. Its adoption of non-profit maximizing prices in response to Jays’ competitive challenge was thus more reasonable and more necessary than if it had been the dominant supplier.

C. Entry Barriers

Jays describes the barriers to entering the snack food market as “almost insurmountable.” As common sense suggests, supermarket sales of potato chips depend to a large extent upon the shelf space allocated to a supplier. A supplier needs adequate shelf space to compete successfully in the cacophony of kinds, colors, shapes and sizes of the various snack food products and their packages. Too little shelf space creates difficult supply problems requiring frequent restocking. Inadequate shelf space will also hinder expansion into new product lines. Supermarkets allocate shelf space on the basis of sales. Because they allocate shelf space relatively infrequently, and because of the tie between shelf space and sales, shelf space once lost is difficult to regain. Getting shelf space in the first place can be a daunting task.

Jays’ position is that the link between sales and shelf space, the difficulties in recapturing lost space, and the obstacles to gaining access to supermarket shelves, create a substantial barrier to entry into the Chicago potato chip market. This barrier was important for two reasons. First, because barriers to entry protect the inflated profits of a monopolist, the attractiveness of predatory pricing is directly proportional to the height of the barriers. Second, Jays argues that the efforts taken by Frito-Lay to increase its allocation of shelf space reflects Frito-Lay’s predatory intent.

In the absence of substantial evidence to the contrary, this court has doubts as to whether the purported entry barriers caused by shelf space limits are unusually high for potato chips. Presumably all products for which supermarket sales are important can be said to have equally high entry barriers. Assuming the existence of entry barriers, it is also unclear whether Jays, the largest potato chip supplier in the Chicago area, faced unusual difficulties in maintaining or expanding its share of supermarket shelf space or in penetrating into new supermarkets.

MCI appears to minimize the importance of high entry barriers in the analysis of predatory pricing. Some courts have held that high entry barriers may make prices above average variable cost but below short run profit maximizing levels predatory. See e.g. International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714, 724 (5th Cir.1975), cert. denied, 424 U.S. 943, 96 S.Ct. 1411, 47 L.Ed.2d 349 (1976). The MCI court did suggest that in some circumstances a short-run average variable cost test might be inappropriate where entry barriers are high, 708 F.2d at 1121, n. 57. Yet, the court indicated that high entry barriers did not affect the viability of a measure of average total cost, such as the long-run incremental cost test. Indeed, entry barriers may not even have to be considered when the long-run incremental cost test is employed:

An important, but presently theoretical, issue not directly before this court is the propriety of using short-run marginal cost (as opposed to some measure of average total cost) in predatory pricing cases involving industries with high entry barriers ... there is some evidence that barriers to entry may be high in the long distance telecommunications field. There is also evidence, however, that the development of microwave technology has significantly lowered these barriers. Because the parties here have argued from measures of average total cost we do not reach this question.

Id. (emphasis added) (citation omitted). The MCI court never considered the effects of entry barriers as part of its application of the long-run incremental cost test.

In this case it is near certain that Frito-Lay priced its potato chips above average variable cost. When all inferences are drawn in plaintiff’s favor it appears, however, that entry barriers in the Chicago market might be high enough to east some doubt on the propriety of strict adherence to the average variable cost test in the face of convincing non-cost evidence of predatory behavior. MCI seems to indicate that the long-run incremental cost test is unaffected by the presence of high entry barriers. Here the long-run incremental cost data is too rudimentary for a supportable conclusion that there has been predation.

Jays also points to evidence of anti-competitive efforts by Frito-Lay to increase its share of supermarket shelf space. When all inferences are drawn in Jays’ favor, it appears that some Frito-Lay employees may have attempted to buy extra shelf space and to sabotage supermarket tests of snack food sales in order to obtain more space. While such evidence, if true, is not conclusive of liability, this being after all a predatory pricing case, it has some weight as circumstantial evidence of a predatory scheme.

D. Expressions of Predatory Intent

Jays has culled from the Frito-Lay files various expressions of competitive combativeness by Frito-Lay employees. Courts are to approach purported expressions of predatory intent by company officials warily:

Even if it were possible to identify those persons within a firm whose intentions are relevant, the meaning of the evidence will usually be obscure. After all, competition consists of winning business from rivals. The intent to preserve or expand one’s market share is presumptively lawful. To encourage judges and juries to rely overly on non-probative data allegedly bearing on a firms “state of mind” invites the twin mischiefs of (1) burdening the litigation with thousands of documents about the firm’s motives and calculations, and (2) encouraging inconsistent and quixotic results.

MCI, 708 F.2d at 1113.

The closest the evidence comes to a “smoking pistol” is a statement in a memorandum:

Maximum Impact on Competition —By placing incremental effort behind these low share markets, we would maximize the effectiveness of our spending, since these markets account for 77% of the volume of our top five competitors and 77% of all branded competition. This is significant since the bulk of our major competition’s volume/profit comes from their potato chip business. Focusing our efforts on potato chip growth is most likely to hinder aggressive competitive expansion, (emphasis added)

This statement, however, is part of a discussion of where Frito-Lay should focus its promotional resources and is not directly connected to Frito-Lay’s pricing policy. It is alone far from conclusive on the issue of whether Frito-Lay engaged in predatory pricing. The remaining intent evidence appears to be primarily naive expressions of competitive zeal. In short, the existing evidence of predatory intent has only some limited weight as corroborative circumstantial evidence of Frito-Lay’s predatory intent. Standing by itself, the intent evidence is wholly insufficient to establish Frito-Lay’s predatory intent.

E. Price and Promotional Discrimination

Jays provide some evidence that Frito-Lay ran promotions featuring price discounts longer in Chicago than in other markets and generally devoted more merchandising resources to the zone of which Chicago was a part. Even if true, these things do not necessarily indicate predatory pricing. The same principles that apply to Jays’ product maximization and profit price cross-subsidization arguments apply in this instance. So long as Frito-Lay priced potato chips above its average variable cost and its long-run incremental cost, then there is no compelling reason to deny Chicago consumers the benefits of longer and greater promotional discounts. While the social benefits of increased advertising might be debated, there is nothing inherently predatory about heavy advertising in highly competitive markets.

V.

Courts generally approach summary disposition of complex antitrust eases with caution. See Lupia v. Stella D’Oro Company, Inc., 586 F.2d 1163 (7th Cir.), cert. denied, 440 U.S. 982, 99 S.Ct. 1791, 60 L.Ed.2d 242 (1979). This is especially true in antitrust cases where motive and intent play leading roles. Feldman v. Health Care Service Corp., 562 F.Supp. 941 (N.D.Ill.1982). If, however, after completion of discovery it is clear that the plaintiff will not be able to establish an essential element of its claim, summary judgment in defendant’s favor is warranted. Products Liability Insurance Agency, Inc. v. Crum & Forster Insurance Companies, 682 F.2d 660 (7th Cir.1982).

The parties have completed discovery and filed a massive pretrial order. If the court denies Frito-Lay’s motion for summary judgment the parties will go to trial using exactly the same body of evidence that they have drawn upon for their briefs. This trial is optimistically estimated to last six weeks. It will expose Frito-Lay to treble damages.

Jays simply has failed to make out even the outlines of a case of predatory pricing. MCI makes clear that an essential element of a predatory pricing case is proof that defendant’s prices were below average variable or long-range incremental costs. After completing its discovery and after having many months to send legions of experts through the thickets of cost data, plaintiff has failed to come close to satisfying either cost standard. In fact, to the extent it is usable, the available cost data indicates that Frito-Lay’s pricing policy was not predatory.

Jays rests its case upon the legal proposition that non-cost evidence can support a predatory pricing claim. A weak pricing ease can perhaps be rescued by convincing non-cost evidence. But here plaintiff’s pricing data is anemic at best and its non-cost evidence is unilluminating.

Because it is based largely upon empirical factors, predatory pricing analysis does not depend upon considerations of motive and intent. That barrier to summary judgment is thus not at issue. Now that the pretrial order is entered there is no possibility that Jays can divine cost figures or uncover non-cost evidence that reveals predatory pricing. Even though it has made a Herculean effort, Jays has advanced a case that rests largely upon speculation and conjecture. In order to avoid presenting a jury with such a case, the court has no option under the circumstances but to grant Frito-Lay’s motion for summary judgment.

VI.

Count II is brought under the RobinsonPatman Act, 15 U.S.C. § 13(a), which provides that

it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale ... and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce.

Plaintiff moves for summary judgment on that count.

There are three contested issues with respect to Jays’ Robinson-Patman Act claim: whether Frito-Lay (1) discriminated in price; (2) in the sale of goods of like grade and quality; (3) such that competition was substantially lessened. Plaintiff’s motion is directed only at the first two issues. For purposes of the motion Jays focuses only on the sale in the Chicago market of supermarket-sized products within the categories of (1) Lays/Frito-Lays; (2) Ruffles; and (3) flavored potato chips.

The extent to which a product is of like grade and quality as another product depends on “the characteristics of the product itself.” FTC v. Borden Co., 383 U.S. 637, 641, 86 S.Ct. 1092, 1095, 16 L.Ed.2d 153 (1966). In Borden the court held that evaporated milk produced and sold under the Borden name was of like grade and quality as that which Borden produced for sale at lower prices under other brand names. The physical and chemical identity of the two products, rather than brand names and consumer preferences, are conclusive of the like grade and quality question. Id. at 639-640, 86 S.Ct. at 1094-1095.

Defendant emphasizes the physical differences between the various lines of Frito-Lay products marketed in Chicago and throughout the country. The likeness of grade and quality of, for example, a plain potato chip and a flavored ridged potato chip presents a genuine issue of fact which cannot be resolved upon a motion for summary judgment. See Checker Motors Corp. v. Chrysler Corp., 283 F.Supp. 876, 888-89 (S.D.N.Y.1968), aff'd 405 F.2d 319 (2d Cir.), cert. denied, 394 U.S. 999, 89 S.Ct. 1595, 22 L.Ed.2d 777 (1969). Jays’ motion, as this court understands it, is directed instead towards establishing only that the various lines of supermarket-sized Frito-Lay products sold in Chicago were substantially identical to the same items Frito-Lay sold in the same supermarket-sized packages outside of Chicago. So, for example, barbecued potato chips sold in supermarket-sized packages in Chicago are substantially identical to barbecued potato chips sold in supermarket-sized packages elsewhere, but not substantially identical to ridged potato chips sold in supermarket-sized packages. The evidence supports this rather unremarkable proposition.

Price discrimination under the Robinson-Patman Act “is merely a price difference.” FTC v. Anheuser-Busch, Inc., 363 U.S. 536, 549, 80 S.Ct. 1267, 1274, 4 L.Ed.2d 1385 (1960). Jays has advanced evidence that Frito-Lay prices for its supermarket-sized products were sometimes lower in the Chicago market than elsewhere. Frito-Lay provides evidence that its prices were sometimes higher in Chicago than elsewhere. Frito-Lay also argues that the price differentials were simply inherited from the local companies which it absorbed. See Dean Milk Company v. FTC, 395 F.2d 696, 700-03 (7th Cir.1968). Summary disposition of this issue is unwarranted in view of the uncertainty of the data. It would seem, however, that the parties ought to be able to agree on historical pricing data, thus eliminating the need for evidence on that issue, and perhaps on post-1978 promotional campaign discounts.

Conclusion

Defendant’s motion for summary judgment on Count I is granted. Plaintiff’s motion for summary judgment on Count II is granted in part within the parameters as set out in the opinion. Defendant’s motion for summary judgment on the Count II price discrimination issue is denied.

      . Jays filed its complaint on Nov. 3, 1978. Frito-Lay argues and Jays concedes that the four-year statute of limitations, 15 U.S.C. § 15b, bars Jays from recovering damages suffered prior to Nov. 3, 1974.

      . Frito-Lay apparently had more than a 25% share of the potato chip market by mid-1978. By the late 1970s Jays potato chips outsold Frito-Lay potato chips within Chicago, but Frito-Lay had a 55% share of the total salty snack food business in Chicago while Jays’ share of that market was 24%.

      . Courts generally have held that plaintiff makes out a prima facie case of predatory pricing by showing that defendant’s prices fell below average variable cost and are thus presumptively predatory. When prices are above average variable but below average total cost plaintiffs must rebut the presumption that the prices are not predatory. See generally William Inglis & Sons Baking Company v. ITT Continental Baking Company, Inc., 668 F.2d 1014, 1035-36 (9th Cir.1981), cert. denied, 459 U.S. 825, 103 S.Ct. 57, 74 L.Ed.2d 61 (1982). The Transamerica court set plaintiff’s burden even higher when defendant’s prices are above average total cost. 698 F.2d at 1388.

      . There is no indication that the MCI decision requires any different treatment of non-cost factors when the long-run incremental cost test rather than the average variable cost test is employed.

      . The cost study shows that Frito-Lay’s revenues exceeded its total cost for the last eight weeks of 1974.

      . In 1981 Price, Waterhouse & Company prepared an analysis of a contribution made by the sale of potato chips in the sale zone which included Chicago. The study found that the potato chips made a positive contribution on a variable cost basis each year during the 1974-1980 period. That is, for the zone as a whole, Frito-Lay was selling its potato chips above its average variable cost. Plaintiffs theory, of course, is that Frito-Lay was selling its supermarket potato chips below its average variable cost in Chicago, even though its potato chips prices may have exceeded average variable cost throughout the zone as a whole.

      . The Allen Park plant was somewhat more inefficient that most other Frito-Lay plants. Plaintiff points out that cost study, which may not have fully accounted for the inefficiencies of the Allen Park plan, may thus understate actual cost.


source: Caselaw Access Project

author: CLIFFORD SCOTT GREEN, District Judge.

license: Public Domain

text:
    MUSEBECK, Barbara by MUSEBECK, Hazel Guardian-ad-litem v. HECKLER, Margaret, Secretary, Dept. of Health & Human Services, United States of America.
    Civ. A. No. 84-1997.
    United States District Court, E.D. Pennsylvania.
    Aug. 2, 1985.

      Nancy Schuster, Bristol, Pa., for plaintiff.
    Rachel Shao, Asst. U.S. Atty., Philadelphia, Pa., for defendant.
   MEMORANDUM

CLIFFORD SCOTT GREEN, District Judge.

This is an appeal under sections 205(g) and 1631(c)(3) of the Social Security Act (“Act”), 42 U.S.C. §§ 405(g) and 1383(c)(3) (1982), from a final decision of the Secretary of Health and Human Services (“Secretary”) finding that plaintiff, Barbara Musebeck, engaged in substantial gainful activity during a nine month period (January-June, August-October) in 1980 (“critical period”), and therefore was no longer disabled as of November, 1980. For reasons demonstrated below, I find that plaintiff’s clearly subsidized earnings, standing alone, do not constitute substantial evidence of substantial gainful activity. Moreover, because there is an abundance of evidence that plaintiff was not in fact performing substantial gainful activity, I reverse.

I. Plaintiffs Medical History

Musebeck who is thirty years of age has been receiving psychiatric treatment since early childhood. The record clearly reflects that throughout her life she has undergone numerous psychiatric hospitalizations. She has been variously diagnosed as suffering from organic brain syndrome, explosive personality, temporal lobe epilepsy, borderline personality disorder and manic depressive illness. Plaintiff applied for and became a recipient of Supplemental Security Income (“SSI”) benefits beginning in June, 1977.

In May of 1977, she came under the care and treatment of Doctor William Boehmler. Dr. Boehmler treated Musebeck from May, 1977 through November, 1981. He reported that during this treatment period plaintiff never “achieve[d] a level of functioning that was to be construed of as independent.” (Tr. 346). Subsequent to November, 1981 Musebeck underwent five psychiatric hospitalizations in a period ending April 30, 1982. The behaviors which led to these hospitalizations included impulsive anger, destruction of furniture, assaultive behaviors, suicidal gestures, compulsive thoughts, staggering gait and hand tremors. The examiners noted her inability to do two-step commands, as well as abnormal tracings on electroencephalograms.

In July, 1982, Musebeck was committed to Norristown State Hospital. She was discharged in November of 1984 into a community living arrangement under the auspices of the Bristol-Bensalem Mental Health Center.

II. Plaintiffs Employment History

Musebeck was first employed after graduating from special education classes in high school. She worked as a dietary helper at a nursing home for approximately one and one-half years (1974-75).

Plaintiff next worked in a sheltered workshop/group therapy program as a commuting outpatient from Norristown State Hospital where she was undergoing her fifth psychiatric hospitalization. She began work with this program in March of 1976. In November of 1976, she was discharged and continued her work as a live in resident at the program’s facilities until February, 1977 when she was terminated due to behavioral problems and was once again psychiatrically hospitalized. She earned two dollars a week during her tenure of employment.

Following other therapeutic residential placements, Musebeck returned to the workshop program in January, 1978 and continued until she was once again terminated due to violent behavior in March of 1979.

From May until December of 1979, plaintiff was employed by Associated Production Services (“APS”). She worked in this sheltered workshop program in a closely supervised setting. According to Jonathan Belding, the program’s executive director, Musebeck produced “at approximately 50% of the rate required in a competitive industrial setting.” (Tr. 300) When referring to plaintiff’s tenure with APS, Belding felt constrained to “qualify the word employment”, preferring rather to characterize her participation as “training.” (Tr. 302) Musebeck earned $1017.30 for the May-Deeember 1979 period, an average of $127.16 per month. (Tr. 180)

A. Critical Employment Period

Plaintiff left the APS workshop in December, 1979 and began participating in a Comprehensive Employment Training Act (“CETA”), 29 U.S.C. § 801-999 (1973), repealed by, Pub.L. No. 97-300, title I, § 184(a)(1), 96 Stat. 1357 (1982), program. Under the CETA program, she worked as a stock clerk at the Navy Exchange, Willow Grove Naval Air Station. She was employed as a stock clerk during a 6-month training program which ended in June, 1980. During that six month period (Jan.June 1980) she underwent various treatments and had various incidents due to her assaultive behavior and psychiatric problems.

On August 2, 1980, Musebeck was hired by the Navy Exchange under a special program within which she could continue her work as a stock clerk. She continued there until she was terminated in August of 1982. Barbara O’Boyle, the personnel clerk at the Navy Exchange described plaintiff’s overall performance during the CETA program and thereafter as follows:

It was clear even in the beginning that she couldn’t keep up with the other stock clerks. There were days when I would characterize her work as of little use to the Exchange. This situation got progressively worse as time went on. I do remember a number of occasions when it was necessary to send her home in the middle of the day because she was emotionally distraught (depressed), or she had forgotten her medication. We felt at times that she might present a danger to herself or someone else. She missed a great deal of work due to her emotional problems, particularly towards the end of the employment.

(Tr. 298-99). Ms. O’Boyle also described the duties normally required of a person holding the stock clerk position and how Musebeck was only capable of performing half of those duties. She felt that plaintiff “require[d] closer supervision than the other employees.” (Tr. 298) Ms. O’Boyle remarked of “special considerations” given Musebeck:

She was clearly a handicapped individual and we were willing to put up with a great many behavioral and attendance problems before we found that we could no longer continue to employ her. If we did not have a special policy for hiring people with problems such as hers, I would doubt that we would have been able to employ her for as long as we did.

(Tr. 299)

In the first nine months of her employment at the Exchange, the critical period, Musebeck earned at least $3,170.65. It is possible that she earned up to $3,608.40. If the lower figure is used, she had a monthly average earnings of $352.94; if the higher figure is used then her monthly average would have been $400.93. Either way her earnings were above an average of $300 per month. Musebeck earned $384.40 in November, 1980 and $398.40 in December of that year.

The record fails to reflect that plaintiffs earnings ever exceeded the $300 level for any month after December, 1980.

III. The Secretary’s Action

Initially, Musebeck was notified that because she had engaged in substantial gainful activity as of February 1980, her eligibility for SSI benefits had ceased in April of that year.

In March of 1981, plaintiff filed a timely request for reconsideration of the Secretary’s initial termination decision. This request was denied. Subsequently, Muse-beck requested a hearing, and a hearing was held before an Administrative Law Judge (“AU”) in November of 1981. Plaintiff was unable to appear due to yet another hospitalization for psychiatric treatment. Hazel Musebeck, plaintiff’s mother and guardian ad litem, offered testimony in her daughter’s behalf.

In his decision of October, 1982, the AU essentially reaffirmed the Secretary’s prior position. Thereafter, plaintiff petitioned the Appeals Council for review of the AU’s decision. The Appeals Council granted review, and by decision dated February 27, 1984 found that Musebeck had engaged in substantial gainful activity for a nine month period in 1980 (January-June, August-October), that Musebeck’s disability had ceased in November 1980, and that her eligibility for SSI benefits had ceased in January of 1981. It is this final decision that plaintiff seeks this court to review in this action.

IY. Analysis

By statute, this court’s review of the Secretary’s action in this case is limited to the question of whether her decision is supported by substantial evidence. See 42 U.S.C. § 405(g). Additionally, the Act, as amended by the Social Security Disability Reform Act of 1984, Pub.L. No. 98-460, 98 Stat. 1794, provides that the Secretary may terminate a recipient’s benefits only upon “a finding that the physical or mental impairment” that forms the basis of such benefits “has ceased, does not exist, or is not disabling ...” 42 U.S.C. § 423(f). In the instant case the above mentioned finding must be based on “substantial evidence which demonstrates that ... the individual is now able to engage in substantial gainful activity ...” 42 U.S.C. § 423(f)(l)(B)(i). Thus, there must be substantial evidence of record that Musebeck can engage in substantial gainful activity.

Substantial evidence is “such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 1427, 28 L.Ed.2d 842 (1971). Substantial evidence is more than a mere scintilla, but may be somewhat less than a preponderance. Dobrowolsky v. Califano, 606 F.2d 403, 406 (3d Cir.1979).

The Secretary attempts to support her finding of substantial gainful employment in this case through her reliance on 20 C.F.R. § 416.974 (1984). That regulation provides in pertinent part:

(2) Earnings that will ORDINARILY show that you have engaged in substantial gainful activity. We will consider that your earnings from your work activities as an employee show that you have engaged in substantial gainful activity if—
(vi) Your earnings averaged more than $300 a month in calendar years after 1979.

(Italics in original, capitalization added). The Secretary urges that plaintiffs earnings during the critical period in 1980 average in excess of $300 per month and therefore plaintiff is no longer disabled. Such a misapplication of her own regulation cannot be substantial evidence to support the Secretary’s finding herein.

The above quoted regulation plainly states that such earnings will ordinarily demonstrate substantial gainful activity. Thus, substantial gainful activity is not conclusively shown “when a magic number on the earnings scale appears.” Coulter v. Weinberger, 527 F.2d 224, 229 (3d Cir.1975). Substantial gainful activity “consists] of two distinct, albeit interrelated, components: compensation and the substantiality of the activity itself” Patane v. Harris, 507 F.Supp. 115, 117 (E.D.Pa.1981) (first emphasis in original, second added). It is beyond doubt that the specific activity that the claimant performs must be considered: “If you are doing work that involves minimal duties that make little or no demands on you and that are of little or no use to your employer ... this does not show that you are working at the substantial gainful activity level.” 20 C.F.R. § 416.973 (1984) (emphasis added) see also Chicager v. Califano, 574 F.2d 161, 163 (3d Cir.1978), It is uncontradicted in the record that Musebeck’s work during the critical period was “of little use to the Exchange”. (Tr. 288)

It is equally beyond doubt that how well the claimant performs the specific activity must also be considered. See Chicager v. Califano, supra at 163; Stark v. Weinberger, 497 F.2d 1092, 1100 (7th Cir.1974) (Stevens, J.); Leibel v. Harris, 493 F.Supp. 132, 134 (E.D.Pa.1980). The Secretary’s own regulations also raise this consideration: ‘If you are unable, because of your impairments, to do ordinary or simple tasks satisfactorily without more supervision or assistance than is usually given other people doing similar work, this may show that you are not working at the substantial gainful activity level.” 20 C.F.R. § 416.-973(b) (1984). Also uncontradicted in the record is the fact that because of her illness Musebeck required “closer supervision than the other employees.” (Tr. 298)

Other indicators of a claimant’s quality of performance which point to a lack of substantial gainful activity despite earnings are (1) a high absence rate, Stark v. Weinberger, 497 F.2d at 1100; (2) ultimate termination due to inability to satisfactorily perform the activity without assistance, id.; (3) special concessions made for the claimant such as fewer and easier duties, Liebel v. Harris, 493 F.Supp. at 134; (4) production and quality of claimant’s work lower than that of other employees, id.; and (5) unusual assistance required of coworkers by claimant, Chicager v. Califano, 574 F.2d at 164.

There is uncontroverted evidence of record which overwhelmingly and conclusively demonstrates the existence of all of the above listed indicators in Musebeck’s case. These indicators form the basis of substantial evidence that she was not, in fact, performing substantial gainful activity, but rather receiving a governmental subsidy during the critical period. She was therefore “disabled within the meaning of the Act notwithstanding the fact that she actually did work” during that period. Stark v. Weinberger, 497 F.2d at 1100. See also Fowler v. Califano, 596 F.2d 600, 603 (3d Cir.1979).

Moreover, in determining whether a claimant is no longer disabled the record as a whole must be considered. See Morrone v. Secretary of Health, Education & Welfare, 372 F.Supp. 794, 801 (E.D.Pa.1974) (Becker, J.). This is because isolated or sporadic work periods within a claimant’s protracted disability may be indicative of his/her inability to engage in substantial gainful activity. Id. See also Coulter v. Weinberger, 527 F.2d 224, 229 (3d Cir.1975).

The record as a whole in this case clearly and unambiguously supports a finding of Musebeck’s continued disability. Her medical history before, during, and after the critical period unmistakably indicates the existence of a very severe mental impairment. The fact that this severe mental impairment precluded her from engaging in substantial gainful activity before, during and after the critical period is evidenced by her employment history. Thus, there is substantial evidence on the record as a whole that Musebeck was and continues to be disabled.

Because “[rjeversal with a direction to the Secretary to award benefits is particularly appropriate ‘where the administrative record has been fully developed and substantial evidence on that record as a whole indicates that the claimant is disabled,’ ” Walker v. Heckler, No. 84-2653, slip op. at 7 (E.D.Pa. May 24, 1985) (quoting Caffee v. Schweiker, 752 F.2d 63, 68 (3d Cir.1985)), plaintiff’s motion for summary judgment will be granted, defendant’s cross motion will be denied, and the Secretary will be directed to pay plaintiff the SSI benefits due her.

      . In February, plaintiff was seen at the Doylestown Emergency Room for "nervousness, tremor of the hands and legs and nausea.” (Tr. 323) In March, she threatened with a butcher knife a worker at the Bucks County Association for Retarded Citizens Community Living Arrangement ("BARC-CLA") where she had resided since mid-1979. In April, she became violent again — attacking two BARC-CLA staff members. She was then discharged from BARCCLA. In May, she underwent psychological evaluation by Dr. Charles Kaska. He found plaintiff significantly limited in terms of academic achievement with a “mid-fourth grade level in arithmetic" and "early seventh grade level in reading" with the ability to "give back approximately 25% of material” at the minimum level of literacy. (Tr. 227)

        . The record reflects conflicting data with regard to plaintiffs earning for August, September and October of 1980.


author: WEXLER, District Judge.

text:
    NASSAU NURSING HOME, Plaintiff, v. Margaret M. HECKLER, as Secretary of the United States Department of Health and Human Services and David Axelrod, as Commissioner of the State Department of Health of the State of New York, Defendants.
    No. CV 84-4901.
    United States District Court, E.D. New York.
    Aug. 2, 1985.

      Solomon & Rosenblum, Dreschler & Leff, New York City, for plaintiff.
    Raymond J. Dearie, U.S. Atty. by Patricia Galvin, Asst. U.S. Atty.,. Brooklyn, N.Y., for defendants.
   MEMORANDUM AND ORDER

WEXLER, District Judge.

This action raises questions concerning the procedures which the Secretary of Health and Human Services must employ when the Secretary imposes a ban upon Medicare and Medicaid admissions to a skilled nursing facility pursuant to 42 U.S.C. § 1395cc(f)(l).

I. FACTS

Plaintiff Nassau Nursing Home has entered into a provider agreement with the defendant Secretary, under which plaintiff may provide skilled nursing services for Medicare beneficiaries and receive reimbursement from the Secretary, and provide services to recipients under New York State’s Medicaid program.

On June 14, 1984 the New York State Department of Health (“DOH”) conducted an onsite survey of plaintiff.

On July 6, 1984 DOH provided plaintiff with a Statement of Deficiencies. DOH found that plaintiff was not in compliance with a number of federal regulations, most concerning dietetic services.

On July 20, 1984 plaintiff submitted a Plan of Correction to DOH.

. On July 31, 1984 DOH conducted a second survey of plaintiff.

On August 8, 1984 DOH informed plaintiff that plaintiff’s Plan of Correction was unacceptable in part.

On August 14, 1984 DOH supplied plaintiff with a list of deficiencies which DOH found had been corrected as of July 31. DOH did not supply plaintiff with a list of uncorrected deficiencies.

On August 22, 1984 plaintiff submitted a second Plan of Correction. On September 18, 1984 DOH informed plaintiff that the second Plan of Correction was unacceptable in part. On September 25, 1984 plaintiff submitted a third Plan.

On September 25, 1984 DOH recommended that the Secretary ban Medicare and Medicaid admissions to plaintiff, on the ground that the DOH surveys on June 14 and July 31 indicated that plaintiff was not in compliance with applicable regulations.

On October 4, 1984 DOH informed plaintiff that the third Plan of Correction was unacceptable in part. On October 15, 1984 plaintiff submitted a fourth plan.

On October 16, 1984 the Secretary informed plaintiff that the Secretary intended to impose a ban on Medicare and Medicaid admissions.

On October 26, 1984 DOH informed plaintiff that the fourth Plan of Correction was acceptable.

On November 8, 1984 a meeting was held, attended by the respective representatives of DOH, the Secretary, and plaintiff. Plaintiff’s representatives stated that plaintiff had never been informed of the results of the DOH survey of July 31, 1984. DOH’s representative agreed to supply plaintiff with further information. The Secretary’s representative gave plaintiff a choice between: (1) requesting a third survey, with the understanding that if DOH again found plaintiff non-compliant the Secretary would impose the ban and plaintiff could not request a fourth survey for ninety days; and (2) accepting the ban, with the right to request a third survey at any time.

On November 9, 1984 DOH sent plaintiff a letter listing the legal conditions and standards which DOH concluded plaintiff had failed to meet. DOH did not supply plaintiff with an actual report based on the July 31 survey listing specific factual findings.

On November 21, 1984 DOH conducted a third survey at plaintiff’s request.

On November 30, 1984 DOH informed the Secretary that plaintiff was still non-compliant as of November 21.

On December 5, 1984 the Secretary informed plaintiff that the Secretary would impose a ban on Medicare and Medicaid admissions effective December 23, 1984.

II. THE INSTANT ACTION

On December 20, 1984 plaintiff commenced the instant action, seeking an injunction against the imposition of a ban.

On December 21, 1984, following oral argument, this Court ordered that defendants not impose a ban pending further hearing by this Court, that a fourth survey should be conducted, and that both sides should prepare checklists indicating which deficiencies listed in the July 6 Statement of Deficiencies (based upon the June 14 survey) had been corrected and which had not. This order was confirmed in writing on January 7, 1985. On January 14-15, 1985 a fourth survey was conducted.

On January 28, 1985 this Court held a conference. This Court referred this case to the Honorable David F. Jordan, U.S. Magistrate, for the purpose of preparing a Report and Recommendation on the issue of whether the deficiencies found in the June 14 survey had been corrected. Magistrate Jordan held hearings on April 8-10, 1985, and issued a Report and Recommendation on May 8, 1985.

The secretary has moved to dismiss. Both sides have filed objections to Magistrate Jordan’s Report and Recommendation.

III. JURISDICTION

A. INTRODUCTION

The first issue is whether this Court has jurisdiction over the subject matter of this case.

We note initially that if the Court has jurisdiction, such jurisdiction probably does not derive from 28 U.S.C. § 1331, the “general federal question jurisdiction” statute, or 28 U.S.C. § 1346, which deals with the “United States as defendant”. Under 42 U.S.C. § 405(h), “no action against the United States, the Secretary, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter [Title 42, Chapter 7, Subchapter II]”. Under 42 U.S.C. § 1395Ü, the provisions of § 405(h) are made applicable to Title 42, Chapter 7, Subchapter XVIII. Subchapter XVIII includes § 1395cc(f)(l), which deals with bans on Medicare and Medicaid admissions. The Supreme Court has held that § 405(h), where applicable, precludes resort to general federal question jurisdiction. Weinberger v. Salfi, 422 U.S. 749, 756-62, 95 S.Ct. 2457, 2462-65, 45 L.Ed.2d 522 (1975). In that case, which involved a constitutional claim, the Court found that jurisdiction was available under § 405(g). In South Windsor Convalescent Home, Inc. v. Mathews, 541 F.2d 910 (2d Cir.1976), the Court was presented with a constitutional claim for which district court jurisdiction under § 405(g) was unavailable. Noting that the case fell within the jurisdiction of the Court of Claims, the Second Circuit held that § 405(h) barred district court general federal question jurisdiction. The Court warned that it is unlikely that the Constitution and statutes will be interpreted in such a way as to preclude all courts from exercising jurisdiction over a constitutional claim.

In the instant case, plaintiff has presented at least a colorable constitutional claim. Plaintiff contends that the Secretary did not provide plaintiff with adequate hearing procedures prior to the Secretary's decision to impose the ban, and that imposition of the ban will therefore constitute a deprivation of property without due process in violation of the Fifth Amendment. Plaintiff appears to have a property interest in its expectation of continued participation in the Medicare and Medicaid programs. Case v. Weinberger, 523 F.2d 602, 606 (2d Cir.1975). Procedural due process generally requires some form of pre-deprivation notice and hearing (not necessarily a full-scale evidentiary hearing). Cleveland Board of Education v. Loudermill, — U.S. -, 105 S.Ct. 1487, 84 L.Ed.2d 494 (1985); Case v. Weinberger, supra. In the instant case, it is at least open to question whether the meeting held November 8, 1984 provided plaintiff with adequate predeprivation notice of the charges against it and hearing.

B. THIS COURT HAS JURISDICTION

Fortunately, we find that this Court has jurisdiction over this case under 42 U.S.C. §§ 1395ff(c), 1396i(c)(2), and 405(g). Consequently, we are not here confronted with an attempt by Congress to preclude all courts from exercising jurisdiction over a colorable constitutional claim.

The reason that this Court has jurisdiction is as follows.

Under 42 U.S.C. § 1395ff(c), “any institution or agency dissatisfied with any determination by the Secretary that it is not a provider of services, or with any determination described in section 1395cc(b)(2) of this title, shall be entitled to a hearing thereon by the Secretary (after reasonable notice and opportunity for hearing) to the same extent as is provided in section 405(b) of this title, and to judicial review of the Secretary’s final decision after such hearing as is provided in section 405(g) of this title.” The question then arises of whether the Secretary’s determination in the instant case constitutes a “determination described in § 1395cc(b)(2).”

Determinations “described in § 1395cc(b)(2)” include a determination that a provider of services (such as plaintiff) “no longer substantially meets the applicable provisions of section 1395x of this title”. § 1395cc(b)(2)(B). In the instant case, the Secretary has determined that plaintiff no longer substantially meets the provisions of § 1395x(j) (which deals with the standards for skilled nursing facilities), and therefore seeks to ban Medicare and Medicaid admissions pursuant to § 1395cc(f)(l). Consequently, although the Secretary does not seek immediate termination of plaintiff’s Medicare provider agreement pursuant to § 1395cc(b)(2)(B), but rather seeks the intermediate sanction of a ban on Medicare and Medicaid admissions under § 1395cc(f)(l), the Secretary’s determination nevertheless constitutes a “determination described in § 1395cc(b)(2)”.

Consequently, pursuant to § 1395ff(c), plaintiff is entitled to (at the very least) elaborate post-deprivation administrative review under § 405(b), followed by judicial review under § 405(g). See also § 1396i(c)(2). The only remaining possible obstacle to this Court exercising jurisdiction at the present time under § 405(g) is the doctrine of exhaustion of administrative remedies.

Although § 405(g) ordinarily requires exhaustion of administrative remedies prior to judicial review, the Supreme Court has held that where (as here) the Secretary has made a determination, and a plaintiff asserts a colorable constitutional claim that the plaintiff has received inadequate pre-deprivation process, a district court can exercise jurisdiction over the constitutional claim pursuant to § 405(g) without awaiting further administrative proceedings. Mathews v. Eldridge, 424 U.S. 319, 326-32, 96 S.Ct. 893, 899-01, 47 L.Ed.2d 18 (1976). Consequently, the doctrine of exhaustion of remedies does not preclude this Court from exercising jurisdiction over plaintiffs constitutional claim pursuant to § 405(g).

There is a second reason why this action is not barred by the doctrine of exhaustion of remedies. In the instant case, the Secretary denies that plaintiff will be entitled to any administrative hearings after the ban is imposed. Defendant’s Memorandum at 24. Consequently, plaintiff has exhausted all administrative remedies the Secretary is willing to provide. Consequently, this Court has jurisdiction to review the Secretary’s decision to impose a ban pursuant to § 405(g). Of course, this does not necessarily mean that the Court should immediately review the merits of the decision to impose a ban. The Court has the authority to remand the case to the Secretary for further proceedings.

For the above reasons, this Court has jurisdiction pursuant to § 405(g).

IV. HEARING PROCEDURES

The Secretary’s decision to impose a ban was based primarily upon the third DOH survey conducted November 21,1984. The Secretary did not give plaintiff a copy of the survey report and did not give plaintiff an opportunity for an informal hearing following the November 21 survey. It therefore appears that the Secretary violated § 1395cc(f)(2), which provides that a ban cannot be imposed until the facility “has had a reasonable opportunity, following the initial determination that it no longer meets the provisions of section 1395x(j) of this title, to correct its deficiencies, and, following this period, has been given reasonable notice and opportunity for a hearing.” We wish to emphasize that we do not suggest that an elaborate pre-ban hearing was required. The statute requires only an informal non-evidentiary pre-ban hearing. See H.R.Rep. No. 96-1167, 96th Cong., 2d Sess. 56, 409, reprinted in [1980] U.S.Code Cong. & Ad.News 5526, 5569, 5772. Due process does not require an evidentiary predeprivation hearing in cases of this type. Case v. Weinberger, 523 F.2d 602, 606-09 (2d Cir.1975).

It might be argued that the meeting on November 8, 1984 satisfied the statutory notice and hearing requirement. We disagree. First, this meeting took place prior to the November 21 survey. Since the November 21 survey was the immediate basis for the ban, we believe that the statute required the Secretary to give plaintiff a copy of the November 21 survey report and an informal meeting to discuss that report. Second, at the time of the November 8 meeting plaintiff had not even been given a copy of the report of the second DOH survey conducted on July 31. Indeed, plaintiff was not given a copy of either the July 31 report or the November 21 report until long after the instant action was commenced.

For the above reasons, we find that the Secretary has violated § 1395cc(f)(2) by failing to provide plaintiff with an adequate informal pre-ban hearing and adequate notice of the charges against plaintiff.

Since the Secretary violated the statute, it is unnecessary for us to address plaintiff’s constitutional claim that plaintiff has been denied adequate pre-ban process.

V. REMEDY

Since plaintiff was not given a statutorily adequate pre-ban hearing, we will vacate the Secretary’s decision to impose a ban and remand this case to the Secretary for further proceedings pursuant to § 405(g).

On remand, the Secretary must give the plaintiff an informal non-evidentiary hearing at which plaintiff will be given an opportunity to discuss the most recent survey report then available. As we have stated, that is all the pre-ban process which § 1395cc(f)(2) requires. Due process requires no more. Case v. Weinberger, supra. If the Secretary then decides to impose the ban, the Secretary must then supply plaintiff with post-imposition administrative review, including an opportunity for an evidentiary hearing, as is required by § 405(b) as incorporated in § 1395ff(c) and § 1396i(c)(2). We need not discuss whether there is a constitutional due process right to such a hearing, although case law strongly suggests that there is. Case v. Weinberger, supra. Afterwards, plaintiff may seek judicial review pursuant to § 405(g), We make no determination at the present time as to the merits of the question of whether plaintiff is in compliance with applicable regulations and whether plaintiff has been given an adequate opportunity to correct deficiencies.

The Court expresses sincere thanks to Magistrate Jordan for conducting hearings and preparing a Report and Recommendation. Upon reflection, however, the Court believes that a remand to the Secretary is the proper course.

VI. APPEALABILITY

The question arises as to whether this decision or any part thereof is or should be made immediately appealable as of right. We express no opinion as to whether this decision or any part thereof is appealable as of right in the absence of the entry of a partial judgment pursuant to Rule 54(b). We decline to direct the entry of such a partial judgment. Further, we will not direct the entry of a complete judgment, as the ultimate question of whether a ban should be imposed remains to be decided by the Secretary, subject to post-imposition judicial review by this Court. We will, however, certify the appropriateness of an interlocutory appeal by permission.

VII. ORDER

The Secretary’s decision to impose a ban upon Medicaid and Medicare admissions to plaintiff Nassau Nursing Home is vacated. This case is remanded to the Secretary for further proceedings consistent with this opinion. The Clerk shall close the file, but shall not enter judgment. It appearing that this order involves controlling questions of law as to which there is substantial ground for difference of opinion and that an immediate appeal from this order may materially advance the ultimate termination of this litigation, this order is hereby certified as being appropriate for an interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

SO ORDERED.

      . The availability of administrative appeals and judicial review following the imposition of a ban is confirmed by legislative history. See H.R.Rep. No. 96-1167, 96th Cong., 2d Sess. 56, 409, reprinted in [1980] U.S.Code Cong. & Ad. News 5569, 5772.


author: RAMSEY, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. Charles W. SHEARS, Defendant.
    Crim. No. R-84-00396.
    United States District Court, D. Maryland.
    Aug. 2, 1985.

      Asst. U.S. Atty., Mark Berthiaume, Baltimore, Md., for U.S.
    Paul R. Kramer, Stuart Snyder, Baltimore, Md., for defendant.
   MEMORANDUM AND ORDER

RAMSEY, District Judge.

Introduction

This case presents the Court with a second opportunity to pass upon the voluntariness, and hence the admissibility, of a custodial statement elicited by law enforcement officers.

The defendant in this case was arrested at the Baltimore-Washington International Airport on August 14, 1984. On August 22, 1984, a five-count indictment was returned charging the defendant with conspiracy to distribute cocaine and related offenses. The defendant filed a number of pretrial motions, including a motion to suppress physical evidence seized from the defendant and a motion to suppress statements made by the defendant while in custody following his arrest. Trial of the case was set for December 3, 1984. On that day, the Court heard testimony and argument on defendant’s pretrial motions. By oral ruling later formalized by written Order, the Court denied defendant’s motion to suppress physical evidence and granted defendant’s motion to suppress statements.

Following the swearing of a jury panel but prior to the commencement of opening statements, a mistrial was declared upon motion of the defendant on December 4, 1985, because of sudden and widespread publicity concerning an undercover drug investigation which ended in tragedy. While the incident was unrelated to the case at bar, the Court believed that the defendant’s right to a fair trial might be jeopardized by media reports of the drug-related death. Following the declaration of a mistrial, the government noted an appeal of the Court’s Order suppressing defendant’s statements. The Court postponed scheduling a new trial date pending the disposition of the government’s appeal.

On May 23, 1985, a divided Fourth Circuit panel reversed this Court’s Order suppressing defendant’s statements. United States v. Shears, 762 F.2d 397, 403 (4th Cir.1985) (Winter, C.J.). While concluding that the facts relied upon by this Court in its oral ruling were insufficient to support a finding that the defendant’s confession was involuntary, the majority noted that its conclusion “does not necessarily mean that defendant’s statements must be admitted or that a further hearing is required to determine their admissibility.” Id.

In light of the Fourth Circuit opinion, this Court allowed the defendant to reassert his suppression motion on the basis of the record then developed. The defendant renewed that motion on June 17, 1985, and the government filed its opposition on July 1, 1985. The defendant, in turn, filed a reply brief on July 15, 1985. The Court now rules without need for a hearing pursuant to Local Rule 6 (D.Md.1985).

Facts

The defendant was arrested on August 14, 1984, outside the airmail facility at Baltimore-Washington International Airport after he picked up an airmail parcel which contained cocaine. Drug Enforcement Administration (DEA) agents advised the defendant of his Miranda rights and asked the defendant whether he wished to have his truck left upon the airport parking lot or towed to a secure location. The defendant expressed his desire that the truck remain at the airport.

DEA Agents Coront and Crawford transported the defendant to the DEA office in Baltimore for processing. Coront and Crawford then took the defendant to the United States Courthouse, which is across the street from the building housing the DEA office, where a magistrate conducted defendant’s initial appearance and set defendant’s bail at $10,000, cash or corporate surety.

While in the Marshal’s lockup in the courthouse following his initial appearance, the defendant attempted to make a telephone call. Agent Coront told the defendant that the agents in charge of the case would like to talk with the defendant. Coront further advised the defendant that if the defendant wished to cooperate with the agents, it was preferable that no one know of defendant’s arrest. The agent also indicated that defendant would not need a bondsman if he cooperated with the agents. The defendant made a telephone call to his brother. Thereafter, the defendant was transported to the Baltimore City Jail where he remained in custody overnight.

Following the discussion between defendant and Agent Coront on August 14, Agent Crawford advised DEA Agent Boronyak, the agent in charge of the case, that Agent Coront believed that the defendant was willing to cooperate. Agent Boronyak was unable to pursue the matter that day because of his involvement in an unrelated investigation.

During the evening of August 14, the defendant’s brother contacted a bail bondsman in an effort to secure the defendant’s release. The bondsman made arrangements with defendant’s family to attempt to post bond the next day. On the morning of August 15, the bondsman contacted the Chambers of a United States Magistrate and was informed that a hearing could be conducted at approximately 4 p.m. that day. The defendant was transported from the City Jail to the marshal’s lockup in the federal courthouse.

Having been informed that the defendant was in the marshal’s lockup awaiting an opportunity to post bail, Agent Boronyak, accompanied by Postal Inspector Reilly, proceeded to the lockup about 12:30 p.m. to speak with the defendant. A conversation ensued at the lockup during which only the defendant, the DEA agent and the postal inspector were present. The defendant was advised of his Miranda rights. When asked to provide information, the defendant inquired of the officers as to what they could do for him in return for his cooperation. In the course of this give and take, Agent Boronyak informed the defendant that the government had fifteen or sixteen counts to bring against the defendant. The defendant was promised that in return for his cooperation, his bond would be lowered so that he could be released that afternoon without the necessity of a bondsman. The defendant was also promised that in return for his statement, he would be allowed to plead to reduced charges.

Following the agent’s proffer of the quid pro quo, the defendant gave an oral statement to the agents regarding the circumstances surrounding his receipt of the airmail parcels which led to his arrest. Thereafter, Agent Boronyak, Inspector Reilly, and the defendant walked across the street to the Baltimore DEA office where the defendant signed a written waiver of rights and executed a written statement regarding his participation in the crimes now charged. The defendant’s cooperation was made known to an Assistant United States Attorney who procured the defendant’s release that afternoon on personal recognizance.

One week later, a five-count indictment was filed against the defendant. During the weeks following defendant’s release, the defendant and his counsel met on several occasions with representatives of the United States Attorney’s Office and the DEA to make a proffer of cooperation and to work out the details of a plea agreement. All of these efforts failed, as the parties were unable to agree upon the terms of the agreement. On September 20, 1984, the defendant filed a motion to suppress the oral and written statements given to Agent Boronyak and Inspector Reilly on August 15.

Conclusions

Whether a custodial confession is involuntary, and thus subject to suppression, is a question of fact to be determined from the totality of the circumstances surrounding the confesión. Schneckloth v. Bustamonte, 412 U.S. 218, 226, 93 S.Ct. 2041, 2047, 36 L.Ed.2d 854 (1973); United States v. Wertz, 625 F.2d 1128, 1133-34 (4th Cir.1980). A court should consider the setting in which the confession was obtained, the details of the interrogation and the particular characteristics of the accused in arriving at a determination of whether the accused’s confession was induced by conduct and conditions that deprived his confession of voluntariness. United States v. Wertz, 625 F.2d at 1134.

While the Supreme Court has stated that the test for voluntariness “is whether the confession was ‘extracted by any sort of threats or violence, or obtained by any direct or implied promises, however slight, or by the exertion of any improper influence, ’ ” cases in the Courts of Appeal indicate that “government agents may validly make some representations to a defendant or may discuss cooperation without rendering the resulting confession involuntary.” There are, nevertheless, “certain promises whose attraction renders a resulting confession involuntary if the promises are not kept.” Where a confession is challenged by a defendant as involuntary, the burden is upon the prosecution to prove at least by a preponderance of the evidence that the confession was in fact voluntarily rendered. Lego v. Twomey, 404 U.S. 477, 489, 92 S.Ct. 619, 626, 30 L.Ed.2d 618 (1972).

In the case at bar, defendant’s statements followed promises by government agents that the defendant would be released without posting a cash bond or paying a bondsman’s premium. The defendant was also promised that he could plead to reduced charges if he cooperated and made a statement. These promises constituted the principal and determinative factor motivating the defendant to give the statements now challenged. These assurances of lenient treatment, viewed in the totality of the circumstances, were improperly coercive and rendered the resulting statements involuntary. See Grades v. Boles, 398 F.2d 409 (4th Cir.1968); see also Shotwell Mfg Co. v. United States, 371 U.S. 341, 347-48, 83 S.Ct. 448, 453,9 L.Ed.2d 357 (1963). Because the government has failed to prove that the statements were voluntarily made, their use at defendant’s trial would violate the Fifth Amendment privilege against self-incrimination. Accordingly, defendant’s motion to suppress statements will be granted.

For the reasons stated herein, it is this 2nd day of August, 1985, by the United States District Court for the District of Maryland,

ORDERED:

1. That defendant’s motion to suppress statements is GRANTED; and,

2. That the Clerk of the Court shall mail copies of this Memorandum and Order to all counsel of record.

      . On December 3, 1984, an undercover narcotics officer was murdered in Baltimore while negotiating a drug transaction with a target of the investigation. DEA Agent Boronyak, who had testified at the suppression hearing in this case and was expected to testify at trial, was wounded during a shootout following the murder of his fellow officer.

      . Judge Murnaghan, writing in dissent, expressed his belief that this Court’s Order was not clearly erroneous and should have been affirmed.

      . In considering the renewed motion to suppress, the parties and the Court rely on the Joint Appendix filed in the Fourth Circuit in connection with the appeal of the Court's earlier suppression Order.

      . The description of events which follows constitutes the Court’s finding of facts based on the evidentiary hearing conducted on December 3, 1984.

      . Because it was made clear to the defendant at the time of his arrest that the DEA had expressed no interest in seizing his truck, the Court rejects the contention of defendant’s counsel that defendant’s later confession was motivated in part by a desire to obtain or retain possession of his truck.

      . Agent Corout denied making this statement. He was unsure as to whether the defendant’s need for a bondsman had been discussed. The Court credits the defendant’s testimony on this point.

      . No charges had been presented to the grand jury at the time of this statement.

      . Agent Boronyak and Inspector Reilly testified on direct examination that they made no promises to the defendant. When asked on cross examination whether he had promised that the defendant could plead to a lesser charge, Agent Boronyak testified:
      No, sir. As a matter of fact, I advised Mr. Shears that it is the policy of the United States Attorney's office that any cooperation does not mean that you will automatically walk out of here. I made that perfectly clear.
      In fact, I told him that he will have to plead guilty to a narcotic violation, I said that violation he would plead guilty to would be up to the U.S. Attorney, that I did not have that decision to make but he would definitely be pleading guilty.
      Joint Appendix at 145.
      The Court credits the testimony of the defendant regarding promises made to him prior to his giving the statements which are the subject of the instant motion.

      . Defendant at one point in his testimony described the agent’s promise to allow the defendant to plead "to a lesser count;” at other points in his testimony, defendant described the agent’s representation that defendant could “plead to a lesser sentence.” (See Joint Appendix at 159, 163 and 174).

      . The defendant testified that the Assistant U.S. Attorney would not accept a plea agreement unless it included the defendant’s undertaking to plead guilty to an offense subjecting the defendant to a possible penalty of fifteen years imprisonment. The defendant further testified that this position of the U.S. Attorney’s Office was inconsistent with the promise made by the DEA agent that the defendant would be allowed to "plead to a lesser sentence.”

      . Hutto v. Ross, 429 U.S. 28, 30, 97 S.Ct. 202, 203, 50 L.Ed.2d 194 (1976) (per curiam) quoting Bram v. United States, 168 U.S. 532, 542-43, 18 S.Ct. 183, 186-87, 42 L.Ed. 568 (1897) (emphasis added). The Court in Hutto held that where the accused had been informed that the terms of a plea bargain were available regardless of whether he made a statement, the statement later given was not per se inadmissible merely because it was made subsequent to the plea bargain which was never executed.

      . United States v. Shears, 762 F.2d 397, 401 and cases cited therein.

      . Id. at 402 and cases cited therein.