Petition By the United States For An Order To Show Cause Why Respondents Smith International, Inc. and Schlumberger Ltd. Should Not Be Found In Criminal Contempt

The United States of America, by its attorneys, acting under the direction of the Attorney General of the United States, presents this Petition for an Order requiring Respondents Smith International, Inc. and Schlumberger Ltd. to show cause why they should not be found in criminal contempt of the Final Judgment entered by this Court on April 12, 1994 in United States v. Baroid, et al., Civil Action No. 93-2621 ("Final Judgment"), as modified by this Court's Order on September 19, 1996. Copies of the Final Judgment and this Court's Order modifying it are appended as Exhibits 1 and 7. The United States represents as follows:

DESCRIPTION OF THE RESPONDENTS

1. Respondent Smith International, Inc., ("Smith") is a corporation organized and existing under the laws of the State of Delaware with its principal place of business at 16740 Hardy St., Houston, Texas 77205.

2. Respondent Schlumberger Ltd. ("Schlumberger") is a corporation organized and existing under the laws of The Netherlands with its principal place of business in the United States at 277 Park Avenue, New York City, New York 10172.

JURISDICTION OF THE COURT

3. This Court has statutory power to enforce compliance with its orders under 18 U.S.C. § 401(3) (1998), Rule 42(b) of the Federal Rules of Criminal Procedure, and Paragraph XIV of the Final Judgment, which similarly provides:

FINAL JUDGMENT OF THE COURT

4. On December 23, 1993, the United States filed a civil antitrust Complaint under Section 7 of the Clayton Act to block the merger of Dresser Industries, Inc. ("Dresser") and Baroid Corporation ("Baroid"), alleging that the transaction would substantially lessen competition in the diamond drill bit and drilling fluid markets. [Exhibit 2] Dresser competed in the drilling fluid business through its 64 percent interest in M-I Drilling Fluids (now known as M-I L.L.C. and hereinafter referred to as M-I); Baroid competed through its subsidiary Baroid Drilling Fluids.

5. Simultaneously with the Complaint, the United States filed a proposed Final Judgment. To preserve competition in drilling fluids, Paragraph IV.A. of the Final Judgment ordered Dresser to divest the "drilling fluid business," which was defined as either its 64 percent interest in M-I or all assets of Baroid Drilling Fluids, plus any other assets of Baroid Corporation used for its domestic or international drilling fluid business.

6. Paragraph IV.F. of the Final Judgment imposed restrictions on the purchaser of the drilling fluid business:

7. The Court entered the Final Judgment on April 12, 1994. Dresser chose to divest its interest in M-I and sold the interest to Smith. As required by Paragraph III.B. of the Final Judgment, Smith, as a condition of the divestiture, agreed to be bound by the provisions of the Final Judgment. [Exhibit 4]

8. In 1996, Smith proposed acquiring Anchor Drilling Fluids, a Norwegian company that produced and sold drilling fluids worldwide. The United States joined Smith in a motion to modify the Final Judgment to allow the acquisition, provided Smith divest the United States drilling fluid operations of Anchor, referred to as Anchor USA. [Exhibits 5 and 6]

9. This Court entered an Order on September 19, 1996, approving the modification. [Exhibit 7] The Order continued the bar on selling the divested drilling fluid business to, or combining that business with, the drilling fluid operations of Schlumberger. That Order also provided: "With respect to Smith International, Inc., the terms of this Final Judgment shall expire on the tenth anniversary of the date this Order is filed and entered."

VIOLATION OF THE FINAL JUDGMENT

10. Smith and Schlumberger started discussing the formation of a joint venture of

M-I and Schlumberger's drilling fluid operations in 1998, after Smith acquired the remaining 36 percent interest in M-I from Halliburton Company. Smith and Schlumberger signed a Memorandum of Understanding on October 21, 1998 and executed a formal joint venture agreement on February 5, 1999. Under the agreement, Schlumberger would pay Smith $280 million for a 40 percent interest in a joint venture that would include M-I, and the parties would combine the operations of M-I and Schlumberger's worldwide drilling fluid business. The joint venture agreement recognized that the transaction could not proceed without modification of the Final Judgment:

[Exhibit 8]

11. The Antitrust Division opened an investigation to determine if the Division should consent to modification of the Final Judgment to permit Smith and Schlumberger to form the joint venture. On July 1, Schlumberger wrote the Division that it had decided to discontinue its U.S. drilling fluid operations, and that "it seems clear that the U.S. v. Baroid decree should not prohibit Schlumberger and Smith from consummating their proposed joint venture . . . . " [Exhibit 9] Then, on July 8, 1999, Smith's counsel wrote the Division that, with the decision to shut down Schlumberger's U.S. drilling fluid operations, "the Baroid decree does not apply to this transaction" and that the parties planned to close and would provide the United States with 48 hours notice. [Exhibit 10] On July 12, 1999, Smith's counsel advised that the parties intended to close the transaction on July 14. [Exhibit 11]

12. On July 13, 1999, the Division sent, and Smith and Schlumberger received, a letter that stated, "In [the Division's] view, such action by Smith would clearly violate the Final Judgment entered by Judge Sporkin in United States v. Baroid Corporation, et al., Civil Action 93-2621." [Exhibit 12]

13. On July 14, 1999, Smith and Schlumberger consummated the transaction. [Exhibit 13]

14. Smith and Schlumberger proceeded with a transaction that contravened the clear and specific language in the Final Judgment despite a warning by the United States that doing so would violate the Final Judgment. The transaction violates the Final Judgment in two respects. First, Smith has sold an interest in a joint venture that includes M-I to Schlumberger in contravention of the clause in the Final Judgment prohibiting it from selling the divested drilling fluid business to Schlumberger. Second, Smith has combined the divested drilling fluid business with Schlumberger's drilling fluid operations in contravention of the clause in the Final Judgment prohibiting them from doing so. In consummating the joint venture, Smith and Schlumberger knowingly and willfully violated an Order of this Court and are in criminal contempt.

PRAYER

WHEREFORE, for the foregoing reasons, and as set forth more fully in its Memorandum in support of this Petition, the United States respectfully requests that this Court enter an Order directing Respondents to appear before this Court at a time and place to be fixed in said Order, to show cause why they should not be adjudged in criminal contempt of this Court and prays for the following relief:

1. find Smith and Schlumberger in criminal contempt;
2. impose upon each Respondent an appropriate fine;
3. award the United States its costs and attorneys' fees incurred in filing this petition to show cause; and
4. issue such other Orders as are appropriate to punish Smith's and Schlumberger's actions.