United States Court of
Appeals
FOR
THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 12, 2001
Decided April 27, 2001
No. 00-5362
Federal Trade Commission,
Appellant
v.
H.J. Heinz Co. and Milnot Holding
Corporation,
Appellees
Appeal from the United States District Court
for the District of Columbia
(No.
00cv01688)
Debra A.
Valentine, General Counsel, Federal Trade Com-
mission, argued the cause
for the appellant. John F. Daly,
Assistant
General Counsel, Richard G. Parker, Director, and
David A. Balto and
David C. Shonka, Attorneys, Federal
Trade Commission, were on
brief.
Edward P. Henneberry argued the
cause for the appellees.
W.
Bradford Reynolds, Marc G. Schildkraut, Kenneth W.
Starr, and Mark L.
Kovner were on brief.
J.
Joseph Curran, Jr., Attorney General, and Ellen S.
Cooper, Assistant
Attorney General, State of Maryland;
Bruce M. Botelho, Attorney General, State of Alaska; Janet
Napolitano, Attorney General,
State of Arizona; Mark
Pryor,
Attorney General, State of Arkansas; Bill
Lockyer,
Attorney General, and Peter Siggins, Chief Deputy Attorney
General, State of California; Ken
Salazar, Attorney General,
State of Colorado; Richard Blumenthal, Attorney General
and Steven Rutstein,
Assistant Attorney General, State of
Connecticut; Robert R. Rigsby, Corporation Counsel,
Charles
L. Reischel, Deputy Corporation Counsel, and Bennett Rush-
koff,
Senior Counsel, District of Columbia;
Robert A. Butter-
worth, Attorney General, State of Florida; Earl I. Anzai,
Attorney General, State
of Hawaii; Alan G. Lance, Attorney
General, State of Idaho; James E.
Ryan, Attorney General,
State of Illinois; Karen M. Freeman-Wilson, Attorney Gen-
eral, State of
Indiana; Thomas J. Miller, Attorney
General,
State of Iowa; Carla J.
Stovall, Attorney General, State of
Kansas; Richard P. Ieyoub, Attorney General, State of Loui-
siana; Jennifer Granholm, Attorney General, and
Thomas L.
Casey, Solicitor General, State of Michigan; Julie Ralston
Aoki, Assistant Attorney
General, State of Minnesota; Mike
Moore, Attorney General, State of Mississippi; Frankie Sue
Del Papa, Attorney General, State of
Nevada; Philip T.
McLaughlin,
Attorney General, State of New Hampshire;
Eliot Spitzer, Attorney General, State of New York; Michael
F. Easley, Attorney General,
and K.D. Sturgis, Assistant
Attorney General, State of North
Carolina; Herbert D. Soll,
Attorney
General, Commonwealth of the Northern Mariana
Islands; Betty D. Montgomery, Attorney General, State
of
Ohio; W.A. Drew Edmondson,
Attorney General, State of
Oklahoma;
Angel E. Rotger-Sabat, Attorney General, Com-
monwealth of Puerto
Rico; Mark Barnett, Attorney General,
State of South Dakota; John
Cornyn, Attorney General,
State of Texas; Jan Graham, Attorney General, State of
Utah; William H. Sorrell, Attorney General, State
of Ver-
mont; Mark L. Earley, Attorney General,
Commonwealth of
Virginia;
Christine O. Gregoire, Attorney General, State of
Washington; Darrell V. McGraw, Jr., Attorney General,
and
Douglas L. Davis, Assistant Attorney General, State of West
Virginia; James E. Doyle, Attorney General, and Kevin
J.
O'Connor, State of Wisconsin;
and Gay Woodhouse, Attorney
General, State of Wyoming; were on brief for The Thirty-Six
Amici
Curiae in support of the appellant.
James H. Skiles and Jan Amundson were on brief for
Grocery
Manufacturers of America, Inc. et al., Amici Curiae
in support of the
appellees.
C. Boyden
Gray, William J. Kolasky, Jeffrey D. Ayer and
Robert H. Bork were on
brief for Citizens for a Sound
Economy Foundation, Amicus Curiae, in
support of the appel-
lees.
Before: Henderson,
Randolph and Garland, Circuit
Judges.
Opinion for the court filed by Circuit
Judge Henderson.
Karen
LeCraft Henderson, Circuit Judge: On
February
28, 2000 H.J. Heinz Company (Heinz) and Milnot Holding
Corporation
(Beech-Nut) entered into a merger agreement.
The Federal Trade Commission (Commission or FTC) sought
a
preliminary injunction pursuant to section 13(b) of the
Federal Trade
Commission Act (FTCA), 15 U.S.C. s 53(b), to
enjoin the consummation of
the merger. The injunction was
sought
in aid of an FTC administrative proceeding which was
subsequently
instituted by complaint to challenge the merger
as violative of, inter
alia, section 7 of the Clayton Act, 15
U.S.C. s 18. The district court denied the preliminary
in-
junction and the FTC appealed to this court. For the
reasons set forth below, we reverse the district
court and
remand for entry of a preliminary injunction against Heinz
and Beech-Nut.
I. Background
Four million infants in the United States
consume 80
million cases of jarred baby food annually, representing a
domestic market of $865 million to $1 billion.1 FTC v. H.J.
Heinz, Co., 116 F. Supp. 2d 190, 192 (D.D.C.
2000). The baby
food market is
dominated by three firms, Gerber Products
Company (Gerber), Heinz and
Beech-Nut. Gerber, the in-
dustry
leader, enjoys a 65 per cent market share while Heinz
and Beech-Nut come
in second and third, with a 17.4 per cent
and a 15.4 per cent share
respectively. Id. The district
court found that Gerber
enjoys unparalleled brand recogni-
tion with a brand loyalty greater than
any other product sold
in the United States. Id. at 193. Gerber's
products are
found in over 90 per cent of all American
supermarkets.2
By
contrast, Heinz is sold in approximately 40 per cent of
all
supermarkets. Its sales are nationwide
but concentrated
in northern New England, the Southeast and Deep South
and
the Midwest. Id. at 194. Despite its second-place domestic
market
share, Heinz is the largest producer of baby food in
the world with $1
billion in sales worldwide. Its
domestic
baby food products with annual net sales of $103 million are
manufactured at its Pittsburgh, Pennsylvania plant, which
was
updated in 1991 at a cost of $120 million.
Id. at 192-93.
The plant
operates at 40 per cent of its production capacity
and produces 12
million cases of baby food annually.
Its
baby food line includes about 130 SKUs (stock keeping units),
that is, product varieties (e.g., strained carrots, apple sauce,
etc.). Heinz lacks Gerber's brand recognition; it markets
itself as a "value
brand" with a shelf price several cents below
Gerber's. Id. at 193.
Beech-Nut has a market share (15.4%)
comparable to that
of Heinz (17.4%), with $138.7 million in annual sales
of baby
food, of which 72 per cent is jarred baby food. Its jarred
__________
1 The facts as set forth herein are based
on the district court's
factual findings and the record material
submitted by the parties.
2 Product volume in retail stores throughout the country is mea-
sured
by the product's All Commodity Volume (ACV).
Gerber's
near 100 per cent ACV is impressive because virtually all
supermar-
kets stock at most two brands of baby food. In at least one area of
the country as
many as 80 per cent of supermarket retailers stock
only Gerber.
baby food line consists of 128 SKUs.
Beech-Nut manufac-
tures all of its baby food in Canajoharie, New
York at a
manufacturing plant that was built in 1907 and began
manu-
facturing baby food in 1931.
Beech-Nut maintains price
parity with Gerber, selling at about one
penny less. It
markets its
product as a premium brand. Id. Consumers
generally view its product
as comparable in quality to Ger-
ber's.
Id. Beech-Nut is carried in
approximately 45 per
cent of all grocery stores. Although its sales are nationwide,
they
are concentrated in New York, New Jersey, California
and Florida.3 Id. at 194.
At the wholesale level Heinz and
Beech-Nut both make
lump-sum payments called "fixed trade
spending" (also
known as "slotting fees" or
"pay-to-stay" arrangements) to
grocery stores to obtain shelf
placement. Id. at 197. Gerber,
with its strong name
recognition and brand loyalty, does not
make such pay-to-stay
payments. The other type of
whole-
sale trade spending is "variable trade spending," which
typi-
cally consists of manufacturers' discounts and allowances to
supermarkets
to create retail price differentials that entice
the consumer to purchase
their product instead of a competi-
tor's. Id.
Under
the terms of their merger agreement, Heinz would
acquire 100 per cent of
Beech-Nut's voting securities for $185
million. Accordingly, they filed a Premerger Notification and
Report
Form with the FTC and the United States Depart-
ment of Justice pursuant
to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, 15 U.S.C. s 18a.4 On July 7, 2000
__________
3 Although Heinz and Beech-Nut introduced
evidence showing
that in areas that account for 80% of Beech-Nut sales,
Heinz has a
market share of about 2% and in areas that account for about
72%
of Heinz sales, Beech-Nut's share is about 4%, the FTC introduced
evidence that Heinz and Beech-Nut are locked in an intense battle
at
the wholesale level to gain (and maintain) position as the second
brand
on retail shelves.
4
Section 18a requires pre-merger notification for a merger in
which either
the acquiring or the acquired firm has total net sales
or assets of at
least $10 million and the other firm has annual sales
the FTC authorized this action for a preliminary injunction
under section
13(b) of the FTCA and, on July 14, 2000, it filed
a complaint and motion
for preliminary injunction. The
district
court conducted a five-day hearing in late August and
early September and
heard final arguments on September 21,
2000. The record before the district court consisted of 1,267
exhibits,
including 150 demonstrative exhibits, 32 depositions
and 41
affidavits. In addition, eleven
witnesses testified. On
October
18, 2000 the district court denied preliminary injunc-
tive relief. The court concluded that it was "more
probable
than not that consummation of the Heinz/Beech-Nut merger
will
actually increase competition in jarred baby food in the
United
States." H.J. Heinz, 116 F. Supp.
2d at 200. The
FTC appealed and
sought injunctive relief pending appeal,
which this court granted on
November 8, 2000. On Novem-
ber
22, 2000 the FTC filed an administrative complaint
against Heinz and
Beech-Nut, charging that the proposed
merger violates section 5 of the
FTCA and, if consummated,
would violate section 7 of the Clayton
Act. In the Matter of
H. J.
Heinz, Docket No. 9295 (filed Nov. 22, 2000).
II. Analysis
A. Standard of Review
We review a district court order denying preliminary in-
junctive
relief for abuse of discretion, National Wildlife Fed'n
v. Burford, 835
F.2d 305, 319 (D.C. Cir. 1987), and will set
aside the court's factual
findings only if they are "clearly
erroneous." Fed. R. Civ. P. 52(a); United States v. Marine
Bancorporation,
Inc., 418 U.S. 602, 615 n.13 (1974). If
our
review of the district court order "reveals that it rests on an
erroneous premise as to the pertinent law, however, we must
examine
the decision in light of the legal principles we believe
proper and
sound." Ambach v. Bell, 686 F.2d
974, 979 (D.C.
Cir. 1982). We
apply de novo review to the district court's
__________
or
total assets of at least $100 million.
The acquirer must have at
least 15 per cent or $15 million worth
of the target firm's voting
securities or assets. 15 U.S.C. s 18a(a). Filers must disclose
specific
financial and market data and pay a filing fee.
conclusions of law. See FTC v. National
Tea Co., 603 F.2d
694, 696-98 (8th Cir. 1979) (reviewing de novo proper
stan-
dard of proof under section 13(b) of FTCA); cf. FTC v.
Warner Communications Inc.,
742 F.2d 1156, 1160 (9th Cir.
1984) (per curiam) (finding as matter of
law district court
applied incorrect standard for section 7
violation). In decid-
ing whether
to grant preliminary injunctive relief under
section 13(b), the court
evaluates whether it is in the public
interest to enjoin the proposed
merger. See 15 U.S.C.
s
53(b).
B. Section 7 of the Clayton Act
Section 7 of the Clayton Act prohibits acquisitions,
includ-
ing mergers, "where in any line of commerce or in any
activity
affecting commerce in any section of the country, the
effect of such
acquisition may be substantially to lessen
competition, or to tend to
create a monopoly." 15 U.S.C.
s 18; see United States v.
Philadelphia Nat'l Bank, 374 U.S.
321, 355 (1963) ("The statutory
test is whether the effect of
the merger 'may be substantially to lessen
competition' 'in
any line of commerce in any section of the country.'
"). The
"Congress used the
words 'may be substantially to lessen
competition' (emphasis supplied),
to indicate that its concern
was with probabilities, not
certainties." Brown Shoe Co. v.
United States, 370 U.S. 294, 323 (1962) (emphasis original);
see S. Rep. No. 1775, at 6 (1950)
("The use of these words
["may be"] means that the bill,
if enacted, would not apply to
the mere possibility but only to the
reasonable probability of
the pr[o]scribed effect...."). "Merger enforcement, like oth-
er
areas of antitrust, is directed at market power. It shares
with the law of monopolization a degree of
schizophrenia: an
aversion to
potent power that heightens risk of abuse;
and
tolerance of that degree of power required to attain economic
benefits." Lawrence A.
Sullivan & Warren S. Grimes, The
Law of Antitrust s 9.1, at 511
(2000). The Congress has
empowered
the FTC, inter alia, to weed out those mergers
whose effect "may be
substantially to lessen competition"
from those that enhance
competition. See H.R. Rep. No.
1142,
at 18-19 (1914). In section 13(b) of
the FTCA, the
Congress provided a mechanism whereby the FTC may seek
preliminary injunctive relief preventing the merging parties
from consummating the merger until the Commission has had
an opportunity
to investigate and, if necessary, adjudicate the
matter.
C.
Section 13(b) of the Federal Trade Commission Act
"Whenever the Commission has reason to believe that a
corporation is violating, or is about to violate, Section 7 of the
Clayton
Act, the FTC may seek a preliminary injunction to
prevent a merger
pending the Commission's administrative
adjudication of the merger's
legality." FTC v. Staples, Inc.,
970 F. Supp. 1066, 1070 (D.D.C. 1997);
see 15 U.S.C. s 53(b).
Section 13(b) provides for the grant of a
preliminary injunc-
tion where such action would be in the public
interest--as
determined by a weighing of the equities and a consideration
of the Commission's likelihood of success on the merits. 15
U.S.C. s 53(b).5 The Congress intended this standard to
depart from what it regarded as the then-traditional equity
standard,
which it characterized as requiring the plaintiff to
show: (1) irreparable damage, (2) probability of
success on
the merits and (3) a balance of equities favoring the
plaintiff.
H.R. Rep. No. 93-624,
at 31 (1971). The Congress deter-
mined
that the traditional standard was not "appropriate for
the
implementation of a Federal statute by an independent
regulatory agency
where the standards of the public interest
measure the propriety and the
need for injunctive relief."
Id.
"The courts had
evolved an approach to cases in which
government agencies, acting to
enforce a federal statute,
sought interim relief. The agency, in such cases, was not
held
to the high thresholds applicable where private parties
seek interim
restraining orders." FTC v.
Weyerhaeuser Co.,
665 F.2d 1072, 1082 (D.C. Cir. 1981); see FTC v. Exxon
Corp., 636 F.2d 1336,
1343 (D.C. Cir. 1980) ("In enacting
[Section 13(b)], Congress
further demonstrated its concern
that injunctive relief be broadly
available to the FTC by
__________
5 Section 13(b) of the FTCA provides that "[u]pon a
proper
showing that, weighing the equities and considering the
Commis-
sion's likelihood of ultimate success, such action would be in the
public interest, ... a preliminary injunction may be granted." 15
U.S.C. s 53(b).
incorporating a unique 'public interest' standard in 15 U.S.C.
s 53(b),
rather than the more stringent, traditional 'equity'
standard for
injunctive relief."). The FTC is
not required to
establish that the proposed merger would in fact violate
section 7 of the Clayton Act.
Staples, 970 F. Supp. at 1071;
see FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1342 (4th
Cir.
1976) ("The district court is not authorized to determine
whether
the antitrust laws have been or are about to be
violated. That
adjudicatory function is vested in the FTC in
the first
instance."). We now consider the
FTC's likelihood of
success and weigh the equities. Accord FTC v. Freeman
Hosp., 69 F.3d
260, 267 (8th Cir. 1995); FTC v.
University
Health, Inc., 938 F.2d 1206, 1217 (11th Cir. 1991); Warner
Communications, 742 F.2d at
1160.
1.
Likelihood of Success
To
determine likelihood of success on the merits we mea-
sure the probability
that, after an administrative hearing on
the merits, the Commission will
succeed in proving that the
effect of the Heinz/Beech-Nut merger
"may be substantially
to lessen competition, or to tend to create a
monopoly" in
violation of section 7 of the Clayton Act. 15 U.S.C. s
18. This
court and others have
suggested that the standard for likeli-
hood of success on the merits is
met if the FTC "has raised
questions going to the merits so serious,
substantial, difficult
and doubtful as to make them fair ground for
thorough
investigation, study, deliberation and determination by the
FTC in the first instance and ultimately by the Court of
Appeals." FTC v. Beatrice Foods Co., 587 F.2d 1225,
1229
(D.C. Cir. 1978) (Appendix to Statement of MacKinnon &
Robb,
JJ.)6; Staples, 970 F. Supp. at
1071; Warner Commu-
nications, 742
F.2d at 1162 (quoting National Tea, 603 F.2d
at 698); see University Health, 938 F.2d at
1218. This
specific standard was
articulated by the court below, see H.J.
__________
6 In Beatrice Foods, two members of the
court, writing separately
from a denial of en banc review, included the
quoted language from
an unpublished judgment and memorandum issued
earlier in the
litigation.
Heinz, 116 F. Supp. 2d at 194, and it is a standard to which
the
appellees have not objected.
In United States v. Baker Hughes Inc., 908 F.2d 981, 982-
83 (D.C.
Cir. 1990), we explained the analytical approach by
which the government
establishes a section 7 violation.
First
the government must show that the merger would produce
"a
firm controlling an undue percentage share of the relevant
market,
and [would] result[ ] in a significant increase in the
concentration of
firms in that market."
Philadelphia Nat'l
Bank, 374 U.S. at 363. Such a showing establishes a
"pre-
sumption" that the merger will substantially lessen
competi-
tion. See Baker Hughes,
908 F.2d at 982. To rebut the
presumption,
the defendants must produce evidence that
"show[s] that the
market-share statistics [give] an inaccurate
account of the [merger's]
probable effects on competition" in
the relevant market. United States v. Citizens & S. Nat'l
Bank, 422 U.S. 86, 120 (1975).7
"If the defendant successfully
rebuts the presumption [of
illegality], the burden of producing
additional evidence of
anticompetitive effect shifts to the
government, and merges with the
ultimate burden of persua-
sion, which remains with the government at all
times." Bak-
er Hughes Inc.,
908 F.2d at 983; see also Kaiser
Aluminum,
652 F.2d at 1340 & n.12.
Although Baker Hughes was
decided at the merits stage as opposed
to the preliminary
injunctive relief stage, we can nonetheless use its
analytical
approach in evaluating the Commission's showing of
likeli-
__________
7 To rebut the defendants may rely on "[n]onstatistical evidence
which casts doubt on the persuasive quality of the statistics to
predict
future anticompetitive consequences" such as "ease of entry
into
the market, the trend of the market either toward or away
from
concentration, and the continuation of active price competi-
tion." Kaiser Aluminum & Chem. Corp. v. FTC,
652 F.2d 1324,
1341 (7th Cir. 1981).
In addition, the defendants may demonstrate
unique economic
circumstances that undermine the predictive value
of the government's
statistics. See United States v.
General Dy-
namics Corp., 415 U.S. 486, 506-10 (1974) (fundamental changes
in
structure of coal market made market concentration statistics
inac-
curate predictors of anticompetitive effect); see also University
Health, 938 F.2d
at 1218.
hood of success. Accordingly, we look
at the FTC's prima
facie case and the defendants' rebuttal
evidence.
a. Prima Facie Case
Merger law "rests upon the theory
that, where rivals are
few, firms will be able to coordinate their
behavior, either by
overt collusion or implicit understanding, in order
to restrict
output and achieve profits above competitive
levels." FTC v.
PPG Indus.,
798 F.2d 1500, 1503 (D.C. Cir. 1986).8
Increases
in concentration above certain levels are thought to
"raise[ ] a
likelihood of 'interdependent anticompetitive conduct.'
" Id.
(quoting General
Dynamics, 415 U.S. at 497); see FTC v.
Elders Grain, 868 F.2d 901, 905 (7th Cir. 1989). Market
concentration, or the lack
thereof, is often measured by the
Herfindahl-Hirschmann Index (HHI). See Staples, 970
F. Supp. at 1081
n.12.9
__________
8
A "horizontal merger" involves firms selling the same or similar
products in a common geographical market.
9 "The FTC and the Department of
Justice, as well as most
economists, consider the measure superior to
such cruder measures
as the four-or eight-firm concentration ratios which
merely sum up
the market shares of the largest four or eight
firms." PPG, 798
F.2d at
1503. The Department of Justice and the
FTC rely on the
HHI in evaluating proposed horizontal mergers. See United States
Dep't of Justice
& Federal Trade Comm'n, Horizontal Merger
Guidelines ss 1.5, 1.51
(1992), as revised (1997). The HHI is
calculated by totaling the squares of the market shares of every
firm
in the relevant market. For example, a
market with ten firms
having market shares of 20%, 17%, 13%, 12%, 10%,
10%, 8%, 5%,
3% and 2% has an HHI of 1304 (202 + 172 + 132 + 122 + 102 +
102 + 82 + 52 +32 +22). If the
firms with 13% and 5% market
shares were to merge, the HHI would increase
by 130 points,
expressed by the formula 2ab, which is derived from (a+b)2
or a2 +
2ab + b2. Under the
Merger Guidelines a market with a post-
merger HHI above 1800 is
considered "highly concentrated" and
mergers that increase the
HHI in such a market by over 50 points
"potentially raise significant
competitive concerns." Id. at s
1.51.
Mergers "producing an
increase in the HHI of more than 100 points
[in such markets] are
[presumed] likely to create or enhance market
Sufficiently large HHI figures
establish the FTC's prima
facie case that a merger is
anti-competitive. See Baker
Hughes,
908 F.2d at 982-83 & n.3; PPG, 798
F.2d at 1503.
The district court
found that the pre-merger HHI "score for
the baby food industry is
4775"--indicative of a highly con-
centrated industry.10 H.J. Heinz, 116 F. Supp. 2d at 196; see
PPG, 798 F.2d at 1503; Horizontal Merger Guidelines, supra,
s
1.51. The merger of Heinz and Beech-Nut
will increase
the HHI by 510 points.
This creates, by a wide margin, a
presumption that the merger will
lessen competition in the
domestic jarred baby food market. See Horizontal Merger
Guidelines,
supra, s 1.51 (stating that HHI increase of more
than 100 points, where
post-merger HHI exceeds 1800, is
"presumed ... likely to create or
enhance market power or
facilitate its exercise"); see also Baker Hughes, 908 F.2d at
982-83
& n.3; PPG, 798 F.2d at
1503.11 Here, the FTC's
__________
power
or facilitate its exercise."
Id. Although the Merger
Guide-
lines are not binding on the court, they provide "a useful
illustration
of the application of the HHI." PPG, 798 F.2d at 1503 n.4.
10 To determine the HHI score the
district court first had to
define the relevant market. The court defined the product market
as
jarred baby food and the geographic market as the United
States. H.J. Heinz, 116 F. Supp. 2d at 195. The parties do not
challenge the
court's definition.
11
The FTC argues that this finding alone--that it is certain to
establish a
prima facie case--entitles it to preliminary injunctive
relief under
PPG. We disagree with the Commission's
reading of
PPG. In PPG, the
Commission appealed the district court's denial
of its request for a
preliminary injunction to prevent PPG Indus-
tries, the world's largest
producer of glass aircraft transparencies,
from acquiring Swedlow, Inc.,
the world's largest manufacturer of
acrylic aircraft transparencies. 798 F.2d at 1502. After defining
the relevant market and determining market
share, the district
court found that the merger would significantly
increase the concen-
tration in an already highly concentrated
market. It also "found
high
market-entry barriers that would prolong high market concen-
tration." Id. at 1503. On appeal, this court stated:
"There is no
doubt that the pre-and post-acquisition HHI's
and market shares
found in this case entitle the Commission to some
preliminary
relief."
Id. This statement came,
however, in the context of a case
market concentration statistics12
are bolstered by the indis-
putable fact that the merger will eliminate
competition be-
tween the two merging parties at the wholesale level,
where
they are currently the only competitors for what the district
court described as the "second position on the supermarket
shelves." H.J. Heinz, 116 F. Supp. 2d at 196. Heinz's own
documents recognize the
wholesale competition and anticipate
that the merger will end it. JA 2680;
see also JA 2185.
Indeed,
those documents disclose that Heinz considered three
options to end the
vigorous wholesale competition with
Beech-Nut: two involved innovative measures while the third
entailed
the acquisition of Beech-Nut. JA
2184. Heinz
chose the third, and
least pro-competitive, of the options.
Finally, the anticompetitive effect of the merger is further
enhanced by high barriers to market entry.13 The district
__________
in which the appellants
offered no rebuttal (other than the observa-
tion of rapid and continuing
technological changes in the industry)
to the presumption generated by the
market concentration data on
which the FTC based its prima facie
showing. Id. at 1506. The
court then noted the rule
established in Weyerhaeuser that the FTC
is entitled to a
"presumption in favor of a preliminary injunction
when [it]
establishes a strong likelihood of success on the merits."
Id. at 1507.
12 The Supreme Court has cautioned that
statistics reflecting
market share and concentration, while of great
significance, are not
conclusive indicators of anticompetitive
effects. See General Dy-
namics,
415 U.S. at 498; Brown Shoe, 370 U.S.
at 322 n.38
("Statistics reflecting the shares of the market
controlled by the
industry leaders and the parties to the merger are, of
course, the
primary index of market power; but only a further examination of
the particular
market--its structure, history and probable future--
can provide the
appropriate setting for judging the probable anti-
competitive effect of
the merger."). In General Dynamics
the
Supreme Court held that the market share statistics the Commis-
sion
used to seek divestiture of the merged firm were insufficient
because, in
failing to take into account the acquired firm's long-term
contractual
commitments (coal contracts), the statistics overestimat-
ed the acquired
firm's ability to compete in the relevant market in
the future. General Dynamics, 415 U.S. at 500-504.
13 Barriers to entry are important in
evaluating whether market
concentration statistics accurately reflect the
pre- and likely post-
court found that there had been no significant
entries in the
baby food market in decades and that new entry was
"diffi-
cult and improbable."
H.J. Heinz, 116 F. Supp. 2d at 196.
This finding largely eliminates the possibility that the re-
duced
competition caused by the merger will be ameliorated
by new competition
from outsiders and further strengthens
the FTC's case. See University Health, 938 F.2d at 1219
&
n.26.
As far
as we can determine, no court has ever approved a
merger to duopoly under
similar circumstances.
b. Rebuttal Arguments
In response to the FTC's prima facie
showing, the appel-
lees make three rebuttal arguments, which the district
court
accepted in reaching its conclusion that the merger was not
likely
to lessen competition substantially.
For the reasons
__________
merger competitive
picture. Cf. Baker Hughes, 908 F.2d at 987.
If entry barriers are low, the threat of outside entry can
significant-
ly alter the anticompetitive effects of the merger by deterring
the
remaining entities from colluding or exercising market power. See
United States v. Falstaff Brewing
Corp., 410 U.S. 526, 532-33
(1973);
Baker Hughes, 908 F.2d at 987 ("In the absence of signifi-
cant
barriers, a company probably cannot maintain supracompeti-
tive pricing
for any length of time.");
Horizontal Merger Guide-
lines, supra, s 3.0 ("A merger is not
likely to create or enhance
market power or to facilitate its exercise,
if entry into the market is
so easy that market participants, after the
merger, either collective-
ly or unilaterally could not profitably
maintain a price increase
above premerger levels."). Low barriers to entry enable a potential
competitor to deter anticompetitive behavior by firms within the
market
simply by its ability to enter the market.
FTC v. Procter &
Gamble Co., 386 U.S. 568, 581 (1967)
("It is clear that the existence
of Procter at the edge of the
industry exerted considerable influ-
ence on the market."). Existing firms know that if they collude or
exercise market power to charge supracompetitive prices, entry by
firms
currently not competing in the market becomes likely, there-
by increasing
the pressure on them to act competitively.
See Baker
Hughes, 908 F.2d at 988; Byars v. Bluff City News Co., 609 F.2d
843, 851 n.19 (6th
Cir. 1979).
discussed below, these arguments fail and thus were not a
proper basis
for denying the FTC injunctive relief.
1. Extent of Pre-Merger Competition
The appellees first contend, and the district court agreed,
that Heinz and Beech-Nut do not really compete against each
other
at the retail level. Consumers do not
regard the
products of the two companies as substitutes, the appellees
claim, and generally only one of the two brands is available on
any
given store's shelves. Hence, they
argue, there is little
competitive loss from the merger.
This argument has a number of flaws which
render clearly
erroneous the court's finding that Heinz and Beech-Nut
have
not engaged in significant pre-merger competition. First, in
accepting the appellees'
argument that Heinz and Beech-Nut
do not compete, the district court
failed to address the record
evidence that the two do in fact price
against each other, see,
e.g., 8/31/2000 Tr. 247-48, and that, where both
are present in
the same areas,14 they depress each other's prices as well
as
those of Gerber even though they are virtually never all found
in
the same store. See, e.g., 8/30/2000
Tr. 147-48, 172; PX
531 at p
8; PX 481 at p 12; PX 479 at p p 6-7; PX 478 at p 6;
DX
14 at RP-110. This evidence undermines
the district
court's factual finding.
Second, the district court's finding is
inconsistent with its
conclusion that there is a single, national market
for jarred
baby food in the United States. The Supreme Court has
explained that "[t]he outer
boundaries of a product market
are determined by the reasonable
interchangeability of use
[by consumers] or the cross-elasticity of
demand between the
product itself and substitutes for it." Brown Shoe, 370 U.S.
at 325; see also United States v. E.I. du Pont de
Nemours &
Co., 351 U.S. 377, 395 (1956).15 The definition of product
__________
14 There are at least ten metropolitan
areas in which Heinz and
Beech-Nut both have more than a 10 per cent
market share and
their combined share exceeds 35 per cent. PX 781 at Ex. 1B.
15 Interchangeability of use and
cross-elasticity of demand look to
the availability of products that are
similar in nature or use and the
market thus "focuses solely
on demand substitution factors,"
i.e., that consumers regard the
products as substitutes. Hori-
zontal
Merger Guidelines, supra, s 1.0;
Sullivan & Grimes,
supra, s 11.2b1, at 579. By defining the relevant product
market
generically as jarred baby food, the district court
concluded that in
areas where Heinz's and Beech-Nut's prod-
ucts are both sold, consumers
will switch between them in
response to a "small but significant and
nontransitory in-
crease in price (SSNIP)." Horizontal Merger Guidelines,
supra, s 1.11; H.J. Heinz, 116 F. Supp. 2d at 195. The
district court never explained
this inherent inconsistency in
its logic nor could counsel for the
appellees explain it at oral
argument.
Third, and perhaps most important, the
court's conclusion
concerning pre-merger competition does not take into
account
the indisputable fact that the merger will eliminate
competi-
tion at the wholesale level between the only two competitors
for the "second shelf" position. Competition between Heinz
and Beech-Nut to gain accounts at
the wholesale level is
fierce with each contest concluding in a
winner-take-all result.
JA
2680. The district court regarded this
loss of competition
as irrelevant because the FTC did not establish to
its satisfac-
tion that wholesale competition ultimately benefitted
consum-
ers through lower retail prices.
The district court concluded
that fixed trade spending did not
affect consumer prices and
that "the FTC's assertion that the
proposed merger will
affect variable trade spending levels and consumer
prices is
... at best, inconclusive."16 H.J. Heinz, 116 F. Supp. 2d at
197. Although the court noted the FTC's examples
of con-
__________
degree to which buyers are willing to
substitute those similar
products for one another. See E.I. du Pont de Nemours, 351 U.S.
at
393.
16 Fixed trade
spending consists of "slotting fees," "pay-to-stay"
arrangements,
new store allowances and other payments to retail-
ers in exchange for
shelf space and desired product display.
H.J.
Heinz, 116 F. Supp. 2d at 197. Variable trade spending includes
payments to retailers tied
to sales volume and intended to insure a
specific sales volume and lower
shelf price. Id.
sumer benefit through couponing initiatives, the court held
that it was
"impossible to conclude with any certainty that the
consumer benefit
from such couponing initiatives would be
lost in the merger." Id.
In rejecting the FTC's argument regarding the loss of
wholesale
competition, the court committed two legal errors.
First, as the
appellees conceded at oral argument, no court
has ever held that a
reduction in competition for wholesale
purchasers is not relevant unless
the plaintiff can prove
impact at the consumer level. Oral Arg. Tr. at 22, 28; see
Hospital Corp. of Am. v. FTC, 807
F.2d 1381, 1389 (7th Cir.
1986) ("Section 7 does not require proof
that a merger or
other acquisition has caused higher prices in the
affected
market. All that is necessary
is that the merger create an
appreciable danger of [collusive practices]
in the future. A
predictive judgment, necessarily probabilistic and
judgmental
rather than demonstrable, is called for.") (citation
omitted).
Second, it is, in any event, not the FTC's burden to prove
such an impact with "certainty." To the contrary, the anti-
trust laws assume that a retailer
faced with an increase in the
cost of one of its inventory items
"will try so far as competi-
tion allows to pass that cost on to its
customers in the form of
a higher price for its product." In re Brand Name Prescrip-
tion Drugs
Antitrust Litig., 123 F.3d 599, 605 (7th Cir. 1997),
reh'g and suggestion
for reh'g en banc denied (Oct. 8, 1997).
Section 7 is, after all,
concerned with probabilities, not cer-
tainties. United States v. El Paso Natural Gas Co., 376 U.S.
651, 658
(1964); Brown Shoe, 370 U.S. at
323; Baker Hughes,
908 F.2d at
984).17
__________
17 Although the merger's effects on the wholesale market for baby
food
are important to a determination of whether the merger is
likely to
reduce competition in the baby food market overall, we
reject the FTC's
argument here that the "wholesale competition"
between Heinz
and Beech-Nut is an entirely distinct "line of
commerce" within
the meaning of section 7 of the Clayton Act such
that it must be analyzed
independently from "retail competition."
The Congress amended section 7 in 1950 "to make the
measure of
anticompetitive acquisitions the extent to which they lessened
com-
petition 'in any line of commerce,' rather than the extent to which
2. Post-Merger Efficiencies
The appellees' second attempt to rebut the FTC's prima
facie
showing is their contention that the anticompetitive
effects of the
merger will be offset by efficiencies resulting
from the union of the two
companies, efficiencies which they
assert will be used to compete more
effectively against Ger-
ber. It
is true that a merger's primary benefit to the
economy is its potential
to generate efficiencies. See
general-
ly 4A Phillip E. Areeda, Herbert Hovenkamp & John L.
Solow,
Antitrust Law p 970 at 22-25 (1998). As
the Merger
Guidelines now recognize, efficiencies "can enhance the
merged firm's ability and incentive to compete, which may
result in
lower prices, improved quality, or new products."
Horizontal Merger Guidelines, supra, s
4.
Although the Supreme
Court has not sanctioned the use of
the efficiencies defense in a section
7 case, see Procter &
Gamble Co., 386 U.S. at 580,18 the trend among
lower courts
__________
they lessened competition 'between'
the two companies." Citizen
Publishing
Co. v. United States, 394 U.S. 131, 137 n.3 (1969).
Courts interpret "line of commerce" as synonymous
with the rele-
vant product market.
See General Dynamics, 415 U.S. at 510;
Falstaff Brewing, 410 U.S. at 531-32. The district court defined
only one market--jarred baby
food sold throughout the line of
commerce in the United States. Thus, the proper "line of com-
merce"
for analysis in this case is the overall market for jarred
baby food,
which includes both retail and wholesale levels. At this
point in the proceedings, the wholesale market
cannot be separated
out for analysis without regard to the merger's
effect on other
levels of competition.
18 In Procter & Gamble Co., 386 U.S.
at 580, the Supreme Court
stated that "[p]ossible economies cannot
be used as a defense to
illegality" in section 7 merger cases. The issue is, however, not a
closed book. See Staples, 970 F. Supp. at 1088
(collecting cases).
Areeda and
Turner explain that "[i]n interpreting the Clorox lan-
guage,
moreover, observe that the court referred only to 'possible'
economies
and to economies that 'may' result from mergers that
lessen
competition. To reject an economies
defense based on mere
possibilities does not mean that one should reject
such a defense
based on more convincing proof." 4 Phillip Areeda & Donald
is
to recognize the defense. See, e.g.,
FTC v. Tenet Health
Care Corp., 186 F.3d 1045, 1054 (8th Cir. 1999),
reh'g and
reh'g en banc denied (Oct. 6. 1999); University Health, 938
F.2d at 1222; FTC v. Cardinal Health, Inc., 12 F. Supp. 2d
34, 61 (D.D.C. 1998); Staples,
970 F. Supp. at 1088-89; see
also
ABA Antitrust Section, Mergers and Acquisitions: Un-
derstanding the Antitrust Issues 152 (2000) ("The
majority of
courts have considered efficiencies as a means to rebut the
government's prima facie case that a merger will lead to
restricted
output or increased prices. These
courts, however,
generally have found inadequate proof of efficiencies to
sus-
tain a rebuttal of the government's case."). In 1997 the
Department of Justice and
the FTC revised their Horizontal
Merger Guidelines to recognize that
"mergers have the po-
tential to generate significant efficiencies by
permitting a
better utilization of existing assets, enabling the combined
firm to achieve lower costs in producing a given quantity and
quality
than either firm could have achieved without the
proposed
transaction." Horizontal Merger
Guidelines, supra,
s 4.
Nevertheless, the high market concentration levels present
in this
case require, in rebuttal, proof of extraordinary effi-
ciencies, which
the appellees failed to supply. See
University
Health, 938 F.2d at 1223 ("[A] defendant who seeks to
overcome a presumption that a proposed acquisition would
substantially
lessen competition must demonstrate that the
intended acquisition would
result in significant economies and
that these economies ultimately would
benefit competition
and, hence, consumers."); Horizontal Merger Guidelines, su-
pra,
s 4 (stating that "[e]fficiencies almost never justify a
merger to
monopoly or near-monopoly"); 4A
Areeda, et al.,
Antitrust Law p 971f, at 44 (requiring
"extraordinary" effi-
ciencies where the "HHI is well above
1800 and the HHI
increase is well above 100"). Moreover, given the high con-
__________
Turner,
Antitrust Law p 941b, at 154 (1980).
They conclude that
"[t]he Court's brief and unelaborated
language [in Clorox] cannot
reasonably be taken as a definitive
disposition of so important and
complex an issue as the role of economies
in analyzing legality of a
merger."
Id.
centration levels, the court must undertake a rigorous analy-
sis of the
kinds of efficiencies being urged by the parties in
order to ensure that
those "efficiencies" represent more than
mere speculation and
promises about post-merger behavior.
The district court did not undertake that analysis here.
In support of its conclusion that
post-merger efficiencies
will outweigh the merger's anticompetitive
effects, the district
court found that the consolidation of baby food
production in
Heinz's under-utilized Pittsburgh plant "will achieve
substan-
tial cost savings in salaries and operating costs." H.J. Heinz,
16 F. Supp. 2d at
199. The court also credited the
appellees'
promise of improved product quality as a result of recipe
consolidation.19 The only cost
reduction the court quantified
as a percentage of pre-merger costs,
however, was the so-
called "variable conversion cost": the cost of processing the
volume of
baby food now processed by Beech-Nut.
The
court accepted the appellees' claim that this cost would be
reduced by 43% if the Beech-Nut production were shifted to
Heinz's
plant, see JA 4619, a reduction the appellees' expert
characterized as
"extraordinary."
The district court's analysis falls short of the findings
necessary
for a successful efficiencies defense in the circum-
stances of this
case. We mention only three of the most
important deficiencies here.
First, "variable conversion cost"
is only a percentage
of the total variable manufacturing cost.
A large percentage reduction in only a small portion of the
company's
overall variable manufacturing cost does not neces-
sarily translate into
a significant cost advantage to the merg-
er. Thus, for cost reduction to be relevant, we must at least
__________
19 In addition, the district court described
Heinz's distribution
network as much more efficient than
Beech-Nut's. H.J. Heinz, 116
F.
Supp. 2d at 199. It failed to find,
however, a significant
diseconomy of scale in distribution from which
either Heinz or
Beech-Nut suffers.
4A Areeda, et al., supra, p 975e1, at 73. In
other words, although Beech-Nut has an inefficient
distribution
system, it can make that system more efficient without
merger.
Heinz's own efficient
distribution network illustrates that a firm the
size of Beech-Nut does
not need to merge in order to attain an
efficient distribution
system.
consider the percentage of Beech-Nut's total variable manu-
facturing cost
that would be reduced as a consequence of the
merger. At oral argument, the appellees' counsel
agreed.
Oral Arg. Tr. at 43. This
correction immediately cuts the
asserted efficiency gain in half since,
according to the appel-
lees' evidence, using total variable manufacturing
cost as the
measure cuts the cost savings from 43% to 22.3%. See JA
4620.
Second, the percentage reduction in Beech-Nut's cost is still
not
the relevant figure. After the merger,
the two entities
will be combined, and to determine whether the merged
entity will be a significantly more efficient competitor, cost
reductions
must be measured across the new entity's com-
bined production--not just
across the pre-merger output of
Beech-Nut. See 4A Areeda, et al., supra, p 976d at 93-94.
The district court, however, did not
consider the cost reduc-
tion over the merged firm's combined output. At oral argu-
ment the appellees'
counsel was unable to suggest a formula
that could be used for
determining that cost reduction. See
Oral Arg. Tr. at 45-47.
Finally, and as the district court recognized, the asserted
efficiencies
must be "merger-specific" to be cognizable as a
defense.20 H.J. Heinz, 116 F. Supp. 2d at 198-99; see
__________
20 The Horizontal Merger Guidelines
explain that "merging firms
must substantiate efficiency claims so
that the Agency can verify by
reasonable means the likelihood and
magnitude of each asserted
efficiency, how and when each would be
achieved (and any costs of
doing so), how each would enhance the merged
firm's ability and
incentive to compete, and why each would be merger-specific.
Efficiency claims will not be
considered if they are vague or
speculative or otherwise cannot be
verified by reasonable means."
Horizontal Merger Guidelines, supra, s 4. Regarding the types of
efficiencies
asserted here, the Guidelines state:
The Agency has found that certain types of efficiencies are
more likely to be cognizable
and substantial than others. For
example, efficiencies resulting from
shifting production among
facilities formerly owned separately, which enable the merging
firms to reduce the marginal cost of
production, are more likely
to be susceptible to verification, merger-specific, and substan-
Horizontal Merger Guidelines,
supra, s 4; 4A Areeda, et al.,
supra,
p 973, at 49-62. That is, they must be
efficiencies that
cannot be achieved by either company alone because, if
they
can, the merger's asserted benefits can be achieved without
the
concomitant loss of a competitor. See
generally 4A
Areeda, et al., supra, p 973. Yet the district court never
explained why Heinz could not
achieve the kind of efficiencies
urged without merger. As noted, the principal merger bene-
fit
asserted for Heinz is the acquisition of Beech-Nut's better
recipes,
which will allegedly make its product more attractive
and permit expanded
sales at prices lower than those charged
by Beech-Nut, which produces at
an inefficient plant. Yet,
neither
the district court nor the appellees addressed the
question whether Heinz
could obtain the benefit of better
recipes by investing more money in
product development and
promotion--say, by an amount less than the amount
Heinz
would spend to acquire Beech-Nut.
At oral argument,
Heinz's counsel agreed that the taste of Heinz's
products was
not so bad that no amount of money could improve the
brand's
consumer appeal. Oral Arg. Tr. at
54. That being
the case, the
question is how much Heinz would have to spend
to make its product
equivalent to the Beech-Nut product and
hence whether Heinz could achieve
the efficiencies of merger
without eliminating Beech-Nut as a
competitor. The district
court,
however, undertook no inquiry in this regard.
In
short, the district court failed to make the kind of factual
determinations necessary to render the appellees' efficiency
defense
sufficiently concrete to offset the FTC's prima facie
showing.
__________
tial, and are less likely to result from
anticompetitive reduc-
tions
in output. Other efficiencies, such as
those relating to
research and
development, are potentially substantial but are
generally less susceptible to
verification and may be the result
of anticompetitive output reductions.
Yet others, such as those
relating to procurement, management, or capital cost are less
likely to be merger-specific or
substantial, or may not be
cognizable for other reasons.
Id.
3. Innovation
The appellees claim
next that the merger is required to
enable Heinz to innovate, and thus to
improve its competitive
position against Gerber. Heinz and Beech-Nut asserted, and
the
district court found, that without the merger the two
firms are unable to
launch new products to compete with
Gerber because they lack a sufficient
shelf presence or ACV.
See H.J.
Heinz, 116 F. Supp. 2d at 199-200. This
kind of
defense is often a speculative proposition. See 4A Areeda, et
al., supra, p 975g
(noting "truly formidable" proof problems
in determining
innovation economies). In this case,
given the
old-economy nature of the industry as well as Heinz's position
as the world's largest baby food manufacturer, it is a particu-
larly
difficult defense to prove. The court
below accepted the
appellees' argument principally on the basis of their
expert's
testimony that new product launches are cost-effective only
when a firm's ACV is 70% or greater (Heinz's is presently
40%; Beech-Nut's is 45%). That testimony, in turn, was
based on
a graph that plotted revenue against ACV.
Accord-
ing to the expert, the graph showed that only four out of
27
new products launched in 1995 had been successful--all for
companies
with an ACV of 70% or greater.
The chart, however, does not establish this proposition and
the
court's consequent finding that the merger is necessary
for innovation is
thus unsupported and clearly erroneous.
All
the chart plotted was revenue against ACV and hence all it
showed was the unsurprising fact that the greater a compa-
ny's ACV,
the greater the revenue it received.
Because the
graph did not plot the profitability (or any measure
of "cost-
effectiveness"), there is no way to know whether the
expert's
claim--that a 70% ACV is required for a launch to be
"successful"
in an economic sense--is true.21
Moreover, the
__________
21 For example, a 5 cent piece of bubble gum introduced with a
90% ACV could appear as a failure on the graph because of low
revenue
but nonetheless be profitable. On the
other hand, a high
priced grocery product introduced with the same ACV
could gener-
ate a lot of revenue (and thus appear as a
"success" on the graph)
yet be unprofitable.
number of data points on the chart were few;
they were
limited to launches in a single year; and they involved
launches of all new
grocery products rather than of baby food
alone. Assessing such data's statistical
significance in estab-
lishing the proposition at issue, i.e., the
necessity of 70% ACV
penetration, is thus highly speculative. The district court did
not even
address the question of the data's statistical signifi-
cance and the
appellees' counsel could offer no help at oral
argument. See Oral Arg. Tr. at 39 ("I'm not aware
of the
statistical significance of the underlying study.").22 In the
absence of reliable and
significant evidence that the merger
will permit innovation that
otherwise could not be accom-
plished, the district court had no basis to
conclude that the
FTC's showing was rebutted by an innovation
defense.
Moreover,
Heinz's insistence on a 70-plus ACV before it
brings a new product to
market may be largely to persuade
the court to recognize promotional
economies as a defense.
Heinz
argues that to profitably launch a new product, it must
have nationwide
market penetration to recoup the money
spent on advertising and
promotion. It wants to spread
advertising
costs out among as many product units as possi-
ble, thereby lowering the
advertising cost per unit. It does
not want to "waste" promotional expenditures in markets
where
its products are not on the shelf or where they are on
only a few
shelves. For example, in a metropolitan
area in
which Heinz has a 75 per cent ACV, every dollar spent on
__________
22 The graph evidence is also not useful
unless we know the
"sunk" costs in bringing the product to
market and the manufactur-
er's fixed and variable costs in producing the
product. Sunk costs
are costs
that have already been incurred such as research and
development and
promotional expenses, including brand name de-
velopment. See Henry N. Butler, Economic Analysis for
Lawyers
935 (1998). Fixed costs
refer to those expenses that do not vary
with output and will be incurred
as long as the firm continues in
business. Variable costs are those that change with the rate of
output
such as wages paid to workers and payments for raw
materials. See id. at 920, 936; E. Thomas Sullivan & Jeffrey L.
Harrison,
Understanding Antitrust and its Economic Implications
19-21 (3d ed.
1998).
advertising is two or three times more "effective" than in a
market
in which it has only a 25 per cent ACV.
As one
authority notes, however, "[t]he case for recognizing
a de-
fense based on promotional economies is relatively weak."
4A Areeda, et al., supra, p 975f, at
77. The district court
accepted
Heinz's claim that it could not introduce new prod-
ucts without at least
a 70 per cent ACV because it would be
unable to adequately diffuse its
advertising and promotional
expenditures. But the court failed to determine whether
substantial
promotional scale economies exist now and, if they
do, whether Heinz and
Beech-Nut "for that reason operate at
a substantial competitive
disadvantage in the market or mar-
kets in which they sell" or
whether there are effective alter-
natives to merger by which the disadvantage
can be over-
come. Id. at p 975f2,
at 78.
4. Structural Barriers to Collusion
In a footnote the district court dismissed the likelihood of
collusion derived from the FTC's market concentration data.
"[S]tructural market barriers to
collusion" in the retail mar-
ket for jarred baby food, the court
said, rebut the normal
presumption that increases in concentration will
increase the
likelihood of tacit collusion. H.J. Heinz, 116 F. Supp. 2d at
198 n.7. The court's sole citation, however, was to
testimony
by the appellees' expert, Jonathan B. Baker, a former Di-
rector
of the Bureau of Economics at the FTC, who testified
that in order to
coordinate successfully, firms must solve
"cartel problems"
such as reaching a consensus on price and
market share and deterring each
other from deviating from
that consensus by either lowering price or
increasing produc-
tion. He opined
that after the merger the merged entity
would want to expand its market
share at Gerber's expense,
thereby decreasing the likelihood of consensus
on price and
market share.
9/8/2000 Tr. 1010-1013. In his
report, Baker
elaborated on his theory, explaining that the efficiencies
created by the merger will give the merged firm the ability
and
incentive to take on Gerber in price and product improve-
ments. DX 617.
He also predicted that policing and moni-
toring of any agreement
would be more difficult than it is
now, due in part to a time lag in the
ability of one firm to
detect price cuts by another. But the
district court made no
finding that any of these "cartel
problems" are so much
greater in the baby food industry than in
other industries
that they rebut the normal presumption. In fact, Baker's
testimony about
"time lag" is refuted by the record which
reflects that
supermarket prices are available from industry-
wide scanner data within
4-8 weeks. See DX 617 at p 86
(report
of appellees' expert Jonathan Baker);
see also Oral
Arg. Tr. at 30 (statement by appellees' counsel that
nothing in
record reflects time lag is greater in baby food industry than
in other industries). His
testimony is further undermined by
the record evidence of past price
leadership in the baby food
industry.23
The combination of a concentrated market
and barriers to
entry is a recipe for price coordination. See University
Health, 938 F.2d at
1218 n.24 ("Significant market concentra-
tion makes it 'easier for
firms in the market to collude,
expressly or tacitly, and thereby force
price above or farther
above the competitive level.' " (citation omitted)). "[W]here
rivals are few, firms
will be able to coordinate their behavior,
either by overt collusion or
implicit understanding, in order to
restrict output and achieve profits
above competitive levels."
PPG,
798 F.2d at 1503. The creation of a
durable duopoly
affords both the opportunity and incentive for both firms
to
__________
23
In an oligopolistic market characterized by few producers, price
leadership
occurs when firms engage in interdependent pricing,
setting their prices
at a profit-maximizing, supracompetitive level
by recognizing their
shared economic interests with respect to price
and output
decisions. See Brooke Group Ltd. v.
Brown & William-
son Tobacco Corp., 509 U.S. 209, 227 (1993); see also Jesse W.
Markham, The Nature
and Significance of Price Leadership, 41
Amer. Econ. Rev. 891
(1951); Richard A. Posner, Oligopoly
and the
Antitrust Laws: A
Suggested Approach, 21 Stan. L. Rev. 1562, 1582
(1969); Donald Arthur Washburn, Price Leadership, 64
Va. L. Rev.
691, 693-697 (1978).
In a duopoly, a market with only two competi-
tors,
supracompetitive pricing at monopolistic levels is a danger.
See Edward Hastings Chamberlin, The
Theory of Monopolistic
Competition:
A Re-orientation of the Theory of Value 46-55 (8th
ed.
1962).
coordinate to increase prices. The
district court recognized
this when it questioned Baker on whether the
merged entity
will, up to a point, expand its market share but "then
[with
Gerber will] find a nice equilibrium and they'll all get along
together." 9/8/2000 Tr.
1014. Tacit coordination
is feared by antitrust policy even more
than express
collusion, for
tacit coordination, even when observed,
cannot easily be controlled directly by the antitrust
laws.
It is a central object of merger policy to obstruct the
creation or reinforcement by merger of
such oligopolistic
market
structures in which tacit coordination can occur.
4 Phillip E. Areeda, Herbert
Hovenkamp & John L. Solow,
Antitrust Law p 901b2, at 9 (rev. ed.
1998). Because the
district court
failed to specify any "structural market barriers
to collusion"
that are unique to the baby food industry, its
conclusion that the ordinary
presumption of collusion in a
merger to duopoly was rebutted is clearly
erroneous.24
* * * * *
Although we recognize that, post-hearing, the FTC may
accept the
rebuttal arguments proffered by the appellees,
including their
efficiencies defense, and permit the merger to
proceed, we conclude that
the FTC succeeded in "rais[ing]
questions going to the merits so
serious, substantial, difficult
and doubtful as to make them fair ground
for thorough
investigation, study, deliberation and determination by the
FTC." Warner Communications,
742 F.2d at 1162. The
FTC
demonstrated that the merger to duopoly will increase
the concentration
in an already highly concentrated market;
that entry barriers in the market make it unlikely that any
anticompetitive
effects will be avoided; that
pre-merger com-
petition is vigorous at the wholesale level nationwide and
__________
24
Contrary to the appellees' claims, nothing in Baker Hughes
suggests
otherwise. In that case, the
sophisticated nature of the
purchasers of the industry's product and the
"volatile and shifting"
nature of each firm's market share
rendered the HHI figures an
unreliable measure of concentration. See 908 F.2d at 986-87. No
such circumstances exist in this
case.
present at the retail level in some metropolitan areas; and
that post-merger competition may
be lessened substantially.
These
substantial questions have not been sufficiently an-
swered by the
appellees. As we said in Baker Hughes,
"[t]he
more compelling the prima facie case, the more evidence the
defendant must present to rebut it successfully." 908 F.2d at
991. In concluding that the FTC failed to make
the requisite
showing, the district court erred in a number of
respects.
Regarding the
contention of lack of pre-merger competition,
it made a clearly erroneous
factual finding and misunderstood
the law with respect to the import of
competition at the
wholesale level.
Regarding the proffered efficiencies defense,
the court failed to
make the kind of factual findings required
to render that defense
sufficiently concrete to rebut the
government's prima facie showing. Finally, as to the conten-
tion that
the merger is necessary for innovation, the court
clearly erred in relying
on evidence that does not support its
conclusion. Because the district
court incorrectly assessed the
merits of the appellees' rebuttal
arguments, it improperly
discounted the FTC's showing of likelihood of
success.
2.
Weighing of the Equities
Although the FTC's showing of likelihood of success cre-
ates a
presumption in favor of preliminary injunctive relief,
we must still
weigh the equities in order to decide whether
enjoining the merger would
be in the public interest. 15
U.S.C.
s 53(b); see PPG, 798 F.2d at
1507; Weyerhaeuser,
665 F.2d at
1081-83. The principal public equity
weighing in
favor of issuance of preliminary injunctive relief is the
public
interest in effective enforcement of the antitrust laws. Uni-
versity Health, 938 F.2d at
1225. The Congress specifically
had
this public equity consideration in mind when it enacted
section
13(b). See Food Town Stores, 539 F.2d
at 1346
(Congress enacted section 13(b) to preserve status quo until
FTC can perform its function).
The district court found, and
there is no dispute, that if the
merger were allowed to
proceed, subsequent administrative and judicial
proceedings
on the merits "will not matter" because Beech-Nut's
manu-
facturing facility "will be closed, the Beech-Nut distribution
channels will be closed, the new label and recipes will be in
place, and
it will be impossible as a practical matter to undo
the
transaction." H.J. Heinz, 116 F.
Supp. 2d at 201.
Hence, if the
merger were ultimately found to violate the
Clayton Act, it would be
impossible to recreate pre-merger
competition. See Warner Communications, 742 F.2d at 1165
("A denial
of a preliminary injunction would preclude effective
relief if the
Commission ultimately prevails and divestiture is
ordered."). Section 13(b) itself embodies congressional
recog-
nition of the fact that divestiture is an inadequate and
unsat-
isfactory remedy in a merger case, 119 Cong. Rec. 36612
(1973),
a point that has been emphasized by the United States
Supreme Court. See, e.g., FTC v. Dean Foods Co., 384 U.S.
597, 606 n.5 (1966) ("Administrative experience shows that the
Commission's inability to unscramble merged assets frequent-
ly
prevents entry of an effective order of divestiture.").
On the other side of the ledger, the
appellees claim that the
injunction would deny consumers the
procompetitive advan-
tages of the merger. See FTC v. Pharmtech Research, Inc.,
576 F. Supp. 294, 299
(D.D.C. 1983) (explaining that public
equities include "beneficial
economic effects and procompeti-
tive advantages for
consumers"). The district court
found
that if the merger were preliminarily enjoined, the injury to
competition would also be irreversible, that is, the merger
would
be abandoned and could not be consummated if ulti-
mately found
lawful. By contrast to its first
finding, however,
for the latter conclusion the court relied not on the
facts of
this case but on our statement in Exxon that--as a general
matter--temporarily blocking a tender offer is likely to end
an
attempted acquisition, "as a result of the short life-span of
most
tender offers." Id. (quoting Exxon, 636 F.2d at 1343).
In their brief in this court, the
appellees offer nothing more
to support the finding that the merger would
never be
consummated were an injunction to issue. Indeed, they
devote only a single
sentence, without any citation, to the
point. The district court's finding that an injunction would
"kill
this merger" is thus not a factual finding supported by
record
evidence. This case does not involve a
short-lived
tender offer as did the case cited by the court for its
"kill the
merger" conclusion. The appellees
acknowledge that there is
no alternative buyer for Beech-Nut and the
court found that
it is not a failing company but rather a
"profitable and
ongoing enterprise." H.J. Heinz, 116 F. Supp. 2d at 201 n.9.
If the merger makes economic sense now, the appellees have
offered no reason why it would not do so later. Moreover,
Beech-Nut's principal assets of value to Heinz
are, asserted-
ly, its recipes and brand name. Nothing in the record leads
us to believe that both will
not still exist when the FTC
completes its work. It may be that Beech-Nut will have to
sell
its recipes to Heinz at a lower price than the price of
today's
merger. But that is at best a
"private" equity which
does not affect our analysis of the
impact on the market of
the two options now before us and which has not
in any event
been urged by the appellees.25 See id.
In
sum, weighing of the equities favors the FTC.
If the
merger is ultimately found to violate section 7 of the
Clayton
Act, it will be too late to preserve competition if no
prelimi-
nary injunction has issued.
On the other hand, if the merger
is found not to lessen
competition substantially, the efficien-
cies that the appellees urge can
be reclaimed by a renewed
__________
25 The district court noted that
"[t]he parties have not stressed
private equities" but the
court nonetheless considered them. It
concluded that while "the corporate interests of Heinz and Milnot
and especially the interests of Dearborn Capital Partners LP, which
presumably acquired Milnot through a leveraged buyout with the
purpose
and intent of selling its interest at a profit" were important
to
the private parties, they should not affect the outcome of the
proceeding. H.J. Heinz, 116 F. Supp. 2d at 200 n.9. We agree.
"While it is proper to consider private equities in deciding
whether
to enjoin a particular transaction, we must afford such concerns
little weight, lest we undermine section 13(b)'s purpose of
protect-
ing the 'public-at-large, rather than the individual private
competi-
tors.' " University
Health, 938 F.2d at 1225 (citation omitted);
cf.
Weyerhaeuser, 665 F.2d at 1083 ("Private equities do not
outweigh
effective enforcement of the antitrust laws. When the Commission
demonstrates a
likelihood of ultimate success, a countershowing of
private equities
alone would not suffice to justify denial of a
preliminary injunction
barring the merger.").
transaction. Our conclusion with
respect to the equities
necessarily lightens the burden on the FTC to
show likelihood
of success on the merits, a burden which the FTC has met
here.
III. Conclusion
It is important to emphasize the posture of this case. We
do not decide whether the FTC will
ultimately prove its case
or whether the defendants' claimed efficiencies
will carry the
day.26 Our task is
to review the district court's order to
determine whether, under section
13(b), preliminary injunc-
tive relief would be in the public
interest. We have consid-
ered the
FTC's likelihood of success on the merits. We have
weighed the
equities. We conclude that the FTC has
raised
serious and substantial questions. We also conclude that the
public equities weigh in favor of
preliminary injunctive relief
and therefore that a preliminary injunction
would be in the
public interest.
Accordingly, we reverse the district court's
denial of preliminary
injunctive relief and remand the case for
entry of a preliminary
injunction pursuant to section 13(b) of
the Federal Trade Commission
Act.
So
ordered.
__________
26 "The most difficult mergers to assess may be those that
combine
both negative and positive effects:
creating market power
that increases the risk of oligopolistic
pricing while at the same time
creating efficiencies that reduce production
or marketing costs."
Sullivan
& Grimes, supra, s 9.1, at 511.