*1 v. CONSOLI- COMMISSION TRADE FEDERAL CORP. FOODS DATED April 28, 1965. 10-11, 1965. Decided Argued March No. petitioner. for the cause argued Cox General Solicitor Attorney General Assistant were the brief him on With Kestenbaum, Mcl. James Lewin, Lionel Orrick, Nathan George R. Kucik. Henderson and Daniel Walker argued respondent. cause With him on the brief Owen, were Anderson A. Bromley, Bruce *2 George B. Turner and Allen F. Maulsby.
Herbert Bruce Griswold filed a brief for Trabón Engi- neering Corp. al., curiae, et as amici urging reversal. V.
Thomas Koykka and Edward D. Crocker a filed brief for Eaton Manufacturing Co., curiae, as amicus urging affirmance. Douglas
Mr. opinion delivered the Justice Court. question
The presented involves an important con- struction and application of § 7 of Clayton Act,1 38 Stat. 731, as amended, 15 U. S. C. § 18. Consolidated Foods Corp. owns food processing plants and —which network of wholesale and retail food acquired stores — Gentry, Inc., in 1951. Gentry manufactures principally dehydrated onion garlic. The Federal Trade Com- mission held that the acquisition violated § 7 because it gave respondent the advantage of a mixed threat and lure of reciprocal buying in its competition for business and “the power to foreclose competition from a substantial share of the markets for dehydrated onion garlic.” It concluded, in other words, that the effect of the acquisi- tion “may be substantially to lessen competition” within the meaning of 7,§ and it ordered gave divestiture and
1Section pertinent 7 reads in part as follows: corporation “No engaged in commerce acquire, shall directly or indirectly, the any whole part or of the stock or other capital share corporation no subject jurisdiction to the of the Federal Trade Commission acquire shall any part whole or of the assets of another corporation engaged also in commerce, any where in line of commerce any section of the country, the effect of acquisition such may be substantially to competition, lessen monopoly.” to tend to create a 15 U. S. C. 18.§ Ap- The Court C.-,-. -F. T. other relief. expe- post-acquisition years mainly on relying peals, to show had failed the Commission that held rience, lessen substantially would acquisition on cer- is here The case 623. 329 F. 2d competition, S. tiorari. U. made “reciprocity” at the outset
We hold congeries is one of the an acquisition such possible are laws the antitrust at which practices anticompetitive and alien in “an irrelevant results practice aimed. - T; the choice intruding into C., -,p. F. factor,” pri at least “a creating products, among competing International Salt equal prices.” at ority on the business Northern States, 392, 396-397; Co. v. United 332 U. S. *3 States, Co. United 1, 3, 6, S. Pac. R. 356 U. v. 12. Reciprocal bludgeoning from or coercion trading may ensue not A threatened with arrangements. from more subtle being an affiliate cease products of if of drawal orders conditioning purchases as well as a of future on bought, affiliate, of of that is an receipt products the orders for Clayton of Act is anticompetitive practice.2 Section 7 the 2 Conglomerate Bigness Edwards, Power, of Bur. as a Source 'Nat. Policy 331, Research, (1955), Eco. Business Concentration and Price p. 342: large powerful
“Where and concerns encounter each other as seller buyer, favors, exchange and there of is sometimes a great enterprises strengthens which of each the the other. relationship probably recipro- “The most common form of such a buying. may reciprocal buying arrangement through cal A arise either through understanding may formal contract or an informal be scarcely distinguishable policy cultivating good from mere large arrangement will of a customer. The essence of the is the will- ingness buy company other, upon from each conditioned expectation company reciprocal pur- the other will make goods bought typicalfy kind, chases. The are dissimilar in and in the which, usual case could be obtained from other sources on terms aside reciprocal purchases, advantageous. from the be no would less Where relationship established, prevents' competitors such a is well Brown “with not certainties.” probabilities, concerned States, 323; United 294, Shoe Co. United 370 U. S. v. Bank, 321, S. Philadelphia States v. Nat. 374 U. vio- Reciprocity trading acquisition as a result of an lessening competition if of a 7, lates aspect principal, shown. We turn then that, present case. purchaser products is a substantial Consolidated onion processors purchase dehydrated of food who in turn preparing for their food. packaging and use and in the Gentry, principally engaged which as noted is 1950, manufacture of onion garlic, had Consolidated, immediately prior acquisition by to its dehydrated garlic about of the total sales of the 32% and, onion industry together principal competi- with its tor, Vegetable Products, Inc., accounted almost of the total industry remaining sales. The 90% 10% By divided between two other firms. the total in- dustry output products Gentry’s of both doubled, had rising share and the combined share of 35% remaining and Basic at about 90%.3 company selling each company, to the other and affords to each company strength whatever increase of size and can be derived from place supplier an assured as to the other.” Stocking Mueller, And see Reciprocity Business and the Size of Firms, 73, (1957); Ammer, J. Bus. U. Chi. 75-77 Realistic Reci- *4 procity, 1,116 (1962); Reciprocal 40 Hausman, Harv. Bus. Rev. No. Dealing Laws, (1964). and the Antitrust 77 Harv. L. Rev. 873 conglomerate
For acquisition (the type a discussion of the in- present case) in Report, volved see Federal Trade Commission Merger (A Summary seq. on The Report, 1948), p. Movement 59 et Appeals: As stated the Court of “Immediately prior Consolidated-Gentry merger, to the Basic ac- Gentry dehydrated counted for By and of onion sales. 60% 28% 1958, figures 35%, respectively. these were and In 57% garlic sales, Basic had of 1958, the market in 1950 and in 36% 50% Gentry’s years.” while shares were and for the same 51% 39% 2d, p. F. dis- later (though Consolidated acquisition After did reciprocity) of any policy to claiming adherence Con- official An selling. Gentry assist to undertake : distributing divisions to its as follows wrote solidated when know to advantage great ais “Oftentimes, it or not that whether a prospect, on calling you are own your within someone supplier is a prospect pro- in reciprocity believes Everyone organization. equal. are things viding all Gentry our for prospects list is a “Attached indicate you have to like We would products. purchasing are you or list whether on the so, If indicate them. from supplies your any small relatively large, are purchases your whether . .. insignificant. party proper to the the list please refer you
“Will special any have you If ... organization. your prop- helpful be you could as to how suggestions, listed, it will any those Gentry to erly presenting appreciated.” be they stated Consolidated sold who processors
Food for business and their onion give would quality and price if it meet could reasons reciprocity is a letter Typical products. competitors’ of its Co.: Armour and people of our the desire it is you assure
“I can way any you with cooperate to reciprocate I am practices, business good line with can in we overcome, can be obstacles quality if our sure that consideration. favorable will receive your quotations highly very you relationship our We value lately have been unable that we disappointed are on cooperation fine Armour your reciprocate Meats.” Pantry Shelf *5 suppliers responded gave reciprocal
Some orders. gave generous Some who first orders later reduced them or practice. impossible abandoned the It is to recreate precise anatomy arrangements follow- market ing acquisition, though respondent offers factual seeking prove “reciprocity” brief either failed history. was not a factor in major post-acquisition found, “merely as however, Commission result of its without Consolidated, connection any action on an part, Gentry the latter’s would have unfair make advantage competitors enabling over it to sales might that otherwise not have been made.”
And the Commission concluded:
“With two accounting firms for better than 85% product both years, lines for eleven successive max- imum concentration monopoly already short of been If prevent achieved. desirable to a trend oligopoly toward it is a desirable to remove, fortiori so far possible, as gen- obstacles to the creation of uinely competitive oligopolistic conditions an industry. Respondent’s reciprocal buying power, through obtained acquisition of Gentry, just such an anticompetitive obstacle.
“This conclusion is by peculiar buttressed nature of the dehydrated onion garlic industry. In the first place, the record Gentry’s shows that leading competitor, Vegetable Products, Inc., has been the innovator and leader Gen- field. try has recently made technical strides narrowing, although probably not closing, the gap between them. There is also evidence that the third firm, Puccinelli Packing is not Co., only much commanding smaller — only about of each product market —but is con- 10% sidered many buyers to an product offer inferior and inferior service.” -F. C., p.-. T. *6 post- hand, gave on the other Appeals, of
The Court pointed weight. It conclusive almost evidence acquisition onion dehydrated share the Gentry’s while that, out of the share its 7%, by some increased market also It 626. 2d, p. 329 F. decreased market garlic 12%. reciprocal attempts at unsuccessful apparently on relied concluded Appeals The Court Ibid. buying. past the by what gauged be can best “Probability Id., p. taught.” considering in error was not in Appeals
The Court See United in case. this evidence post-acquisition the et seq., et Co., 586, 597 Pont 353 U. S. du v. States to it. Cf. weight too gave much think seq. But we Co., 441, 463. Can S. Continental 378 U. v. United States buying reciprocal company with a acquiring group No give To period. a “free trial” entitled to opportunities The “mere of 7.§ the scheme tobe distort it such would enough. is not restraint prohibited possibility” of the Co., Prob- supra, p. Pont & 598.) du v. (United States noted. as we have required, evil is ability proscribed given conclusive evidence were If the post-acquisition then probabilities, all allowed to override weight or bid- willy-nilly, parties go forward would acquisitions fully to bloom. was allowed reciprocity time until ing their may conduct post-acquisition true that is, course, It no evi- though there is §of 7 even to a violation amount in limine. See United to establish dence Co., supra, Pont But the du & 597-598. States v. pp. tran- in what later probabilities, force of 7 is still case, for once necessarily must be the spired. That the fate of no one what are united knows companies two competitors its would have acquired company merger. been for the post-acquisition here tends to
Moreover, the evidence probable anti- upon, rather than doubt confirm, cast which the Commission found competitive effect Basic’s The Commission found that merger have. would Gentry’s product superior Gentry’s president —as freely repeatedly Gentry, rapidly admitted. Yet onion expanding market, was able to increase its share of and to hold to a de- sales its losses 7% 12% ground crease. on surely Thus Commission was safe reaching following conclusion: buying “If Gentry protected creates for market, despite supe- which penetrate others cannot riority price, competition quality, service, expand lessened whether or not can its mar- *7 reject ket share. It this reason that we re- spondent’s argument the its share of that decline garlic the the of proves market ineffectiveness reci- procity. do would not We not know that its share fallen still had not been for the influ- farther, have reciprocal of buying. ence This loss of sales fails to reciprocity refute the likelihood that Consolidated’s a power, willingness exploit which it has shown to will not of full, segment the immunize a substantial price, market from normal quality, the competition.” p.-,4 service -F. T. C., Appeals ignored the Court of the Commission’s But findings inferiority Gentry’s product; as to the of indeed point supplanted findings at one it even those with its own Gentry’s were superior: conclusion that onions years “Consolidated’s division the fol- lowing acquisition, during improved the which time it processing equipment prob- its onion a eliminate arising lem from the presence splinters of wood higher achieved a product quality than that its of of competitors, rapidly increased its share ex- market panding by only respect some 7% onion 2d, p. (Em- . . . .” 329 F. phasis supplied.)
4 The last three sentences a footnote to the were first sentence. unques- contrary conclusion But the Commission’s following evidence, as tionably on substantial based par- president Gentry’s testimony excerpt ticularly indicates: Gen- that Prater, Dr. fact,
“Q. You mentioned to Basic being second reputation a try had in the involved factors one quality. Was problem? splinter the wood competition quality Yes, been problem splinter wood “A. many years. industry for dehydration in the problem im- by extensively, and solved it exploited this use, or in the techniques provements production instead by using, methods, and use of better by the fibers. glass plastic trays of aluminum trays, of wood improve- competition partially this metWe and installation techniques production of our ment dehydrators.” conveyor continuous no acquisition, say any as to go so far doWe small, if is a there violates matter how only to may amount situations buying. Some is of here, acquisition as where, minimis. But de market, of a share a substantial commands company *8 by Com- buying the of finding a of be trusts, should Congress the expertise mission, whose it. support if is substantial evidence honored, there Reci- substantial. plainly view The evidence is our again it sometimes worked. over and was tried procity being leader the industry peculiar, structure evidence, there is gap. Gentry closing the Moreover found, buyers deter- many have “that as the Commission protected be may best supply source of that their mined recip- When suppliers.” from two by policy buying the added, of it—is the inducement buying rocal —or observed: Commission ground Basic on the likely to lean toward
“Buyers are supply seeking second, protective but, quality, in the belief that channel, purchase Gentry this will further their sales Consolidated. Not might other- only does thus obtain sales but the two-firm go Puccinelli, wise to Basic industry strengthened oligopoly structure by discouraged.” others is entry and solidified and new -F. T. C., p.-.
We conclude that there is substantial evidence to sus- tain that conclusion and that the order the Commission not have been judgment should denied enforcement. The Appeals accordingly of the Court of
Reversed. Harlan, Mr. Justice concurring judgment. the Had the complaint grounded § Commission’s been on 5 of the Federal Trade Commission manifest Act, it seems to me that no case would have been made out on this rec- given ord. ambulatory Clayton But use of 7 of the by Act sanctioned the Court in United States du Pont v. Co., S. I concur 586, judgment. & U. so, however, upon premises do stated in con Stewart, curring opinion my post, p. Brother 602, with one To anything reservation. the extent that in his might be taken opinion drawing upon as on evidence which reliance, the Commission indicated no I could not sub approach. scribe to that This Court must review admin findings by istrative as are made they agency con if cerned, support the evidence will not findings theory upon agency which the an acted, affirmance agency’s order properly upon cannot rest a reassess ment of the record Exchange us. See Securities & Chenery Comm’n v. Corp., S. 194, 196; U. Labor Co., ante, Board v. Metropolitan Ins. pp. 443- 438, Life However, agree since both sides “conglomerate” *9 mergers reciprocal buying are within purview § think the 7,1 Commission’s order is though supportable,
602 which upon the evidence the confines within
barely so, relied. apparently Co, States, 294, 370 U. S. United Brown Shoe v. affected” “market contention any forecloses In play. bring 7 into enough to was not substantial propo- case on the its pitched has Consolidated this Court it ac- power full whatever it used to the sition that reciprocal bring about merger of the to as a result quired instances only found seven buying. The Commission to suppliers pressure to by Consolidated Successful efforts rep- had few instances If in fact these buy Gentry. from in- ability to full measure Consolidated’s resented the insuf- would for me be they Gentry, purchasing duce I order, day for the Commission’s carry to ficient I cannot subscribe affirm. While would vote opinion of the made in the Court’s undiscriminating use enough in seven these statistics, think there buying Packing Phillips Company, example, the instances —for Morgan Company, Meat Sons, Illinois J. Gielow & J. justi- Commission episodes Packing Company —for not used all the had find that Consolidated fiably to the Com- leverage muster; it could buying reasonably conclude therefore, could mission, be sub- Gentry acquisition would of the probable effect market. competition the relevant stantially to lessen I concur in the result reached the Court. basis On this concurring judgment. Stewart, Mr. Justice invalidating Commission, Trade The Federal Gentry, Inc., Foods and Consolidated merger between bring the facts of this case theory a novel espoused Clayton Act. Its resolution scope §of 7 within the disputed.1 and much has been much debated of the issue Laws, Hausman, Reciprocal Dealing and the Antitrust See Legality Reciprocity 873; Krash, under Sec Harv. L. Rev. Ammer, Clayton Act, (1964); 9 Antitrust Bull. 93 tion 7 of the (1962). 1, Reciprocity, 40 Harv. Bus. Rev. No. Realistic *10 Appeals The Court of disagreed with the Commis- sion’s of the facts in appraisal this case and with its con- concerning clusions implications § 7 of reciprocity. being Other are awaiting cases held clarification from this Court.2 We must decide the applicability of the Act to of this case, facts we provide guidance should also to the Commission the courts which will have grapple the future with the potentialities of reciprocal buying §in 7 cases. I agree While with the result that the Court has reached, persuaded am to file sepa- this rate my statement of views regarding the issues involved.
Clearly the opportunity for reciprocity is not alone enough to merger invalidate a under § 7. The Clayton Act was passed not outlaw diversification. large Yet scale diversity of industrial always pre- interests almost sents the possibility of reciprocal some relationships. purpose Often the of diversification is to acquire com- panies present whose management can benefit technical skills and sales acumen of acquiring corpora- tion. Without more, § 7 of the Clayton Act does pro- hibit mergers whose sole effect is to introduce into an arena of “soft” competition the experience and skills aggressive more organization.
It obviously requires more than this kind of poten- bare tial for reciprocal buying to bring a merger within the ban of § 7. Before a may merger be properly outlawed under § 7 on the solely basis of reciprocal buying potentials, law requires a more closely textured economic analysis. The Court summarizes the “substantial” evidence before the Commission as follows:
“Reciprocity was tried over again some- times worked. industry structure was peculiar, being the leader with Gentry closing the gap. 2See, g., e. United States v. General Dynamics Corp. (D. C. S. D. Y.); N. v. General Motors United States (D. Corp. Ill.); C. N. D. Engineering Trabon Corp. v. Eaton Mfg. (D. C. Co. Ohio). N. D.
Moreover there is evidence, as the Commission found, many buyers ‘that have determined their source of may best supply be protected by a policy of buying from suppliers.’ two When buying the inducement of it—is added, the Com- —or mission observed: ‘. . . the two-firm oligopoly struc- ture of the industry *11 strengthened and solidified ” and new entry by others is discouraged.’ agree cannot that these elements, singly or together, are sufficient to make unlawful the merger negotiated by Consolidated and Gentry. Certainly the mere effort at reciprocity cannot be the basis finding the probability a significant alteration in the market structure. Sec- tion 7 does punish intent. No matter how bent on reciprocity Consolidated might have if been, its activities would not have requisite probable impact on competi- tion, it cannot be held to have violated this law. IAnd, think, it is not enough to say that the merger is illegal merely because the reciprocity attempts “sometimes worked.” If the opportunity for reciprocity itself is not a violation the Act when the merger occurs, then some standard must be established for determining how effec- tive reciprocity must be before the merger subject invalidation. Nor Ido think that illegality of this merger can be rested upon the fact that industry “[t]he structure was peculiar, being the leader with Gentry closing the gap.” There is evidence that years in the following 1951, when merger took place, increased emphasis was placed on solving technical problems which prevented had some processors from relying on dehydrated, rather than raw, onions. The 1950’swere a time of flux for the indus- try. Basic was sometimes the innovator of technological change leading to increased sales; sometimes Gentry had the upper hand. It is possible that this shift to more intensive competition was connected with the merger. Faced with a new competitive situation, Basic may have which had problems control quality to solve determined show seems the evidence Indeed, long been dormant. the salu- industry reflected acquisition, that, after competition. free with normally associated tary qualities a better furnishing Gentry were Basic and both Overall, beginning. at than period end of this at the product features, industry oligopolistic that the had It is true entry were barriers to to indicate that no evidence there is “closing while it was Gentry, And severe.3 particularly falling onions, regard dehydrated gap” Basic in the sales even farther behind fact significance to the Finally, I can attach no garlic. nor- seeking supply, source of processors, second That fact on rather than Puccinelli. mally relied hypotheses that it is many can rest on so alternative persuasive as to none.4 competi- is the touchstone takes the drastic
tion will be lessened. But before court clear ordering divestiture, the evidence must be step *12 require exists. Act that such The does certainty anticompetitive that there be a effect. But that not mean that the or the does courts Commission rely slipshod confusingly presented can on information ambiguous implications. in its not re- The law does competition certainly by that will be lessened quire proof merger. the But the record should be clear and con- vincing requisite probability present. that the is
To that probability, determine the courts and the Com- rely mission should on the best information available, Indeed, the time of the Commission’s decision an additional Gilroy Inc., firm, Foods, had entered this market. example, Gentry For customers of often chose Basic their supplier, probably because of alternative doubt that Puccinelli could satisfy if the occasion their needs arose. There is no reason to assume backstop chose any that customers of Basic as a for motives more nefarious.
whether it is an examination of the market structure merger concerning before the place, taken facts changes merger in the market after has been consum- mated. that reason, For differ with Court its weight assessment to be post-acquisition accorded That evidence. evidence is best evidence available to determine whether the merger will distort market forces in the dehydrated onion and The Court industry. Appeals, my view, not wrong “gave it because weight” too much to the post-acquisition evidence. It erred gloss because of the placed on the statistics and testimony adduced hearing before the examiner and the Commission.
The Court discounts the value of post-acquisition evi- ground dence on the companies are not entitled to a “free trial” period merger. after the That charac- terization, however, misstates the gives case. one No the company a “free trial” by assessing, light of what actually happened, what only could be hypotheses at the time the merger occurred. Without post-acquisition evi- dence, the trier is faced with a blank slate and untested speculation. merger in this case was achieved 1951, yet the Commission did not issue a cease-and-desist order years until six may later. We be sure Commission on relied post-acquisition in issuing factors its order; there no why reason we rely should on those factors less in assessing the propriety of the Commission’s action. Indeed, if anyone had a “free period trial” check the anticompetitive potential of the merger, it was not the respondent but the Commission.
The record in this case sorely incomplete, and a re- *13 viewing given court is guidance little in determining why this merger should be voided, if reciprocity-creating mergers not per se invalid. Yet our responsibility to are the Commission —to respect its findings where there is evidence support to requires close scrutiny of the them — the record I think upset. are its conclusions record before of the invalidation support to enough just contains in the to not referred of evidence because merger, opinion. Court’s basically of composed is industry processing food includes which class, manufacturers. One classes of
two significant has built Swift, as Armour processors such of their acceptance commanding consumer names brand retail at exposure companies, For such products. whole- Foods, as the Consolidated market is assured. that its processors on such sufficiently dependent saler, cannot minimal. It class is over this power economic purchasing into strong-arm Armour readily losing Consolidated’s pain at the onions processors the smaller incorporates class A second favor. to Con- product sell their industry. Many these in the labels of under house bulk, packaging solidated which Many products of the divisions. Consolidated own labels are not under their package processors these persuade on the wholesaler to widely known; they rely so counters. These try to them on their supermarkets pressures are to the subtle susceptible processors reciprocity. me that most reading persuades
My record buying their in this second class shifted processors though the extent of that shift Gentry, from Basic It is true that testi- company company. varied from of these com- agents many mony purchasing from the However, other causes. the shift to panies attributed to the in this when contrasted pattern class, of movement me among major processors, seems to pattern lack of a conclusion that support the Commission’s sufficient reciprocity, to the influence of response shifts were these “tacitly pat- accommodative.” The express whether are independent processors because the tern relevant in the dehydrated onion and purchasers substantial *14 Furthermore, pattern market. this confirms what the Commission: by was assumed Consolidated seg- power purchases to influence the substantial suppliers. independent proc- ment of its Some of the essors failed, merged large have and others have greater processors leading to concentration in the food processing industry. The Commission could, therefore, fairly inhibitory have concluded that effects of reci- procity in this situation marked this merger with illegality.
For these reasons judgment concur Court.