Lead Opinion
The parties to an acquisition appeal from a preliminary injunction, issued upon the application of the Federal Trade Commission, that ordered them to rescind the acquisition pending administrative proceedings to determine whether it violates section 7 of the Clayton Act, as amended, 15 U.S.C. § 18. Section 7 forbids corporate acquisitions that may lessen competition substantially or tend to create a monopoly. The appeals raise antitrust issues under section 7, primarily concerning the definition of the geographical market, and procedural and remedial issues under section 13(b) of the Federal Trade Commission Act, 15 U.S.C. § 53(b). Section 13(b) authorizes the Commission to seek a preliminary injunction against the violation of a statute (such as section 7 of the Clayton Act) enforced by the Commission, pending administrative proceedings, and authorizes a federal district judge to grant the injunction “upon a proper showing that, weighing the equities and considering the Commission’s likelihood of ultimate success, such action would be in the public interest.”
Illinois Cereal Mills is a principal manufacturer of “industrial dry corn,” a type of processed corn sold to manufacturers of corn flakes, corn bread, doughnuts, beer, and other food products. ICM’s two mills are in Illinois and Indiana. On June 5 of last year it bought from Elders Grain the Lincoln Grain Company, which manufactures industrial dry corn at a mill in Atchi-son, Kansas. At the time, ICM and Lincoln were the second and fifth largest producers of industrial dry com in the United States. The acquisition made ICM the largest, with a market share of 32 percent (up from 23 percent before the acquisition). There are only four other significant producers of industrial dry corn. The Commission learned on June 2 that the acquisition was scheduled to be consummated on June 7, and on June 3 it gave ICM and Elders written notice of its intention to challenge the acquisition and to seek rescission if the acquisition was consummated before an injunction could be obtained. ICM and Elders moved up the closing to June 5 (a
After a two-day evidentiary hearing, the district judge on June 24 issued a preliminary injunction that orders the transaction rescinded until the Commission concludes its administrative proceeding to determine whether the acquisition violated section 7.
Section 13(b) of the Federal Trade Commission Act directs the district judge, in passing on a request by the FTC for an injunction pending administrative proceedings, to weigh the equities and determine the Commission’s ultimate likelihood of success. Such a directive is rather empty without specification of how the evaluation of the equities and the evaluation of the merits (i.e., ultimate likelihood of success) are to be combined, a matter on which the scanty legislative history of section 13(b) is silent. The case law (also scanty) contains such statements as, “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.” FTC v. Weyerhaeuser Co.,
In suits under antitrust statutes that are silent on the standard for granting or denying preliminary injunctions, we and other courts have used a “sliding scale” approach. See, e.g., Roland Machinery Co. v. Dresser Industries, Inc.,
The district judge thought the FTC likely to succeed on the merits. He then weighed the harms in the balance, and the balance tipped against the acquisition. He thought, in fact, that the public interest in preventing an anticompetitive acquisition could not be outweighed by what he described as the defendants’ purely private financial interests in completing the acquisition. By do
It is always better to avoid relying on vague concepts and instead to ask concretely who would be helped and who hurt by a proposed action: here, who would be helped and who would be hurt by allowing —and who by forbidding — a challenged acquisition to go through before what are often protracted administrative proceedings are completed. In other words, what are the consequences of the alternative courses of action that the district judge might take? If the acquisition seems anti-competitive, then failing to stop it during the administrative proceedings will deprive consumers and suppliers of the benefits of competition pendente lite and perhaps forever, for it is difficult to undo a merger years after it has been consummated.
That difficulty is not merely theoretical in the present case. It is a speculative question whether several years from now, if the acquisition is held to violate section 7, Lincoln Grain Company will either be able to stand on its own or be attractive to a company from outside the industrial dry corn industry — for if it is sold to one of the four other firms in the industry, the number of competitors will be no greater than if the present acquisition is upheld, although concentration will be lower if the buyer is smaller than ICM. Elders, which is not a member of the industry, obtained Lincoln as part of a larger deal, and was eager to sell it. It is not likely to want to buy it back in several years. After several years of tutelage by ICM, even under the district court’s freeze order entered on June 10 Lincoln may not be able to reenter the industry as a vigorous independent competitor. On the other side of the balance, the defendants argue forcefully that if the acquisition is rescinded it will never be renewed even if the defendants prevail in the FTC proceeding. Elders doesn’t want to be in the industrial dry corn industry. It will sell Lincoln Grain Company to someone else, and the benefits of the acquisition will be lost. But what are those benefits? Here the defendants turn vague. They argued to the district judge that ICM plans to modify the operations of the Atchi-son plant in a number of particulars, but did not make a convincing showing that the modifications would result in a significant increase in output (which would of course benefit consumers).
The district judge was correct that in a section 13(b) proceeding the merits and equities are not completely separable, though they are not as inseparable as he thought. The merits depend to a great extent on the economic effects of the challenged acquisition; the equities depend to a great extent on the same thing. An acquisition that is procompetitive or that is likely to lead to lower prices via expansion of output through economies of scale or other efficiencies will benefit consumers, suppliers, and other economic players, and the benefits will be reduced (perhaps to zero) if the acquisition is enjoined or rescinded. An acquisition that is anticompetitive is likely to have the opposite effects (though occasionally these will be offset by lower costs, passed on to consumers in the form of lower prices), and those effects will be
If the market was correctly defined as the sale of industrial dry com throughout the nation, there can be little doubt that the district judge was correct in finding that the Commission is likely to prevail on the merits. (We set to one side the cynical though perhaps realistic speculation that since the Commission is both the instigator and the trier of the cases filed before it, the decision to seek a preliminary injunction is a good predictor of the likely outcome of the administrative proceeding. There is always judicial review to curb any tendency of the Commission to succumb to the temptations implicit in its being, in a sense, a judge in its own cause. There is also rapid turnover among Commissioners.) The supply of industrial dry corn was already highly concentrated before the acquisition, with only six firms of any significance. The acquisition has reduced that number to five. This will make it easier for leading members of the industry to collude on price and output without committing a detectable violation of section 1 of the Sherman Act, 15 U.S.C. § 1, or section 5 of the FTC Act, 15 U.S.C. § 45, both of which forbid price-fixing. The penalties for price-fixing are now substantial, but they are brought into play only where sellers actually agree on price or output or other dimensions of competition; and if conditions are ripe, sellers may not have to communicate or otherwise collude overtly in order to coordinate their price and output decisions; at least they may not have to collude in a readily detectable manner. Since there are no close substitutes for industrial dry corn, its sellers can raise price above competitive levels (i.e., above cost, defined as economists define it to include a reasonable profit) without immediately losing all or most of their sales to the makers of other products. The varieties of industrial dry corn (brewers’ grits, corn meal, flaking grits, etc.) appear to be largely standardized and homogeneous, making it easier for sellers to agree on a common price to charge for them, if they are so minded. And since entry into the industry is slow — it takes three to nine years to design, build, and start operating a new mill — colluding sellers need not fear that any attempt to restrict output in order to drive up price will be promptly nullified by new production. Compare Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc.,
Granted, the factors that make a market more or less amenable to being cartelized are not all on one side in this case. The buyers of industrial dry com are a handful of large and sophisticated manufacturers of food products. A concentrated and knowledgeable buying side makes collusion by sellers more difficult. Colluders are tempted to cheat on their fellows when they can augment their profits by a single large sale (at a shade below the cartel price) that is unlikely to be detected. Knowing this, sophisticated buyers may be able to chivvy particular sellers for secret discounts, and the cumulative effect may be the collapse of the cartel. Another temptation to cheat in the industrial dry corn industry is the presence of excess capacity. It is estimated (roughly) to be 20 to 30 percent, and is concentrated apparently in the largest firms; Lincoln is said to have had little or no excess capacity. The existence of excess capacity implies that additional sales can be made at little additional cost, making them disproportionately
Section 7 forbids mergers and other acquisitions the effect of which “may” be to lessen competition substantially. A certainty, even a high probability, need not be shown. Of course the word “may” should not be taken literally, for if it were, every acquisition would be unlawful. But the statute requires a prediction, and doubts are to be resolved against the transaction. See, e.g., United States v. Philadelphia National Bank,
But all this assumes a properly defined market. The defendants point out that shipping costs are substantial, that their plants are in different parts of the country (ICM’s is east of the Mississippi and Lincoln’s west — and there is a surcharge for rail shipments that cross the river), and that they tend to sell different varieties of industrial dry corn to different customers. These points are not impressive. All of the nation’s industrial dry corn mills are in a belt of states running from Indiana on the east to Kansas and Nebraska on the west. All of these mills, it appears, ship industrial dry corn into the nation’s largest states, which include New York, Pennsylvania, Florida, and California. Lincoln’s plant, located in Atchison, Kansas, ships to both the east and west coasts and to the southeastern tip of the country (Florida), while ICM’s plant in Indiana ships its products more than 2,000 miles to California. It is true that there is a surcharge for shipping by rail across the Mississippi, but it is small and subject to negotiation (the Staggers Rail Act of 1980 has largely deregulated rail prices), and, despite it, Lincoln ships anywhere from 9 to 19 percent of its output east of the Mississippi, and ICM about 30 percent of its output west of the Mississippi. The Illinois plant of Bunge — the largest firm in the industry until ICM bought Lincoln — ships 61 percent of its output of flaking grits west of the Mississippi, while Bunge’s Nebraska plant sells 61 percent of its output of other grits and meal east of the Mississippi. The defendants, valiantly striving to establish two markets, one east of the Mississippi and one west (so that ICM and Lincoln are not even competitors), have explanations for each and every shipment that has crossed the river — a special deal here, an emergency there — but the district judge was not required to believe this special pleading. The defendants and everyone else in their industry ship industrial dry corn all over the United States. If shipping costs were as high as the defendants say they are relative to price and profit, there would be mills closer to major
A market is the set of sellers to which a set of buyers can turn for supplies at existing or slightly higher prices. See Tampa Electric Co. v. Nashville Coal Co.,
The argument that ICM and Lincoln are not in the same market because most of their customers are different and because the two firms don’t sell the same product mix is based on a misunderstanding of competition. No market fits the economist’s model of perfect competition — implying an infinite number of sellers having identical costs, a perfectly homogeneous product, and perfectly informed buyers — although some agricultural markets come close. In a normal market, sellers establish relations of mutual trust and advantage with particular customers, and the result is that at a given moment different sellers may have different customers. That doesn’t mean the sellers are not competing. Customers aren’t locked into these relationships; they can be lured away by a better offer. The possibility of such offers keeps the existing relationships from becoming exploitive.
The last issue is remedy. Apparently a district court has never ordered rescission in a proceeding under section 13(b). But the defendants concede as they must that the statutory grant of the power to issue a preliminary injunction carries with it the power to issue whatever ancillary equitable relief is necessary to the effective exercise of the granted power. Several cases so hold — including our recent World Travel. See FTC v. World Travel Vacation Brokers, Inc., supra, at 1026-27; FTC v. U.S. Oil & Gas Corp.,
AFFIRMED.
Concurrence Opinion
concurring.
I join the judgment of the court and in the essential reasoning of its opinion. I write separately only to emphasize that I do not read the court’s opinion as diluting the importance of the merits of the government’s underlying case in assessing a request for injunctive relief under section 13(b). A strong showing by the government that a violation of law has occurred necessarily produces “public equities” that must “receive far greater weight” than “private equities.” FTC v. Warner Communications, Inc., 742 F.2d 1156, 1165 (9th Cir.1984) (per curiam). Of course, “private equities may be considered.” Id. When the government’s case is weak, the “public equities” will be less clear. Consequently, in such a case, “private equities” often will play a more dominant role in the analysis.