UNITED STATES DISTRICT COURT FEDERAL TRADE COMMISSION, Plaintiff, v. H.J. HEINZ COMPANY , et al., Defendants Civ. No. 1:00CV01688 JR PUBLIC VERSION MEMORANDUM IN SUPPORT OF PLAINTIFF'S MOTION
July 14, 2000 INTRODUCTION AND SUMMARY The Federal Trade Commission ("Commission") asks this Court to enjoin the proposed merger of H.J. Heinz Company ("Heinz") and Beech-Nut Nutrition Company ("Beech-Nut"), two of the three dominant baby food companies in the United States, pending a full administrative trial on the merits before the Commission.(1) The "baby food industry carries the crucial responsibility for providing much of the nutrition for almost all of the infants nationwide, an obligation that emphasizes the necessity for total compliance under the Sherman Act."(2) For over 60 years, Gerber Products Company ("Gerber"),(3) Heinz, and Beech-Nut(4) have dominated the prepared baby food market in the U.S., With Gerber as the market leader found on almost all supermarket shelves, Beech-Nut and Heinz, effectively the only other firms in the market, compete head-to-head to be the second brand. This direct competition for shelf space has driven the market to a substantial degree, forcing Gerber as well to compete on price and innovation for sales to the consumer. Heinz's acquisition of Beech-Nut would eliminate the increasingly fierce competition between two of only three companies, substantially increasing market concentration in a market Retailer consolidation has forced these companies to compete more and more aggressively against one another, bringing consumers better prices and innovation. The result would be a duopoly, between Gerber and Heinz, which would not have to "work smarter" because they would control 98 percent of the market in the U.S. and in almost any smaller geographic market one could imagine. Unless this merger is enjoined, consumers will be left with one firm "competing" for shelf space to complement Gerber, where now they have two, and with no prospect that entry could effectively replace Beech-Nut as a constraint on the exercise of market power after the acquisition. The merger would cause a market that is already highly concentrated to become significantly more concentrated. A market is considered highly concentrated when the HHI, or Herfindahl-Hirschman Index, exceeds 1800,(5) and in such case, unless entry is easy, "it will be presumed" that the merger "is likely to create or enhance market power or facilitate its exercise."(6) Here, the merger would increase the HHI to over 5400 out of a possible 10,000, rendering it presumptively unlawful. The principal reason for the presumption is that excessive concentration can lead to "oligopolistic price coordination." Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 229-30 (1993). Such coordination
Phillip Areeda, IV Antitrust Law, ¶ 901b2 at 9 (1998 rev. ed.).
Fortunately for consumers, the fight between Beech-Nut and Heinz for market share precluded this strategy from succeeding. Based on the structure of this industry alone, that is, a reduction from three firms to two, a significant increase in concentration, and no likelihood of entry (there has been no significant entry for 60 years), the Commission is presumptively entitled to preliminary relief. Indeed, no court has allowed such a merger, absent a strong argument that one of the companies is failing in a dying industry. That certainly is not the case here.(8) The presumption that this merger will reduce competition is fully justified here. Nonetheless, the parties will likely argue that an increase in concentration of this magnitude should be tolerated because consumers assertedly do not benefit from the aggressive competition between Beech-Nut and Heinz. Not only does this unique argument run counter to logic.(9) (10) Beech-Nut and Heinz also compete intensively for placement on the supermarket shelf. Supermarkets typically carry only two brands of prepared baby food, and practically all supermarkets carry Gerber. Thus, Beech-Nut and Heinz compete to be the second brand carried by the supermarket.(11) (12) Both firms have competed aggressively against one another for shelf space on numerous other occasions.(13) The defendants will likely try to diminish the significance of this competition by arguing that Heinz and Beech-Nut each have separate regional strongholds in which the other firm has little presence. But this argument both understates the degree of competitive overlap and misperceives the nature of their competition. The parties' protestations notwithstanding, there are significant competitive overlaps in numerous markets.(14) Moreover, the degree of overlap between Beech-Nut and Heinz will likely increase as supermarkets continue to consolidate. Supermarket chains prefer to deal with a single vendor to supply all their stores, and as supermarkets consolidate Beech-Nut and Heinz will increasingly compete head-to-head in some of their traditional strongholds.(15) This court recently enjoined a merger where "absent the merger, the firms [were] likely, and in fact have planned, to enter more of each other's markets, leading to a deconcentration of the market, and, therefore, increased competition . . . ." FTC v. Staples, Inc., 970 F. Supp. 1066, 1082 (D.D.C. 1997). The parties' argument also inaccurately perceives the nature of competition because even if a firm is not the successful bidder, the fact that it bids is an important form of competition. In many instances Heinz or Beech-Nut must increase discounts or allowances in order to win a bid for one of their traditional customers.(16) As many courts have held, Section 7 prevents a diminution of bidding competition. See United States v. El Paso Natural Gas Co., 376 U.S. 651 (1964); FTC v. Alliant Techsystems Inc., 808 F. Supp. 9 (D.D.C. 1992). Even without a bid, however, both firms are under pressure to perform due to the ever-present threat of the other to take away an account.(17) Pricing and trade spending are not the only forms of competition. Innovation has played an important competitive role in this market, and Beech-Nut and Heinz have competed aggressively in new product development and product differentiation. For example, Beech-Nut was the first firm to put baby food in glass jars when others used lead-soldered metal cans, the first to use stages based on age levels, the first to remove salt from all baby foods, and the first to eliminate unnecessary starches and sugars.(18) Beech-Nut has important patents on additives that improve the nutritional value of the baby food. . Beech-Nut is the only brand offering Kosher for Passover prepared baby food. Heinz markets itself as the innovator with respect to organic baby foods.(19) (20) (21) The merger will also reduce the incentive to increase quality and reputation. Heinz has had at least two significant recalls in the recent past. (22) Removing the "threat" of such competition would result in significant consumer harm. Beyond the loss of competition between Heinz and Beech-Nut, the merger will increase the ability of the two remaining firms to coordinate tacitly. The central factor in the firms' ability to coordinate is the number of participants in the market. As this court has observed: "The relative lack of competitors eases coordination of actions, explicitly or implicitly, among the remaining few to approximate the performance of a monopolist." FTC v. PPG Indus., Inc., 628 F. Supp. 881, 885 n.9 (D.D.C.), aff'd in part, 798 F.2d 1500 (D.C. Cir. 1986). The proposed acquisition will substantially change the structure of this already highly concentrated market, to a duopoly comprising over 98% of the market. Courts have found violations where the decrease in the number of competitors was far less significant. By extinguishing that competition, as well as the image and cost differences, this merger will enhance the ability of Gerber and Heinz to coordinate. Defendants likely will argue that the merger will lead to substantial efficiencies that will enable the merged firm to compete more aggressively against Gerber. The courts have uniformly rejected this defense in markets, like this one, with significant entry barriers because, as the Supreme Court has acknowledged, "if concentration is already great, the importance of preventing even slight increases in concentration is correspondingly great." United States v. General Dynamics Corp., 415 U.S. 486, 497 (1974).(23) Moreover, absent the most extraordinary circumstances, even substantial proven efficiencies would not justify a merger to monopoly or near-monopoly because the competitive rivalry that forces firms to pass on the savings from efficiencies is destroyed by such mergers. See United States v. United Tote, Inc., 768 F. Supp. 1064, 1084-85 (D. Del. 1991)(rejecting efficiency defense in merger to duopoly; efficiencies insufficient to outweigh the loss of competition since "even if the merger resulted in efficiency gains, there are no guarantees that these savings would be passed on to the consuming public."); Merger Guidelines, § 4.0 ("When the potential adverse competitive effect of a merger is likely to be particularly large, extraordinarily great cognizable efficiencies would be necessary to prevent the merger from being anticompetitive"). The Commission requests injunctive relief to preserve the status quo pending its full consideration of the issues in an administrative trial. The anticompetitive effects that would flow from the transaction in the interim and the difficulty of obtaining adequate relief in the future justify preliminary relief. The Commission asks this Court to provide temporary relief under the specific standards of Section 13(b) of the FTC Act, which provides that the Commission must show that it has a likelihood of success on the merits and that an injunction would be in the public interest. In this case, the Commission meets both of these criteria. ARGUMENT I. BACKGROUND: THE PARTIES AND THE PROPOSED TRANSACTION The prepared baby food market has existed since the early 1930s when Beech-Nut created the first packaged baby food. For decades the market has consisted of only three firms: Gerber, Beech-Nut, and Heinz. Over 4 million infants and toddlers consume prepared baby food and the U.S. market exceeds $800 million annually in sales. Most prepared baby food sales are made through supermarkets, nearly all of which carry two main brands, consisting of Gerber and either Beech-Nut or Heinz. Although Heinz and Beech-Nut each enjoy certain parts of the country where they have historically had higher shares, they increasingly compete to be the second brand for national chains with divisions located in each other's core markets. Each company has had significant success within the past two years at penetrating the others "stronghold." Part of that competition takes the form of promotional allowances, which translate to discounts or other benefits for consumers. Heinz, with its principal executive offices in Pittsburgh, Pennsylvania, is a worldwide producer and distributor of a wide variety of food products, with over $ million of prepared baby foods. Heinz accounts for over percent of prepared baby food sales in the United States. Worldwide, Heinz is the largest seller of prepared baby foods, with over $1 billion in sales. It has a 90% or greater share in Italy, Hungary, Canada, Australia, and New Zealand, a 63% share in the United Kingdom, a 50% or greater share in Venezuela and China. In the U.S., Heinz baby foods are marketed as the "value" brand and are priced at a significant discount compared to Gerber and even Beech-Nut brand.(24) Heinz's line of baby foods includes about 230 SKUs (stock keeping units). Heinz's manufacturing facility is in Pittsburgh, Pennsylvania, where it is the number one brand. Beech-Nut is a subsidiary of Milnot, a food product company located in St. Louis, Missouri. Beech-Nut has over $100 million in sales in prepared baby food sales and accounts for over 12 percent of sales. PX 280 at 20; PX 189 at 385; PX 299 at III-2. Prepared baby foods account for about two-thirds of Milnot's estimated revenues for the year 2000. PX 280. Beech-Nut's line of baby foods is comprised of 227 SKUs, and includes strained fruits and vegetables, meats, infant juices, infant cereals, and toddler meals. Beech-Nut has higher market shares in the Northeast and the West Coast. Its manufacturing facilities are in Canojaharie and Fort Plain, New York. Beech-Nut's prepared baby foods generally are viewed, including by Heinz, as "premium" products, comparable in quality to those of Gerber, the market leader. In contrast to Heinz's substantially discounted prices, Beech-Nut's products are typically sold at the same price as, or at a small discount relative to, Gerber's products. On or about February 28, 2000, Heinz entered into an agreement to acquire 100% of the voting securities of Milnot from Madison Dearborn Capital Partners, L.P., for approximately $185 million. Unless enjoined by this court, Heinz will be able to consummate this acquisition at midnight on Wednesday, July 19, 2000. II. SECTION 13(b) OF THE FEDERAL TRADE COMMISSION ACT ESTABLISHES A PUBLIC INTEREST STANDARD FOR GRANTING INJUNCTIVE RELIEF. Section 13(b) of the FTC Act provides that a preliminary injunction may be granted "upon a proper showing that, weighing the equities and considering the FTC's likelihood of ultimate success, such action would be in the public interest." 15 U.S.C. § 53(b). In enacting Section 13(b), Congress adopted the "public interest" standard common in litigation by government agencies to enforce statutory requirements, in place of the traditional four-part test applicable to private parties seeking a preliminary injunction.(25) FTC v. Weyerhaeuser Co., 665 F.2d 1072, 1081-82 (D.C. Cir. 1981). In deciding whether to grant injunctive relief under the "public interest" standard, this Court "must (1) determine the likelihood that the FTC will ultimately succeed on the merits and (2) balance the equities." PPG, 798 F.2d at 1501-02; FTC v. University Health, Inc., 938 F.2d 1206, 1217 (11th Cir. 1991); Warner Communications, 742 F.2d at 1160; FTC v. Cardinal Health, 12 F. Supp. 2d 34, 44 (D.D.C. 1998); Staples, 970 F. Supp. at 1071. The Court's "task is not to make a final determination on whether the proposed [acquisition] violates Section 7, but rather to make only a preliminary assessment of the [acquisition]'s impact on competition."(26) The FTC satisfies its burden in this regard if it "raise[s] 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." Cardinal, 12 F. Supp. 2d at 45; Staples, 970 F. Supp. at 1071. In balancing the equities, the principal public equity is the effective enforcement of the antitrust laws. Without a preliminary injunction, the government often cannot restore competition via divestiture, to the public's detriment. Weyerhaeuser, 665 F.2d at 1086 n.31. Section 13(b) enables the Commission to protect that interest by preventing businesses from being acquired so that competition will continue in the marketplace until the legality of the proposed acquisition is finally determined. FTC v. Exxon Corp., 636 F.2d 1336, 1342-43 (D.C. Cir. 1980). Thus, "section 13(b) itself shows congressional recognition of the fact that divestiture is an inadequate and unsatisfactory remedy and reflects a continuing congressional concern with the means of halting incipient violations of Clayton § 7 before they occur." FTC v. Lancaster Colony Corp., 434 F. Supp. 1088, 1097 (S.D.N.Y. 1977). Although the Court may properly consider private equities as well as public, the public equities are to be given far greater weight in the balance. PPG, 798 F.2d at 1506; Warner Communications, 742 F.2d at 1165. III. THE PROPOSED ACQUISITION VIOLATES THE ANTITRUST LAWS Section 7 of the Clayton Act prohibits any merger or asset acquisition "where in any line of 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. § 18. Section 7 is intended to arrest anticompetitive acquisitions "in their incipiency" and, accordingly, requires a prediction as to the merger's likely impact on future competition. Philadelphia Nat'l Bank, 374 U.S. at 362.(27) Merger analysis under Section 7 requires determinations of: (1) the "line of commerce" or relevant product market; (2) the "section of the country" or relevant geographic market; and (3) the transaction's probable effect on competition in the product and geographic markets. Evidence establishing undue concentration in the relevant market makes out the government's prima facie case and gives rise to a presumption of unlawfulness. Philadelphia Nat'l Bank, 374 U.S. at 363; United States v. Baker Hughes, Inc., 908 F.2d 981, 982-83 (D.C. Cir. 1990); Cardinal, 12 F. Supp. 2d at 52. Once a prima facie violation is established, the burden shifts to defendants to rebut the prima facie case by demonstrating that other market characteristics make the presumption of anticompetitive effects implausible. United States v. Marine Bancorporation, Inc., 418 U.S. 602, 613 (1974); Baker Hughes, 908 F.2d at 982-83; Cardinal, 12 F. Supp. 2d at 54. If defendants offer evidence seeking to rebut the presumption from concentration and market share, the Commission stands ready to prove that the merger is likely to reduce competition on price and innovation in the relevant market. A. Prepared Baby Food (and Smaller Segments Thereof) Is a Relevant Product Market 1. The legal standard The purpose of market definition is to distinguish the firms that are significant and close competitors of the merging firms from those that are insignificant or remote. Only by identifying relevant, effective, constraining competitors can the court determine whether those competitors will prevent the merger from impairing competition. As the leading treatise puts it: the "line of commerce" language of § 7 of the Clayton Act and the general principles of merger policy require the government to identify some grouping of sales that constitutes a relevant market in which prices might rise as a consequence of the merger. That a larger group of sales might also constitute a market is beside the point. Areeda, IV Antitrust Law ¶ 929d, at 130. Therefore, the relevant product market "must be drawn narrowly to exclude any other product to which, within reasonable variations in price, only a limited number of buyers will turn . . . ." Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 612 n.31 (1953). The antitrust agencies and the courts have implemented this test by seeking to identify the smallest group of products over which prices could be profitably increased by a "small but significant" amount (normally 5 percent) for a substantial period of time (normally one year). Staples, 970 F. Supp. at 1076 n.8; Merger Guidelines,§ 1.11. The pivotal question is whether an increase in price for one group of products would cause a sufficient number of buyers to turn to other products so as to make the price increase unprofitable. See, e.g., Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210, 218 (D.C. Cir. 1986). If the price increase is profitable, those other product substitutes are properly excluded from the relevant product market. Id. There is strong evidence that the market in which to consider the likely competitive effects of the proposed merger is prepared baby food, or smaller segments thereof, consisting primarily of glass jars of food.(28) While all babies eventually graduate to table food, regular table food is not appropriate for infants. Infant foods are specially prepared with low (or no) seasoning and strained for easy swallowing and digestion. Although home preparation is a possible alternative to commercially-prepared baby food, as Beech-Nut notes, "time [often] becomes an issue."(29) The operative question in the relevant market inquiry is whether home preparation (or, for older babies, perhaps even some prepared adult foods) as an alternative serves as a competitive restraint on prices of commercially prepared baby foods. There is little evidence that it does.(30) (31) Thus, there is little evidence that home prepared foods would constrain the ability of firms to impose anticompetitive price increases on prepared baby food. 2. The Defendants Themselves Recognize that Prepared Baby Food Constitutes a Distinct Product Market. Defendants' business documents reveal a belief in a separate and distinct prepared baby food market.(32) Market share and pricing data is routinely collected by the defendants by this category. The companies refer to each other (and no others) as their competitors.(33) This is a significant indication that prepared baby food is a distinct product market. See Community Publishers, Inc. v. Donrey Corp., 892 F. Supp. 1146, 1153-54, 1156 (W.D. Ark. 1995) (where firm routinely concentrates on some presumptively competitive products and ignores others, other products are not in relevant product market), aff'd, 139 F.3d 1180 (8th Cir. 1998); FTC v. Coca-Cola Co., 641 F. Supp 1128, 1133 (D.D.C. 1986) (pricing and marketing decisions based primarily on comparisons with rival carbonated soft drinks, with little if any concern about possible competition from other beverages), vacated as moot, 829 F.2d 191 (D.C. Cir. 1987) (transaction abandoned). 3. Other Evidence Shows that Prepared Baby Food Is a Distinct Market In Brown Shoe, the Supreme Court identified "practical indicia" of product market boundaries, including industry or public recognition of the submarket as a separate economic entity, the product's particular characteristics and uses, unique production facilities, distinct customers, sensitivity to price changes, and specialized vendors. 370 U.S. at 325. This Court has recently endorsed these criteria. Cardinal, 12 F. Supp. 2d at 46; Staples, 970 F. Supp. at 1075; see also Bon-Ton Stores v. May Dep't Stores Co., 881 F. Supp. 860, 868-70 (W.D.N.Y. 1994); Coca-Cola Co., 641 F. Supp. at 1133. These practical indica point to baby food as a distinct product market. First, baby foods are formulated with special characteristics for a distinct customer group - infants. Infants have unique nutritional needs. As stated by Gerber: "It's often tempting to think of feeding your baby like a little adult. Babies are not like adults, or older children, or teenagers. Their nutritional and developmental needs are quite different."(34) Gerber's food labels display different nutritional information from that displayed on products intended for adults.(35) Baby foods typically are much blander than adult foods. Unlike many adult food products, Beech-Nut makes its baby food without "unnecessary additives like salt, sugar, starch or harsh spices."(36) While home prepared foods can be made to the same standards as commercially prepared baby foods, commercial baby food has the unique characteristic of convenience. Indeed, the Gerber Company was founded after Mrs. Gerber convinced her husband that preparation of solid foods for infants, previously done by hand-straining, could be done much more easily in a commercial food processing plant.(37) In addition, baby food is packaged in convenient sizes that vary according to the baby's age and appetite.(38) In sum, the evidence shows that prepared baby food is a relevant product market in which to assess the competitive effects of this acquisition. B. The United States and Several Smaller Markets are the Relevant Geographic Markets The focus in defining relevant geographic markets is to determine which areas of the country would be affected adversely by an acquisition. Philadelphia Nat'l Bank, 374 U.S. at 357. The relevant geographic market must "correspond with the commercial realities of the industry . . . ." Brown Shoe, 370 U.S. at 336; FTC v. Imo Indus., 1992-2 Trade Cas. (CCH) ¶ 69,943, at 68,558 (D.D.C. 1989). Relevant geographic markets may be as large as the nation or the world, or as small as a metropolitan area or neighborhood. See Brown Shoe, 370 U.S. at 337; see also United States v. Pabst Brewing Co., 384 U.S. 546, 551-52 (1966) (entire nation, three-state area, one state). In assessing the commercial realities of a proposed geographic market, the test is a practical one: are there, in reality, producers beyond certain geographic boundaries whose competitive activities significantly affect those of producers within the boundaries? See Merger Guidelines, § 1.2. In this case, the United States and several smaller metropolitan markets are the relevant geographic markets. Although there are some multinational companies that produce prepared baby food, imports of prepared baby food into the United States are virtually nonexistent. Heinz states that "Heinz baby food products and promotions are somewhat different in the United States and Canada (and around the world, too, for that matter), reflecting both the different countries' government regulations/guidelines, and the different market dynamics."(39) Price increases in the U.S. have not prompted foreign competitors to import into the U.S. U.S. customers therefore cannot turn to foreign suppliers in the event of an anticompetitive price increase, and thus the United States is a relevant geographic market. Smaller geographic areas within the United States also constitute relevant geographic markets for prepared baby food. Prepared baby food is purchased primarily by supermarkets and other mass merchandisers. Thus, Heinz and Beech-Nut compete in a number of metropolitan markets, closely tracking and targeting each other's sales and promotional activities in those local markets. The geographic areas in which these retailers operate can constitute relevant geographic markets if there are no sources of supply outside those areas to which they can practically turn in the event of anticompetitive price increases by suppliers within their geographic area. Here, Heinz, Beech-Nut and Gerber are essentially the only suppliers to any geographic region within the United States.(40) These local areas therefore constitute geographic markets based on geographic price discrimination. Merger Guidelines, § 1.22. C. This Merger Will Significantly Reduce Competition in the Market for Prepared Baby Food (and Smaller Segments Thereof) in the United States and Other Relevant Markets It is well established that the "market shares which companies may control by merging is one of the most important factors to be considered" when analyzing the likely effects of an acquisition. Brown Shoe, 370 U.S. at 343; see, e.g., Cardinal, 12 F. Supp. 2d at 52. Where a merger results in a significant increase in concentration and produces a firm that controls an undue percentage of the market, the combination is so inherently likely to lessen competition substantially that it "must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects." Philadelphia Nat'l Bank, 374 U.S. at 363. On this evidence alone the Commission establishes its prima facie case that this merger violates the antitrust laws. Here, the Commission is entitled to a presumption that the merger is illegal. The Merger Guidelines and courts measure concentration using the HHI, which is calculated by summing the squares of the market share of each market participant. In highly concentrated markets (those with an HHI above 1800), where a merger causes the HHI to increase by 100 points or more, it will be presumed that the "merger [is] likely to create or enhance market power or facilitate its exercise."(41) This merger will increase market concentration significantly, to extraordinarily concentrated levels. The HHI will increase by almost 400 points, to over 5300 (PX 299 at III-8), far exceeding the thresholds in which courts have enjoined mergers in highly concentrated markets.(42) This concentration level exceeds the range that the Court of Appeals for this Circuit has found to be "overwhelming." PPG, 798 F.2d at 1505-06 (post-merger HHIs estimated from 3184 to 5213).(43) Two firms will control over 98 percent of the market. Moreover, where the market is already highly concentrated, "the importance of preventing even slight increases in concentration is correspondingly great."(44) Courts have consistently concluded that within these markets any further industry consolidation would facilitate collusion.(45) In fact, where high concentration exists, courts have prohibited combinations with post-merger market shares as low as 26% and have enjoined industry consolidation resulting in post-merger HHIs as low as 2277. D. This Merger Will Harm Competition "By showing that the proposed transaction . . . will lead to undue concentration" in the prepared baby food market, "the Commission establishes a presumption that the transaction will substantially lessen competition," and thus establishes its prima facie right to injunctive relief. See Staples, 970 F. Supp. at 1083; Cardinal, 12 F. Supp. 2d at 52 ("under Section 7 of the Clayton Act, a prima facie case can be made if the government establishes that the merged entities will have a significant percentage of the relevant market-enabling them to raise prices above competitive levels.") "Once such a presumption has been established, the burden of producing evidence to rebut the presumption then shifts to the defendants." Staples, 970 F. Supp. at 1083; Cardinal, 12 F. Supp. 2d at 54 ("Although the ultimate burden of persuasion always rests with the FTC, once a presumption has been established that the proposed transaction will substantially affect competition, the burden of production shifts to the defendants to rebut the presumption"). "To meet their burden, the defendants must show that the market-share statistics . . . 'give an inaccurate prediction of the proposed acquisition's probably effect on competition.'" Cardinal, 12 F. Supp. 2d at 54 (quoting Staples, 970 F. Supp. at 1083). Even assuming arguendo that defendants could produce evidence to rebut the presumption that their proposed merger would substantially lessen competition, the Commission has assembled additional evidence that easily satisfies its "ultimate burden of persuasion" that the proposed merger will in fact substantially reduce competition in the prepared baby food market in two ways. First, the proposed merger would eliminate substantial head-to-head competition between Beech-Nut and Heinz, thus enabling the merged firm to increase its prices unilaterally. Second, by reducing the number of competitors in the prepared baby food market from three to two, the proposed merger would significantly increase the likelihood that the merged firm and Gerber would engage in coordinated behavior. 1. The Proposed Merger Would Enable the Merged Firm to Increase Prices Unilaterally Beech-Nut and Heinz are each other's most direct competitors. As described above, virtually all retailers that carry baby food carry Gerber and either Beech-Nut or Heinz. Thus, Beech-Nut and Heinz compete directly against one another to be the second baby food offered by retailers. Post-acquisition, Heinz will be in a position to exercise market power unilaterally, through its control of the combined Heinz and Beech-Nut prepared baby food brands. Heinz plans to eliminate the "Heinz" brand and replace it with Beech-Nut. Customers would no longer enjoy the benefit of competition between Beech-Nut and Heinz, and the merged entity would be able to increase the price of baby food unilaterally. See Merger Guidelines, § 2.21, at 22 ("merging firms may find it profitable to alter their behavior unilaterally following the acquisition by elevating price and suppressing output.") Heinz and Beech-Nut compete aggressively to secure shelf space by offering supermarkets a variety of promotional allowances, discounts, couponing, and payments for shelf space.(46) (47) As this demonstrates, American consumers stand to lose the benefits of this aggressive competition if Beech-Nut and Heinz are permitted to merge.(48) This argument must be rejected for two reasons. The defendants will compete more frequently and for larger accounts as this consolidation continues. Since supermarkets prefer to deal with a single vendor, mergers of firms served by different vendors often provide prepared baby food competitors with the chance to invade each others' territories.(49) Thus, even if there are geographic regions in which either Heinz or Beech-Nut historically has not had a significant market share, that is likely to change in the future. Moreover, the presence of Heinz or Beech-Nut at any share level gives that firm a foothold. Second, and more importantly, the fact that the parties unsuccessfully bid for business in markets in which the other firm historically has been the stronger second baby food brand indicates that the parties are meaningful competitors in such markets. "Unsuccessful bidders are no less competitors than the successful one." United States v. El Paso Natural Gas Co., 376 U.S. 651 (1964); Grunman Corp. v. LTV Corp., 665 F.2d 10, 12 (2d Cir. 1981). In any event, Section 7 protects competition in "any section of the country."(50) There are at least 12 significant geographic markets in which the parties have a combined market share that approaches or far exceeds [ ]%, including the following: Columbus, OH, South Carolina, Toledo, OH, Tampa, FL, Roanoke, VA, Raleigh/Greensboro, NC, Cincinnati/Dayton, OH, Cleveland, OH, Orlando, FL, Charlotte, Jacksonville, FL, Knoxville, TN and Atlanta, GA. The Merger Guidelines explain that unilateral effects are most likely where the post-merger HHI exceeds 1,000, where a significant share of one of the merging parties' customers regard the other merging party's product as their second choice,(51) and where the merging firms have a combined market share exceeding 35%. Merger Guidelines, § 2.211. Each of these conditions is satisfied in the 13 geographic markets identified above, at a minimum. Moreover, unilateral effects are likely in all other geographic regions as well. As discussed above, Beech-Nut and Heinz compete directly against each other for selection as the second baby food to be carried by their customers. Thus, the proposed merger of Beech-Nut and Heinz is likely to enable the combined firm to unilaterally increase the price of baby food. As discussed previously, the merger will also substantially decrease the incentive to innovate. The loss of Beech-Nut as an independent innovator would harm consumers.(52) 2. The Merger Would Increase the Likelihood that the Merged Firm and Gerber Would Engage in Coordinated Interaction By creating a duopoly, the acquisition would make it easier for Gerber and Heinz to coordinate their behavior. The ability of firms to coordinate their actions - to pull their competitive punches, with the expectation that their competitors would do the same - is one of the central concerns of the antitrust laws. Courts recognize that "significant market concentration makes it 'easier for firms in the market to collude, expressly or tacitly, and thereby force price above or farther above the competitive level.'" University Health, 938 F.2d at 1218 n.24. "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." PPG, 798 F.2d at 1503. Tacit collusion is more likely where firms have a better opportunity to monitor their competition and enforce cooperative pricing strategies. The easiest environment in which competitors can engage in coordinated interaction arises when a merger between companies results in a duopoly. A merger violates Section 7 if the remaining firms will be more likely to engage in conduct that is likely to result in higher prices, even if that conduct would be entirely lawful.(53) The chief competitive problem in this case, the tightening of oligopoly market conditions, lies at the heart of Section 7. "The dominant concern of horizontal merger policy is that mergers might result in oligopoly rather than competitive performance or might exacerbate any tendency toward oligopoly that already exists . . . ."(54) As the Supreme Court has recognized: "firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing, supracompetitive level by recognizing their shared economic interests and their interdependence with respect to price and output decisions." Brooke Group, 509 U.S. at 227. The most important determinant of the practicability of coordination is the number of participants in the market. As this Court has observed, "The relative lack of competitors eases coordination of actions, explicitly or implicitly, among the remaining few to approximate the performance of a monopolist." PPG Indus., 628 F. Supp. at 885 n.9. By creating a duopoly, this merger will enhance coordination. See United States v. Ivaco, Inc., 704 F. Supp. 1409, 1428 n.18 (W.D. Mich. 1989) ("with only two firms in the market, the firms would be able to police cheating, or non-collusive pricing by their competitor.") Because of the increased likelihood of anticompetitive behavior, no court has permitted a merger-to-duopoly absent clear evidence that new entry into the market was likely.(55) Other post-merger render this market "conducive to reaching terms of coordination, detecting deviations from those terms, and punishing such deviations." Merger Guidelines, § 2.1. These conditions include:
B.F. Goodrich Co., 110 F.T.C. 207, 295 (1988). Most of these factors suggest that the proposed merger would enhance the likelihood of coordinated interaction. As discussed infra in Section III.D.3., barriers to entry into the prepared baby food market are extremely high. As discussed supra in Section III.C., the proposed merger would reduce the number of effective competitors from three to two, and would increase the HHI by almost 400 points to over 5300. Demand for prepared baby food is relatively inelastic, and as discussed supra in Section III.A.1. Moreover, transactions are relatively frequent and pricing information is visible and collected regularly by the companies. Although some of the parties' customers are large, there are a large number of smaller customers, and transactions are generally numerous and small, both at wholesale and retail. This minimizes the incentive to cheat, as the gains from cheating would also be small. Merger Guidelines, § 2.12. Post-merger, the two remaining firms would be well-positioned to detect any cheating by the other company. Indeed, in affirming the district court's opinion that the parties had not engaged in price fixing in In re Baby Food Antitrust Litigation, the Third Circuit acknowledged that "[i]n an oligopoly consisting of no more than three companies at one time and collectively controlling almost the entire market, there is a pricing structure in which each company is likely aware of the pricing of its competitors." 166 F.3d at 128. If Heinz and Beech-Nut were to combine, this transparency would only be exacerbated.;(56) .(57) The bottom line is that post-merger, the incentives for the merged entity and Gerber to compete will be significantly diminished. Almost all retailers that carry baby food carry two brands of baby food - Gerber and either Beech-Nut or Heinz. However, nearly all retailers are reluctant to carry only a single brand of baby food, for fear of not providing their customers a choice.(58) Post-merger, there would only be two brands of baby food available. In view of the fact that almost uniformally retailers carry two brands of baby foods on their shelves, there would be significantly less incentive for the merged entity and Gerber to engage in head-to-head competition to displace each other-there would be space on the shelves for both firms' products. Thus, there would be a significantly reduced incentive for either of the two remaining firms to cheat on any tacit understanding they may reach, or even to compete aggressively against one another.(59) 3. Entry Is Unlikely to Defeat the Acquisition's Anticompetitive Effects. Entry by new firms would not defeat a merger's anticompetitive effects unless that entry would be likely to occur in a timely manner (e.g., two years) and in sufficient magnitude to constrain anticompetitive behavior. Merger Guidelines,§ 3.0. The ultimate issue is whether entry is so easy that it "would likely avert [the] anticompetitive effects" resulting from the proposed acquisition. Staples, 970 F. Supp. at 1086, quoting Baker Hughes, 908 F.2d at 989. To constitute a defense to an anticompetitive merger, entry must be "timely, likely, and sufficient in its magnitude, character and scope to deter or counteract the competitive effects" of a proposed transaction. Merger Guidelines, § 3.0; see Cardinal, 12 F. Supp. 2d at 55-58 (adopting "timely, likely, sufficient" test). As this Court has recognized, the Court of Appeals for this Circuit explicitly endorsed the "sufficiency" element of the entry test: "[T]he Court must consider whether, in this case, 'entry into the market would likely avert anticompetitive effects from [Staples'] acquisition of [Office Depot].'" Staples, 970 F. Supp. at 1086, quoting Baker Hughes, 908 F.2d at 989.(60) In order for new entry to be likely, the sales opportunities available to a new entrant must be sufficient to enable the entering firm to operate at a large enough scale to make entry profitable. Merger Guidelines, § 3.3. In this case there are substantial barriers to entry that make new entry highly unlikely. In many respects the prepared baby food market is similar to the carbonated beverage market in FTC v. Coca-Cola, 641 F. Supp. at 1137, the last case in which this court evaluated entry barriers in a consumer product market. In both cases, effective entry would require:
The importance of a brand to ensure consumer acceptance and convey a reputation for quality cannot be understated. Other factors make new entry into this market particularly unlikely. The market has been stable or declining. Declining consumption limits the sales opportunities available to a new entrant. It also means that a new entrant would have to take sales from incumbent competitors, increasing competition, decreasing market pricing, and making more it more difficult for the new entrant to earn an acceptable return on investment. Finally, the history of entry provides a concrete testament to the difficulty of entry. For 60 years, no significant entry has occurred. In such circumstances the courts appropriately assume that entry will not reduce the potential anticompetitive effects of the merger. See Staples, 970 F. Supp. at 1087 (recent trend of exit, not entry); United Tote, 768 F. Supp. at 1076, 1080-82 (lack of entry supported finding of barriers); California v. American Stores, Inc., 697 F. Supp. 1125, 1131-32 (C.D. Cal. 1988); FTC v. Illinois Cereal Mills, Inc., 691 F. Supp. 1131, 1144-45 (N.D. Ill. 1988), aff'd sub nom. FTC v. Elders Grain, 868 F.2d 901 (7th Cir. 1989). 4. Defendants' Asserted Efficiencies Cannot Save this Transaction Defendants argued before the Commission that the proposed acquisitions would result in significant efficiencies. The Supreme Court has stated that "possible economies cannot be used as a defense to illegality" in Section 7 merger cases. FTC v. Procter & Gamble Co., 386 U.S. 568, 580 (1966); see also Philadelphia Nat'l Bank, 374 U.S. at 371. Many courts have followed the Supreme Court's undisturbed precedent.(62) Others have held that in appropriate circumstances, a defendant can rebut the presumption that a merger "would substantially lessen competition" by proving "substantial efficiencies that benefit competition and, hence consumers," University Health, 938 F.2d at 1222, just as the antitrust agencies consider procompetitive efficiencies in evaluating a merger's likely competitive effect. Merger Guidelines, § 4.0, at 18-20. All courts, however, agree that the ultimate issue under Section 7 is whether a proposed merger is likely to lessen competition substantially in any line of commerce in any section of the country, and if it is determined that a merger would have such an impact, proven efficiencies, however great, "will not insulate the merger from a Section 7 challenge." University Health, 938 F.2d at 1222 n.29; see Cardinal, 12 F. Supp. 2d at 63 ("the critical question raised by the efficiencies defense is whether the projected savings from the mergers are enough to overcome the evidence that tends to show that possibly greater benefits can be achieved by the public through existing, continued competition"). The defendants will claim that this merger will result in substantial cost savings that ultimately will lead to lower prices for consumers. They face a heavy burden in demonstrating that those efficiencies will outweigh the anticompetitive effects here, because this merger will eliminate a significant rival from a market impervious to new entry. It is rivalry that spurs for efficiency, and without that rivalry, whether consumers receive the benefits of any new efficiencies will depend on the good intentions of the duopolists which control the market. Antitrust law, however, prefers the workings of the competitive marketplace to the intentions of dominant firms. IV. THE FACTS OF THIS CASE DEMONSTRATE THE NEED FOR PRELIMINARY INJUNCTIVE RELIEF. Where, as here, the Commission has demonstrated a likelihood of success on the merits, defendants face a difficult task of "justifying anything less than a full stop injunction." PPG, 798 F.2d at 1506; Staples, 970 F. Supp. at 1091. The strong presumption in favor of a preliminary injunction can be overcome only if: (1) significant equities compel that the transaction be permitted; (2) a less drastic remedy would preserve the Commission's ability to obtain eventual relief; and (3) a less drastic remedy would check interim competitive harm. 798 F.2d at 1506-07. Weighing the equities in this case, where the facts so strongly mitigate against allowing the acquisition, demonstrates that a preliminary injunction should issue. "The principal equity weighing in favor of issuance of the injunction is the public's interest in effective enforcement of the antitrust laws." University Health, Inc., 938 F.2d at 1225. In observing this interest, this Court has consistently held that "[a] demonstration of probable anticompetitive effects . . . generally alone is adequate to satisfy the equity requirement for injunctive relief." FTC v. Alliant Techsystems Inc., 808 F. Supp. 9, 22 (D.D.C. 1992). See also Cardinal, 12 F. Supp. 2d at 66; Staples, 970 F. Supp. at 1091. Preliminary injunctive relief is also in the public interest because, absent injunctive relief, interim harm to competition would occur pending the relief devised following a full administrative trial on the merits. Staples, 970 F. Supp. at 1091. The benefits customers realize from competition in the prepared baby food market would be lost during a full trial on the merits because customers would, in the meantime, face a duopoly and higher prepared baby food prices. These lost customer dollars could never be recouped, even if the administrative proceeding results in a finding that the acquisition violates the antitrust laws and the Commission orders permanent relief. See id. Courts recognize the necessity of preventing this interim harm: "Later remedies cannot remove retroactively the harm that has already occurred. A court should, therefore, prohibit consummation of a merger pursuant to Section 13(b) where serious questions are raised about its legality." Bass Bros., 1984-1 Trade Cas. (CCH) ¶ 66,041, at 68,622. See also Staples, 970 F. Supp. at 1091. This is particularly true in this case because it will be difficult for Beech-Nut to regain the confidence of consumers once it has exited the market. CONCLUSION For the foregoing reasons, the Court should grant the Commission's motion for a preliminary injunction against the proposed acquisition. Respectfully submitted,
1. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), authorizes the Commission to seek, and empowers this Court to grant, preliminary relief pending the completion of administrative proceedings challenging the proposed acquisition. Section 13(b) further provides that the Commission must commence its administrative proceeding within 20 days after the issuance by a federal court of any preliminary injunction. The Commission is empowered to bring an administrative complaint challenging the transaction under Sections 7 and 11 of the Clayton Act, 15 U.S.C. §§ 18, 21, and under Section 5 of the FTC Act, 15 U.S.C. § 45. 2. In Re: Baby Food Antitrust Litigation, 166 F.3d 112, 138 (3d Cir. 1999). 3. Gerber is a subsidiary of Novartis. 4. Beech-Nut Nutrition Company is owned by Milnot Holding Corporation ("Milnot"), which in turn is owned by Madison Dearborn Capital Partners, L.P. 5. 5 The U.S. Department of Justice and the Federal Trade Commission Horizontal Merger Guidelines (April 2, 1992) ("Merger Guidelines") measure concentration using the Herfindahl-Hirschman Index ("HHI"), which is calculated by summing the squares of the market share of each participant. A merger that results in an HHI over 1800 indicates a highly concentrated market; an increase in the HHI of 50 points in a highly concentrated market raises significant antitrust concerns. Where the post-merger HHI is over 1800 and the increase in the HHI is over 100 points, it is presumed that the merger will be anticompetitive. Merger Guidelines,§ 1.51, at 16-17. Courts "have come to accept the HHI as the most prominent and accurate method of measuring market concentration." FTC v. Cardinal Health, Inc., 12 F. Supp.2d 34, 53 (D.D.C. 1998). See also FTC v. University Health, Inc., 938 F.2d 1206, 1211 n.12 (11th Cir. 1991); FTC v. PPG Indus., Inc., 798 F.2d 1500, 1503 (D.C. Cir. 1986); FTC v. Staples, Inc., 970 F. Supp. 1066, 1081-82 (D.D.C. 1997). 6. Merger Guidelines,§ 1.51; see United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 364 (1962); FTC v. PPG Indus., 798 F.2d 1500, 1502-03 (D.C. Cir. 1986); F. M. Scherer & David Ross, Industrial Market Structure & Economic Performance 82 (3d ed. 1990) ("when the leading four firms control 40 percent or more of the total market, oligopolistic behavior becomes likely")(emphasis added). 18. Beech-Nut, Our Heritage, available at http://www.beechnut.com/our_story/heritage_bot.htm> 23. See Ford Motor Co. v. United States, 405 U.S. 562, 569-70 (1972) (rejecting argument that acquisition would have beneficial effect because it would make third firm in market "a more vigorous and effective competitor against" the top two firms); RSR Corp. v. FTC, 602 F.2d 1317, 1325 (9th Cir. 1979) (declining to approve merger which increased the merged firm's market share from 12% to 19%, because "a merger of the second and fifth largest firms . . . is not the merger of 'two small firms.'"); United Tote, 768 F. Supp. at 1084; United States v. Bethlehem Steel Corp., 168 F. Supp. 576, 618 (S.D.N.Y. 1958) (if argument were credited it would lead to an even more highly concentrated industry). Cf. United States v. Country Lake Foods, 754 F. Supp. 669, 680 (D. Minn. 1990)(permitting merger of second and third largest milk processors where there was an "absence of entry barriers" and powerful purchasers which had numerous alternatives in response to a price increase). 25. In particular, the FTC is not required to show irreparable harm. FTC v. Warner Communications, Inc., 742 F.2d 1156, 1159 (9th Cir. 1984). Nonetheless, without an injunction, the public interest in effective antitrust enforcement will be irreparably harmed, because competition will be eliminated in the interim and because of the inadequacy of eventual relief through post-consummation divestiture. See Part IV below. 26. University Health, 938 F.2d at 1218; Warner Communications, 742 F.2d at 1162; see Cardinal, 12 F. Supp. 2d at 45; Staples, 970 F. Supp. at 1070-71. This Court need not resolve all conflicts of evidence or analyze extensively all antitrust issues. Such final resolution is the province of the administrative proceeding. Warner Communications, 742 F.2d at 1164. 27. Because Section 7 addresses the probable future effects of an acquisition, it necessarily requires predictions and inherently "deals in probabilities, not certainties." Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962). The government need only show a reasonable probability, not a certainty, that the proscribed anticompetitive activity may occur. "All that is necessary is that the merger create an appreciable danger of [anticompetitive] consequences in the future. A predictive judgment, necessarily probabilistic and judgmental rather than demonstrable, is called for." Hospital Corp. of America v. FTC, 807 F.2d 1381, 1389 (7th Cir. 1986), cert. denied, 481 U.S. 1038 (1987); Staples, 970 F. Supp. at 1072. 28. While not directly at issue in the litigation, this product market definition is consistent with how the Third Circuit viewed the product market in In Re: Baby Food Antitrust Litigation, 166 F.3d 112, 116 (3d Cir. 1999). See also Gerber Products Company v. Beech-Nut Life Savers, Inc., 160 F. Supp. 916 (S.D.N.Y. 1958) (antitrust action alleging attempted monopolization in a "baby food products market"). 29. Beech-Nut, Food for Thought, available at http://www.beechnut.com/food4thought/fft_bot.htm>. 32. Documents also recognize the existence of a distinct jar segment. 33. Gerber sees Heinz and Beech-Nut as its "principal competitors in the baby food market." Gerber Products Company, 1994 SEC Form 10-K at 7 (referring to Heinz and Ralcorp Holdings, Inc., a previous parent of Beech-Nut). In addition, Gerber a number of years ago filed a preliminary injunction action against Beech-Nut alleging attempted monopolization and other antitrust violations in a "baby food products market" in California. Gerber Products Co. v. Beech-Nut Life Savers, Inc., 160 F. Supp. 916 (S.D. N.Y. 1958). 34. Gerber Products Company, Dietary Guidelines for Infants, available at <http://www/gerber.com/prc/>. 35. Gerber Products Company, Baby Food Label Guidelines, available at <http://www/gerber.com/prc/>. 36. Beech-Nut, Food for Thought, available at <http://www.beechnut.com/food4thought/fft_bot.htm>. 37. Gerber Products Company, History, available at <http://www.gerber.com/contactus/history.asp>. 38. Beech-Nut, Food for Thought, available at http://www.beechnut.com/food4thought/fft_bot.htm>. 39. Heinz Canada's Infant & Toddler Nutrition Web Site, Note to Our American Friends, <http://www.heinzbaby.com/contactus/american.cfm>. The web site is targeted specifically to Canadian residents. 41. Merger Guidelines, at § 1.51. As the leading antitrust treatise explains: Mergers in [the highly concentrated range] should carry a strong presumption of illegality that can be defeated only by a showing of extraordinarily easy entry or truly extraordinary efficiencies; all other evidence relating to product differentiation, nature of transactions or of buyers should ordinarily be ignored unless the defendant can establish by clear and convincing evidence that such a characteristic makes both collusion and noncooperative oligopoly virtually impossible. Areeda, IV Antitrust Law ¶ 932, at 160. 43. 43 798 F.2d at 1502-03. Courts have barred mergers resulting in substantially lower concentration levels. FTC v. Elders Grain, 868 F.2d 901, 902 (7th Cir. 1989)(acquisition increased market shares of largest firm from 23% to 32%); Hospital Corp. of Am., 807 F.2d at 1384 (acquisition increased market share of second largest firm from 14% to 26%); Warner Communications, 742 F.2d at 1163 (four-firm concentration ratio of 75%); Cardinal, 12 F. Supp. 2d at 52 (mergers increasing HHIs from 1648 to 2450 and 1648 to 2277); United Tote, 768 F. Supp. at 1069-70 (merger between two firms with 13 and 27% of sales, increasing the HHI from 3940 to 4640, held presumptively unlawful); FTC v. Bass Bros. Enters. Inc., 1984-1 Trade Cas. ¶ 66,041, at 68,609-10 (N.D. Ohio 1984) (acquisition increased market share of second largest firm from 20.9% to 28.5%, increasing HHI from 1802 to 2320). 44. General Dynamics, 415 U.S. at 497. 45. See, e.g., Elders Grain, 868 F.2d at 905; PPG. Indus., 628 F. Supp. at 885; Bass Bros., 1984-1 Trade Cas. (CCH) ¶ 66,041, at 68,620. 50. In Philadelphia National Bank, the Court rejected the argument that two Philadelphia banks should be permitted to merge because they could more effectively compete against large New York banks: "We reject this application of the concept of 'countervailing power.' If anticompetitive effects in one market could be justified by procompetitive consequences in another, the logical upshot would be that every firm in the industry could, without violating § 7, embark on a series of mergers that would make it in the end as large as the industry leader." 374 U.S. at 370. 51. For a unilateral price increase to be profitable, the two brands at issue need not be the two "closest" substitutes in some absolute sense or in the minds of all consumers. There need only be a substantial number of consumers who would switch between the two brands in response to a price increase in one of them. See Areeda, IV Antitrust Law ¶ 914h at 74. 53. See Cardinal Health, 12 F. Supp. 2d at 65 ("Although the Court is not convinced from the record that the Defendants actually engaged in wrongdoing, it is persuaded that in the event of a merger, the Defendants would likely have an increased ability to coordinate their pricing practices."); Merger Guidelines, § 2.1. As the leading antitrust treatise observes, Section 7 "is concerned with far more than 'collusion' in the sense of an illegal conspiracy; it is very much concerned with 'collusion' in the sense of tacit coordination not amounting to conspiracy." Areeda, IV Antitrust Law ¶ 916, at 85 . 54. Areeda, IV Antitrust Law, ¶ 918, at 91. See also Brooke Group, 509 U.S. at 229-30 ("[i]n the § 7 context, it has long been settled that excessive concentration, and the oligopolistic price coordination it portends, may be the injury to competition the Act prohibits"); Hospital Corp., 807 F.2d at 1386. 55. See, e.g., Staples, 970 F. Supp. 1066; United Tote, 768 F. Supp. 1064; United States v. Ivaco, 704 F. Supp. 1409 (W.D. Mich. 1989). Cf. United States v. Syufy Enter., 903 F.2d 659 (9th Cir. 1990) (permitting merger-to-monopoly because new entry occurred after merger and entry barriers were low). 56. Removing this excess capacity would in turn lead to less discounting. Cardinal, 12 F. Supp. 2d at 63-64. See also Elders Grain, 868 F.2d at 905-06 (excess capacity suggested that there would be an incentive to cheat on any agreement); FTC v. Owens-Illinois, Inc., 681 F. Supp. 27, 49 (D.D.C.) (considering lack of excess capacity as factor "favor[ing] collusive behavior"), vacated as moot, 850 F.2d 694 (D.D.Cir. 1988); B.F. Goodrich, 110 F.T.C. at 326-27. 57. Another factor relevant to determining whether a merger will increase the likelihood of coordinated interaction is whether collusion has previously occurred in the market. See Elders Grain, 868 F.2d at 905. 60. Similarly, in Cardinal, this Court found that defendants (despite their efforts) had failed to come forward with sufficient evidence of sufficiency of entry (and of likelihood of entry) to rebut the presumption from concentration. 12 F. Supp. 2d at 58; accord Staples, 970 F. Supp. at 1087 (finding entry to be unlikely). 61. A new entrant would have to develop "brand equity" to be accepted in the market. Compare Ansell, Inc. v. Schmid Laboratories, Inc., 757 F. Supp. 467, 474-75 (D.N.J. 1991) (difficulty developing successful brand name recognition and consumer loyalty prevent entry into retail market); United States v. Mrs. Smith's Pie Co., 440 F. Supp. 220, 229 (E.D. Pa. 1976) (brand name recognition and consumer recognition constitute barriers to entry into retail market); United States v. Pabst Brewing Co., 384 U.S. 546, 560 (1966) (Harlan, J., concurring) (Aheavy emphasis on consumer recognition and promotional techniques in the marketing of beer supports the conclusion that there does exist a substantial barrier to a new competitor in a regional market . . .@). 62. As Judge Gesell wrote: "Any federal judge considering regulatory aims such as those laid down by Congress in Section 7 of the Clayton Act should hesitate before grafting onto the Act an untried economic theory such as the wealth-maximization and efficiency-through-acquisition doctrine expounded by [defendants] . . . . To be sure, efficiencies that benefit consumers were recognized [by Congress] as desirable but they were to be developed by dominant concerns using their brains, not their money by buying out troubling competitors. The Court has no authority to move in a direction neither the Congress nor the Supreme Court has accepted." Coca-Cola, 641 F. Supp. at 1141. |