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the pending merger and applicable legal theories. The staff also records its recommended course of action and, if suit is recommended, attaches a proposed complaint.
This material is then reviewed by our Operations Office. That office then makes its recommendation as to what action, if any, should be taken by the Division with respect to the pending merger, frequently after soliciting the views of other units within the Division, such as the Economic Policy Office and the Evaluation Section. Recommendations to file suit are reviewed by the Assistant Attorney General and at least one of his Deputies. In addition, recommendations not to challenge a merger are reviewed by the Assistant Attorney General when significant policy issues are involved. The ultimate decision to file suit, of course, is made by the Assistant Attorney General.
Where consummation of a merger has not yet occurred, a decision to file suit will almost always be accompanied by a decision to seek a preliminary injunction blocking consummation. Generally, only when the parties agree to postpone consummation, or when we feel we have had insufficient time or information to adequately present a case for a preliminary injunction, will we decline to attempt to block consummation. I believe quite strongly that divestiture is a wholly inadequate remedy in a merger case, and we seek to avoid that problem whenever
This is an important point, and cannot be overemphasized. Our investigatory process is designed to obtain what is necessary to make a litigation decision before consummation. Experience clearly shows that divestiture very often does not, and frequently cannot, result in a return to the competitive status quo ante. There is almost always a change in circumstances caused by a consummated merger that can never be undone. As a practical matter, divestiture is slow and unwieldy, and experience proves what can be expected-a company that loses a Section 7 case after consummation has little incentive to assist in rapid divestiture. Horror stories abound, with the approximately 17-year history of the El Paso Natural Gas case one of the most visible. Unfortunately, the interminable problems and delay involved in obtaining divestiture are the rule, not the excep tion. There is every reason for the parties to delay an ordered divestiture, as both we and the FTC are only too painfully aware.3
In addition, our failure to obtain preliminary injunctive relief creates an incentive for defendants to delay rather than expedite the litigation. Our experience in bank merger cases, where there is an automatic statutory stay, is that those cases move significantly faster than merger cases challenging a consummated transaction. I am convinced that preliminary relief is necessary to expedite litigation and that, with preliminary relief, these matters can be disposed of fairly rapidly, as was the recent Copper Range-Amax case, which was disposed of in 60 days.
Aside from the influence of whether or not a preliminary injunction is in effect, the litigation process is roughly similar for all mergers, varying with factors unique to particular transactions. The time that elapses from our first awareness of a transaction to the beginning of litigation may be a few months or a few days; the litigation can take a few weeks, as in Amar, or several years.
At least three important conclusions can be drawn from this overview of our merger enforcement process. First, the more notice we have, the better job we will do. Second, expanded investigatory authority would enable us to do a better job and with greater speed. Third, whether we get a preliminary injunction can have a significant effect on the length of the litigation and the adequacy of available relief. These conclusions are extremely important to consideration of the effectiveness of the antitrust laws today.
The Subcommittee has requested a brief outline of my views on merger enforcement policy. Of course, merger policy must be derived from the purposes which led Congress to enact Section 7 of the Clayton Act, and to amend it in 1950 and the case law interpreting that statute.
In 1968, the FTC stated it intended to sue Papercraft Corp. seeking divestiture of CPS Industries, Inc. which Papercraft had acquired in 1967. A divestiture order was obtained by the FTC in July, 1971. For over four years, the FTC sought to enforce the divestiture decree without success. Since 1967. CPS contributed over $11 million to Papercraft's profits, more than double its acquisition price. See Wall Street Journal, December 2, 1975, p. 48.
Whatever one believes about the advantages or disadvantages flowing from existing concentration levels in the American economy, there are several per. suasive reasons for preventing any further increase. The dominant theme per vading Congressional action in 1950 was a fear of what was perceived to be a rising tide of economic concentration. Increased concentration may not only reduce competition, but threaten social or political values as well. Section 7 was designed to prevent such harm by outlawing probably anticompetitive mergers when the trend to a lessening of competition in a line of commerce is in its incipiency.
Our foremost concern is with horizontal mergers. A horizontal merger is one between companies that are competitors, such as manufacturers of the same or very similar products, or distributors selling competing products in the same market area. Such mergers eliminate a competitor and concentrate the power of two firms into one. The law with regard to horizontal mergers is relatively clear and well developed.
The Supreme Court established the general rule governing the legality of horizontal mergers in United States v. Philadelphia National Bank:*
"A merger which produces a firm controlling an undue percentage of the relevant market and results in a significant increase in the concentration of firms in that market 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."
By use of this rule the Court dispensed with elaborate proof of market behavior or probable anticompetitive effects. Instead it fashioned a relatively simple test focusing on the level of concentration in relevant product and geographic markets, increases in such that would result from a proposed merger, and the percentage of the market which would be controlled by the resulting firm. In the Philadelphia National Bank case the rule was used to find presumptive illegality in a highly concentrated market in which the five leading banks had represented 80% of the business before the merger and in which the merger of the escond and third largest banks created a company with a 30% market position.
In United States v. Aluminum Company of America" the Court recognized a variation of the Philadelphia National Bank rule: in a highly concentrated market the acquisition by a large company with a 28% market share of a company with a 1.3% market share was unlawful where the acquired company, though small, was an aggressive and viable competitor. Hence, two related rules emerge for highly concentrated industries. Mergers between substantial competitors which further increase concentration or mergers which absorb a small but important competitive factor in the market are probably unlawful.
In light of the case law governing horizontal mergers, it is difficult to articulate any meaningful enforcement policy that distinguishes between "big" and "small" mergers. The size of a merger can be judged by a variety of measurements, most importantly for our purposes by market shares. In addition, size is not the only factor to be considered in assessing the legality of a horizontal merger. The aggressiveness of a firm,' the trend toward concentration in the relevant product market, and the history of a particular market' must also be considered. It is unlikely, however, that any significant horizontal merger will go unchallenged by the Justice Department or the Federal Trade Commission. In determining whether to challenge a horizontal merger, the 1968 Merger Guidelines, while not controlling, serve as a useful benchmark by which to assess its probable anticompetitive significance.
A vertical merger is one between businesses that have a customer-supplier relation to each other, such as a manufacturer acquiring a supplier of raw materials. The law regarding vertical mergers is not as well developed as that concerning horizontal mergers. The principal jurisprudence was established in the Brown Shoe and duPont cases.' The main concern raised by vertical mergers is
4 Brown Shoe v. United States, 370 U.S. 294 (1962).
5 374 U.S. 321 (1963).
6 377 U.S. 271 (1964).
8 Brown Shoe Co. v. United States, 370 U.S. 294 (1962).
10 United States v. duPont, 353 U.S. 586 (1957). There the Court held unlawful duPont's acquisition of a controlling share of General Motors' stock. DuPont supplied GM with
tomotive finishes and fabrics. In Brown Shoe, the Court held unlawful a merger between Kinney Co. and Brown Shoe. The merger had both horizontal and vertical aspects. Kinney and Brown both manufactured shoes and sold them at retail.
that barriers to entry or competition by other firms may be raised. For instance, if a manufacturer acquires a supplier of crucial raw materials for its product, other competitors or would-be entrants to the manufacturer's market may be denied access to these key resources.
Conglomerate mergers are generally defined to include all those which are neither horizontal or vertical." The principal analytic framework used to assess the legality of such mergers is the potential competition doctrine. Under that doctrine, conglomerate mergers may be anticompetitive for three basic reasons. First, the acquiring firm may be eliminated as an actual new entrant into the relevant market under consideration, thereby depriving that market of increased future competition. Second, the acquiring firm may be eliminated as an existing procompetitive force on the edge of the market; while it is not actually doing business in the market, it spurs competition in the market because of its threat to enter if profits or controllable costs of actual market competitors rise. Third, the acquisition may operate to entrench the dominance of the acquired firm.
There is significant case law on the potential competition doctrine, from the first Penn-Olin case through Marine Bancorporation.13 Certain criteria for assessing the legality of a potential competition merger are well recognized, such as concentration levels in the relevant market and the capability and incentive of the acquiring firm to enter the market in other ways. Projections for successful prosecution, however, are problematical. We have found some courts reluctant to draw what we believe are reasonable inferences of probable anticompetitive effects of these mergers, but we remain convinced of the soundness of our theories.
Our recent challenge to the Inco-ESB merger rests upon the potential competition doctrine. We believe that Inco would have entered ESB's industrial battery market de novo in the absence of the merger.
Mergers in regulated industries present special problems. Where clear antitrust immunity exists, we must, of course, confine our activities to appearances before regulatory authorities with jurisdiction to approve such mergers, and to possible direct judicial review. However, even where challenges under the Clayton Act are possible, special factors may come into play in evaluating the probable anticompetitive consequences of a merger. For example, concentration ratios may have special significance in a line of commerce which can be entered only upon receipt of an officially authorized charter or certificate of entry. Regulation may itself limit the opportunities for competition. Where this is so, it is especially important that available opportunities for competition be preserved and encouraged."
In addition, regulatory entry barriers may affect application of the potential competition doctrine. With regard to the banking industry, the Supreme Court has stated that in states which stringently limit the ability of banks to branch or otherwise to expand internally, "in the absence of a likelihood of entrenchment, the potential competition doctrine-grounded as it is on relative freedom of entry on the part of the acquiring firm-will seldom bar a geographic market extension merger by a commercial bank." United States v. Marine Bancorporation, Inc., 418 U.S. 602 (1974).
Finally, in some cases, Congress has provided for specific statutory defenses to a merger between regulated firms which would otherwise violate the antitrust laws.15
Thus, the existence of state and federal regulation may require the use of spe cial standards in determining the legality of a merger involving regulated firms.
"The term "conglomerate" is less frequently confined to describing mergers between companies with unrelated product lines. Under that definition, so-called market extension or product extension mergers would not be conglomerate. "Market extension" mergers are between concerns selling the same or similar products in different geographic markets. "Product extension" mergers involve firms selling noncompetitive products which are so functionally related that they may be easily produced, promoted or marketed together. An example would be a detergent manufacturer's acquisition of a household bleach producer. See FTC v. Procter and Gamble Co., 386 U.S. 568 (1967).
United States v. Penn-Olin Chemical Co., 378 U.S. 158 (1964).
13 United States v. Marine Bancorporation, Inc., 418 U.S. 602 (1974).
14 See United States v. Philadelphia National Bank, 374 U.S. 321 (1963).
15 For example, in the banking industry an otherwise anticompetitive merger is legal if its anticompetitive effects are clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served. 12 U.S.C. 1828 (c).
Finally, you have requested my views on legislation which would contribute to a more effective and efficient merger enforcement program. In my judgment, three legislative reforms would provide much needed assistance.
The first would require substantial companies to provide pre-merger notification to the Department. Such notification would provide us with time to develop the information needed to ensure a thorough evaluation of whether the proposed merger should be challenged. It would thus provide us with a meaningful opportunity to seek a preliminary injunction before a questionable merger is consummated. This is of great practical importance because divestiture of stock or assets after an illegal merger is consummated is frequently an inadequate remedy for a variety of reasons.
Assets may be scrambled, making re-creation of the acquired firm impossible. Key employees may be lost. The goodwill of the acquired firm may be dissipated, making it a weaker competitive force after divestiture.
Moreover, divestiture is normally a painfully slow process, and in some cases might never occur. Locating an appropriate buyer willing to purchase at a reasonable price is frequently difficult. Firms under divestiture orders may deliberately delay to reap the benefits of the unlawful merger. During these delays, anticompetitive consequences grow.
Pre-merger notification will also advance the legitimate interests of the business community in planning and predictability. It will enable firms to make postacquisition changes with much more confidence than they can at present.
Lastly, pre-merger notification will prevent the consummation of so-called “midnight" mergers designed to subvert the Department's authority to seek preliminary relief.
A second important proposal would extend the coverage of Section 7 of the Clayton Act to the limits of Congressional power under the Commerce Clause. Last year in United States v. American Building Maintenance Industries, 422 U.S. 271 (1975), the Court interpreted Section 7 more narrowly. It held that the phrase "engaged in commerce" in that section means "engaged in the flow of interstate commerce, and was not intended to reach all corporations engaged in activities subject to the federal commerce power." As a consequence of the American Building decision, many economically significant " mergers cannot be reached under Section 7 if one of the corporations involved conducts a wholly intrastate business: that is, the corporation is not "directly engaged in the production, distribution, or acquisition of goods or services in interstate commerce." 422 U.S. at 283.
This decision leaves an undesirable gap in the coverage of Section 7 of the Clayton Act, which can be closed by simply conforming its jurisdictional scope to the federal commerce power. Last year, Congress granted the FTC authority over unfair methods of competition and unfair or deceptive acts or practices extending to constitutional limits." The Sherman Act has that same reach.19 Section 7 is a remedial statute designed to arrest the lessening of competition in its incipiency before it develops into restraints and monopolies prohibited by the Sherman Act. Its current restrictive application partially defeats that purpose.
A third reform relates generally to more effective antitrust enforcement but has special application to enforcement of the Clayton Act. Enactment of H.R. 39 would expand the Department's civil investigative demand (CID) authority. I testified in support of that bill before this Subcommittee last May.1
This is not the appropriate time to reiterate what I think are the compelling reasons justifiying enactment of H.R. 39. It is, however, a very appropriate occasion to emphasize the particular importance of the use of the authority contained in H.R. 39 to merger enforcement efforts generally. H.R. 39, if approved by the Congress, would eliminate whatever uncertainty exists today about the use of CIDS in investigating proposed mergers and acquisitions. In addition, it would allow us to obtain information relevant to the analysis of such transactions, not only from the parties thereto, but from any person having such in
18 The American Building case itself is illustrative. The relevant market was the sale of janitorial services in Southern California. In 1969. the acquiring company controlled 10 percent of that market with revenues of $10.9 million and the acquired companies controlled 7 percent of the market with sales of over $7.2 million.
17 Pub. L. 93-637.
18 United States v. South-Eastern Underwriters, 322 U.S. 533 (1944).
18 See Hearings Before the House Judiciary Subcommittee on Monopolies and Commercial Law, 94th Cong., 1st Sess. (1975), pp. 22-69.
formation. This latter ability is particularly important in this area, since the crucial determinations of relevant product and geographical markets can frequently be made only by obtaining market data from competitors, trade associations, suppliers, or customers. These third parties are not subject to our present CID authority, and often refuse to provide information voluntarily. Enactment of H.R. 39 is thus central to any program of reform of merger law to enhance its efficacy in maintaining competition as the nation's primary economic policy.
MERGER CASES FILED SINCE FISCAL YEAR 1960
2. Alcoholic Beverages-8
3. Oil & Petroleum Products-15
4. Paper & Paper Products--6
6. Dental Products-4
7. Metal and Metal Products-15
9. Chemicals & Chemicals Products-13
10. Automobiles-Parts & Accessories-6 11. Bedding-3
12. Food & Foodstuffs & Food Services-11
13. Pharmaceutical Products & Services-4
14. Vehicles and Heavy Equipment-13
15. Clothing and Accessories-5
16. Books, Magazines and Other Publications-3 17. Transportation-8
18. Energy Producing Units and Parts-10
19. Tools and Instruments-6
20. Service Industries-3
21. Construction and Construction Materials-5
TESTIMONY OF THOMAS E. KAUPER, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF JUSTICE
Mr. KAUPER. Thank you, Mr. Chairman.
I think the record should show that I'm accompanied today by Deputy Assistant Attorney General Joe Sims.
Chairman RODINO. Welcome, Mr. Sims.
Mr. KAUPER. I welcome today the opportunity to testify on the Department's experience and enforcement policy under section 7 of the Clayton Act. I will, in addition, discuss three areas in which legislation could significantly improve antitrust enforcement efforts in the merger area.
At the outset, I wish to commend the subcommittee for its plan to conduct extensive antitrust oversight hearings. As the Supreme Court has noted.
Subject to narrow qualifications, it is surely the case that competition is our fundamental national economic policy, offering as it does the only alternative to the cartelization of governmental regimentation of large portions of the
Since the antitrust laws are designed to insure that competition is allowed to serve this crucial purpose, the task of determining whether the antitrust laws are working properly is enormously important. I am confident that your hearings will serve as a foundation for improving both the antitrust laws and the enforcement, and thereby substantially benefit the interests of consumers throughout the country.