ARCHER-DANIELS-MIDLAND COMPANY, ET AL., PETITIONERS V. UNITED
STATES OF AMERICA

   No. 88-1723

   In The Supreme Court Of The United States

   October Term, 1988

   On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Eighth Circuit

   Brief For The United States In Opposition

            TABLE OF CONTENTS
   Question Presented
   Opinions below
   Jurisdiction
   Statement
   Argument
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. 1a-12a) is reported
at 866 F.2d 242.  The opinion of the district court (Pet. App.
13a-54a) is reported at 695 F. Supp. 1000.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. 55a) was entered on
December 15, 1988.  A petition for rehearing was denied on March 8,
1989 (Pet. App. 56a).  The petition for a writ of certiorari was filed
on April 24, 1989.  The jurisdiction of this Court is invoked under 28
U.S.C. 1254(1).

                          QUESTION PRESENTED

   Whether the court of appeals erred in holding that sugar and high
fructose corn syrup are not in the same relevant market for the
purpose of examining a merger under the antitrust laws.

                               STATEMENT

   1. In June 1982, petitioner Archer-Daniels-Midland Company, a
leading producer of high fructose corn syrup (HFCS), acquired by
long-term lease two plants from petitioner Nabisco Brands, Inc. that
were used for producing HFCS.  Three months later, the government
brought this action claiming that the transaction would diminish
competition in the production and sale of HFCS, in violation of
Section 7 of the Clayton Act (15 U.S.C. 18) and Section 1 of the
Sherman Act (15 U.S.C. 1).  The issue raised by the petition for
certiorari is whether HFCS and sugar are in the same relevant product
market for purposes of analyzing petitioners' transaction under the
antitrust laws.

   2. Sugar, which comes from cane and beets, has historically been
the principal sweetener in foods.  Sugar is used by food processors in
both its liquid and non-liquid forms.  HFCS is a liquid sweetener
produced from corn.  /1/ It is widely used today instead of sugar as a
sweetener in many products, most notably soft drinks.  Pet. App. 2a.
Although HFCS is not suitable for many uses of sugar, sugar is
"interchangeable for virtually every use of HFCS" (Pet. App. 38a).

   HFCS is cheaper than sugar in the United States.  The district
court noted that "since its commercial introduction in the 1970's,
HFCS has been priced generally at a discount of 10% to 30% below the
price of sugar" (Pet. App. 39a).  That price difference exists
primarily because of the "U.S. Sugar Program," which protects domestic
sugar from low-priced foreign competition and insulates domestic sugar
from low world sugar prices (id. at 3a).  /2/ As the district court
stated:  "The parties to this litigation agree that the current U.S.
Sugar Program has artificially inflated the price of sugar, and as a
result, the domestic price of sugar has been higher than the price of
HFCS" (id. at 24a).

   Because HFCS is cheaper than sugar, food processors have gradually
switched from sugar to HFCS in circumstances where HFCS is suitable
(Pet. App. 7a, 39a-40a).  That process has extended over a number of
years;  the last major step was in 1984 when the major soft drink
manufacturers decided to permit complete substitution of HFCS for
sugar in their formulations (id. at 45a & n.38).  As a Department of
Agriculture agricultural economist explained (C.A. App. 907-908):
"The market for HFCS is now almost completely mature, in the sense
that there is only a marginal amount of sucrose (sugar) use left for
which HFCS is technically suitable but has not yet displaced sucrose *
* *.  The process by which HFCS has displaced sugar is therefore
largely at an end." As long as the price of sugar is artificially
inflated, it is unlikely that this process will be reversed.  "HFCS
purchasers will not switch back to sugar as long as HFCS remains
cheaper" (Pet. App. 4a;  see id. at 47a-48a).

   3. In the district court, the government claimed that petitioners'
merger transaction would diminish competition in the HFCS market.
After four years of discovery, petitioners moved for summary judgment
on the ground that the government could not prove that HFCS was a
relevant product market by itself.  /3/ The district court granted
petitioners' motion.  The court ruled that the relevant product market
included at least sugar in addition to HFCS.  Pet. App. 14a.

   The court considered three factors in its market analysis:
interchangeability of use, cross-elasticity of demand, and price
correlation (Pet. App. 30a).  The parties agreed that HFCS and sugar
were functionally interchangeable in the sense that sugar could be
used instead of HFCS.  The court found "cross-elasticity of demand
between HFCS and sugar" (id. at 41a) because "the reduced price for
HFCS as compared to sugar has led to substantial displacement of
sugar" (id. at 39a).  In addition, the court noted that in Canada,
which has no counterpart to the U.S. Sugar Program, buyers switch back
and forth between HFCS and sugar in accordance with changes in the
relative prices (id. at 40a-41a).  The district court then found
"significant price correlation between HFCS and sugar" (id. at 43a).
Lastly, the court stated that "price differentials, even substantial
ones, are insufficient as a matter of law to overcome other undisputed
evidence showing interchangeability, cross-elasticity and price
correlation between substitute products" (id. at 46a).

   4. The court of appeals reversed.  Relying on United States v. E.I.
du Pont de Nemours & Co., 351 U.S. 377 (1956) (Cellophane), the court
stated that the "lawfulness of an acquisition turns on the purchaser's
potential for creating, enhancing, or facilitating the exercise of
market power -- the ability of one or more firms to raise prices above
competitive levels for a significant period of time" (Pet. App. 6a).
Turning to the record, the court observed that the price of sugar was
"artificially inflated" and that buyers had turned to HFCS because of
its lower price (id. at 7a).  It concluded that "(a)s long as an
effective price support program is in existence, a monopolist of HFCS
will be able to raise the price of HFCS to just below the supported
price of sugar before being constrained by the competitive forces of
sugar.  In other words, the HFCS monopolist is able to exercise excess
market power" (ibid.).  The court concluded, therefore, that although
sugar and HFCS are similar in quality, the artificially high price of
sugar prevents it from being reasonably interchangeable by consumers
with HFCS so they are not in the same relevant product market.

   The court of appeals also stated that "(w)hether two particular
products belong in the same relevant product market can be
demonstrated by the extent of cross-elasticity of demand between the
two products;  in other words, the readiness and ability of consumers
of one product to turn to the other product" (Pet. App. 11a).  /4/ To
show that two products belong in the same market, the cross-elasticity
must be sufficiently high so that "a slight increase in the price of
HFCS causes a considerable number of buyers of HFCS to switch to
sugar" (id. at 11a, 12a, n.1).  The court of appeals found that "no
evidence exists at the present time demonstrating a high
cross-elasticity of demand between sugar and HFCS" (id. at 11a).  /5/

                               ARGUMENT

   The court of appeals' decision is correct and it does not conflict
with any decision of this Court or any other court of appeals.  Thus
no further review is warranted.

   1.a. Section 7 of the Clayton Act prohibits any acquisition whose
effect "may be substantially to lessen competition, or to tend to
create a monopoly." 15 U.S.C. 18.  The lawfulness of an acquisition
thus turns on its potential for creating or enhancing the exercise of
monopoly power -- i.e., the ability to raise prices above competitive
levels for a significant period of time.  Cellophane, 351 U.S. at 391,
393.  And "(w)ithout a definition of (the relevant) market there is no
way to measure (the) * * * ability (of the challenged transaction) to
lessen or destroy competition." Walker Process Equipment, Inc. v. Food
Machinery & Chemical Corp., 382 U.S. 172, 177 (1965).  Accordingly,
the central issue in this case is the proper definition of the
relevant market.  /6/

   In Cellophane, this Court outlined the basic approach to market
definition.  /7/ In that case, the government had charged the dominant
producer of cellophane with monopolizing the cellophane market.  The
issue before the Court was whether cellophane itself constituted a
relevant product market, or whether other flexible packaging materials
were also part of the market (351 U.S. at 399).  The Court ruled that
the market issue turned on whether competition from other flexible
packaging materials constrained the cellophane maker's "power to set
the price of cellophane" (id. at 392).  In particular, the Court
focused on whether the various packaging materials were "reasonably
interchangeable by consumers for the same purpose" (id. at 395) in
light of their "price, use and qualities" (id. at 404).  And the Court
examined the various products and observed that customers were very
sensitive to price changes -- i.e., an increase in the price of
cellophane would shift enough purchases to other products to make the
price increase unprofitable.  The Court held, therefore, that the
relevant market included all flexible packaging materials, not just
cellophane.  Ibid.  /8/

   b. The court of appeals in this case followed the Court's
Cellophane analysis.  It approached the issue of market definition by
inquiring into power over the price of a single item -- here HFCS.
The court of appeals used the concepts of reasonable
interchangeability and cross-elasticity of demand to determine the
boundaries of the relevant product market.  The court concluded, on
the undisputed facts before it, that the cross-elasticity of demand
between sugar and HFCS was low;  a small increase in the price of HFCS
would not cause a considerable number of buyers of HFCS to switch to
sugar.  The court of appeals reasoned, therefore, that the two
products were not reasonably interchangeable by consumers.  /9/

   Petitioners contend (Pet. 12-14) that the specific results in
Cellophane and this case are inconsistent.  That claim is
unpersuasive.  In Cellophane, the Court found that products of
different prices were in the same relevant product market.  But in
that case, the difference in price was a function of quality
differences.  351 U.S. at 396-399.  In other words, the typical
consumer would be willing to pay more for the product of higher
quality.  In this case, by contrast, the difference in price between
sugar and HFCS is primarily the result of the U.S. Sugar Program, not
quality differences.  /10/ Sugar and HFCS are functionally
interchangeable products for all uses of HFCS.  Accordingly, price
alone is the determinative factor in consumer choice and a monopolist
of HFCS could raise its price up to the price of sugar.

   This case is therefore similar to United States v. Aluminum Company
of America, 377 U.S. 271 (1964), where this Court held that insulated
aluminum and insulated copper cable were in different product markets.
 /11/ Although there were no quality differences between the two
products, copper cable was more expensive.  Id. at 276.  That price
difference, which resulted from differences in material costs (id. at
275), led to the displacement of copper by aluminum cable and was
decisive in the Court's market definition.  The Court stated:  "(T)o
ignore price in determining the relevant line of commerce is to ignore
the single, most important, practical factor in the business" (id. at
276).  Likewise, because sugar and HFCS are similar in quality in
those uses for which HFCS is suitable, the difference in price is
critical to market definition here.  /12/

   2. Contrary to petitioners' contention (Pet. 14-16), the decision
below does not conflict with the decisions of other courts of appeals.
 Petitioners identify several cases in which products were found to be
in the same market even though they had different prices.  Those
cases, however, are all explained on the basis of facts that are not
present here.

   The district court in American Crystal Sugar Co. v. Cuban-American
Sugar Co., 152 F. Supp. 387 (S.D.N.Y. 1957), aff'd, 259 F.2d 524 (2d
Cir. 1958), ruled that cane sugar and beet sugar were within the same
relevant market even though the list price of cane sugar was slightly
higher -- i.e., two-tenths of a cent per pound, or a two percent price
difference.  Id. at 402.  The district court noted that "(t)o some
extent cane sugar has a higher degree of consumer acceptance" (id. at
398).  That fact might have accounted for the willingness of
wholesalers to pay a little more for cane sugar.  But in any event,
there was evidence that the price difference was fading or even gone
in some areas.  See 259 F.2d 524, 529-530 (2d Cir. 1958).  The
district court concluded, therefore, that cane and beet sugar were
within the same market because they were "interchangeable and (were)
purchased on the basis of price" (152 F. Supp. at 398).  That ruling
was not challenged on appeal.  See 259 F.2d at 527 & n.3, 529.  Thus
nothing in American Crystal Sugar Co. is contrary to the decision in
this case, where the price difference is 10 to 30% and where there is
no perceived difference in quality with respect to HFCS applications.

   The Second Circuit's decision in Nifty Foods Corp. v. Great
Atlantic & Pacific Tea Co., 614 F.2d 832 (1980), is also consistent
with this case.  The plaintiff contended in that case that private
label waffles and brand name waffles were in different submarkets
because of the higher cost of brand name waffles (614 F.2d at 840).
But there was no evidence in that case that the difference in price
was due to anything other than usual consumer preference for name
brands.  Moreover, the court of appeals noted that there was no
evidence concerning what effect a change in the price of private label
waffles would have on the demand for brand name waffles.  Here, by
contrast, the court of appeals noted that a small increase in the
price of HFCS would not affect the demand for sugar.  See Pet. App.
11a.  And the difference in prices of HFCS and sugar is not a function
of consumer preferences;  it is primarily a function of the U.S. Sugar
Program.  See Pet. App. 24a.

   The other cases that petitioners cite (Pet. 14-15) also do not
conflict with the court of appeals' decision.  In George R. Whitten,
Jr., Inc. v. Paddock Pool Builders, Inc., 508 F.2d 547, 552 (1st Cir.
1974), cert. denied, 421 U.S. 1004 (1975), the court held that two
types of recirculating systems for swimming pools were in the same
market where "there are no constant or predictable price distinctions
between the two systems" and the relevant elasticity "is high indeed."
In Liggett & Myers, Inc. v. FTC, 567 F.2d 1273, 1274 (4th Cir. 1977),
the court merely held that two kinds of dog food with distinct
differences in quality and price were in the same product market;  it
did not address whether the two would have been in the same market had
there been no significant difference in quality but nevertheless a
substantial difference in price.  And in Kaplan v. Burroughs Corp.,
611 F.2d 286, 292 (9th Cir. 1979), cert. denied, 447 U.S. 924 (1980),
the court rightly observed that "price differential alone does not
govern the scope of the relevant market" because a court must address
-- as the court of appeals did here -- consumer responses to price
changes and the cross-elasticity of demand.  /13/

                              CONCLUSION

   The petition for a writ of certiorari should be denied.

   Respectfully submitted.

   KENNETH W. STARR

      Solicitor General

   JUDY L. WHALLEY

      Acting Assistant Attorney General

   BRIAN J. MARTIN

      Assistant to the Solicitor General

   ROBERT B. NICHOLSON

   DAVID SEIDMAN

      Attorneys

   JUNE 1989

   /1/ HFCS is generally available in three grades:  HFCS-42, HFCS-55,
and HFCS-90.  The number indicates the percentage of fructose in the
formulation;  the higher the percentage, the sweeter the product.
Pet. App. 2a.

   /2/ The Sugar Program has been in effect since 1934.  As
petitioners note (Pet. 7), there have been brief periods without
effective price support from the U.S. Sugar Program.  Those times were
periods when market prices for sugar were unusually high (Pet. App.
21a-22a).  The current program relies on non-recourse loans and a
system of fees and quotas on raw sugar imported into the United
States.  By its terms, the current program expires with the 1990 crop
year, and so its impact on sugar prices will continue at least into
1991.

   /3/ The government conceded that, if the relevant product market
included sugar, the lease transaction in this case would not
significantly diminish competition.

   /4/ Cross-elasticity of demand measures "the extent to which small
changes in the current price of one product affects demand for another
product." L. Sullivan, Handbook of the Law of Antitrust 54 (1977).
For a more technical definition, see C. Ferguson, Microeconomic Theory
55 (1966).

   /5/ The court explained that the district court, in relying on
evidence of past displacement resulting from the lower price of HFCS,
had mistakenly addressed static, rather than dynamic, price and demand
relationships.  And the Canadian evidence was irrelevant because
"market conditions in Canada differ radically from the market
conditions in the United States" (Pet. App. 12a n.1) and would
continue to do so as long as the U.S. Sugar Program exists.

   /6/ When the relevant market is defined, a transaction's probable
effect on competition is evaluated by, among other things, the
concentration of firms within that market.  United States v.
Philadelphia National Bank, 374 U.S. 321, 363 (1963).

   /7/ Cellophane involved Section 2 of the Sherman Act, not Section 7
of the Clayton Act.  But this Court has relied on the Cellophane
approach to market definition in Section 7 cases.  See, e.g., United
States v. Continental Can Co., 378 U.S. 441, 449 (1964).

   /8/ The Court alternatively phrased the question of reasonable
interchangeability in terms of cross-elasticity of demand.  351 U.S.
at 394, 400.  The Court stated that high cross-elasticity of demand
between two products indicates that they compete in the same market.
351 U.S. at 400.  The Court had made substantially the same point in
Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 612 n.31
(1953).

   /9/ Because the court found low cross-elasticity of demand and an
absence of reasonable interchangeability, it did not hold, as
petitioners claim (Pet. 11), that "a government price support program
provides an exception to the usual antitrust rule that a price
differential, without more, does not create separate markets for the
two products involved."

   /10/ Petitioners' claim that all "the price differences reflect
actual or perceived quality differences" (Pet. 19) is belied by the
record.  The undisputed fact is that the U.S. Sugar Program
artificially inflates the price of sugar above that of HFCS (see Pet.
App. 24a).  In the district court, petitioners did not claim that
supposed quality differences accounted for the price difference.
Compare petitioners' statements at C.A. App. 133-137, 1199-1202 with
the government's observation at C.A. App. 1506.  Petitioners' claim
first surfaced in its petition for rehearing in the court of appeals.

   /11/ Although the Court phrased its analysis in terms of
submarkets, 377 U.S. at 276, a "submarket" must, for antitrust
purposes, satisfy the ordinary criteria of market definition.  See,
e.g., Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d
210, 218 & n.4 (D.C. Cir. 1986), cert. denied, 479 U.S. 1033 (1987);
White & White, Inc. v. American Hospital Supply Corp., 723 F.2d 495,
502 (6th Cir. 1983).

   /12/ The cause of the large price difference -- a government
program -- is "simply * * * another fact of market life."
International Telephone & Telegraph Corp. v. General Telephone &
Electronics Corp., 518 F.2d 913, 935-936 (9th Cir. 1975).  The
possible expiration of the Sugar Program in 1991, at the end of the
1990 crop year, may bring future changes in market conditions.  That
possibility, however, does not affect market definition now.

   /13/ Petitioners suggest (Pet. 16-17) that this Court should
resolve a supposed conflict within the Eighth Circuit.  Not a single
judge of that Circuit perceived any conflict warranting rehearing
(Pet. App. 8a-11a, 12a, 56a).  And in any event "(i)t is primarily the
task of a Court of Appeals to reconcile its internal difficulties."
Wisniewski v. United States, 353 U.S. 901, 902 (1957) (per curiam).