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Nature of Suit Code: 410
Nature of Suit: Antitrust
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 12, 2001 Decided April 27, 2001

No. 00-5362

Federal Trade Commission,

Appellant

v.

H.J. Heinz Co. and Milnot Holding Corporation,

Appellees

Appeal from the United States District Court

for the District of Columbia

(No. 00cv01688)

Debra A. Valentine, General Counsel, Federal Trade Commission, argued the cause for the appellant. John F. Daly,

Assistant General Counsel, Richard G. Parker, Director, and

David A. Balto and David C. Shonka, Attorneys, Federal

Trade Commission, were on brief.

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Edward P. Henneberry argued the cause for the appellees.

W. Bradford Reynolds, Marc G. Schildkraut, Kenneth W.

Starr, and Mark L. Kovner were on brief.

J. Joseph Curran, Jr., Attorney General, and Ellen S.

Cooper, Assistant Attorney General, State of Maryland;

Bruce M. Botelho, Attorney General, State of Alaska; Janet

Napolitano, Attorney General, State of Arizona; Mark

Pryor, Attorney General, State of Arkansas; Bill Lockyer,

Attorney General, and Peter Siggins, Chief Deputy Attorney

General, State of California; Ken Salazar, Attorney General,

State of Colorado; Richard Blumenthal, Attorney General

and Steven Rutstein, Assistant Attorney General, State of

Connecticut; Robert R. Rigsby, Corporation Counsel, Charles

L. Reischel, Deputy Corporation Counsel, and Bennett Rushkoff, Senior Counsel, District of Columbia; Robert A. Butterworth, Attorney General, State of Florida; Earl I. Anzai,

Attorney General, State of Hawaii; Alan G. Lance, Attorney

General, State of Idaho; James E. Ryan, Attorney General,

State of Illinois; Karen M. Freeman-Wilson, Attorney General, State of Indiana; Thomas J. Miller, Attorney General,

State of Iowa; Carla J. Stovall, Attorney General, State of

Kansas; Richard P. Ieyoub, Attorney General, State of Louisiana; Jennifer Granholm, Attorney General, and Thomas L.

Casey, Solicitor General, State of Michigan; Julie Ralston

Aoki, Assistant Attorney General, State of Minnesota; Mike

Moore, Attorney General, State of Mississippi; Frankie Sue

Del Papa, Attorney General, State of Nevada; Philip T.

McLaughlin, Attorney General, State of New Hampshire;

Eliot Spitzer, Attorney General, State of New York; Michael

F. Easley, Attorney General, and K.D. Sturgis, Assistant

Attorney General, State of North Carolina; Herbert D. Soll,

Attorney General, Commonwealth of the Northern Mariana

Islands; Betty D. Montgomery, Attorney General, State of

Ohio; W.A. Drew Edmondson, Attorney General, State of

Oklahoma; Angel E. Rotger-Sabat, Attorney General, Commonwealth of Puerto Rico; Mark Barnett, Attorney General,

State of South Dakota; John Cornyn, Attorney General,

State of Texas; Jan Graham, Attorney General, State of

Utah; William H. Sorrell, Attorney General, State of VerUSCA Case #00-5362 Document #592638 Filed: 04/27/2001 Page 2 of 31
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mont; Mark L. Earley, Attorney General, Commonwealth of

Virginia; Christine O. Gregoire, Attorney General, State of

Washington; Darrell V. McGraw, Jr., Attorney General, and

Douglas L. Davis, Assistant Attorney General, State of West

Virginia; James E. Doyle, Attorney General, and Kevin J.

O'Connor, State of Wisconsin; and Gay Woodhouse, Attorney

General, State of Wyoming; were on brief for The Thirty-Six

Amici Curiae in support of the appellant.

James H. Skiles and Jan Amundson were on brief for

Grocery Manufacturers of America, Inc. et al., Amici Curiae

in support of the appellees.

C. Boyden Gray, William J. Kolasky, Jeffrey D. Ayer and

Robert H. Bork were on brief for Citizens for a Sound

Economy Foundation, Amicus Curiae, in support of the appellees.

Before: Henderson, Randolph and Garland, Circuit

Judges.

Opinion for the court filed by Circuit Judge Henderson.

Karen LeCraft Henderson, Circuit Judge: On February

28, 2000 H.J. Heinz Company (Heinz) and Milnot Holding

Corporation (Beech-Nut) entered into a merger agreement.

The Federal Trade Commission (Commission or FTC) sought

a preliminary injunction pursuant to section 13(b) of the

Federal Trade Commission Act (FTCA), 15 U.S.C. s 53(b), to

enjoin the consummation of the merger. The injunction was

sought in aid of an FTC administrative proceeding which was

subsequently instituted by complaint to challenge the merger

as violative of, inter alia, section 7 of the Clayton Act, 15

U.S.C. s 18. The district court denied the preliminary injunction and the FTC appealed to this court. For the

reasons set forth below, we reverse the district court and

remand for entry of a preliminary injunction against Heinz

and Beech-Nut.

I. Background

Four million infants in the United States consume 80

million cases of jarred baby food annually, representing a

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domestic market of $865 million to $1 billion.1 FTC v. H.J.

Heinz, Co., 116 F. Supp. 2d 190, 192 (D.D.C. 2000). The baby

food market is dominated by three firms, Gerber Products

Company (Gerber), Heinz and Beech-Nut. Gerber, the industry leader, enjoys a 65 per cent market share while Heinz

and Beech-Nut come in second and third, with a 17.4 per cent

and a 15.4 per cent share respectively. Id. The district

court found that Gerber enjoys unparalleled brand recognition with a brand loyalty greater than any other product sold

in the United States. Id. at 193. Gerber's products are

found in over 90 per cent of all American supermarkets.2

By contrast, Heinz is sold in approximately 40 per cent of

all supermarkets. Its sales are nationwide but concentrated

in northern New England, the Southeast and Deep South and

the Midwest. Id. at 194. Despite its second-place domestic

market share, Heinz is the largest producer of baby food in

the world with $1 billion in sales worldwide. Its domestic

baby food products with annual net sales of $103 million are

manufactured at its Pittsburgh, Pennsylvania plant, which

was updated in 1991 at a cost of $120 million. Id. at 192-93.

The plant operates at 40 per cent of its production capacity

and produces 12 million cases of baby food annually. Its

baby food line includes about 130 SKUs (stock keeping units),

that is, product varieties (e.g., strained carrots, apple sauce,

etc.). Heinz lacks Gerber's brand recognition; it markets

itself as a "value brand" with a shelf price several cents below

Gerber's. Id. at 193.

Beech-Nut has a market share (15.4%) comparable to that

of Heinz (17.4%), with $138.7 million in annual sales of baby

food, of which 72 per cent is jarred baby food. Its jarred

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1 The facts as set forth herein are based on the district court's

factual findings and the record material submitted by the parties.

2 Product volume in retail stores throughout the country is measured by the product's All Commodity Volume (ACV). Gerber's

near 100 per cent ACV is impressive because virtually all supermarkets stock at most two brands of baby food. In at least one area of

the country as many as 80 per cent of supermarket retailers stock

only Gerber.

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baby food line consists of 128 SKUs. Beech-Nut manufactures all of its baby food in Canajoharie, New York at a

manufacturing plant that was built in 1907 and began manufacturing baby food in 1931. Beech-Nut maintains price

parity with Gerber, selling at about one penny less. It

markets its product as a premium brand. Id. Consumers

generally view its product as comparable in quality to Gerber's. Id. Beech-Nut is carried in approximately 45 per

cent of all grocery stores. Although its sales are nationwide,

they are concentrated in New York, New Jersey, California

and Florida.3 Id. at 194.

At the wholesale level Heinz and Beech-Nut both make

lump-sum payments called "fixed trade spending" (also

known as "slotting fees" or "pay-to-stay" arrangements) to

grocery stores to obtain shelf placement. Id. at 197. Gerber,

with its strong name recognition and brand loyalty, does not

make such pay-to-stay payments. The other type of wholesale trade spending is "variable trade spending," which typically consists of manufacturers' discounts and allowances to

supermarkets to create retail price differentials that entice

the consumer to purchase their product instead of a competitor's. Id.

Under the terms of their merger agreement, Heinz would

acquire 100 per cent of Beech-Nut's voting securities for $185

million. Accordingly, they filed a Premerger Notification and

Report Form with the FTC and the United States Department of Justice pursuant to the Hart-Scott-Rodino Antitrust

Improvement Act of 1976, 15 U.S.C. s 18a.4 On July 7, 2000

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3 Although Heinz and Beech-Nut introduced evidence showing

that in areas that account for 80% of Beech-Nut sales, Heinz has a

market share of about 2% and in areas that account for about 72%

of Heinz sales, Beech-Nut's share is about 4%, the FTC introduced

evidence that Heinz and Beech-Nut are locked in an intense battle

at the wholesale level to gain (and maintain) position as the second

brand on retail shelves.

4 Section 18a requires pre-merger notification for a merger in

which either the acquiring or the acquired firm has total net sales

or assets of at least $10 million and the other firm has annual sales

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the FTC authorized this action for a preliminary injunction

under section 13(b) of the FTCA and, on July 14, 2000, it filed

a complaint and motion for preliminary injunction. The

district court conducted a five-day hearing in late August and

early September and heard final arguments on September 21,

2000. The record before the district court consisted of 1,267

exhibits, including 150 demonstrative exhibits, 32 depositions

and 41 affidavits. In addition, eleven witnesses testified. On

October 18, 2000 the district court denied preliminary injunctive relief. The court concluded that it was "more probable

than not that consummation of the Heinz/Beech-Nut merger

will actually increase competition in jarred baby food in the

United States." H.J. Heinz, 116 F. Supp. 2d at 200. The

FTC appealed and sought injunctive relief pending appeal,

which this court granted on November 8, 2000. On November 22, 2000 the FTC filed an administrative complaint

against Heinz and Beech-Nut, charging that the proposed

merger violates section 5 of the FTCA and, if consummated,

would violate section 7 of the Clayton Act. In the Matter of

H. J. Heinz, Docket No. 9295 (filed Nov. 22, 2000).

II. Analysis

A. Standard of Review

We review a district court order denying preliminary injunctive relief for abuse of discretion, National Wildlife Fed'n

v. Burford, 835 F.2d 305, 319 (D.C. Cir. 1987), and will set

aside the court's factual findings only if they are "clearly

erroneous." Fed. R. Civ. P. 52(a); United States v. Marine

Bancorporation, Inc., 418 U.S. 602, 615 n.13 (1974). If our

review of the district court order "reveals that it rests on an

erroneous premise as to the pertinent law, however, we must

examine the decision in light of the legal principles we believe

proper and sound." Ambach v. Bell, 686 F.2d 974, 979 (D.C.

Cir. 1982). We apply de novo review to the district court's

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or total assets of at least $100 million. The acquirer must have at

least 15 per cent or $15 million worth of the target firm's voting

securities or assets. 15 U.S.C. s 18a(a). Filers must disclose

specific financial and market data and pay a filing fee.

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conclusions of law. See FTC v. National Tea Co., 603 F.2d

694, 696-98 (8th Cir. 1979) (reviewing de novo proper standard of proof under section 13(b) of FTCA); cf. FTC v.

Warner Communications Inc., 742 F.2d 1156, 1160 (9th Cir.

1984) (per curiam) (finding as matter of law district court

applied incorrect standard for section 7 violation). In deciding whether to grant preliminary injunctive relief under

section 13(b), the court evaluates whether it is in the public

interest to enjoin the proposed merger. See 15 U.S.C.

s 53(b).

B. Section 7 of the Clayton Act

Section 7 of the Clayton Act prohibits acquisitions, including mergers, "where in any line of commerce or in any

activity affecting 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.

s 18; see United States v. Philadelphia Nat'l Bank, 374 U.S.

321, 355 (1963) ("The statutory test is whether the effect of

the merger 'may be substantially to lessen competition' 'in

any line of commerce in any section of the country.' "). The

"Congress used the words 'may be substantially to lessen

competition' (emphasis supplied), to indicate that its concern

was with probabilities, not certainties." Brown Shoe Co. v.

United States, 370 U.S. 294, 323 (1962) (emphasis original);

see S. Rep. No. 1775, at 6 (1950) ("The use of these words

["may be"] means that the bill, if enacted, would not apply to

the mere possibility but only to the reasonable probability of

the pr[o]scribed effect...."). "Merger enforcement, like other areas of antitrust, is directed at market power. It shares

with the law of monopolization a degree of schizophrenia: an

aversion to potent power that heightens risk of abuse; and

tolerance of that degree of power required to attain economic

benefits." Lawrence A. Sullivan & Warren S. Grimes, The

Law of Antitrust s 9.1, at 511 (2000). The Congress has

empowered the FTC, inter alia, to weed out those mergers

whose effect "may be substantially to lessen competition"

from those that enhance competition. See H.R. Rep. No.

1142, at 18-19 (1914). In section 13(b) of the FTCA, the

Congress provided a mechanism whereby the FTC may seek

preliminary injunctive relief preventing the merging parties

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from consummating the merger until the Commission has had

an opportunity to investigate and, if necessary, adjudicate the

matter.

C. Section 13(b) of the Federal Trade Commission Act

"Whenever the Commission has reason to believe that a

corporation is violating, or is about to violate, Section 7 of the

Clayton Act, the FTC may seek a preliminary injunction to

prevent a merger pending the Commission's administrative

adjudication of the merger's legality." FTC v. Staples, Inc.,

970 F. Supp. 1066, 1070 (D.D.C. 1997); see 15 U.S.C. s 53(b).

Section 13(b) provides for the grant of a preliminary injunction where such action would be in the public interest--as

determined by a weighing of the equities and a consideration

of the Commission's likelihood of success on the merits. 15

U.S.C. s 53(b).5 The Congress intended this standard to

depart from what it regarded as the then-traditional equity

standard, which it characterized as requiring the plaintiff to

show: (1) irreparable damage, (2) probability of success on

the merits and (3) a balance of equities favoring the plaintiff.

H.R. Rep. No. 93-624, at 31 (1971). The Congress determined that the traditional standard was not "appropriate for

the implementation of a Federal statute by an independent

regulatory agency where the standards of the public interest

measure the propriety and the need for injunctive relief." Id.

"The courts had evolved an approach to cases in which

government agencies, acting to enforce a federal statute,

sought interim relief. The agency, in such cases, was not

held to the high thresholds applicable where private parties

seek interim restraining orders." FTC v. Weyerhaeuser Co.,

665 F.2d 1072, 1082 (D.C. Cir. 1981); see FTC v. Exxon

Corp., 636 F.2d 1336, 1343 (D.C. Cir. 1980) ("In enacting

[Section 13(b)], Congress further demonstrated its concern

that injunctive relief be broadly available to the FTC by

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5 Section 13(b) of the FTCA provides that "[u]pon a proper

showing that, weighing the equities and considering the Commission's likelihood of ultimate success, such action would be in the

public interest, ... a preliminary injunction may be granted." 15

U.S.C. s 53(b).

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incorporating a unique 'public interest' standard in 15 U.S.C.

s 53(b), rather than the more stringent, traditional 'equity'

standard for injunctive relief."). The FTC is not required to

establish that the proposed merger would in fact violate

section 7 of the Clayton Act. Staples, 970 F. Supp. at 1071;

see FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1342 (4th

Cir. 1976) ("The district court is not authorized to determine

whether the antitrust laws have been or are about to be

violated. That adjudicatory function is vested in the FTC in

the first instance."). We now consider the FTC's likelihood of

success and weigh the equities. Accord FTC v. Freeman

Hosp., 69 F.3d 260, 267 (8th Cir. 1995); FTC v. University

Health, Inc., 938 F.2d 1206, 1217 (11th Cir. 1991); Warner

Communications, 742 F.2d at 1160.

1. Likelihood of Success

To determine likelihood of success on the merits we measure the probability that, after an administrative hearing on

the merits, the Commission will succeed in proving that the

effect of the Heinz/Beech-Nut merger "may be substantially

to lessen competition, or to tend to create a monopoly" in

violation of section 7 of the Clayton Act. 15 U.S.C. s 18. This

court and others have suggested that the standard for likelihood of success on the merits is met if the FTC "has raised

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." FTC v. Beatrice Foods Co., 587 F.2d 1225, 1229

(D.C. Cir. 1978) (Appendix to Statement of MacKinnon &

Robb, JJ.)6; Staples, 970 F. Supp. at 1071; Warner Communications, 742 F.2d at 1162 (quoting National Tea, 603 F.2d

at 698); see University Health, 938 F.2d at 1218. This

specific standard was articulated by the court below, see H.J.

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6 In Beatrice Foods, two members of the court, writing separately

from a denial of en banc review, included the quoted language from

an unpublished judgment and memorandum issued earlier in the

litigation.

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Heinz, 116 F. Supp. 2d at 194, and it is a standard to which

the appellees have not objected.

In United States v. Baker Hughes Inc., 908 F.2d 981, 982-

83 (D.C. Cir. 1990), we explained the analytical approach by

which the government establishes a section 7 violation. First

the government must show that the merger would produce "a

firm controlling an undue percentage share of the relevant

market, and [would] result[ ] in a significant increase in the

concentration of firms in that market." Philadelphia Nat'l

Bank, 374 U.S. at 363. Such a showing establishes a "presumption" that the merger will substantially lessen competition. See Baker Hughes, 908 F.2d at 982. To rebut the

presumption, the defendants must produce evidence that

"show[s] that the market-share statistics [give] an inaccurate

account of the [merger's] probable effects on competition" in

the relevant market. United States v. Citizens & S. Nat'l

Bank, 422 U.S. 86, 120 (1975).7 "If the defendant successfully

rebuts the presumption [of illegality], the burden of producing

additional evidence of anticompetitive effect shifts to the

government, and merges with the ultimate burden of persuasion, which remains with the government at all times." Baker Hughes Inc., 908 F.2d at 983; see also Kaiser Aluminum,

652 F.2d at 1340 & n.12. Although Baker Hughes was

decided at the merits stage as opposed to the preliminary

injunctive relief stage, we can nonetheless use its analytical

approach in evaluating the Commission's showing of likeli-

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7 To rebut the defendants may rely on "[n]onstatistical evidence

which casts doubt on the persuasive quality of the statistics to

predict future anticompetitive consequences" such as "ease of entry

into the market, the trend of the market either toward or away

from concentration, and the continuation of active price competition." Kaiser Aluminum & Chem. Corp. v. FTC, 652 F.2d 1324,

1341 (7th Cir. 1981). In addition, the defendants may demonstrate

unique economic circumstances that undermine the predictive value

of the government's statistics. See United States v. General Dynamics Corp., 415 U.S. 486, 506-10 (1974) (fundamental changes in

structure of coal market made market concentration statistics inaccurate predictors of anticompetitive effect); see also University

Health, 938 F.2d at 1218.

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hood of success. Accordingly, we look at the FTC's prima

facie case and the defendants' rebuttal evidence.

a. Prima Facie Case

Merger law "rests upon the theory that, 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." FTC v.

PPG Indus., 798 F.2d 1500, 1503 (D.C. Cir. 1986).8 Increases

in concentration above certain levels are thought to "raise[ ] a

likelihood of 'interdependent anticompetitive conduct.' " Id.

(quoting General Dynamics, 415 U.S. at 497); see FTC v.

Elders Grain, 868 F.2d 901, 905 (7th Cir. 1989). Market

concentration, or the lack thereof, is often measured by the

Herfindahl-Hirschmann Index (HHI). See Staples, 970

F. Supp. at 1081 n.12.9

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8 A "horizontal merger" involves firms selling the same or similar

products in a common geographical market.

9 "The FTC and the Department of Justice, as well as most

economists, consider the measure superior to such cruder measures

as the four-or eight-firm concentration ratios which merely sum up

the market shares of the largest four or eight firms." PPG, 798

F.2d at 1503. The Department of Justice and the FTC rely on the

HHI in evaluating proposed horizontal mergers. See United States

Dep't of Justice & Federal Trade Comm'n, Horizontal Merger

Guidelines ss 1.5, 1.51 (1992), as revised (1997). The HHI is

calculated by totaling the squares of the market shares of every

firm in the relevant market. For example, a market with ten firms

having market shares of 20%, 17%, 13%, 12%, 10%, 10%, 8%, 5%,

3% and 2% has an HHI of 1304 (202 + 172 + 132 + 122 + 102 +

102 + 82 + 52 +32 +22). If the firms with 13% and 5% market

shares were to merge, the HHI would increase by 130 points,

expressed by the formula 2ab, which is derived from (a+b)2 or a2 +

2ab + b2. Under the Merger Guidelines a market with a postmerger HHI above 1800 is considered "highly concentrated" and

mergers that increase the HHI in such a market by over 50 points

"potentially raise significant competitive concerns." Id. at s 1.51.

Mergers "producing an increase in the HHI of more than 100 points

[in such markets] are [presumed] likely to create or enhance market

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Sufficiently large HHI figures establish the FTC's prima

facie case that a merger is anti-competitive. See Baker

Hughes, 908 F.2d at 982-83 & n.3; PPG, 798 F.2d at 1503.

The district court found that the pre-merger HHI "score for

the baby food industry is 4775"--indicative of a highly concentrated industry.10 H.J. Heinz, 116 F. Supp. 2d at 196; see

PPG, 798 F.2d at 1503; Horizontal Merger Guidelines, supra,

s 1.51. The merger of Heinz and Beech-Nut will increase

the HHI by 510 points. This creates, by a wide margin, a

presumption that the merger will lessen competition in the

domestic jarred baby food market. See Horizontal Merger

Guidelines, supra, s 1.51 (stating that HHI increase of more

than 100 points, where post-merger HHI exceeds 1800, is

"presumed ... likely to create or enhance market power or

facilitate its exercise"); see also Baker Hughes, 908 F.2d at

982-83 & n.3; PPG, 798 F.2d at 1503.11 Here, the FTC's

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power or facilitate its exercise." Id. Although the Merger Guidelines are not binding on the court, they provide "a useful illustration

of the application of the HHI." PPG, 798 F.2d at 1503 n.4.

10 To determine the HHI score the district court first had to

define the relevant market. The court defined the product market

as jarred baby food and the geographic market as the United

States. H.J. Heinz, 116 F. Supp. 2d at 195. The parties do not

challenge the court's definition.

11 The FTC argues that this finding alone--that it is certain to

establish a prima facie case--entitles it to preliminary injunctive

relief under PPG. We disagree with the Commission's reading of

PPG. In PPG, the Commission appealed the district court's denial

of its request for a preliminary injunction to prevent PPG Industries, the world's largest producer of glass aircraft transparencies,

from acquiring Swedlow, Inc., the world's largest manufacturer of

acrylic aircraft transparencies. 798 F.2d at 1502. After defining

the relevant market and determining market share, the district

court found that the merger would significantly increase the concentration in an already highly concentrated market. It also "found

high market-entry barriers that would prolong high market concentration." Id. at 1503. On appeal, this court stated: "There is no

doubt that the pre-and post-acquisition HHI's and market shares

found in this case entitle the Commission to some preliminary

relief." Id. This statement came, however, in the context of a case

market concentration statistics12 are bolstered by the indisputable fact that the merger will eliminate competition between the two merging parties at the wholesale level, where

they are currently the only competitors for what the district

court described as the "second position on the supermarket

shelves." H.J. Heinz, 116 F. Supp. 2d at 196. Heinz's own

documents recognize the wholesale competition and anticipate

that the merger will end it. JA 2680; see also JA 2185.

Indeed, those documents disclose that Heinz considered three

options to end the vigorous wholesale competition with

Beech-Nut: two involved innovative measures while the third

entailed the acquisition of Beech-Nut. JA 2184. Heinz

chose the third, and least pro-competitive, of the options.

Finally, the anticompetitive effect of the merger is further

enhanced by high barriers to market entry.13 The district

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in which the appellants offered no rebuttal (other than the observation of rapid and continuing technological changes in the industry)

to the presumption generated by the market concentration data on

which the FTC based its prima facie showing. Id. at 1506. The

court then noted the rule established in Weyerhaeuser that the FTC

is entitled to a "presumption in favor of a preliminary injunction

when [it] establishes a strong likelihood of success on the merits."

Id. at 1507.

12 The Supreme Court has cautioned that statistics reflecting

market share and concentration, while of great significance, are not

conclusive indicators of anticompetitive effects. See General Dynamics, 415 U.S. at 498; Brown Shoe, 370 U.S. at 322 n.38

("Statistics reflecting the shares of the market controlled by the

industry leaders and the parties to the merger are, of course, the

primary index of market power; but only a further examination of

the particular market--its structure, history and probable future--

can provide the appropriate setting for judging the probable anticompetitive effect of the merger."). In General Dynamics the

Supreme Court held that the market share statistics the Commission used to seek divestiture of the merged firm were insufficient

because, in failing to take into account the acquired firm's long-term

contractual commitments (coal contracts), the statistics overestimated the acquired firm's ability to compete in the relevant market in

the future. General Dynamics, 415 U.S. at 500-504.

13 Barriers to entry are important in evaluating whether market

concentration statistics accurately reflect the pre- and likely postcourt found that there had been no significant entries in the

baby food market in decades and that new entry was "difficult and improbable." H.J. Heinz, 116 F. Supp. 2d at 196.

This finding largely eliminates the possibility that the reduced competition caused by the merger will be ameliorated

by new competition from outsiders and further strengthens

the FTC's case. See University Health, 938 F.2d at 1219 &

n.26.

As far as we can determine, no court has ever approved a

merger to duopoly under similar circumstances.

b. Rebuttal Arguments

In response to the FTC's prima facie showing, the appellees make three rebuttal arguments, which the district court

accepted in reaching its conclusion that the merger was not

likely to lessen competition substantially. For the reasons

__________

merger competitive picture. Cf. Baker Hughes, 908 F.2d at 987.

If entry barriers are low, the threat of outside entry can significantly alter the anticompetitive effects of the merger by deterring the

remaining entities from colluding or exercising market power. See

United States v. Falstaff Brewing Corp., 410 U.S. 526, 532-33

(1973); Baker Hughes, 908 F.2d at 987 ("In the absence of significant barriers, a company probably cannot maintain supracompetitive pricing for any length of time."); Horizontal Merger Guidelines, supra, s 3.0 ("A merger is not likely to create or enhance

market power or to facilitate its exercise, if entry into the market is

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so easy that market participants, after the merger, either collectively or unilaterally could not profitably maintain a price increase

above premerger levels."). Low barriers to entry enable a potential

competitor to deter anticompetitive behavior by firms within the

market simply by its ability to enter the market. FTC v. Procter &

Gamble Co., 386 U.S. 568, 581 (1967) ("It is clear that the existence

of Procter at the edge of the industry exerted considerable influence on the market."). Existing firms know that if they collude or

exercise market power to charge supracompetitive prices, entry by

firms currently not competing in the market becomes likely, thereby increasing the pressure on them to act competitively. See Baker

Hughes, 908 F.2d at 988; Byars v. Bluff City News Co., 609 F.2d

843, 851 n.19 (6th Cir. 1979).

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discussed below, these arguments fail and thus were not a

proper basis for denying the FTC injunctive relief.

1. Extent of Pre-Merger Competition

The appellees first contend, and the district court agreed,

that Heinz and Beech-Nut do not really compete against each

other at the retail level. Consumers do not regard the

products of the two companies as substitutes, the appellees

claim, and generally only one of the two brands is available on

any given store's shelves. Hence, they argue, there is little

competitive loss from the merger.

This argument has a number of flaws which render clearly

erroneous the court's finding that Heinz and Beech-Nut have

not engaged in significant pre-merger competition. First, in

accepting the appellees' argument that Heinz and Beech-Nut

do not compete, the district court failed to address the record

evidence that the two do in fact price against each other, see,

e.g., 8/31/2000 Tr. 247-48, and that, where both are present in

the same areas,14 they depress each other's prices as well as

those of Gerber even though they are virtually never all found

in the same store. See, e.g., 8/30/2000 Tr. 147-48, 172; PX

531 at p 8; PX 481 at p 12; PX 479 at p p 6-7; PX 478 at p 6;

DX 14 at RP-110. This evidence undermines the district

court's factual finding.

Second, the district court's finding is inconsistent with its

conclusion that there is a single, national market for jarred

baby food in the United States. The Supreme Court has

explained that "[t]he outer boundaries of a product market

are determined by the reasonable interchangeability of use

[by consumers] or the cross-elasticity of demand between the

product itself and substitutes for it." Brown Shoe, 370 U.S.

at 325; see also United States v. E.I. du Pont de Nemours &

Co., 351 U.S. 377, 395 (1956).15 The definition of product

__________

14 There are at least ten metropolitan areas in which Heinz and

Beech-Nut both have more than a 10 per cent market share and

their combined share exceeds 35 per cent. PX 781 at Ex. 1B.

15 Interchangeability of use and cross-elasticity of demand look to

the availability of products that are similar in nature or use and the

market thus "focuses solely on demand substitution factors,"

i.e., that consumers regard the products as substitutes. Horizontal Merger Guidelines, supra, s 1.0; Sullivan & Grimes,

supra, s 11.2b1, at 579. By defining the relevant product

market generically as jarred baby food, the district court

concluded that in areas where Heinz's and Beech-Nut's products are both sold, consumers will switch between them in

response to a "small but significant and nontransitory increase in price (SSNIP)." Horizontal Merger Guidelines,

supra, s 1.11; H.J. Heinz, 116 F. Supp. 2d at 195. The

district court never explained this inherent inconsistency in

its logic nor could counsel for the appellees explain it at oral

argument.

Third, and perhaps most important, the court's conclusion

concerning pre-merger competition does not take into account

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the indisputable fact that the merger will eliminate competition at the wholesale level between the only two competitors

for the "second shelf" position. Competition between Heinz

and Beech-Nut to gain accounts at the wholesale level is

fierce with each contest concluding in a winner-take-all result.

JA 2680. The district court regarded this loss of competition

as irrelevant because the FTC did not establish to its satisfaction that wholesale competition ultimately benefitted consumers through lower retail prices. The district court concluded

that fixed trade spending did not affect consumer prices and

that "the FTC's assertion that the proposed merger will

affect variable trade spending levels and consumer prices is

... at best, inconclusive."16 H.J. Heinz, 116 F. Supp. 2d at

197. Although the court noted the FTC's examples of con-

__________

degree to which buyers are willing to substitute those similar

products for one another. See E.I. du Pont de Nemours, 351 U.S.

at 393.

16 Fixed trade spending consists of "slotting fees," "pay-to-stay"

arrangements, new store allowances and other payments to retailers in exchange for shelf space and desired product display. H.J.

Heinz, 116 F. Supp. 2d at 197. Variable trade spending includes

payments to retailers tied to sales volume and intended to insure a

specific sales volume and lower shelf price. Id.

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sumer benefit through couponing initiatives, the court held

that it was "impossible to conclude with any certainty that the

consumer benefit from such couponing initiatives would be

lost in the merger." Id.

In rejecting the FTC's argument regarding the loss of

wholesale competition, the court committed two legal errors.

First, as the appellees conceded at oral argument, no court

has ever held that a reduction in competition for wholesale

purchasers is not relevant unless the plaintiff can prove

impact at the consumer level. Oral Arg. Tr. at 22, 28; see

Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1389 (7th Cir.

1986) ("Section 7 does not require proof that a merger or

other acquisition has caused higher prices in the affected

market. All that is necessary is that the merger create an

appreciable danger of [collusive practices] in the future. A

predictive judgment, necessarily probabilistic and judgmental

rather than demonstrable, is called for.") (citation omitted).

Second, it is, in any event, not the FTC's burden to prove

such an impact with "certainty." To the contrary, the antitrust laws assume that a retailer faced with an increase in the

cost of one of its inventory items "will try so far as competition allows to pass that cost on to its customers in the form of

a higher price for its product." In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599, 605 (7th Cir. 1997),

reh'g and suggestion for reh'g en banc denied (Oct. 8, 1997).

Section 7 is, after all, concerned with probabilities, not certainties. United States v. El Paso Natural Gas Co., 376 U.S.

651, 658 (1964); Brown Shoe, 370 U.S. at 323; Baker Hughes,

908 F.2d at 984).17

__________

17 Although the merger's effects on the wholesale market for baby

food are important to a determination of whether the merger is

likely to reduce competition in the baby food market overall, we

reject the FTC's argument here that the "wholesale competition"

between Heinz and Beech-Nut is an entirely distinct "line of

commerce" within the meaning of section 7 of the Clayton Act such

that it must be analyzed independently from "retail competition."

The Congress amended section 7 in 1950 "to make the measure of

anticompetitive acquisitions the extent to which they lessened competition 'in any line of commerce,' rather than the extent to which

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2. Post-Merger Efficiencies

The appellees' second attempt to rebut the FTC's prima

facie showing is their contention that the anticompetitive

effects of the merger will be offset by efficiencies resulting

from the union of the two companies, efficiencies which they

assert will be used to compete more effectively against Gerber. It is true that a merger's primary benefit to the

economy is its potential to generate efficiencies. See generally 4A Phillip E. Areeda, Herbert Hovenkamp & John L.

Solow, Antitrust Law p 970 at 22-25 (1998). As the Merger

Guidelines now recognize, efficiencies "can enhance the

merged firm's ability and incentive to compete, which may

result in lower prices, improved quality, or new products."

Horizontal Merger Guidelines, supra, s 4.

Although the Supreme Court has not sanctioned the use of

the efficiencies defense in a section 7 case, see Procter &

Gamble Co., 386 U.S. at 580,18 the trend among lower courts

__________

they lessened competition 'between' the two companies." Citizen

Publishing Co. v. United States, 394 U.S. 131, 137 n.3 (1969).

Courts interpret "line of commerce" as synonymous with the relevant product market. See General Dynamics, 415 U.S. at 510;

Falstaff Brewing, 410 U.S. at 531-32. The district court defined

only one market--jarred baby food sold throughout the line of

commerce in the United States. Thus, the proper "line of commerce" for analysis in this case is the overall market for jarred

baby food, which includes both retail and wholesale levels. At this

point in the proceedings, the wholesale market cannot be separated

out for analysis without regard to the merger's effect on other

levels of competition.

18 In Procter & Gamble Co., 386 U.S. at 580, the Supreme Court

stated that "[p]ossible economies cannot be used as a defense to

illegality" in section 7 merger cases. The issue is, however, not a

closed book. See Staples, 970 F. Supp. at 1088 (collecting cases).

Areeda and Turner explain that "[i]n interpreting the Clorox language, moreover, observe that the court referred only to 'possible'

economies and to economies that 'may' result from mergers that

lessen competition. To reject an economies defense based on mere

possibilities does not mean that one should reject such a defense

based on more convincing proof." 4 Phillip Areeda & Donald

is to recognize the defense. See, e.g., FTC v. Tenet Health

Care Corp., 186 F.3d 1045, 1054 (8th Cir. 1999), reh'g and

reh'g en banc denied (Oct. 6. 1999); University Health, 938

F.2d at 1222; FTC v. Cardinal Health, Inc., 12 F. Supp. 2d

34, 61 (D.D.C. 1998); Staples, 970 F. Supp. at 1088-89; see

also ABA Antitrust Section, Mergers and Acquisitions: Understanding the Antitrust Issues 152 (2000) ("The majority of

courts have considered efficiencies as a means to rebut the

government's prima facie case that a merger will lead to

restricted output or increased prices. These courts, however,

generally have found inadequate proof of efficiencies to sustain a rebuttal of the government's case."). In 1997 the

Department of Justice and the FTC revised their Horizontal

Merger Guidelines to recognize that "mergers have the potential to generate significant efficiencies by permitting a

better utilization of existing assets, enabling the combined

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firm to achieve lower costs in producing a given quantity and

quality than either firm could have achieved without the

proposed transaction." Horizontal Merger Guidelines, supra,

s 4.

Nevertheless, the high market concentration levels present

in this case require, in rebuttal, proof of extraordinary efficiencies, which the appellees failed to supply. See University

Health, 938 F.2d at 1223 ("[A] defendant who seeks to

overcome a presumption that a proposed acquisition would

substantially lessen competition must demonstrate that the

intended acquisition would result in significant economies and

that these economies ultimately would benefit competition

and, hence, consumers."); Horizontal Merger Guidelines, supra, s 4 (stating that "[e]fficiencies almost never justify a

merger to monopoly or near-monopoly"); 4A Areeda, et al.,

Antitrust Law p 971f, at 44 (requiring "extraordinary" efficiencies where the "HHI is well above 1800 and the HHI

increase is well above 100"). Moreover, given the high con-

__________

Turner, Antitrust Law p 941b, at 154 (1980). They conclude that

"[t]he Court's brief and unelaborated language [in Clorox] cannot

reasonably be taken as a definitive disposition of so important and

complex an issue as the role of economies in analyzing legality of a

merger." Id.

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centration levels, the court must undertake a rigorous analysis of the kinds of efficiencies being urged by the parties in

order to ensure that those "efficiencies" represent more than

mere speculation and promises about post-merger behavior.

The district court did not undertake that analysis here.

In support of its conclusion that post-merger efficiencies

will outweigh the merger's anticompetitive effects, the district

court found that the consolidation of baby food production in

Heinz's under-utilized Pittsburgh plant "will achieve substantial cost savings in salaries and operating costs." H.J. Heinz,

16 F. Supp. 2d at 199. The court also credited the appellees'

promise of improved product quality as a result of recipe

consolidation.19 The only cost reduction the court quantified

as a percentage of pre-merger costs, however, was the socalled "variable conversion cost": the cost of processing the

volume of baby food now processed by Beech-Nut. The

court accepted the appellees' claim that this cost would be

reduced by 43% if the Beech-Nut production were shifted to

Heinz's plant, see JA 4619, a reduction the appellees' expert

characterized as "extraordinary."

The district court's analysis falls short of the findings

necessary for a successful efficiencies defense in the circumstances of this case. We mention only three of the most

important deficiencies here. First, "variable conversion cost"

is only a percentage of the total variable manufacturing cost.

A large percentage reduction in only a small portion of the

company's overall variable manufacturing cost does not necessarily translate into a significant cost advantage to the merger. Thus, for cost reduction to be relevant, we must at least

__________

19 In addition, the district court described Heinz's distribution

network as much more efficient than Beech-Nut's. H.J. Heinz, 116

F. Supp. 2d at 199. It failed to find, however, a significant

diseconomy of scale in distribution from which either Heinz or

Beech-Nut suffers. 4A Areeda, et al., supra, p 975e1, at 73. In

other words, although Beech-Nut has an inefficient distribution

system, it can make that system more efficient without merger.

Heinz's own efficient distribution network illustrates that a firm the

size of Beech-Nut does not need to merge in order to attain an

efficient distribution system.

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consider the percentage of Beech-Nut's total variable manufacturing cost that would be reduced as a consequence of the

merger. At oral argument, the appellees' counsel agreed.

Oral Arg. Tr. at 43. This correction immediately cuts the

asserted efficiency gain in half since, according to the appellees' evidence, using total variable manufacturing cost as the

measure cuts the cost savings from 43% to 22.3%. See JA

4620.

Second, the percentage reduction in Beech-Nut's cost is still

not the relevant figure. After the merger, the two entities

will be combined, and to determine whether the merged

entity will be a significantly more efficient competitor, cost

reductions must be measured across the new entity's combined production--not just across the pre-merger output of

Beech-Nut. See 4A Areeda, et al., supra, p 976d at 93-94.

The district court, however, did not consider the cost reduction over the merged firm's combined output. At oral argument the appellees' counsel was unable to suggest a formula

that could be used for determining that cost reduction. See

Oral Arg. Tr. at 45-47.

Finally, and as the district court recognized, the asserted

efficiencies must be "merger-specific" to be cognizable as a

defense.20 H.J. Heinz, 116 F. Supp. 2d at 198-99; see

__________

20 The Horizontal Merger Guidelines explain that "merging firms

must substantiate efficiency claims so that the Agency can verify by

reasonable means the likelihood and magnitude of each asserted

efficiency, how and when each would be achieved (and any costs of

doing so), how each would enhance the merged firm's ability and

incentive to compete, and why each would be merger-specific.

Efficiency claims will not be considered if they are vague or

speculative or otherwise cannot be verified by reasonable means."

Horizontal Merger Guidelines, supra, s 4. Regarding the types of

efficiencies asserted here, the Guidelines state:

The Agency has found that certain types of efficiencies are

more likely to be cognizable and substantial than others. For

example, efficiencies resulting from shifting production among

facilities formerly owned separately, which enable the merging

firms to reduce the marginal cost of production, are more likely

to be susceptible to verification, merger-specific, and substanHorizontal Merger Guidelines, supra, s 4; 4A Areeda, et al.,

supra, p 973, at 49-62. That is, they must be efficiencies that

cannot be achieved by either company alone because, if they

can, the merger's asserted benefits can be achieved without

the concomitant loss of a competitor. See generally 4A

Areeda, et al., supra, p 973. Yet the district court never

explained why Heinz could not achieve the kind of efficiencies

urged without merger. As noted, the principal merger benefit asserted for Heinz is the acquisition of Beech-Nut's better

recipes, which will allegedly make its product more attractive

and permit expanded sales at prices lower than those charged

by Beech-Nut, which produces at an inefficient plant. Yet,

neither the district court nor the appellees addressed the

question whether Heinz could obtain the benefit of better

recipes by investing more money in product development and

promotion--say, by an amount less than the amount Heinz

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would spend to acquire Beech-Nut. At oral argument,

Heinz's counsel agreed that the taste of Heinz's products was

not so bad that no amount of money could improve the

brand's consumer appeal. Oral Arg. Tr. at 54. That being

the case, the question is how much Heinz would have to spend

to make its product equivalent to the Beech-Nut product and

hence whether Heinz could achieve the efficiencies of merger

without eliminating Beech-Nut as a competitor. The district

court, however, undertook no inquiry in this regard. In

short, the district court failed to make the kind of factual

determinations necessary to render the appellees' efficiency

defense sufficiently concrete to offset the FTC's prima facie

showing.

__________

tial, and are less likely to result from anticompetitive reductions in output. Other efficiencies, such as those relating to

research and development, are potentially substantial but are

generally less susceptible to verification and may be the result

of anticompetitive output reductions. Yet others, such as those

relating to procurement, management, or capital cost are less

likely to be merger-specific or substantial, or may not be

cognizable for other reasons.

Id.

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3. Innovation

The appellees claim next that the merger is required to

enable Heinz to innovate, and thus to improve its competitive

position against Gerber. Heinz and Beech-Nut asserted, and

the district court found, that without the merger the two

firms are unable to launch new products to compete with

Gerber because they lack a sufficient shelf presence or ACV.

See H.J. Heinz, 116 F. Supp. 2d at 199-200. This kind of

defense is often a speculative proposition. See 4A Areeda, et

al., supra, p 975g (noting "truly formidable" proof problems

in determining innovation economies). In this case, given the

old-economy nature of the industry as well as Heinz's position

as the world's largest baby food manufacturer, it is a particularly difficult defense to prove. The court below accepted the

appellees' argument principally on the basis of their expert's

testimony that new product launches are cost-effective only

when a firm's ACV is 70% or greater (Heinz's is presently

40%; Beech-Nut's is 45%). That testimony, in turn, was

based on a graph that plotted revenue against ACV. According to the expert, the graph showed that only four out of 27

new products launched in 1995 had been successful--all for

companies with an ACV of 70% or greater.

The chart, however, does not establish this proposition and

the court's consequent finding that the merger is necessary

for innovation is thus unsupported and clearly erroneous. All

the chart plotted was revenue against ACV and hence all it

showed was the unsurprising fact that the greater a company's ACV, the greater the revenue it received. Because the

graph did not plot the profitability (or any measure of "costeffectiveness"), there is no way to know whether the expert's

claim--that a 70% ACV is required for a launch to be

"successful" in an economic sense--is true.21 Moreover, the

__________

21 For example, a 5 cent piece of bubble gum introduced with a

90% ACV could appear as a failure on the graph because of low

revenue but nonetheless be profitable. On the other hand, a high

priced grocery product introduced with the same ACV could generate a lot of revenue (and thus appear as a "success" on the graph)

yet be unprofitable.

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number of data points on the chart were few; they were

limited to launches in a single year; and they involved

launches of all new grocery products rather than of baby food

alone. Assessing such data's statistical significance in establishing the proposition at issue, i.e., the necessity of 70% ACV

penetration, is thus highly speculative. The district court did

not even address the question of the data's statistical significance and the appellees' counsel could offer no help at oral

argument. See Oral Arg. Tr. at 39 ("I'm not aware of the

statistical significance of the underlying study.").22 In the

absence of reliable and significant evidence that the merger

will permit innovation that otherwise could not be accomplished, the district court had no basis to conclude that the

FTC's showing was rebutted by an innovation defense.

Moreover, Heinz's insistence on a 70-plus ACV before it

brings a new product to market may be largely to persuade

the court to recognize promotional economies as a defense.

Heinz argues that to profitably launch a new product, it must

have nationwide market penetration to recoup the money

spent on advertising and promotion. It wants to spread

advertising costs out among as many product units as possible, thereby lowering the advertising cost per unit. It does

not want to "waste" promotional expenditures in markets

where its products are not on the shelf or where they are on

only a few shelves. For example, in a metropolitan area in

which Heinz has a 75 per cent ACV, every dollar spent on

__________

22 The graph evidence is also not useful unless we know the

"sunk" costs in bringing the product to market and the manufacturer's fixed and variable costs in producing the product. Sunk costs

are costs that have already been incurred such as research and

development and promotional expenses, including brand name development. See Henry N. Butler, Economic Analysis for Lawyers

935 (1998). Fixed costs refer to those expenses that do not vary

with output and will be incurred as long as the firm continues in

business. Variable costs are those that change with the rate of

output such as wages paid to workers and payments for raw

materials. See id. at 920, 936; E. Thomas Sullivan & Jeffrey L.

Harrison, Understanding Antitrust and its Economic Implications

19-21 (3d ed. 1998).

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advertising is two or three times more "effective" than in a

market in which it has only a 25 per cent ACV. As one

authority notes, however, "[t]he case for recognizing a defense based on promotional economies is relatively weak."

4A Areeda, et al., supra, p 975f, at 77. The district court

accepted Heinz's claim that it could not introduce new products without at least a 70 per cent ACV because it would be

unable to adequately diffuse its advertising and promotional

expenditures. But the court failed to determine whether

substantial promotional scale economies exist now and, if they

do, whether Heinz and Beech-Nut "for that reason operate at

a substantial competitive disadvantage in the market or markets in which they sell" or whether there are effective alternatives to merger by which the disadvantage can be overcome. Id. at p 975f2, at 78.

4. Structural Barriers to Collusion

In a footnote the district court dismissed the likelihood of

collusion derived from the FTC's market concentration data.

"[S]tructural market barriers to collusion" in the retail market for jarred baby food, the court said, rebut the normal

presumption that increases in concentration will increase the

likelihood of tacit collusion. H.J. Heinz, 116 F. Supp. 2d at

198 n.7. The court's sole citation, however, was to testimony

by the appellees' expert, Jonathan B. Baker, a former Director of the Bureau of Economics at the FTC, who testified

that in order to coordinate successfully, firms must solve

"cartel problems" such as reaching a consensus on price and

market share and deterring each other from deviating from

that consensus by either lowering price or increasing production. He opined that after the merger the merged entity

would want to expand its market share at Gerber's expense,

thereby decreasing the likelihood of consensus on price and

market share. 9/8/2000 Tr. 1010-1013. In his report, Baker

elaborated on his theory, explaining that the efficiencies

created by the merger will give the merged firm the ability

and incentive to take on Gerber in price and product improvements. DX 617. He also predicted that policing and monitoring of any agreement would be more difficult than it is

now, due in part to a time lag in the ability of one firm to

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detect price cuts by another. But the district court made no

finding that any of these "cartel problems" are so much

greater in the baby food industry than in other industries

that they rebut the normal presumption. In fact, Baker's

testimony about "time lag" is refuted by the record which

reflects that supermarket prices are available from industrywide scanner data within 4-8 weeks. See DX 617 at p 86

(report of appellees' expert Jonathan Baker); see also Oral

Arg. Tr. at 30 (statement by appellees' counsel that nothing in

record reflects time lag is greater in baby food industry than

in other industries). His testimony is further undermined by

the record evidence of past price leadership in the baby food

industry.23

The combination of a concentrated market and barriers to

entry is a recipe for price coordination. See University

Health, 938 F.2d at 1218 n.24 ("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.' " (citation omitted)). "[W]here

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. The creation of a durable duopoly

affords both the opportunity and incentive for both firms to

__________

23 In an oligopolistic market characterized by few producers, price

leadership occurs when firms engage in interdependent pricing,

setting their prices at a profit-maximizing, supracompetitive level

by recognizing their shared economic interests with respect to price

and output decisions. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 227 (1993); see also Jesse W.

Markham, The Nature and Significance of Price Leadership, 41

Amer. Econ. Rev. 891 (1951); Richard A. Posner, Oligopoly and the

Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562, 1582

(1969); Donald Arthur Washburn, Price Leadership, 64 Va. L. Rev.

691, 693-697 (1978). In a duopoly, a market with only two competitors, supracompetitive pricing at monopolistic levels is a danger.

See Edward Hastings Chamberlin, The Theory of Monopolistic

Competition: A Re-orientation of the Theory of Value 46-55 (8th

ed. 1962).

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coordinate to increase prices. The district court recognized

this when it questioned Baker on whether the merged entity

will, up to a point, expand its market share but "then [with

Gerber will] find a nice equilibrium and they'll all get along

together." 9/8/2000 Tr. 1014. Tacit coordination

is feared by antitrust policy even more than express

collusion, for tacit coordination, even when observed,

cannot easily be controlled directly by the antitrust laws.

It is a central object of merger policy to obstruct the

creation or reinforcement by merger of such oligopolistic

market structures in which tacit coordination can occur.

4 Phillip E. Areeda, Herbert Hovenkamp & John L. Solow,

Antitrust Law p 901b2, at 9 (rev. ed. 1998). Because the

district court failed to specify any "structural market barriers

to collusion" that are unique to the baby food industry, its

conclusion that the ordinary presumption of collusion in a

merger to duopoly was rebutted is clearly erroneous.24

* * * * *

Although we recognize that, post-hearing, the FTC may

accept the rebuttal arguments proffered by the appellees,

including their efficiencies defense, and permit the merger to

proceed, we conclude that the FTC succeeded in "rais[ing]

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." Warner Communications, 742 F.2d at 1162. The

FTC demonstrated that the merger to duopoly will increase

the concentration in an already highly concentrated market;

that entry barriers in the market make it unlikely that any

anticompetitive effects will be avoided; that pre-merger competition is vigorous at the wholesale level nationwide and

__________

24 Contrary to the appellees' claims, nothing in Baker Hughes

suggests otherwise. In that case, the sophisticated nature of the

purchasers of the industry's product and the "volatile and shifting"

nature of each firm's market share rendered the HHI figures an

unreliable measure of concentration. See 908 F.2d at 986-87. No

such circumstances exist in this case.

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present at the retail level in some metropolitan areas; and

that post-merger competition may be lessened substantially.

These substantial questions have not been sufficiently answered by the appellees. As we said in Baker Hughes, "[t]he

more compelling the prima facie case, the more evidence the

defendant must present to rebut it successfully." 908 F.2d at

991. In concluding that the FTC failed to make the requisite

showing, the district court erred in a number of respects.

Regarding the contention of lack of pre-merger competition,

it made a clearly erroneous factual finding and misunderstood

the law with respect to the import of competition at the

wholesale level. Regarding the proffered efficiencies defense,

the court failed to make the kind of factual findings required

to render that defense sufficiently concrete to rebut the

government's prima facie showing. Finally, as to the contention that the merger is necessary for innovation, the court

clearly erred in relying on evidence that does not support its

conclusion. Because the district court incorrectly assessed the

merits of the appellees' rebuttal arguments, it improperly

discounted the FTC's showing of likelihood of success.

2. Weighing of the Equities

Although the FTC's showing of likelihood of success creates a presumption in favor of preliminary injunctive relief,

we must still weigh the equities in order to decide whether

enjoining the merger would be in the public interest. 15

U.S.C. s 53(b); see PPG, 798 F.2d at 1507; Weyerhaeuser,

665 F.2d at 1081-83. The principal public equity weighing in

favor of issuance of preliminary injunctive relief is the public

interest in effective enforcement of the antitrust laws. University Health, 938 F.2d at 1225. The Congress specifically

had this public equity consideration in mind when it enacted

section 13(b). See Food Town Stores, 539 F.2d at 1346

(Congress enacted section 13(b) to preserve status quo until

FTC can perform its function). The district court found, and

there is no dispute, that if the merger were allowed to

proceed, subsequent administrative and judicial proceedings

on the merits "will not matter" because Beech-Nut's manufacturing facility "will be closed, the Beech-Nut distribution

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channels will be closed, the new label and recipes will be in

place, and it will be impossible as a practical matter to undo

the transaction." H.J. Heinz, 116 F. Supp. 2d at 201.

Hence, if the merger were ultimately found to violate the

Clayton Act, it would be impossible to recreate pre-merger

competition. See Warner Communications, 742 F.2d at 1165

("A denial of a preliminary injunction would preclude effective

relief if the Commission ultimately prevails and divestiture is

ordered."). Section 13(b) itself embodies congressional recognition of the fact that divestiture is an inadequate and unsatisfactory remedy in a merger case, 119 Cong. Rec. 36612

(1973), a point that has been emphasized by the United States

Supreme Court. See, e.g., FTC v. Dean Foods Co., 384 U.S.

597, 606 n.5 (1966) ("Administrative experience shows that the

Commission's inability to unscramble merged assets frequently prevents entry of an effective order of divestiture.").

On the other side of the ledger, the appellees claim that the

injunction would deny consumers the procompetitive advantages of the merger. See FTC v. Pharmtech Research, Inc.,

576 F. Supp. 294, 299 (D.D.C. 1983) (explaining that public

equities include "beneficial economic effects and procompetitive advantages for consumers"). The district court found

that if the merger were preliminarily enjoined, the injury to

competition would also be irreversible, that is, the merger

would be abandoned and could not be consummated if ultimately found lawful. By contrast to its first finding, however,

for the latter conclusion the court relied not on the facts of

this case but on our statement in Exxon that--as a general

matter--temporarily blocking a tender offer is likely to end

an attempted acquisition, "as a result of the short life-span of

most tender offers." Id. (quoting Exxon, 636 F.2d at 1343).

In their brief in this court, the appellees offer nothing more

to support the finding that the merger would never be

consummated were an injunction to issue. Indeed, they

devote only a single sentence, without any citation, to the

point. The district court's finding that an injunction would

"kill this merger" is thus not a factual finding supported by

record evidence. This case does not involve a short-lived

tender offer as did the case cited by the court for its "kill the

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merger" conclusion. The appellees acknowledge that there is

no alternative buyer for Beech-Nut and the court found that

it is not a failing company but rather a "profitable and

ongoing enterprise." H.J. Heinz, 116 F. Supp. 2d at 201 n.9.

If the merger makes economic sense now, the appellees have

offered no reason why it would not do so later. Moreover,

Beech-Nut's principal assets of value to Heinz are, assertedly, its recipes and brand name. Nothing in the record leads

us to believe that both will not still exist when the FTC

completes its work. It may be that Beech-Nut will have to

sell its recipes to Heinz at a lower price than the price of

today's merger. But that is at best a "private" equity which

does not affect our analysis of the impact on the market of

the two options now before us and which has not in any event

been urged by the appellees.25 See id.

In sum, weighing of the equities favors the FTC. If the

merger is ultimately found to violate section 7 of the Clayton

Act, it will be too late to preserve competition if no preliminary injunction has issued. On the other hand, if the merger

is found not to lessen competition substantially, the efficiencies that the appellees urge can be reclaimed by a renewed

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25 The district court noted that "[t]he parties have not stressed

private equities" but the court nonetheless considered them. It

concluded that while "the corporate interests of Heinz and Milnot

and especially the interests of Dearborn Capital Partners LP, which

presumably acquired Milnot through a leveraged buyout with the

purpose and intent of selling its interest at a profit" were important

to the private parties, they should not affect the outcome of the

proceeding. H.J. Heinz, 116 F. Supp. 2d at 200 n.9. We agree.

"While it is proper to consider private equities in deciding whether

to enjoin a particular transaction, we must afford such concerns

little weight, lest we undermine section 13(b)'s purpose of protecting the 'public-at-large, rather than the individual private competitors.' " University Health, 938 F.2d at 1225 (citation omitted); cf.

Weyerhaeuser, 665 F.2d at 1083 ("Private equities do not outweigh

effective enforcement of the antitrust laws. When the Commission

demonstrates a likelihood of ultimate success, a countershowing of

private equities alone would not suffice to justify denial of a

preliminary injunction barring the merger.").

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transaction. Our conclusion with respect to the equities

necessarily lightens the burden on the FTC to show likelihood

of success on the merits, a burden which the FTC has met

here.

III. Conclusion

It is important to emphasize the posture of this case. We

do not decide whether the FTC will ultimately prove its case

or whether the defendants' claimed efficiencies will carry the

day.26 Our task is to review the district court's order to

determine whether, under section 13(b), preliminary injunctive relief would be in the public interest. We have considered the FTC's likelihood of success on the merits. We have

weighed the equities. We conclude that the FTC has raised

serious and substantial questions. We also conclude that the

public equities weigh in favor of preliminary injunctive relief

and therefore that a preliminary injunction would be in the

public interest. Accordingly, we reverse the district court's

denial of preliminary injunctive relief and remand the case for

entry of a preliminary injunction pursuant to section 13(b) of

the Federal Trade Commission Act.

So ordered.

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26 "The most difficult mergers to assess may be those that

combine both negative and positive effects: creating market power

that increases the risk of oligopolistic pricing while at the same time

creating efficiencies that reduce production or marketing costs."

Sullivan & Grimes, supra, s 9.1, at 511.

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