UNITED STATES OF AMERICA 


BEFORE THE FEDERAL TRADE COMMISSION 


COMMISSIONERS: Jon Leibowitz, Chairman ORIGINAL 

J. Thomas Rosch 

Edith Ramirez 

Julie Brill 

) 

In the Matter of ) 

) 

GRACOINC. ) 

a corporation, ) 

) Docket No. 9350 

ILLINOIS TOOL WORKS INC. ) 

a corporation, ) PUBLIC 

) 

and ) 

) 

ILLINOIS FINISHING LLC ) 

a limited liability company. ) 

) 

ANSWER OF DEFENDANT GRACO INC. TO THE FEDERAL TRADE 

COMMISSION'S ADMINISTRATIVE COMPLAINT 

Pursuant to 16 C.F.R. § 3.12, Respondent Graco Inc. ("Graco") hereby answers the 

Federal Trade Commission's Complaint as follows: 

PRELIMINARY STATEMENT 

Graco Inc. ("Graco"), headquartered in Minneapolis, Minnesota and founded in 1926, 

designs, develops, manufactures, and sells fluid handling equipment, components, and parts for a 

variety ofindustries. The company's liquid finishing products include applicators (guns), pumps 

(piston and diaphragm), proportioners, packages, and accessories. Graco prides itself on 

operational excellence, manufacturing efficiency, and product development, innovation, and 

quality. The company manufactures its finishing products in the United States and sells them 

worldwide. 

Graco has contracted to purchase the finishing business ofIllinois Tool Works Inc. 

("ITW"). This transaction will make Graco more competitive by: 

• 	 Lowering costs by more than $10 million within three years; 

• 	 Enabling Graco's entry into powder finishing, where the company has no current 

presence; 

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• 	 Enabling Graco's entry into rotary atomizers, cure ovens, systems, gear pump 

proportioners, and consumables, products that Graco does not offer; 

• 	 Strengthening Graco's offerings in automotive refinish, a business in which Graco 

is insignificant; and 

• 	 Providing access to ITW's global footprint, which will help Graco expand foreign 

sales. 

Graco has also agreed to divest or license to a buyer approved by the FTC, product lines 

and their respective spare parts, including: ITW's line of Ransflow manual electronic 

proportioners; ITW's line ofBX pumps; ITW's Solo line of manual electrostatic guns; ITW's 

line of Pitbull airless guns; and ITW's line of Protective Coatings BX Packages. Graco has 

agreed to continue to operate ITW Finishing distribution channels and Graco Finishing 

distribution channels in the same manner as they were pre-merger for a period of three years. As 

well, Graco has agreed, for a period ofthree years, not to raise U.S. prices on Graco and ITW 

industrial liquid finishing products in excess of the year over year change in the US Producer 

Price Index prepared by the US Bureau of Labor Statistics. 

There is no reason to anticipate post-acquisition anti competitive effects from this 

transaction. When Graco and ITW are systematically compared product by product, their 

offerings generally are not close substitutes. The parties do not compete for the sale of finishing 

products as a whole; neither distributors nor end users typically purchase all of either party's 

finishing products as a discrete bundle. Rather, Graco and ITW compete with each other and 

numerous other manufacturers for end user business on a product-by-product basis. Furthermore, 

they have taken different marketplace approaches. Graco typically focuses on component sales 

to industrial users and sells solely through distribution. ITW has built a hybrid model, selling 

direct to customers in some cases and through distribution in others. Additionally, ITW has a 

sales force, with specialized engineering and other expertise, that is focused just on systems 

sales. The distribution channel itself introduces a layer of competition. Products are distributed 

by traditional distributors, integrators, and material suppliers, among others. 

More importantly, there are strong competitors in all aspects of the finishing business and 

in industries that use closely analogous products. At least five competitors active in the United 

States offer a comparable, if not fuller, portfolio offinishing products than those offered by 

Graco and ITW and have been successful at selling their products to demanding and 

sophisticated customers. Exel Industries, for example, is a large French-based industrial 

conglomerate that boasts Audi, Fiat, PSA Peugeot Citroen, Ford, General Motors, and Caterpillar 

as customers. Wagner, a German company, provides finishing equipment for the likes of BMW 

and Mercedes and has just completed investment in a significant new facility center in Illinois, a 

measure ofits growing presence in the United States. Another firm, Nordson, serves U.S. 

customers Harley-Davidson, Mackie Designs, American Axle Manufacturing, Eagle Window & 

Door, WireCrafters, Manko, American Desk, and Trek USA, generating $135 million in revenue 

from its finishing business in 2010. Anest Iwata and Asahi Sunac have manufactured finishing 

products since the 1920s and 1950s, respectively. Both are Japanese firms that leveraged their 

popularity with Japanese car companies to launch successful U.S. operations. In addition to 

these companies, there are hundreds of other companies that offer products within one or more 

categories offinishing products, including corporate giants such as 3M. 

In sum, Graco and ITW compete for the sale of individual finishing products against 

many strong companies. Moreover, Graco's and ITW's product offerings are largely 

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complementary. Accordingly, there is no possibility ofa material unilateral effect because Graco 

and ITW are not particularly close competitors, and there are many other competitors that sell 

products that compete closely with those supplied by each ofthe merging parties. 

RESPONSES TO THE FTC'S ALLEGATIONS 

I. NATURE OF THE CASE 

1. Graco admits that Graco and Illinois Tool Works Inc. ("ITW") entered into an 

Asset Purchase Agreement ("the Agreement") dated April 14, 2011. Graco avers that its 

presidents' statements as a whole speak for themselves. Graco denies the remaining allegations 

in Paragraph 1. 

2. Graco avers that its president's documents and statements as a whole speak for 

themselves. Graco denies the allegations of Paragraph 2. 

3. Graco denies the allegations in Paragraph 3. 

4. The allegations in Paragraph 4 are legal conclusions to which no response is 

required. To the extent a response is required, the allegations in Paragraph 4 are denied. 

5. Graco denies the allegations in Paragraph 5. 

6. Graco denies the allegations in Paragraph 6. Graco avers that its documents as a 

whole speak for themselves. 

II. RESPONDENTS 

7. Graco admits sentence one of Paragraph 7. Graco avers that it manufactures and 

sells liquid finishing equipment in various parts ofthe United States and abroad. Graco denies 

the remaining allegations in Paragraph 7. 

8. The allegations in Paragraph 8 relate to an entity other than Graco, and Graco is 

without knowledge or information sufficient to form a belief as to the truth ofthese allegations. 

9. The allegations in Paragraph 9 relate to an entity other than Graco, and Graco is 

without knowledge or information sufficient to form a belief as to the truth of these allegations. 

III. JURISDICTION 

10. The allegations in Paragraph 10 are legal conclusions to which no response is 

required. To the extent a response is required, the allegations in Paragraph 10 are denied. 

11. The allegation in Paragraph 11 is a legal conclusion to which no response is 

required. To the extent a response is required, the allegations in Paragraph 11 are denied. 

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IV. THE ACQUISITION 

12. Graco admits that Graco and ITW entered into an Asset Purchase Agreement 


dated April 14, 2011. The Asset Purchase Agreement speaks for itself. Graco denies the 


remaining allegations in Paragraph 12. 


V. INDUSTRY STRUCTURE AND ANTICOMPETITIVE EFFECTS 

13. Graco admits that industrial manufacturers use liquid finishing equipment to apply 

paint and other coatings to certain manufactured goods. Graco admits applying a consistent 

finish is an important part ofthe manufacturing process. Graco denies the remaining allegations 

in Paragraph 13. 

14. Graco admits that Graco and ITW manufacture industrial liquid finishing 

equipment, and that this equipment includes, but is not limited to, pumps, applicators, 

proportioners, and related equipment. Graco denies that any of these product categories 

constitute relevant product markets for the purpose of evaluating anticompetitive effects. Graco 

denies the remaining allegations in Paragraph 14. 

15. Graco admits that Graco and ITW sell products to distributors. Graco denies the 

allegations in Paragraph 15. 

16. Graco admits that it sells all of its industrial finishing equipment to distributors 

and integrators. The allegations in sentence 4 of Paragraph 16 relates to an entity other than 

Graco, and Graco is without knowledge or information sufficient to form a belief as to the truth 

of these allegations. Graco denies the remaining allegations in Paragraph 16. 

17. Graco denies the allegations in Paragraph 17. 

18. Graco admits that the statement quoted in Paragraph 18 was made in an 

investigational hearing taken by the FTC. The transcript speaks for itself. Graco denies the 

remaining allegations in Paragraph 18. 

19. Graco admits that the statements quoted in Paragraph 19 were made in an 

investigational hearing taken by the FTC. The hearing transcript speaks for itself. Graco denies 

the remaining allegations in Paragraph 19. 

20. Graco denies the allegations in Paragraph 20. 

21. Graco denies the allegations in Paragraph 21. 

22. Graco avers that the documents speak for themselves. Graco denies the remaining 

allegations in Paragraph 22. 

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23. Graco denies the allegations in Paragraph 23. 

24. Graco denies the allegations in Paragraph 24. 

VI. RELEVANT PRODUCT MARKETS 

25. Graco denies the allegations in Paragraph 25. 

26. Graco denies that the putative product markets set forth in Paragraph 26 and each 

of its subparts are relevant markets for antitrust purposes. 

A. Liquid Finishing Pumps for Industrial Use 

27. Graco denies the allegations in Paragraph 27. In addition, Graco denies that 


industrial liquid finishing pumps constitute a relevant product market. 


B. Liquid Finishing Spray Guns for Industrial Use 

28. Graco denies the allegations in Paragraph 28. In addition, Graco denies that 

industrial liquid finishing spray guns constitute a relevant product market. 

C. Liquid Finishing Proportioners for Industrial Use 

29. Graco denies the allegations in Paragraph 29. In addition, Graco denies that 

industrial liquid finishing proportioners constitute a relevant product market. 

D. Circulation Pumps for Paint Systems in Automotive Assembly Plants 

30. Graco denies the allegations in Paragraph 30. In addition, Graco denies that paint 

circulation pumps used in automotive plants constitute a relevant product market. 

E. Industrial Liquid Finishing Equipment for Resale 

31. Graco denies the allegations in Paragraph 31. In addition, Graco denies that 

"Industrial Liquid Finishing Equipment for Resale" constitutes a relevant product market. 

VII. GEOGRAPHIC MARKET 

32. Graco denies the allegations in Paragraph 32. 

VIII. PRESUMPTIVE ILLEGALITY OF THE ACQUISITION 

33. The allegation in Paragraph 33 that the acquisition would be "illegal" is a legal 

conclusion, to which no response is required. To the extent a response is required, this allegation 

is denied. Graco denies the remaining allegations in Paragraph 33. 

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34. The first sentence in Paragraph 34 is a legal conclusion to which no response is 


required. To the extent that a response is required, the allegation is denied. Graco denies the 


remaining allegations in Paragraph 34. 


35. Graco denies the allegations in Paragraph 35. 

36. Graco denies the allegations in Paragraph 36. 

37. The allegations in Paragraph 37 are legal conclusions to which no response is 

required. To the extent a response is required, the allegations are denied. 

IX. ENTRY AND REPOSITIONING BARRIERS AND LACK OF EFFICIENCIES 

38. Graco denies the allegations in Paragraph 38. 

39. Graco denies the allegations in Paragraph 39. 

40. Graco denies the allegations in Paragraph 40. 

41. Graco denies the allegations in Paragraph 41. 

X. VIOLATIONS 

COUNT I - ILLEGAL AGREEMENT 

42. Except as where specifically admitted above, the allegations in Paragraphs 1-41 of 

the Complaint are denied. 

43. The allegations in Paragraph 43 are legal conclusions to which no response is 

required. To the extent a response is required, the allegations are denied. 

COUNT II - ILLEGAL ACQUISITION 

44. Except as where specifically admitted above, the allegations in Paragraphs 1-41 of 

the Complaint are denied. 

45. The allegations in Paragraph 45 are legal conclusions to which no response is 

required. To the extent a response is required, the allegations are denied. 

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XII. AFFIRMATIVE DEFENSES 

FIRST AFFIRMATIVE DEFENSE 

The Complaint fails to state a claim upon which relief can be granted. 

SECOND AFFIRMATIVE DEFENSE 

The contemplated relief would not be in the public interest. 

THIRD AFFIRMATIVE DEFENSE 

To provide further assurances that there will be no anti competitive effects, Graco has 

agreed to divest or license the following product lines, to a buyer approved by the FTC within a 

period of 180 days: 

• ITW's line of Ransflow manual electronic proportioners (including spare parts) 

• ITW's line ofBX pumps (including spare parts) 

• ITW's Solo line of manual electrostatic guns (including spare parts) 

• ITW's line of Pit bull airless guns (including spare parts) 

• 	 ITW's line of Protective Coatings BX Packages (including spare parts) 


FOURTH AFFIRMATIVE DEFENSE 


To provide further assurances that there will be no anti competitive effects, Graco has 

agreed to the following terms: 

Regarding ITW Industrial Finishing Distribution: 

Graco will continue to operate ITW Finishing distribution channels in the same manner 

as they were pre-merger for a period ofthree years. To that end, Graco will: 

a. Offer to extend any current ITW Finishing Distributor or Integrator agreement for a 

period of three years (subject to existing minimum sales and credit standards). 

b. Confirm in writing to each ITW Finishing Distributor that its agreement is nonexclusive and that there are no restrictions on which manufacturers, customers, or 

integrators with which they choose to deal as it relates to ITW Finishing products. 

c. If the ITW Finishing Distributor or Integrator is also a Graco distributor, integrator 

or customer, Graco will not use any means to restrict that Distributor or Integrator 

from selling ITW Finishing Products. 

d. For a period ofthree years, Graco will continue to offer for sale to ITW 

Distributors and Integrators a full package ofITW Finishing branded products (no 

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lesser in scope to the previously offered package, with the exception of divested 

lines). 

Regarding Graco Industrial Finishing Distribution: 

Graco will continue to operate Graco Finishing distribution channels in the same manner 

as they were pre-merger for a period of three years. To that end, Graco will: 

a. Offer to extend any current Graco Industrial Finishing Distributor or Integrator 

agreement for a period of three years (subject to existing minimum sales and credit 

standards) . 

b. Confirm in writing to each Graco Finishing Distributor that its agreement is nonexclusive and that there are no restrictions on which manufacturers, customers, or 

integrators with which they choose to deal. 

c. For a period of three years, Graco will continue to offer for sale to Graco 

Distributors and Integrators a full package of Graco Finishing branded products (no 

lesser in scope to the previously offered package, with the exception of divested 

lines). 

FIFTH AFFIRMATIVE DEFENSE 

To provide further assurances that there will be no anticompetitive effects, Graco has 

agreed, for a period of 3 years, not to raise U.S. prices on Graco and ITW industrial liquid 

finishing products in excess ofthe year over year change in the US Producer Price Index (most 

recent issue) as prepared by the US Bureau of Labor Statistics. This excludes Gema, BGK, and 

Auto Refinish. 

SIXTH AFFIRMATIVE DEFENSE 

Efficiencies and other pro-competitive benefits resulting from the acquisition outweigh 

any and all proffered anti competitive effects. 

OTHER AFFIRMATIVE DEFENSES 

Graco reserves the right to assert any other defenses as discovery proceeds. 

CONCLUSION 

WHEREFORE, Graco respectfully requests that the Court (i) deny the FTC's 

contemplated relief, (ii) dismiss the Complaint in its entirety with prejudice, (iii) award Graco its 

costs of suit, including attorneys' fees, and (iv) award such other relief and further relief as the 

court may deem proper. 

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Dated: Jan. 3,2012 

. ~ " ....

Respectfully submitted, , '.-, '\, " '," ; 

Richard G. Parker (D.C. Bar No. 327544) 


Michael E. Antalics (D.C. Bar No. 475218) 


Katrina M. Robson (D.C. Bar No. 989341) 


O'MELVENY & MYERS LLP 


1625 Eye Street, N.W. 


Washington, D.C. 20006-4001 


(202) 383-5300 

Of Counsel: 

John H. Hinderaker 

Richard A. Duncan 

F AEGRE & BENSON LLP 

2200 Wells Fargo Center 

90 South Seventh Street 

Minneapolis, MN 55402 

(612) 766-7000 

(612) 766-1600 (fax) 

Attorneys for Graco Inc. 

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CERTIFICATE OF SERVICE 

I hereby certify that on January 3, 2012, I filed an original and one paper copy of the 

foregoing Answer with the Office ofthe Secretary of the Federal Trade Commission at the 

following address: 

Donald S. Clark 

Secretary of the Commission 

Federal Trade Commission 

600 Pennsylvania Avenue, NW 

Room H-126 

Washington, DC 20580 

I also emailed a copy ofthe foregoing to secretary@ftc.gov, caused a copy to be filed via 

ECF, and personally served a paper copy on the following: 

The Honorable D. Michael Chappell 

Chief Administrative Law Judge 

Federal Trade Commission 

Office ofAdministrative Law Judges 

600 Pennsylvania Avenue, NW 

Room H-I06 

Washington, DC 20580 

I further certify that on January 3, 2012, I have caused the foregoing Answer to be served 

by email upon Phillip Broyles (pbroyles@ftc.gov), Peter Richman (prichman@ftc.gov), Mark 

Schneider (mschneider@ftc.gov); and Amanda Hamilton (ahamiltonl@ftc.gov) ofthe Federal 

Trade Commission; and upon J. Robert Robertson (robby.robertson@hoganlovells.com), counsel 

for Illinois Tool Works Inc. and Illinois Tool Works Finishing LLC. 

Michelle J. Koch