IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 94-41224

COCA-COLA BOTTLING COMPANY

OF THE SOUTHWEST,

Petitioner,

versus

FEDERAL TRADE COMMISSION,

Respondent.

Petition for Review of an Order of the

Federal Trade Commission

June 10, 1996

Before REAVLEY, HIGGINBOTHAM, and BARKSDALE, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

Today we review a divestiture order of the Federa l Trade

Commission. We must decide whether the Soft Drink Interbrand

Competition Act of 1980, 15 U.S.C. § 3501-03, governs the antitrust

legality of an exclusive territorial soft drink license previously

held by a competing soft drink bottler that was a subsidiary of the

licensor. The FTC seeks to undo a 1984 transaction in which the Dr

Pepper Company, a manufacturer of soft drink concentrates and

syrups, licensed the Coca-Cola Bottling Company of the Southwest,

a Texas bottler, to distribute exclusively the Dr Pepper soft drink

brand in a defined territory. The FTC found the Soft Drink Act

inapplicable, ruling that the 1984 licensing of Coca-Cola Southwest2

and withdrawal of Dr Pepper from distribution was substantially

likely to lessen competition in violatio n of § 5 of the Federal

Trade Commission Act, 15 U.S.C. § 45, and § 7 of the Clayton Act,

15 U.S.C. § 18.

We hold that the FTC used the wrong legal standard in finding

that § 5 of the FTC Act prohibited this change in distribution. We

vacate the FTC's divestiture order and remand for a consideration

of the transaction's validity under the Soft Drink Act.

I.

A.

Petitioner, Coca-Cola Bottling Company of the Southwest, is a

regional bottler and fountain distributor of Coca-Cola, Dr Pepper,

and other soft drink brands in South and Central Texas. Coca-Cola

Southwest operates with trademark licenses from m anufacturers of

soft drink concentrat es and syrups, the flavoring ingredients in

retail soft d rink beverages. A license creates an exclusive

territorial franchise whereby the manufacturer supplies soft drink

c oncentrates and syrups to its licensee, which bottles and sells

the branded soft drinks in a defined geographic area.

The Dr Pepper Company is the nationwide manufact urer of

concentrate and syrup for its Dr Pepper soft drink brand. At issue

in this appeal is a 1984 transaction in which Dr Pepper Company

licensed Coca-Cola Southwest to bot tle and distribute Dr Pepper

soft drinks in a ten-coun ty territory around San Antonio, Texas.

Until 1984, Dr Pepper Company was a publicly held corporation that1 Coca-Cola Southwest initially bid $5 million for both the Dr

pepper and Canada Dry franchises, but subsequently increased its

offer to $14.5 million.

3 did not distribute through an ind ependent bottler in the San

Antonio area. Rather, it carried its product to the consumer

through its wholly owned bottling subsidiary, San Antonio Dr Pepper

Bottling Company. Dr Pepper-San Antonio was also the exclusive

bottler for other concentrate manufacturers, including Canada Dry,

Big Red, Royal Cr own, Crush, and Hires. Here began the events

leading directly to the distribution changes attacked by the FTC.

In 1984, Forstmann Little acquired Dr Pepper Company in a

leveraged buyout. After the buyout, Forstmann Little arranged for

Dr Pepper Company to sell its company-owned bottling operations,

including Dr Pepper-San Antonio, and to distribute through

independent bottlers. Dr Pepper Company attempted to sell the San

Antoni o bottling operation as a whole, but was unable to do so.

Coca-Cola Sou thwest was interested in the subsidiary's Dr Pepper

and Canada Dry licenses, but had no need for its main production

facility. Unable to sell its entire bottling operation, Dr Pepper

licensed Coca-Cola Southwest. Coca-Cola Southwest paid $14.5

million to Dr Pepper for a license to bottle and sell Dr Pepper and

Canada Dry. 1 Coca-Cola Southwest also purchased certain of Dr

Pepper Company's property used in distributing its product: a

warehouse, 2150 used vending machines, and 40% of its used delivery

and over-the-road trucks, for $2.5 million.

After the August 1984 transaction , Dr Pepper-San Antonio

retai ned ownership of its bottling plant and its licenses for2 At the time of the August 1984 transaction, t here were a

total of five competing soft-drink bottlers operating in San

Antonio, including Coca-Cola Southwest and Dr Pepper-San Antonio.

A fter 1984, Coca-Cola Southwest was involved in two additional

transactions resulting in its receipt of new licenses from the Dr

Pepper Company. First, in December 1986, Texas Bottling Group,

Inc. purch ased Coca-Cola Southwest; the FTC and the Dr Pepper

Company were notified of the transact ion, after which Dr Pepper

Company issued new Dr Pepper licenses to Coca-Cola Southwest.

Texas Bottl ing Group is still the sole shareholder of Coca-Cola

Southwest. Second, in April 1987, Coca-Cola Southwest acquired the

assets of the bottler of Dr Pepper and Coca-Cola soft drink

products in Corpus Christi; again, as part of that transaction, the

Dr Pepper Company issued new Dr Pepper licenses [to Coc a-Cola

Southwest] for the adjacent Corpus Christi territory.

T he FTC explains that it did not find out about the 1984

transaction until after it was co mpleted, noting that Coca-Cola

4 brands other than Dr Pepper and Canada Dry, and for a short while

thereafter, Dr Pepper Company continued operating the subsidiary as

a bottler and distributor for these other brands in its 28-county

territory. 2 Later that year, Dr Pepper Company sold Dr Pepper-San

Antonio's bottling plant and its other property and rights to a new

entrant, Grant-Lydick Beverage Company. Thus, by the end of 1984,

Dr Pepper Company had withdrawn from bottling and distribution in

two separate transactions, involving Coca-Cola Southwest and then

Grant-Lydick. Coca-Cola Southwest held the licenses for the Dr

Pepper and Canada Dry brands, along with a handful of Dr Pepper-San

Antonio's assets, while Grant-Lydick had obtained the subsidiary's

remaining assets and rights, its bottling plant and other

licenses, 3 including Big Red, Royal Crown, Crush, and Hires.

On July 29, 1988, the FTC issued an administrative complaint

challenging Coca-Cola Southwest's 1984 receipt of the Dr Pepper and

Canada Dry licenses. 4 The complaint alleged that this acquisitionSouthwest's purchase of the Dr Pepper assets was broken into two

contracts (the $14.5 million acquisition and a $2.5 million sales

agreement), each of which was below the Hart-Scott-Rodino Act's

reporting threshold of $15 million.

T he ALJ determined that (1) the relevant product market

included all ca rbonated soft drinks and other similar noncarbo nated soft drinks; (2) the relevant geographic market was

broader than the ten-county San Antonio area pled by Complaint

Counsel; (3) entry was easy; (4) competition had been fierce; (5)

no customer had complained about the situation; and (6) there was

no likelihood of anticompetitive effects from Coca-Cola Southwest's

receipt of the 1984 Dr Pepper licenses.

T hree Commissioners participated in the decision; one filed a concurring and dissent ing opinion, and the author of the main

opinion also filed a separate concurring opinion.

5 substantially lessened competition in violation of § 5 of the FTC

Act, 15 U.S.C. § 45, and § 7 of the Clayton Act, 15 U.S.C. § 18.

It sought, inter alia

, to require Coca-Cola Southwest to divest the

Dr Pepper and Canada Dry licenses and assets acquired in 1984.

An administrative law jud g e held a thirteen-week hearing

beginning on July 10, 1990. On June 14, 1991, the ALJ rendered his

initial decision in favor of Coca-Cola Southwest, concluding that

a reduction in competition was unlikely and ordering dismissal of

the complaint. 5 The FTC's complaint counsel appealed to the full

Commission. On August 31, 1994, the Commission entered a decision

reversing the ALJ's initial decision. 6 The Commission declined to

consi der Coca-Cola Southwest's 1984 receipt of the Dr Pepper and

Canada Dry licenses under the Soft Drink Interbrand Competition Act

of 1980, 15 U.S.C. § 3501-03, and instead agreed with complaint

counsel that Coca -Cola Southwest's acquisition of the Dr Pepper

franchise violated the FTC Act and the Clayton Act. For different

reasons than those set forth by the ALJ, the Commission ruled thatT he FTC found that Coca-Cola Southwest's receipt of the "Dr

Pepper" and "Canada Dry" franchises increased its share of the

relevant market from 44.7% to 54.5%.

T he divestiture order is automatically stayed pending this

appeal. 15 U.S.C.A. § 45(g)(4).

6 Coca-Cola Southwest's receipt of the Canada Dry franchise did not

violate the federa l antitrust laws. 7 Accordingly, the Commission

entered a Final Order requiring Coca-Cola Southwest to divest the

Dr Pepper license and to obtain prior approval from the Commission

before acquiring any additional branded soft-drink assets in areas

in which Coca-Cola Southwest was already doing business.

On October 7, 1 994, Coca-Cola Southwest filed a motion for

reconsideration and a stay before the Commission. The Commission,

however, never acted on those motions. On November 22, 1994, CocaCola Southwest petitioned for review of the Commission's decision. 8

II.

Coca-Cola Southwest challenges the Commission's divestiture

order on multiple grounds. Coca-Cola Southwest argues that the

Commission erred in refusing to apply the Soft Drink Interbrand

Competition Act; in d efining the relevant product and geographic

markets; in its findings of barriers to entry; in refusing to allow

Coca-Cola Southwest to rebut certain documents admitted after the

close of evidence; and in according insufficient weight to certain

evidence that favored Coca-Cola Southwest.

Although this case does not yield an easy answer, we are

persuaded that the FTC should have applied th e Soft Drink Act in9 Section 7 of the Clayton Act provides: "No corporation

eng aged in commerce shall acquire, directly or indirectly, the

whole or any part of the stock or other share capital and no

cor poration subject to the jurisdiction of the Federal Trade

Commission shall acquire the whole or any part of the assets of

another corporation engaged also in commerce, where in any line of

commerce in any section of the country, the effect of such

acquisition may be substantially to lessen competition, or to tend

to create a monopoly." 15 U.S.C. § 18. Section 5 of the FTC Act

empowers the FTC with authority to attack transa ctions that are

unlawful under § 7 of the Clayton Act: "Unfair methods of

competition in commerce, and unfair or deceptive acts or practices

in commerce, are declared unlawful." 15 U.S.C. § 45(a)(1). The

FTC may enter an "order requiring such person, partnership, or corporation to cease and desist from using such method of

competition or such act or practice." 15 U.S.C. § 45(b).

7 this instance. We decline to reach Coca-Cola Southwest's remaining

contentions.

A.

We review de novo the question whether the FTC e rred in not

applying the Soft Drink Act's legal standard in this case.

The FTC's administrative complaint against Coca-Cola Southwest

charged that the effect of Coca-Cola Southwest's 1984 acquisition

of the exclusive Dr Pepper license for the San Antonio area may be

substantially to lessen competition in soft drink products in that

area in violation of § 5 of the FTC Act, 15 U.S.C. § 45, and § 7 of

the Clayton Act, 15 U.S.C. § 18. 9 Coca-Cola Southwest argues that

the FTC erred in examining the 1984 transaction under the Clayton

Act's "effect-may-be-sub stantially-to-lessen-competition" standard.

According to Coca-Cola Southwest, the Soft Drink Act supersedes the

FTC and Clayton Acts and legitimizes its receipt and use of the Dr

Pepper license for th e San Antonio Area so long as the Dr Pepper

brand "is in substantial and effective competition with other1 0 See The Coca-Cola Co.

, 91 F.T.C. 517 (1978), r ev'd and

remanded

, 642 F.2d 1387 (D.C. Cir. 1981); Pepsico, Inc.

, 91 F.T.C.

680 (1978), rev'd and remanded , 642 F.2d 1387 (D.C. Cir. 1981).

8 products of the same general class in the relevant market or

markets." 15 U.S.C. § 3501.

Congress enacted the Soft Drink Act in response to two cases

from the 1970's 10 in which the FTC ruled that exclusive territories

used by t he Coca-Cola Company and PepsiCo were unlawful vertical

restraints of trade in violation of § 5 of the FTC Act. H.R. Rep.

No. 96-1118, 96th Cong., 2d Sess. 3-4 (1980), reprinted in 1980

U.S.C.C.A.N. 2373, 2375; S. Rep. No. 96-645, 96th Cong., 2d Sess.

6-9 (19 80). Congress passed the Soft Drink Act to assure that

territorial restrictions in soft drink licenses would be evaluated

under the rule of reason analysis as articulated in C ontin ental

T.V. Inc. v. GTE Sylvania, Inc.

, 433 U.S. 36 (1977). To that end,

the Soft Drink Act provides, in relevant part:

Nothing contained in any antitrust law shall r e nder

unlawful the inclusion and enforcement in a ny trademark

licensing contract or a greement, pursuant to which the

licensee engages in the manufacture (including manufacture by

a sublicensee, agent, or subcontractor), distribution, and

sale of a trademarked s oft drink product, of provisions

g ranting the licensee the sole and exclusive right to

manufacture, d istribute, and sell such product in a defined

geographic area or limiting the licensee, directly or indirectly, to the manufacture, distribution, and sale of such

product for ultima te resale to consumers within a defined

geographic area: P rovided

, That such product is in

substantial and effective competition with other products of

the same general class in the relevant market or markets.

15 U.S.C. § 3501. The Soft Drink Act defines "antitrust law" to

mean the Sherman Act, 15 U.S.C. 1 et seq., the Clayton Act, and the

FTC Act, see 15 U.S.C. § 3503; its plain text thus establishes that9

the FTC and Clayton Acts cannot "render unlawful" an exclusive

territorial restriction in a soft drink license so long as the

licensed brand "is in substantial and effective competition" with

comparable soft drink products in the relevant market. If the Soft

Drink Act applies and the requisite "subs tantial and effective

competition" exists, the FTC cannot enforce the FTC Act or Clayton

Act in a manner that invalidates the exclusivity provisions in

Coca-Cola Southwest's Dr Pepper license for the San Antonio area.

The FTC contends that while the Soft Drink Act authorizes the

use of territorial restrictions in soft drink licenses, it does not

govern the legality of a horizontal combination of such licenses.

Thus, the FTC insists that the Soft Drink Act is inapplicable here

"[b]ecause this case concerns only the validity of combining in one

bottler the franchises of two competing brands, and in no way

challenges the legality of exclusive territorial restrictions."

According to the FTC:

At issue in this proceeding is whether a combination of the

Coca-Cola fran chise with the Dr Pepper franchise in the San

Antonio market may substantially lessen competition in

violation of §§ 5 of the FTC Act and 7 of the Clayton Act.

The Commission is not challenging the right of [Dr Pepper

Company], or any other concentrate manufacturer, to grant an

exclusive franchise for its brand, but only a bottler's right

to acquire a competing bottler's franchise where competition

in the relevant market may be adversely affected. The

Commission has in no way attacked the legality of [Dr Pepper

Company's] exclusive territorial license, and "[n]othing in

[the Soft Drink Act] is intended to protec t . . . any other

practice or conduct of licensors or licensees

. . . from

challenge under the anti trust laws." S. Rep. 10. In other

words, by merely legitimizing exclusive territories, the [Soft

Drink Act] does not grant a bottler the unfettered right to

acquire any license of its choice.10

The FTC points out that there was a horizontal transfer of assets

to Coca-Cola Southwest from a former competitor and thus views the

1984 transaction as "a `garden variety' horizontal acquisition in

which one competitor has purchased the assets of another."

Coca-Cola Southwest disputes the FTC's characterization and

urges that Dr Pepper Company's issuance of the Dr Pepper franchise

to Coca-Cola Southwest was vertical, not horizontal. According to

Coca-Cola Southwest:

The end result of the challenged 1984 transaction was to

structure a vertical exclusive licensing arrangement between

[Dr Pepper Company] and [Coca-Cola Southwest]. If [Dr Pepper

Company] had had no prior presence in San Antonio and in 1984

had structured an exclusive licensing arrangement with [CocaCola Southwest], there could be no question that the [Soft

Drink Act] standard would govern. The policy considerations

under the [Soft Drink Act] are no different when the soft

drink concentrate manufacturer already has a presence in the

territory and structures the exclusive licensing arrangement

with the new licensee [Coca-Cola Southwest].

As the parties see it, this case pivots on dueling

characterizations. On one hand, Coca-Cola Southwest insists that

the Soft Drink Act governs here because its 1984 transaction was

vertical in that Dr Pepper Company issu ed a new franchise to a

d ownstream distributor, Coca-Cola Southwest. On the other hand,

the FTC finds the Soft Dr ink Act inapplicable because the

transactio n was horizontal in that Coca-Cola Southwest gained

market share by acquiring an additional exclu sive license from a

competing local bottler, Dr Pepper-San Antonio. In short, the

parties' framing of the inquiry suggests that the applicability of

the Soft Drink Act turns on the question of whose characterization11

prevails: Coca-Cola Southwest wins if we say that the transaction

was vertical, while the FTC wins if we see it as horizontal.

We do not find the applicability of the act to be so easy.

The transaction was neither purely vertical nor purely horizontal.

The events culminating in the grant of the Dr Pepper license to

Coca-Cola Southwest evinced both vertical and horizontal aspects.

Of course, the horizontal features of the transaction are less than

15% of the deal, measured in dollars. FTC does not dispute that

Dr Pepper Company was considering its own interests when it chose

to license Coca-Cola Southwest in connection with its effort to

close down Dr Pepper-San Antonio and distribute instead through an

independent bottler. Coca-Cola Southwest, in turn, does not

dispute that its use and enforcement of the Dr Pepper franchise may

have an impact on interbrand competition at the distributor level.

In sum, even in the language of the parties the critical question

is not whether the transaction was vertical or horizontal, but

whether it was sufficiently vertical to come within the ambit of

the Soft Drink Act. However framed, the ultimate inquiry must be

i nto economic reality and function where vertical and horizontal

are helpful signals but not controlling categories.

We are not prepared to say that the Soft Drink Act might not

apply in some cases in which an existing bottler acquires either a

competing independent bottler or an additional license from such a

bottler. We are prepared to say that this is not one of those

cases. In sum, though Coca-Cola Southwest and Dr Pepper Company

nominally structured parts of their 1984 transaction as a12

horizontal purchase, that is not dispositive of the question

whether the Soft Drink Act ap plies in deciding whether Coca-Cola

Southwest may use and enforce the Dr Pepper franchise. Rather, as

we will explain, we conclude that the economic impact of Dr Pepper

Company's grant of the Dr Pepper license to Coca-Cola Southwest was

more like the economic impact of the territorial restraints and

exclusivity provisions measured by the Soft Drink Act than the

effects of concentration attending mergers and disappearing

competitors.

The FTC’s contention must persuade us that a license by a

manufacturer of a dis tributor handling competing brands is not

cover ed by the Soft Drink Act, except in the introduction of new

product. Its contention must accommodate the reality that any

anticompetiti ve force of granting a license to a distributor

handling competing lines would be drained by dropping the

exclu sivity feature of the license – a license provision

explicitly treated by the Act.

B.

Our analysis proceeds in three steps. First, we start with

the proposition that the Soft Drink Act governs when a national

syrup manufacturer issues a new exclusive soft dri nk license to

facilitate initial entry of a licensed brand in a regional market.

This transaction is aptly characterized as vertical, since the

manufacturer's appointment of a downstream bottler is inspired by

its effort to offer a soft drink brand not otherwise available in

the local market. Second, we assume without deciding that the Soft13

Drink Act is inapplicable when an existing bottler acquires

additional soft drink licenses for established brands from an

independent competing bottler. Such an acquisition may be seen as

horizontal for Cla yton Act purposes insofar as it is impelled

primarily by the interests of the acquiring bottler rather than of

the national syrup manufacturer.

These two inquiries suggest that the applicability of the Soft

Drink Act turns on whether the manufacturer is appointing a new

distributor to facilitate its entry into the local market, or

whether, instead, the receiving bottler acquires the new license

from another existing competitor. Hence, our third step is to

decide whether the 1984 transaction between Coca-Cola Southwest and

Dr Pepper Company properly belongs in the first category or the

second — i.e., whether it is vertically or horizontally inspired.

On this third inq uiry, we conclude that the Soft Drink Act does

apply because the forces driving the 1984 transaction did not come

from Coca-Cola Southwest's pursuit of greater market share via the

acquisition of an additional license. Rather, the impetus behind

the transaction was Dr Pepper Company's decision to cease its own

distributing operations and to turn instead to an independent San

Antonio bottler for the first time. This decision necessarily

required that Dr Pepper license a new independently owned entity.

It attempted to sell its subsidiary as a package but was unable to

do so.14 1.

It is undisputed that the Soft Drink Act supplies the proper

standard for evaluating territorial and exclusivity restrictions in

a soft drink license where the licensed bottler holds that soft

drink license and no others. The difficult question is the extent

to which the Soft Drink Act applies when the license increases the

concentration of exclusive soft drink licenses in the hands of a

single bottler. Our first step is to determine whether the Soft

Drink Act ever applies when a single bottler holds multiple soft

drink licenses.

As the FTC has acknowledged, national syrup manufacturers

often gain entry into a regional market by licensing an existing

regional bottler that already holds licenses from other syrup

manufacturers. This practice is called "piggybacking" in the soft

drink industry, and the FTC concedes that the Sof t Drink Act was

premised in part on congressional approval of piggybac king as a

means for market entry:

The legisla tive history of [the Soft Drink Act] merely

recognizes that piggybacking may facili tate new entry. By

giving favorable antitrust treatment to exclusive territories,

[the Soft Drink Act] allows the new entrant to promise a prospective bottler an exclusive territory for its brand, and

thereby encourages bottlers to accept new brands.

Thus, in noting that the Soft Drink Act gives "favorable antitrust

treatment to exclusive territories," the FTC recognizes that some

piggybacked soft drink licenses are to be scruti nized under the

Soft Drink Act and upheld so long as the requisite substantial and

effective competition exists.15

If the Dr Pepper brand had never been distributed in the San

Antonio area, the Soft Drink Act would have governed the validity

of Dr Pepper Company's grant of an exclusive Dr Pepper license to

an existing San Antonio bottler such as Coca-Cola Southwest, even

though that bottler already had other soft drink licenses. CocaCola Southwest's receipt of the additional license from Dr Pepper

Company concentrates product distribution. Nonetheless, the Soft

Drink Act would preclude antitrust scrutiny of the piggybacked Dr

Pepper license so long as the Dr Pepper brand faced substantial and

effective competition in the relevant market.

2.

Having concluded that the Soft Drink Act governs the validity

of a piggybacked soft drink license used to introduce a new brand,

we turn to the FTC's argument that the Soft Drink Act nevertheless

becomes inapplicable when an existing bottler obt ains additional

licenses by acquiring them from an established competing bottler.

According to the FTC, "nothing in the legislative history of [the

Soft Drink Act], let alone the statutory text, suggests a new

antitrust standard for evaluating combinations between established

competing brands." On this view, the Soft Drink Act does not

purport t o deprive the FTC of its statutory power to challenge a

transaction that amounts to a garden-variety horizontal merger of

soft drink licenses held by existing competitors. Since there is

no reduction in competition for distribution of Dr Pepper

(intrabrand competition) given the exclusivity provisions in the16

license, the FTC must be challenging a reduction of interbrand

competition.

As we explained today, we assume that the FTC could employ the

traditional measures of the FTC and Clayton Acts in challenging a

transaction in which a bottler with a large market share obtains

additional exclusive licenses for c o mpeting soft drink brands

previously held b y another independent bottler. This assumption

points to a distinction between the grant of an exclusive license

to faci litate vertical entry and the horizontal combination of

licenses previously held by established independent bottlers. The

Soft Drink Act applies in the former scenario, but not in the

latter.

3.

We think that Dr Pepper's licensing of Coca-Cola Southwest is

best viewed as a predominantly vertical transaction consummated as

part of Dr Pepper Company's effort to end its direct distribution

and enter the San Antonio area market through independent

di stributors. Dr Pepper Company withdrew from that competitive

level. Three related factors lead us to this conclusion.

First, Dr Pepper Company initiated the 1984 events. Coca-Cola

Southwest did not seek out the Dr Pepper franchise, and acquired it

only after Dr Peppe r Company offered it for sale. The 1984

transaction betwe en Coca-Cola Southwest and Dr Pepper Company is

fueled by different economic impulses and hence diffe rent likely

economic consequences, from a situation in which a bottler acquires

additional licenses from another independent bottler; in the latter17

scenario, the manufacturer need not be involved, and is not

departing and then re-entering. The FTC to be sure, urges that

"the horizonta l effects on interbrand competition are identical

regardless of whether the bottler transferring the franchise is

owned by a concentrate company or independently owned." While that

may be accurate, so also are the vertical effects unchanged. Such

horizontal conseq uences do not change the reality that Dr Pepper

Company entered into this transaction to extricate itself from the

distribution business in San Antonio and then return through

independent distributors.

Second, our characterization of the tran saction as vertical

rather than horizontal is consistent with the economic incentives

implicated in Dr Pepper Company's decision to undertake it. As Dr

Pepper Company explains in its amicus brief:

The unique structure of this industry means that the more competitive the bottler, the bett er for the concentrate

company, because the more soft drinks the bottler sells, the

more concentrate the bottler purchases. As a result, the

interests of concentrate companies are, as an economic matter,

directly aligned with the interests of the ultimate soft drink

consumer: both want the bottler to produce and sell soft

drinks at the lowest possible cost and price.

We would not expect a manufacturer to accede to a bottler's effort

to acquire additional l icenses for the purpose of gaining market

share and exercising market power in the regional market, since

t hat outcome would reduce the manufacturer's profits. The

dampening effects of horizontal cartelization and horizontally

inspired concentration are not in the economic interests of the

manufacture r. Hence, a transaction sought out by a manufacturer

rather than a bottler is less likely motivated by a bottler's quest18

for pricing power in the downstream market. It is true that intent

is difficult to ascertain, but our primary litmus is the incentive

f or maximization of profits. Here, economic incentives at least

provide corroborating indications that Dr Pepper Company was acting

vertically when it selected Coca-Cola Southwest as its exclusively

licensed San Antonio bottler.

T hird, the form of the transaction involved cancellat ion of

the license held by Dr Pepper Company's former bottling subsidiary

and the subsequent issuance of a new Dr Pepper license to Coca-Cola

Southwest. Thus, the transaction consisted of the cessation of one

vertical arrangement followed by the creation of a second one. We

are mindful, to be sure, that the 1984 transaction was nominally

framed as a purchase, listing Coca-Cola S outhwest as the "buyer"

and Dr Pepper Company as the "seller." Nevertheless, the parties

were able to cons ummate the deal only through a sequence of two

vertical transactions

— Dr Pepper Company end ed its direct

distribution and then appointed a new, independent bottler.

Indeed, since the Dr Pepper l icenses expressly provide that they

are not transferable, Coca-Cola Southwest could not have acquired

the licenses from Dr Pepper-San Antonio without Dr Pepper Company's

consent. Dr Pepper Company sought for the first time to appoint an

independent bottler, and Coca-Cola Southwest answered the call.

Their use of the rubric of a nominal purchase does not change the

reality that the transaction effectuated Dr Pepper Co mpany's

decision to pursue a vertical lic ensing agreement with a new

distributor.19

In sum, we find that the 1984 transaction b etween Coca-Cola

Southwest and Dr Pepper Company was a ve rtically inspired event

through which Dr Pepper Company issued an exclusive license to

Coca-Cola Southwest as part of its effort to shift to independent

distribution for the first time in the San Antonio area market.

Hence, we conclude that the Soft Drink Act gives the appropriate

standard for deciding whether Coca-Cola Southwest can continue to

hold and enforce the Dr Pepper license.

C.

The FTC relies extensively on legislative history in urging

that the Soft Drink Act is inapplicable here. As we are mindful of

the FTC's admonition against allowing the Soft Drink Act to swallow

the other federal antitrust laws, we find it appropriate to respond

directly to its concerns. We are satisfied that the Soft Drink

Act's legislative history is consistent with our view that the text

of the Soft Drink Act mandates its application in this case.

Congress explained that the purpose of the Soft Drink Act was

"to clarify the circumstances under which territorial provisions

and licenses to manufacture, distribute, and sell trademarked soft

drink products are unlawful under the antitrust laws." S. Rep. No.

645, 96 Cong. 2d Sess. 1 (1980); H.R. Rep. No. 118 , 96 Cong. 2d

Sess. 1 (1980), reprinted in 1980 U.S.C.C.A.N . at 4391. The FTC

insists that the "the sole purpose of the Act is to legitimize the

use of exclusive territorial limitations in soft drin k trademark

licensing agreements when the requirements of the statute have been

met." The FTC emphasizes the Senate Report's caveat that20

"[n]othing in this bill is intended to protect any other provisions

in such trademark licenses, or any other practice or conduct of

licensors or l icensees of trademarked soft drink products, from

challenge under the antitrust laws." S. Rep. 10. Likewise, the

FTC point s to the following statement in the House Report: "The

Committee intends that [the Soft Drink Act] provide necessary

relief without granting antitrust immunity and without establishing

any precedent that would weaken our beleaguered antit rust laws."

H.R. Rep. 7. Thus, according to the FTC, this legislative history

indicates that the Soft Drink Act legitimizes only the use of

exclusive territorial restrictions in soft drink franchise s but

does not limit the reach of other antitrust laws with respect to

the actions of the regional bottlers that actually operate with the

exclusive licenses.

The legislative history, however, suggests that the authors of

the Soft Drink Act we re concerned primarily about preserving the

vitality of prohibitions on horizontal price fixing and other per

se violations. Thus, to that end, Section 3 of the Soft Drink Act

declares that the Act does not insulate conduct that is otherwise

per se illegal:

Nothing in this chapter shall be construe d to legalize

the enforcement of provisions described in sectio n 3501 of

this title in trademark licensing contracts or agreements

described in that section by means of price fixing agreements,

horizontal restraints of trade, or group boycotts, if such

agreements, restraints, or boycotts would otherwise be

unlawful.

15 U.S.C. § 3502. This inclusion of § 3 in the Soft Drink Act is

significant. It suggests that congressional concerns about not11 The Commission was persuaded, stating:

In reaching this conclusion, we reject [Coca-Cola Southwest's]

efforts to characterize the horizontal acquisition of assets

( e.g.

, franchise agreements) from a competi ng bottler as a

vertical transaction merely because licenses from concentrate

companies are involved. If this argument were accepted, it

21 vitiating other antitrust laws found expression in this provision

limiting the applicability of the Soft Drink Act, not in an implied

limitation on the applicability of § 2. As explained in the House

Report:

Section 2 provides that the an titrust laws will continue to

a pply with full force where there is n ot substantial and

effective competition in the relevant markets. Nor is there

any intent to exempt conduct that constitutes a per se

violation of the antitrust laws. Underlining this concern,

Section 3 of the bill, added by t he Committee amendment,

ensures that traditional per se violations will not be

exempted under the guise of attempts to enforce oth erwise

lawful territorial restraints.

H. Rep. at 4. In short, we think that the § 3 of the Soft Drink

Act itself gives the best indication of what the Congress meant in

expre ssing concern about not weakening our "beleagured antitrust

laws." Congress, in explaining that the Soft Drink Act does not

"protect any other provisions in such trademark licenses, or any

other practice or conduct of licensors or licensees of trademarked

soft drink products, from challenge under the antitrust laws," was

simply describing the content of § 3 of the Soft Drink Act rather

than the expressing the inapplicability of § 2.

We are mindful of the FTC concern that "[a]cceptance of [CocaCola Southwest's] novel views regardi ng the applicability of the

[Soft Drink Act] would effectively shield from antitrust scrutiny

any transfer of a franchise from one bottler to another." 11 As wewould immunize virtually all acquisitions by bottlers, including

the acquisition of a major competitor, from antitrust scrutiny.

1 2 It bears emphasis that application of the Soft Drink Act does

not result in immunity from federal antitrust laws; rather, the Act

gives a different standard for evaluating soft drink licenses. As

explained in the House Report:

The [Soft Drink Act's] clarification eliminates uncertainty in

the law that has plagued the indu stry, particularly smaller

bottlers, during the last decade. I t does not grant antitrust

imm unities. Indeed, the legislation will apply only in

situations in which there is `substantial and effective

competition' among soft drink bottlers and among their syrup

manufacturers in the relevant product and geographic markets.

H. Rep. 2 (emphasis added).

22 have explained, however, our decision today is sufficiently narrow

and does not extend a shield to all franchise transfers. We hold

only that the Soft Drink Act applies in a case such as this one in

which the manufacturer sells its wholly-owned bottling subsidiary

and then enters the downstream market by licensing an independent

distributor for the first time. We leave open the possibility that

the FTC may challenge a bottler's acquisition of licenses held by

a competing independent bottler, particularly where such a transfer

did not flow from a manufacturer's independent desire to appoint a

new distributor. 12

III.

In sum, we agree with Coca-Cola Southwest that the FTC should

have applied the Soft Drink Act in examining Coca-Cola Southwest's

1984 receipt of the Dr Pepper license and asked whether there was

"substantial and effective competition" in the San Ant onio area

among soft drink products that compete with the Dr Pepper brand.23

Coca-Cola Southwest asks that we render judgment in its favor under

the Soft Drink Act, arguing that the findings below establish that

the Dr Pepper brand does face the requisite substantial and

effective competition. While Coca-Cola Southwest's argument is

strong, we decline its invitation to render judgment at this time.

Instead, we think it appropriate to remand th is case so that the

FTC can have the first opportunity t o define and apply the Soft

Drink Act. Since the meaning of "substantial and effective

competition" for purposes of the Soft Drink Act is unsettled, we

prefer to give to the FTC the opportunity to first consider these

terms.

VACATED and REMANDED.