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United States v. Falstaff Brewing Corp. (full text) :: 410 U.S. 526 (1973) :: Justia U.S. Supreme Court Center Log In
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United States v. Falstaff Brewing Corp. 410 U.S. 526 (1973)
U.S. Supreme CourtUnited States v. Falstaff Brewing Corp., 410 U.S. 526 (1973)United States v. Falstaff Brewing Corp.No. 71-873Argued October 17, 1972Decided February 28, 1973410 U.S. 526APPEAL FROM THE UNITED STATES DISTRICT COURT
Held: The District Court erred in assuming that, because respondent would not have entered the market de novo, it could not be considered a potential competitor. The court should have considered whether respondent was a potential competitor in the sense that its position on the edge of the market exerted a beneficial influence on the market's competitive conditions. Pp. 410 U. S. 531-538.
WHITE, J., delivered the opinion of the Court, in which BURGER, C.J., and BLACKMUN, J., joined, and in Part I of which DOUGLAS, J., joined. DOUGLAS, J., filed an opinion concurring in part, post, p. 410 U. S. 538. MARSHALL, J., filed an opinion concurring in the result, post p. 410 U. S. 545. REHNQUIST, J., filed a dissenting opinion, in which STEWART, J., joined, post, p. 410 U. S. 572. BRENNAN, J., took no part in the decision of the case. POWELL, J., took no part in the consideration or decision of the case. Page 410 U. S. 527
Alleging that Falstaff Brewing Corp.'s acquisition of the Narragansett Brewing Co. in 1965 violated § 7 of the Clayton Act, 38 Stat. 731, as amended, 15 U.S.C. § 18, [Footnote 1] the United States brought this antitrust suit under the theory that potential competition in the New England beer market may be substantially lessened by the acquisition. The District Court held to the contrary, 332 F.Supp. 970 (1971), and we noted probable jurisdiction [Footnote 2] to determine whether the trial court applied an erroneous legal standard in so deciding, 405 U.S. 952 (1972). We remand to the District Court for a proper assessment of Falstaff as a potential competitor.
As stipulated by the parties, the relevant product market is the production and sale of beer, and the six New England States [Footnote 3] compose the geographic market. While beer sales in New England increased approximately 9.5% in the four years preceding the acquisition, the eight largest sellers increased their share of these sales from approximately 74% to 81.2%. In 1960, approximately 50% of the sales were made by the four largest sellers; by 1964, their share of the market was 54%; and, Page 410 U. S. 528 by 1965, the year of acquisition, their share was 61.3%. The number of brewers operating plants in the geographic market decreased from 32 in 1935, to 11 in 1957, to six in 1964. [Footnote 4]
Of the Nation's 10 largest brewers in 1964, only Falstaff and two others did not sell beer in New England; Falstaff was the largest of the three, and had the closest brewery. [Footnote 5] In relation to the New England market, Falstaff sold its product in western Ohio, to the west and in Washington, D.C. to the south.
The fourth largest producer of beer in the United States at the time of acquisition, Falstaff was a regional brewer [Footnote 6] with 5.9% of the Nation's production in 1964, having grown steadily since its beginning as a brewer in 1933 through acquisition and expansion of other breweries. As of January, 1965, Falstaff sold beer in 32 States, but did not sell in the Northeast, an area composed of New England and States such as New York and New Jersey, the area being the highest beer consumption region in the Page 410 U. S. 529 United States. Between 1955 and 1966, the company's net sales and net income almost doubled, and, in 1964, it was planning a 10-year, $35 million program to expand its existing plants.
Falstaff met increasingly strong competition in the 1960's from four brewers who sold in all of the significant markets. National brewers possess competitive advantages, since they are able to advertise on a nationwide basis, their beers have greater prestige than regional or local beers, and they are less affected by the weather or labor problems in a particular region. Thus, Falstaff concluded that it must convert from "regional" to "national" status, if it was to compete effectively with the national producers. [Footnote 7] For several years, Falstaff publicly expressed its desire for national distribution, [Footnote 8] and, after making several efforts in the early 1960's to enter the Northeast by acquisition, agreed to acquire Narragansett in 1965.
Before the acquisition was accomplished, the United States brought suit, [Footnote 9] alleging that the acquisition would violate § 7 because its effect may be to substantially lessen competition in the production and sale of beer in the New England market. This contention was based on two grounds: because Falstaff was a potential entrant Page 410 U. S. 530 and because the acquisition eliminated competition that would have existed had Falstaff entered the market de novo or by acquisition and expansion of a smaller firm, a so-called "toe-hold" acquisition. [Footnote 10] The acquisition was completed after the Government's motions for injunctive relief were denied, and Falstaff agreed to operate Narragansett as a separate subsidiary until otherwise ordered by the court.
After a trial on the merits, the District Court found that the geographic market was highly competitive; that Falstaff was desirous of becoming a national brewer by entering the Northeast; that its management was committed against de novo entry; and that competition had not diminished since the acquisition. [Footnote 11] The District Court then held:
"The Government's contentions that Falstaff at the time of said acquisition was a potential entrant into said New England market, and that said acquisition deprived the New England market of additional competition are not supported by the evidence. On the contrary, the credible evidence establishes beyond a reasonable doubt that the executive management of Falstaff had consistently decided not to attempt to enter said market unless it could acquire a brewery with a strong and viable distribution system such as that possessed by Narragansett. Said executives had carefully considered such possible alternatives as (1) acquisition of a small brewery on the east coast, (2) the shipping of beer from its Page 410 U. S. 531 existing breweries, the nearest of which was located in Ft. Wayne, Indiana, (3) the building of a new brewery on the east coast and other possible alternatives, but concluded that none of said alternatives would have effected a reasonable probability of a profitable entry for it in said New England market. In my considered opinion, the plaintiff has failed to establish by a fair preponderance of the evidence that Falstaff was a potential competitor in said New England market at the time it acquired Narragansett. The credible evidence establishes that it was not a potential entrant into said market by any means or way other than by said acquisition. Consequently it cannot be said that its acquisition of Narragansett eliminated it as a potential competitor therein."
Section 7 of the Clayton Act forbids mergers in any line of commerce where the effect may be substantially to lessen competition or tend to create a monopoly. The section proscribes many mergers between competitors in a market, United States v. Continental Can Co., 378 U. S. 441 (1964); Brown Shoe Co. v. United States, 370 U. S. 294 (1962); it also bars certain acquisitions of a market competitor by a noncompetitor, such as a merger by an entrant who threatens to dominate the market or otherwise upset market conditions to the detriment of competition, FTC v. Procter & Gamble Co., 386 U. S. 568, 386 U. S. 578-580 (1967). Suspect also is the acquisition by a company not competing in the market but so situated Page 410 U. S. 532 as to be a potential competitor and likely to exercise substantial influence on market behavior. Entry through merger by such a company, although its competitive conduct in the market may be the mirror image of that of the acquired company, may nevertheless violate § 7 because the entry eliminates a potential competitor exercising present influence on the market. Id. at 386 U. S. 580-581; United States v. Penn-Olin Chemical Co., 378 U. S. 158, 378 U. S. 173-174 (1964). As the Court stated in United States v. Penn-Olin Chemical Co., supra, at 378 U. S. 174,
In the case before us, Falstaff was not a competitor in the New England market, nor is it contended that its merger with Narragansett represented an entry by a dominant market force. It was urged, however, that Falstaff was a potential competitor so situated that its entry by merger, rather than de novo, violated § 7. The District Court, however, relying heavily on testimony of Falstaff officers, concluded that the company had no intent to enter the New England market except through acquisition, and that it therefore could not be considered a potential competitor in that market. Having put aside Falstaff as a potential de novoo competitor, it followed for the District Court that entry by a merger would not adversely affect competition in New England.
The District Court erred as a matter of law. The error lay in the assumption that, because Falstaff, as a matter of fact, would never have entered the market de novo, it could in no sense be considered a potential competitor. More specifically, the District Court failed to give separate consideration to whether Falstaff was a potential competitor in the sense that it was so positioned Page 410 U. S. 533 on the edge of the market that it exerted beneficial influence on competitive conditions in that market.
A similar error was committed by the Court of Appeals in FTC v. Procter & Gamble Co., supra, where one of the reasons for the Commission's finding the acquisition in violation of § 7 was that the merger eliminated Procter as a potential entrant, not because Procter would have entered independently, but because the acquisition eliminated the procompetitive effect Procter exerted from the fringe of the market. Id. at 386 U. S. 575. The Court of Appeals struck down this finding because there was no evidence that Procter ever intended de novo entry, but we held the Commission's finding was "amply supported by the evidence," id. at 386 U. S. 581, because the evidence "clearly show[ed] that Procter was the most likely entrant," id. at 386 U. S. 580, and it was "clear that the existence of Procter at the edge of the industry exerted considerable influence on the market," id. at 386 U. S. 581. Thus, the fact that Falstaff and its management had no intent to enter de novo, and would not have done so, does not, ipso facto, dispose of the potential competition issue.
The specific question with respect to this phase of the case is not what Falstaff's internal company decisions were, but whether, given its financial capabilities and conditions in the New England market, it would be reasonable to consider it a potential entrant into that market. Surely it could not be said on this record that Falstaff's general interest in the New England market was unknown; [Footnote 12] and if it would appear to rational beer merchants in New England that Falstaff might well build a new brewery to supply the northeastern market, then its entry by merger becomes suspect under § 7. The District Court should therefore have appraised the economic facts about Falstaff and the New England market Page 410 U. S. 534 in order to determine whether, in any realistic sense, Falstaff could be said to be a potential competitor on the fringe of the market with likely influence on existing competition. [Footnote 13] This does not mean that the testimony Page 410 U. S. 535 of company officials about actual intentions of the company is irrelevant or is to be looked upon with suspicion; but it does mean that theirs is not necessarily the last Page 410 U. S. 536 word in arriving at a conclusion about how Falstaff should be considered in terms of its status as a potential entrant into the market in issue. Page 410 U. S. 537
Because we remand for proper assessment of Falstaff as an "on the fringe" potential competitor, it is not necessary to reach the question of whether § 7 bars a market-extension merger by a company whose entry into the market would have no influence whatsoever on the present state of competition in the market -- that is, the entrant will not be a dominant force in the market, and has no current influence in the marketplace. We leave for another day the question of the applicability of § 7 to a merger that will leave competition in the marketplace exactly as it was, neither hurt nor helped, and that is challengeable under § 7 only on grounds that the company could, but did not, enter de novo or through "toe-hold" acquisition, and that there is less competition than there would have been had entry been in such a manner. There are traces of this view in our cases, see Ford Motor Co. v. United States, 405 U. S. 562, 405 U. S. 567 (1972); id. at 405 U. S. 587 (BURGER, C.J., concurring in part and dissenting in part); FTC v. Procter & Gamble Co., 386 U.S. at 386 U. S. 580; id. at 386 U. S. 586 (Harlan, J., concurring); United States v. Penn-Olin Chemical Co., 378 U.S. at 378 U. S. 173, but the Court has not squarely faced the question, [Footnote 14] if for no other reason than because there has Page 410 U. S. 538 been no necessity to consider it. See Ford Motor Co. v. United States, supra; FTC v. Procter & Gamble Co., supra; United States v. Penn-Olin Chemical Co., supra; United States v. El Paso Natural Gas Co., 376 U. S. 651 (1964).
15 U.S.C. § 18. For the legislative history of the amendment in 1950 that greatly expanded the section's scope, 64 Stat. 1125, see Brown Shoe Co. v. United States, 370 U. S. 294, 370 U. S. 311-323 (1962).
In FTC v. Procter & Gamble Co., 386 U. S. 568, 386 U. S. 581 (1967), we found the acquiring company at the edge of the market exerted "considerable influence" on the market because "market behavior . . . was influenced by each firm's predictions of the market behavior of its competitors, actual and potential"; because "barriers to entry . . . were not significant" as to the acquiring company; because "the number of potential entrants was not so large that the elimination of one would be insignificant"; and because the acquiring firm was the most likely entrant.
The Government did not produce direct evidence of how members of the New England market reacted to potential competition from Falstaff, but circumstantial evidence is the lifeblood of antitrust law, see Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S. 100 (1969); Interstate Circuit, Inc. v. United States, 306 U. S. 208, 306 U. S. 221 (1939); Frey & Son, Inc. v. Cudahy Packing Co., 256 U. S. 208, 256 U. S. 210 (1921), especially for § 7 which is concerned "with probabilities, not certainties," Brown Shoe Co. v. United States, 370 U.S. at 370 U. S. 323. As was stated in United States v. Penn-Olin Chemical Co., 378 U. S. 158, 378 U. S. 174 (1964), "[p]otential competition cannot be put to a subjective test. It is not susceptible of a ready and precise answer.'"
Nor was there any lack of circumstantial evidence of Falstaff's on-the-fringe competitive impact. As the record shows, Falstaff was in the relevant line of commerce, was admittedly interested in entering the Northeast, and had, among other ways, see n 8, supra, made its interest known by prior-acquisition discussions. Moreover, there were, as my Brother MARSHALL would put it, objective economic facts as to Falstaff's capability to enter the New England market; and the same facts which he would have the District Court look to in determining whether the particular theory of potential competition we do not reach has been violated, would be probative of violation of § 7 through loss of a procompetitive "on the fringe" influence. See FTC v. Procter & Gamble Co., supra, at 386 U. S. 580-581; United States v. Penn-Olin Chemical Co., supra, at 378 U. S. 173-177; United States v. El Paso Natural Gas Co., 376 U. S. 651, 376 U. S. 660 (1964).
"to establish that Falstaff was a company that was on the wings or at the edge of the New England market. . . . What I mean by that is that Falstaff was capable and interested in entering the New England market, and would be waiting for the opportunity to develop, but that Falstaff, over the long-term, would eventually or could eventually or was a likely entrant into the New England market, to use the terminology in FTC v. Procter & Gamble Company."
"* * * *" "If there is any sense to this total theory at all, it must be that the acquiring company was, in fact, so closely located to the market served by the acquired company that its entrance into the market unilaterally, under its own steam, without motivation, was a distinct threat to those who were competing in the market."
It is suggested that certain language in the Court's opinion in United States v. Continental Can Co., 378 U. S. 441, 378 U. S. 464 (1964), is to the contrary. But there, the merger was held proved prima facie anticompetitive because the acquiring and acquired companies were engaged in the same overall line of commerce in the same geographic market. This notwithstanding, it is again only arbitrary to assume that the quoted language was not referring to the acquired company's "on the fringe" influence as a potential competitor for certain end uses for containers.
There can be no question that it would be sufficient for the Government to prove its case to show that Falstaff would have made a de novo entry but for the acquisition of Narragansett or that Falstaff was a potential competitor exercising present influence on the market. See Ford Motor Co. v. United States, 405 U. S. 562; FTC v. Procter & Gamble Co., 386 U. S. 568; United States v. Penn-Olin Chemical Co., 378 U. S. 158; United States v. El Paso Natural Gas Co., 376 U. S. 651. But, I do not believe that it was a prerequisite to the Government's Page 410 U. S. 539 case to prove that the acquisition had marked immediate, i.e., present, anticompetitive effects.
Section 7 evidences a definite concern for protecting competitive markets. It does not require "merely an appraisal of the immediate impact of the merger upon competition, but a prediction of its impact upon competitive conditions in the future. . . ." United States v. Philadelphia National Bank, 374 U. S. 321, 374 U. S. 362. In United States v. Penn-Olin Chemical Co., supra, at 278 U. S. 170-171, the Court said:
Moreover, we are concerned with probabilities, not certainties. See Brown Shoe Co. v. United States, 370 U. S. 294, 370 U. S. 323.
During the four years preceding 1965, beer sales in New England had increased approximately 9.5%. Nevertheless, the market had become more concentrated. In 1960, the eight largest sellers accounted for approximately Page 410 U. S. 540 74% of the beer sales; by 1964, they accounted for 81.2%. From 1957 to 1964, the number of breweries decreased from 11 to 6. In addition, there is evidence that two of the remaining breweries were interested in being acquired. And, by Falstaff's own admission, "[a]t the time of the acquisition, the substantial growth in the market shares of the national brewers was just beginning to occur."
One of the principal purposes of § 7 was to stem the "rising tide' of concentration in American business." United States v. Pabst Brewing Co., 384 U. S. 546, 384 U. S. 552. When an industry or a market evidences signs of decreasing competition, we cannot allow an acquisition which may "tend to accelerate concentration." Ibid.; Brown Shoe Co. v. United States, supra, at 376 U. S. 346.
"You cannot have true American citizenship, you cannot preserve political liberty, you cannot secure American standards of living unless some degree of industrial liberty accompanies it. [Footnote 2/1]"
He went on to say [Footnote 2/2] in answer to George W. Perkins, who testified against the bill:
"Mr. Perkins' argument in favor of the efficiency of monopoly proceeds upon the assumption, in the first place, and mainly upon the assumption, that with increase of size comes increase of efficiency. If any general proposition could be laid down on that subject, it would, in my opinion, be the opposite. It is, of course, true that a business unit may be too small to be efficient, but it is equally Page 410 U. S. 541 true that a unit may be too large to be efficient. And the circumstances attending business today are such that the temptation is toward the creation of too large units of efficiency, rather than too small. The tendency to create large units is great not because larger units tend to greater efficiency, but because the owner of a business may make a great deal more money if he increases the volume of his business tenfold, even if the unit profit is in the process reduced one-half. It may, therefore, be for the interest of an owner of a business who has capital, or who can obtain capital at a reasonable cost, to forfeit efficiency to a certain degree, because the result to him, in profits, may be greater by reason of the volume of the business. Now, not only may that be so, but, in very many cases, it is so."
That is why the Celler Committee, reporting in 1971 on conglomerates and other types of mergers , [Footnote 2/3] said that
"Preservation of a competitive system was seen as essential to avoid the concentration of economic power that was thought to be a threat to the Nation's political and social system. [Footnote 2/4]"
Control of American business is being transferred from local communities to distant cities, Page 410 U. S. 542 where men on the 54th floor with only balance sheets and profit and loss statements before them decide the fate of communities with which they have little or no relationship. As a result of mergers and other acquisitions, some States are losing major corporate headquarters and their local communities are becoming satellites of a distant corporate control. [Footnote 2/5] The antitrust laws favored a wide diffusion of corporate control, and that aim has been largely defeated, with serious consequences. Thus, a recent Wisconsin study shows that
"[t]he growth of aggregate Wisconsin employment of companies acquired by out-of-state corporations declined substantially more than that of those acquired by in-state corporations. [Footnote 2/6]"
In this connection, the Celler Report states: [Footnote 2/7]
"The fact that this frequently did not happen in companies acquired by out-of-state firms would lead one to believe that their acquirers have transferred a portion of the higher salaried employees to a location outside Wisconsin. Such transfers mean a loss of talent, retail expenditures, and personal income taxes in the economics of Wisconsin's communities and the state. "Page 410 U. S. 543
The adverse influence on local affairs of out-of-state acquisitions has not gone unnoticed in our opinions. Thus, "the desirability of retaining local control' over industry and the protection of small businesses" was our comment in Brown Shoe Co. v. United States, 370 U.S. at 370 U. S. 315-316, on one of the purposes of strengthening § 7 of the Clayton Act through passage of the Celler-Kefauver Act.
A nation of clerks is anathema to the American antitrust dream. So is the spawning of federal regulatory agencies to police the mounting economic power. For the path of those who want the concentration of power to develop unhindered leads predictably to socialism that is antagonistic to our system. See Blake & Jones, The Goals of Antitrust: A Dialogue on Policy -- In Defense of Antitrust, 65 Col.L.Rev. 377 (1965). Page 410 U. S. 544
In United States v. El Paso Natural Gas Co., 376 U.S. at 376 U. S. 660, we indicated that
Falstaff's president testified below that Falstaff for some time had wanted to enter the New England market as part of its interest in becoming a national brewer. And Falstaff has conceded in its brief before this Court that, "given an acceptable level of profit, it had the financial capability and the interest to enter the New England beer market." With both the interest and the capability to enter the market, Falstaff was "the most likely entrant." FTC v. Procter & Gamble Co., 386 U.S. at 386 U. S. 581. Thus, although Falstaff might not have made a de novo entry if it had not been allowed to acquire Narragansett, [Footnote 2/8] we cannot say that it would be unwilling to make such an entry in the future when the New England market might be ripe for an infusion of new competition. At this point in time, it is the most likely new competitor. Moreover, there can be no question that replacing the leading seller in the market, a regional brewer, with a seller Page 410 U. S. 545 with national capabilities increased the trend toward concentration.
The majority accuses the District Judge of neglecting to assess the present procompetitive effect which Falstaff exerted by remaining on the fringe of the market. The explanation for this failing is rather simple. The Government never alleged in its complaint that Falstaff was exerting a present procompetitive influence, [Footnote 3/1] it introduced not a scrap of evidence to support this view, [Footnote 3/2] and Page 410 U. S. 546 even at this stage of the proceedings, it seemingly disclaims reliance on this theory. [Footnote 3/3]
Thus, our remand leaves the hapless District Judge with the unenviable task of reassessing nonexistent evidence under a theory advanced by neither of the parties. I submit that civil antitrust litigation is complicated enough when the trial judge confines his attention to the legal arguments and evidence offered by the parties and avoids investigation of hypothetical lawsuits which might have been brought. Page 410 U. S. 547
The majority's departure from this self-evident proposition is all the more startling when one realizes that the Court eschews reliance on a well established, plainly applicable body of law in order to reach questions not properly before it. As MR. JUSTICE DOUGLAS ably demonstrates, see ante at 410 U. S. 539-540, many decisions by this Court hold that § 7 is violated when a merger is reasonably likely to eliminate future or potential competition. See also infra at 410 U. S. 560-562. I know of no case suggesting that this principle is only applicable when the plaintiff can show that the merger will have present anticompetitive consequences, and the majority cites no authority for this proposition.
In the course of a nine-day trial, the Government introduced voluminous evidence to support its potential competition theory. But at the conclusion of the trial, the District Judge dismissed the Government's action in an opinion covering a scant two and one-half pages in the Federal Supplement, [Footnote 3/4] and without making any findings of fact or conclusions of law. [Footnote 3/5] See United States v. Falstaff Brewing Corp., 332 F.Supp. 970 (RI 1971).
"was not a potential entrant into said market by any means or way other than by said acquisition. Consequently, it cannot be Page 410 U. S. 548 said that its acquisition of Narragansett eliminated it as a potential competitor therein."
Although this case ultimately turns on a point of law, it cannot be satisfactorily understood without some appreciation of the factual. context in which it arises. A somewhat more detailed description of the relevant line of commerce, the relevant geographic market, and the market structure than that provided by the majority is therefore in order. Page 410 U. S. 549
Originally, most of the market was held by a large number of small local and regional brewers. The high cost of transporting beer favored the local distributor in early years. But more recently, the national brewers have been able to overcome this difficulty to some extent by decentralizing their production facilities. Moreover, any remaining extra transportation costs associated with national distribution are now outweighed by the advantages of centralized management and, especially, national advertising. Thus, in recent years, while the beer market as a whole has expanded, the number of breweries has declined dramatically. See United States v. Pabst Brewing Co., 384 U. S. 546, 384 U. S. 550 (1966). Whereas, in 1935, there were 684 brewing plants operating in the United States, by 1965, the number had been reduced to 178. Economies of scale, a relatively low profit margin, and significant barriers to market entry have all led to a concentration of beer production among the few national and large regional brewers.
These national trends are reflected in the six New England States, which constitute the relevant geographic market. In the four years preceding Falstaff's acquisition Page 410 U. S. 550 of Narragansett, New England beer sales increased 9.5% -- a substantial gain, although somewhat below the increase in national sales for the same period. At the same time, however, the number of brewers operating plants in the region declined precipitately. Thus, in 1957, there were 11 breweries in the New England States, but, by 1964, the number had declined to six, and of those six, two of the three smallest had publicly expressed an interest in merging with a larger competitor.
At the same time, however, the concentration of the market does not yet seem to have produced blatantly anticompetitive effects. In recent years, prices have remained fairly stable despite rising costs, and competition seems relatively intense among the few large firms which dominate the market. Still, there is no doubt that the seeds of anticompetitive conduct are present, since "[a]s [an oligopolistic] condition develops, the greater is the likelihood that parallel policies of mutual advantage, not competition, will emerge." United States v. Aluminum Co. of America, 377 U. S. 271, 377 U. S. 280 (1964). One commentator's description of the national beer market aptly characterizes the situation in New England:
"The Page 410 U. S. 551 increasing concentration . . . and the unlikely entrance of new rivals poses a threat to the future level of competition in this industry. Thus, far, there is no evidence of collusion in the beer industry. But as the. industry becomes populated by fewer and fewer companies, the possibility and likelihood will be enhanced of their engaging in tacit or direct collusion -- given the inelastic nature of demand -- to establish a joint profit maximizing price and output. Similarly, the chances will become slimmer that individual firms in the industry will follow a truly independent price and production strategy, vigorously striving to take sales away from rival brewers. With only a few sellers will come the increasing awareness that parallel business behavior might be feasible."
Notwithstanding this growth, Narragansett felt itself under some pressure from the national brewers. [Footnote 3/6] The Page 410 U. S. 552 corporation was closely held by the Haffenreffer family, and the stockholders apparently concluded that it was in their interest to diversify their personal holdings by selling Narragansett.
Throughout its history, Falstaff has followed a pattern of acquiring weak breweries and expanding them so as to extend its influence to new markets. Although still a regional brewer, by 1965, the company had expanded its network of plants and distributorships over an area far larger than that in which Narragansett competed. In that year, Falstaff operated eight plants and sold its product in 32 States in the West, Midwest, and South. Sixteen of these States were added in the period after 1950. However, as of 1965, Falstaff sold virtually no beer in any of the Northeastern States, including the six composing the New England area. Falstaff marketed its product both through company-owned branches and through some 600 independent distributorships. [Footnote 3/7] Page 410 U. S. 553
"[t]here appears to be ample reason . . . for building, rather than buying, . . . [and] that major new market entrances need Page 410 U. S. 554 not be predicated on the availability of a brewery Falstaff could purchase."
Despite this analysis, Falstaff's own management personnel apparently concluded that the profit return on a de novo entry would be inordinately low. [Footnote 3/8] Falstaff argued at trial that it needed a strong, preexisting distribution system to make a profitable entry. But cf. n. 7, supra. An independent economist, Dr. Ira Horowitz, testified on behalf of Falstaff that de novo entry would result in a 6.7% return, which he characterized as "a very, very poor investment indeed." However, it should be noted that the 6.7% figure failed to account for the increment in Falstaff's profit margin which would result from its newly gained status as a national brewer with modern plants to serve the eastern part of the Nation -- the very increment which provided the primary motivation for expansion in the first place. While Dr. Horowitz apparently recognized that such an increment might materialize, he stated that he was unable to estimate its size. [Footnote 3/9] Moreover, even the 6.7% return rate compares favorably with Falstaff's actual rate of return on its Narragansett purchase, which was a mere 3.7%.
In any event, whatever the abstract merits of this dispute, it is clear that Falstaff's management personnel determined that entry by acquisition offered the preferable avenue for expansion. Beginning in 1962, the company held discussions with Liebmann, P. Ballantine Page 410 U. S. 555 & Sons, [Footnote 3/10] Piel Brothers, and Dawsons, all of which did a significant percentage of their business in the New England market. All of these possibilities were eventually rejected, and in 1965, Falstaff finally settled on Narragansett as the most promising available brewery.
United States v. Aluminum Co. of America, 377 U.S. at 377 U. S. 280.
But § 7 does more than prohibit mergers with immediate anticompetitive effects. The Act, by its terms, prohibits acquisitions which "may . . . substantially . . . lessen competition, or . . . tend to create a monopoly." The use of the subjunctive indicates that Congress was concerned with the potential effects of mergers even though, at the time they occur, they may cause no present anticompetitive consequences. See, e.g., FTC v. Procter & Gamble Co., 386 U. S. 568, 386 U. S. 577 (1967). To be sure, remote possibilities are not sufficient to satisfy the test set forth in § 7. Despite substantial concern with halting a trend toward concentration in its incipiency, Congress did not intend to prohibit all expansion and growth through acquisition Page 410 U. S. 556 and merger. The predictive judgment often required under § 7 involves a decision based upon a careful scrutiny and a reasonable assessment of the future consequences of a merger without unjustifiable, speculative interference with traditional market freedoms. As we stated in Brown Shoe Co. v. United States, 370 U. S. 294, 370 U. S. 323 (1962):
See also United States v. Pabst Brewing Co., 384 U.S. at 384 U. S. 552; United States v. Penn-Olin Chemical Co., 378 U. S. 158, 378 U. S. 171 (1964).
The legislative history of § 7 makes plain that this was the intent of Congress. Before 1950, § 7 prohibited only those mergers which lessened competition "between the corporation whose stock is so acquired and the corporation making the acquisition." [Footnote 3/11] The Celler-Kefauver Amendment, added in 1950, deleted these words and provided instead that all mergers which substantially lessened competition "in any line of commerce in any section of the country" were to be outlawed. See 64 Stat. 1126. Thus, whereas before 1950, § 7 proscribed only Page 410 U. S. 557 those mergers which eliminated present, actual competition between the merging firm, the Celler-Kefauver Amendment reached cases where future or potential competition in the entire relevant market might be adversely affected by the merger. [Footnote 3/12]
"Section 7 of the Clayton Act was intended to arrest the anticompetitive effects of market power in their incipiency. The core question is whether a merger may substantially lessen competition, and necessarily requires a prediction of the merger's impact on competition, present and future. . . . The section can deal only with probabilities, not with certainties. . . . And there is certainly no requirement that the anticompetitive power manifest itself in anticompetitive Page 410 U. S. 558 action before § 7 can be called into play. If the enforcement of § 7 turned on the existence of actual anticompetitive practices, the congressional policy of thwarting such practices in their incipiency would be frustrated."
FTC v. Procter & Gamble Co., 386 U.S. at 386 U. S. 577.
1. The Dominant Entrant. -- In some situations, a firm outside the market may have overpowering resources which, if brought to bear within the market, could ultimately have a substantial anticompetitive effect. If such a firm were to acquire a company within the relevant market, it might drive other marginal companies out of business, thus creating an oligopoly, or it might raise entry barriers to such an extent that potential new entrants would be discouraged from entering the market. Cf. Ford Motor Co. v. United States, 405 U. S. 562, 405 U. S. 567-568 (1972); FTC v. Procter & Gamble Co., 386 Page 410 U. S. 559 U.S. at 575. [Footnote 3/13] Such a danger is especially intense when the market is already highly concentrated or entry barriers are already unusually high before the dominant firm enters the market.
2. The Perceived Potential Entrant. -- Even if the entry of a firm does not upset the competitive balance within the market, it may be that the removal of the firm from the fringe of the market has a present anticompetitive effect. In a concentrated oligopolistic market, the presence of a large potential competitor on the edge of the market, apparently ready to enter if entry barriers are lowered, may deter anticompetitive conduct within the market. As we pointed out in United States v. Penn-Olin Chemical Co., 378 U.S. at 378 U. S. 174:
From the perspective of the firms already in the market, the possibility of entry by such a lingering firm may be an important consideration in their pricing and marketing decisions. When the lingering firm enters the market by acquisition, the competitive influence exerted by the firm is lost with no offsetting gain through an increase in the number of companies seeking a share of the relevant market. The result is a net decrease Page 410 U. S. 560 in competitive pressure. [Footnote 3/14] Cf. United States v. El Paso Natural Gas Co., 376 U. S. 651, 376 U. S. 659-660 (1964).
3. The Actual Potential Entrant. -- Since the effect of a perceived potential entrant depends upon the perception of those already in the market, it may in some cases be difficult to prove. Moreover, in a market which is already competitive, the existence of a perceived potential entrant will have no present effect at all. [Footnote 3/15] The entry by acquisition of such a firm may nonetheless have an anticompetitive effect by eliminating an actual potential competitor. When a firm enters the market by acquiring a strong company within the market, it merely assumes the position of that company without necessarily increasing competitive pressures. Had such a firm not entered by acquisition, it might at some point have entered de Page 410 U. S. 561 novo. An entry de novo would increase competitive pressures within the market, and an entry by acquisition eliminates the possibility that such an increase will take place in the future. Thus, even if a firm at the fringe of the market exerts no present procompetitive effect, its entry by acquisition may end for all time the promise of more effective competition at some future date.
Obviously, the anticompetitive effect of such an acquisition depends on the possibility that the firm would have entered de novo had it not entered by acquisition. If the company would have remained outside the market but for the possibility of entry by acquisition, and if it is exerting no influence as a perceived potential entrant, then there will normally be no competitive loss when it enters by acquisition. Indeed, there may even be a competitive gain to the extent that it strengthens the market position of the acquired firm. [Footnote 3/16] Thus, mere entry by acquisition would not prima facie establish a firm's status as an actual potential entrant. For example, a firm, although able to enter the market by acquisition, might, because of inability to shoulder the de novo start-up costs, be unable to enter de novo. But where a powerful firm is engaging in a related line of commerce at the fringe of the relevant market, where it has a strong incentive to enter the market de novo, and where it has the financial capabilities to do so, we have not hesitated to ascribe to it the role of an actual potential entrant In such cases, we have held that § 7 prohibits an entry by acquisition, since such an entry eliminates the possibility of future actual competition which would occur if there were an entry de novo. Page 410 U. S. 562
In light of the many decisions to this effect, the majority's assertion that "the Court has not squarely faced [this] question" is inexplicable. In United States v. Continental Can Co., 378 U. S. 441 (1964), for example, the defendant argued that "the types of containers produced by Continental and Hazel-Atlas [the acquired firm] at the time of the merger were for the most part not in competition with each other and hence the merger could have no effect on competition." Id. at 378 U. S. 462. But MR. JUSTICE WHITE, writing for the Court, rejected that argument, holding that
"[i]t is not at all self-evident that the lack of current competition between Continental and Hazel-Atlas for some important end uses of metal and glass containers significantly diminished the adverse effect of the merger on competition. Continental might have concluded that it could effectively insulate itself from competition by acquiring a major firm not presently directing its market acquisition efforts toward the same end uses as Continental, but possessing the potential to do so."
Id. at 378 U. S. 465 (emphasis added). See also Ford Motor Co. v. United States, 405 U. S. 562 (1972); FTC v. Procter & Gamble Co., 386 U. S. 568 (1967); United States v. Penn-Olin Chemical Co., 378 U. S. 158 (1964); United States v. El Paso Natural Gas Co., 376 U. S. 651 (1964). Page 410 U. S. 563
United States v. Philadelphia National Bank, 374 U.S. at 374 U. S. 362. The unavoidable problems of proof are compounded in some cases by the relevance of subjective statements of future intent by the managers of the acquiring firm. Although not susceptible of precise analysis, the objective conditions of the market may at least be measured and quantified. But there exists no very good way of evaluating a subjective statement by the manager of a firm that the firm does or does not intend to enter a given market at some future date.
Fortunately, in two of the three forms of potential competition, such subjective evidence has no role to play. Clearly, in the case of a dominant entrant, the only issue is whether the firm's entry by acquisition will so upset objective market forces as to substantially reduce future competition. Since the firm will have already taken steps to enter the market by the time a § 7 action is filed, its statements of subjective intent are irrelevant. Page 410 U. S. 564
Similarly, when the Government proceeds on the theory that the acquiring firm is a perceived potential entrant, testimony as to the subjective intent of the acquiring firm is not probative. The perceived potential entrant exerts a pro-competitive effect because companies in the market perceive it as a potential entrant. The companies in the market may entertain this perception whether the perceived potential entrant is in fact, a potential entrant or not. Thus, a firm on the fringe of the market may exert a procompetitive effect even if it has no intention of entering the market, so long as it seems to those within the market that it may have such an intention. [Footnote 3/17] It follows that subjective testimony by the managers of the perceived potential entrant is irrelevant. [Footnote 3/18]
However, subjective statements of management are probative in cases where the acquiring firm is alleged to be an actual potential entrant. First, management's statements that it does not intend to make a de novoo market entry, together with its associated reasons, provide an expert judgment on the conclusions to be drawn Page 410 U. S. 565 by the trier of fact from the objective market forces. Just as the Government may introduce expert testimony to inform and guide the trial court with respect to the appropriate business judgments to be derived from the objective data, so too the defendant is entitled to present the evaluation of its own "experts" who may include its management personnel. Although such evidence from management is obviously biased and self-serving, it is nonetheless admissible to prove that the objective market pressures do not favor a de novo entry.
But although subjective evidence is probative and admissible in actual potential entry cases, its utility is sharply limited. We have certainly never suggested that subjective evidence of likely future entry is required to make out a § 7 case. On the contrary, in United States v. Penn-Olin Chemical Co., 378 U.S. at 378 U. S. 175, where the objective evidence of potential entry was strong, we said,
"Unless we are going to require subjective evidence, this array of probability certainly reaches the prima facie stage. As we have indicated, to require more would be to read the statutory requirement of reasonable probability into a requirement of certainty. This we will not do."
(Emphasis added.) Page 410 U. S. 566
Nor do our prior cases hold that the district courts are bound by subjective statements of company officials that they have no intention of making a de now entry. We have emphasized that the decision whether the acquiring firm is an actual potential entrant is, in the last analysis, an independent one to be made by the trial court on the basis of all relevant evidence properly weighted according to its credibility. Thus, in FTC v. Procter Gamble Co, for example, managers of Procter & Gamble testified that they had no intention of making a ,de novo entry, and the Court of Appeals thought itself bound by that testimony. See 386 U.S. at 386 U. S. 580, and id. at 386 U. S. 585 (Harlan, J., concurring). We reversed, holding that "[t]he evidence . . . clearly shows that Procter was the most likely entrant." Id. at 386 U. S. 580.
As these cases indicate, subjective evidence has, at best, only a marginal role to play in actual potential entry cases. In order to make out a prima facie case, the Government need only show that objectively measurable market data favor a de novo entry, and that the alleged potential entrant has the economic capability to make such an entry. To be sure, the defendant may then introduce subjective testimony in rebuttal, and in the rare case where the objective evidence is evenly divided, it is conceivable that extremely credible subjective evidence might tip the balance. But where objectively measurable market forces make clear that it is in a firm's economic self-interest to make a de novo entry and that the firm has the economic capability to do so, I would hold that it is error for the District Court to conclude that the firm is not an actual potential entrant on the basis of testimony by company officials as to the firm's future intent. [Footnote 3/19] Page 410 U. S. 567
The reasons for so limiting the role of subjective evidence are not difficult to discern. Such evidence should obviously be given no weight if it is not credible. But it is in the very nature of such evidence that in the Page 410 U. S. 568 usual case it is not worthy of credit. [Footnote 3/20] First, any statement of future intent will be inherently self-serving. A defendant in a § 7 case such as this wishes to enter the market by acquisition and its managers know that its ability to do so depends upon whether it can convince a court that it would not have entered de novo if entry by acquisition were prevented. It is thus strongly in management's interest to represent that it has no intention of entering de novo -- a representation which is not subject to external verification and which is so speculative in nature that it could virtually never serve as the predicate for a perjury charge.
Moreover, in a case where the objective evidence strongly favors entry de novo, a firm which asks us to believe that it does not intend to enter de novo by implication asks us to believe that it does not intend to act in its own economic self-interest. But corporations are, after all, profit-making institutions, and, absent special circumstances, they can be expected to follow courses of action most likely to maximize profits. [Footnote 3/21] The Page 410 U. S. 569 trier of fact should, therefore, look with great suspicion upon a suggestion that a company with an opportunity to expand its market and the means to seize upon that opportunity will follow a deliberate policy of self-abnegation if the route of expansion first selected is legally foreclosed to it.
Thus, in most cases, subjective statements contrary to the objective evidence simply should not be believed. But even if the threshold credibility gap is breached, it still does not follow that subjective statements of future intent should outweigh strong objective evidence to the contrary. Even if it is true that management has no present intent of entering the market de novo, the possibility remains that it may change its mind as the objective factors favoring such entry are more clearly perceived. Of course, it is possible that management will adamantly continue to close its eyes to the company's own self-interest. But, in that event, the chance remains that the stockholders will install new, more competent officers who will better serve their interests. All of these possibilities are abruptly and irrevocably aborted when the firm is allowed to enter the market by acquisition. And while it is conceivable that none of the possibilities will materialize if entry by acquisition Page 410 U. S. 570 is prevented, it is absolutely certain that they will not materialize if such entry is permitted. All that is necessary to trigger a § 7 violation is a finding by the trial court of a reasonable chance of future competition. In most cases, strong objective evidence will be sufficient to create such a chance despite even credible subjective statements to the contrary. [Footnote 3/22]
As indicated above, the Government failed to press the argument that Falstaff was a dominant or perceived potential entrant. Since there is virtually no evidence in the record to support either of these theories, I cannot Page 410 U. S. 571 say that the District Judge erred in rejecting them. It does appear, however, that he applied an erroneous standard in evaluating the subjective evidence relevant to Falstaff's position as an actual potential entrant, and that this error infected the court's factual determinations. I would therefore remand the cause so that a proper factfinding can be made.
To be sure, Falstaff introduced a great deal of evidence tending to show that entry de novo would have been less profitable for it than entry by acquisition. Page 410 U. S. 572 I have no doubt that this is true. Indeed, if it can be assumed that Falstaff is a rational, profit-maximizing corporation, its own decision offers strong proof that entry by acquisition was the preferable alternative. But the test in § 7 cases is not whether anticompetitive conduct is profit-maximizing. The very purpose of § 7 is to direct the profit incentive into channels which are procompetitive. Thus, the proper test is whether Falstaff would have entered the market de novo if the preferable alternative of entry by acquisition had been denied it. The objective evidence strongly suggests that such an entry would have occurred.
The Government's complaint alleged that the merger violated § 7 because "[p]otential competition in the production and sale of beer between Falstaff and Narragansett will be eliminated." (Emphasis added.) While it is true, as the majority asserts, that "potential competition may stimulate a present procompetitive influence," see ante at 410 U. S. 534 n. 13, the complaint nowhere alleges that such a procompetitive influence occurred in this case.
Cf. United States v. El Paso Natural Gas Co., 376 U. S. 651, 376 U. S. 663 (1964) (opinion of Harlan, J.):
See Fed.Rule Civ.Proc. 52(a). Cf. United States v. El Paso Natural Gas Co., supra, at 376 U. S. 656-657.
United States v. Philadelphia National Bank, 374 U. S. 321, 374 U. S. 370 (1963). Moreover, entry by acquisition has the added evil of eliminating one firm in the market, and thus increasing the burden on the remaining firms which must compete with the dominant entering firm.
However, if the acquired firm is strengthened to such an extent that it upsets the market balance and drives its competitors out of the market, the acquiring firm takes on the characteristics of a dominant entrant, and the merger may therefore violate § 7 under that theory. See supra at 410 U. S. 558-560 and n. 14.
Thus, in United States v. Penn-Olin Chemical Co., 378 U. S. 158 (1964), for example, management testified that the company had no intention of making a de novo, nonacquisitive entry, id. at 378 U. S. 166, and in part on the basis of this testimony, the District Court found that such an entry was unlikely, id. at 378 U. S. 173. But we rejected this finding as irrelevant to the company's status as a perceived potential entrant since "the corporation . . . might have remained at the edge of the market, continually threatening to enter," ibid., and so affected competition within the market.
It might be argued that economic decisions are "inherently subjective," and that any attempt to derive objective conclusion from economic data is futile. If this observation means that different people reach different conclusions from the same objective data, then the point must, of course, be conceded. Similarly, if the point is that economic predictions are difficult and fraught with uncertainty, it is well taken. As we recognized in United States v. Philadelphia National Bank, such questions are "not . . . susceptible of a ready and precise answer in most cases." 374 U.S. at 374 U. S. 362. But although the factual controversies in § 7 cases may prove difficult to resolve, the statutory scheme clearly demands their resolution. As this Court held years ago, in response to a similar argument:
Standard Oil Co. v. United States, 221 U. S. 1, 221 U. S. 69-70 (1911). Section 7, by its terms, requires the trial judge to make a prediction, and it is entirely possible that others may reasonably disagree with the conclusion he reaches. But a holding that the fact of such disagreement requires the judge to delegate his decisionmaking authority to one of the parties would strike at the heart of the very notion of judicial conflict resolution. While it may be true that different people see economic facts in different light, § 7 gives federal judges and juries the responsibility to reach their conclusions as to the economic facts. And "[i]f justice requires the fact to be ascertained, the difficulty of doing so is no ground for refusing to try." O. Holmes, The Common Law 48.
The distinction between subjective statements of intent and objectively verifiable facts is not unknown in other areas of the law. See, e.g., Wright v. Council of City of Emporia, 407 U. S. 451, 407 U. S. 460-462 (1972); NLRB v. Erie Resistor Corp., 373 U. S. 221, 373 U. S. 227-228 (1963). Indeed, perhaps the oldest rule of evidence -- that a man is presumed to intend the natural and probable consequences of his acts -- is based on the common law's preference for objectively measurable data over subjective statements of opinion and intent. Nor have we hesitated to apply this principle to antitrust law. See, e.g., Utah Pie Co. v. Continental Baking Co., 386 U. S. 685, 386 U. S. 702-703 (1967); United States v. Gypsum Co., 333 U. S. 364, 333 U. S. 394 (1948).
Civil litigation in our common law system is conducted within the framework of the time-honored principle that the plaintiff must introduce sufficient evidence to convince Page 410 U. S. 573 the trier of fact that his claim for relief is factually meritorious. However large the societal interest in the area of antitrust law, so long as Congress assigns the vindication of those interests to civil litigation in the federal courts, antitrust litigation is no exception to that rule. The plaintiff, whether public or private, must prove to the satisfaction of the judge or jury that the defendant violated the antitrust laws. United States v. Yellow Cab Co., 338 U. S. 338 (1949). It is the exclusive responsibility of the trier of fact to weigh, as he sees fit, all admissible evidence in resolving disputed issues of fact, ibid., and his findings of fact cannot be overturned on appeal unless "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. Gypsum Co., 333 U. S. 364, 333 U. S. 395 (1948). Cf. FTC v. Procter & Gamble Co., 386 U. S. 568 (1967). The Court today simply disregards these principles.
Ante at 410 U. S. 532-533. The antitrust theory underlying the remand is that the competitors in the relative geographic market, aware of Falstaff's presence on the periphery, would not exercise their ostensible market power to raise prices because of the possibility that Falstaff, sufficiently tempted by the high prices in that market, would enter. A Government suit challenging a merger or acquisition can, of course, be premised on this theory, and, if sufficient evidence to convince the trier of fact is introduced, the determination that the merger or acquisition violated § 7 would not be reversed on appeal.
As my Brother MARSHALL convincingly demonstrates, however, in this case, the Government neither proceeded on the theory advanced by the Court nor introduced any Page 410 U. S. 574 evidence that would support that theory. The theory that the Government did advance, and upon which it offered its evidence, is concisely summarized in the Government's statement in opposition to Falstaff's motion to dismiss.
For this Court to reverse and to remand for consideration of a possible factual basis for a theory never advanced by the plaintiff is a drastic and unwarranted departure from the most basic principles of civil litigation Page 410 U. S. 575 and appellate review. In this case, the Government originally advanced one theory, but failed to introduce sufficient evidence to convince the trier of fact. That failure is "a not uncommon form of litigation casualty, from which the Government is no more immune than others." United States v. Yellow Cab Co., 338 U.S. at 338 U. S. 341. The Court now resuscitates this "casualty" by use of a theory transplant, allowing the Government a second opportunity to vindicate its position by arguing a different theory not originally propounded before the District Court or on appeal. I cannot join in the Court's rescue operation for this "litigation casualty," an operation which succeeds only by flagrantly disregarding some of the axioms upon which our judicial system is founded.
Although agreeing with my Brother MARSHALL's criticism of the Court's reason for remanding this case, I cannot agree with his grounds for remanding to the District Court for reconsideration. That theory is based, erroneously I believe, on the notion that there is an identifiable difference between "objective" and "subjective" evidence in an antitrust case such as this. My Brother MARSHALL would have the District Court weigh "objective" evidence more heavily than "subjective" evidence. In the field of economic forecasting in general, and in the area of potential competition in particular, however, the distinction between "objective" and "subjective" evidence is largely illusory. It is, I believe, incorrect to state that a trier of fact can determine "objectively" what "is in a firm's economic self-interest." Such a determination is guesswork. The term "economic self-interest" is a convenient shorthand for describing the economic decision reached by an individual or firm, but does not connote some simple, mechanical formula which determines the input values, or their assigned weight, in the process of economic decisionmaking. The simple fact is that any economic decision is largely subjective. Page 410 U. S. 576 In the instant case, Falstaff sought to prove why it was not in the "economic self-interest" of that firm to enter a new geographic market without an established distribution system. Its explanation is as "objective" as any of the evidence offered by the Government to show why a hypothetical Falstaff should enter the market. The question of who is an "actual potential competitor" is entirely factual. In deciding questions of fact, it is the province of the trier to weigh all of the evidence; but it is peculiarly his province to determine questions of credibility.
United States v. Yellow Cab Co., 338 U.S. at 338 U. S. 341-342.