Source: http://www.justice.gov/atr/cases/f200900/200942.htm
Timestamp: 2014-08-01 08:36:21
Document Index: 253411579

Matched Legal Cases: ['§ 18', '§ 25', '§ 25', '§ 1331', '§ 22', '§ 1391', '§ 18']

Verified Complaint : U.S. v. UPM-Kymmene, OYJ, Raflatac, Inc., Bemis Company, Inc., Morgan Adhesives Company
FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION UNITED STATES OF AMERICA,	Department of Justice	Antitrust Division	1401 H Street, N.W., Suite 4000	Washington, DC 20530, Plaintiff,
v. UPM-KYMMENE, OYJ Etelaasplanadi 2, PL 380 FIN-00101	Helsinki, Finland,	RAFLATAC, INC. 235 Cane Creek Road	Fletcher, NC 28732, BEMIS COMPANY, INC.	222 South Ninth Street, Suite 2300	Minneapolis, MN 55402, MORGAN ADHESIVES COMPANY 4560 Darrow Road	Stow, OH 44224, Defendants.
| Civil No. 03C 2528 Filed April 15, 2003
Judge Nordberg Magistrate Judge Mason
United States, brings this civil action to enjoin UPM-Kymmene Oyj ("UPM") from acquiring
Morgan Adhesives Company ("MACtac"), a wholly owned subsidiary of Bemis Company, Inc.
("Bemis") and to enjoin any merger or other combination of MACtac and UPM's subsidiary
Raflatac, Inc. ("Raflatac"), and alleges as follows: 1. UPM, through Raflatac, and MACtac are leading producers of pressure sensitive
labelstock (hereafter, "labelstock") in North America. Labelstock is sold primarily to companies
called label "converters" for use in making self adhesive, or pressure sensitive, labels for a broad
range of consumer and commercial labeling applications. The two principal types of labeling
applications are "variable information printing" (or "VIP"), where the information to be printed
on the label will vary and be supplied by the end user (such as bar code labels and labels used for
shipping packages), and "prime" labels used for product identification (such as labels on food
and beverage containers). UPM and MACtac both produce such labelstock on a bulk basis, that
is, at high volume production and low unit cost for high demand applications (in contrast to
specialty labelstock produced at low volume for low demand applications).
2. UPM and MACtac are the second and third largest North American producers of
bulk labelstock used to make pressure sensitive paper labels for VIP and prime labeling
applications. UPM, MACtac, and the largest North American labelstock producer (hereafter
referenced as "the Leading Producer") collectively account for over 70 percent of total sales of
such labelstock in North America. UPM has been a particularly aggressive competitor, having
made strategic commitments to substantially expand its North American labelstock sales. As a
result of this vigorous competition, labelstock customers have enjoyed significantly lower prices
and higher product and service quality than they would have otherwise received. 3. UPM's acquisition of MACtac would leave two large producers, UPM and the
Leading Producer, in a position to lead jointly and to coordinate generally a lessening of
competition in the production and sale of bulk labelstock used to make paper labels for VIP and
prime labeling applications. Post-acquisition, the remaining smaller labelstock producers would
have neither the capabilities nor incentives to prevent UPM and the Leading Producer from
engaging in anticompetitive coordination. UPM and the Leading Producer have already
attempted to limit competition between themselves, as reflected in written and oral
communications to each other through high level executives regarding explicit anticompetitive
understandings, although the extent to which these efforts have succeeded to date is not entirely
clear to the United States at the present time.
4. By acquiring MACtac, UPM would more than double its current North American
labelstock sales, achieve its strategic growth objectives, and begin to approach parity with the
Leading Producer in sales volume and market share. UPM would then have diminished
incentives to compete for sales to the Leading Producer's customers, because it would stand to
lose proportionately more business than otherwise if the Leading Producer retaliated by
competing for UPM customers, and it would instead have enhanced incentives to cooperate with
the Leading Producer. The transaction thus would likely substantially lessen competition in
North American markets for the production and sale of bulk labelstock used to make paper labels
for VIP and prime labeling applications, leading to higher prices and lower quality products and
services than purchasers of such labelstock would receive absent the transaction. Indeed, shortly
after announcement of the transaction, MACtac's CEO, whom UPM has chosen to manage
UPM's North American labelstock business after the transaction, advised a securities analyst that
the transaction should bring pricing "discipline" to UPM; and senior UPM officials advised at
least two labelstock customers about UPM plans to increase prices after the transaction. For all
of these reasons, UPM's acquisition of MACtac would violate Section 7 of the Clayton Act, 15
U.S.C. § 18, and the United States seeks an order permanently enjoining its consummation.
5. This action is filed by the United States under Section 15 of the Clayton Act, 15
U.S.C. § 25, to prevent and restrain the defendants from violating Section 7 of the Clayton Act,
6. UPM, Raflatac, Bemis, and MACtac are each engaged in interstate commerce and
in activities substantially affecting interstate commerce. The Court has jurisdiction over this
action pursuant to Section 15 of the Clayton Act, 15 U.S.C. § 25, and 28 U.S.C. §§ 1331, 1337. 7. UPM, Raflatac, Bemis, and MACtac each transact business and are found in the
Northern District of Illinois. UPM's wholly owned subsidiary, UPM-Kymmene, Inc., maintains
its principal office in this District, and transacts business in this District by, among other things,
selling a number of lines of paper products to customers in this District. Raflatac transacts
business in this District by, among other things, selling labelstock products to customers in this
District. Bemis and MACtac transact business in this District by, among other things, selling
flexible packaging and labelstock products to customers in this District. Venue is proper under
15 U.S.C. § 22 and 28 U.S.C. §§ 1391(c), 1391(d).
8. Bemis is a corporation organized and existing under the laws of Missouri. Bemis
is engaged in two lines of business: the production and sale of pressure sensitive materials,
through its MACtac subsidiary; and the production and sale of flexible packaging products,
conducted through other Bemis operations. In 2002, Bemis reported total worldwide revenues of
over $2.4 billion. MACtac, a wholly owned Bemis subsidiary organized and existing under the
laws of Ohio, is one of the world's leading suppliers of labelstock. In 2002, MACtac had total
worldwide sales of $499 million. In North America, MACtac operates several labelstock
production plants and had total labelstock sales of about $200 million in 2002. 9. UPM is a corporation organized and existing under the laws of Finland and is one
of the world's largest producers of forestry and paper products. In 2002, UPM reported total
worldwide revenues of over $10 billion. UPM produces and markets labelstock in North
America through Raflatac, Inc., a wholly owned subsidiary corporation organized and existing
under the laws of North Carolina. UPM produces and sells labelstock in Europe and other parts
of the world through other subsidiary Raflatac companies. In 2002, UPM's worldwide Raflatac
operations had revenues of over $736 million, of which $123 million were from labelstock sales
in North America. 10. UPM also is a major producer of various types of paper used to produce
labelstock (collectively known to the industry as "label papers"). UPM produces label papers
both for the internal needs of its Raflatac labelstock operations and for sale to other labelstock
producers. The Leading Producer, which is the largest manufacturer of labelstock in North
America and the world, is also UPM's largest external customer of label papers. 11. On August 20, 2002, UPM and Bemis entered into a Stock Purchase Agreement
pursuant to which UPM agreed to purchase MACtac for a cash price of about $420 million.
12. UPM and MACtac produce labelstock and compete to sell labelstock primarily to
label converters, for whom the product is the main material input for the production of pressure
sensitive, or self-adhesive, labels. Pressure sensitive labels are peeled off a base material and
applied to packages, documents, or other surfaces. With pressure sensitive labels, adhesion
occurs by applying pressure, while other types of labels use adhesives that must be moistened or
heat activated, or require application of a glue at the time of use.
13. Labelstock is produced in large rolls of a multi-layer laminate consisting of a face
material (the surface of the label on which information and/or decoration is printed); an adhesive
(which fixes the label to the surface); a silicon layer or coating (which allows an easy release of
the face material from the base material); and the base material (also called "release," which
protects the adhesive). Labelstock is produced with either paper or synthetic (plastic) film as the
face material, and various types of permanent or removable adhesives may be used. As hereafter
used in this Complaint, "paper labelstock" refers to labelstock produced with a paper face
material, and "film labelstock" refers to labelstock produced with a film face material.
14. Converters make pressure sensitive labels from labelstock by cutting it to desired
sizes and shapes and adding printed text as needed by their customers. The great bulk of all
labelstock production is converted into labels used for one of two general purposes -- "variable
information printing" (or "VIP") and "prime." VIP labels are blank or partially blank; the
information to be printed on such a label is variable and is meant to be filled in by the user when
the label is applied. Examples of VIP labels are labels used for printing bar codes, shipping
labels, supermarket deli counter labels, and office supply labels. Prime labelstock is used to
make labels for product identification and promotional labeling applications where the end user
does not vary the information printed on the labels. 15. Almost all paper labelstock sold for VIP applications, and the great majority of
paper labelstock sold for prime labeling uses, are "bulk" materials in that they are substantially
standardized products in widespread commercial usage and commonly sold for high demand and
large volume applications. Producers manufacture bulk labelstock at high volumes to drive cost
economies that enable them to achieve low unit production costs. In addition, some producers
make "specialty" labelstock products for low demand application, such as labelstock made with
face materials, colors, adhesives, or other construction or design elements that are not found in
widespread commercial usage. Specialty labelstock products are made in small volumes and at
relatively high unit production costs.
16. The relevant product markets affected by UPM's proposed acquisition of MACtac
are bulk paper labelstock used to make pressure sensitive VIP labels, for which total 2002 sales
in North America were about $780 million, and bulk paper labelstock used to make pressure
sensitive prime labels, for which total 2002 sales in North America were about $400 million.
17. Since labelstock is sold primarily to converters who use it to make labels for their
end-user customers, demand for labelstock among converters is driven by demand for labels
among the end-users, which include individuals and businesses in all kinds of industries that
need labels for shipping goods, supply chain management, and product labeling. While these
customers can also use other labeling materials and technologies, they use pressure sensitive
paper labeling in applications where it is the most cost-effective means of providing the desired
labeling functionality and performance.
18. A small but significant increase in the prices of bulk paper labelstock for either
VIP or prime labeling applications, with a resulting increase in the prices of the paper labels
made from such labelstock, would not cause a significant reduction in the usage of the paper
labels in favor of any potential alternative labeling materials or technologies. One potential
alternative, film labelstock, is substantially more expensive than paper labelstock on a price per
unit basis. Absent any functional or performance considerations, paper labels are strongly
favored over film because of the substantial cost advantage. Paper is also used in applications
where it has functional or performance advantages over film -- such as the ability of paper to be
torn, its printability, or where it conveys the desired look, feel, or texture. 19. Paper labels are used in the great majority of pressure sensitive VIP applications,
where customers require a low cost labeling solution and do not need the performance features of
film. While both paper and film are used in prime labeling applications, film labels are used
only where its higher cost is justified by performance, functionality, or look and feel that paper
cannot provide -- for example, film is more durable and moisture resistant, it is more flexible,
and it can provide a transparent look. However, film is not an effective constraint on pricing of
paper labelstock for either VIP or prime labeling applications, because in neither case would an
increase in paper label prices, caused by a small but significant increase in paper labelstock
prices, lead to significant customer switching to film labeling.
20. Non-pressure sensitive labeling technologies -- such as gum labels, glue applied
labels, non-adhesive shrink wrap film packaging, or direct printing of labeling text onto products
or packages -- also do not represent effective competitive constraints on prices for pressure
sensitive paper labelstock. For a very substantial portion of VIP label usage, such non-pressure
sensitive technologies simply are not close functional substitutes for pressure sensitive paper
labels. Even in the minority of uses where a non-pressure sensitive labeling technology could
potentially be a close functional substitute, replacing pressure sensitive paper labels with a non-pressure sensitive labeling technology would entail significant switching costs, including
expenditures to change label application equipment and increased product packaging or other
operational costs. An increase in pressure sensitive paper label prices caused by a small but
significant increase in labelstock prices would not cause significant customer switching to any
non-pressure sensitive labeling technologies in either of the relevant markets.
21. The relevant geographic market affected by the proposed transaction is North
America (meaning the United States and Canada). UPM, MACtac, and other competitors sell to
customers throughout North America, and without facing any significant competition from any
foreign producers that do not have labelstock production capabilities in North America.
22. The relevant markets are highly concentrated and would become significantly
more concentrated as a result of the proposed transaction. In the North American market for
bulk paper labelstock produced and sold for VIP applications, the Leading Producer's market
share is approximately 50 percent, while MACtac and UPM each have shares of about 12
percent (based on 2002 data on unit sales volumes). Using a standard measure of market
concentration called the "HHI" (defined and explained in Appendix A), the market is highly
concentrated, with a pre-merger HHI of about 2960, the proposed transaction would increase
HHI by about 290, and the post-merger HHI would be about 3250.
23. In the North American market for bulk paper labelstock produced and sold for
prime labeling applications, the Leading Producer's market share is approximately 49 percent,
MACtac's share is about 12 percent, and UPM's share is about 8 percent (based on 2002 data on
unit sales volumes). The pre-merger HHI in this market is about 2800, the proposed transaction
would increase HHI by about 190, and the post-merger HHI would be about 2990.
24. Competition in the relevant labelstock markets has been driven by rivalry among
UPM, MACtac, and the Leading Producer. Over the past few years, these three firms have made
large investments to construct the industry's newest and most efficient labelstock production
plants. While UPM, MACtac, and the Leading Producer added substantial new production
capacity, market demand for paper labelstock flattened, with only modest expectations for
growth over the foreseeable future. MACtac, in particular, has a substantial amount of excess
labelstock production capacity.
25. UPM has been an aggressive and disruptive competitor. Until 2001, UPM did not
produce labelstock in North America, but over many years had developed a small toehold market
presence by importing labelstock produced by its plants in Europe. In 1999, UPM committed to
expanding its North American market position to advance broader strategic objectives of
becoming a major competitor in the global labelstock marketplace and supporting UPM's
growing production and sales of label papers used in making labelstock. Recognizing that it
could not build a large enough North American labelstock business without having local
production capabilities, UPM tried to acquire MACtac in early 1999, and when this effort failed,
it committed to construction of a $56 million labelstock production plant in Fletcher, North
Carolina. UPM has since competed aggressively to build its customer base and expand sales
volume, leading or substantially contributing to market-wide erosion of prices and producer
profitability. While customers of paper labelstock derived substantial benefit from this
competition, MACtac's president and CEO has testified that, from his vantage point, UPM's
aggressive pricing "ruined the industry."
26. Prior to entering into the proposed transaction, UPM set and pursued aggressive
labelstock volume growth targets. With the transaction, however, the market will be left with
just two firms, UPM and the Leading Producer, in positions of marketplace dominance and with
significant incentives to engage in tacit or explicit competitive coordination rather than to
compete vigorously against each other. The incentives and ability of UPM and the Leading
Producer for coordination are enhanced by the existence of a longstanding strategic paper supply
relationship between them. Over the past several years, the Leading Producer has become
UPM's largest customer of label papers, and UPM has become one of the Leading Producer's
largest suppliers. This supply relationship provides UPM and the Leading Producer with the
motivations, opportunities, and means to coordinate on price, monitor adherence, punish
cheating, and engage in side payments that can be hidden in label paper transactions. 27. UPM and the Leading Producer have already sought to reach explicit
understandings aimed at limiting competition between themselves, including discussions
between high level executives of the two companies. In a June 2001 memo to the head of
UPM's labelstock business worldwide, the executive in charge of UPM's North American
operations noted that his organization did not regard the Leading Producer as the main
competitor, but that it was trying to compete against MACtac and other labelstock suppliers.
28. As UPM expanded its sales in North Ameican, other producers competed to
defend their market shares and market-wide price erosion ensued. UPM and the Leading
Producer were not able to avoid competing against each other in the marketplace, and the
resulting competitive frictions strained the relationship between UPM and the Leading Producer
at the highest corporate levels. In June 2001, in response to the Leading Producer's complaints
about UPM's aggressively competitive behavior, a senior UPM executive who had overall
operational responsibilities for both UPM's labelstock and label papers businesses worldwide,
wrote to a senior manager of the Leading Producer:
Raflatac management considers unjustified the blame that they are destroying the
market . . . . I think it is the role of the big players to be extremely careful to
avoid major instability. I can assure you that our management have been
reinstructed to fully commit to a balanced market development which will benefit
both the customers and suppliers. Looking forward to meeting you the next time
you are visiting Europe. [emphasis added]
29. The competitive conflicts between UPM and the Leading Producer continued to
escalate and further discussions took place between high level executives regarding the level of
price competition between them. In September 2001, according to documented internal
deliberations at UPM's highest executive levels, UPM recognized the strategic value of
appeasing the Leading Producer. The minutes of these deliberations identify the acquisition of
MACtac as a possible course of action, which "[f]or [the Leading Producer] . . . would be a
clearly pleasant alternative." Subsequently, while UPM and Bemis were in active negotiations
over the proposed transaction, UPM sought to contain the competitive conflicts with the Leading
Producer and to stabilize the price erosion then taking place. According to the minutes of an
October 2, 2001, meeting among the members of the Raflatac Americas Management Board:
"[The] Raflatac board dictates that we may follow a price decline but may not lead it. We need
to gain market share on our quality and choices not price." A Raflatac Monthly Report dated
November 30, 2001 declared: "The good news is that [the Leading Producer] seems to have
taken our signal not to go below $0.20/msi [a labelstock unit price]." 30. After entering into the proposed transaction to acquire MACtac, UPM appears to
have abandoned the aggressive volume growth targets that it had previously pursued. In each of
the past two years, for example, UPM's paper labelstock unit sales grew by more than 30 percent
over the prior year, and its plans called for aggressive annual rates of growth over the following
years. In contrast to such aggressive growth, UPM has advised the United States, in a letter from
UPM counsel dated October 9, 2002, that it now "projects no increases in sales growth or market
share in North America for 2003 apart from those associated with the MACtac acquisition."
31. Several smaller competitors produce paper labelstock. Over the past few years,
however, these small competitors, have increasingly focused on the production of specialty
labelstock and away from the production of bulk paper labelstock, and would not constrain the
competitive harm resulting from UPM's acquisition of MACtac in either of the relevant markets. After the transaction, UPM and the Leading Producer together would control over 70 percent of
all North American sales in the relevant markets, with the remaining sales dispersed among these
small producers. Whether viewed collectively or individually, these small producers face
capacity limitations that would constrain them from significantly expanding sales in response to
a post-merger price increase. In addition, these small firms produce labelstock with smaller,
slower, and less efficient production equipment than the leading producers, and are therefore
competitively constrained by production cost disadvantages; they face materials cost
disadvantages owing to their smaller scale of operations; and they variously suffer from
significant distributional and marketing disadvantages and financial weaknesses in comparison
to UPM, MACtac, and the Leading Producer. In order to improve their own profit margins,
these competitors would likely follow a post-merger price increase led by UPM and the Leading
Producer rather than defeat the increase by expanding their sales. 32. The potential for new entry into either of the relevant markets is extremely
limited and would not mitigate the competitive harm from the proposed transaction. Entry is
difficult, time-consuming, and financially costly and risky. Apart from the time and costs of
building a production plant, entry would be discouraged by current and foreseeable excess
capacity conditions brought about largely by the capacity additions of UPM and MACtac. 33. Expansion of capacity by any of the existing small competitors also would be
difficult, time-consuming, and an unlikely response to a post-merger price increase. In this
regard, it has taken substantial time and effort for MACtac, a highly experienced producer of
labelstock, to add new capacity to its existing production base. MACtac has expended several
months to a year to install new labelstock production lines, and then another several months to a
year of pre-production work before the new lines have been able to produce commercially
acceptable material at production volumes on a cost effective basis. 34. A small number of firms that currently produce film labelstock, but not paper
labelstock, in North America could in theory use their existing production plants to begin
competing in the relevant markets. However, because film labelstock margins are significantly
higher than margins for bulk paper labelstock, film labelstock producers would not find it
profitable to divert capacity to produce bulk paper labelstock. Moreover, because the capacities
of these producers are optimized in terms of production process and scale to produce film
labelstock, they are not cost-effective platforms for competing in either of the relevant markets. Entry for these firms would thus require substantial investments in time and capital for the
construction of dedicated paper labelstock production capabilities.
VIII. VIOLATION ALLEGED 35. The United States hereby incorporates paragraphs 1 through 34.
36. UPM's acquisition of MACtac would likely substantially lessen competition in
the production and sale of bulk paper labelstock used to make pressure sensitive VIP and prime
labels in North American, in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18. The
transaction would likely have the following effects, among others:
(a) actual and potential competition between UPM and MACtac in the
development, production, and sale of such labelstock in North America would be
eliminated; (b) actual and potential competition between UPM and the Leading Producer
in the development, production, and sale of such labelstock in North America would be
eliminated or substantially lessened; (c) competition generally in the development, production, and sale of such
labelstock in North America would be eliminated or substantially lessened;
(d) prices for such labelstock in North America would likely increase to levels
above those that would prevail absent the merger; and
(e) innovation and quality of such labelstock products and services in North
America would likely decrease to levels below those that would prevail absent the
merger. PRAYER FOR RELIEF
That the proposed acquisition be adjudged to violate Section 7 of the Clayton Act,
Stock Purchase Agreement between UPM and Bemis dated August 20, 2002, or from entering
into or carrying out any agreement, understanding, or plan by which UPM would merge with or
acquire MACtac, its capital stock, or any of its assets;
That the United States have such other relief as the Court may deem just and
_______________/s/________________ R. Hewitt Pate	Acting Assistant Attorney General
_______________/s/________________ Constance K. Robinson Director of Operations
_______________/s/________________ Mark Botti, Chief John Read, Assistant Chief Litigation I Section	_______________/s/________________ Patrick J. Fitzgerald
_______________/s/________________ Claude F. Scott, Jr. Weeun Wang Steven Kramer Karl D. Knutsen Michael Spector Michael Bishop Ihan Kim Trial Attorneys U.S. Department of Justice Antitrust Division Litigation I Section 1401 H Street, NW, Suite 4000
_______________/s/________________ Carla Stern
Chicago, IL 60604 Dated :
I, Weeun Wang, declare:
I am an attorney with the Antitrust Division of the United States Department of Justice.
The foregoing Verified Complaint for and on behalf of the United States of America was duly
prepared under the direction of the Attorney General of the United States. The facts stated
therein have been assembled by authorized employees and counsel for the United States of
America. The allegations therein are true and correct to the best of my knowledge,
Attached hereto as Attachment A is a true and correct copy of a letter by M. Elaine Johnston,
Esq., of White & Case LLP to Mark J. Botti, Esq. of the U.S. Department of Justice, Antitrust
Division, describing the terms of the timing agreement between the plaintiffs and defendants
in this action. As described in the agreement, the parties to the transaction may consummate
the transaction as soon as forty-eight (48) hours after providing notice to this Court. I declare under penalty of perjury that the above is true and correct.
Executed on: April 15, 2003 _______________/s/________________