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United States v. Connecticut Nat'l Bank (full text) :: 418 U.S. 656 (1974) :: Justia U.S. Supreme Court Center Log In
› United States v. Connecticut Nat'l Bank
United States v. Connecticut Nat'l Bank 418 U.S. 656 (1974)
U.S. Supreme CourtUnited States v. Connecticut Nat'l Bank, 418 U.S. 656 (1974)United States v. Connecticut National BankNo. 73-767Argued April 23, 1974Decided June 26, 1974418 U.S. 656APPEAL FROM THE UNITED STATES DISTRICT COURT
1. The District Court erred in holding that the appropriate "line of commerce" within the meaning of § 7 included both commercial banks and savings banks. Pp. 418 U. S. 660-666.
2. The District Court further erred in ruling that the relevant geographic market is the State of Connecticut as a whole. In a potential competition case like this, the relevant geographic market must be defined as the localized area in which the acquired bank is in significant, direct competition with other banks, albeit not the acquiring bank. United States v. Marine Bancorporation, ante, p. 602. Pp. 418 U. S. 666-668.
3. On remand, the District Court must make a determination as to the geographic market in which each of the banks operates Page 418 U. S. 657 and to which the bulk of it customers may turn for alternative commercial bank services, and, in making that determination, it will be aided by the following considerations: (i) the Government has the burden of producing evidence to define localized banking markets; (ii) in satisfying that burden (as the District Court correctly held), the Government cannot rely only on Standard Metropolitan Statistical Areas; and (iii) town boundaries, although significant, are not controlling. Pp. 418 U. S. 668-671.
4. The Government's contention that the State as a whole, though not a banking market, is a "section of the country" within the meaning of § 7 is without merit, Marine Bancorporation, supra. Pp. 418 U. S. 672-673.
POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, BLACKMUN, and REHNQUIST, JJ., joined, and in Part I of which DOUGLAS, BRENNAN, WHITE, and MARSHALL, JJ., joined. WHITE, J., filed an opinion concurring in part and dissenting in part, in which DOUGLAS, BRENNAN, and MARSHALL, JJ., joined, post, p. 418 U. S. 673.
This case concerns the legality of a proposed consolidation of two nationally chartered commercial banks operating in adjoining regions of Connecticut. The United States brought a civil antitrust action challenging the Page 418 U. S. 658 consolidation under § 7 of the Clayton Act, 38 Stat. 731, as amended, 15 U.S.C. § 18. Following a lengthy trial and on the basis of extensive findings and conclusions, the United States District Court for the District of Connecticut dismissed the Government's complaint. 362 F.Supp. 240 (1973). The Government brought a direct appeal pursuant to the Expediting Act, 32 Stat. 823, as amended, 15 U.S.C. § 29, and the Court noted probable jurisdiction, 414 U.S. 1127 (1974).
In Connecticut as a whole at the end of 1971, the five largest commercial banks held 61% and the 10 largest commercial banks held 83% of the deposits in such banks in the State. Two large commercial banks based in Hartford, Connecticut Bank & Trust Co. of Hartford and Hartford National Bank, operate essentially state-wide. At year-end 1972, they had 41% of the total commercial bank deposits held by Connecticut banks. Page 418 U. S. 659
CNB and FNH both have offices and are in direct competition in a so-called "four-town area" located between Bridgeport and New Haven. The banks assured the District Court, however, that, in implementing the consolidation, they would divest themselves of a sufficient number of offices in the four-town area to render insignificant the degree of overlap of their areas of actual operation. The District Court held that this divestiture plan eliminated any antitrust difficulties presented by the merger of direct competitors. 362 F.Supp. at 268-270, 286. The United States has not pursued the point on appeal. Accordingly, the case has been presented to us strictly as a geographic market extension merger on the part of both banks. The proposed consolidation would join the banks under FNH's national charter (with headquarters in Bridgeport). It would have no effect on the number of banks operating in either the Bridgeport or New Haven area. In that posture, the case presents potential competition issues similar to those raised in United States v. Marine Bancorporation, Inc., ante, p. 418 U. S. 602.
The District Court rejected the Government's potential competition arguments, relying on such factors as state law restraints on de novo branching, [Footnote 1] the expansion Page 418 U. S. 660 plans and capabilities of the two banks, the posture of national and state regulatory officials regarding the issuance of new bank charters, and the existence and economic feasibility of possible foothold acquisitions. 362 F.Supp. at 286-288. As we have held today in the Marine Bancorporation case, these and analogous factors are the appropriate considerations to take into account in determining the legality under § 7 of the Clayton Act of geographic market extension mergers by commercial banks. We are unable, however, to reach the question of whether the District Court correctly assessed the import of those factors in the instant case. We have also held in Marine Bancorporation that the legality of a market extension merger must be determined against the backdrop of properly defined product and geographic markets. See ante at 418 U. S. 618. In our view, the District Court erred in its definition of both concepts, and it is not possible to ascertain the degree, if any, to which those errors may have influenced its conclusions with regard to the Government's potential competition arguments. Accordingly, the District Court's judgment must be vacated and the case remanded for reconsideration.
The District Court concluded that the appropriate "line of commerce" within the meaning of § 7 included both commercial banks and savings banks. 362 F.Supp. at 281. The court recognized that its conclusion departed from this Court's holdings in, e.g., United States v. Phillipsburg National Bank, 399 U. S. 350, 399 U. S. 359-362 (1970), and United States v. Philadelphia National Bank, 374 U. S. 321, 374 U. S. 356-357 (1963). But in the District Court's Page 418 U. S. 661 view the pronouncements in Phillipsburg National Bank and Philadelphia National Bank
and that "[t]he cold, hard realities of the situation are that savings and commercial banks are fierce competitors in this state." Ibid. The court noted that, under state law, savings banks in the near future will be permitted to offer one of the traditional indicia of commercial banks, personal checking accounts. See Conn.Pub.Act No. 7 195 (May 14, 1973). It pointed out that savings banks in Connecticut compete with commercial banks for real estate mortgages, personal loans, IPC (individual, partnership, and corporate) deposits, and, the court found, commercial loans. 362 F.Supp. at 280. It cited United States v. Continental Can Co., 378 U. S. 441 (1964), for the proposition that "complete industry overlap" is not required to establish a relevant line of commerce under § 7. 362 F.Supp. at 281. It also relied on the omission of the "in any line of commerce" phrase from the Bank Merger Act of 1966, 12 U.S.C. § 1828(c)(5)(B), an Act which in other essential respects tracks the language of § 7 of the Clayton Act. [Footnote 2] Finally, it distinguished Page 418 U. S. 662 Philadelphia National Bank, supra, and Phillipsburg National Bank, supra, by pointing to the absence of significant competition by savings banks in the relevant geographic markets in those cases. 362 F.Supp. at 281. The District Court's conclusion on the appropriate line of commerce caused it to "shade" (i.e., to reduce) the Government's concentration ratios to take into account the presence of savings banks. Id. at 285.
We are in complete agreement with the District Court that Phillipsburg National Bank and Philadelphia National Bank do not require a court to blind itself to economic realities. Similarly, we have no doubt on this record that savings banks and commercial banks in Connecticut are "fierce competitors," see 362 F.Supp. at 280, to the degree that they offer identical or essentially fungible services. The District Court was also correct that "complete inter-industry competitive overlap need not be shown." Continental Can Co., supra, at 378 U. S. 457. As the Court declared in Continental Can, "we must recognize meaningful competition where it is found to exist." 378 U.S. at 378 U. S. 449. Nonetheless, we hold for several reasons that the District Court was mistaken in including both savings and commercial banks in the same product market for purposes of this case. Page 418 U. S. 663
Two of the District Court's reasons may be dealt with briefly. The court erred as a matter of law in concluding that the absence of a "line of commerce" phrase in the Bank Merger Act of 1966 alters traditional standards under § 7 of the Clayton Act for defining the relevant product market in a bank merger case. United States v. Third National Bank, 390 U. S. 171, 390 U. S. 182 n. 15 (1968). See Phillipsburg National Bank, 399 U.S. at 399 U. S. 359-362. Moreover, the absence of significant competition from savings banks in Philadelphia National Bank, supra, and Phillipsburg National Bank, supra, is not determinative. The commercial banks in both of those cases faced significant competition from savings and loan associations and other credit institutions. See, e.g., 374 U.S. at 374 U. S. 357 n. 34; United States v. Phillipsburg National Bank, 306 F.Supp. 645, 649 (NJ 1969). The Court in both instances nevertheless viewed the business of commercial banking as sufficiently distinct from other credit institutions to merit treatment as a separate "line of commerce" under § 7. Analogous distinctions, although perhaps not as sharply defined, are controlling here.
We believe that the District Court overestimated the degree of competitive overlap that in fact exists between savings banks and commercial banks in Connecticut. To be sure, there is a large measure of similarity between the services marketed by the two categories of banks. [Footnote 3] In Page 418 U. S. 664 our view, however, the overlap is not sufficient at this stage in the development of savings banks in Connecticut to treat them together with commercial banks in the instant case. Despite the strides that savings banks in that State have made toward parity with commercial banks, the latter continue to be able to provide a cluster of services that the former cannot, particularly with regard to commercial customers, and this Court has repeatedly held that it is the unique cluster of services provided by commercial banks that sets them apart for purposes of § 7.
The Court declared in Phillipsburg National Bank, supra, at 399 U. S. 360:
"Philadelphia Bank emphasized that it is the cluster of products and services that full service banks offer that as a matter of trade reality makes commercial banking a distinct line of commerce. Commercial banks are the only financial institutions in which a wide variety of financial products and services -- some unique to commercial banking and others not -- are gathered together in one place. The clustering of financial products and services in banks facilitates convenient access to them for all banking customers. . . ."
The District Court concluded that "meaningful competition" existed between commercial and savings banks Page 418 U. S. 665 for commercial loans. 362 F.Supp. at 280. This conclusion is not supported by the record. Commercial loans, generally speaking, are relatively short-term loans to business enterprises of all sizes, usually for purposes of inventory or working capital. At the end of 1971, commercial banks in Connecticut had outstanding $1.03 billion in commercial loans. [Footnote 4] Savings banks, by comparison, had $26 million in such loans at that time. [Footnote 5] The disparity in these figures demonstrates that the commercial bank loan business in Connecticut is controlled almost exclusively by commercial banks. Moreover, commercial banks in the State offer credit card plans, loans for securities purchases, trust services, investment services, computer and account services, and letters of credit. Savings banks do not.
It is true that, under state law, savings banks soon will be able to provide some checking account services. Conn.Pub.Act No. 73-195 (May 14, 1973). [Footnote 6] This will increase the degree of direct competition between savings banks and commercial banks, because demand deposits have traditionally been a unique attribute of the latter institutions. But even this new authority for savings banks will not allow them to serve commercial customers, who constitute a significant percentage of the clientele of commercial banks. The state statute empowering savings banks to offer demand deposits forbids those banks from marketing the service to anyone "for the purpose of, or in connection with, the carrying on of any business, trade, occupation or profession." Id. §§ 1(a), 5. Thus, Page 418 U. S. 666 under the new Act, savings banks will be restricted to offering personal checking accounts. Id., § 2.
The District Court ruled that the relevant geographic market, or "section of the country," under § 7, is the State as a whole. 362 F.Supp. at 283. We think the District Court erred on this point for several reasons. If the State were the relevant geographic market, it would then be appropriate to analyze this not as a potential competition case, but as a direct competition case involving the consolidation of two firms holding an aggregate market share of approximately 10%. Even if this figure is "shaded" by a factor of 10% to account for the influence of banks in New York, see id. at 260; Philadelphia National Bank, 374 U.S. at 374 U. S. 364 n. 40, the consolidation of CNB and FNH would create a firm holding a 9% share of state-wide commercial-bank deposits. Mergers between direct competitors producing smaller shares Page 418 U. S. 667 of less concentrated markets have been held illegal under § 7. E.g., United States v. Von's Grocery Co., 384 U. S. 270 (1966).
As indicated by our opinion today in Marine Bancorporation, ante, p. 418 U. S. 602, the relevant geographic market of the acquired bank is the localized area in which that bank is in significant, direct competition with other banks, albeit not the acquiring bank. This area must be defined in accordance with this Court's precedents in prior bank merger cases. Yet the District Court's conclusion on this issue conflicts with Philadelphia National Bank, supra. The Court emphasized in that case:
"In banking, as in most service industries, convenience of location is essential to effective competition. Individuals and corporations typically confer the bulk of their patronage on banks in their Page 418 U. S. 668 local community; they find it impractical to conduct their banking business at a distance. . . . The factor of inconvenience localizes banking competition as effectively as high transportation costs in other industries."
374 U.S. at 374 U. S. 358 (footnote and citations omitted). In recognition of the local character of the great majority of commercial bank activities, Philadelphia National Bank indicated that the relevant geographic market in bank merger cases must be drawn narrowly to encompass the area where "the effect of the merger on competition will be direct and immediate." Id. at 374 U. S. 357. Moreover, the geographic market must be delineated in a way that takes into account the local nature of the demand for most bank services. It
Id. at 374 U. S. 359 (citations, internal quotations, and italics omitted). Because the economic scale of separate categories of consumers of bank services will vary, a workable compromise must be struck "to delineate the area in which bank customers that are neither very large nor very small find it practical to do their banking business. . . ." Id. at 374 U. S. 361. [Footnote 7]
On remand, the District Court must determine pursuant to the localized approach denoted above the geographic market in which CNB operates and to which the bulk of its customers may turn for alternative commercial bank services. It must do the same with regard to FNH, for this case presents the unusual fact situation of a consolidation of two banks, each with a history of de novo geographic expansion, rather than the acquisition of Page 418 U. S. 669 a geographically stable bank as in Marine Bancorporation, ante, p. 418 U. S. 602. The task is important, because the definition of the respective geographic markets determines the number of alternative avenues of entry theoretically open to CNB in piercing FNH's area of significant competitive influence and vice versa.
The difficulty of the responsibility imposed on the District Court with regard to defining the geographic markets of the two banks is ameliorated by several considerations. First, the burden of producing evidence on this subject is on the Government. The Government repeatedly notes that it is not required to define geographic markets by "metes and bounds," citing United States v. Pabst Brewing Co., 384 U. S. 546, 384 U. S. 549 (1966). To the extent that this means that such markets need not -- indeed cannot -- be defined with scientific precision, it is accurate. But it is nevertheless the Government's role to come forward with evidence delineating the rough approximation Page 418 U. S. 670 of localized banking markets mandated by Philadelphia National Bank, supra, and Phillipsburg National Bank, supra.
Second, we affirm that portion of the District Court's judgment holding that the Government cannot rely, without more, on Standard Metropolitan Statistical Areas (SMSA's) as defining the geographic markets of the two banks. See 362 F.Supp. at 249-250, 281-282. SMSA's are prepared by the Office of Management and Budget to determine areas of economic and social integration, principally on the basis of the commuting patterns of residents. [Footnote 8] They are not defined in terms of banking criteria, and they were not developed as a tool for analyzing banking markets. Id. at 249. Exclusive reliance on SMSA's here may lead to inaccuracies. For example, as the District Court noted, only 57% of CNB's deposits originate from the Bridgeport SMSA. Id. at 250, 282. This is because CNB's offices extend to several areas outside the Bridgeport SMSA. The Bridgeport SMSA is relevant, if at all, only to the CNB offices located in Bridgeport, and even then it is, at best, a crude indicator. The same is true of the New Haven SMSA and the FNH offices located in the town of New Haven. In sum, although the Bridgeport and New Haven SMSA's may be helpful in defining the general metropolitan characteristics of southwest Connecticut, they are not sufficiently refined in terms of realistic commercial banking markets to satisfy the Government's burden. The Government must demonstrate more accurately than is possible solely with SMSA's the localized banking markets, or areas of significant competitive influence, surrounding the sites where CNB and FNH maintain their banking offices. [Footnote 9] Page 418 U. S. 671
On remand, the District Court must delineate the localized banking markets surrounding the sites where CNB and FNH maintain their bank offices. It must then evaluate the economically and legally feasible alternative methods of entry, if any, into those areas available to one bank or the other. In so doing, it should keep in mind the considerations outlined today in Marine Bancorporation, ante, p. 418 U. S. 602. [Footnote 10] Page 418 U. S. 672
In conformity with its approach in Marine Bancorporation, the Government argues that the State as a whole, although not a banking market, is nonetheless a "section of the country" within the meaning of § 7 of the Clayton Act. The Government repeats the concern expressed in Marine Bancorporation, see ante at 418 U. S. 620, that a state-wide linkage of oligopolies "may" arise, and that large banks across the state "may engage" in more standardized behavior as a result. [Footnote 11] Moreover, the Government contends that a state-wide approach is appropriate because the challenged consolidation would eliminate one of eight banks in Connecticut with the potential for state-wide operation.
"Thus, the effect of a merger which eliminates even one of these banks will be felt state-wide, for it will have an impact in every local market in the state where that bank does not currently operate but which it might otherwise enter. [Footnote 12]"
We reject the Government's state-wide approach here, as we did in Marine Bancorporation, ante at 418 U. S. 620. The Government's argument that "a geographic area need not be a banking market to be a section of the country . . . " [Footnote 13] is foreclosed by the precedents. Ante at 418 U. S. 620-622. Its theory of linked oligopolies appears to be as devoid of evidentiary support here as it was in Marine Bancorporation. Finally, its concern for any area of the State in which CNB or FNH "might" enter independently of the consolidation Page 418 U. S. 673 is too speculative to establish a case under the Clayton Act. In advancing the latter argument, the Government borders on espousing a per se rule against geographic market extension mergers by Connecticut commercial banks so long as any town in the State remains open to de novo branching. On remand, the District Court will address itself to the geographic markets in which CNB and FNH presently operate. [Footnote 14]
As we have noted, the District Court identified some of the services offered by both savings and commercial banks, including real estate mortgages, personal loans, and time deposits. As the District Court put it in another context, it would be "ostrich-like," 362 F.Supp. at 254, to assume that the two types of banks are not in direct and vigorous competition with regard to the services they share or are not viewed by many bank customers as more or less fungible for purposes of those services. Cf. United States v. Phillipsburg National Bank, 399 U. S. 350, 399 U. S. 360 (1970). That savings and commercial banks are direct competitors in some submarkets, however, is not the end of the inquiry, as Phillipsburg makes clear. Ibid.
The Court's approach in Philadelphia National Bank to defining geographic markets for commercial banks was reaffirmed in Phillipsburg National Bank, 399 U.S. at 399 U. S. 362-365.
In Marine Bancorporation, ante at 418 U. S. 619, we affirmed the District Court's determination of the Spokane metropolitan area as the relevant geographic market. That holding was not an affirmation of SMSA's as banking markets; SMSA's were not at issue in that case. The Spokane metropolitan area was defined as the relevant geographic market in Marine Bancorporation because it is an insulated banking market, is comparatively small by geographic standards in the Western States, contains all the banking offices of the target bank, and is the area from which that bank draws some 90% of its deposit accounts.
The District Court also concluded that, assuming, arguendo, that the consolidation violated the Clayton Act, it nonetheless met the standards of the "convenience and needs" test of the Bank Merger Act of 1966, 12 U.S.C. § 1828(c)(5)(B). 362 F.Supp. at 288. Its findings on the "convenience and needs" defense are not controlling, however, if it erred in the standards applied in judging the status of the consolidation under the Clayton Act. United States v. Third National Bank, 390 U. S. 171, 390 U. S. 183-184 (1968). See also Phillipsburg National Bank, 399 U.S. at 399 U. S. 369-370.
relying on a statement to similar effect in United States v. Marine Bancorporation, Inc., ante, p. 418 U. S. 602. Accordingly, the Court rejects the proposition, which the appellee banks accepted Page 418 U. S. 674 below, * that the merger of FNH and CNB should be analyzed in terms of its effect on possible potential competition in areas not in or adjacent to the New Haven and Bridgeport markets, however those markets are to be defined.
To be sure, the selection of any relevant geographic market in a banking case must be chosen in terms of the needs of the customers and the area in which sellers operate, United States v. Philadelphia National Bank, 374 U. S. 321, 374 U. S. 357-359 (1963), but this may result in several possible markets, especially in a potential competition case where a merger might affect the economic behavior of existing firms in various markets. .
As I read the majority opinion, if one assumed that FNH and CNB were the two largest banks in Connecticut, and, although located in southwest Connecticut, both had the capability and interest to enter a concentrated banking market in northeast Connecticut, it would be improper for the Government to oppose their merger, since Page 418 U. S. 675 neither bank had as yet entered the northeast Connecticut banking market. The majority describes the possibility of such dual entry as "too speculative." Ante at 418 U. S. 673. What is a relevant geographic market is an issue entirely distinct from who is a potential competitor. It is obvious, for example, that, while New Haven and/or its environs is a relevant market of banking competition, it may nonetheless be true that CNB may not prove to be a potential competitor with respect to that market. It, therefore, follows that whether the banking market in northeast Connecticut is a relevant banking market is a question entirely separate from whether FNH and/or CNB should be considered potential competitors in that market, and whether the elimination of one of those competitors lessens either the possibility of deconcentration in that market or, under the "wings theory," affects present competition in that market. Since the majority professes to leave issues of potential competition to the District Court on remand, it should not preclude a finding that this merger will affect banking competition in areas of the State other than Bridgeport or New Haven. The possibility of finding many banking markets in Connecticut is an entirely separate matter from finding one banking market in the State under a theory of state-wide linkage of oligopolies. The latter assumes that a section of the country need not be a banking market; the former does not.