Source: http://www.justice.gov/atr/cases/f4800/4883.htm
Timestamp: 2014-08-23 11:42:11
Document Index: 401727484

Matched Legal Cases: ['§ 7', '§ 18', '§ 25', '§ 7', '§ 18', '§ 15', '§ 25', '§ 7', '§ 7', '§ 7', '§\n18', '§ 7', '§ 7', '§ 18', '§ 7', '§ 7', '§ 7', '§ 13', '§ 13']

Memorandum of the United States in Support of Motion for a Temporary Restraining Order and Preliminary Injunction : U.S. v. Franklin Electric Co., Inc., United Dominion Industries Limited, and United Dominion Industries, Inc.
v. FRANKLIN ELECTRIC CO., INC., UNITED DOMINION INDUSTRIES LIMITED, and UNITED DOMINION INDUSTRIES, INC.,
| Civil No:
Filed: 5/31/00
MEMORANDUM OF UNITED STATES IN SUPPORT OF
Introduction Factual Overview
The Defendants Franklin Electric Co., Inc.
United Dominion Industries Limited and United Dominion Industries, Inc.
The Submersible Turbine Pump Industry The Legal Standard for Preliminary Relief Has Been Satisfied
The Government Is Likely to Succeed on the Merits Under the Standards
Established by § 7 of the Clayton Act The Government Is Likely to Prevail at Trial in Establishing That the
Production, Manufacture, and Sale of Submersible Turbine Pumps Is a
Relevant Product Markets Include All Practical, Cost-Effective
Substitutes and Exclude Other Possible Substitutes The Development, Production, and Sale of Submersible Turbine
Pumps Constitutes a Relevant Product Market
The Government Is Likely to Prevail at Trial in Establishing That the
United States Is a Relevant Geographic Market for the Manufacture and
Sale of Submersible Turbine Pumps The Government Is Likely to Prevail at Trial in Establishing that the
Acquisition Is Likely to Lessen Competition Substantially The Transaction Creating a Joint Venture with Control of All of
the Submersible Turbine Pump Market Is Presumptively Illegal The Defendants Cannot Point to Any Factors That Overcome the
Presumption That the Proposed Joint Venture is Illegal Entry Is Not Likely to Occur in a Timely and Sufficient
Manner to Prevent Franklin Electric from Exercising
Defendants Cannot Demonstrate That the Anticompetitive
Effects of the Transaction Are Overcome by
Countervailing Efficiencies
In the Absence of Injunctive Relief Competition Will Suffer Irreparable
Preliminary Relief Advances the Public Interest
Any Pecuniary Harm to the Defendants' Interests Is Outweighed
by the Public's
Interest in Preserving Competition
Conclusion TABLE OF AUTHORITIES
AlliedSignal, Inc. v. B.F. Goodrich Co., 183 F.3d 568 (7th Cir. 1999) Ball Memorial Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325 (7th Cir.
1986) Brown Shoe Co. v. United States, 370 U.S. 294 (1962) California v. American Stores Co., 495 U.S. 271 (1990) Christian Schmidt Brewing Co. v. G. Heileman Brewing Co., 600 F. Supp. 1326
(E.D. Mich.),
aff'd, 753 F.2d 1354 (6th Cir. 1985) Community Publishers, Inc. v. Donrey Corp., 892 F. Supp. 1146 (W.D. Ark.
1995), aff'd sub
nom. Community Publishers, Inc. v. DR Partners, 139 F.3d 1180 (8th Cir. 1998) Consolidated Gold Fields, PLC v. Anglo Am. Corp. of S. Afr., 698 F. Supp.
487 (S.D.N.Y.
1988), aff'd in part and rev'd in part on other grounds sub nom. Consolidated Gold Fields
v. Minorco, SA, 871 F.2d 252 (2d Cir. 1989) Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979) FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34 (D.D.C. 1998)
FTC v. Elders Grain, Inc., 868 F.2d 901 (7th Cir. 1989) FTC v. PepsiCo, 477 F.2d 24 (2d Cir. 1973) FTC v. PPG Indus., 798 F.2d 1500 (D.C. Cir. 1986) FTC v. Procter & Gamble Co., 386 U.S. 568 (1967) FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) FTC v. University Health, Inc., 938 F.2d 1206 (11th Cir. 1991) FTC v. World Travel Vacation Brokers, Inc., 861 F.2d 1020 (7th Cir. 1988)
Gulf & W. Indus. v. Great Atl. & Pac. Tea Co., 476 F.2d 687 (2d Cir.
1973) Hospital Corp. of Am. v. FTC, 807 F.2d 1381 (7th Cir. 1986) Marathon Oil Co. v. Mobil Corp., 530 F. Supp. 315 (N.D. Ohio),
aff'd, 669 F.2d 378 (6th Cir.
1981) Tasty Baking Co v. Ralston Purina, Inc., 653 F. Supp. 1250 (E.D. Pa. 1987)
Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953) United Nuclear Corp. v. Combustion Eng'g, Inc., 302 F. Supp. 539 (E.D. Pa.
1969) United States v. Archer-Daniels-Midland Co., 866 F.2d 242 (8th Cir. 1988)
United States v. Baker Hughes Inc., 908 F.2d 981 (D.C. Cir. 1990) United States v. Citizens & S. Nat'l Bank, 422 U.S. 86 (1975) 16
United States v. Columbia Pictures Indus., 507 F. Supp. 412 (S.D.N.Y. 1980)
United States v. Continental Can Co., 378 U.S. 441 (1964)
United States v. General Dynamics Corp., 415 U.S. 486 (1974) United States v. Ingersoll-Rand Co., 218 F. Supp. 530 (W.D. Pa.),
aff'd, 320 F.2d 509 (3d Cir.
1963) United States v. Ingersoll-Rand Co., 320 F.2d 509 (3d Cir. 1963) United States v. Ivaco, Inc., 704 F. Supp. 1409 (W.D. Mich. 1989) United States v. Marine Bancorporation, 418 U.S. 602 (1974) United States v. Philadelphia Nat'l Bank, 374 U.S. 321 (1963) United States v. Rockford Memorial Corp., 717 F. Supp. 1251 (N.D. Ill. 1989),
aff'd, 898 F.2d
1278 (7th Cir. 1990) United States v. Rockford Memorial Corp., 898 F.2d 1278 (7th Cir. 1990)
United States v. Siemens Corp., 621 F.2d 499 (2d Cir. 1980)
United States v. United Tote, Inc., 768 F. Supp. 1064 (D. Del. 1991) United States v. White Consol. Indus., 323 F. Supp. 1397 (N.D. Ohio 1971)
United States v. Wilson Sporting Goods Co., 288 F. Supp. 543 (N.D. Ill. 1968)
Will v. Comprehensive Accounting Corp., 776 F.2d 665 (7th Cir. 1985) YourNetDating, LLC v. Mitchell, 88 F. Supp. 2d 870 (N.D. Ill. 2000) Statutes
15 U.S.C. § 18 2, 8, 9, 14, 21
15 U.S.C. § 25 7
U.S. Department of Justice and Federal Trade Commission, Horizontal Merger
Guidelines (1997
rev.) I. Introduction
The United States brings this antitrust action to block the combination of Franklin
Electric Co., Inc. ("Franklin Electric") and United Dominion Industries, Inc. ("UDI"), the only
two manufacturers of submersible turbine pumps for gasoline service stations ("STPs") that are
used in the United States. (United States' Proposed Findings of Fact and Conclusions of Law
[hereinafter "Prop. Find."] ¶ 13.) Franklin Electric and UDI propose to combine their
businesses into a new joint venture which will be controlled by Franklin Electric. (Prop. Find.
¶ 5.) The joint venture would eliminate the vigorous competition between the
has provided consumers with competitive prices, product innovation, and comprehensive
service. (Prop. Find. ¶ 17.) Through the creation of the joint venture Franklin Electric
unlawfully gain monopoly power in the STP market, enabling the joint venture to raise prices
and reduce quality and service.
STPs are a critical component in gasoline service stations. STPs are located in the
underground gasoline storage tanks at service stations and pump the gasoline up through the
piping system to the above-ground islands containing the dispensers(1) that ultimately deliver the
gasoline to the vehicle. (Prop. Find. ¶ 7.) Currently, nearly all gasoline service stations in
United States require STPs for each of their underground storage tanks (Prop. Find. ¶ 11),
these purchasers of STPs have benefitted significantly from the competition between Franklin
Electric and UDI (Prop. Find. ¶ 14). Defendants, for example, have made repeated
improvements to their STPs, in significant part due to the competitive pressure created by their
rivalry. (Prop. Find. ¶ 16.) The proposed joint venture would eliminate all competition in
STP market and give the joint venture significant market power -- indeed, monopoly power --
in violation of the antitrust laws.
Unless the Court issues the temporary restraining order and preliminary injunction
requested by the United States, defendants may close this transaction as early as June 5, 2000,
preventing a full and meaningful resolution of this case on the merits. To prevent serious harm
to competition and to protect the service stations and other customers who are benefitting from
competition between the merging firms, the United States has filed a complaint under § 7
Clayton Act. Section 7 provides that:
No person engaged in commerce or in any activity affecting
commerce shall acquire, directly or indirectly, the whole or any
part of the stock . . . of another person engaged also in commerce
or in any activity affecting commerce, where in any line of
commerce or in any activity affecting commerce in any section of
the country, the effect of such acquisition may be substantially to
lessen competition, or to tend to create an monopoly.
15 U.S.C. § 18 (emphasis added). Plaintiff United States submits this Memorandum
of its Motion for a Temporary Restraining Order and a Preliminary Injunction to prevent the
defendants from consummating their proposed joint venture pending a full trial on the merits.
II. Factual Overview
Franklin Electric is an Indiana corporation headquartered in Bluffton, Indiana. Franklin
Electric is the world's largest manufacturer of submersible electric motors and a leading
producer of engineered specialty electric motor products and electronic drives and controls. In
1998, as part of the settlement of an intellectual property dispute between Franklin Electric and
UDI, Franklin Electric purchased UDI's submersible motor business.
FE Petro, Inc. ("FE Petro") is a wholly-owned subsidiary of Franklin Electric; FE Petro's
corporate headquarters is located in McFarland, Wisconsin. FE Petro was incorporated in July,
1988, and produced its first STP in late 1989 after acquiring the STP business of Gilbarco. Its
STPs are sold under the "FE Petro" brand name. In November, 1992, FE Petro also acquired the
STP business of Tokheim Corporation. FE Petro produces STPs in its plant in McFarland,
Wisconsin, using motors that Franklin Electric manufactures in Bluffton, Indiana. Franklin
Electric will likely close the McFarland plant if it succeeds in acquiring control over the Marley
STP business.
United Dominion Industries Limited and United Dominion
United Dominion Industries Limited is a Canadian corporation headquartered in
Charlotte, North Carolina. The company manufacturers proprietary engineered products for
industrial markets throughout the world. UDI, a wholly-owned subsidiary of United Dominion
Industries Limited, is a Delaware corporation also headquartered in Charlotte, North Carolina. Marley Pump Company ("Marley Pump"), a division of UDI, is a Delaware corporation
headquartered in Davenport, Iowa. UDI acquired The Marley Company ("Marley"), including
its Marley Pump subsidiary, in 1993. Marley designs, manufactures, and sells STPs, mechanical
and electronic leak detection devices, and submersible and surface pump water systems. Marley
Pump's products are sold under the "Red Jacket" brand name. Marley Pump manufactures its
STPs in Davenport, Iowa.
Pursuant to a joint venture agreement between Franklin Electric and UDI, Franklin
Electric will contribute 100% of the voting stock of FE Petro to the joint venture. UDI will
contribute the principal assets used in its STP business to the joint venture. Franklin Electric
will own 75% of the joint venture and therefore control the joint venture's operations; UDI will
own the remaining 25%. On formation of the joint venture, Franklin Electric will pay UDI
approximately $50.3 million. Under the terms of the joint venture agreement, Franklin Electric
can force UDI to sell its share of the joint venture at any time for $16.8 million; UDI can also
force Franklin Electric to purchase UDI's share of the joint venture at any time, also for $16.8
The Submersible Turbine Pump Industry
A submersible turbine pump is an essential piece of equipment in gasoline service
stations in the United States. As the name suggests, the pump is submersed in gasoline inside
the underground storage tank. One STP is required for each storage tank at a gasoline service
station. For example, a typical gasoline service station might have three STPs: one for
standard-grade gasoline, one for high-grade gasoline, and one for diesel fuel.(2) An STP can
generally be purchased for under $1500. An STP consists of three main components: a motor, a pumping unit, and a discharge
head. In appearance, an STP resembles a pipe with a slightly larger cylinder at the bottom and
the distribution head at the top. The underground storage tanks typically have an opening just
large enough to insert a motor and pumping unit four inches in diameter. The cylinder, which
extends vertically from an opening at the top of the storage tank to just a few inches from the
bottom, contains the actual pumping unit, the electric motor, and the impeller, which forces the
gasoline up through the cylinder. The distribution head, which sits on top of the tank, contains
the manifold and connects to the underground network of pipes. The distribution head also
contains the electrical supply; a conduit extending through the cylindrical pipe contains wires
that supply power to the pumping mechanism. STPs come in a variety of motor horsepowers and are increasingly equipped with
variable speed and telescoping shaft features. Variable speed drives allow the pump to maintain
a constant flow regardless of the number of dispensers delivering gas from that storage tank at
any particular time. The telescoping shaft allows the product to be adjusted to fit a variety of
Because the pump in an STP operates while submerged in gasoline, it must be designed
so that it does not produce sparks that would ignite the gasoline and cause an explosion. In the
United States, STPs must therefore receive Class I explosion proof certification from
Underwriter Laboratories ("UL"). (Prop. Find. ¶ 9.) UL certification requires that the
motor be sealed away from the gasoline in which it rests, and that the electrical connection,
wiring, and other components have gasoline resistant properties. Franklin Electric is the only
company in the world that manufactures submersible motors that are approved by UL for sale in
the United States.(3) (Prop. Find. ¶ 23.)
FE Petro and Marley sell their STPs primarily through independent petroleum equipment
distributors. These independent distributors sell a wide range of petroleum equipment to
gasoline service station owners, operators, and building contractors. A small portion of STPs are
sold directly to FE Petro's and Marley's larger end-user customers, including major oil
companies such as ExxonMobil or BP Amoco. The major oil companies, however, operate only
a fraction of the stations which market gasoline under their brand name. The remaining stations
are owned by independent firms; these firms purchase STPs independently and are not bound by
the major oil companies' decision to purchase a particular brand STP.
The only product that can perform the same general function as an STP -- moving the
gasoline from the underground storage tank to the dispenser -- is the suction pump. Suction
pumps are located inside each gasoline dispenser instead of in the underground storage tank. Because a single STP can serve several dispensers, STPs have virtually replaced suction pumps
for use in gasoline service stations in the United States. Suction pumps are still used in
commercial applications, such as a business with an on-site dispenser to service its own fleet of
FE Petro and Marley are the only two manufacturers in the world of STPs suitable for
use in the United States.(4) (Prop. Find. ¶ 13.) Competition between FE Petro and Marley has
provided tremendous benefits to customers, particularly in terms of price, innovation, and
service. (Prop. Find. ¶ 14.) Before FE Petro entered the market, Marley Pump was the
dominant supplier of STPs in the United States and the world. Because customers had few
choices for STPs, competition in pricing, service, and product innovation was minimal. As a
new entrant, FE Petro struggled for years until it introduced two major improvements to the
STP: a variable speed drive and a telescoping shaft. Both these features developed by FE Petro
had enormous appeal to customers. As a result of this innovation, FE Petro rapidly gained
market share and Marley was ultimately forced to copy these improvements to remain
competitive. FE Petro developed a variable speed motor that improved flow to the dispenser in
large gasoline service stations. FE Petro also developed a telescoping, or variable-length, shaft
for the STP. The telescoping shaft makes the installation of STPs easier, since the piping can be
adjusted to fit different size tanks; the telescoping STP is also easier to transport and store
because it takes up less space.
III. The Legal Standard for Preliminary Relief Has Been
Pursuant to § 15 of the Clayton Act, in proceedings brought by the United States to
prevent the Act's violation, "the court may at any time make such temporary restraining order or
prohibition as shall be deemed just in the premises." 15 U.S.C. § 25.
The standard employed in the Seventh Circuit for granting preliminary relief(5) requires
the movant to "meet the threshold burden of establishing (1) some likelihood of prevailing on
the merits; and (2) that in the absence of the injunction, [the movant] will suffer irreparable harm
for which there is no adequate remedy at law." AlliedSignal, Inc. v. B.F. Goodrich
Co., 183
F.3d 568, 573 (7th Cir. 1999). Once the movant satisfies this initial test, the district court
"engages in a 'sliding scale' analysis by balancing the harms to the parties and the public
interest." Id. The Seventh Circuit has described this sliding scale analysis in
antitrust cases by
observing that "[t]he greater the plaintiff's likelihood of success on the merits when those merits
are ultimately determined after a full trial . . . the less harm from denial of the preliminary
injunction the plaintiff need show in relation to the harm that the defendant will suffer if the
preliminary injunction is granted." FTC v. Elders Grain, Inc., 868 F.2d 901, 903
(7th Cir.
The application of this test in the present case leads to the inexorable conclusion that
preliminary relief should issue. First, the United States can demonstrate overwhelmingly that
the proposed transaction, which will eliminate Franklin Electric's only competitor in the STP
market, is likely to substantially lessen competition in the STP market, and thus that the
proposed transaction violates § 7 of the Clayton Act. Second, once the United States
reasonable probability that § 7 has been violated, the government "need not prove
injury to obtain a preliminary injunction." Elders Grain, 868 F.2d at 903;
accord FTC v. World
Travel Vacation Brokers, Inc., 861 F.2d 1020, 1028-29 (7th Cir. 1988); United
States v. Siemens
Corp., 621 F.2d 499, 506 (2d Cir. 1980); United States v. Ingersoll-Rand Co.,
320 F.2d 509, 524
(3d Cir. 1963). Third, although the defendants may claim that they will suffer financial harm as
a result of any delay in closing the transaction, any such harm is speculative in nature and does
not outweigh the public's interest in preserving competition in the present case. See Elders
Grain, 868 F.2d at 903-04. Fourth, maintenance of the status quo through the issuance of
preliminary relief comports with Congress' intent in enacting the Clayton Act, and thus is in the
public interest. See Gulf & W. Indus. v. Great Atl. & Pac. Tea Co., 476
F.2d 687, 699 (2d Cir.
1973) (noting that in litigation brought by the government, any "doubts as to whether an
injunction sought is necessary to safeguard the public interest -- when the public interest
involved is as clear, pervasive and vital as the record here demonstrates -- should be resolved in
favor of granting the injunction" (citing United States v. First Nat'l City Bank, 379
U.S. 378,
383 (1965))).
The Government Is Likely to Succeed on the Merits Under the
Established by § 7 of the Clayton Act
Section 7 of the Clayton Act prohibits any acquisition "where in any line of commerce or
in any activity affecting commerce in any section of the country, the effect of such acquisition
may be substantially to lessen competition, or to tend to create a monopoly." 15 U.S.C. §
18. The purpose of § 7 is to prevent acquisitions or mergers before they create
harm. See Brown
Shoe Co. v. United States, 370 U.S. 294, 318 n.32 (1962); Hospital Corp. of Am. v.
FTC, 807
F.2d 1381, 1389 (7th Cir. 1986); Fruehauf Corp. v. FTC, 603 F.2d 345, 351 (2d Cir.
(noting that "Section 7 of the Clayton Act was intended to arrest a trade restraint or a substantial
lessening of competition in its incipiency; it is not concerned with 'certainties'"). To establish a § 7 violation, a "plaintiff need only prove that [the] effect [of the
challenged acquisition] 'may be substantially to lessen competition'" within a
relevant market. California v. American Stores Co., 495 U.S. 271, 284 (1990) (quoting 15 U.S.C.
§ 18)
(emphasis added in original). Accordingly, "[s]ection 7 does not require proof that a merger or
other acquisition has caused higher prices in the affected market. All that is necessary is that the
merger create an appreciable danger of such consequences in the future. A predictive judgment,
necessarily probabilistic and judgmental rather than demonstrable is called for." Hospital
807 F.2d at 1389 (citation omitted) (citing United States v. Philadelphia Nat'l Bank,
321, 362 (1963)); accord FTC v. PepsiCo, 477 F.2d 24, 28 (2d Cir. 1973) (noting
government "need not establish any actual anti-competitive effects but only an incipiency"). "[D]oubts are to be resolved against the transaction." Elders Grain, 868 F.2d at 906.
To predict whether an acquisition may substantially lessen competition or tend to create a
monopoly, the reviewing court must determine: (1) the "line of commerce" or product market in
which to assess the transaction; (2) the "section of the country" or geographic market in which to
assess the transaction, and (3) the transaction's probable effect on competition in the product and
geographic markets. See United States v. Marine Bancorporation, 418 U.S. 602,
618-23 (1974);
FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34, 45 (D.D.C. 1998);
United States v. Ivaco, Inc.,
704 F. Supp. 1409, 1415, 1418 (W.D. Mich. 1989); Christian Schmidt Brewing Co. v. G.
Heileman Brewing Co., 600 F. Supp. 1326, 1328 (E.D. Mich.), aff'd, 753
F.2d 1354 (6th Cir.
1985). The Seventh Circuit has mandated that "the economic concept of competition, rather
than any desire to preserve rivals as such, is the lodestar that shall guide the contemporary
application of the antitrust laws," including in merger cases.(6) Hospital Corp., 807 F.2d at 1386. The Government Is Likely to Prevail at Trial in Establishing That
Production, Manufacture, and Sale of Submersible Turbine Pumps Is
a Relevant Product Market
Relevant Product Markets Include All Practical, Cost-Effective Substitutes and
Exclude Other Possible Substitutes
The starting point in any merger analysis is determining the relevant product market. The relevant product market establishes the boundaries within which competition meaningfully
exists. Those "commodities reasonably interchangeable by consumers for the same purposes"
constitute a product market for antitrust purposes. United States v. E.I. du Pont de
Nemours &
Co., 351 U.S. 377, 395 (1956). As the Supreme Court has recognized, the market "must
drawn narrowly to exclude any other product to which, within reasonable variations in price,
only a limited number of buyers will turn." Times-Picayune Publishing Co. v. United
345 U.S. 594, 612 n.31 (1953); accord Brown Shoe, 370 U.S. at 325 (noting that
markets are delineated "by the reasonable interchangeability of use or the cross-elasticity of
demand between the product itself and substitutes for it").
A way of verifying whether substitutes are practical and cost effective, and therefore
belong in the product market, is by ascertaining whether an increase in price for the product in
question would cause a sufficient number of buyers to turn to other product substitutes so as to
make the price increase unprofitable. See United States v. Archer-Daniels-Midland
Co., 866
F.2d 242, 246-48 (8th Cir. 1988). If the price increase would be profitable, despite the
availability of the claimed substitutes, those other product substitutes are properly excluded from
the relevant product market. See id. at 248. This same analytical approach is incorporated into the Department of Justice and Federal
Trade Commission 1992 Horizontal Merger Guidelines. See U.S. Department of
Federal Trade Commission, Horizontal Merger Guidelines ¶ 1.11
(1997 rev.) (hereinafter
"Merger Guidelines").(7) The Merger Guidelines take the
smallest possible group of competing
products and ask whether a "hypothetical monopolist over that group of products would
profitably impose at least a 'small but significant and nontransitory' [price] increase." Merger
Guidelines ¶ 1.11. Under the Merger Guidelines, a "small but significant and
nontransitory"
price increase in most instances is an "increase of five percent lasting for the foreseeable future." Id. ¶ 1.11; accord Consolidated Gold Fields, PLC v. Anglo Am. Corp.
of S. Afr., 698 F. Supp.
487, 501 (S.D.N.Y. 1988) (noting that the "benchmark for including a substitute in a market is
that the sales of the substitute rise significantly in response to a non-temporary 5% or more
increase in prices"), aff'd in part and rev'd in part on other grounds sub nom. Consolidated
Gold Fields PLC v. Minorco, SA, 871 F.2d 252 (2d Cir. 1989).
The Development, Production, and Sale of Submersible
Turbine Pumps Constitutes a Relevant Product Market
In the event of a small but significant increase in the price of STPs, gasoline service
stations would not switch to any other product in sufficient numbers to defeat the profitability of
the price increase. (Prop. Find. ¶ 12.) No other product is an effective economic
STPs in the United States. (Prop. Find. ¶ 11.) While suction pumps can deliver fuel from
underground storage tanks to the dispenser, as STPs do, suction pumps suffer from several
performance and financial disadvantages that make them a poor economic substitute for STPs in
the large, high-volume service stations prevalent in the United States. Suction pumps cannot be used in large modern service stations because they cannot
effectively pull the gasoline with the required flow rate for the distance required under the layout
of modern stations with large underground storage tanks. Suction pumps are also more
expensive in a high-volume retail service station because far more suction pumps would be
needed. A separate suction pump is needed in each dispenser for each grade of gasoline,
whereas a single STP in the underground storage tank can serve all the dispensers connected to
that tank. In addition, substantially more piping may be required in a suction pump system than
in an STP system. Suction pumps are also subject to "vapor lock" at high temperatures; vapor
lock shuts down the pump and occurs when the fuel vaporizes due to the heat and the suctioning
force applied by the suction pump. In a retail service station, where STPs are primarily used today, the economics of the
STP are so compelling in comparison to the suction pump that consumers would not switch to
suction pumps in response to a small but significant increase in the price of STPs, nor would
STP purchasers refrain from buying STPs in response to a small but significant non-transitory
price increase. While STPs represent a very small portion of the cost of building, upgrading,
and operating a gasoline service station, STPs are a critical component of any gas station. A
modest increase in the price of STPs would therefore have little, if any, impact on the demand
for STPs. Demand for STPs is, in other words, highly inelastic.
The Government Is Likely to Prevail at Trial in Establishing That
United States Is a Relevant Geographic Market for the Manufacture
and Sale of Submersible Turbine Pumps
A relevant geographic market is an "area in which the seller operates, and to which the
purchaser can practicably turn for supplies." United States v. Philadelphia Nat'l
Bank, 374 U.S.
321, 359 (1963) (internal quotation marks and emphasis omitted); accord Elders
Grain, 868
F.2d at 907 ("A market is the set of sellers to which a set of buyers can turn for supplies at
existing or slightly higher prices"). If consumers in a given geographic area do not consider
products from outside that area as reasonable, practical alternatives, then that geographic area is
a relevant geographic market. Hospital Corp., 807 F.2d at 1388. The Merger
identify the relevant geographic market as "a region such that a hypothetical monopolist that was
the only present or future producer of the relevant product at locations in that region would
profitably impose at least a 'small but significant and nontransitory' increase in price, holding
constant the terms of sale for all products produced elsewhere." Merger Guidelines ¶
For submersible turbine pumps, the relevant geographic market is the United States. FE
Petro and Red Jacket STPs are manufactured in the United States and sold throughout the United
States. Currently, there are no STPs manufactured abroad that are imported for use in the
United States. The government is aware of only one firm outside the United States -- Barbero,
a small Italian company -- that manufactures STPs. Barbero has less than a 1% share of
worldwide STP sales and its STP has not been approved by UL for sale in the United States. U.S. STP customers would therefore not turn to Barbero in response to a price increase by a
hypothetical monopolist in the United States. Accordingly, the United States is a relevant
geographic market for the production and sale of STPs.
the Acquisition Is Likely to Lessen Competition Substantially
The Transaction Creating a Joint Venture with Control of All
of the Submersible Turbine Pump Market Is Presumptively
A transaction challenged under § 7 of the Clayton Act is presumed
illegal if the
Government can show that the combined entity would have a significant market share in a
sufficiently concentrated market. Philadelphia Nat'l Bank, 374 U.S. at 363
(concluding that "a
merger which produces a firm controlling an undue percentage share of the relevant market, and
results in a significant increase in the concentration of firms in that market is so inherently likely
to lessen competition substantially that it must be enjoined in the absence of evidence clearly
showing that the merger is not likely to have such anticompetitive effects"); United States
Rockford Memorial Corp., 898 F.2d 1278, 1285 (7th Cir. 1990); see also FTC v.
Health, Inc., 938 F.2d 1206, 1218 (11th Cir. 1991). In Philadelphia National
Supreme Court held that a merger resulting in a single firm controlling 30% of a market in
which four firms had 78% of the sales was presumptively illegal. Philadelphia Nat'l
Bank, 374
U.S. at 364. Similarly, in United States v. Continental Can Co., 378 U.S. 441
(1964), the Court
found a merger presumptively illegal where the merging firms' aggregate market share was
25%, the acquired firm's pre-merger share was 3.1%, and the leading four firms would have
accounted for 66.8% of the relevant market after the merger. Id. at 461.(8)
Here the parties are merging to monopoly. The joint venture would eliminate the
vigorous competition that exists today between FE Petro and Marley. This market has been
served by a monopoly firm in the past; Marley's dominant position before FE Petro's entry into
the market resulted in uncompetitive pricing, poor service, and minimal innovation. If
defendants are allowed to proceed with the proposed joint venture, Franklin Electric would
control 100% of the United States market for STPs. Following the Supreme Court's mandate in
Philadelphia National Bank, the proposed transaction must be presumed illegal. See also
Rockford Memorial, 898 F.2d at 1285-86.
The Defendants Cannot Point to Any Factors That Overcome
the Presumption That the Proposed Joint Venture is Illegal
Once the United States has established a presumptive violation of the Clayton Act, the
defendants may introduce evidence to attempt to rebut that presumption. However, the Supreme
Court has directed that the presumption will not easily be overcome. Philadelphia Nat'l
374 U.S. at 363 (concluding that defendants must "clearly" demonstrate that the acquisition will
not substantially lessen competition). Defendants can only rebut this presumption of illegality
by a clear showing that other market characteristics would preclude the merger from
substantially lessening competition. Id.; United States v. General Dynamics
Corp., 415 U.S.
486, 497-98 (1974). In such a case, the presumption of illegality can be overcome only if the
defendants show that "the market-share statistics gave an inaccurate account of the
acquisition['s] probable effects on competition." United States v. Citizens & S. Nat'l
Bank, 422
U.S. 86, 120 (1975); accord Rockford Memorial, 898 F.2d at 1286 (noting that once
established merger would create firm with monopoly market share, "it behooved the defendants
to present evidence that the normal inference to be drawn from such a market share would
mislead").
Entry Is Not Likely to Occur in a Timely and Sufficient
The presumption that the proposed transaction will result in
anticompetitive effects,
created by Franklin Electric's control of the entire STP market after the joint venture, can
generally be overcome where entry in the market is so easy that the merged entity could not
profitably maintain a price increase above pre-merger levels. See, e.g., United
States v. Baker
Hughes Inc., 908 F.2d 981, 987 (D.C. Cir. 1990) ("In the absence of significant [entry]
a company probably cannot maintain supracompetitive pricing for any length of time.");
Comprehensive Accounting Corp., 776 F.2d 665, 672 n.3 (7th Cir. 1985) ("Unless
entry prevent rivals from entering the market at the same cost of production, even a very large
market share does not establish market power."); cf. Elders Grain, 868 F.2d at 905
(concluding
that "since entry into the industry is slow," collusion could be profitable). However, whether
entry is sufficiently easy to eliminate the anticompetitive danger posed by a given transaction
will depend on whether such entry would be timely, likely and sufficient in its magnitude,
character and scope to deter or counteract the loss of competition. See, e.g., Merger
¶ 3.0. Thus, the question of whether entry can rebut a prima facie showing that a
violates Section 7 turns on the specific facts of the particular market affected by the transaction. See, e.g., Tasty Baking Co v. Ralston Purina, Inc., 653 F. Supp. 1250,
1263-64 (E.D. Pa. 1987);
cf. Ball Memorial Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1335-37
(concluding in rule of reason case that low entry barriers in particular market overcame usual
inference of market power from high market share figures).
In the STP market, substantial entry is unlikely to occur within a sufficient period of time
to discipline the merged firm. Any new entrant would face substantial difficulties, including the
necessity of designing around patents that would be held by Franklin Electric,(9) locating a source
of motors for the pump,(10) securing approval from the
UL, establishing a distribution network,
and obtaining customer acceptance of the new product, all in the face of established products
currently produced by the defendants. Even from the perspective of the most optimistic new
entrant, it would be at least three years before the new entrant has any substantial share of the
STP market.(11) Any new entrant, moreover, would be
forced to compete with an entrenched
monopolist, further reducing the likelihood the entrant would be a viable competitor. The
likelihood of a new firm entering the STP market in a timely and sufficient manner to prevent
Franklin Electric from exercising market power through the joint venture is exceedingly remote.
Defendants Cannot Demonstrate That the
Anticompetitive Effects of the Transaction Are
Overcome by Countervailing Efficiencies
Although Franklin Electric may claim that the acquisition of control over its only
competitor would result in efficiencies, such efficiencies do not justify approval of this merger to
monopoly. Case law suggests that claimed efficiencies cannot save an otherwise illegal merger: [A] merger the effect of which "may be substantially to lessen competition" is not
saved because, on some ultimate reckoning of social or economic debits and
credits, it may be deemed beneficial. A value choice of such magnitude is
beyond the ordinary limits of judicial competence, and in any event has been
made for us already, by Congress when it enacted the amended § 7. Congress
determined to preserve our traditionally competitive economy.
Philadelphia Nat'l Bank, 374 U.S. at 371; accord FTC v. Procter &
Gamble Co., 386 U.S. 568,
580 (1967); United States v. United Tote, Inc., 768 F. Supp. 1064, 1084-85 (D. Del.
(noting that "even if the merger resulted in efficiency gains, there are no guarantees that these
savings would be passed on to the consuming public"); United States v. Rockford
Corp., 717 F. Supp. 1251, 1288-89 (N.D. Ill. 1989), aff'd, 898 F.2d 1278 (7th
Cir. 1990); United
Nuclear Corp. v. Combustion Eng'g, Inc., 302 F. Supp. 539, 554-555 (E.D. Pa. 1969). Indeed,
no court has ever approved a merger based on an efficiencies defense, let alone in a merger to
monopoly. The Merger Guidelines allow for consideration of verifiable, merger-specific efficiencies
that are generated in the relevant product market, if the "efficiencies are of a character and
magnitude such that the merger is not likely to be anticompetitive in any relevant market." Merger Guidelines ¶ 4. The Merger Guidelines, however, correctly caution that
"[e]fficiencies
almost never justify a merger to monopoly or near-monopoly." Id. This merger
present the exceptional case where a merger to monopoly might be justified by substantial and
credible claims of merger-specific efficiencies. Even courts that have considered efficiency
claims have laid down a "very rigorous standard" that must be met. Rockford
Memorial, 717 F.
Supp. at 1289. Defendants must prove, by "clear and convincing evidence," id.,
claimed efficiencies: (1) will actually be achieved and are not based on speculation,
Health, 938 F.2d at 1222-23; (2) are merger specific, and can be achieved "only through
merger and in no other manner," Rockford Memorial, 717 F. Supp. at 1289; (3) will
on, providing a "significant economic benefit to consumers," id.; and (4) will
merger's anticompetitive effect, providing a "net economic benefit" for the consumer,
Franklin Electric cannot meet this demanding standard. Franklin Electric did not conduct
a detailed analysis of the cost savings that could be achieved by the joint venture prior to
entering into the joint venture agreement. Franklin Electric has offered only broad estimates that
are unaccompanied by the details necessary to conclude the savings will be achieved. Nor is it
possible to conclude that these savings, given their speculative and vague contours, can only be
achieved through the combination of the STP businesses of Franklin Electric and UDI.
More importantly, given the extremely high inelasticity of demand for STPs there is no
reason to believe any efficiencies Franklin Electric managed to achieve through the joint venture
would be passed on to the customer. The monopolistic joint venture would have no incentive to
lower prices as doing so would not substantially increase demand for STPs; conversely, Franklin
Electric, as a monopolist, would have every incentive to raise price as doing so would not reduce
Defendants have claimed they need to merge in order to penetrate the markets outside the
United States that, for a variety of historical reasons, largely still rely on suction pumps. The
defendants have not established that they need to merge their businesses in order to develop
these new markets; indeed, both FE Petro and Marley sell their products throughout the world
today. Even if the defendants' argument were true, however, customers in the United States
should not be forced to endure a monopolist in STPs so that customers in other countries can
benefit. Philadelphia Nat'l Bank, 374 U.S. at 370 (rejecting argument that
"anticompetitive
effects in one market could be justified by procompetitive consequences in another").
In the Absence of Injunctive Relief Competition Will Suffer
Once the government has established a likelihood of success on the merits of its §
claim, irreparable harm is presumed. Elders Grain, 868 F.2d at 903. This is so
because "the
threatened violation of the law here is itself sufficient public injury to justify the requested relief. The Congressional pronouncement in § 7 embodies the irreparable injury of violations of
provisions." United States v. Ingersoll-Rand Co., 218 F. Supp. 530, 544 (W.D. Pa.),
aff'd, 320
F.2d 509 (3d Cir. 1963); accord Ivaco, 704 F. Supp. at 1429. In this instance, serious and permanent harm to competition would occur if the
transaction is allowed to proceed. Once the assets of the two firms are combined to form the
joint venture, management, manufacturing, marketing and service personnel are integrated, and
customer and trade relationships are rearranged, it becomes unlikely that even a subsequent
divestiture would adequately return the market to its pre-merger state. In addition, competition
would be harmed substantially in the interim. Courts have long recognized that an after-the-fact, court-ordered divestiture is most often
an inferior alternative to preliminary relief. "If preliminary relief is not awarded and the merger
is subsequently found to be unlawful, it would be extremely difficult, if at all possible, to
remedy effectively the unlawful merger." Christian Schmidt Brewing, 600 F. Supp.
at 1332;
Ivaco, 704 F. Supp. at 1429 (concluding that subsequent divestiture requirements
are "typically
rejected by the courts as ineffective."). Nor would any form of preliminary relief less than a
complete injunction be adequate. A hold separate order, no matter how well crafted, would not
protect the public against interim competitive harm or ensure the adequacy of final relief. See
FTC v. PPG Indus., 798 F.2d 1500, 1507-08 (D.C. Cir. 1986); United States v.
White Consol.
Indus., 323 F. Supp. 1397, 1399 (N.D. Ohio 1971); United States v. Wilson
Sporting Goods Co.,
288 F. Supp. 543, 569 (N.D. Ill. 1968); cf. AlliedSignal, 183 F.3d at 576
(concluding that district
court judge did not abuse discretion in issuing preliminary injunction where defendant offered to
hold division of company separate, as "this might unduly prejudice the scope of a possible
remedy should the merger ultimately be found to violate Section 7"). In cases such as this,
where the transaction is "almost certainly illegal, the district court face[s] a difficult task in
justifying anything less than a full stop injunction." PPG Indus., 798 F.2d at 1506
case under statutory preliminary injunction standard of § 13(b) of the FTC Act); see
also FTC v.
Staples, Inc., 970 F. Supp. 1066, 1091 (D.D.C. 1997) (employing § 13(b) standard
that where "the Court finds that the [government] has established a likelihood of success on the
merits, a presumption in favor of a preliminary injunction arises"). Unless a temporary
restraining order and preliminary injunction are issued, purchasers of STPs will suffer
Preservation of FE Petro and Marley as independent competitors is also in the public
interest. "By enacting Section 7, Congress declared that the preservation of competition is
always in the public interest." Ivaco, 704 F. Supp. at 1430; accord Marathon
Oil Co. v. Mobil
Corp., 530 F. Supp. 315, 320 (N.D. Ohio) ("[T]he mere possibility that Marathon would
eliminated as an effective competitor from the marketplace is sufficient to satisfy the public
interest criterion."), aff'd, 669 F.2d 378 (6th Cir. 1981). "The public has an interest
preservation of competition in the market, and an injunction is necessary to protect that interest." Ivaco, 704 F. Supp. at 1430. An injunction would preserve competition between FE
Petro and
Marley in the STP market. Any Pecuniary Harm to the Defendants' Interests Is Outweighed
Public's Interest in Preserving Competition
Although the issuance of a preliminary injunction would delay closing of the proposed
transaction, and perhaps cause the defendants some risk of pecuniary harm, "[t]his private,
financial harm must, however yield to the public interest in maintaining effective competition." Ivaco, 704 F. Supp. at 1430; accord Elders Grain, 868 F.2d at
903; University Health, 938 F.2d
at 1225; Christian Schmidt Brewing, 600 F. Supp. at 1332; United States v.
Indus., 507 F. Supp. 412, 434 (S.D.N.Y. 1980). The interest of the public here is great since lessening of competition in the STP market
would likely have a significant negative impact on the quality and services provided to
consumers. The probability that the proposed acquisition is unlawful is, as demonstrated above,
substantial. The only harm the defendants would endure if preliminary relief is granted is delay,
an equity that should be subordinated to the public's interest in preserving the status quo until
these issues are fully heard.
In order to preserve competition in the market for submersible turbine pumps, the United
States requests that this Court issue a temporary restraining order and a preliminary injunction to
enjoin Franklin Electric, UDI, and United Dominion Industries Limited from consummating the
proposed joint venture pending a full trial on the merits. Respectfully submitted,
For Plaintiff United
_______________/s/________________J. Robert Kramer II (Pa. Bar #23963)
Willie L. Hudgins (D.C. Bar # 37127)
Assistant Chief, Litigation II Section _______________/s/________________
Joan Farragher (Ohio Bar #0009231)
Burney P.C. Huber
Bruce K. Yamanaga
Rex Fujichaku
Trial Attorneys, Litigation II Section
Dated: May ___, 2000.
1. The dispenser contains the hose and nozzle for each grade of
gasoline and is commonly
called the "gas pump" by the general public. The actual pumping system is located in the
underground storage tank, and not in the dispenser. Before STPs were developed and widely
adopted, however, the pump was actually located in the dispenser and pulled the gasoline out of
the storage tank by suction.
2. Some service stations blend the standard-grade and high-grade
fuels at the dispenser to
create a medium-grade fuel. Other service stations maintain a separate storage tank (and STP)
for a medium-grade fuel.
3. UDI manufactured UL-approved submersible motors until 1998,
when it sold its
submersible motor business to Franklin Electric and entered into a ten year motor supply
agreement with Franklin Electric. 4. Barbero, a small Italian firm, manufactures STPs that are not
approved by UL. Barbero
has less than 1% of the worldwide sales of STPs. FE Petro and Marley account for more than
99% of STP sales worldwide.
5. The standards for issuing a temporary restraining order and a
preliminary injunction are
the same in the Seventh Circuit. See, e.g., YourNetDating, LLC v.
Mitchell, 88 F. Supp. 2d 870,
871 (N.D. Ill. 2000).
6. The Seventh Circuit has also observed that "[w]hen an economic
approach is taken in a
section 7 case, the ultimate issue is whether the challenged acquisition is likely to facilitate
collusion." Hospital Corp., 807 F.2d at 1386. A merger to monopoly represents the
facilitation of collusion by eliminating the need for collusion entirely -- if the proposed joint
venture is consummated, there will be no one left that Franklin Electric must collude with in
order to raise prices.
7. Courts often look to the Merger Guidelines' analytical approach
to define markets. See, e.g., Ball Memorial Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1336
1986); Community Publishers, Inc. v. Donrey Corp., 892 F. Supp. 1146, 1153 n.6
(W.D. Ark.
1995) ("It is well recognized that the Merger Guidelines do not have the force of law, but many
courts still cite them, and the expert testimony in this case shows that they represent mainstream
economic thinking." (citation omitted)), aff'd sub nom. Community Publishers, Inc. v. DR
Partners, 139 F.3d 1180 (8th Cir. 1998).
8. A growing number of courts, including those in the Seventh
Circuit, have applied the
Merger Guidelines' approach for assessing pre- and post-merger concentration through use of
the Herfindahl-Hirschman Index ("HHI"). See, e.g., Allied Signal, 183
F.3d at 574. The HHI
for a market is calculated by summing the squares of the individual market shares of all firms
participating in the market. Merger Guidelines ¶ 1.5.
Under the Merger Guidelines' approach, markets with an HHI below 1000 are deemed
"unconcentrated;" those with an HHI between 1000 and 1800 are "moderately concentrated;"
and those with an HHI above 1800 are termed "highly concentrated." Id. ¶
1.51. In cases
where the post-merger market is "highly concentrated," and an acquisition would result in an
increase of more than 100 points in the HHI, the acquisition is presumed to be "likely to create
or enhance market power or facilitate its exercise." Id. ¶ 1.51(c).
Although the Merger Guidelines' standards for creating a presumption that a transaction
is anticompetitive have been called overly strict, "in the sense of erring on the side of allowing
takeovers to proceed," Consolidated Gold Fields, 698 F. Supp. at 500, the
acquisition in this
case far exceeds even these conservative standards. Franklin Electric's acquisition of control
over the Marley STP business would increase the HHI in the United States STP market, based
on 1999 sales figures, by 4838 points, from 5162 to the maximum of 10,000.
9. The patents cover key competitive features such as the variable
speed drive and the
telescoping shaft. Franklin Electric has been vigorous in defending its patents in the past --
witness the recent STP patent litigation between Franklin Electric and Marley.
10. Franklin Electric is the only company that currently
manufactures motors that can be
used in petroleum STPs in the United States. Finding an alternative source for the motor would
likely be difficult, time-consuming, and expensive.
11. It took FE Petro at least five years to achieve a substantial
market share; FE Petro only
began to truly succeeded when it introduced innovative technology that offered clear benefits to
the consumer. FE Petro was also able to facilitate its entry by purchasing smaller STP
manufacturers that existed in the market at the time. If the defendants succeed in creating their
proposed joint venture, a new entrant would not be able to acquire this foothold.