Opinion ID: 290209
Heading Depth: 1
Heading Rank: 2

Heading: the requisite anticompetitive effect

Text: 32 Section 7 of the Clayton Act, as amended, was intended by Congress to 'arrest in their incipiency restraints    in a relevant market,' United States v. E. I. duPont & Co., 353 U.S. 586, 589, 77 S.Ct. 872, 875, 1 L.Ed.2d 1057 (1957), and to reach out beyond acquisitions which pose a 'clear-cut menace to competition.' Brown Shoe Co. v. United States, 370 U.S. 294, 323, 82 S.Ct. 1502, 1523 (1962). 33 In determining whether the effect of an acquisition 'may be substantially to lessen competition' the 'incipiency' standard is to be applied functionally. Brown Shoe Co. v. United States, supra. 370 U.S. at 294, 82 S.Ct. at 1502. In dealing with vertical acquisitions under Section 7, as amended, the United States Supreme Court has relied on several functional factors as indicia of the requisite anti-competitive effect: (1) foreclosing of the competitors of either party from a segment of the market otherwise open to them; (2) the 'nature and purpose' of the vertical arrangement; (3) actual and reasonable likely adverse effects upon local industries and small businesses; (4) the level and trend of concentration in the market shares of participating companies, including any trend towards domination by a few leaders; (5) the existence of a trend towards vertical integration and consolidation in previously independent industries; and (6) the ease with which potential entrants may readily overcome barriers to full entry and compete effectively with existing companies. FTC v. Consolidated Foods, 380 U.S. 592, 85 S.Ct. 1220, 14 L.Ed.2d 95 (1965); United States v. Kennecott Copper Corp., 231 F.Supp. 95 (SDNY1964), aff'd per curiam, 381 U.S. 414, 85 S.Ct. 1575, 14 L.Ed.2d 692 (1965); Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502 (1962). These same factors were considered in holding horizontal and product-extension acquisitions violative of the Clayton Act 7. FTC v. Procter & Gamble Co., 386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1967); United States v. Pabst Brewing Co., 384 U.S. 546, 86 S.Ct. 1665, 16 L.Ed.2d 765 (1964); United States v. Continental Can Co., 378 U.S. 441, 84 S.Ct. 1738, 12 L.Ed.2d 953 (1964); United States v. Alcoa, 377 U.S. 271, 84 S.Ct. 1283, 12 L.Ed.2d 314 (1964); United States v. Philadelphia National Bank, 374 U.S. 321, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963). Similar factors were considered in holding an acquisition of stock of vertically related concerns violative of the old Section 7, prior to the 1950 amendments. United States v. E. I. duPont, 353 U.S. 586, 77 S.Ct. 872, 1 L.Ed.2d 1057 (1956). The Commission has found the presence of each of the above six factors and their attendant anticompetitive consequences in the instant acquisition. We find substantial evidence to support each of these determinations. 34 Foreclosure. The Commission found the foreclosure of U.S. Steel's competitors from a substantial share of the portland cement market to be 'very significant.' Foreclosure of a customer of portland cement by one of its suppliers has as its primary vice, in the instant acquisition, the tying of Certified's purchases of cement to U.A.C's supplies on a permanent basis. A segment of U.A.C. supply of cement and substantially all of Certified's demand for cement will be foreclosed from their respective competitors. A segment of the market otherwise open to the competing members of the two industries is removed from the two industries As the United States Supreme Court noted in Brown Shoe: 35 'The arrangement may act as a 'clog on competition,' Standard Oil Co. of California v. United States, 337 U.S. 293, 314, 69 S.Ct. 1051, 1062, 93 L.Ed. 1371, which 'deprive(s)    rivals of a fair opportunity to compete.' H.R.Rep. No. 1191, 81st Cong., 1st Sess.' 8 370 U.S. at 324, 82 S.Ct. at 1523. 36 The acquisition of Certified by U.S. Steel climaxed a three year verticalfinancial relationship between the two which, since its inception, had led to increasing dependency of Certified upon U.A.C. cement supplies. In 1961, the last year in which U.S. Steel had no vertical relationship with Certified, the latter purchased only 36,675, barrels of cement, or 8.4 per cent of its total requirements from U.A.C. In 1964, the year of the acquisition, Certified purchased 701,151 barrels of cement or 88.4 per cent of its requirements from U.A.C. The pattern of increasing sales paralleling the financial involvement of U.S. Steel and the evidence of 'tacit' and 'expected' minimum purchases in return for extension of credit and favors provides very substantial evidence to support a finding that all, or nearly all, of Certified's purchases of portland cement actually or probably were foreclosed from the competitors of U.A.C. 37 The Commission's finding that this foreclosure is 'extremely significant' is supported by the market structure in the cement and ready-mixed industries. The cement industry is a concentrated one, both nationally, regionally, and within the NYMA. 16 In 1964, U.S. Steel was one of the four largest producers of cement nationally and in the Northeastern United States. In addition, it was the second largest producer of cement in the NYMA. This position was achieved by capturing the several-hundred-thousand-barrel demand of Certified, the largest open market purchaser of cement in the NYMA and one of the five or ten largest purchasers in the entire Northeastern market. The Commission found that the acquisition brought about the largest single foreclosure which could have been obtained in the relevant geographic markets of the cement-concrete industries. 17 38 Placing these facts in percentage terms further validates the Commission's conclusion. In 1964, Certified represented 9.8 per cent of the cement purchases by ready-mixed concrete companies and 6.7 per cent of total cement consumption in the NYMA. In the same year, U.S. Steel shipped 11.4 per cent of the total shipments of cement into the NYMA. While no precise percentage terms have been set forth as yardsticks for vertical mergers, the 9.8 per cent of Certified and 11.4 per cent of U.A.C. are well within the range of numbers which have been held to be unduly high in the past. 18 Further, the oligopolistic and vertically integrated nature of the cement and concrete industries increases the significance of these percentages. 19 There is substantial evidence to uphold the Commission's finding that the foreclosure which resulted from the acquisition is economically 'extremely significant' and 'anticompetitive.' 39 Nature and Purpose. In determining if a specific market share of foreclosure is violative of Section 7 of the Clayton Act, references may be made to the nature and purpose of the vertical arrangement. Brown Shoe Co. v. United States, supra, 370 U.S. at 329, 82 S.Ct. 1502. The nature and purpose of the present acquisition reinforces the Commission's finding as to the anticompetitive significance of the foreclosure by the acquisition. 40 The 'nature' of this vertical arrangement is an acquisition, a permanent restructuring of the supplier-customer relationship. Kessler and Stern, Competition, Contract and Vertical Integration, 69 Yale Law Journal 1, 78 (1959). It is not a 'limited term exclusive-dealing contract' or the use of tying 'to aid a small company in an attempt to break into a market.' Brown Shoe Co. v. United States, supra, 370 U.S. at 330, 82 S.Ct. at 1526. See Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 81 S.Ct. 623, 5 L.Ed.2d 580 (1961); Harley-Davidson Motor Co., 50 F.T.C. 1047, 1066. 41 The 'purpose' of the arrangement was in the words of the U.S. Steel's management 'to insure Universal Atlas Cement participation in the New York market.' This 'purpose' was successfully implemented by the tremendous increase in cement purchases made by Certified subsequent to the initiation of a vertical relationship between U.S. Steel and Certified. Just as the United States Supreme Court found Brown Shoe's desire to 'force' its shoes into Kinney's stores in the post-acquisition period to be an adverse purpose, so is U.S. Steel's purpose of 'insuring participation' obnoxious. Brown Shoe Co. v. United States, supra, 370 U.S. at 330, 82 S.Ct. 1502. The important consideration is that the acquired company would not be free to choose for itself who shall supply its needs solely on the basis of price, service and quality of goods because the acquiring company has the power to substitute its own suppliers, and the intention of doing so. United States v. E. I. duPont, supra, 353 U.S. at 607, 77 S.Ct. 872; United States v. Kimberly-Clark, supra, 264 F.Supp. at 464. We find there is substantial evidence that the nature and purpose of the acquisition support the Commission's finding that the resultant foreclosure was 'very significant' and 'anticompetitive.' 42 Actual Effects on Local Business. 43 The testimony in this case reveals numerous actual anticompetitive effects of the acquisition upon local business concerns in both the ready-mix concrete and portland cement industries. One of the impelling instructions of the antitrust laws has been the protection of small businesses and local control from the 'attendant adverse effects' of oligopolistic markets and economic concentration. 44 The vertical alignment of Certified and U.A.C., as the Examiner found, had immediate and significant effects on several of the cement and concrete competitors in the NYMA. Alpha Portland Cement Company, which manufactured cement in the Hudson River Valley and opened a terminal on Long Island, was forced to close its local terminal because of its loss of Certified as a customer for its cement. 20 Triangle Cement, which acted as a distributor for Atlantic Cement, closed its terminal in Brooklyn at the end of their distributorship contract. Triangle was Certified's third largest supplier in 1963, but sold it no cement in 1964. 21 Several ready-mix companies indicated they were forced to expand or shift their sales territories to areas where there was less vertical integration because of the competitive forces in vertically integrating markets. 22 A number of cement company officials also indicated that while opposed to vertical integration, they might have to acquire a ready-mix company to protect their market. The Examiner specifically found that at least one of the vertical acquisitions in the industry 23 was caused, in part, by U.A.C.'s acquisition of Certified. 45 These actual adverse effects on competitors of U.A.C. and Certified are further substantial evidence supportive of the Commission's finding that the acquisition was anticompetitive. 46 Concentration. The Commission found that concentration in the cement industry had been 'aggravated' as a result of the acquisition. Any increase in concentration in industries whose concentration levels are already 'great' is alarming because such increases make so much less likely the possibility of eventual deconcentration. United States v. Philadelphia National Bank, supra, 374 U.S. at 365 n. 42, 83 S.Ct. 1715. Thus, in Alcoa, the Aluminum Corporation of America, a leading producer of aluminum conductor with 27.8 per cent of an oligopolistic market, was not permitted to acquire Rome Cable Corporation, which produced 1.3 per cent of the aluminum conductor. The United States Supreme Court observed 'the presence of small but significant competitors    may well    thwart' the further development of an oligopolistic, concentrated industry. United States v. Alcoa, supra, 377 U.S. at 280, 84 S.Ct. at 1289. 47 The facts indicate that between 1961 and 1964 U.A.C. advanced its position from sixth to second largest producer of portland cement in the NYMA because of its vertical relationship with Certified. /24/ This increase along with the increase in share of the vertically integrated Colonial, raised the combined shares of the four largest cement companies shipping to the NYMA from 44.8 per cent in 1960 to 53.4 per cent in 1964. Similarly, the shares of the four leading cement companies shipping in the Northeast increased from 37 per cent in 1960 to 43.6 per cent in 1964. U.S. Steel increased its shipment by 80.5 per cent in the Northeast area, compared with an average increase of 20.2 per cent for all firms, and became one of the largest shippers in the market. 48 We find substantial evidence to support the Commission's finding that the acquisition of Certified, as an assured source of supply, was a significant element in the increasing concentration ratios of the leading firms in the cement industry. 49 Vertical Integration. The Commission found that there was a trend toward vertical integration in the cement and concrete industries, that non-integrated concerns were at a growing competitive disadvantage, and that this acquisition stimulated these adverse factors and gave U.S. Steel decisive competitive advantages. 50 One of the purposes of Section 7 is to reverse the trend toward concentration in American industry. Thus an acquisition which may be viewed as part of an industry-wide trend toward vertical integration may be considered particularly obnoxious to Section 7. 'Remaining vigor cannot immunize a merger if the trend in that industry is towards oligopoly (or vertical integration).' 370 U.S. at 332-333, 82 S.Ct. at 1528. 51 The evidence reveals wide-scale national and urban trends towards vertical integration and concentration in the cement and concrete industries since 1958. Cement companies in the NYMA have been seeking assured outlets for their products by acquiring the remaining large independent ready-mix operations. 25 Among other factors, the Commission's response to these pressures to vertically integrate has resulted in the divertiture of the acquisitions of the fourth, fifth and sixth largest ready-mixed companies. It is as part of this response that the Commission also attacks the instant acquisition. 52 This trend towards vertical integration has made it quite difficult for non-integrated firms to compete even apart from open-market foreclosure. A vertically integrated cement and ready-mix company has decisive cost advantages over non-integrated competitors. Cement manufacturers are burdened with high fixed costs, as well as significant marketing, shipping and distribution costs. Vertical integration creates a more assured level of plant utilization, an elimination of any significant sales and marketing expenses to ones' own ready-mix subsidiary, and the ability to integrate the storage and distribution facilities of the cement and ready-mix company into a single urban terminal. All of these factors work to lower overall unit costs of integrated vis-a-vis non-integrated concerns. 53 However, while unit costs might be used to lower the price of cement to customers generally, they also have the potential of being used as weapons of economic discipline. 26 This is particularly true when an industry is tending towards oligopoly. In such markets, the handful of leading vertically integrated firms do not engage in general price cutting. Price cuts are used as a more selective instrument: to punish an aggressive marketeer or price-cutter of cement; to woo away a crucial account of a nonintegrated concern; or to maintain respective oligopoly shares. United States v. Wilson Sporting Goods, 288 F.Supp. 543, 556-557 (NDIll.1968). The 'mixed threat and lure of reciprocal buying' was the potential anticompetitive device which condemned the acquisition of Gentry, Inc. by Consolidated Foods. Federal Trade Commission v. Consolidated Foods, supra, 380 U.S. at 593-595, 85 S.Ct. 1220, 14 L.Ed.2d 95. Similarly, in the concentrating cement and concrete industries, the decisive cost factors of vertical integration create a 'mixed threat and lure:' a 'threat' insofar as the non-integrated firms must remain well-behaved or suffer the consequences; and a 'lure' in that the well-behaved firms will not be subject to serious price-cutting. Such market conditions push the remaining non-integrated firms toward vertical integration. 54 Further, the sheer size and financial resources of U.S. Steel visit non-competitive stabilizing forces upon the competitors of Certified and U.A.C. U.S. Steel has the capacity to extend its credit and resources to aid either U.A.C. or Certified in gaining a particular job. It has extensive financial and personal contacts throughout the building industry. No other cement or ready-mix company is in any position to compete with U.S. Steel's ability to extend credit, 27 to exploit allied personal and financial ties in the building industry, to maintain and capture the accounts of others in the event of slackened demand, or to withstand temporary losses. Several courts have recently commented on the presence of such a large industrial factor in a concentrating industry. In F.T.C. v. Procter & Gamble Co., the United States Supreme Court observed: 55 'There is every reason to assume that the smaller firms would become more cautious in competing due to their fear of retaliation by Procter. It is probable that Procter would become the price leader and that oligopoly would become more rigid.' 386 U.S. at 578, 87 S.Ct. at 1230. 56 The existence of such 'adverse psychological effects    on smaller rivals' was a key basis of the Government's successful opposition to the acquisition of Nissen Corporation by Wilson Sporting Goods Company, a subsidiary of Ling-Tempco Vought, Inc. United States v. Wilson Sporting Goods Co., 288 F.Supp. 543, 556-557 (N.D.Ill.1968). See General Foods Corp. v. Federal Trade Commission, 386 F.2d 936, 945-946 (3d Cir. 1967); Reynolds Metals Co. v. Federal Trade Commission, 114 U.S.App.D.C. 2, 309 F.2d 223, 229-230 (1962), United States v. Aluminum Co. of America, 233 F.Supp. 718, 727-728 (E.D.Mo.1964). 57 We find that all of these facts taken together provide very substantial evidence for each of the Commission's findings that 'the ability to non-integrated cement producers (to compete) may be substantially impaired,' that the 'Respondent U.S. Steel may have achieved a decisive competitive advantage over its competitors,' and that the 'trend towards vertical concentration in the production and sale of cement and concrete has been aggravated' as a result of the instant acquisition. 58 Barriers to Entry. The Commission also found that, as a result of the acquisition, 'new sellers of portland cement and ready-mixed concrete may be inhibited or prevented' from entering the industry. 59 Any substantial new barrier to entry into a market enhances the market power of existing firms and intensifies their ability to wield oligopolistic and anticompetitive practices with relative impunity. The raising of such barriers may be an important element in maintaining competition. Federal Trade Commission v. Procter & Gamble Co., supra, 386 U.S. at 578-581, 87 S.Ct. 1224; United States v. Penn-Olin Co., 378 U.S. 158, 173-174, 84 S.Ct. 1710, 12 L.Ed.2d 775 (1964). 60 Even prior to the acquisition of Certified, barriers to entry in the cement industry were 'formidable.' The only successful entrant to the Northeastern market for cement in recent years, Atlantic Cement, had to invest some $64 million to achieve initial access. Further, it ultimately was forced to extend its efforts outside of the large urban NYMA market because there were insufficient customers to maintain its distribution within the metropolitan area. For the Northeastern market as a whole, 70.8 per cent of that market was dominated by eight sellers. Subsequent to the acquisition, a majority of that segment was vertically integrated. There remains very little of the market for any new cement firm to seek as outlets for its product. 61 The barriers to entry in the concentrating and integrating ready-mix industry are also quite significant. Unless one seeks to become a 'gypsy' operator, a prospective manufacturer of ready-mix concrete must expect to spend between three to five million dollars in initial capital requirements. In addition, the new entrant would face a market with a single vertically integrated competitor enjoying over one-half the market and the leading four sellers dominating 73.6 per cent of the total sales within the NYMA. 62 As a result of the U.S. Steel-Certified alliance, the barriers to entry in both the cement and concrete industries were stiffended. Immediately after the merger, nearly one-half of the entire cement market and two-thirds of cement sales to ready-mix concrete producers were foreclosed by three vertically integrated concerns. A prospective entrant to the cement industry must assume the risk of competing for the business of the remaining one-half of the cement market's demands and one-third of the ready-mixers' demands not already foreclosed. Further, such an entrant must run the risk that unless he vertically integrates, he may lose his customers either to the competitively stronger vertically integrated concerns or through their integration into a cement company. Similarly, a ready-mix entrant must either ante up the additional capital to vertically integrate or face a number of increased market perils. These include a possible reliance on suppliers from a vertically integrated firm with whom he is also competing at the ready-mix level; the greater ability of integrated concerns to absorb loss subiness at the ready-mix level to maintain high utilization of plant equipment and cover the fixed costs of their cement facilities; the ability of integrated concerns to use a 'price-squeeze' to obtain any particular job in times when there is a supply shortage in the cement industry; and the psychological 'fears' of smaller rivals competing with large integrated concerns. Federal Trade Commission v. Procter & Gamble Co., supra, 386 U.S. at 578, 87 S.Ct. 1224, 18 L.Ed.2d 303. 63 We find, therefore, substantial evidence to support the Commission's finding that the acquisition will tend to unduly raise barriers to entry in certain markets in the cement and concrete industries. 64 Having reviewed six functional indicia of the competitiveness of a vertical alliance and having found very substantial evidence to support the findings of the Commission with regard to each of these factors, we uphold the Commission's determination that the effect of the instant acquisition 'may be substantially to lessen competition.'