Opinion ID: 409218
Heading Depth: 1
Heading Rank: 5

Heading: Actual Potential Competition

Text: 26 To establish a violation of section 7 in this case based upon the elimination of actual potential competition, assuming for the moment that the doctrine is valid, the Commission must show: (1) that the relevant market is oligopolistic; (2) that absent its acquisition of Monroe, Tenneco would likely have entered the market in the near future either de novo or through toehold acquisition; and (3) that such entry by Tenneco carried a substantial likelihood of ultimately producing deconcentration of the market or other significant procompetitive effects. See Marine Bancorporation, 418 U.S. at 630, 633, 94 S.Ct. at 2874, 2875; Siemens Corp., 621 F.2d at 505; BOC International Ltd. v. FTC, 557 F.2d 24, 29 (2d Cir. 1977). Tenneco argues that the Commission's findings on the relevant market and the likelihood of entry lack substantial record support. 27 Tenneco's challenges to the Commission's conclusion that the market for replacement shock absorbers was oligopolistic are not persuasive. Tenneco concedes that the concentration ratios in the market, the primary index of market power, Brown Shoe Co. v. United States, 370 U.S. 294, 322 n. 38, 82 S.Ct. 1502, 1522 n. 38, 8 L.Ed.2d 510 (1962), were extraordinarily high during the relevant period: Four-firm concentration was over 90% and two-firm concentration was over 77%. Brief for Tenneco at 18. This fact alone established a prima facie case that the ... market was a candidate for the potential-competition doctrine. Marine Bancorporation, 418 U.S. at 631, 94 S.Ct. at 2874. Therefore, it was Tenneco's burden to show that these high concentration ratios did not accurately reflect the competitive conditions in the market. Id. Tenneco, however, showed only that in 1974 the market for replacement shock absorbers suffered from decreased earnings apparently caused by falling prices, suggesting a more competitive market than the high concentration ratios would reflect. Tenneco argues that this evidence of increased competition, combined with the Supreme Court's warning that high concentration ratios are not alone conclusive, United States v. General Dynamics Corp., 415 U.S. 486, 498, 94 S.Ct. 1186, 1194, 39 L.Ed.2d 530 (1974); see Brown Shoe Co., 370 U.S. at 321-22 & n. 38, 82 S.Ct. at 1521-1522 & n. 38, 8 L.Ed.2d 510, undermines the Commission's finding that the market for replacement shock absorbers was sufficiently concentrated and anticompetitive to justify application of the potential competition doctrine. We disagree. 28 The record establishes that the structure, history and probable future of the market for replacement shock absorbers-the factors that the Supreme Court identified as proper considerations in addition to concentration ratios, General Dynamics Corp., 415 U.S. at 498, 94 S.Ct. at 1194; Brown Shoe Co., 370 U.S. at 322 n. 38, 82 S.Ct. at 1522 n. 38, 8 L.Ed.2d 510-are all consistent with the Commission's finding. The extraordinarily high concentration ratios have remained stable over many years with the same firms occupying the top four positions since at least the late 1960s. Substantial barriers to entry severely limit the number of firms likely to provide additional competition. See section A. III, supra. The industry has been highly profitable, and despite recent indications that profit margins may be decreasing, industry experts, including Tenneco executives, foresee a bright future. Based upon this evidence, the Commission was fully justified in concluding that the replacement shock absorber market was not genuinely competitive and in proceeding to assess Tenneco's effects on that market. 29 Nevertheless, we reject the Commission's finding that Tenneco was an actual potential entrant likely to increase competition in the market for replacement shock absorbers. The record lacks substantial evidence supporting the Commission's finding that Tenneco was likely to have entered the market for replacement shock absorbers in the near future either de novo or through toehold acquisition. See Marine Bancorporation, 418 U.S. at 633, 94 S.Ct. at 2875; Siemens Corp., 621 F.2d at 505; BOC International Ltd., 557 F.2d at 29. 30 The record contains abundant evidence that Tenneco had both the interest and the incentive to enter the market for replacement shock absorbers. The Commission relied upon internal Tenneco and Walker documents identifying shock absorbers as complementary to Walker's exhaust system products line and urging entry into the shock absorber market. In addition, uncontradicted evidence revealed that Tenneco had negotiated with major European shock absorber manufacturers regarding possible acquisitions or license arrangements and had actually acquired a small manufacturing company that held a patent on a new shock absorber design. The record strongly supports the conclusion that Tenneco was actively considering entry into the market and was pursuing all leads to that end at least since the late 1960s or early 1970s. Moreover, Tenneco clearly possessed adequate financial resources to make the large initial investment needed to attempt to penetrate the market. The record, however, is deficient in evidence that there were viable toehold options available to Tenneco or that Tenneco would have entered the market de novo. 31 The Commission conceded in its opinion that Tenneco never expressed any interest in entering the market for replacement shock absorbers on a completely de novo basis. Commission Opinion at 57, J. App. at 247. However, the Commission found that Tenneco had expressed interest in entering the market essentially de novo, building the required production facilities from scratch and acquiring the necessary technology via a license from an established foreign shock absorber producer, id. at 57-58, J. App. at 247-48. The Commission concluded that Tenneco would likely have done so absent its acquisition of Monroe. 32 The Commission's reasoning is flawed. It ignores Tenneco's decision not to enter the market during the 1960s and early 1970s, a period of high profitability for shock absorber manufacturers, because of anticipated inadequate earnings during early years. The record is devoid of evidentiary support for the Commission's assertion that in the period relevant to this case, when industry earnings were in decline, Tenneco would have been willing to suffer the cost disadvantage inherent in the building of an efficient scale plant that would remain underutilized for a number of years. Commission Opinion at 59 n. 61, J. App. at 249. The Commission's conclusion that Tenneco would have entered the market de novo with the aid of a license absent its acquisition of Monroe is based on the kind of unsupported speculation that the Supreme Court condemned when it warned that we should remember( ) that § 7 deals in 'probabilities,' not 'ephemeral possibilities.'  Marine Bancorporation, 418 U.S. at 622-23, 94 S.Ct. at 2870-2871 (quoting Brown Shoe Co., 370 U.S. at 323, 82 S.Ct. at 1522). 33 The Commission's conclusion that Tenneco would likely have entered the replacement shock absorber market through toehold acquisition is similarly flawed. The Commission identified Armstrong Patents, Ltd. (Armstrong), a British shock absorber manufacturer, DeCarbon Shock Absorber Co. (DeCarbon), a French company, and Blackstone Manufacturing Corp. (Blackstone), a small United States producer of shock absorbers, as potential toeholds. 5 However, the record reveals that Tenneco in fact negotiated unsuccessfully with Armstrong and DeCarbon. Armstrong management indicated that Tenneco would have to offer a 100% premium over the market price of its stock to generate its interest. Tenneco's negotiations with DeCarbon, which were conducted through an independent broker, were equally fruitless. DeCarbon had asked a selling price of 100 times its earnings. In addition, there was testimony that the French Ministry of Industry had the authority and probably the inclination to disallow such an acquisition. 34 Despite recognizing the failure of Tenneco's negotiations with Armstrong and DeCarbon, the Commission again retreated to speculation, asserting that continued negotiation could have produced favorable results. As we stated above, speculation does not provide an adequate basis for a finding of a section 7 violation. The Commission cannot negate the strong evidence that Armstrong and DeCarbon were not reasonably available with a bald prediction that the situation might change in the future. 35 As for Blackstone, the Commission itself described that company as a small, struggling domestic firm ... burdened with aged equipment, a less than complete product line ..., declining market share and a mediocre reputation. Commission Opinion at 61, J. App. at 251. Since 1974, Blackstone had unsuccessfully sought a buyer for its business, soliciting, among others, Midas International Corp., which operates a chain of muffler installation shops, and Questor. Nevertheless, the Commission remarkably concluded that Blackstone would have served as a viable method of toehold entry, although this route would have been more difficult and less attractive than the acquisition of a substantial foreign firm. Id. We do not believe that the Commission's assertion that Tenneco would have acquired a weak and deteriorating firm with a poorly accepted product and run-down equipment in which neither Tenneco nor any other company had shown significant interest satisfies the requirement that a finding of a section 7 violation be based on probabilities. See Marine Bancorporation, 418 U.S. at 622-23, 94 S.Ct. at 2870-2871 (quoting Brown Shoe Co., 370 U.S. at 323, 82 S.Ct. at 1522). 36 Because we hold that the Commission's findings and conclusions with respect to Tenneco as an actual potential competitor in the market for replacement shock absorbers are unsupported by substantial record evidence, we need not reach the issue of the validity of the actual potential competition doctrine.