Opinion ID: 409218
Heading Depth: 1
Heading Rank: 4

Heading: The Clayton Act and Potential Competition

Text: 14 The Supreme Court summarized the purpose of Section 7 of the Clayton Act and its relationship to the doctrine of potential competition in United States v. Falstaff Brewing Corp., 410 U.S. 526, 531-32, 93 S.Ct. 1096, 1099-1100, 35 L.Ed.2d 475 (1973): 15 Section 7 of the Clayton Act forbids mergers in any line of commerce where the effect may be substantially to lessen competition or tend to create a monopoly. The section proscribes many mergers between competitors in a market, United States v. Continental Can Co., 378 U.S. 441 (84 S.Ct. 1738, 12 L.Ed.2d 953) (1964); Brown Shoe Co. v. United States, 370 U.S. 294 (82 S.Ct. 1502, 8 L.Ed.2d 510) (1962); it also bars certain acquisitions of a market competitor by a noncompetitor, such as a merger by an entrant who threatens to dominate the market or otherwise upset market conditions to the detriment of competition, FTC v. Procter & Gamble Co., 386 U.S. 568, 578-580 (87 S.Ct. 1224, 1230-1231, 18 L.Ed.2d 303) (1967). Suspect also is the acquisition by a company not competing in the market but so situated as to be a potential competitor and likely to exercise substantial influence on market behavior. Entry through merger by such a company, although its competitive conduct in the market may be the mirror image of that of the acquired company, may nevertheless violate § 7 because the entry eliminates a potential competitor exercising present influence on the market. Id., at 580-581 (87 S.Ct. at 1231-1232); United States v. Penn-Olin Chemical Co., 378 U.S. 158, 173-174 (84 S.Ct. 1710-1718, 12 L.Ed.2d 775) (1964). As the Court stated in United States v. Penn-Olin Chemical Co., supra, at 174 (84 S.Ct. at 1718). The existence of an aggressive, well equipped and well financed corporation engaged in the same or related lines of commerce waiting anxiously to enter an oligopolistic market would be a substantial incentive to competition which cannot be underestimated. 16 As later explained by the Court in United States v. Marine Bancorporation, Inc., 418 U.S. 602, 624-25, 94 S.Ct. 2856, 2871-2872, 41 L.Ed.2d 978 (1974), the potential competition doctrine is divisible into two theories: perceived potential competition and actual potential competition. The Commission found that Tenneco had violated section 7 under both theories. 17 The Supreme Court has described the theory of perceived potential competition, which it has approved for application to cases brought under Section 7 of the Clayton Act, see, e.g., Marine Bancorporation, 418 U.S. at 625, 94 S.Ct. at 2871; Falstaff Brewing Corp., 410 U.S. at 531-37, 93 S.Ct. at 1099-1103, as the principal focus of the (potential competition) doctrine. Marine Bancorporation, 418 U.S. at 624, 94 S.Ct. at 2871. 18 In developing and applying the (perceived potential competition) doctrine, the Court has recognized that a market extension merger may be unlawful if the target market is substantially concentrated, if the acquiring firm has the characteristics, capabilities, and economic incentive to render it a perceived potential de novo entrant, and if the acquiring firm's premerger presence on the fringe of the target market in fact tempered oligopolistic behavior on the part of existing participants in that market. In other words, the Court has interpreted § 7 as encompassing what is commonly known as the wings effect-the probability that the acquiring firm prompted premerger procompetitive effects within the target market by being perceived by the existing firms in that market as likely to enter de novo. 19 Id. at 624-25, 94 S.Ct. at 2871-2872. 20 The actual potential competition theory, which has yet to receive sanction from the Supreme Court or this Court, see, e.g., id. at 625, 639, 94 S.Ct. at 2871, 2878; United States v. Siemens Corp., 621 F.2d 499, 504 (2d Cir. 1980), would 21 proscribe( ) a market extension merger solely on the ground that such a merger eliminates the prospect for long-term deconcentration of an oligopolistic market that in theory might result if the acquiring firm were forbidden to enter except through a de novo undertaking or through the acquisition of a small existing entrant (a so-called foothold or toehold acquisition). 22 Marine Bancorporation, 418 U.S. at 625, 94 S.Ct. at 2871. 23 The theory of the (actual potential competition) doctrine is that competition in the market would be enhanced by the addition of the new competitor and therefore the elimination of such a potential competitor would substantially lessen competition within the meaning of § 7. 24 Siemens Corp., 621 F.2d at 504. 25 The Commission established two independent grounds on which to base its ruling that Tenneco's acquisition of Monroe violated section 7 by finding that the acquisition eliminated both actual and perceived potential competition in the market for replacement shock absorbers. Tenneco challenges both grounds, arguing that the record is inadequate to support the factual findings underlying them. We will discuss the substantiality of the evidence underlying both halves of the Commission's case, addressing first the findings relating to actual potential competition.