Opinion ID: 109287
Heading Depth: 3
Heading Rank: 2

Heading: De Facto Branching Under the Sherman Act

Text: Three of the 5-percent banksthe Park National, South DeKalb, and North Fulton bankswere formed after July 1, 1966, and their correspondent associate relationships with C&S are therefore beyond the reach of the grandfather provision of the Bank Holding Company Act and subject to scrutiny under the Sherman Act. Each of these banks was founded ab initio through the sponsorship of C&S. Except for that sponsorship, they would very probably not exist. The record shows that other banking organizations had been unsuccessful in attempting to launch new banks in the area, and C&S affiliation and financial backing were instrumental in convincing state and federal banking authorities to charter these new banks. In short, these banks represented a policy by C&S of de facto branching through the formation of new banking units, rather than through the acquisition, and consequent elimination, of pre-existing, independent banks. [21] Of necessity, the Government's attack on this process is highly technical. Had the new banks been de jure branches of C&S, the whole process would have been beyond reproach. Branching allows established banks to extend their services to new markets, thereby broadening the choices available to consumers in those markets. [22] Having access to parent-bank financial support, expert advice, and proved banking services, branches of several city banks can often enter a market not yet large or developed enough to support a variety of independent, unit banks. Branching thus offers competitive choice to markets where monopoly or oligopoly might otherwise prevail. Furthermore, the branching process gives to outlying customers the benefit of sophisticated services which local unit banks might have little ability or incentive to deliver. The Government denies none of this, nor that C&S's program of de facto branching was, until 1970, the closest substitute to de jure branching allowed under Georgia law. Yet the Government insists that this de facto branching violated the Sherman Act because the parent bank and its de facto branches were legally distinct corporate entities and were obligated, therefore, to compete vigorously against each other. It is, of course, conceded that C&S's de facto branches have not behaved as active competitors with respect either to each other or to C&S National and its majority-owned affiliates. But the Government goes further and contends that the correspondent associate programs have actually encompassed at least a tacit agreement to fix interest rates and service charges, see Interstate Circuit, Inc. v. United States, 306 U. S. 208, 227; United States v. Masonite Corp., 316 U. S. 265, 275-276; United States v. Bausch & Lomb Optical Co., 321 U. S. 707, 723; United States v. General Motors Corp., 384 U. S. 127, 142-143, so as to make the interrelationshipsto that extent at leastillegal per se. See United States v. Socony-Vacuum Oil Co., 310 U. S. 150, 224-226, n. 59; United States v. Parke, Davis & Co., 362 U. S. 29, 47. C&S vigorously denies the existence of any agreement to fix prices. The evidence in the record is mixed. C&S did regularly notify the 5-percent banksas it did its de jure branchesof the interest rates and service charges in force at C&S National and its affiliates. But the dissemination of price information is not itself a per se violation of the Sherman Act. See Maple Flooring Assn. v. United States, 268 U. S. 563; Cement Mfrs. Protective Assn. v. United States, 268 U. S. 588; United States v. Container Corp., 393 U. S. 333, 338 (concurring opinion). A few of the memoranda distributed by C&S could be construed as advocating price uniformity; on the other hand, the memoranda were almost without exception stamped for information only, and the 5-percent banks were admonished by C&S, several times and very clearly, to use their own judgment in setting prices; indeed, the banks were warned that the antitrust laws required no less. The District Court observed that in fact prices did not often vary significantly among the 5-percent banks or between these banks and C&S National, but the court attributed this to the natural deference of the recipient to information from one with greater expertise or better services. 372 F. Supp., at 628. And the court found as a fact that there was no collusive price fixing. Id., at 626. Were we dealing with independent competitors having no permissible reason for intimate and continuous cooperation and consultation as to almost every facet of doing business, the evidence adduced here might well preclude a finding that the parties were not engaged in a conspiracy to affect prices. But, as we indicate below, the correspondent associate programs, as such, were permissible under the Sherman Act. In this unusual light, we cannot hold clearly erroneous the District Court's finding that the lack of significant price competition did not flow from a tacit agreement but instead was an indirect, unintentional, and formally discouraged result of the sharing of expertise and information which was at the heart of the correspondent associate programs. Fed. Rule Civ. Proc. 52 (a); United States v. General Dynamics Corp., 415 U. S. 486, 508. The Government argues, alternatively, that the correspondent associate programs have gone far beyond conventional correspondent relationships, and that consequently these programs have unreasonably restrained competition among the 5-percent banks and between these banks and C&S National. The District Court was not persuaded by this theory: The difference between a pure correspondent relationship and a correspondent associate relationship as set forth in the evidence is merely one of degree, a fine line of demarcation almost impossible for the Court to perceive. . . . In either case there is the flow of information as to rates, practices, etc., which the Government apparently applauds or at least condones in a correspondent banking relationship. 372 F. Supp., at 628. The court's dilemma is understandable, for in neither law nor banking custom has there developed a clear, fixed definition of the correspondent relationship: [23] Correspondent banking is an interbank practice whereby `city' correspondent banks provide a cluster of services to smaller `country' banks in exchange for interbank deposits. Dating back to colonial times, correspondent banking originally provided an extended network of independent unit banks with a link to financial centers, and at the same time furnished substitute central banking functions. Today, as a vital component of the era of electronic banking, it enables city correspondents to provide customers with a range of services that is varied, extensive and constantly expanding; one survey lists as many as fifty different categories. Among the services typically provided within a conventional correspondent arrangement are check clearing, help with bill collections, participation in large loans, legal advice, help in building securities portfolios, counselling as to personnel policies, staff training, help in site selection, auditing, and the provision of electronic data processing. Furthermore, like C&S's program, the correspondent arrangement is often established as a prelude to a formal merger between the two banks. [24] Nevertheless, C&S's program does appear to have gone several steps beyond conventional correspondent arrangements. C&S has closely advised the boards of directors of the 5-percent banks, supplied their chief executive officers, allowed full branchlike use of the C&S logogram, provided all the C&S services available at a de jure branch, dealt with the 5-percent banks through the C&S branch administration department, and provided constant and detailed information on prices and on all banking procedures. [25] It is conceivable that these relationships, separately or taken together, have restrained competition among the defendant banks more thoroughly or effectively than would have a conventional correspondence program. But even if the Government had proved this, which the District Court found not to be the case, that alone would not make out a Sherman Act violation. C&S has operated the 5-percent banks as de facto branches as a direct response to Georgia's historic restrictions on de jure branching, and the question therefore remains whether restraints of trade integral to this particular, unusual function are unreasonable. See Chicago Board of Trade v. United States, 246 U. S. 231, 238. We turn directly to that question. The central message of the Sherman Act is that a business entity must find new customers and higher profits through internal expansionthat is, by competing successfully rather than by arranging treaties with its competitors. This Court has held that even commonly owned firms must compete against each other, if they hold themselves out as distinct entities. The corporate interrelationships of the conspirators . . . are not determinative of the applicability of the Sherman Act. United States v. Yellow Cab Co., 332 U. S. 218, 227. See also Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U. S. 211, 215; Timken Roller Bearing Co. v. United States, 341 U. S. 593, 598; Perma Life Mufflers, Inc. v. International Parts Corp., 392 U. S. 134, 141-142. A fortiori, independently owned firms cannot escape competing merely by pretending to common ownership or control, for the pretense would simply perfect the cartel. We may also assume, though the question is a new one, that a business entity generally cannot justify restraining trade between itself and an independently owned entity merely on the ground that it helped launch that entity, by providing expert advice or seed capital. Otherwise the technique of sponsorship followed by restraint might displace internal growth as the normal and legitimate technique of business expansion, with unknowable consequences. But these general principles do not dispose of the present case. C&S was absolutely restrained by state law from reaching the suburban market through the preferred process of internal expansion. De facto branching was the closest available substitute. [26] Just last Term, in a brief presented to this Court, the Justice Department told us that it was desirable and procompetitive for a bank to [enter] de novo into areas foreclosed to branching by sponsoring the organization of an affiliate bank, and later acquiring the bank. This method of expansion is legal and a well-recognized practice used by large statewide banking organizations, and recognized by the federal banking authorities. [27] The Government acknowledged that such a sponsored bank could be affiliated with its sponsor for purposes of correspondent relationships and other inter-bank services, including financial support, and that it could be formed by the parent bank's officers, directors, or their associates and could be assisted by the parent firm until acquired and converted into a branch. [28] This is as good a curbstone description as any of precisely the relationships at issue in the present case. [29] To characterize these relationships as an unreasonable restraint of trade is to forget that their whole purpose and effect were to defeat a restraint of trade. Georgia's antibranching law amounted to a compulsory market division. Accomplished through private agreement, market division is a per se offense under the Sherman Act: This Court has reiterated time and again that `[h]orizontal territorial limitations . . . are naked restraints of trade with no purpose except stifling of competition.'  United States v. Topco Associates, Inc., 405 U. S. 596, 608, quoting White Motor Co. v. United States, 372 U. S. 253, 263. The obvious purpose and effect of a rigid antibranching law are to make the potential bank customers of suburban, small town, and rural areas a captive market for small unit banks. [30] C&S devised a strategy to circumvent this statutory barrier. By providing new banking options to suburban Atlanta customers, while eliminating no existing options, the de facto branching program of C&S has plainly been procompetitive. The Government suggests that a conventional correspondent relationship between C&S and the 5-percent banks would have been equally procompetitive and would have had the added virtue of facilitating competition among the 5-percent banks and between them and C&S National. This is mere speculation on the present record. Moreover, it is far from clear that a conventional correspondent relationship would have allowed C&S to put its full range of services into the suburban market which, in light of the antibranching law, was the very point of its policy and program. Putting to one side the total lack of realism in suggesting that C&S might have founded new banks that would have competed vigorously with it and with each other, cf. United States v. Penn-Olin Chemical Co., 378 U. S. 158, 169, the Government's argument wholly disregards C&S's ultimate goal of acquiring the new banks outright as soon as legally possible, a goal which the Government last year thought wholly proper. We hold that, in the face of the stringent state restrictions on branching, C&S's program of founding new de facto branches, and maintaining them as such, did not infringe § 1 of the Sherman Act.