Opinion ID: 409218
Heading Depth: 1
Heading Rank: 6

Heading: Perceived Potential Competition

Text: 37 We also conclude that the record contains inadequate evidence to support the Commission's conclusion that Tenneco's acquisition of Monroe violated section 7 by eliminating Tenneco as a perceived potential competitor in the market for replacement shock absorbers. 38 In order to make out a perceived potential competition case the (Commission), in addition to showing a market highly concentrated among a few firms, must prove that the acquiring company is (1) perceived by existing firms in the market as a potential independent entrant, and (2) has exercised a tempering impact on the competitive conduct of existing sellers. 39 Siemens Corp., 621 F.2d at 505 (footnote omitted). See also Marine Bancorporation, 418 U.S. at 624-25, 94 S.Ct. at 2871-2872. Tenneco once again challenges the Commission's findings on each of these elements, including the finding of a highly concentrated market, which we have already addressed in section B. II, supra. 40 There is abundant evidence that the oligopolists in the market for replacement shock absorbers perceived Tenneco as a potential entrant. Industry executives testified that they considered Tenneco one of very few manufacturers with both the incentive and the capability to enter the market. This perception was based on Tenneco's financial strength and on the compatibility of shock absorbers with exhaust system parts produced by Tenneco's Walker Division. This testimony was enhanced by evidence that the negotiations between Tenneco and DeCarbon were initiated by an independent broker and that the negotiations that eventually led to the Tenneco-Monroe merger were initiated by Monroe, indicating that those in the industry were aware of Tenneco's interest. This, especially when combined with the fact that industry participants were apparently not privy to the lack of success in Tenneco's toehold acquisition negotiations, is more than sufficient to satisfy the substantial evidence requirement with respect to industry perceptions of Tenneco as a potential entrant. 41 However, the analysis does not end here. The Commission's conclusion that the perception of Tenneco as a potential entrant actually tempered the conduct of oligopolists in the market must also be supported by substantial evidence. It is not. 42 Throughout this case, Tenneco has argued that in the years immediately preceding its acquisition of Monroe the market for replacement shock absorbers had become highly competitive. The Commission apparently agrees with this assessment. Commission Opinion at 13, J. App. at 203. The rate of increase in advertised retail prices for shock absorbers fell significantly behind inflation, and so-called mass merchandisers such as Sears Roebuck replaced traditional wholesale distributors as the leading purchasers of replacement shock absorbers from manufacturers. Sears retail prices for shock absorbers were frequently below the prices that manufacturers charged wholesale distributors, who were several levels above the retail customer in the traditional chain of distribution. 43 The advent of increased sales by mass merchandisers coincided with aggressive competition among shock absorber manufacturers. Manufacturers offered substantial discounts off their circulated price sheets to traditional wholesalers and implemented stocklifting, a practice in which a manufacturer buys a wholesaler's inventory of a competing manufacturer's product and replaces it with his own product. Perhaps the most aggressive and certainly the most successful manufacturer was Maremont, which acquired Gabriel in 1962. At the time of the acquisition, Gabriel was, in the Commission's words, in a downward trend, id. at 64, J. App. at 254, and ranked third in the industry with a market share of between 10% and 20%, J. App. at 1650-51. After the acquisition, Maremont undertook an aggressive campaign to improve its position. Since that time, Gabriel's market share has at least doubled and has possibly increased four-fold. Maremont today is the number one firm in the replacement shock absorber market. Commission Opinion at 64, J. App. at 254. 44 While agreeing that competitive activity increased dramatically in the mid-1970s, the Commission stated: 45 (W)e disagree with (Tenneco) over the cause of that new competitive vigor. In brief, we find that the source of the improved economic performance lay in industry fears that Tenneco was likely to attempt entry-an actual edge effect-rather than in the buyer power supposedly asserted by mass merchants against their suppliers. 46 Commission Opinion at 13-14, J. App. at 203-04. The Commission's hypothesis depends almost entirely on inferences drawn from the activity of Maremont. The Commission pointed to the testimony of Byron Pond, Senior Vice-President and Director of Maremont, who stated: 47 the attractive nature of the shock absorber business has caused us to invest because of the opportunities and also to invest because, if we didn't invest, someone else would. 48 .... 49 ... One of the ways that you strengthen your position in a business and restrict or limit the amount of competition that you are faced with is to make considerable efforts to become a low-cost producer. 50 J. App. at 679-80. The Commission inferred from this testimony that Maremont's efforts to 'restrict or limit' competition were in large measure aimed at deterring a destabilizing de novo or toehold Tenneco entry. Commission Opinion at 53, J. App. at 243. The Commission analyzed other Maremont activities as follows: 51 Maremont testified that it invested heavily in inventory to improve the quality of its service, its rate of order fill, to a level substantially higher than the industry standard then in effect. The record does not reveal competitive pressure from Monroe or others within the replacement shock absorber market to improve service, but an extraordinary level of order fill could be a useful weapon against a feared potential entrant. One obvious impact is in raising the investment in inventory needed by a potential entrant to compete in winning over new accounts, making entry more expensive. Providing improved service to its accounts also can reasonably be expected to increase the loyalty of those accounts to Maremont, to increase the difficulty facing a new entrant in winning market shares generally, and to push whatever loss did arise onto Monroe or others. Finally, there is the possibility that Maremont was responding to an expectation that Tenneco, upon entering, would set a high standard of service, comparable to what it was already providing in the replacement (exhaust system parts) market. 52 Similarly, a better explanation for Maremont's cost-cutting and cost-absorption can be found in fear of potential entry than in the actual competition which then faced the firm. One would not expect a firm in such a concentrated market voluntarily to absorb cost increases and thereby cut its rate of return. Rather, one would expect Maremont merely to pass such increases through in the reasonable expectation that its one main competitor will find that enlightened self interest lay in following a similar course. 53 Even investments in cost-cutting, which generally would appear not to be inhibited by a high level of concentration, as the payoff from that investment could be retained by the firm, here appear motivated by fear of potential entry rather than by the present competition facing Maremont. Maremont, it must be noted, had a large proportion of its sales, 41%, going to one account, Sears, Roebuck and Co., and an additional 14% going to three other mass merchants. Although the record does not disclose the nature of Maremont's contractual relationships with these other big accounts, it does demonstrate that the Sears contract provided for payment on a cost-plus basis, i.e., projected actual cost for the contract year plus a fixed percentage of that cost as Maremont's return. This arrangement is significant for it limits the return which Maremont could obtain from investments in new, cost-saving technology. Thus, the benefit to Maremont of investment in this area is substantially less than it would otherwise seem to be. 54 Investment in cost-reducing technology, however, might be completely justified as an attempt to deter entry by Tenneco, or to be better prepared for more rigorous competition following entry. Indeed, Maremont recognized that Tenneco was a highly efficient (exhaust system parts) manufacturer. 55 In conclusion, we find that the various improvements in the competitiveness of the replacement shock absorber market in the pre-merger period cannot be adequately explained by factors indigenous to that market. Rather, the competitive upsurge appears closely related to the presence of Tenneco poised on the market's edge, in short, an actual edge effect. 56 Commission Opinion at 54-57, J. App. at 244-47 (footnotes and citations omitted). 57 Whatever might be our conclusion on the substantiality of this evidence standing alone to support the Commission's findings, a review of the record reveals that the Commission ignored evidence contrary to its hypothesis. We must weigh this evidence in our review of the substantiality of the record evidence. The substantiality of evidence must take into account whatever in the record fairly detracts from its weight. Universal Camera Corp. v. NLRB, 340 U.S. 474, 488, 71 S.Ct. 456, 464, 95 L.Ed. 456 (1951). 58 The Commission appears to have disregarded in this portion of its analysis evidence of the precarious condition of Gabriel at the time it was acquired by Maremont. As we noted above, the Commission described Gabriel as a firm in a downward trend when Maremont took it over and began to implement the aggressive competitive measures which the Commission concluded were prompted by a perception of Tenneco on the wings. We find it somewhat remarkable that, apparently aware of Maremont's shaky position in the replacement shock absorber market and its resultant need to improve that position and increase its market share, the Commission could conclude starkly: The record does not reveal competitive pressure from Monroe or others within the replacement shock absorber market to improve (the quality of its) service.... Id. at 54, J. App. at 244. Equally striking is the Commission's statement that, because the industry was highly concentrated, Maremont would not voluntarily absorb cost increases and decrease its rate of return. We cannot understand how else Maremont could attract customers away from industry leader Monroe and others. The Commission's conclusion that Maremont's activity cannot be explained by a need to compete against those already in the market is clearly contrary to the record as well as common sense. 59 In its brief to this Court, the Commission attempts to resurrect its conclusion by noting that it need not trace competitive conduct (in a concentrated market) 'directly and solely' ... to the perception of a firm's presence on the edge of the market. Brief for Commission at 52. Rather, the Commission argues that it need only produce enough evidence from which one might draw a reasonable inference that the competitive activities were 'at least in part' attributable to (industry participants') perception(s) of (a potential competitor's) presence in the wings. Id. at 55. 60 We have no doubt that direct evidence of an edge effect is not required to support a Commission finding of a section 7 violation. See Falstaff Brewing Corp., 410 U.S. at 534 n.13, 93 S.Ct. at 1101 n.13. In this case, however, direct evidence concerning Tenneco's edge effect on Maremont was elicited by the Commission, though it does not support the Commission's conclusion. During the testimony of Byron Pond, Senior Vice-President and Director of Maremont, the following colloquy occurred: 61 Q (By Commission Counsel:) Did the presence of Walker, IPC or Midas and/or TRW as likely potential entrants into the shock absorber market, have any effect on Maremont's decisions, business decisions? 62 A (By Mr. Pond:) I don't think that we looked specifically at competitors on a periodic basis or potential competitors, in developing our strategy. I think we developed our strategy and approach to the business based on how we perceive it and how we perceived the opportunities.... 63 J. App. at 678-79. The Commission dismissed this testimony, arguing that the fact that Maremont did not take Tenneco directly into account was unimportant in a section 7 case which is concerned with the probable anticompetitive impacts of acquisitions. Commission Opinion at 54, J. App. at 244. 64 The Commission's analysis of Mr. Pond's testimony confuses direct evidence with evidence of a direct effect. The Commission is correct that it need not produce direct evidence that Maremont altered its actions in response to a perception of Tenneco in the wings. However, it must produce at least circumstantial evidence that Tenneco's presence probably directly affected competitive activity in the market. Marine Bancorporation, 418 U.S. at 625, 94 S.Ct. at 2871 (To prove a potential competition case, the moving party must show that 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.) (emphasis added); Siemens Corp., 621 F.2d at 509 (A claim of 'perceived' potential entry will not be upheld in the absence of evidence that present competitors have altered or tempered their conduct as a result of the acquiring firm's presence.). Moreover, when determining the substantiality of that circumstantial evidence, we must consider all other record evidence that fairly detracts from its weight. Universal Camera Corp., 340 U.S. at 488, 71 S.Ct. at 464. Mr. Pond's testimony constitutes direct evidence that Tenneco had no direct effect on Maremont's business decisions or competitive activity. In the face of this contrary and unchallenged direct evidence, the substantiality of circumstantial evidence arguably suggesting an edge effect vanishes. Accordingly, we hold that the Commission's finding that Maremont's actions were probably taken in response to its desire to dissuade Tenneco from entering the market is unsupported by substantial evidence in the record. Our reading of Mr. Pond's testimony and our conclusions with respect to its effect on the substantiality of evidence underlying the Commission's findings are buttressed by the ALJ's finding that the evidence was insufficient to show an edge effect exerted by Tenneco. (E)vidence supporting a conclusion may be less substantial when an impartial, experienced examiner who has observed the witnesses and lived with the case has drawn conclusions different from the (Commission's) than when he has reached the same conclusion. Id. at 496, 71 S.Ct. at 468.