Opinion ID: 290209
Heading Depth: 1
Heading Rank: 3

Heading: failing company defenses

Text: 65 We turn now to U.S. Steel's assertion of 'failing company' defenses. On the basis of the Commission's findings, 28 U.S. Steel contends that the failing character of Certified exempts the acquisition from the coverage of the Clayton Act 7 on two grounds. First, U.S. Steel contends that-- from an economic standpoint-- the acquisition of a company that would have failed, but for its vertical integration, can not be anticompetitive in that the acquired company would have fallen from the market place. 29 Second, U.S. Steel contends that tion is completely immunized by the judicially created 'failing company doctrine.' International Shoe Co. v. F.T.C., 280 U.S. 291, S.Ct. 89, 74 L.Ed. 431 (1930). We reject these two defenses. 66 First, we find substantial evidence to support the Commission's finding that the anticompetitive consequences in Certified's continued existence as a giant vertically integrated concern would deteriorate competitive conditions in the concrete and cement industry more than its elimination by business failure. 67 With regard to the cement industry, assuming Certified dropped from the market place, 30 its ready-mix business (and hence cement consumption) would be taken up by its competitors. 31 Correspondingly, those ready-mix producers would then order thier additional cement requirements from various suppliers to the NYMA, creating a broad based demand for cement between the several suppliers in the Northeast. In contrast, Certified's acquisition by U.A.C. forecloses any open-market competition between cement suppliers for Certified's cement consumption. 68 Similarly, with regard to the ready-mix industry, the reduction of the number of ready-mix competitors by one may be far less anticompetitive than Certified's continued existence as a vertically integrated giant. As we have previously noted, the presence of a vertically integrated company in a concentrating industry serves to dampen the vigor of competition by non-integrated concerns. Also potential entrants, as well as non-integrated ready-mix producers, will be less likely to challenge the pricing practices of a concern with resources so many times larger than their resources as is the U.A.C.-Certified-U.S. Steel complex. 69 Second, U.S. Steel contends that the Commission's findings that Certified was in imminent danger of bankruptcy and that there was no other purchaser available except U.S. Steel, are two factual parameters which completely immunize the instant acquisition. The Commission, however, has taken the position that the 'failing company doctrine' does not grant absolute immunity under section 7 where, in view of an acquisition's anticompetitive effects, the probable 'harm to individuals' and 'injury to the communities where its plants were operated' is not so serious that the consummation of the acquisition is in the 'public interest.' 70 In recent years the 'failing company defense' has been subject to considerable academic discussion, 32 most of which has posed the very theoretical conflict which we have here-- whether 'failing company' status is to immunize an acquisition or is merely to be a factor to be weighed in determining whether the acquisition is in the 'public interest.' 71 We need not resolve this conflict because it is our belief that U.S. Steel has failed to prove the 'ultimate facts material to the rule of International Shoe Co. v. Federal Trade Com'n, 280 U.S. 291, 50 S.Ct. 89, 74 L.Ed. 431 (1930),' 33 approved by Congress, S. Hearings on H.R. 2734 at 115; 134-35, 198; 96 Cong.Rec. 16435, 16444; R.R.Rep.No.1191, 81st Cong.1st Sess. at 6; S.Rep.No.1775, 81st Cong.2nd Sess. at 7, and thereafter clarified by a series of United States Supreme Court cases culminating in the recent decision of Citizen Publishing Company v. United States, 394 U.S. 131, 89 S.Ct. 927, 22 L.Ed.2d 148 (1969). Brown Shoe Co. v. United States, 370 U.S. 297, 319-320, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962); United States v. Diebold, Inc., 369 U.S. 654, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962). 72 The United States Supreme Court first carved out the 'failing company' defense to the antitrust laws in International Shoe. That case involved the acquisition of the McElwain Company, a manufacturer and distributor of shoes in several states, by the International Shoe Company, a nationally integrated manufacturer and distributor of shoes. At the time of the acquisition, the financial resources of the McElwain Company were 'so depleted and the prospects of rehabilitation so remote' that the corporation was faced with 'only (two) alternatives:' either liquidation of its assets through a receiver or an outright sale. The Court found that McElwain had no hope of ultimate recovery if 'it    availed itself of a receivership' to continue as a going concern. 280 U.S. at 299, 301, 302, 50 S.Ct. at 92. 34 It was under these circumstances that the Court concluded: 73 'We hold that the purchase of its capital stock by a competitor (there being no other prospective purchaser), not with a purpose to lessen competition, but to facilitate the accumulated business of the purchaser and with the effect of mitigating seriously injurious consequences otherwise probable, is not in contemplation of law prejudicial to the public and does not substantially lessen competition or restrain commerce within the intent of the Clayton Act.' 280 U.S. at 302, 50 S.Ct. at 93. 74 Twenty years later, in 1950, while reporting on the Celler-Kefaufer amendments to the Clayton Act, both houses of Congress expressed an intention to preserve the failing company defense established in International Shoe. 35 Indeed, since the effect of those amendments was to broaden the sweep of the Clayton Act 7 to include acquisitions which lessened competition 'in any line of commerce,' rather than merely 'between' two companies, Congress ostensibly approved an extension of the failing company doctrine to vertical, product extension, and conglomerate acquisitions, in addition to the horizontal-type acquisition which took place in International Shoe. 36 75 Twelve years later, in 1962, the United States Supreme Court affirmed the applicability of the 'failing company doctrine' to horizontal, United States v. Diebold, Inc., 369 U.S. 654, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962), and vertical mergers, Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962) under the amended Clayton Act 7. 15 U.S.C. 18 (1964). 76 Not until 1969 in Citizen Publishing Co. v. United States, 394 U.S. 131, 89 S.Ct. 927, 22 L.Ed.2d 148 (1969), did the United States Supreme Court give any extended consideration 37 to the 'failing company doctrine.' Citizens Publishing involves a joint operating agreement and stock purchase between a healthy and a failing newspaper in Tucson, Arizona, which the Government attacked, in part, as being violative of Section 7. The District Court required the newspapers to submit a plan for divesture and re-establishment of independent competition. 77 In affirming the District Court, the United States Supreme Court entered into a full discussion of the 'ultimate facts material,' United States v. Diebold, Inc., 369 U.S. at 655, 82 S.Ct. at 994, to a determination of whether 'the conditions of the failing company doctrine have been satisfied    (by) those who seek refuge under it.' The Court emphasized the 'present narrow scope,' 394 U.S. at 139, 89 S.Ct. 927, of the doctrine and clarified the 'requirements' of the defense. First, the evidence must show that the financial condition and resources of the company are so dire that 'it faced the grave probability of a business failure.' 394 U.S. at 137, 89 S.Ct. at 930. Second, there can be 'no other prospective purchaser.' 394 U.S. at 137, 89 S.Ct. 927. Finally, the Court observed that the prospects of the acquired company emerging from reorganization as a competitive unit must be 'dim or non-existent.' 38 394 U.S. at 138, 89 S.Ct. 927. 78 This third requirement was implicit in the holding of International Shoe. The facts of International Shoe reveal that the majority dismissed McElwain's hope of ultimate recovery as a competitive unit through receivership 'as lying wholly within the realm of speculation,' 280 U.S. at 301, 50 S.Ct. at 92. A reading of the dissent of Mr. Justice Stone, concurred in by Mr. Justice Brandeis and Mr. Justice Holmes, forties the inference that the majority found no 'reasonable inference    that its (McElwain's) business, conducted either through a receivership or a reorganized company, would probably continue to compete,   ' 280 U.S. at 306, 50 S.Ct at 94. Further, the briefs of the parties reveal that whether McElwain could have passed through bankruptcy or receivership and emerged as a going concern was an issue before the Court. 39 The language of Citizen Publishing that the prospects of the acquired company surviving as a competitive unit through bankruptcy receivership or reorganization proceedings must be 'dim or nonexistent' has its origin in the 'ultimate facts material' to International Shoe. We may fairly infer from the Court's holding in International Shoe the 'failing company doctrine' would not have applied to McElwain had the prospects for going through receivership not been 'wholly speculative.' 79 Citizen Publishing has clarified this inference. It has emphasized that the failing company doctrine must be considered in terms of today's economic environment for companies facing bankruptcy. It has observed that 'we know from broad experience    since 1930,    that companies reorganized through receivership or through Chapter X or Chapter XI of the Bankruptcy Act often (emerge) as strong competitive companies,' 394 U.S. at 138, 89 S.Ct. at 931. It has placed the burden of 'proving the conditions of the failing company doctrine    on those who seek refuge under it.' 394 U.S. at 138-139, 89 S.Ct. at 931. 80 Turning to the facts of the instant acquisition, U.S. Steel and the Commission have devoted insufficient consideration to the prospects of reorganizing Certified into a vital, competitive company. The record, however, is replete with evidence on the subject. United States Steel paid over a million dollars to the equity interests of Certified, after assuming all liabilities. Further, the record indicates that Certified was created by the tying together of a number of ready-mix concrete and building aggregate companies primarily serving the NYMA, each of which had created a certain amount of goodwill. Also, Certified had an expanding sales organization, an aggressive reputation in marketing and long-term contract commitments. Each of these facts suggest the possibility that Certified may have been split into several going concern packages in a receivership proceeding. Clearly, the creation of any such going concern packages might well eliminate the vertical foreclosure of cement purchasing and intimidation towards competitors that inheres in the instant vertical integration. In any event, U.S. Steel has failed to satisfy its burden of proving that the facts of this case make Certified's opportunity for some form of continued competitive vitality through bankruptcy or similar proceedings to be 'dim or non-existent.' 81 We find that there is very substantial evidence of the anticompetitive effects and tendencies of the instant acquisition and that U.S. Steel has failed to satisfy the 'ultimate facts material' to the 'present narrow scope' of the failing company doctrine. Recognizing that Citizen Publishing Co. v. United States, 394 U.S. 131, 138, 89 S.Ct. 927, 22 L.Ed.2d 14, (1969) was decided subsequent to the Federal Trade Commission's disposition of the instant case, it is appropriate to remand this case to give U.S. Steel an opportunity to bring forth evidence that the prospects of Certified passing through bankruptcy or similar proceedings were 'dim or non-existent.' Similarly, the Commission will be in a position on remand to make a finding of fact as to this crucial element in the failing company defense. 82 Moreover, upon remand we believe the Commission should reassess the standards by which the actions and defenses of United States Steel Company are to be judged. While the instant acquisition was consummated on April 30, 1964, the record reveals that U.S. Steel-Certified vertical ties may have taken an unlawful cast as early as January 1963. If such vertical ties were unlawful, then the failing character of Certified must be shown to have existed at that time. Citizen Publishing Co. v. United States, 394 U.S. 131, 133, 140-142, 89 S.Ct. 927, 22 L.Ed.2d 148 (The failing character of the Company was measured from 1940 at which time the first joint operating agreement was effected, rather than from 1953 at which time the challenged agreement was effected.) 83 In January, 1963, U.S. Steel entered a 'notes purchase agreement' with Bankers Trust Company which enabled Certified to obtain a large sum of money beyond its needs to pay U.S. Steel for its cement supplies. Apparently U.S. Steel and Certified participated in this three party agreement with the tacit understanding and expectation that Certified would receive a large loan at exceptionally favorable interest rates in return for which Certified would purchase a very substantial portion of its future cement supplies from U.S. Steel. The effect of such an agreement may very well have been the use of credit, as a lever, to unreasonably restrain or induce Certified from purchasing its cement needs for a significant period of time on the open market. Such an arrangement, and its accompanying effects, may well be unlawful under Section 1 of the Sherman Act, 15 U.S.C. 1 (1964), Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969), the Federal Trade Commission Act 5, 15 U.S.C. 45(a) (1964), Hastings Mfg. Co. v. Federal Trade Commission, 153 F.2d 253, 256-257 (6th Cir. 1946), and the Clayton Act 3, 15 U.S.C. 14 (1964), see Curly's Dairy, Inc. v. Dairy Cooperative Association, 202 F.Supp. 481, 484-485 (D.Ore.1962); Oral Argument before Trial Examiner, Record at 1259-60. 84 To the extent that unreasonable foreclosure of Certified's cement demands occurred as a result of the financial arrangement in January, 1963, we believe that the failing company defense must be measured from the inception of these unreasonable vertical arrangements, not from the point of their final consummation. 85 This matter is remanded to the Federal Trade Commission for findings of fact and further proceedings consistent with this opinion. Upon remand the Commission may consider any evidence previously taken and now on file and such additional evidence on any issue raised by the complaint as may be admissible and relevant to such issues. Any party shall be accorded the right to require the presence of any previously sworn witness for additional testimony either on direct or cross-examination.