Federal Trade Commission v. Consolidated Foods Corp.

Mr. Justice Douglas

delivered the opinion of the Court.

The question presented involves an important construction and application of § 7 of the Clayton Act,1 38 Stat. 731, as amended, 15 U. S. C. § 18. Consolidated Foods Corp. — which owns food processing plants and a network of wholesale and retail food stores — acquired Gentry, Inc., in 1951. Gentry manufactures principally dehydrated onion and garlic. The Federal Trade Commission held that the acquisition violated § 7 because it gave respondent the advantage of a mixed threat and lure of reciprocal buying in its competition for business and “the power to foreclose competition from a substantial share of the markets for dehydrated onion and garlic.” It concluded, in other words, that the effect of the acquisition “may be substantially to lessen competition” within the meaning of § 7, and it ordered divestiture and gave *594other relief. -F. T. C.-,-. The Court of Appeals, relying mainly on 10 years of post-acquisition experience, held that the Commission had failed to show a probability that the acquisition would substantially lessen competition, 329 F. 2d 623. The case is here on cer-tiorari. 379 U. S. 912.

We hold at the outset that the “reciprocity” made possible by such an acquisition is one of the congeries of anticompetitive practices at which the antitrust laws are aimed. The practice results in “an irrelevant and alien factor,” - F. T; C., p. -, intruding into the choice among competing products, creating at the least “a priority on the business at equal prices.” International Salt Co. v. United States, 332 U. S. 392, 396-397; Northern Pac. R. Co. v. United States, 356 U. S. 1, 3, 6, 12. Reciprocal trading may ensue not from bludgeoning or coercion but from more subtle arrangements. A threatened withdrawal of orders if products of an affiliate cease being bought, as well as a conditioning of future purchases on the receipt of orders for products of that affiliate, is an anticompetitive practice.2 Section 7 of the Clayton Act is *595concerned “with probabilities, not certainties.” Brown Shoe Co. v. United States, 370 U. S. 294, 323; United States v. Philadelphia Nat. Bank, 374 U. S. 321, 362. Reciprocity in trading as a result of an acquisition violates § 7, if the probability of a lessening of competition is shown. We turn then to that, the principal, aspect of the present case.

Consolidated is a substantial purchaser of the products of food processors who in turn purchase dehydrated onion and garlic for use in preparing and packaging their food. Gentry, which as noted is principally engaged in the manufacture of dehydrated onion and garlic, had in 1950, immediately prior to its acquisition by Consolidated, about 32% of the total sales of the dehydrated garlic and onion industry and, together with its principal competitor, Basic Vegetable Products, Inc., accounted for almost 90% of the total industry sales. The remaining 10% was divided between two other firms. By 1958 the total industry output of both products had doubled, Gentry’s share rising to 35% and the combined share of Gentry and Basic remaining at about 90%.3

*596After the acquisition Consolidated (though later disclaiming adherence to any policy of reciprocity) did undertake to assist Gentry in selling. An official of Consolidated wrote as follows to its distributing divisions :

“Oftentimes, it is a great advantage to know when you are calling on a prospect, whether or not that prospect is a supplier of someone within your own organization. Everyone believes in reciprocity providing all things are equal.
“Attached is a list of prospects for our Gentry products. We would like to have you indicate on the list whether or not you are purchasing any of your supplies from them. If so, indicate whether your purchases are relatively large, small or insignificant. . . .
“Will you please refer the list to the proper party in your organization. ... If you have any special suggestions, as to how you could be helpful in properly presenting Gentry to any of those listed, it will be appreciated.”

Food processors who sold to Consolidated stated they would give their onion and garlic business to Gentry for reciprocity reasons if it could meet the price and quality of its competitors’ products. Typical is a letter from Armour and Co.:

“I can assure you that it is the desire of our people to reciprocate and cooperate with you in any way we can in line with good business practices, and I am sure that if our quality obstacles can be overcome, your quotations will receive favorable consideration. We value our relationship with you very highly and are disappointed that we have been unable lately to reciprocate for your fine cooperation on Armour Pantry Shelf Meats.”

*597Some suppliers responded and gave reciprocal orders. Some who first gave generous orders later reduced them or abandoned the practice. It is impossible to recreate the precise anatomy of the market arrangements following the acquisition, though respondent offers a factual brief seeking to prove that “reciprocity” either failed or was not a major factor in the post-acquisition history.

The Commission found, however, that “merely as a result of its connection with Consolidated, and without any action on the latter’s part, Gentry would have an unfair advantage over competitors enabling it to make sales that otherwise might not have been made.”

And the Commission concluded:

“With two firms accounting for better than 85% of both product lines for eleven successive years, maximum concentration short of monopoly has already been achieved. If it is desirable to prevent a trend toward oligopoly it is a fortiori desirable to remove, so far as possible, obstacles to the creation of genuinely competitive conditions in an oligopolistic industry. Respondent’s reciprocal buying power, obtained through acquisition of Gentry, is just such an anticompetitive obstacle.
“This conclusion is buttressed by the peculiar nature of the dehydrated onion and garlic industry. In the first place, the record shows that Gentry’s leading competitor, Basic Vegetable Products, Inc., has been the innovator and leader in the field. Gentry has recently made technical strides narrowing, although probably not closing, the gap between them. There is also evidence that the third firm, Puccinelli Packing Co., is not only much smaller — commanding only about 10% of each product market — but is considered by many buyers to offer an inferior product and inferior service.” -F. T. C., p.-.

*598The Court of Appeals, on the other hand, gave post-acquisition evidence almost conclusive weight. It pointed out that, while Gentry’s share of the dehydrated onion market increased by some 7%, its share of the dehydrated garlic market decreased 12%. 329 F. 2d, p. 626. It also relied on apparently unsuccessful attempts at reciprocal buying. Ibid. The Court of Appeals concluded that “Probability can best be gauged by what the past has taught.” Id., p. 627.

The Court of Appeals was not in error in considering the post-acquisition evidence in this case. See United States v. du Pont Co., 353 U. S. 586, 597 et seq., 602 et seq. But we think it gave too much weight to it. Cf. United States v. Continental Can Co., 378 U. S. 441, 463. No group acquiring a company with reciprocal buying opportunities is entitled to a “free trial” period. To give it such would be to distort the scheme of § 7. The “mere possibility” of the prohibited restraint is not enough. (United States v. du Pont & Co., supra, p. 598.) Probability of the proscribed evil is required, as we have noted. If the post-acquisition evidence were given conclusive weight or allowed to override all probabilities, then acquisitions would go forward willy-nilly, the parties biding their time until reciprocity was allowed fully to bloom. It is, of course, true that post-acquisition conduct may amount to a violation of § 7 even though there is no evidence to establish probability in limine. See United States v. du Pont & Co., supra, pp. 597-598. But the force of § 7 is still in probabilities, not in what later transpired. That must necessarily be the case, for once the two companies are united no one knows what the fate of the acquired company and its competitors would have been but for the merger.

Moreover, the post-acquisition evidence here tends to confirm, rather than cast doubt upon, the probable anti-competitive effect which the Commission found the merger would have. The Commission found that Basic’s *599product was superior to Gentry’s — as Gentry’s president freely and repeatedly admitted. Yet Gentry, in a rapidly expanding market, was able to increase its share of onion sales by 7% and to hold its losses in garlic to a 12% decrease. Thus the Commission was surely on safe ground in reaching the following conclusion:

“If reciprocal buying creates for Gentry a protected market, which others cannot penetrate despite superiority of price, quality, or service, competition is lessened whether or not Gentry can expand its market share. It is for this reason that we reject respondent’s argument that the decline in its share of the garlic market proves the ineffectiveness of reciprocity. We do not know that its share would not have fallen still farther, had it not been for the influence of reciprocal buying. This loss of sales fails to refute the likelihood that Consolidated’s reciprocity power, which it has shown a willingness to exploit to the full, will not immunize a substantial segment of the garlic market from normal quality, price, and service competition.” -F. T. C., p.-,4

But the Court of Appeals ignored the Commission’s findings as to the inferiority of Gentry’s product; indeed at one point it even supplanted those findings with its own conclusion that Gentry’s onions were superior:

“Consolidated’s Gentry division in the years following the acquisition, during which time it improved its onion processing equipment to eliminate a problem arising from the presence of wood splinters and achieved a product of higher quality than that of its competitors, increased its share of the rapidly expanding market by only some 7% with respect to dehydrated onion . . . .” 329 F. 2d, p. 626. (Emphasis supplied.)

*600But the Commission’s contrary conclusion was unquestionably based on substantial evidence, as the following excerpt from the testimony of Gentry’s president particularly indicates:

“Q. You mentioned the fact, Dr. Prater, that Gentry had a reputation of being second to Basic in quality. Was one of the factors involved in the quality competition the wood splinter problem?
“A. Yes, the wood splinter problem has been a problem in the dehydration industry for many years. Basic exploited this extensively, and solved it by improvements in production techniques in the use, or by the use of better methods, and by using, instead of wood trays, trays of aluminum plastic glass fibers. We met this competition partially by the improvement of our production techniques and installation of continuous conveyor dehydrators.”

We do not go so far as to say that any acquisition, no matter how small, violates § 7 if there is a probability of reciprocal buying. Some situations may amount only to de minimis. But where, as here, the acquisition is of a company that commands a substantial share of a market, a finding of probability of reciprocal buying by the Commission, whose expertise the Congress trusts, should be honored, if there is substantial evidence to support it.

The evidence is in our view plainly substantial. Reciprocity was tried over and again and it sometimes worked. The industry structure was peculiar, Basic being the leader with Gentry closing the gap. Moreover there is evidence, as the Commission found, “that many buyers have determined that their source of supply may best be protected by a policy of buying from two suppliers.” When reciprocal buying — or the inducement of it — is added, the Commission observed:

“Buyers are likely to lean toward Basic on the ground of quality, but, in seeking a second, protective supply *601channel, to purchase from Gentry in the belief that this will further their sales to Consolidated. Not only does Gentry thus obtain sales that might otherwise go to Basic or Puccinelli, but the two-firm oligopoly structure of the industry is strengthened and solidified and new entry by others is discouraged.” -F. T. C., p.-.

We conclude that there is substantial evidence to sustain that conclusion and that the order of the Commission should not have been denied enforcement. The judgment of the Court of Appeals is accordingly

Reversed.

Section 7 reads in pertinent part as follows:

“No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 15 U. S. C. § 18.

Edwards, Conglomerate Bigness as a Source of Power, in 'Nat. Bur. Eco. Research, Business Concentration and Price Policy (1955), 331, p. 342:

“Where large and powerful concerns encounter each other as seller and buyer, there is sometimes a reciprocal exchange of favors, by which each of the great enterprises strengthens the other.
“The most common form of such a relationship is probably reciprocal buying. A reciprocal buying arrangement may arise either through formal contract or through an informal understanding that may be scarcely distinguishable from a mere policy of cultivating the good will of a large customer. The essence of the arrangement is the willingness of each company to buy from the other, conditioned upon the expectation that the other company will make reciprocal purchases. The goods bought are typicalfy dissimilar in kind, and in the usual case could be obtained from other sources on terms which, aside from the reciprocal purchases, would be no less advantageous. Where such a relationship is well established, it prevents' the competitors of *595each company from selling to the other company, and affords to each company whatever increase of size and strength can be derived from an assured place as supplier to the other.”

And see Stocking and Mueller, Business Reciprocity and the Size of Firms, 30 J. Bus. U. Chi. 73, 75-77 (1957); Ammer, Realistic Reciprocity, 40 Harv. Bus. Rev. No. 1,116 (1962); Hausman, Reciprocal Dealing and the Antitrust Laws, 77 Harv. L. Rev. 873 (1964).

For a discussion of the conglomerate acquisition (the type involved in the present case) see Report, Federal Trade Commission on The Merger Movement (A Summary Report, 1948), p. 59 et seq.

As stated by the Court of Appeals:

“Immediately prior to the Consolidated-Gentry merger, Basic accounted for 60% and Gentry 28% of dehydrated onion sales. By 1958, these figures were 57% and 35%, respectively. In dehydrated garlic sales, Basic had 36% of the market in 1950 and 50% in 1958, while Gentry’s shares were 51% and 39% for the same years.” 329 F. 2d, p. 625.

The last three sentences were a footnote to the first sentence.