United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 12, 2001 Decided April 27, 2001
No. 00-5362
Federal Trade Commission,
Appellant
v.
H.J. Heinz Co. and Milnot Holding Corporation,
Appellees
Appeal from the United States District Court
for the District of Columbia
(No. 00cv01688)
Debra A. Valentine, General Counsel, Federal Trade Com-
mission, argued the cause for the appellant. John F. Daly,
Assistant General Counsel, Richard G. Parker, Director, and
David A. Balto and David C. Shonka, Attorneys, Federal
Trade Commission, were on brief.
Edward P. Henneberry argued the cause for the appellees.
W. Bradford Reynolds, Marc G. Schildkraut, Kenneth W.
Starr, and Mark L. Kovner were on brief.
J. Joseph Curran, Jr., Attorney General, and Ellen S.
Cooper, Assistant Attorney General, State of Maryland;
Bruce M. Botelho, Attorney General, State of Alaska; Janet
Napolitano, Attorney General, State of Arizona; Mark
Pryor, Attorney General, State of Arkansas; Bill Lockyer,
Attorney General, and Peter Siggins, Chief Deputy Attorney
General, State of California; Ken Salazar, Attorney General,
State of Colorado; Richard Blumenthal, Attorney General
and Steven Rutstein, Assistant Attorney General, State of
Connecticut; Robert R. Rigsby, Corporation Counsel, Charles
L. Reischel, Deputy Corporation Counsel, and Bennett Rush-
koff, Senior Counsel, District of Columbia; Robert A. Butter-
worth, Attorney General, State of Florida; Earl I. Anzai,
Attorney General, State of Hawaii; Alan G. Lance, Attorney
General, State of Idaho; James E. Ryan, Attorney General,
State of Illinois; Karen M. Freeman-Wilson, Attorney Gen-
eral, State of Indiana; Thomas J. Miller, Attorney General,
State of Iowa; Carla J. Stovall, Attorney General, State of
Kansas; Richard P. Ieyoub, Attorney General, State of Loui-
siana; Jennifer Granholm, Attorney General, and Thomas L.
Casey, Solicitor General, State of Michigan; Julie Ralston
Aoki, Assistant Attorney General, State of Minnesota; Mike
Moore, Attorney General, State of Mississippi; Frankie Sue
Del Papa, Attorney General, State of Nevada; Philip T.
McLaughlin, Attorney General, State of New Hampshire;
Eliot Spitzer, Attorney General, State of New York; Michael
F. Easley, Attorney General, and K.D. Sturgis, Assistant
Attorney General, State of North Carolina; Herbert D. Soll,
Attorney General, Commonwealth of the Northern Mariana
Islands; Betty D. Montgomery, Attorney General, State of
Ohio; W.A. Drew Edmondson, Attorney General, State of
Oklahoma; Angel E. Rotger-Sabat, Attorney General, Com-
monwealth of Puerto Rico; Mark Barnett, Attorney General,
State of South Dakota; John Cornyn, Attorney General,
State of Texas; Jan Graham, Attorney General, State of
Utah; William H. Sorrell, Attorney General, State of Ver-
mont; Mark L. Earley, Attorney General, Commonwealth of
Virginia; Christine O. Gregoire, Attorney General, State of
Washington; Darrell V. McGraw, Jr., Attorney General, and
Douglas L. Davis, Assistant Attorney General, State of West
Virginia; James E. Doyle, Attorney General, and Kevin J.
O'Connor, State of Wisconsin; and Gay Woodhouse, Attorney
General, State of Wyoming; were on brief for The Thirty-Six
Amici Curiae in support of the appellant.
James H. Skiles and Jan Amundson were on brief for
Grocery Manufacturers of America, Inc. et al., Amici Curiae
in support of the appellees.
C. Boyden Gray, William J. Kolasky, Jeffrey D. Ayer and
Robert H. Bork were on brief for Citizens for a Sound
Economy Foundation, Amicus Curiae, in support of the appel-
lees.
Before: Henderson, Randolph and Garland, Circuit
Judges.
Opinion for the court filed by Circuit Judge Henderson.
Karen LeCraft Henderson, Circuit Judge: On February
28, 2000 H.J. Heinz Company (Heinz) and Milnot Holding
Corporation (Beech-Nut) entered into a merger agreement.
The Federal Trade Commission (Commission or FTC) sought
a preliminary injunction pursuant to section 13(b) of the
Federal Trade Commission Act (FTCA), 15 U.S.C. s 53(b), to
enjoin the consummation of the merger. The injunction was
sought in aid of an FTC administrative proceeding which was
subsequently instituted by complaint to challenge the merger
as violative of, inter alia, section 7 of the Clayton Act, 15
U.S.C. s 18. The district court denied the preliminary in-
junction and the FTC appealed to this court. For the
reasons set forth below, we reverse the district court and
remand for entry of a preliminary injunction against Heinz
and Beech-Nut.
I. Background
Four million infants in the United States consume 80
million cases of jarred baby food annually, representing a
domestic market of $865 million to $1 billion.1 FTC v. H.J.
Heinz, Co., 116 F. Supp. 2d 190, 192 (D.D.C. 2000). The baby
food market is dominated by three firms, Gerber Products
Company (Gerber), Heinz and Beech-Nut. Gerber, the in-
dustry leader, enjoys a 65 per cent market share while Heinz
and Beech-Nut come in second and third, with a 17.4 per cent
and a 15.4 per cent share respectively. Id. The district
court found that Gerber enjoys unparalleled brand recogni-
tion with a brand loyalty greater than any other product sold
in the United States. Id. at 193. Gerber's products are
found in over 90 per cent of all American supermarkets.2
By contrast, Heinz is sold in approximately 40 per cent of
all supermarkets. Its sales are nationwide but concentrated
in northern New England, the Southeast and Deep South and
the Midwest. Id. at 194. Despite its second-place domestic
market share, Heinz is the largest producer of baby food in
the world with $1 billion in sales worldwide. Its domestic
baby food products with annual net sales of $103 million are
manufactured at its Pittsburgh, Pennsylvania plant, which
was updated in 1991 at a cost of $120 million. Id. at 192-93.
The plant operates at 40 per cent of its production capacity
and produces 12 million cases of baby food annually. Its
baby food line includes about 130 SKUs (stock keeping units),
that is, product varieties (e.g., strained carrots, apple sauce,
etc.). Heinz lacks Gerber's brand recognition; it markets
itself as a "value brand" with a shelf price several cents below
Gerber's. Id. at 193.
Beech-Nut has a market share (15.4%) comparable to that
of Heinz (17.4%), with $138.7 million in annual sales of baby
food, of which 72 per cent is jarred baby food. Its jarred
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1 The facts as set forth herein are based on the district court's
factual findings and the record material submitted by the parties.
2 Product volume in retail stores throughout the country is mea-
sured by the product's All Commodity Volume (ACV). Gerber's
near 100 per cent ACV is impressive because virtually all supermar-
kets stock at most two brands of baby food. In at least one area of
the country as many as 80 per cent of supermarket retailers stock
only Gerber.
baby food line consists of 128 SKUs. Beech-Nut manufac-
tures all of its baby food in Canajoharie, New York at a
manufacturing plant that was built in 1907 and began manu-
facturing baby food in 1931. Beech-Nut maintains price
parity with Gerber, selling at about one penny less. It
markets its product as a premium brand. Id. Consumers
generally view its product as comparable in quality to Ger-
ber's. Id. Beech-Nut is carried in approximately 45 per
cent of all grocery stores. Although its sales are nationwide,
they are concentrated in New York, New Jersey, California
and Florida.3 Id. at 194.
At the wholesale level Heinz and Beech-Nut both make
lump-sum payments called "fixed trade spending" (also
known as "slotting fees" or "pay-to-stay" arrangements) to
grocery stores to obtain shelf placement. Id. at 197. Gerber,
with its strong name recognition and brand loyalty, does not
make such pay-to-stay payments. The other type of whole-
sale trade spending is "variable trade spending," which typi-
cally consists of manufacturers' discounts and allowances to
supermarkets to create retail price differentials that entice
the consumer to purchase their product instead of a competi-
tor's. Id.
Under the terms of their merger agreement, Heinz would
acquire 100 per cent of Beech-Nut's voting securities for $185
million. Accordingly, they filed a Premerger Notification and
Report Form with the FTC and the United States Depart-
ment of Justice pursuant to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, 15 U.S.C. s 18a.4 On July 7, 2000
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3 Although Heinz and Beech-Nut introduced evidence showing
that in areas that account for 80% of Beech-Nut sales, Heinz has a
market share of about 2% and in areas that account for about 72%
of Heinz sales, Beech-Nut's share is about 4%, the FTC introduced
evidence that Heinz and Beech-Nut are locked in an intense battle
at the wholesale level to gain (and maintain) position as the second
brand on retail shelves.
4 Section 18a requires pre-merger notification for a merger in
which either the acquiring or the acquired firm has total net sales
or assets of at least $10 million and the other firm has annual sales
the FTC authorized this action for a preliminary injunction
under section 13(b) of the FTCA and, on July 14, 2000, it filed
a complaint and motion for preliminary injunction. The
district court conducted a five-day hearing in late August and
early September and heard final arguments on September 21,
2000. The record before the district court consisted of 1,267
exhibits, including 150 demonstrative exhibits, 32 depositions
and 41 affidavits. In addition, eleven witnesses testified. On
October 18, 2000 the district court denied preliminary injunc-
tive relief. The court concluded that it was "more probable
than not that consummation of the Heinz/Beech-Nut merger
will actually increase competition in jarred baby food in the
United States." H.J. Heinz, 116 F. Supp. 2d at 200. The
FTC appealed and sought injunctive relief pending appeal,
which this court granted on November 8, 2000. On Novem-
ber 22, 2000 the FTC filed an administrative complaint
against Heinz and Beech-Nut, charging that the proposed
merger violates section 5 of the FTCA and, if consummated,
would violate section 7 of the Clayton Act. In the Matter of
H. J. Heinz, Docket No. 9295 (filed Nov. 22, 2000).
II. Analysis
A. Standard of Review
We review a district court order denying preliminary in-
junctive relief for abuse of discretion, National Wildlife Fed'n
v. Burford, 835 F.2d 305, 319 (D.C. Cir. 1987), and will set
aside the court's factual findings only if they are "clearly
erroneous." Fed. R. Civ. P. 52(a); United States v. Marine
Bancorporation, Inc., 418 U.S. 602, 615 n.13 (1974). If our
review of the district court order "reveals that it rests on an
erroneous premise as to the pertinent law, however, we must
examine the decision in light of the legal principles we believe
proper and sound." Ambach v. Bell, 686 F.2d 974, 979 (D.C.
Cir. 1982). We apply de novo review to the district court's
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or total assets of at least $100 million. The acquirer must have at
least 15 per cent or $15 million worth of the target firm's voting
securities or assets. 15 U.S.C. s 18a(a). Filers must disclose
specific financial and market data and pay a filing fee.
conclusions of law. See FTC v. National Tea Co., 603 F.2d
694, 696-98 (8th Cir. 1979) (reviewing de novo proper stan-
dard of proof under section 13(b) of FTCA); cf. FTC v.
Warner Communications Inc., 742 F.2d 1156, 1160 (9th Cir.
1984) (per curiam) (finding as matter of law district court
applied incorrect standard for section 7 violation). In decid-
ing whether to grant preliminary injunctive relief under
section 13(b), the court evaluates whether it is in the public
interest to enjoin the proposed merger. See 15 U.S.C.
s 53(b).
B. Section 7 of the Clayton Act
Section 7 of the Clayton Act prohibits acquisitions, includ-
ing mergers, "where in any line of commerce or in any
activity affecting 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.
s 18; see United States v. Philadelphia Nat'l Bank, 374 U.S.
321, 355 (1963) ("The statutory test is whether the effect of
the merger 'may be substantially to lessen competition' 'in
any line of commerce in any section of the country.' "). The
"Congress used the words 'may be substantially to lessen
competition' (emphasis supplied), to indicate that its concern
was with probabilities, not certainties." Brown Shoe Co. v.
United States, 370 U.S. 294, 323 (1962) (emphasis original);
see S. Rep. No. 1775, at 6 (1950) ("The use of these words
["may be"] means that the bill, if enacted, would not apply to
the mere possibility but only to the reasonable probability of
the pr[o]scribed effect...."). "Merger enforcement, like oth-
er areas of antitrust, is directed at market power. It shares
with the law of monopolization a degree of schizophrenia: an
aversion to potent power that heightens risk of abuse; and
tolerance of that degree of power required to attain economic
benefits." Lawrence A. Sullivan & Warren S. Grimes, The
Law of Antitrust s 9.1, at 511 (2000). The Congress has
empowered the FTC, inter alia, to weed out those mergers
whose effect "may be substantially to lessen competition"
from those that enhance competition. See H.R. Rep. No.
1142, at 18-19 (1914). In section 13(b) of the FTCA, the
Congress provided a mechanism whereby the FTC may seek
preliminary injunctive relief preventing the merging parties
from consummating the merger until the Commission has had
an opportunity to investigate and, if necessary, adjudicate the
matter.
C. Section 13(b) of the Federal Trade Commission Act
"Whenever the Commission has reason to believe that a
corporation is violating, or is about to violate, Section 7 of the
Clayton Act, the FTC may seek a preliminary injunction to
prevent a merger pending the Commission's administrative
adjudication of the merger's legality." FTC v. Staples, Inc.,
970 F. Supp. 1066, 1070 (D.D.C. 1997); see 15 U.S.C. s 53(b).
Section 13(b) provides for the grant of a preliminary injunc-
tion where such action would be in the public interest--as
determined by a weighing of the equities and a consideration
of the Commission's likelihood of success on the merits. 15
U.S.C. s 53(b).5 The Congress intended this standard to
depart from what it regarded as the then-traditional equity
standard, which it characterized as requiring the plaintiff to
show: (1) irreparable damage, (2) probability of success on
the merits and (3) a balance of equities favoring the plaintiff.
H.R. Rep. No. 93-624, at 31 (1971). The Congress deter-
mined that the traditional standard was not "appropriate for
the implementation of a Federal statute by an independent
regulatory agency where the standards of the public interest
measure the propriety and the need for injunctive relief." Id.
"The courts had evolved an approach to cases in which
government agencies, acting to enforce a federal statute,
sought interim relief. The agency, in such cases, was not
held to the high thresholds applicable where private parties
seek interim restraining orders." FTC v. Weyerhaeuser Co.,
665 F.2d 1072, 1082 (D.C. Cir. 1981); see FTC v. Exxon
Corp., 636 F.2d 1336, 1343 (D.C. Cir. 1980) ("In enacting
[Section 13(b)], Congress further demonstrated its concern
that injunctive relief be broadly available to the FTC by
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5 Section 13(b) of the FTCA provides that "[u]pon a proper
showing that, weighing the equities and considering the Commis-
sion's likelihood of ultimate success, such action would be in the
public interest, ... a preliminary injunction may be granted." 15
U.S.C. s 53(b).
incorporating a unique 'public interest' standard in 15 U.S.C.
s 53(b), rather than the more stringent, traditional 'equity'
standard for injunctive relief."). The FTC is not required to
establish that the proposed merger would in fact violate
section 7 of the Clayton Act. Staples, 970 F. Supp. at 1071;
see FTC v. Food Town Stores, Inc., 539 F.2d 1339, 1342 (4th
Cir. 1976) ("The district court is not authorized to determine
whether the antitrust laws have been or are about to be
violated. That adjudicatory function is vested in the FTC in
the first instance."). We now consider the FTC's likelihood of
success and weigh the equities. Accord FTC v. Freeman
Hosp., 69 F.3d 260, 267 (8th Cir. 1995); FTC v. University
Health, Inc., 938 F.2d 1206, 1217 (11th Cir. 1991); Warner
Communications, 742 F.2d at 1160.
1. Likelihood of Success
To determine likelihood of success on the merits we mea-
sure the probability that, after an administrative hearing on
the merits, the Commission will succeed in proving that the
effect of the Heinz/Beech-Nut merger "may be substantially
to lessen competition, or to tend to create a monopoly" in
violation of section 7 of the Clayton Act. 15 U.S.C. s 18. This
court and others have suggested that the standard for likeli-
hood of success on the merits is met if the FTC "has raised
questions going to the merits so serious, substantial, difficult
and doubtful as to make them fair ground for thorough
investigation, study, deliberation and determination by the
FTC in the first instance and ultimately by the Court of
Appeals." FTC v. Beatrice Foods Co., 587 F.2d 1225, 1229
(D.C. Cir. 1978) (Appendix to Statement of MacKinnon &
Robb, JJ.)6; Staples, 970 F. Supp. at 1071; Warner Commu-
nications, 742 F.2d at 1162 (quoting National Tea, 603 F.2d
at 698); see University Health, 938 F.2d at 1218. This
specific standard was articulated by the court below, see H.J.
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6 In Beatrice Foods, two members of the court, writing separately
from a denial of en banc review, included the quoted language from
an unpublished judgment and memorandum issued earlier in the
litigation.
Heinz, 116 F. Supp. 2d at 194, and it is a standard to which
the appellees have not objected.
In United States v. Baker Hughes Inc., 908 F.2d 981, 982-
83 (D.C. Cir. 1990), we explained the analytical approach by
which the government establishes a section 7 violation. First
the government must show that the merger would produce "a
firm controlling an undue percentage share of the relevant
market, and [would] result[ ] in a significant increase in the
concentration of firms in that market." Philadelphia Nat'l
Bank, 374 U.S. at 363. Such a showing establishes a "pre-
sumption" that the merger will substantially lessen competi-
tion. See Baker Hughes, 908 F.2d at 982. To rebut the
presumption, the defendants must produce evidence that
"show[s] that the market-share statistics [give] an inaccurate
account of the [merger's] probable effects on competition" in
the relevant market. United States v. Citizens & S. Nat'l
Bank, 422 U.S. 86, 120 (1975).7 "If the defendant successfully
rebuts the presumption [of illegality], the burden of producing
additional evidence of anticompetitive effect shifts to the
government, and merges with the ultimate burden of persua-
sion, which remains with the government at all times." Bak-
er Hughes Inc., 908 F.2d at 983; see also Kaiser Aluminum,
652 F.2d at 1340 & n.12. Although Baker Hughes was
decided at the merits stage as opposed to the preliminary
injunctive relief stage, we can nonetheless use its analytical
approach in evaluating the Commission's showing of likeli-
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7 To rebut the defendants may rely on "[n]onstatistical evidence
which casts doubt on the persuasive quality of the statistics to
predict future anticompetitive consequences" such as "ease of entry
into the market, the trend of the market either toward or away
from concentration, and the continuation of active price competi-
tion." Kaiser Aluminum & Chem. Corp. v. FTC, 652 F.2d 1324,
1341 (7th Cir. 1981). In addition, the defendants may demonstrate
unique economic circumstances that undermine the predictive value
of the government's statistics. See United States v. General Dy-
namics Corp., 415 U.S. 486, 506-10 (1974) (fundamental changes in
structure of coal market made market concentration statistics inac-
curate predictors of anticompetitive effect); see also University
Health, 938 F.2d at 1218.
hood of success. Accordingly, we look at the FTC's prima
facie case and the defendants' rebuttal evidence.
a. Prima Facie Case
Merger law "rests upon the theory that, where rivals are
few, firms will be able to coordinate their behavior, either by
overt collusion or implicit understanding, in order to restrict
output and achieve profits above competitive levels." FTC v.
PPG Indus., 798 F.2d 1500, 1503 (D.C. Cir. 1986).8 Increases
in concentration above certain levels are thought to "raise[ ] a
likelihood of 'interdependent anticompetitive conduct.' " Id.
(quoting General Dynamics, 415 U.S. at 497); see FTC v.
Elders Grain, 868 F.2d 901, 905 (7th Cir. 1989). Market
concentration, or the lack thereof, is often measured by the
Herfindahl-Hirschmann Index (HHI). See Staples, 970
F. Supp. at 1081 n.12.9
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8 A "horizontal merger" involves firms selling the same or similar
products in a common geographical market.
9 "The FTC and the Department of Justice, as well as most
economists, consider the measure superior to such cruder measures
as the four-or eight-firm concentration ratios which merely sum up
the market shares of the largest four or eight firms." PPG, 798
F.2d at 1503. The Department of Justice and the FTC rely on the
HHI in evaluating proposed horizontal mergers. See United States
Dep't of Justice & Federal Trade Comm'n, Horizontal Merger
Guidelines ss 1.5, 1.51 (1992), as revised (1997). The HHI is
calculated by totaling the squares of the market shares of every
firm in the relevant market. For example, a market with ten firms
having market shares of 20%, 17%, 13%, 12%, 10%, 10%, 8%, 5%,
3% and 2% has an HHI of 1304 (202 + 172 + 132 + 122 + 102 +
102 + 82 + 52 +32 +22). If the firms with 13% and 5% market
shares were to merge, the HHI would increase by 130 points,
expressed by the formula 2ab, which is derived from (a+b)2 or a2 +
2ab + b2. Under the Merger Guidelines a market with a post-
merger HHI above 1800 is considered "highly concentrated" and
mergers that increase the HHI in such a market by over 50 points
"potentially raise significant competitive concerns." Id. at s 1.51.
Mergers "producing an increase in the HHI of more than 100 points
[in such markets] are [presumed] likely to create or enhance market
Sufficiently large HHI figures establish the FTC's prima
facie case that a merger is anti-competitive. See Baker
Hughes, 908 F.2d at 982-83 & n.3; PPG, 798 F.2d at 1503.
The district court found that the pre-merger HHI "score for
the baby food industry is 4775"--indicative of a highly con-
centrated industry.10 H.J. Heinz, 116 F. Supp. 2d at 196; see
PPG, 798 F.2d at 1503; Horizontal Merger Guidelines, supra,
s 1.51. The merger of Heinz and Beech-Nut will increase
the HHI by 510 points. This creates, by a wide margin, a
presumption that the merger will lessen competition in the
domestic jarred baby food market. See Horizontal Merger
Guidelines, supra, s 1.51 (stating that HHI increase of more
than 100 points, where post-merger HHI exceeds 1800, is
"presumed ... likely to create or enhance market power or
facilitate its exercise"); see also Baker Hughes, 908 F.2d at
982-83 & n.3; PPG, 798 F.2d at 1503.11 Here, the FTC's
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power or facilitate its exercise." Id. Although the Merger Guide-
lines are not binding on the court, they provide "a useful illustration
of the application of the HHI." PPG, 798 F.2d at 1503 n.4.
10 To determine the HHI score the district court first had to
define the relevant market. The court defined the product market
as jarred baby food and the geographic market as the United
States. H.J. Heinz, 116 F. Supp. 2d at 195. The parties do not
challenge the court's definition.
11 The FTC argues that this finding alone--that it is certain to
establish a prima facie case--entitles it to preliminary injunctive
relief under PPG. We disagree with the Commission's reading of
PPG. In PPG, the Commission appealed the district court's denial
of its request for a preliminary injunction to prevent PPG Indus-
tries, the world's largest producer of glass aircraft transparencies,
from acquiring Swedlow, Inc., the world's largest manufacturer of
acrylic aircraft transparencies. 798 F.2d at 1502. After defining
the relevant market and determining market share, the district
court found that the merger would significantly increase the concen-
tration in an already highly concentrated market. It also "found
high market-entry barriers that would prolong high market concen-
tration." Id. at 1503. On appeal, this court stated: "There is no
doubt that the pre-and post-acquisition HHI's and market shares
found in this case entitle the Commission to some preliminary
relief." Id. This statement came, however, in the context of a case
market concentration statistics12 are bolstered by the indis-
putable fact that the merger will eliminate competition be-
tween the two merging parties at the wholesale level, where
they are currently the only competitors for what the district
court described as the "second position on the supermarket
shelves." H.J. Heinz, 116 F. Supp. 2d at 196. Heinz's own
documents recognize the wholesale competition and anticipate
that the merger will end it. JA 2680; see also JA 2185.
Indeed, those documents disclose that Heinz considered three
options to end the vigorous wholesale competition with
Beech-Nut: two involved innovative measures while the third
entailed the acquisition of Beech-Nut. JA 2184. Heinz
chose the third, and least pro-competitive, of the options.
Finally, the anticompetitive effect of the merger is further
enhanced by high barriers to market entry.13 The district
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in which the appellants offered no rebuttal (other than the observa-
tion of rapid and continuing technological changes in the industry)
to the presumption generated by the market concentration data on
which the FTC based its prima facie showing. Id. at 1506. The
court then noted the rule established in Weyerhaeuser that the FTC
is entitled to a "presumption in favor of a preliminary injunction
when [it] establishes a strong likelihood of success on the merits."
Id. at 1507.
12 The Supreme Court has cautioned that statistics reflecting
market share and concentration, while of great significance, are not
conclusive indicators of anticompetitive effects. See General Dy-
namics, 415 U.S. at 498; Brown Shoe, 370 U.S. at 322 n.38
("Statistics reflecting the shares of the market controlled by the
industry leaders and the parties to the merger are, of course, the
primary index of market power; but only a further examination of
the particular market--its structure, history and probable future--
can provide the appropriate setting for judging the probable anti-
competitive effect of the merger."). In General Dynamics the
Supreme Court held that the market share statistics the Commis-
sion used to seek divestiture of the merged firm were insufficient
because, in failing to take into account the acquired firm's long-term
contractual commitments (coal contracts), the statistics overestimat-
ed the acquired firm's ability to compete in the relevant market in
the future. General Dynamics, 415 U.S. at 500-504.
13 Barriers to entry are important in evaluating whether market
concentration statistics accurately reflect the pre- and likely post-
court found that there had been no significant entries in the
baby food market in decades and that new entry was "diffi-
cult and improbable." H.J. Heinz, 116 F. Supp. 2d at 196.
This finding largely eliminates the possibility that the re-
duced competition caused by the merger will be ameliorated
by new competition from outsiders and further strengthens
the FTC's case. See University Health, 938 F.2d at 1219 &
n.26.
As far as we can determine, no court has ever approved a
merger to duopoly under similar circumstances.
b. Rebuttal Arguments
In response to the FTC's prima facie showing, the appel-
lees make three rebuttal arguments, which the district court
accepted in reaching its conclusion that the merger was not
likely to lessen competition substantially. For the reasons
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merger competitive picture. Cf. Baker Hughes, 908 F.2d at 987.
If entry barriers are low, the threat of outside entry can significant-
ly alter the anticompetitive effects of the merger by deterring the
remaining entities from colluding or exercising market power. See
United States v. Falstaff Brewing Corp., 410 U.S. 526, 532-33
(1973); Baker Hughes, 908 F.2d at 987 ("In the absence of signifi-
cant barriers, a company probably cannot maintain supracompeti-
tive pricing for any length of time."); Horizontal Merger Guide-
lines, supra, s 3.0 ("A merger is not likely to create or enhance
market power or to facilitate its exercise, if entry into the market is
so easy that market participants, after the merger, either collective-
ly or unilaterally could not profitably maintain a price increase
above premerger levels."). Low barriers to entry enable a potential
competitor to deter anticompetitive behavior by firms within the
market simply by its ability to enter the market. FTC v. Procter &
Gamble Co., 386 U.S. 568, 581 (1967) ("It is clear that the existence
of Procter at the edge of the industry exerted considerable influ-
ence on the market."). Existing firms know that if they collude or
exercise market power to charge supracompetitive prices, entry by
firms currently not competing in the market becomes likely, there-
by increasing the pressure on them to act competitively. See Baker
Hughes, 908 F.2d at 988; Byars v. Bluff City News Co., 609 F.2d
843, 851 n.19 (6th Cir. 1979).
discussed below, these arguments fail and thus were not a
proper basis for denying the FTC injunctive relief.
1. Extent of Pre-Merger Competition
The appellees first contend, and the district court agreed,
that Heinz and Beech-Nut do not really compete against each
other at the retail level. Consumers do not regard the
products of the two companies as substitutes, the appellees
claim, and generally only one of the two brands is available on
any given store's shelves. Hence, they argue, there is little
competitive loss from the merger.
This argument has a number of flaws which render clearly
erroneous the court's finding that Heinz and Beech-Nut have
not engaged in significant pre-merger competition. First, in
accepting the appellees' argument that Heinz and Beech-Nut
do not compete, the district court failed to address the record
evidence that the two do in fact price against each other, see,
e.g., 8/31/2000 Tr. 247-48, and that, where both are present in
the same areas,14 they depress each other's prices as well as
those of Gerber even though they are virtually never all found
in the same store. See, e.g., 8/30/2000 Tr. 147-48, 172; PX
531 at p 8; PX 481 at p 12; PX 479 at p p 6-7; PX 478 at p 6;
DX 14 at RP-110. This evidence undermines the district
court's factual finding.
Second, the district court's finding is inconsistent with its
conclusion that there is a single, national market for jarred
baby food in the United States. The Supreme Court has
explained that "[t]he outer boundaries of a product market
are determined by the reasonable interchangeability of use
[by consumers] or the cross-elasticity of demand between the
product itself and substitutes for it." Brown Shoe, 370 U.S.
at 325; see also United States v. E.I. du Pont de Nemours &
Co., 351 U.S. 377, 395 (1956).15 The definition of product
__________
14 There are at least ten metropolitan areas in which Heinz and
Beech-Nut both have more than a 10 per cent market share and
their combined share exceeds 35 per cent. PX 781 at Ex. 1B.
15 Interchangeability of use and cross-elasticity of demand look to
the availability of products that are similar in nature or use and the
market thus "focuses solely on demand substitution factors,"
i.e., that consumers regard the products as substitutes. Hori-
zontal Merger Guidelines, supra, s 1.0; Sullivan & Grimes,
supra, s 11.2b1, at 579. By defining the relevant product
market generically as jarred baby food, the district court
concluded that in areas where Heinz's and Beech-Nut's prod-
ucts are both sold, consumers will switch between them in
response to a "small but significant and nontransitory in-
crease in price (SSNIP)." Horizontal Merger Guidelines,
supra, s 1.11; H.J. Heinz, 116 F. Supp. 2d at 195. The
district court never explained this inherent inconsistency in
its logic nor could counsel for the appellees explain it at oral
argument.
Third, and perhaps most important, the court's conclusion
concerning pre-merger competition does not take into account
the indisputable fact that the merger will eliminate competi-
tion at the wholesale level between the only two competitors
for the "second shelf" position. Competition between Heinz
and Beech-Nut to gain accounts at the wholesale level is
fierce with each contest concluding in a winner-take-all result.
JA 2680. The district court regarded this loss of competition
as irrelevant because the FTC did not establish to its satisfac-
tion that wholesale competition ultimately benefitted consum-
ers through lower retail prices. The district court concluded
that fixed trade spending did not affect consumer prices and
that "the FTC's assertion that the proposed merger will
affect variable trade spending levels and consumer prices is
... at best, inconclusive."16 H.J. Heinz, 116 F. Supp. 2d at
197. Although the court noted the FTC's examples of con-
__________
degree to which buyers are willing to substitute those similar
products for one another. See E.I. du Pont de Nemours, 351 U.S.
at 393.
16 Fixed trade spending consists of "slotting fees," "pay-to-stay"
arrangements, new store allowances and other payments to retail-
ers in exchange for shelf space and desired product display. H.J.
Heinz, 116 F. Supp. 2d at 197. Variable trade spending includes
payments to retailers tied to sales volume and intended to insure a
specific sales volume and lower shelf price. Id.
sumer benefit through couponing initiatives, the court held
that it was "impossible to conclude with any certainty that the
consumer benefit from such couponing initiatives would be
lost in the merger." Id.
In rejecting the FTC's argument regarding the loss of
wholesale competition, the court committed two legal errors.
First, as the appellees conceded at oral argument, no court
has ever held that a reduction in competition for wholesale
purchasers is not relevant unless the plaintiff can prove
impact at the consumer level. Oral Arg. Tr. at 22, 28; see
Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1389 (7th Cir.
1986) ("Section 7 does not require proof that a merger or
other acquisition has caused higher prices in the affected
market. All that is necessary is that the merger create an
appreciable danger of [collusive practices] in the future. A
predictive judgment, necessarily probabilistic and judgmental
rather than demonstrable, is called for.") (citation omitted).
Second, it is, in any event, not the FTC's burden to prove
such an impact with "certainty." To the contrary, the anti-
trust laws assume that a retailer faced with an increase in the
cost of one of its inventory items "will try so far as competi-
tion allows to pass that cost on to its customers in the form of
a higher price for its product." In re Brand Name Prescrip-
tion Drugs Antitrust Litig., 123 F.3d 599, 605 (7th Cir. 1997),
reh'g and suggestion for reh'g en banc denied (Oct. 8, 1997).
Section 7 is, after all, concerned with probabilities, not cer-
tainties. United States v. El Paso Natural Gas Co., 376 U.S.
651, 658 (1964); Brown Shoe, 370 U.S. at 323; Baker Hughes,
908 F.2d at 984).17
__________
17 Although the merger's effects on the wholesale market for baby
food are important to a determination of whether the merger is
likely to reduce competition in the baby food market overall, we
reject the FTC's argument here that the "wholesale competition"
between Heinz and Beech-Nut is an entirely distinct "line of
commerce" within the meaning of section 7 of the Clayton Act such
that it must be analyzed independently from "retail competition."
The Congress amended section 7 in 1950 "to make the measure of
anticompetitive acquisitions the extent to which they lessened com-
petition 'in any line of commerce,' rather than the extent to which
2. Post-Merger Efficiencies
The appellees' second attempt to rebut the FTC's prima
facie showing is their contention that the anticompetitive
effects of the merger will be offset by efficiencies resulting
from the union of the two companies, efficiencies which they
assert will be used to compete more effectively against Ger-
ber. It is true that a merger's primary benefit to the
economy is its potential to generate efficiencies. See general-
ly 4A Phillip E. Areeda, Herbert Hovenkamp & John L.
Solow, Antitrust Law p 970 at 22-25 (1998). As the Merger
Guidelines now recognize, efficiencies "can enhance the
merged firm's ability and incentive to compete, which may
result in lower prices, improved quality, or new products."
Horizontal Merger Guidelines, supra, s 4.
Although the Supreme Court has not sanctioned the use of
the efficiencies defense in a section 7 case, see Procter &
Gamble Co., 386 U.S. at 580,18 the trend among lower courts
__________
they lessened competition 'between' the two companies." Citizen
Publishing Co. v. United States, 394 U.S. 131, 137 n.3 (1969).
Courts interpret "line of commerce" as synonymous with the rele-
vant product market. See General Dynamics, 415 U.S. at 510;
Falstaff Brewing, 410 U.S. at 531-32. The district court defined
only one market--jarred baby food sold throughout the line of
commerce in the United States. Thus, the proper "line of com-
merce" for analysis in this case is the overall market for jarred
baby food, which includes both retail and wholesale levels. At this
point in the proceedings, the wholesale market cannot be separated
out for analysis without regard to the merger's effect on other
levels of competition.
18 In Procter & Gamble Co., 386 U.S. at 580, the Supreme Court
stated that "[p]ossible economies cannot be used as a defense to
illegality" in section 7 merger cases. The issue is, however, not a
closed book. See Staples, 970 F. Supp. at 1088 (collecting cases).
Areeda and Turner explain that "[i]n interpreting the Clorox lan-
guage, moreover, observe that the court referred only to 'possible'
economies and to economies that 'may' result from mergers that
lessen competition. To reject an economies defense based on mere
possibilities does not mean that one should reject such a defense
based on more convincing proof." 4 Phillip Areeda & Donald
is to recognize the defense. See, e.g., FTC v. Tenet Health
Care Corp., 186 F.3d 1045, 1054 (8th Cir. 1999), reh'g and
reh'g en banc denied (Oct. 6. 1999); University Health, 938
F.2d at 1222; FTC v. Cardinal Health, Inc., 12 F. Supp. 2d
34, 61 (D.D.C. 1998); Staples, 970 F. Supp. at 1088-89; see
also ABA Antitrust Section, Mergers and Acquisitions: Un-
derstanding the Antitrust Issues 152 (2000) ("The majority of
courts have considered efficiencies as a means to rebut the
government's prima facie case that a merger will lead to
restricted output or increased prices. These courts, however,
generally have found inadequate proof of efficiencies to sus-
tain a rebuttal of the government's case."). In 1997 the
Department of Justice and the FTC revised their Horizontal
Merger Guidelines to recognize that "mergers have the po-
tential to generate significant efficiencies by permitting a
better utilization of existing assets, enabling the combined
firm to achieve lower costs in producing a given quantity and
quality than either firm could have achieved without the
proposed transaction." Horizontal Merger Guidelines, supra,
s 4.
Nevertheless, the high market concentration levels present
in this case require, in rebuttal, proof of extraordinary effi-
ciencies, which the appellees failed to supply. See University
Health, 938 F.2d at 1223 ("[A] defendant who seeks to
overcome a presumption that a proposed acquisition would
substantially lessen competition must demonstrate that the
intended acquisition would result in significant economies and
that these economies ultimately would benefit competition
and, hence, consumers."); Horizontal Merger Guidelines, su-
pra, s 4 (stating that "[e]fficiencies almost never justify a
merger to monopoly or near-monopoly"); 4A Areeda, et al.,
Antitrust Law p 971f, at 44 (requiring "extraordinary" effi-
ciencies where the "HHI is well above 1800 and the HHI
increase is well above 100"). Moreover, given the high con-
__________
Turner, Antitrust Law p 941b, at 154 (1980). They conclude that
"[t]he Court's brief and unelaborated language [in Clorox] cannot
reasonably be taken as a definitive disposition of so important and
complex an issue as the role of economies in analyzing legality of a
merger." Id.
centration levels, the court must undertake a rigorous analy-
sis of the kinds of efficiencies being urged by the parties in
order to ensure that those "efficiencies" represent more than
mere speculation and promises about post-merger behavior.
The district court did not undertake that analysis here.
In support of its conclusion that post-merger efficiencies
will outweigh the merger's anticompetitive effects, the district
court found that the consolidation of baby food production in
Heinz's under-utilized Pittsburgh plant "will achieve substan-
tial cost savings in salaries and operating costs." H.J. Heinz,
16 F. Supp. 2d at 199. The court also credited the appellees'
promise of improved product quality as a result of recipe
consolidation.19 The only cost reduction the court quantified
as a percentage of pre-merger costs, however, was the so-
called "variable conversion cost": the cost of processing the
volume of baby food now processed by Beech-Nut. The
court accepted the appellees' claim that this cost would be
reduced by 43% if the Beech-Nut production were shifted to
Heinz's plant, see JA 4619, a reduction the appellees' expert
characterized as "extraordinary."
The district court's analysis falls short of the findings
necessary for a successful efficiencies defense in the circum-
stances of this case. We mention only three of the most
important deficiencies here. First, "variable conversion cost"
is only a percentage of the total variable manufacturing cost.
A large percentage reduction in only a small portion of the
company's overall variable manufacturing cost does not neces-
sarily translate into a significant cost advantage to the merg-
er. Thus, for cost reduction to be relevant, we must at least
__________
19 In addition, the district court described Heinz's distribution
network as much more efficient than Beech-Nut's. H.J. Heinz, 116
F. Supp. 2d at 199. It failed to find, however, a significant
diseconomy of scale in distribution from which either Heinz or
Beech-Nut suffers. 4A Areeda, et al., supra, p 975e1, at 73. In
other words, although Beech-Nut has an inefficient distribution
system, it can make that system more efficient without merger.
Heinz's own efficient distribution network illustrates that a firm the
size of Beech-Nut does not need to merge in order to attain an
efficient distribution system.
consider the percentage of Beech-Nut's total variable manu-
facturing cost that would be reduced as a consequence of the
merger. At oral argument, the appellees' counsel agreed.
Oral Arg. Tr. at 43. This correction immediately cuts the
asserted efficiency gain in half since, according to the appel-
lees' evidence, using total variable manufacturing cost as the
measure cuts the cost savings from 43% to 22.3%. See JA
4620.
Second, the percentage reduction in Beech-Nut's cost is still
not the relevant figure. After the merger, the two entities
will be combined, and to determine whether the merged
entity will be a significantly more efficient competitor, cost
reductions must be measured across the new entity's com-
bined production--not just across the pre-merger output of
Beech-Nut. See 4A Areeda, et al., supra, p 976d at 93-94.
The district court, however, did not consider the cost reduc-
tion over the merged firm's combined output. At oral argu-
ment the appellees' counsel was unable to suggest a formula
that could be used for determining that cost reduction. See
Oral Arg. Tr. at 45-47.
Finally, and as the district court recognized, the asserted
efficiencies must be "merger-specific" to be cognizable as a
defense.20 H.J. Heinz, 116 F. Supp. 2d at 198-99; see
__________
20 The Horizontal Merger Guidelines explain that "merging firms
must substantiate efficiency claims so that the Agency can verify by
reasonable means the likelihood and magnitude of each asserted
efficiency, how and when each would be achieved (and any costs of
doing so), how each would enhance the merged firm's ability and
incentive to compete, and why each would be merger-specific.
Efficiency claims will not be considered if they are vague or
speculative or otherwise cannot be verified by reasonable means."
Horizontal Merger Guidelines, supra, s 4. Regarding the types of
efficiencies asserted here, the Guidelines state:
The Agency has found that certain types of efficiencies are
more likely to be cognizable and substantial than others. For
example, efficiencies resulting from shifting production among
facilities formerly owned separately, which enable the merging
firms to reduce the marginal cost of production, are more likely
to be susceptible to verification, merger-specific, and substan-
Horizontal Merger Guidelines, supra, s 4; 4A Areeda, et al.,
supra, p 973, at 49-62. That is, they must be efficiencies that
cannot be achieved by either company alone because, if they
can, the merger's asserted benefits can be achieved without
the concomitant loss of a competitor. See generally 4A
Areeda, et al., supra, p 973. Yet the district court never
explained why Heinz could not achieve the kind of efficiencies
urged without merger. As noted, the principal merger bene-
fit asserted for Heinz is the acquisition of Beech-Nut's better
recipes, which will allegedly make its product more attractive
and permit expanded sales at prices lower than those charged
by Beech-Nut, which produces at an inefficient plant. Yet,
neither the district court nor the appellees addressed the
question whether Heinz could obtain the benefit of better
recipes by investing more money in product development and
promotion--say, by an amount less than the amount Heinz
would spend to acquire Beech-Nut. At oral argument,
Heinz's counsel agreed that the taste of Heinz's products was
not so bad that no amount of money could improve the
brand's consumer appeal. Oral Arg. Tr. at 54. That being
the case, the question is how much Heinz would have to spend
to make its product equivalent to the Beech-Nut product and
hence whether Heinz could achieve the efficiencies of merger
without eliminating Beech-Nut as a competitor. The district
court, however, undertook no inquiry in this regard. In
short, the district court failed to make the kind of factual
determinations necessary to render the appellees' efficiency
defense sufficiently concrete to offset the FTC's prima facie
showing.
__________
tial, and are less likely to result from anticompetitive reduc-
tions in output. Other efficiencies, such as those relating to
research and development, are potentially substantial but are
generally less susceptible to verification and may be the result
of anticompetitive output reductions. Yet others, such as those
relating to procurement, management, or capital cost are less
likely to be merger-specific or substantial, or may not be
cognizable for other reasons.
Id.
3. Innovation
The appellees claim next that the merger is required to
enable Heinz to innovate, and thus to improve its competitive
position against Gerber. Heinz and Beech-Nut asserted, and
the district court found, that without the merger the two
firms are unable to launch new products to compete with
Gerber because they lack a sufficient shelf presence or ACV.
See H.J. Heinz, 116 F. Supp. 2d at 199-200. This kind of
defense is often a speculative proposition. See 4A Areeda, et
al., supra, p 975g (noting "truly formidable" proof problems
in determining innovation economies). In this case, given the
old-economy nature of the industry as well as Heinz's position
as the world's largest baby food manufacturer, it is a particu-
larly difficult defense to prove. The court below accepted the
appellees' argument principally on the basis of their expert's
testimony that new product launches are cost-effective only
when a firm's ACV is 70% or greater (Heinz's is presently
40%; Beech-Nut's is 45%). That testimony, in turn, was
based on a graph that plotted revenue against ACV. Accord-
ing to the expert, the graph showed that only four out of 27
new products launched in 1995 had been successful--all for
companies with an ACV of 70% or greater.
The chart, however, does not establish this proposition and
the court's consequent finding that the merger is necessary
for innovation is thus unsupported and clearly erroneous. All
the chart plotted was revenue against ACV and hence all it
showed was the unsurprising fact that the greater a compa-
ny's ACV, the greater the revenue it received. Because the
graph did not plot the profitability (or any measure of "cost-
effectiveness"), there is no way to know whether the expert's
claim--that a 70% ACV is required for a launch to be
"successful" in an economic sense--is true.21 Moreover, the
__________
21 For example, a 5 cent piece of bubble gum introduced with a
90% ACV could appear as a failure on the graph because of low
revenue but nonetheless be profitable. On the other hand, a high
priced grocery product introduced with the same ACV could gener-
ate a lot of revenue (and thus appear as a "success" on the graph)
yet be unprofitable.
number of data points on the chart were few; they were
limited to launches in a single year; and they involved
launches of all new grocery products rather than of baby food
alone. Assessing such data's statistical significance in estab-
lishing the proposition at issue, i.e., the necessity of 70% ACV
penetration, is thus highly speculative. The district court did
not even address the question of the data's statistical signifi-
cance and the appellees' counsel could offer no help at oral
argument. See Oral Arg. Tr. at 39 ("I'm not aware of the
statistical significance of the underlying study.").22 In the
absence of reliable and significant evidence that the merger
will permit innovation that otherwise could not be accom-
plished, the district court had no basis to conclude that the
FTC's showing was rebutted by an innovation defense.
Moreover, Heinz's insistence on a 70-plus ACV before it
brings a new product to market may be largely to persuade
the court to recognize promotional economies as a defense.
Heinz argues that to profitably launch a new product, it must
have nationwide market penetration to recoup the money
spent on advertising and promotion. It wants to spread
advertising costs out among as many product units as possi-
ble, thereby lowering the advertising cost per unit. It does
not want to "waste" promotional expenditures in markets
where its products are not on the shelf or where they are on
only a few shelves. For example, in a metropolitan area in
which Heinz has a 75 per cent ACV, every dollar spent on
__________
22 The graph evidence is also not useful unless we know the
"sunk" costs in bringing the product to market and the manufactur-
er's fixed and variable costs in producing the product. Sunk costs
are costs that have already been incurred such as research and
development and promotional expenses, including brand name de-
velopment. See Henry N. Butler, Economic Analysis for Lawyers
935 (1998). Fixed costs refer to those expenses that do not vary
with output and will be incurred as long as the firm continues in
business. Variable costs are those that change with the rate of
output such as wages paid to workers and payments for raw
materials. See id. at 920, 936; E. Thomas Sullivan & Jeffrey L.
Harrison, Understanding Antitrust and its Economic Implications
19-21 (3d ed. 1998).
advertising is two or three times more "effective" than in a
market in which it has only a 25 per cent ACV. As one
authority notes, however, "[t]he case for recognizing a de-
fense based on promotional economies is relatively weak."
4A Areeda, et al., supra, p 975f, at 77. The district court
accepted Heinz's claim that it could not introduce new prod-
ucts without at least a 70 per cent ACV because it would be
unable to adequately diffuse its advertising and promotional
expenditures. But the court failed to determine whether
substantial promotional scale economies exist now and, if they
do, whether Heinz and Beech-Nut "for that reason operate at
a substantial competitive disadvantage in the market or mar-
kets in which they sell" or whether there are effective alter-
natives to merger by which the disadvantage can be over-
come. Id. at p 975f2, at 78.
4. Structural Barriers to Collusion
In a footnote the district court dismissed the likelihood of
collusion derived from the FTC's market concentration data.
"[S]tructural market barriers to collusion" in the retail mar-
ket for jarred baby food, the court said, rebut the normal
presumption that increases in concentration will increase the
likelihood of tacit collusion. H.J. Heinz, 116 F. Supp. 2d at
198 n.7. The court's sole citation, however, was to testimony
by the appellees' expert, Jonathan B. Baker, a former Di-
rector of the Bureau of Economics at the FTC, who testified
that in order to coordinate successfully, firms must solve
"cartel problems" such as reaching a consensus on price and
market share and deterring each other from deviating from
that consensus by either lowering price or increasing produc-
tion. He opined that after the merger the merged entity
would want to expand its market share at Gerber's expense,
thereby decreasing the likelihood of consensus on price and
market share. 9/8/2000 Tr. 1010-1013. In his report, Baker
elaborated on his theory, explaining that the efficiencies
created by the merger will give the merged firm the ability
and incentive to take on Gerber in price and product improve-
ments. DX 617. He also predicted that policing and moni-
toring of any agreement would be more difficult than it is
now, due in part to a time lag in the ability of one firm to
detect price cuts by another. But the district court made no
finding that any of these "cartel problems" are so much
greater in the baby food industry than in other industries
that they rebut the normal presumption. In fact, Baker's
testimony about "time lag" is refuted by the record which
reflects that supermarket prices are available from industry-
wide scanner data within 4-8 weeks. See DX 617 at p 86
(report of appellees' expert Jonathan Baker); see also Oral
Arg. Tr. at 30 (statement by appellees' counsel that nothing in
record reflects time lag is greater in baby food industry than
in other industries). His testimony is further undermined by
the record evidence of past price leadership in the baby food
industry.23
The combination of a concentrated market and barriers to
entry is a recipe for price coordination. See University
Health, 938 F.2d at 1218 n.24 ("Significant market concentra-
tion makes it 'easier for firms in the market to collude,
expressly or tacitly, and thereby force price above or farther
above the competitive level.' " (citation omitted)). "[W]here
rivals are few, firms will be able to coordinate their behavior,
either by overt collusion or implicit understanding, in order to
restrict output and achieve profits above competitive levels."
PPG, 798 F.2d at 1503. The creation of a durable duopoly
affords both the opportunity and incentive for both firms to
__________
23 In an oligopolistic market characterized by few producers, price
leadership occurs when firms engage in interdependent pricing,
setting their prices at a profit-maximizing, supracompetitive level
by recognizing their shared economic interests with respect to price
and output decisions. See Brooke Group Ltd. v. Brown & William-
son Tobacco Corp., 509 U.S. 209, 227 (1993); see also Jesse W.
Markham, The Nature and Significance of Price Leadership, 41
Amer. Econ. Rev. 891 (1951); Richard A. Posner, Oligopoly and the
Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562, 1582
(1969); Donald Arthur Washburn, Price Leadership, 64 Va. L. Rev.
691, 693-697 (1978). In a duopoly, a market with only two competi-
tors, supracompetitive pricing at monopolistic levels is a danger.
See Edward Hastings Chamberlin, The Theory of Monopolistic
Competition: A Re-orientation of the Theory of Value 46-55 (8th
ed. 1962).
coordinate to increase prices. The district court recognized
this when it questioned Baker on whether the merged entity
will, up to a point, expand its market share but "then [with
Gerber will] find a nice equilibrium and they'll all get along
together." 9/8/2000 Tr. 1014. Tacit coordination
is feared by antitrust policy even more than express
collusion, for tacit coordination, even when observed,
cannot easily be controlled directly by the antitrust laws.
It is a central object of merger policy to obstruct the
creation or reinforcement by merger of such oligopolistic
market structures in which tacit coordination can occur.
4 Phillip E. Areeda, Herbert Hovenkamp & John L. Solow,
Antitrust Law p 901b2, at 9 (rev. ed. 1998). Because the
district court failed to specify any "structural market barriers
to collusion" that are unique to the baby food industry, its
conclusion that the ordinary presumption of collusion in a
merger to duopoly was rebutted is clearly erroneous.24
* * * * *
Although we recognize that, post-hearing, the FTC may
accept the rebuttal arguments proffered by the appellees,
including their efficiencies defense, and permit the merger to
proceed, we conclude that the FTC succeeded in "rais[ing]
questions going to the merits so serious, substantial, difficult
and doubtful as to make them fair ground for thorough
investigation, study, deliberation and determination by the
FTC." Warner Communications, 742 F.2d at 1162. The
FTC demonstrated that the merger to duopoly will increase
the concentration in an already highly concentrated market;
that entry barriers in the market make it unlikely that any
anticompetitive effects will be avoided; that pre-merger com-
petition is vigorous at the wholesale level nationwide and
__________
24 Contrary to the appellees' claims, nothing in Baker Hughes
suggests otherwise. In that case, the sophisticated nature of the
purchasers of the industry's product and the "volatile and shifting"
nature of each firm's market share rendered the HHI figures an
unreliable measure of concentration. See 908 F.2d at 986-87. No
such circumstances exist in this case.
present at the retail level in some metropolitan areas; and
that post-merger competition may be lessened substantially.
These substantial questions have not been sufficiently an-
swered by the appellees. As we said in Baker Hughes, "[t]he
more compelling the prima facie case, the more evidence the
defendant must present to rebut it successfully." 908 F.2d at
991. In concluding that the FTC failed to make the requisite
showing, the district court erred in a number of respects.
Regarding the contention of lack of pre-merger competition,
it made a clearly erroneous factual finding and misunderstood
the law with respect to the import of competition at the
wholesale level. Regarding the proffered efficiencies defense,
the court failed to make the kind of factual findings required
to render that defense sufficiently concrete to rebut the
government's prima facie showing. Finally, as to the conten-
tion that the merger is necessary for innovation, the court
clearly erred in relying on evidence that does not support its
conclusion. Because the district court incorrectly assessed the
merits of the appellees' rebuttal arguments, it improperly
discounted the FTC's showing of likelihood of success.
2. Weighing of the Equities
Although the FTC's showing of likelihood of success cre-
ates a presumption in favor of preliminary injunctive relief,
we must still weigh the equities in order to decide whether
enjoining the merger would be in the public interest. 15
U.S.C. s 53(b); see PPG, 798 F.2d at 1507; Weyerhaeuser,
665 F.2d at 1081-83. The principal public equity weighing in
favor of issuance of preliminary injunctive relief is the public
interest in effective enforcement of the antitrust laws. Uni-
versity Health, 938 F.2d at 1225. The Congress specifically
had this public equity consideration in mind when it enacted
section 13(b). See Food Town Stores, 539 F.2d at 1346
(Congress enacted section 13(b) to preserve status quo until
FTC can perform its function). The district court found, and
there is no dispute, that if the merger were allowed to
proceed, subsequent administrative and judicial proceedings
on the merits "will not matter" because Beech-Nut's manu-
facturing facility "will be closed, the Beech-Nut distribution
channels will be closed, the new label and recipes will be in
place, and it will be impossible as a practical matter to undo
the transaction." H.J. Heinz, 116 F. Supp. 2d at 201.
Hence, if the merger were ultimately found to violate the
Clayton Act, it would be impossible to recreate pre-merger
competition. See Warner Communications, 742 F.2d at 1165
("A denial of a preliminary injunction would preclude effective
relief if the Commission ultimately prevails and divestiture is
ordered."). Section 13(b) itself embodies congressional recog-
nition of the fact that divestiture is an inadequate and unsat-
isfactory remedy in a merger case, 119 Cong. Rec. 36612
(1973), a point that has been emphasized by the United States
Supreme Court. See, e.g., FTC v. Dean Foods Co., 384 U.S.
597, 606 n.5 (1966) ("Administrative experience shows that the
Commission's inability to unscramble merged assets frequent-
ly prevents entry of an effective order of divestiture.").
On the other side of the ledger, the appellees claim that the
injunction would deny consumers the procompetitive advan-
tages of the merger. See FTC v. Pharmtech Research, Inc.,
576 F. Supp. 294, 299 (D.D.C. 1983) (explaining that public
equities include "beneficial economic effects and procompeti-
tive advantages for consumers"). The district court found
that if the merger were preliminarily enjoined, the injury to
competition would also be irreversible, that is, the merger
would be abandoned and could not be consummated if ulti-
mately found lawful. By contrast to its first finding, however,
for the latter conclusion the court relied not on the facts of
this case but on our statement in Exxon that--as a general
matter--temporarily blocking a tender offer is likely to end
an attempted acquisition, "as a result of the short life-span of
most tender offers." Id. (quoting Exxon, 636 F.2d at 1343).
In their brief in this court, the appellees offer nothing more
to support the finding that the merger would never be
consummated were an injunction to issue. Indeed, they
devote only a single sentence, without any citation, to the
point. The district court's finding that an injunction would
"kill this merger" is thus not a factual finding supported by
record evidence. This case does not involve a short-lived
tender offer as did the case cited by the court for its "kill the
merger" conclusion. The appellees acknowledge that there is
no alternative buyer for Beech-Nut and the court found that
it is not a failing company but rather a "profitable and
ongoing enterprise." H.J. Heinz, 116 F. Supp. 2d at 201 n.9.
If the merger makes economic sense now, the appellees have
offered no reason why it would not do so later. Moreover,
Beech-Nut's principal assets of value to Heinz are, asserted-
ly, its recipes and brand name. Nothing in the record leads
us to believe that both will not still exist when the FTC
completes its work. It may be that Beech-Nut will have to
sell its recipes to Heinz at a lower price than the price of
today's merger. But that is at best a "private" equity which
does not affect our analysis of the impact on the market of
the two options now before us and which has not in any event
been urged by the appellees.25 See id.
In sum, weighing of the equities favors the FTC. If the
merger is ultimately found to violate section 7 of the Clayton
Act, it will be too late to preserve competition if no prelimi-
nary injunction has issued. On the other hand, if the merger
is found not to lessen competition substantially, the efficien-
cies that the appellees urge can be reclaimed by a renewed
__________
25 The district court noted that "[t]he parties have not stressed
private equities" but the court nonetheless considered them. It
concluded that while "the corporate interests of Heinz and Milnot
and especially the interests of Dearborn Capital Partners LP, which
presumably acquired Milnot through a leveraged buyout with the
purpose and intent of selling its interest at a profit" were important
to the private parties, they should not affect the outcome of the
proceeding. H.J. Heinz, 116 F. Supp. 2d at 200 n.9. We agree.
"While it is proper to consider private equities in deciding whether
to enjoin a particular transaction, we must afford such concerns
little weight, lest we undermine section 13(b)'s purpose of protect-
ing the 'public-at-large, rather than the individual private competi-
tors.' " University Health, 938 F.2d at 1225 (citation omitted); cf.
Weyerhaeuser, 665 F.2d at 1083 ("Private equities do not outweigh
effective enforcement of the antitrust laws. When the Commission
demonstrates a likelihood of ultimate success, a countershowing of
private equities alone would not suffice to justify denial of a
preliminary injunction barring the merger.").
transaction. Our conclusion with respect to the equities
necessarily lightens the burden on the FTC to show likelihood
of success on the merits, a burden which the FTC has met
here.
III. Conclusion
It is important to emphasize the posture of this case. We
do not decide whether the FTC will ultimately prove its case
or whether the defendants' claimed efficiencies will carry the
day.26 Our task is to review the district court's order to
determine whether, under section 13(b), preliminary injunc-
tive relief would be in the public interest. We have consid-
ered the FTC's likelihood of success on the merits. We have
weighed the equities. We conclude that the FTC has raised
serious and substantial questions. We also conclude that the
public equities weigh in favor of preliminary injunctive relief
and therefore that a preliminary injunction would be in the
public interest. Accordingly, we reverse the district court's
denial of preliminary injunctive relief and remand the case for
entry of a preliminary injunction pursuant to section 13(b) of
the Federal Trade Commission Act.
So ordered.
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26 "The most difficult mergers to assess may be those that
combine both negative and positive effects: creating market power
that increases the risk of oligopolistic pricing while at the same time
creating efficiencies that reduce production or marketing costs."
Sullivan & Grimes, supra, s 9.1, at 511.