Law 552 - Antitrust - Instructor: Dwight Drake Brown Shoe v. United States (Sup. Ct. 1962) Basic Facts: Brown, fourth largest shoe manufacture, merged with Kinney Shoes, eighth largest retailer of shoes. Dist. Ct found no violations for manufacturing, but found antitrust violations for foreclosing competition in retail outlets. Supreme Court affirmed. Note: - Vertical arrangement denies competitors opportunity to compete. Product market determined by reasonable interchangeability or cross-elasticity of demand between product and substitutes. Impact on all lines of commerce need be analyzed to determine if competition substantially lessened. Relevant lines here men, women and children shoes. No merger between manufacturer and retailer could foreclosure more City cross over effect of merger – page 287. Act protects competition, not competitors, but Congress concerned about small business and favored decentralization. Increased trend in industry concentration, lead by manufacturer Brown with 1600 retail outlets. Now time to call halt. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake United States v. Philadelphia National Bank (Sup. Ct. 1963) Basic Facts: PHB, 2nd largest bank in market, sought to acquire Girard Trust Corn Exchange Bank, 3rd largest. Post-merger, PNB would hold 36% of bank business in market. Two largest banks would go from controlling 44% to 59% of market. Supreme Court reversed, holding merger should be enjoined. - Proper question is area of overlap competition, where effect of merger will be direct and immediate. Here, four county area is overlap. Dominate theme of Congress is fear of economic concentration in American industry. This theme dispenses with need for elaborate market analysis or probable economic effects when merger produces firm with undue percentage share of relevant market. Here over 30% is undue concentration; increase share of two largest banks (33% increase) huge impact. PNB’s alleged justifications of other competitive banks, government bank regulation, need to compete with big out-of-state banks, and need to attract big business to area all rejected due to lessened competition. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake FTC v. Proctor & Gamble (Sup. Ct. 1967) Basic Facts: P&G, huge soap producer, acquired Clorox, leading liquid bleach manufacturer with 48% market share. Sup. Ct. reversed Ct. of Appeals and ordered divestiture. Other competitors may become more cautious for fear of big P&G retaliation. Merger creates higher barriers of entry with P&C’s big advertising budgets. Congress struck balance in protecting competition. Merger eliminates P&G as possible competitor – new entrant to market. Possible economies cannot be defense to illegality. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake Citizen Publishing Co. v. United States (Sup. Ct. 1969) Basic Facts: Citizen and Star, only two newspapers in Tucson, entered into joint operating agreement to run for 50 years. Alleged purpose of deal was to prevent Citizen, who had losses from going out of business. Sup. Ct. affirmed divestiture. Failing company doctrine is judicial defense for merger. To apply, must prove that company is so bad that the merging party is only potential purchaser to save company. No such showing in this case. There are other potential buyers of Citizen, Citizen not contemplating liquidation, Citizen continued as threat to Star. Burden of proof not sustained. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake United States v. General Dynamics Corporation (Sup. CT. 1974) Basic Facts: General Dynamics acquired two Illinois coal producers, with market shares of 15% and 8%, combined to become largest in market. Number of coal firms in Illinois decreased from 144 to 39 (73%) from 1957 to 1967. Sup. Ct. upheld Dist. Ct. dismissal of U.S. Clayton 7 claim. Under Philadelphia National Bank presumption, no question merger is “undue concentration”. But here, specific evidence showed no lessening of competition. Key factors were: coal less able to compete with other energy sources post WW II; electric utility industry was primary coal consumer (59%); coal sold to electric industry was under long-term needs contracts; all this limited amounts of coal available on “spot” market; evidence of past production and market share less relevant; future prospects show no lessening of competition, just General Dynamic strengthening its “unpromising” prospects for the coal it would need in future. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake United States v. Marine Bancorporation Inc. (Sup. Ct. 1974) Basic Facts: NBC, 2nd largest bank in Washington, sought to acquire Washington Trust, 3rd largest Spokane Bank. Government sued on potential competition theory. Dist. Ct. dismissed. Sup. Ct. affirmed dismissal. Under potential competition doctrine, court may reject merger if target market concentrated, acquiring firm has resources to enter as new player, and acquiring firm sitting in wings may temper activity of firms in market. Here doctrine not applicable because state law prohibits NBC from de novo entry into Spokane. Only way to get in is through merger. Court express no view on question reserved in Falstaff - whether a merger that does not worsen competitive conditions but eliminates a potential new player that may enhance competition can violate Clayton 7. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake Horizontal Merger Guidelines Purpose: Inform lawyers and business people of the merger analysis used by DOJ and FTC. Assume purpose of merger law is to prevent misallocation of resources and transfers of wealth caused by market power. Market Definition: Reasonable good price constraints from substitutable and cross-elastic products. Use SSNIP – small but significant and non-transitory increase in price with hypothetical monopoly seller who moves price up 5 to 10%. Market Concentration: Use Herfindahl-Hirshman Index. (HHI). Market highly concentrated if HHI over 1800. Mergers that increase HHI more than 100 in highly concentrated market likely to enhance market power. Over 100 in moderate concentration (1000 to 1800) deemed “potential” problems. Note: number thresholds are old today. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake Horizontal Merger Guidelines Anticompetitive Effects: Does merger: Decrease output? Increase price? Increase market power of merged firm, acting alone? Create market structure where it will be easier for major firms to coordinate behavior? Involve firms with differentiated products that compete or competing firms differentiated by their capacities? Guidelines state for unilateral effect to increase price or limit output, merger firm need have market share of 35%. Entry Analysis: Entry alternatives, timeliness, likelihood and sufficiency of entry. Efficiencies: Only those efficiencies accomplished by merger and unlikely without merger; Cognizable efficiencies are those that are verified and do not result in anticompetitive reductions in output or service; the greater the HHI impact, the greater need for cognizable efficiencies; efficiencies “almost never” justify merger to monopoly or near monopoly. Law 552 - Antitrust - Instructor: Dwight Drake

Law 552 - Antitrust - Instructor: Dwight Drake Horizontal Merger Guidelines Failing or Exiting Assets: Not likely to enhance market power if imminent threat of one firm failing and exiting market – can’t meet financial obligations, can’t reorganize under Bankruptcy law, unsuccessful good faith efforts to elicit alternative offers. Law 552 - Antitrust - Instructor: Dwight Drake