Opposition Brief — Archer-Daniels-Midland Co. v. United States

Supreme cance U.d. }

aN FILED

a, JUN 23 1989

ere. JOSEPH F. SPANIOL, JR.

fas Ba-1)4

In the Supreme Court of the United States

Octosper TerM, 1988

ARCHER-DaANIELS-MIDLAND ComPaANy, ET AL.,

PETITIONERS

V.

Unitep STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

KENNETH W. Starr

Solicitor General

Jupy L. WHALLEY

Acting Assistant Attorney General

Brian J. Martin

Assistant to the Solicitor General

Rosert B. NicHoLson

Davip SEIDMAN

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

QUESTION PRESENTED

Whether the court of appeals erred in holding that

sugar and high fructose corn syrup are not in the same

relevant market for the purpose of examining a merger

under the antitrust laws.

TABLE OF CONTENTS

Page

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G0 Ea PRE OP oR rice Ng fe a

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TABLE OF AUTHORITIES

Cases:

American Crysial Sugar Co. v. Cuban-American Sugar

Co., 152 F. Supp. 387 (S.D.N.Y. 1957), aff'd, 259

Se ee ee te es ona ea so es a 10

George R. Whitten, Jr., Inc. v. Paddock Pool Builders,

Inc., S08 F.2d 547 (1st Cir. 1974), cert. denied,

ne I oie ilo hae oe Kee ee 8 11

International Telephone & Telegraph Corp. v.

General Telephone & Electronics Corp., 518 F.2d

ar ee ee 9

Kaplan v. Burroughs Corp., 611 F.2d 286 (9th Cir. 1979),

cert. denied, 447 U.S. 924 (1980) ............... 11

Liggett & Myers, Inc. v. FTC, 567 F.2d 1273 (4th Cir.

AS at ae a a ae ee 11

Nifty Foods Corp. v. Great Atlantic & Pacific Tea Co.,

Gt4 P.20 S52 (26 Ce. 1980) ww ees 10

Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792

F.2d 210 (D.C. Cir. 1986), cert. denied, 479 U.S. 1033

RIS er or gaa 9

Times-Picayune Publishing Co. v. United States, 345 U.S.

RRS eee a ea a ee 7

United States v. Aluminum Company of America, 377 U.S.

Ng as Aha os a gia gala dake die eee 4

United States v. Continental Can Co., 378 U.S. 441

RE an ee re ti fd Phy olin ag Wing heal 7

United States v. E.l. du Pont de Nemours & Co., 351 U.S.

I datas OLN ae Va CR gay Gee do Oe 4, 6,

7,8

(IID

IV

Cases—Continued:

United States v. Philadelphia National Bank, 374 U.S.

a a Pare ee ee ee ae ere

Walker Process Equipment, Inc. v. Food Machinery &

Chomios! Core. dee U.5. 170 CEFR) nn ee ee es

White & White, Inc. v. American Hospita! Supply Corp.,

peo gw Fe gs re ere

Wisniewski v. United States, 353 U.S. 901 (1957) ......

Statutes:

i eS el) ee ee ere 2,

Sherman Act, 15 U.S.C. 1 et seq.:

yA ROONEY Og Sr go hd era Oi ae Le ada

Ba ES ols SRE ere aH a ALO eae ewe ere

Miscellaneous:

C. Ferguson, Microeconomic Theory (1966) ..........

L. Sullivan, Handbook of the Law of Aniitrust (1977)

Page

Wa

In the Supreme Court of the Gnited States

Octoser TERM, 1988

No. 88-1723

ARCHER-DANIELS-MIDLAND ComPANY, ET AL.,

PETITIONERS

V

Unitep STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-12a)

is reported at 866 F.2d 242. The opinion of the district

court (Pet. App. 13a-54a) is reported at 695 F. Supp. 1000.

JURISDICTION

The judgment of the court of appeals (Pet. App. 55a)

was entered on December 15, 1988. A petition for rehear-

ing was denied on March 8, 1989 (Pet. App. 56a). The

petition for a writ of certiorari was filed on April 24, 1989.

The jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

(1)

STATEMENT

1. In June 1982, petitioner Archer-Daniels-Midland

Company, a leading producer of high fructose corn syrup

(HFCS), acquired by long-term lease two plants from peti-

tioner Nabisco Brands, Inc. that were used for producing

HFCS. Three months later, the government brought this

action claiming that the transaction would diminish competi-

tion in the production and sale of HFCS, in violation of

Section 7 of the Clayton Act (15 U.S.C. 18) and Section 1

of the Sherman Act (15 U.S.C. 1). The issue raised by the

petition for certiorari is whether HFCS and sugar are in the

same relevant product market for purposes of analyzing

petitioners’ transaction under the antitrust laws.

2. Sugar, which comes from cane and beets, has his-

torically been the principal sweetener in foods. Sugar is

used by food processors in both its liquid and non-liquid

forms. HFCS is a liquid sweetener produced from corn.'

It is widely used today instead of sugar as a sweetener in

many products, most notably soft drinks. Pet. App. 2a.

Although HFCS is not suitable for many uses of sugar,

Sugar is “interchangeable for virtually every use of HFCS”

(Pet. App. 38a).

HFCS is cheaper than sugar in the United States. The

district court noted that “since its commercial introduction

in the 1970’s, HFCS has been priced generally at a discount

of 10% to 30% below the price of sugar” (Pet. App. 39a).

That price difference exists primarily because of the “U.S.

Sugar Program,” which protects domestic sugar from low-

HFCS is generally available in three grades: HFCS-42, HFCS-

55, and HFCS-90. The number indicates the percentage of fructose in

the formulation; the higher the percentage, the sweeter the product. Pet.

App. 2a.

3

priced foreign competition and insulates domestic sugar

from low world sugar prices (id. at 3a).* As the district

court stated: “The parties to this litigation agree that the

current U.S. Sugar Program has artificially inflated the price

of sugar, and as a result, the domestic price of sugar has

been higher than the price of HFCS” (id. at 24a).

Because HFCS is cheaper than sugar, food processors

have gradually switched from sugar to HFCS in circum-

stances where HFCS is suitable (Pet. App. 7a, 39a-40a).

That process has extended over a number of years; the last

major step was in 1984 when the major soft drink manu-

facturers decided to permit complete substitution of HFCS

for sugar in their formulations (id. at 45a & n.38). As a

Department of Agriculture agricultural economist explained

(C.A. App. 907-908): ““The market for HFCS is now almost

completely mature, in the sense that there is only a mar-

ginal amount of sucrose [sugar] use left for which HFCS is

technically suitable but has not yet displaced sucrose * * *.

The process by which HFCS has displaced sugar is there-

fore largely at an end.” As long as the price of sugar is

artificially inflated, it is unlikely that this process will be

reversed. “HFCS purchasers will not switch back to sugar

as long as HFCS remains cheaper” (Pet. App. 4a; see id. at

47a-48a).

3. In the district court, the government claimed that

petitioners’ merger transaction would diminish competition

2

The Sugar Program has been in etfect since 1934. As peu-

tioners note (Pet. 7), there have been brief periods without effective

price support from the U.S. Sugar Program. Those times were periods

when market prices for sugar were unusually high (Pet. App. 21a-22a).

The current program relies on non-recourse loans and a system of fees

and quotas on raw sugar imported into the United States. By its terms,

the current program expires with the 1990 crop year, and so ils impact

on sugar prices will continue at least into 1991.

4

in the HFCS market. After four years of discovery, peti-

tioners moved for summary judgment on the ground that

the government could not prove that HFCS was a relevant

product market by itself.’ The district court granted peti-

tioners’ motion. The court ruled that the relevant product

market included at least sugar in addition to HFCS. Pet.

App. 14a.

The court considered three factors in its market analy-

sis: interchangeability of use, cross-elasticity of demand,

and price correlation (Pet. App. 30a). The parties agreed

that HFCS and sugar were functionally interchangeable in

the sense that sugar could be used instead of HFCS. The

court found “‘cross-elasticity of demand between HFCS and

sugar” (id. at 41a) because “the reduced price for HFCS as

compared to sugar has led to substantial displacement of

sugar” (id. at 39a). In addition, the court noted that in

Canada, which has no counterpart to the U.S. Sugar Pro-

gram, buyers switch back and forth between HFCS and

Sugar in accordance with changes in the relative prices (id.

at 40a-41a). The district court then found “significant price

correlation between HFCS and sugar” (id. at 43a). Lastly,

the court stated that “price differentials, even substantial

Ones, are insufficient as a matter of law to overcome other

undisputed evidence showing interchangeability, cross-elas-

ticity and price correlation between substitute products” (id.

at 46a).

4. The court of appeals reversed. Relying on United

States v. E.l. du Pont de Nemours & Co., 351 U.S. 377

(1956) (Cellophane), the court stated that the “!awfulness of

an acquisition turns on the purchaser’s potential for creating,

; The government conceded that, if the relevant product market

included sugar, the lease transaction in this case would not significantly

diminish competition.

enhancing, or facilitating the exercise of market power —

the ability of one or more firms to raise prices above com-

petitive levels for a significant period of time” (Pet. App.

6a). Turning to the record, the court observed that the

price of sugar was “artificially inflated” and that buyers

had turned tc HFCS because of its lower price (id. at 7a).

It concluded that “[a]s long as an effective price support

program is in existence, a monopolist of HFCS will be able

to raise the price of HFCS to just below the supported price

of sugar before being constrained by the competitive forces

of sugar. In other words, the HFCS monopolist is able to

exercise excess market power” (ibid.). The court con-

cluded, therefore, that although sugar and HFCS are similar

in quality, the artificially high price of sugar prevents it

from being reasonably interchangeabie by consumers with

HFCS so they are not in the same relevant product market.

The court of appeals also stated that “[wjhether two

particular products belong in the same relevant product

market can be demonstrated by the extent of cross-elasticity

of demand between the two products; in other words, the

readiness and ability of consumers of one product to turn

to the other product” (Pet. App. 11a).* To show that two

products belong in the same market, the cross-elasticity

must be sufficiently high so that ‘“‘a slight increase in the

price of HFCS causes a considerable number of buyers of

HFCS to switch to sugar” (id. at lla, 12a, n.1). The court

of appeals found that “no evidence exists at the present

4

Cross-elasticity of demand measures “the extent to which

small changes in the current price of one product affects demand for

another product.” L. Sullivan, Handbook of the Law of Antitrust 54

(1977). For a more technical definition, see C. Ferguson, Microeconom-

ic Theory 55 (1966).

6

time demonstrating a high cross-elasticity of demand be-

tween sugar and HFCS” (id. at 11a).°

ARGUMENT

The court of appeals’ decision is correct and it does

not conflict with any decision of this Court or any other

court of appeals. Thus no further review is warranted.

1. a. Section 7 of the Clayton Act prohibits any ac-

quisition whose effect “may be substantially to lessen com-

petition, or te tend to create a monopoly.” 15 U.S.C. 18.

The lawfulness of an acquisition thus turns on its potential

for creating or enhancing the exercise of monopoly power

— 1.e., the ability to raise prices above competitive levels

for a significant period of time. Cellophane, 351 U.S. at

391, 393. And “[wl]ithout a definition of [the relevant]

market there is no way to measure [the] * * * ability [of

the challenged transaction] to lessen or destroy competition.”

Walker Process Equipment, Inc. v. Food Machinery &

Chemical Corp., 382 U.S. 172, 177 (1965). Accordingly,

the central issue in this case is the proper definition of the

relevant market.°

* The court explained that the district court, in relying on evidence

of past displacement resulting from the lower price of HFCS, had

mistakenly addressed static, rather than dynamic, price and demand

relationships. And the Canadian evidence was irreicvant because “mar-

ket conditions in Canada differ radically from the market conditions in

the United States” (Pet. App. 12a n.1) and would continue to do so as

long as the U.S. Sugar Program exists.

* When the relevant market is defined, a transaction’s probable

effect on competition is evaluated by, among other things, the concentra-

tion of firms within that market. United States v. Philadelphia National

Bank, 374 U.S. 321, 363 (1963).

7

In Cellophane, this Court outlined the basic approach

to market definition.’ In that case, the government had

charged the dominant producer of cellophane with monop-

olizing the cellophane market. The issue before the Court

was whether cellophane itself constituted a relevant product

market, or whether other flexible packaging materials were

also part of the market (351 U.S. at 399). The Court ruled

that the market issue turned on whether competition from

other flexible packaging materials constrained the cellophane

maker’s “power to set the price of cellophane” (id. at 392).

In particular, the Court focused on whether the various

packaging materials were “reasonably interchangeable by

consumers for the same purpose” (id. at 395) in light of

their “price, use and qualities” (id. at 404). And the Court

examined the various products and observed that customers

were very sensitive to price changes — i.eé., an increase in

the price of cellophane would shift enough purchases to

other products to make the price increase unprofitable. The

Court held, therefore, that the relevant market included all

flexible packaging materials, not just cellophane. /bid.*

b. The court of appeals in this case followed the

Court’s Cellophane analysis. It approached the issue of

market definition by inquiring into power over the price of

Cellophane involved Section 2 of the Sherman Act, not

Section 7 of the Clayton Act. But this Court has relied on the Cel-

lophane approach to market definition in Section 7 cases. See, e.g.,

United States v. Continental Can Co., 378 U.S. 441, 449 (1964).

The Court alternatively phrased the question of reasonable

interchangeability in terms of cross-elasticity of demand. 351 U.S. at

394, 400. The Court stated that high cross-elasticity of demand between

two products indicates that they compete in the same market. 351 U.S. —

at 400. The Court had made substantially the same point in 7imes-

Picayune Publishing Co. v. United States, 345 U.S. 594, 612 n.31

(1953).

8

a single item — here HFCS. The court of appeals used the

concepts of reasonable interchangeability and cross-elasticity

of demand to determine the boundaries of the relevant prod-

uct market. The court concluded, on the undisputed facts

before it, that the cross-elasticity of demand between sugar

and HFCS was low; a small increase in the price of HFCS

would not cause a considerable number of buyers of HFCS

to switch to sugar. The court of appeals reasoned, there-

fore, that the two products were not reasonably inter-

changeable by consumers.’

Petitioners contend (Pet. 12-14) that the specific results

in Cellophane and this case are inconsistent. That claim is

unpersuasive. In Cellophane, the Court found that products

of different prices were in the same relevant product mar-

ket. But in that case, the difference in price was a function

of quality differences. 351 U.S. at 396-399. In other

words, the typical consumer would be willing to pay more

for the product of higher quality. In this case, by contrast,

the difference in price between sugar and HFCS is primarily

the result of the U.S. Sugar Program, not quality differ-

ences.” Sugar and HFCS are functionally interchangeable

* — Because the court found low cross-elasticity of demand and an

absence of reasonable interchangeability, it did not hold, as petitioners

claim (Pet. 11), that “a government price support program provides an

exception to the usual antitrust rule that a price differential, without

more, does not create separate markets for the two products involved.”

'° Petitioners’ claim that all “the price differences reflect actual

or perceived quality differences” (Pet. 19) is belied by the record. The

undisputed fact is that the U.S. Sugar Program artificially inflates the

price of sugar above that of HFCS (see Pet. App. 24a). In the district

court, petitioners did not claim that supposed quality differences ac-

counted for the price difference. Compare petitioners’ statements at

C.A. App. 133-137, 1199-1202 with the government’s observation at

9

products for all uses of HFCS. Accordingly, price alone is

the determinative factor in consumer choice and a monopo-

list of HFCS could raise its price up to the price of sugar.

This case is therefore similar to United States v. Alumi-

num Company of America, 377 U.S. 271 (1964), where this

Court held that insulated aluminum and insulated copper

cable were in different product markets.'' Although there

were no quality differences between the two products, cop-

per cable was more expensive. /d. at 276. That price

difference, which resulted from differences in material costs

(id. at 275), led to the displacement of copper by aluminum

cable and was decisive in the Court’s market definition.

The Court stated: “[T]o ignore price in determining the

relevant line of commerce is to ignore the single, most

important, practical factor in the business” (id. at 276).

Likewise, because sugar and HFCS are similar in quality

in those uses for which HFCS is suitable, the difference in

price is critical to market definition here.”

C.A. App. 1506. Petitioners’ claim first surfaced in its petition for

rehearing in the court of appeals.

ve Although the Court phrased its analysis in terms of sub-

markets, 377 U.S. at 276, a “submarket” must, for antitrust purposes,

satisfy the ordinary criteria of market definition. See, e.g., Rothery

Storage & Van Co.v. Atlas Van Lines, Inc., 792 F.2d 210, 218 & n4

(D.C. Cir. 1986), cert. denied, 479 U.S. 1033 (1987); White & White,

Inc. v. American Hospital Supply Corp., 723 F.2d 495, 502 (6th Cir.

1983).

‘2 The cause of the large price difference — a government pro-

gram — is “simply * * * another fact of market life.” /nternational

Telephone & Telegraph Corp. v. General Telephone & Electronics

Corp., 518 F.2d 913, 935-936 (9th Cir. 1975). The possible expiration

of the Sugar Program in 1991, at the end of the 1990 crop year, may

bring future changes in market conditions. That possibility, however,

does not affect market definition now.

10

2. Contrary to petitioners’ contention (Pet. 14-16), the

decision below does not conflict with the decisions of other

courts of appeals. Petitioners identify several cases in

which products were found to be in the same market even

though they had different prices. Those cases, however, are

all explained on the basis of facts that are not present here.

The district court in American Crystal Sugar Co. v.

Cuban-American Sugar Co., 152 F. Supp. 387 (S.D.N.Y.

1957), aff'd, 259 F.2d 524 (2d Cir. 1958), ruled that cane

sugar and beet sugar were within the same relevant market

even though the list price of cane sugar was slightly higher

- i.e., two-tenths of a cent per pound, or a two percent

price difference. /d. at 402. The district court noted that

“[t]lo some extent cane sugar has a higher degree of con-

sumer acceptance” (id. at 398). That fact might have ac-

counted for the willingness of wholesalers to pay a little

more for cane sugar. But in any event, there was evidence

that the price difference was fading or even gone in some

areas. See 259 F.2d 524, 529-530 (2d Cir. 1958). The

district court concluded, therefore, that cane and beet sugar

were within the same market because they were “inter-

changeable and [were] purchased on the basis of price”

(152 F. Supp. at 398). That ruling was not challenged on

appeal. See 259 F.2d at 527 & n.3, 529. Thus nothing in

American Crystal Sugar Co. is contrary to the decision in

this case, where the price difference is 10 to 30% and

where there is no perceived difference in quality with re-

spect to HFCS applications.

The Second Circuit’s decision in Nifty Foods Corp. v.

Great Atlantic & Pacific Tea Co., 614 F.2d 832 (1980), is

also consistent with this case. The plaintiff contended in

that case that private label waffles and brand name waffles

were in different submarkets because of the higher cost of

brand name waffles (614 F.2d at 840). But there was no

11

evidence in that case that the difference in price was due to

anything other than usual consumer preference for name

brands. Moreover, the court of appeals noted that there was

no evidence concerning what effect a change in the price of

private label waffles would have on the demand for brand

name waffles. Here, by contrast, the court of appeals noted

that a small increase in the price of HFCS would not affect

the demand for sugar. See Pet. App. lla. And the dif-

ference in prices of HFCS and sugar is not a function of

consumer preferences; it is primarily a function of the U.S.

Sugar Program. See Pet. App. 24a.

The other cases that petitioners cite (Pet. 14-15) also do

not conflict with the court of appeals’ decision. In George

R. Whitten, Jr., Inc. v. Paddock Pool Builders, Inc., 508

F.2d 547, 552 (ist Cir. 1974), cert. denied, 421 U.S. 1004

(1975), the court held that two types of recirculating sys-

tems for swimming pools were in the same market where

“there are no constant or predictable price distinctions be-

tween the two systems” and the relevant elasticity “is high

indeed.” In Liggett & Myers, Inc. v. FTC, 567 F.2d 1273,

1274 (4th Cir. 1977), the court merely held that two kinds

of dog food with distinct differences in quality and price

were in the same product market; it did not address whether

the two would have been in the same market had there

been no significant difference in quality but nevertheless a

substantial difference in price. And in Kaplan v. Burroughs

Corp., 611 F.2d 286, 292 (9th Cir. 1979), cert. denied, 447

U.S. 924 (1980), the court rightly observed that “price

differential alone does not govern the scope of the relevant

market” because a court must address — as the court of

12

appeals did here — consumer responses to price changes and

the cross-elasticity of demand.”

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

Jupy L. WHALLEY

Acting Assistant Attorney General

Brian J. MArtTIN

Assistant to the Solicitor General

Rosert B. NicHoLson

Davip SEIDMAN

Attorneys

JunE 1989

13

Petitioners suggest (Pet. 16-17) that this Court should resolve

a supposed conflict within the Eighth Circuit. Not a single judge of

that Circuit perceived any conflict warranting rehearing (Pet. App. 8a-

lla, 12a, 56a). And in any event “[iJt is primarily the task of a Court

of Appeals to reconcile its interns’ difficulties.” Wisniewski v. United

States, 353 U.S. 901, 902 (1957, \per curiam).

US GOVERNMENT PRINTING OFFICE 1989—241-699/00322