Opposition — Household Finance Corp. v. United States

No. 79-705

1 PT

In the Supreme Court of the Hnited States

OCTOBER TERM, 1979

HOUSEHOLD FINANCE CORPORATION, ET AL.. PETITIONERS

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

IN OPPOSITION

WabrE H. McCrer. Jr.

Solicitor General

JOHN H. SHENEFIELD

Assistant Attorney General

ROBERT B. NICHOLSON

BRUCE E. FEIN

SEYMOUR H. DussMAN

Attorneys

Department of Justice

Washington, D.C. 20530

Opinions below

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CITATIONS

Cases:

Brown Shoe Co. v. United States, 370 U.S.

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Fortner Enterprises, Inc. v. United States Steel

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Houston Oil Co. vy. Goodrich. 245 U.S.

DH estas dbecsiauntaedgsatiasemoenidd toi oc, oo. 10

en ¥. Gee, oes. 2S )

Southern Power Co. vy. North Carolina Public

mre’ to., me US. ME ...2.:.......... 10

Times Picayune Publishing Co. vy. United States,

Py A idee eka eek te &

United States v. Alcoa, 377 U.S. 27] i aricties. ae *

United States v. Connecticut National Bank.

AE IE isch sssciacrisecesvisediigaasicc) 3 3. 5. 6. 9

United States v. E.1. duPont deNemours & Co.

PREG, bani ierizsmtesemiceaTitiectscticoie ck, 7

United States v. Johnston, 268 U.S.

Diabetes eR vid che cin aid Soleus ap eestnssenravracs. acs, 10

i

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In the Supreme Court of the United States

Page

a vi OCTOBER TERM, 1979

Cases (Continued):

Cnited States vy. Philadelphia National Bank.

TO BE rca ocsitremrecncnnntes 4.5 No. 19-195

United States v. Phillipsburg National Bank. HOUSEHOLD FINANCE CORPORATION, ET AL., PETITIONERS

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Statute: UNITED STATES OF AMERICA

Clayton Act. Section 7. 15 U.S.C. 18 0.0... 2. 4

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. Ib-

I9b) is reported at 602 F. 2d 1255. The opinion of

the district court (Pet. App. la-I5a) is not reported.

JURISDICTION

The judgment of the court of appeals was entered on

August 10, 1979. A petition for rehearing was denied on

September 13, 1979 (Pet. App. Ic). The petition for a

writ of certiorari was filed on November |, 1979. The

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

1254(1).

(1)

to

QUESTION PRESENTED

Whether the court of appeals. ina suit challenging a

Proposed merger of two finance companies, erred in

concluding that the evidence showed a distinct product

market) consisting of direct) cash loans by finance

companies.

STATEMENT

1. In January 1979, the United States filed a civil

antitrust’ action against petitioners. The complaint

alleged that the proposed acquisition of American

Investment Company (“AIC™) by Household Finance

Corporation (“HFC") might substantially lessen competi-

tion or tend to create a monoply in the making of direct

cash loans by finance companies in numerous sections of

the country, in violation of Section 7 of the Clavton Act.

IS U.S.C. 18. Prior to trial. the Parties stipulated that

“[t]he only issue to be tried in this case is hether the

business of making direct) cash loans by finance

companies is a line of commerce within the meaning of

§7 of the Clayton Act” (Pet. App. 2a). They further

stipulated that if the district court found such a line of

commerce in the United States generally. the acquisition

would violate Section 7 and a permanent injunction

should be granted (jihid.).

After a 13-day trial. the district. court dismissed the

complaint, concluding that (Pet. App. 4a):

*** while it is substantially true that the Major

business of the consumer finance industry continues

to be cash loans to individual customers at high, but

regulated, interest rates. and_ in gegerally small

amounts, aggressive entry into competition with the

consumer finance companies by the Variety of other

financial institutions above described. has created a

very substantial overlap of a number of competitors

seeking and serving the same consumer market as

Was once deemed to be the exclusive province of the

consumer iipance companies. This broad overlap

and aggressive competition compels a reassessment

of the once-distinct submarket served by the

consumer finance companies. a submarket. which

can no longer be recognized as a distinct. or

identifiable line of commerce within the meaning of

§7 of the Clayton Act.

2. The court of appeals unanimously reversed (Pet.

App. 19b). Relying on this Court's decisions describing

the characteristics of distinct product) markets in

financial industries,'! the court of appeals concluded that

if “finance companies provide loans. counseling and

other financial services to lower-income. higher-risk

customers which other financial institutions do not.”

cash loans by finance companies would constitute a

distinct product market (id. at 6b). The court of appeals

noted that the district court had found that at one time

consumer finance companies served a distinct clientele

consisting of lower-income, higher-risk consumers who

did not receive service from commerical banks. savings

and loan associations, and other lending institutions (id.

at 3b). The fact that banks and other financial

institutions now compete to some extent with finance

companies in providing a broad range of other services,

the court explained, was not inconsistent with the

continued existence of a distinct product submarket

'See United States v. Connecticut National Bank, 418 U.S. 6562"

664 (1974): United States v. Phillipsburg National Bank, 399 US.

350. 360 (1970); United States vy. Philadelphia National Bank. 374

U.S. 321, 356-357 (1963).

od

consisting of cash loans by finance companies (Pet. App.

6b-7b). The court of appeals noted that two decisions of

this Court? have established that banks do not compete

directly with finance companies in extending cash loans

be-ause the former enjoy large cost advantages in raising

capital and charge much lower Interest rates (id. at 7b-

Sb). The court of appeals also observed that the trial

record established the continuing existence of separate

product markets for cash loans from finance companies

and banks. The record showed thai the average interest

rate charged by finance companies (267) is twice the

average rate charged by banks (13°) (id. at &b n.5). and

that borrowers are increasingly sensitive to interest rate

differentials (id. at 4b),

The court of appeals also discussed other evidence

confirming that the extension of cash loans by finance

companies constitutes a “unique product or service” not

available at other financial institutions and is thus

properly viewed as an independent product market under

Section 7 of the Clayton Act (Pet. App. 8b). It disagreed

with the district court's conclusion that only an

insignificant number of consumers are served only by

finance companies, pointing to extensive evidence (and

findings of the district court) that supported the Opposite

conclusion (id. at 10b-16b). Studies of the eligibility of

consumers for bank loans. differing charge-off ‘and

delinquency rates between banks and finance companies,

and statistics on the characteristics of borrowers using

both categories of institutions provided “overwhelming

evidence” that finance companies alone extend loans to a

significant number of high-risk borrowers. constituting

Cnited States V. Philadelphia’ National Bank, supra: United

States vy. Phillipsburg National Bank. supra.

between 15 and 50 of finance company customers (Pet.

App. 16b-19b). In sum. the court of appeals concluded

“that the record below supports the proposition that

finance companies offer unique products and services to

a class of higher-risk customers than are serviced by

other financial institutions” (id. at 19b).

ARGUMENT

The decision of the court of appeals is correct. and

does not conflict with any decision of this Court or any

other court of appeals. The decision applies settled legal

principles to the facts of this particular case. Further

review by this Court is not werranted.

1. The court of appeals applied legal principles set

forth in decisions of this Court in concluding that the

evidence established a product market consisting of cash

loans by finance companies. Under the rule prescribed in

United States v. Connecticut National. Bank. 418 U.S.

656 (1974). United States v. Phillipsburg National Bank.

399 U.S. 350 (1970), and United States v. Philadelphia

National Bank, 374 U.S. 321 (1963). such a product

market was proven by evidence showing that finance

companies provide cash loans and related services to a

significant’ number of lower-income, higher-risk con-

sumers who cannot practically turn to other institutions

as alternative lenders. The court of appeals correctly

concluded that the requisite showing had been made by

undisputed evidence revealing that finance companies, on

the average, charge interest rates twice as high as those

charged by banks (Pet. App. 8b & n.5).) that customers

‘The importance of comparative interest rates in proving distinct

product markets for loans extended by banks and by finance

companies was emphasized in United States v. Philadelphia

National Bank, supra, 374 U.S. at 356 & n.33. See also United

States Vv. Alcoa, 377 U.S. 271. 276 (1964). Petitioners’ attempt to

are sensitive to interest rate differences (Pet. App. 4b).

that a significant portion of finance company borrowers

do not qualify for bank loans (id. at l6b-17b). that

finance companies experience much higher delinquency

and charge-off rates than banks (id. at 17b-18b). and

that .average income and occupation levels of finance

company borrowers are significantly lower than those of

typical bank borrowers (id. at 18b-19b).4

The court of appeals correctly rejected the district

court’s contrary conclusions (Pet. App. 2b. 7b & n.3, &b-

10b) because they rested on an erroneous interpretation

of the law. The district court mistaketly concluded that

cash loans by finance companies could not constitute a

separate product market if finance companies competed

with various types of financial institutions in providing

other financial services: and that finance companies and

banks must be viewed as direct competitors in making

cash loans if there was some overlap in their respective

customer bases. As the court of appeals observed,

however, this Court held otherwise in United States v.

Connecticut National Bank, supra, 418 U.S. at 660-666

(explaining that the fact that two financial institutions

belittle the importance of the very substantial interest rate

differential between banks and finance companies (Pet. [1-12 n.2) is

contrary to established precedent. It is also contrary to the district

court’s finding that customers are sensitive to interest rate

differences (Pet. App. 7a para. 4). Finally, it is contrary to common

sense; it is difficult to understand why a significant number of

borrowers, who are sensitive to interest rate differences, would pay.

on the average, twice the bank interest rate if bank loans Were a

feasible alternative for them.

‘The fact that cash loans by finance companies are extended to a

distinct group of lower-income. higher-risk borrowers provides

direct support for the delineation of a separate product market. See

Brown Shoe Co. v. United States. 370 US. 294. 325 (1962).

vigorously compete in extending credit to some

customers does not negate the conclusion that other

customers occupy a separate financial market in which

no substantial competition between the two institutions

exists). Relying on findings of the district court and

other record evidence, the court of appeals correctly

rejected the district. court’s conclusion that finance

companies do not uniquely serve a significant number of

lower-income, higher-risk borrowers (Pet. App. 10b-16b).

2. Petitioners nonetheless argue (Pet. 9) that the court

of appeals “held that the absence of 100 percent

competitive overlap between two firms precludes a

finding that the firms operate in the same line of

commerce within the meaning of Section 7.” However.

the court did not adopt any such analysis. To the

contrary, the court of appeals expressly applied the

standards prescribed by this Court for determining

Whether a service offered by a particular type of financial

institution occupies a distinct product market — whether

the service is provided to a_ substantial group. of

customers who cannot obtain the same or equivalent

service from other types of financial institutions (Pet.

App. 6b). See also United States v. E.1. duPont de

Nemours & Co., 351 U.S. 377, 395 (1956).

Petitioners also contend (Pet. 10-11) that the court of

appeals only considered whether finance companies

serve a distinct customer group. However, in addition

to finding a separate group of customers, the court also

found that the loans offered by one type of financial

institution carried much higher interest rates than those

applicable to comparable loans made by the other, and

that the two were not meaningful competitors with

respect to loans granted at widely different rates (Pet.

App. 7b-8b). See also United States v. Alco: 377 USS.

271, 276 (1964) (emphasizing the significance of pricing

differentials in -delineatingssa product market). As the

court of appeals explained. the undisputed evidence in

this case showed that average interest rates charged by

finance companies are 100¢¢ higher than average rates

charged by banks (Pet. App. &b n.5).° That fact confirms

the continuing accuracy of this Court's conclusion that

personal loans made by banks are “insulated” from

effective competition by finance companies because the

interest rates and capital costs of banks are much lower

(id. at 8b).°

3. Petitioners also argue (Pet. 15-18) that even if 506;

customers, then that market or submarket is subject to

scrutiny under the antitrust laws. See Brown Shoe Co. v.

Cnited States, 370 U.S. 294, 325 (1962): ITT v. GTE.

S18 F. 2d 913, 932 (9th Cir. 1975): United States v.

Connecticut’. National Bank, supra, 418 U.S. at 664:

United States v. Phillipsburg National Bank. supra, 399

U.S. at 360-361. As the court of appeals noted. the

record in this case establishes’ that 15-5067 of the

approximately 12.4 million finance customers with cash

loans outstanding (loans in excess of $21 billion) could

not obtain cash loans elsewhere.” This competitively-

insulated market for cash loans was sufficiently large to

of finance company customers cannot obtain cash loans

at banks or other financial institutions, those customers

do not occupy a distinct product market so long as the

justify recognition as a distinct product market. See

Fortner’ Enterprises, Inc. v. United States Steel Corp..

remaining finance company customers are the

beneficiaries of inter-industry competition for cash loans.

That proposition is barren of economic or legal support.

If an industry faces no meaningful competition within an

economically — significant’) market or submarket of

‘Petitioners erroneously assert (Pet. 11) that the 17-18; interest

rate charges on bank credit cards are comparable to interest rates

charged by finance companies. Credit card loans are generally for

amounts of $200 or less (Tr. 224-225, 279-281. 1409): comparable

loans by finance companies generally carry the maximum interest

rate permitted by law, which in many states is 36° per annum.

Petitioners also criticize (Pet. 13) the failure of the court of

appeals to provide a detailed description of all the attributes of the

typical lower-income, higher-risk customer who must turn to finance

companies to obtain cash loans. However, the court of appeals

identified the general income and occupations of such customers as

compared to bank borrowers (Pet. App. 1I&b-19b). Additional

demographic details are not required in delineating a product

market. As this Court noted in Times-Picavune Publishing Co. vy.

United States, 345 U.S. 594, 611 (1953). a product market “cannot

be measured by metes and bounds.”

394 U.S. 495, 501-502 (1969).

‘Gov. Exh. 8 Tables 24, 28.

‘Contrary to petitioners’ assertion (Pet. 19-21). the conclusion that

cash loans by finance companies constitute a distinct product

market raises no conflict: with administrative decisions of the

Federal Reserve Board or the views of the Department of Justice.

The rulings and opinions cited by petitioners correctly recognize that

finance companies and banks compete to some eXtent across a

broad range of the general consumer credit market. especially in the

credit card and second mortgage markets. But this fact is not

inconsistent with the proposition that cash loans by finance

companies constitute an economically — significant’) market or

submarket. As this Court explained in United States v. Connecticut

National Bank, supra, 418 U.S. at 660-666. simply because different

types of financial institutions are aggressive competitors in extending

credit to some customers does not foreclose the possibility that other

customers occupy a separate market in which no real competition

between the institutions exists. See also United States V. Phillipsburg

National Bank, supra, 399 U.S. at 359-360 (competition faced by

commerical banks from other financial institutions in some aspects

of their business does not conflict with the conclusion that there is a

separate market for commerical banking).

10

4. Finally, petitioners argue (Pet. 22) that this Court

should grant review of the court of appeals’ decision in

order to weigh the voluminous evidentiary record.” It is

axiomatic, however, that certiorari will not be granted

“to review evidence” and to draw factual inferences. See.

¢.g., United States v. Johnston, 268 U.S. 220, 227 (1925):

see also Southern Power Co. vy. North Carolina Public

Service Co., 263 U.S. 508, 509 (1924): Houston Oil Co.

V. Goodrich, 245 U.S. 440. 441 (1918). In any event.

petitioners’ assertion that the court of appeals drew

Incorrect’ inferences regarding market boundaries is

Wholly unsupported.!”

Petitioners suggest (Pet. 23) that the court of appeals gave de

novo scrutiny to the evidence. To the contrary. however. the court

of appeals correctly applied the “clearly erroneous” standard of

review (Pet. App. 2b).

Contrary to petitioners’ contention (Pet. 23-25). the court of

appeals properly rejected (Pet. App. l0b-13b) the conclusion that

the studies of Boczar and Murphy disproved the existence of

customer segmentation in the market for cash loans. Other evidence

discussed by petitioners (Pet. 25-28) was correctly viewed by the

court of appeals as not inconsistent with the conclusion that cash

loans by finance companies constitute an independent product

market (Pet. App. 13b-15b). For instance. the tact that some finance

company customers may also hold bank credit cards (Pet. 26) is not

inconsistent with the fact that an economically significant

percentage of finance company borrowers cannot obtain cash loans

elsewhere (id. at 14b-15b). Petitioners’ selective attack (Pet. 2&-30)

on the “overwhelming evidence” in the record substantiating the

existence of significant segmentation of finance company and bank

borrowers according to risk (Pet. App. l6b) is merely a quarrel over

the weight to be given to individual items of evidence and does

not merit review by this Court.

CONCLUSION

Phe petition for a writ of certiorart should be denied.

Respecttully submitted.

Want H. McCren. JR.

Solicitor General

Joun H. SHENEFIELD

Assistant Attorney General

ROBERT Bo NICHOLSON

BRUCE E. FEIN

SEYMOUR H. Dussvian

Attorneys

DECEMBER 1979

DOJ-1979-12