Petition — Borden, Inc. v. Federal Trade Commission

FIL i

R 2 — 3 2 8 f LED

AUG 25 1982

No. 82-

VAS,

IN THE CLERK

Office - Supreme Court, US.

Supreme Court of the United State

Octoser 1982 Term

BORDEN, INC.,

Petitioner,

v.

FEDERAL TRADE COMMISSION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

H. BLan Wuite

(Counsel of Record)

CUARLESs W. Dovetas

Daum M. ScutrFMAN

Sidley & Austin

One First National Plaza

Chicago, Illinois 60603

(312) 853-7000

Water W. Kocuer

Epwarp A, Matto

Harvey A. Rosenzweic

Borden, Inc.

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

Counsel for Petitioner,

Borden, Inc.

August 25, 1982

1.

i

QUESTIONS PRESENTED FOR REVIEW

Should a company that has lawfully obtained a domi-

nant position in the market be prohibited from respond-

ing to local competition by gradually lowering its prices

in an attempt to meet competition and reduce its loss

of market share?

Should a company that sells a premium-priced product

which has gained consumer acceptance and a dominant

position in the market be prohibited from engaging in

vigorous price competition, where the company never

sells the product below cost?

Should a company that is forced by competition to

lower prices or lose sales be deemed to have “monopoly

power” because it has a large percentage share of an

artificial and rarrowly-defined product market and be-

cause consumers are willing to pay more for its brand-

name product?

ii

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED FOR REVIEW ....... Ii

TABLE OF AUTHORITIIELLEggge . iv

Dr cuncopheghesneaeasaseees 1

/ 2

. ! 2

STATEMENT OF THE CAS ꝗZEEZZggg . 2

By ET ID 0:8: c6sncskncbe6essecesedexes 3

r es 5

REASONS FOR GRANTING THE WRIT ......... 7

I. A Company That Has Lawfully Obtained A Dom-

inant Market Position Should Not Be Prohibited

From Responding To Local Competition By Re-

r A 7

A. A Dominant Firm That Is Losing Business

To A Price-Cutting Competitor Is Allowed

To Lower Its Prices To Meet Competition. 8

B. A Dominant Firm Can Tailor Its Price Re-

ductions To Those Markets Where Competi-

tion Is Strong And Prices Are Low ........ 10

II. A Dominant Firm That Sells A Product Which

lias Gained Consumer Acceptance Should Not

Be Prohibited From Engaging In Vigorous Price

Competition As Long As Its Prices Remain

r mba hemdad 12

A. Predatory Pricing Does Not Occur Unless

neee eee 12

B. A Dominant Firm Is Not Required To Avoid

Otherwise Lawful Price Competition Simply

Because Consumers Are Willing To Pay A

Premium Price For Its Products .......... 14

iii

PAGE

III. A Company Which Is Forced To Choose Between

Lowering Its Prices Or Losing Much of Its Busi-

ness Does Not Possess “Monopoly Power” Simply

Because It Has A Large Percentage Share Of A

Narrowly-Defined Market And Because Consum-

ers Are Willing To Pay More For Its Brand-

. 18

,,,. V qꝓↄꝓꝙ⸗S 22

iv

TABLE OF AUTHORITIES

Cases

American Tobacco Co. v. United States, 328 U.S. 781

C ee

eren Photo, Inc. v. Eastman Kodak Co., 603 F. 2d

263 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980)

Borden, Inc. v. FTC, 674 F.2d 498 (6th Cir. 1982)

Broadway Delivery Corp. v. United Parcel Service, 651

. ..

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.

D ͤ öLwmUʃ ˙—⅛¾ͤe• — ¾ͤ me

California Computer Products, Inc. v. IBM, 613 F.2d

r eee ene

Chillicothe Sand d Gravel Co. v. Martin Marietta Corp.,

615 F. ad 427 (7th Cir. 19000))))))))))

Great Atlantic & Pacific Tea Co. v. FTC, 440 US. 69

r ˙ c nne e

ILC Peripherals Leasing Corp. v. IBM, 458 F.Supp.

425 (N.D. Cal. 1978), % per curiam sub nom. Mem-

orex Corp, v. IBM, 636 F.2d 1188 (9th Cir. 1980),

cert, denied, 452 U.S. 972 (1981) ))))

In ve Borden, Inc., 92 F. T. C. 669 (1978), aff'd sub nom.

Borden, Inc. v. FTC, 674 F.2d 498 (6th Cir. 1982)

International Air Industries, Inc. v. American Excel-

sior Co., 517 F.2d 714 (Sth Cir. 1975), cert. denied,

e, ̃ md ˙¹-

Janich Bros., Inc. v. American Distilling Co., 570 F.2d

848 (9th Cir. 1977), cert. denied, 439 U.S. 829 (1978)

Northeastern Tel. Co. v. AT&T, 651 F.2d 76 (2d Cir.

1981), cert. denied, 102 S.Ct. 1438 (1982) ..........

PAGE

18-19

16

passim

19

8, 13

passim

7, 9, 12,

13, 15

10, 13

7-9, 13, 14,

17, 22

PAGE

Pacijic Engineering Co. v. Kerr-McGee Corp., 551 F.2d

790 (10th Cir.), cert. denied, 434 U.S. 879 (1977) ... 7, 9, 10, 12,

13, 15

SuperTurf, Inc. v. Monsanto Co., 660 F.2d 1275 (Sth

„ nese 7, 8, 13

Telex Corp. v. IBM, 510 F.2d 894 (10th Cir.), cert.

dismissed, 423 U.S. S02 (1975) .......cccccccccess 9, 10, 17

United States v. Aluminum Co. of America, 148 F. 2d

III. 20, 22

United States v. E. I. du Pont de Nemours d Co., 351

D 0 006s acccdcesnanesusecuel . 17-20

United States v. Grinnell Cor, 384 U.S. 563 (1966) .. 16-18

United States v. United States Gypsum Co., 438 U.S.

0 ²˙ ! 11

Statutes and Rules

Federal Trade Commission Act § 4, 15 U.S.C. 495. 2

Robinson-Patman Act, 15 U.S.C. 5 1. 10-11

seesmen Act 48, 0 URE. 66 occccaccccscoccccuce passim

SP Cas OEE ˙ . 2

L 3

Other Authorities

P'. Areeda & D. Turner, Predatory Pricing and Related

Practices Under Section 2 of the Sherman Act, 88

err ee 12, 14

. Areeda, Antitrust Law (Supp. 1982) ............. 12

IN THE

Supreme Court of the United States

Ocroser 1982 Term

Petitioner,

Vv

FEDERAL TRADE COMMISSION.

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

OPINIONS BELOW

The opinion of the Court of Appeals is reported at 674

F. 2d 498 (6th Cir. 1982). The opinions of the Federal Trade

Commission and of its Administrative Law Judge are re-

ported at 92 F.T.C. 669 (1978). All of the opinions are

reproduced in the separately-bound Appendix submitted

herewith."

1 The following abbreviations are used in citing the opinions

below and the corresponding page numbers in the Appendia :

CA: the Court of Appeals opinions (pages CA-la through

CA-38a).

FTC: the FTC opinions (pages FTC-39a through FTC-94a).

ALJ: the Administrative Law Judge's opinion (pages ALJ-94a

through ALJ-200a).

References to portions of the record, other than the opinions below,

are to the Joint Appendix (“JA”) filed in the Court of Appeals.

2

JURISDICTION

The Court of Appeals entered judgment on February 24,

1982. Borden filed a timely petition for rehearing and sug-

gestion for rehearing en banc on March 10, 1982, which

was denied on April 12, 1982. By Order of this Court dated

June 29, 1982, Borden’s time for filing a Petition for a Writ

of Certiorari was extended to August 25, 1982. The juris-

diction of this Court is invoked under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

The FTC commenced this proceeding under Section 5(a)

(1) of the Federal Trade Commission Act, 15 U.S.C. § 45

(a)(1), which provides:

“Unfair methods of competition in or affecting com-

meree, and unfair or deceptive acts or practices in or

affecting commerce, are declared unlawful.”

The FTC, as well as the Sixth Circuit (CA-10a-lla;

FTC-42a n.4), treated the case as one brought under Sec-

tion 2 of the Sherman Act, 15 U.S.C. § 2, which provides:

“Every person who shall monopolize, or attempt to

monopolize, or combine or conspire with any other per-

son or persons, to monopolize any part of the trade or

commerce among the several States, or with foreign

nations, shall be decmed guilty of a felony. .. .”

STATEMENT OF THE CASE

Petitioner seeks review of a divided decision of the Sixth

Cireuit Court of Appeals, affirming a decision of the Fed-

eral Trade Commission, which held that Borden had un-

lawfully monopolized the market for processed lemon juice

by “selectively” reducing its prices “in geographic markets

where Borden faced competition from Golden Crown Citrus

Corporation. (CA-la; FTC-57a). The Sixth Cireuit

3

affirmed an order that prohibits Borden from lowering its

prices in local markets where it is losing business to price-

cutting competitors and that requires Borden to charge

essentially uniform national prices. (FTC-93a-94a).

The Underlying Facts

Borden, Inc.“ is the manufacturer of “ReaLemon” brand

reconstituted lemon juice. “ReaLemon was the first firm to

develop and market a bottled lemon juice,” and, as a result,

“it naturally had a monopoly in the market at the outset.“

(FTC-53a). During the 1970's, however, ReaLemon’s mar-

ket position was successfully challenged, first regionally by

Golden Crown (which was acquired by The Seven-Up Com-

pany in 1974), then nationally by Minute Maid (which is

owned by The Coca-Cola Company). (FTC-62a; JA-412).

The FTC's complaint focused on the 1970-1974 period and

Borden's competition with Golden Crown. During that

period, Golden Crown rapidly expanded from its original

Chicago-area base to most other areas of the country.

(AL.J-141a-142a). Its “method of expansion was to sell its

product to retailers at prices well below those of ReaLemon.”

(CA-3a). Those low prices were made possible in part by

? Pursuant to Supreme Court Rule 28.1, Borden states that it

has no parent company. Its domestic subsidiaries and affiliates

(other than wholly owned subsidiaries) are: Bayaman Can Corp.,

Coco Lopez Mfg. Corp., Coco Lopez of New York, Ine, Illinois

Nitrogen Corp., Industrias La Famosa, Inc., John Robert Powers

Attractions, Inc., Monochem, Inc., Productos Damita, Inc, and

The Viking Engraving Corp.

The FTC defined the relevant product market as “processed

lemon juice,” excluding fresh lemons from the market definition

even though the juice of fresh lemons can be and is substituted

for every use of reconstituted lemon juice. (FTC-49a). In this

narrowly-defined market, annual sales are only $25 million. ( ALJ-

95a).

+

Golden Crown’s practice of “routinely” adulterating its

product with cheaper ingredients.“ Golden Crown’s “ex-

tremely low or below cost prices” (ALJ-178a) undersold not

only ReaLemon, but also Realemon’s lower-priced com-

petitors.“ As a result, several local bottlers of lemon juice

lost large parts of their business and were driven out of a

number of markets. (FTC-59a; ALJ-142a; J A-85).

When “the significant price differential between Golden

Crown and ReaLemon began to make inroads on [its] sales”

(CA-3a), Borden reacted with “progressively more vigor-

ous price .. . responses to Golden Crown, running over a

period of four years,” which did not “reach [their] peak until

. . . [ReaLemon’s] national share had fallen by 8 percent-

age points and Golden Crown’s had risen by 13. (FTC.

75a n.4, 89a n.14, Clanton, C., and Pitofsky, C., concurring).

Throughout this period, ReaLemon’s prices were always

higher than Golden Crown’s, generally by “10 to 21 cents per

bottle,” and ReaLemon did not even begin to reduce its

prices until Golden Crown started charging half the price

of ReaLemon. (FTC-62a; see J A-666, 784, 817-35, 1117-19).

Moreover, ReaLemon’s prices were always above its average

variable cost for the product. (ALJ-176a-177a; FTC-68a).

Golden Crown was thus able to capture 15% of the national

market (as defined by the FTC) and a much higher share of

„Golden Crown's reconstituted lemon juice was adulterated

with citric acid and sugar. . . The evidence proves beyond question

that Golden Crown routinely, at least during significant production

periods, manufactured its reconstituted lemon juice using sub-

stantial amounts of citric acid and sugar. . . There was also no

disclosure, it may be noted, on the Golden Crown label of the

presence of sugar and citrie acid.” ( ALJ-176a n.3).

5 Most of ReaLemon's competitors charged lower prices for their

processed lemon juice, although Minute Maid and VitaPakt charged

higher prices. (J A-39-40, 426).

5

many local markets. (ALJ-127a; JA-606, 1086). Another

competitor, Minute Maid, was able to expand even more

dramatically ; during six months of 1976, its share jumped

from 5.6% to 18.2%. (JA-1190-91). In the meantime,

ReaLemon’s share of sales fell rapidly:

ReaLemon’s Share of Sales“

Year By Dollars By Gallons

A 88.9% 88.7%

1 87.1% 86.1%

1 86.1% 84.2%

1E 82.9% 80.2%

aa 79.9% 77.4%

U 77.8% 75.3%

D 65.4% 69.9%

ALI Ia; FTC-66a n.40* ; JA-1190-91.

The Proceedings Below

The FTC con nenced this proceeding in July 1974 and,

following a trial before an administrative law judge, issued

its decision in November 1978. Chairman Pertschuk’s ma-

jority opinion concluded (1) that in spite of the evidence

of competition between fresh lemons and bottled lemon

juice, “processed lemon juice” was an appropriate product

market (FTC-49a); (2) that Borden possessed “monopoly

power” in this market because of its large percentage share

and because ReaLemon, “one of the greatest brand names

in the history of the supermarket,” was “able to command

a substantial price premium” relative to most other brands

(F'TC-50a-5la) ; and (3) that Borden had violated Section 2

of the Sherman Act because it had maintained its market

share through price reductions that were “not economically

inevitable.” (FTC-55a). Even though Borden’s prices were

never below cost and were always profitable (F'TC-S89a),

the FTC held that Borden’s prices were “unreasonably low”

because they forced Golden Crown, which had entered the

6

market with “extremely low or below cost prices,” to con-

tinue selling at a loss if it wished to keep the business it

had taken away from Borden. The FTC therefore entered

a cease-and-desist order prohibiting Borden from charging

“unreasonably low prices”’ and requiring Borden to main-

tain what Commissioner Pitofsky called a “legally man-

dated supra-competitive price.“ (FTC-8la).

Three of the five Commissioners also condemned Borden's

practice of “tailoring” its price reductions “to the com-

petitive situation in individual areas.” (FTC-58a). The

cease-and-desist order therefore also requires Borden to

charge uniform national prices, with reductions allowed

only to the extent “attributable to differing costs.” (FTC.

93a). Two Commissioners dissented from this holding; as

Commissioner Clanton explained, the majority’s approach

“sacrifices both efficiency and consumer welfare and is con-

trary to the overriding goal of the antitrust laws to protect

competition, not competitors.” (F'TC-74a-75a).

A divided panel of the Sixth Circuit Court of Appeals

affirmed in February 1982. The majority adopted the FTC's

market definition and finding of monopoly power, and held

that Borden’s price reductions were predatory because they

“affected competition adversely through selective geo-

graphie price promotions and unreasonably low prices.”

(CA-29a). Judge Kennedy filed a vigorous dissent:

“Borden su ely meant to obtain as much of the recon-

stituted lemon juice market as it could, but that is the

very essence of normal competition, a goal that we

approve even for a monopolist Despite the majority’s

assertion to the contrary this is simple, healthy com-

Under the order, unreasonableness is to be “determined by

reference to Borden's own costs, its awareness of its competitors’

costs, historie price differentials, and competitive conditions in the

market.” (FTC-68a n.41, 94a).

7

petition. The alternative is that Borden must have in-

tended not to respond when its market share began to

disappear, but not even a monepolist need act so irra-

tionally. .. It is simply good business practice, not a

use of monopoly power, to lower prices only where

competition is stiff.” (CA-35a).

REASONS FOR GRANTING THE WRIT

I. A Company That Has Lawfully Obtained A Dominant

Market Position Should Not Be Prohibited From Re-

sponding To Local Competition By Reducing Its Prices

The decision below creates a conflict with six other Cir-

cuits that have upheld the right of any seller, even a mo-

nopolist, to meet its competitors’ prices.“ Moreover, the

decision is extraordinarily anti-competitive, insisting that

Borden maintain uniform national prices so that “new or

toehold entrants [can] penetrate markets without fear” of

local price competition from Borden. (FTC-69a). This

Court should grant certiorari to reaffirm that “the anti-

trust laws .. . were enacied for ‘the protection of compe-

tition, not competitors’”® and to resolve the newly-created

conflict between the Circuits on the question of whether a

firm’: profitable price competition can be regarded as pred-

® Northeastern Tel. Co. v. AT&T, 651 F.2d 76, 86-95 (24 Cir.

1981), cert. denied, 102 S.Ct. 1438 (1982); /nternational Air In-

dustries, Inc. v. American Excelsior (o., 517 F.2d 714, 723-25 (5th

Cir. 1975), cert. denied, 424 U.S, 943 (1976); Chillicothe Sand &

Gravel Co. v. Martin Marietta Corp, 615 F.2d 427, 432 (7th Cir.

1980) ; SuperTurf, Inc. v. Monsanto Co., 660 F.2d 1275, 1281 (8th

Cir. 1981) ; California Cow vuter Products, Inc. v. 1BM, 613 F.2d

727, 742-43 (9th Cir. 1979) ; Pacific Engineering Co. v. Kerr Mess.

Corp., 551 F.2d 790, 797 (10th Cir.), cert. denied, 434 U.S. 879

(1977).

Brunswick Corp. v. Pueblo Bow!-O-Mat, Inc., 429 U.S. 477, 488

(1977) (Courts emphasis).

8

atory. The issue is vitally important because “predatory

pricing is difficult to distinguish from vigorous price com-

petition. Inadvertently condemning such competition as an

instance of predation will undoubtedly chill the very be-

havior the antitrust laws seek to promote.” Northeastern

Tel. Co. v. AT&T, 651 F.2d 76, 88 (2d Cir. 1981), cert.

denied, 102 S.Ct. 1438 (1982).

A. A Dominant Firm That Is Losing Business To A

Price-Cutting Competitor Is Allowed To Lower Its

Prices To Meet Competition

Every recent monopolization case has rejected the posi-

tion adopted below that a monopolist must maintain a

“price umbrella” so that new competitors can enter the

market and take away its business. These cases recognize

that every seller may “aggressively compete in the market-

place”; “even if [defendant] is a monopolist, it [is] within

its rights to respond to the lower prices of its competitors.”

Super Turf, Inc. v. Monsanto Co., 660 F.2d 1275, 1280-81

(8th Cir. 1981). For example, the Ninth Circuit affirmed a

directed verdict in California Computer Products, Ine. v.

IBM, 613 F.2d 727, 739, 741-42 (9th Cir. 1979), holding that

“TBM had the right to respond to the lower prices of its

competitors” because such “price cuts were a part of the

very competitive process the Sherman Act was designed

to promote.” As explained in a related case:

“A company should not be guilty of predatory pricing,

regardless of its costs, when it reduces prices to meet

lower prices already being charged by its competitors.

To force a company to maintain non-competitive prices

would be to turn the antitrust laws on their head.”

ILC Peripherals Leasing Corp. v. 1BM, 458 F.Supp.

423, 433 (N.D. Cal. 1978), % d per curiam sub nom.

Memorex Corp. v. IBM, 636 F.2d 1188 (9th Cir. 1980),

cert, denied, 452 U.S. 972 (1981).

9

Similarly, the Tenth Circuit has twice reversed trial judges

who erroneously found “predatory pricing” when monopo-

lists were reacting to the lower prices of their competitors.

Pacific Engineering & Production Co. v. Kerr-McGee Corp.,

551 F.2d 790 (10th Cir.), cert. denied, 434 U.S. 879 (1977);

Telex Corp. v. IBM, 510 F.2d 894, 926-28 (10th Cir.), cert.

dismissed, 423 U.S. 802 (1975). The Second Circuit like-

wise reversed a finding of predatory pricing in Northeastern

Tel. Co. v. AT&T, 651 F.2d 76, 87 (2d Cir. 1981), cert.

denied, 102 S.Ct. 1438 (1982), rejecting the idea that a

monopolist must maintain “a price ‘umbrella’ under which

less efficient firms could hide from the stresses and storms

of competition.” On similar grounds, the Seventh Circuit

affirmed a directed verdict in favor of a monopolist who

had underpriced a small rival, concluding that this was “the

essence of competition,” not predatory pricing. Chillicothe

Sand d Gravel Co. v. Martin Marietta Corp., 615 F.2d 427,

433 (7th Cir. 1980). The Fifth Cireuit agreed in a case

where the plaintiff alleged that he could not compete be-

cause a monopolist had lowered prices in the plaintiff’s area

to a point below the plaintiff's costs. International Air

Industries, Inc. v. American Excelsior Co., 517 F.2d 714,

724-25 (Sth Cir. 1975), cert. denied, 424 U.S. 943 (1976).

Because the decision below ignored these cases and de-

nied Borden the right to respond to the lower prices of

its competitors, this Court should grant certiorari to make

it clear that even a monopolist is allowed to engage in

normal price competition.

10 In Pacific Engineering, even though the monopolist knew its

competitor “could not survive at the low price level,” the Tenth

Cireuit nevertheless held that the monopolist had no obligation “to

raise prices to a noncompetitive level in order to save its smaller,

undereapitalized rival.“ 551 F.2d at 792, 795.

10

B. A Dominant Firm Can Tailor Its Price Reductions

To Those Markets Where Competition Is Strong And

Prices Are Low

This Court should also reverse the unprecedented holding

that a monopolist must maintain essentially uniform na-

tional prices, regardless of local competition. Such a rule

is in “open conflict with the purposes of . . . antitrust

legislation,” for it “would lead to just such price uniformity

and rigidity” that the Sherman Act was designed to prevent.

See Great Atlantic & Pacific Tea Co. v. FTC, 440 U.S. 69,

80 (1979). As Judge Kennedy explained in her dissent:

“It is simply good business practice, not a use of monopoly

power, to lower prices only where the competition is stiff.”

(CA-35a).

The decision below conflicts with many recent monopoliza-

tion cases that have presented exactly the situation found

here. In each of those cases, the defendant reduced prices

only in those geographic or product markets where it faced

vigorous competition; yet, allegations of predatory pricing

were uniformly rejected as a matter of law.'' “The fact

that [defendant] was charging higher prices in another sub-

market does not change its legitimate competition into an

injury to competition.” Pacific Engineering d Production

Co. v. Kerr-McGee Corp., 551 F.2d 790, 798 (10th Cir.),

cert, denied, 434 U.S. 879 (1977).

The decision also conflicts with the Robinson-Patman Act,

in which Congress specifically legislated on the subject of

11 Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848,

854-55 (9th Cir. 1977), cert. denied, 439 U.S. 829 (1978); Cali-

fornia Computer Products, Inc. v. IBM, 613 F.2d 727, 740 (9th

Cir. 1979); Telex Corp. v. IBM, 510 F.2d 894, 924 (10th Cir.),

cert. dismissed, 423 U.S. 802 (1975).

11

price discrimination. The Act makes it unlawful “to dis-

criminate in price.. where the effect of such discrimination

may be substantially to lessen competition or tend to create

a monopoly.” This prohibition, however, is subject to one

paramount right: the seller is entitled “to meet an equally

low price of a competitor. .. . Thus, Congress weighed

the competing policies and concluded that encouraging

competition is more important than prohibiting “price dis-

crimination,” even when the result may be “to create a

monopoly.” This right to meet competition is “an absolute

defense to liability for price discrimination.” United States

v. United States Gypsum Co., 438 U.S. 422, 450 (1978). The

decision below, however, turned that congressional judg-

ment on its head; the decree is patterned on the Robinson-

Patman Act, but deliberately omits the right “to meet an

equally low price of a competitor.” Accordingly, this Court

should grant certiorari and reverse the decision below.

12 The Robinson-Patman Act, 15 U.S.C. § 13, provides in perti-

nent part:

„(a) It shall be unlawful for any person . . . to discriminate

in price between different purchasers of commodities of like

grade and quality, . . where the effect of such discrimination

may be substantially to lessen competition or tend to create a

monopoly in any line of commerce, or to injure, destroy, or

prevent competition. . . Provided, That nothing herein con-

tained shall prevent differentials which make only due allow-

ance for differences in the cost of manufacture, sale, or delivery

resulting from the differing methods or quantities in which such

commodities are to such purchasers sold or delivered.

“(b) ... Provided, however, That nothing herein contained

shall prevent a seller rebutting the prima facie case thus made

by showing that his lower price . . was made in good faith to

meet an equally low price of a competitor... .”

12

II. A Dominant Firm That Sells A Product Which Has

— Consumer Acceptance Should Not Be Prohibited

In Vigorous Price Competition As

— HN

A. Predatory Pricing Does Not Occur Unless Prices

Fall Below Cost

The conclusion below that Borden engaged in predatory

pricing, even though its sales were always profitable and

its prices always above cost, also conflicts with the position

taken by the Second, Fifth, Seventh, Kighth, Ninth and

Tenth Cireuits.'* These courts agree that a price above

cost “is a fairly competitive price, for it is profitable to

the monopolist if not to its rivals.” /nternational Aur In-

dustries, Inc. v. American Excelsior Co, 517 F.2d 714, 723

(Sth Cir. 1975), cert. denied, 424 U.S. 943 (1976). Such a

price contributes] t+ the company’s cash flow“ and thus

reflects “rational, competitive behavior.” Pacific Engineer-

ing d Production Co. v. Kerr-McGee Corp., 551 F.2d 790,

797 (10th Cir.), cert. denied, 434 U.S. 879 (1977). As the

Seventh Circuit explained:

“In selling at a level which was above average variable

cost, [defendant] acted in an economically rational

manner, derived immediate benefit from its sales, and

did not engage in the ‘deliberate sacrifice of present

revenues for the purpose of driving rivals out of the

market and then recouping the losses through higher

profits earned in the absence of competition.’ ” Chilli-

cothe Sand d Gravel Co. v. Martin Marietta Corp., 615

F.2d 427, 432 (7th Cir. 1980), quoting P. Areeda & D.

Turner, Predatory Pricing and Related Practices Un-

der Section 2 of the Sherman Act, 88 Harv. L. Rev. 697,

698 (1975).

13 Indeed, “virtually every court and commentator agrees upon

the legality of a price exceeding average cost, perhaps conclusively

but at least presumptively.” P. Areeda, Antitrust Law § 711.1

(Supp. 1982).

13

The courts have identified several reasons for examining

the relationship between prices and costs when judging

predatory pricing claims. First, “‘pricing at marginal cost

is the competitive and socially optimal result.”"* “Forcing

a monopolist to charge a price higher than marginal cost

could reduce industry output and waste economic re-

sources.” International Air Industries, Inc. v. American

Excelsior Co., 517 F. 2d 714, 724 (5th Cir. 1975), cert. denied,

424 U.S. 943 (1976). Second, this test “has the considerable

virtue of offering a siugle bright line formulation which

would provide guidance as to permissible behavior to busi-

nessmen and also guidance to the courts and enforcement

agencies.” (F'TC-84a, Pitofsky, C., concurring). And third,

when a price exceeds cost there is no danger that the domi-

nant firm is “subsidizing” its price reductions with profits

earned in less competitive markets; the very fact that

prices are above cost means that every sale adds to profits

and none need a subsidy. Thus, the lower courts have con-

sistently held that “subsidization” can occur only when

price falls below cost.!“

The present case, like those discussed above, was tried on

the theory that Borden had sold ReaLemon at prices below

cost-—specifically, at prices below average variable cost, one

14 Janich Bros., Inc. v. American Distilling C, 570 F.2d 848,

857 (9th Cir. 1977), cert. denied, 439 U.S. 829 (1978) ; SuperTurf,

Inc. v. Monsanto Co., 660 F. 2d 1275, 1281 (8th Cir. 1981) ; accord,

Pacific Engineering & Production Co. v. Kerr-McGee Corp., 551

F.2d 790, 797 (10th Cir.), cert. denied, 434 U.S. 879 (1977).

15 International Air Industries, Inc. v. American Excelsior Co.,

517 F.2d 714, 725 (Sth Cir. 1975), cert. denied, 424 U.S. 943

(1976) ; Northeastern Tel. Co. v. AT&T, 651 F.2d 76, 89 (2d Cir.

1981), cert. denied, 102 S. Ct. 1438 (1982); ILC Peripherals

Leasing Corp. v. IBM, 458 F.Supp. 423, 432 (N.D. Cal. 1978),

aff'd per curiam sub nom. Memorex Corp. v. IBM, 636 F.2d 1188

(9th Cir. 1980), cert. denied, 452 U.S. 972 (1981).

14

of the generally accepted tests for predatory pricing.“ The

allegation, however, was clearly disproven: “The ALJ did

not find that ‘ReaLemon’ was sold below cost, nor do we.”

(FTC-68a). Nevertheless, the court below found predatory

pricing, reaching a result contrary to the law of six other

Circuits. This Court should resolve the conflict and hold that

profitable price competition is lawful. As long as this

straightforward test for predatory pricing is used, there is

no conflict between the seller's goal of seeking higher profits,

the economist’s goal of promoting efficiency, and the Sher-

man Act’s goal of facilitating competition.

B. A Dominant Firm Is Not Required To Avoid Other-

wise Lawful Price Competition Simply Because Con-

sumers Are Willing To Pay A Premium Price For

Its Products

The court below ignored Borden’s right to meet competi-

tion and to charge any price above cost because it found this

case to present “the unique situation of a monopolist market-

ing a product which could command a premium price, giving

1% The lower courts are in general agreement that the proper

measure of cost is marginal cost, but “because marginal cost cannot

be determined from conventional accounting methods, we will use

average variable cost as its surrogate.” Northeastern Tel. Co. v.

AT&T, 651 F.2d 76, 88 (2d Cir. 1981) (citing cases from four other

Circuits), cert. denied, 102 S.Ct. 1438 (1982). “Marginal cost is the

increment to total cost that results from producing an additional

increment of output. . Variable costs, as the name implies, are

costs that vary with changes in output.” Areeda & Turner, supra,

88 Harv. L. Rev. at 700 (emphasis added). Variable costs are dis-

tinguished from fixed costs, such as the cost of a plant, that must

be paid regardless of the quantity produced.

In the present case, the FTC's expert witness recommended the

use of such an average variable cost test (JA-52-53), and that was

the basis for the unsuccessful attempt to prove that Borden’s prices

had fallen below cost. (ALJ-166a-176a).

15

it significant pricing leverage over its competitors.“ “ (CA-

28a-29a). The court held that because Borden had tradi-

tionally charged a higher price than most other sellers, it

must continue to do so; any reduction in prices to recapture

lost business was seen as “manipulation” of the “price pre-

mium” and therefore illegal.

The so-called price premium, however, is not “unique” and

certainly does not justify a deviation from the established

law of monopolization. Many well-known brand names bring

higher prices, but that fact has never limited the seller's

right to compete. For example, in California Computer

Products, Inc. v. IM, 613 F. 2d 727, 740 n.23 (9th Cir. 1979),

the evidence showed that IBM’s products commanded a

price premium ; competitors could take business away from

IBM only by charging significantly lower prices. But that

fact did not affect IBM’s right to cut its own prices. On the

contrary, the court held that the plaintiff's failure to show

sales by IBM at prices below cost “was a failure as a matter

of law to present a prima facie case under § 2.” 613 F.2d at

742-43. Similarly, the Tenth Circuit has held that a monopo-

list can respond to a competitor’s price cuts even if it

knows the competitor “could not survive at the low price

level.” Pacific Engineering Co. v. Kerr-McGee Corp, 551

F.2d 790, 792 (10th Cir.), cert. denied, 434 U.S. 879 (1977).

Accord, International Air Industries, Inc. v. American Er-

celsior Co., 517 F.2d 714, 723-25 (Sth Cir. 1975), cert. denied,

424 U.S. 943 (1976).

* The “price premium is simply a reflection of the fact that

consumers have learned to trust ReaLemon as a quality product and

are willing to pay a few pennies more for ReaLemon than for most

other brands. As Judge Kennedy observed, consumers “pay extra

for ReaLemon to minimize their risk of receiving inferior

goods,” such as Golden Crown's adulterated product. (CA-38, n.5).

16

The real basis for the FTC's decision, upheld by the Sixth

Circuit, was the belief that ReaLemon’s “price premium”

was undeserved, and thus monopolistic, because it was not

the “consequence of a superior product, business acumen,

or historie accident.” United States v. Grinnell Corp., 384

U.S. 563, 571 (1966). Chairman Pertschuk said he could not

“avoid a value judgment” that it is “socially undesirable”

for monopolists to prevail over “producers handicapped

only by an inferior brand image. (F'T'C-H5a). His ma-

jority opinion repeatedly condemned Realemon’s “spurious

product differentiation” and “image-inducted [sic] price

premium” which “stemmed from the creation of ‘an almost

imaginary superiority’ in the consumer's mind.” (FTC-2a,

63a, 66a). He believed consumers were unwisely paying

extra money: “ReaLemon is distinguished from its com-

petitors only by the strength of its trademark.” (FTC-66a).

The FTC completely misunderstood Grinnell and this

Court’s statement that “growth or development as a con-

sequence of a superior product” is not monopolization.

Under Grinnell, superiority is determined by consumers in

the marketplace, not by the FTC on the basis of its dubious

“value judgment.” As the Second Circuit pointed out: “If

a monopolist’s products gain acceptance in the market.

it is of no importance that a judge or jury may later regard

them as inferior, so long as that success was not based on

any form of coercion.” Berkey Photo, Inc. v. Eastman

Nodak Co., 603 F.2d 263, 287 (2d Cir. 1979), cert. denied,

444 U.S. 1093 (1980). Judge Kennedy was certainly correct

when she wrote that the FTC’s “value judgment . . . has

nothing to do with the ‘use of monopoly power’ that See.

1 Of course, Golden Crown suffered from more than “an in-

ferior brand image.” Its product was “adulterated,” and thus,

“consumers may have preferred the taste of ReaLemon to Golden

Crown.” (ALJ-176a n.3; FTC-50a n.16).

17

tion 2 reaches. Whether I agree or disagree with [this]

value judgment, it has no place here.” (CA-36a n.2).

The FTC also misunderstood this Court's statement in

Grinnell that growth through “business ecumen” is lawful.

Such “business acumen” undoubtedly encompasses “shrewd-

ness in profitable price competition.” California Computer

Products, Inc. v. IHM, 613 F.2d 727, 742 (9th Cir. 1979).

It also encompasses Borden’s success in convincing con-

sumers to buy ReaLemon. As Judge Kennedy pointed out

in her dissent:

“Successfully promoting one’s product is the epitome

of the ‘business acumen’ that Grinnell states is not

monopolization. .. . It is not a violation of the anti-

trust laws for a monopolist to take advantage of a

consumer preference at the expense of its competitors.”

(CA-35a, 37a-38a) (emphasis in original).

Section 2 is directed at conduct “which makes it impos-

sible for other persons to engage in fair competition,” not

at “ordinary marketing methods available to all in the

market.“ “ In this case, Borden used only such “ordinary

marketing methods,” all of which were available to its

competitors. Any company was free to sell the product that

ReaLemon invented and to enter the market that ReaLemon

developed. Any company could bottle the product, register

a trademark, promote it, and attempt to convince consumers

that its product was as good as ReaLemon’s. The FTC

thought that Borden's marketing methods were not “avail-

able” to its competitors because their brand names did not

instantly have the same degree of consumer acceptance that

1° United States v. E. JI. du Pont de Nemours d Co., 351 US.

377, 390 & n.15 (1956) (quoting legislative history); Telex Corp.

v. IBM, 510 F.2d 894, 926 (10th Cir.), cert. dismissed, 423 U.S.

802 (1975); Northeastern Tel. Co. v. AT&T, 651 F.2d 76, 93 (2d

Cir. 1981), cert. denied, 102 S.Ct. 1438 (1982).

18

ReaLemon had achieved through years of providing a qual-

ity product. But the Sherman Act does not guarantee over-

night success. It is not a crutch for new entrants who

cannot withstand honest, head-to-head competition in the

marketplace. Sellers are not entitled to the protection of

an “umbrella price,” as the FTC held. Nor are they en-

titled to be free from local price competition, as the FTC

decreed. Because the decision below ignored these princi-

ples, certiorari should be granted and the decision reversed.

III. 2 41 21— > Se bee

Lowering Its Prices Or 711 —

This Court should also grant certiorari on the threshold

question of whether Borden possessed “monopoly power”

— the power to control prices or exclude competition.”

United States v. E. I. du Pont de Nemours d Co., 351 US.

377, 391 (1956); United States v. Grinnell Corp., 384 US.

563, 571 (1966). The decision below is inconsistent with

the law of monopolization in four respects.

First, the FTC used the wrong test in determining

whether Borden had “the power to control prices.” It

reasoned that Borden held such power because, by lowering

its own prices, Borden could force its competitors to lower

theirs. But the power to drive down prices is the power

held by any competitor; as this case demonstrates, even

Golden Crown was able to drive down the price of the

dominant brand, ReaLemon. Monopoly power is just the

reverse: it is the ability of a dominant firm to raise its own

prices, unconstrained by the forces of competition. “The

material consideration in determining whether a monopoly

exists is [whether] . . . power exists to raise prices or to

exclude competition when it is desired to do so.” American

Tobacco Co. v. United States, 328 U.S. 781, 811 (1946)

(emphasis added). Only when prices can be “raised sub-

stantially without . . . losing business” does a seller have

monopoly power. Broadway Delivery Corp. v. United Par-

cel Service, 651 F.2d 122, 131 (2d Cir. 1981). Borden did

not have that power. Indeed, it could not raise prices even

to keep pace with rising costs: “planned price increases for

quart bottles of ReaLemon, occasioned by cost increases,

{did not] go into effect in highly competitive Golden

Crown markets.“ (FTC-57a).

Second, the FTC erroneously concluded that ReaLeimon's

“price premium” gave it the “power to control prices.” But

the fact that a well-known product such as ReaLemon sells

for a higher price than most other brands does not mean the

seller has monopoly power ; it simply means that consumers

regard the product as superior and will pay somewhat

more for it. That is not the control over prices which signi-

fies monopoly power. As Judge Kennedy explained:

“The price premium did not exist because of the monop-

oly. It was nothing more than evidence of a consumer

preference. . . . Manipulation of a consumer prefer-

ence is not a use of monopoly power unless the pref-

erence was somehow created by ihe monopoly position

in the market, and there is no such finding here.”

(CA-37a).

Third, the FTC erroneously equated the concept of a

“barrier to entry” with the ability to “exclude competi-

tion.” It concluded that the “strength” of the “ReaLemon”

trademark was a barrier to entry into the processed

lemon juice market. (FTC-52a). But, as this Court has

recognized, the “power that . . soft-drink manufacturers

have over their trademarked products is wolf the

20

power that makes an illegal monopoly.” United States v.

E. J. du Pont de Nemours d Co., 351 U.S. 377, 393 (1956)

(emphasis added). Moreover, the “Realemon” trademark

certainly did not give Borden the power to exclude com-

petition, particularly in light of the fact that all other bar-

riers to entry were “insignificant.””’ Even Golden Crown,

with an adulterated product that was advertised only “on

a minor scale in selected markets” (CA-2la), was able with-

in four years to capture 15° of all national sales (and a

much higher percentage in a great many local markets).

Minute Maid was able to grow still more rapidly, despite

selling a more expensive product. In just six months, its

share jumped from 5.6% to 18.2%. Meanwhile, Borden's

share dropped to 65% , compared to almost 90% a few years

earlier.*' When new competitors are able to enter a market

this rapidly and this effectively, notwithstanding price

competition thought to be “predatory,” the dominant firm

cannot be said to have the power to “exclude competition.”

Finally, the FTC erred in ignoring the fact that Borden

had no power to control prices or exclude competition,

and relying instead upon an inference drawn from Borden’s

large share of a narrowly-defined market. In defining the

relevant market, the FTC excluded fresh lemons, even

though the evidence clearly established that the juice of

The FTC found that other barriers to entry, including “capital

costs, absolute costs, and scale economies, are insignificant.” (FTC-

69a). “Processed lemon juice is not difficult to manufacture

The raw materials are readily available and the product can

be produced using relatively inexpensive equipment.” (FTC-4la).

2 At this level, ReaLemon did not have a monopolist’s share,

even within the narrow market defined by the FTC. As Judge

Learned Hand pointed out, “it is doubtful whether 60 to 64 per-

cent would be enough for a finding of monopoly power. United

States v. Aluminum Co. of America, 148 F.2d 416, 424 (2d Cir.

1945).

21

fresh lemons can be and is substituted for every use of

reconstituted lemon juice. (J A-495-510, 526-36, 861A). This

narrow market definition was crucial to the FTC’s finding

of monopoly power,“ but that finding was contrary to the

undisputed evidence that Borden could not control prices

or exclude competition. A seller such as Borden, which is

forced to choose between lowering its own prices or suffer-

ing large cuts in its market share, certainly does not have

“monopoly power.“ This Court should grant certiorari to

reverse the clearly erroneous finding that it had such power.

2 The inclusion of fresh lemons within the product market

would necessarily preclude a finding of monopoly power because

this would have reduced Borden's market share . . to less than

ten percent.” (CA-12a & n. 20).

22

CONCLUSION

The decision below, by restricting price competition and

requiring Borden to maintain a nationally uniform “um-

brella” price, denies consumers the benefits of competition

previously ensured by the antitrust laws. Equally import-

ant, it ignores the central principle that “dominant firms,

having lawfully acquired monopoly power, must be allowed

to engage in the rough and tumble of competition.” North-

eastern Tel Co. v. AT&T, 651 F.2d 76, 79 (2d Cir. 1881)

(emphasis added), cert. denied, 102 S.Ct. 1438 (1982). As

Judge Learned Hand pointed out long ago, a “successful

competitor, having been urged to compete, must not be

turned upon when he wins.” United States v. Aluminum Co.

of America, 148 F.2d 416, 430 (2d Cir. 1945). That is exactly

what the Sixth Circuit and the FTC erroneously did in

this case. Certiorari should be granted and the decision

reversed.

Respectfully submitted,

H. Braun Wurre

(Counsel of Record)

Caries W. Douglas

Davio M. ScuirrMan

Sidley & Austin

One First National Plaza

Chicago, IIlinois 60603

(312) 853-7000

Watter W. Kocuer

Epwarp A. Marto

Harvey A. Rosenzwei

Borden, Inc.

180 East Broad Street

Columbus, Ohio 43215

(614) 225-4000

Counsel for Petitioner,

Borden, Inc.