Petition for Writ of Certiorari — General Foods Corp. v. Federal Trade Commission

Supreme Court brief1968

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oo is LT ER AST CI

No 1250 MAR 20 1968

; Bay Fe, cuen ”

INTHE:- .

_o upreme Court of the nied States

Oc TOBER ERM, 1967

GENERAL Foops Corporation, Petitioner

Vv.

FEDERAL TRADE CoMMISSIoN, Respondent

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

Roserts B. OWEN

‘701 Union Trust Building

Washineten,_D. C.— 20005-

Attorney for Pgtitioner,

. General Foods Corporation.

Of Counsel: | “8

GERALD P. Norton

G. JOSEPH VINING

. Covineton & BURLING

701 Union Trust Building

Washington, D. C. 20005

Kenpaut M. Coir

250 North Street

White Plains, New York

Subetees

TABLE OF CONTENTS

OPINIONS BELow re Se euavadesadsedeeueavesouss¢s Scawntbee- oe

JURISDICTION .........-. fiamkeweneeesae erqcessosvege eover 2

_ QUESTIONS PRESENTED .........ecsccccccceeeecees Leecweeee 2°

“SravTuTe INVOLVED .........0eecceeees steutenesonedes we («*S

STATEMENT .......... levavedwesevesseWecdseneces eoeguceds 3

I. The Issue of Substitute Products

i lis eka peanepeeaanenerede. aie

B. Fhe Opeions Belew .ncicicccecvcccvecvecs ceeve

II. The Issue of Entry Barriers

Be TD Eb cKadekeceaccceccovienciveecssuscevs 12

B. The Opinions Below ...-........ veietenevesseees 12

III. The Issue of Operating Efficiencies Pe

A. The Facts ........ Weliveckers aan yvignevidninn aad 14

B. The Opinions Below ..........---+-+eeeeees ieee 15°

_ REASONS FOR GRANTING THE WRIT ...........-.-.0seeeeees

TI. On rue Important LegaL AND Economic QUESTION OF’

THE RELEVANCE OF POTENTIAL COMPETITION FROM CLOSE

SussTITUTE Rropucts, THE RULE ANNOUNCED BELOW

ConFuicts Wits Prior Houpines 6r THis Court AND

Wirn Acceptrep EcoNoMic DocTRINE ............+5.

II. THe RELIANCE OF THE CouRT BELOw on A NoveL As-

STRACT RvuLE—THar Entry Barriers-May° Be An-

ALYZED WitrHout REGARD TO THE CHARACTER OF IDEN-

TIFIED POTENTIAL EnTRANTs—Is INCONSISTENT WITH

ACCEPTED ECONOMIC PRINCIPLES AND-> WITH THE DECTI- |

SIONS OF THIS COURT ................. ie ae rionaies

III. Taw Lower TriBuNALs’ RELIANCE UPON ACHIEVEMENT -

- OF OPERATING EFFICIENCIES AS AN AFFIRMATIVE GROUND

FOR PROHIBITING A CONGLOMERATE MERGER Is a RADICAL

DEPARTURE FROM THE ACCEPTED GOALS OF ANTITRUST

' PoLicy CFE RESELLER VL ICES RSE SOR LEE @m@sreeeeeee¢0

Asvuenk A—OPINION AND qe UDGMENT OF THE Court oF AP-

’ PEALS

APPENDIX B—OPINION AND ORDER OF THE FEDERAL TRADE '

CoMMISSION

APPENDIX C—PETITIONER’ s Morton AND » Sinennieen AFFIDAVIT

IN THE Court or APPEALS

ii at Table of Contents Continued

" CITATIONS Ais

Cases: . ? eA _ Page

Burlington Truck Lines Inc. v. United States, 371 U.S..156

SE snkeuh2nches bedhe bnew see hbekedeeeaabesceeeee 23

Consolidated Foods Corp. v. FTC, 380 U.S. 592 (1965) ineee* 23

Federal Trade Commission v. Procter & Gamble Co., 63 F.T.C.

, [1963-65 Transfer Binder] Trape ‘Rec. REP. { 16,673

(FTC 1963), rev’d, 358 F.2d 74 (6th Cir. 1966), rev’d, 386

EE CUNT ince ekceenas o06eeensedenteexdia 4-6, 10, 16, 18,

21, 53.95, 27, "99

NLRB v. Metropolitam Life a Co., 380. U. S. 438 (1965) evens 23

SEC v. Chenery Corp., 332 U.S. 194 CED davwesednentesss 23

United States v. Continental Can Co., 378 U.S. 441 (1964) ..20,21 ©

United States v. El Paso Gas Co., 376 U. S.651 (1964)-. .18, 21, 23, 25

United States v. Penn-Olin Co., 378 U.S. 158 (1964) ....18, '20, ‘21,

23, 24, 25

Statutes:

Clayton Act, 38 Stat. 730,:as , amended, 6: US.C. § 12 et. seq.? |

"Eee a ia. aan eee er ee mie .3,4,10

Ge ¢ eee Payer er ere unease eeesaneusune 2,6

_ Judicial Code, 28 USC. oiate Cp) eveeseccesecvececees.

= Miscellaneous: : aan

‘Barn, Barrters To New Comperirion (1956) ........... 19, 25, 26

BAIN, INDUSTRIAL ORGANIZATION (1959) .0...........000 08. 17; 19

, Book, MERGERS AND MARKETS (6th ed. 1968) ........... 16, 22, 29

en BRIEF For THE FEDERAL TRADE Commission, FTC v. Procter

& Gamble Co., 386 U.S. 568 (1967) ...... Sn eniaiaasbadens ‘27

CouNCcIL oF Economic Apvisors ANNUAL REPORT, in Economic

REPORT OF THE PRESIDENT (1965) ...........cceccecceces 20

Elman, Clorox and Conglomerate Mergers, 36 ANTITRUST LJ. *

ee SEE cavdadaadawebecceweunees cukwieséceses nike 27, 29

Hale & Hale, More on Mergers, 5 J. Law & Econ. 119 (1962).. 16-

Hearings Before the Subcommittee on Antitrust and Monopoly

_of the Senate Committee on the Judiciary, pursuant to 8.

’ Res. 40, 89th Cong., Ist Sess., pt. 2 (1965) .............4.. 17

-KAYSsEN. & TURNER, ANTITRUST at) ) 17, 26

PEnRosE, THE THEORY OF THE GROWTH OF THE Firm (1959) .. 16

REPORT OF THE ATTORNEY GENERAL’S NATIONAL CoMMITTEE, To cet

Srupy rHe ANTITRUST Laws (1955) .............0c.e00e- 20

" Turner, Conglomerate Mergers and Section 7 of. the Clayton :

Act, 78 Harv. L. Rev. 1313 (1965) ................. 15, 16, 17,

26, 27, 28, 29

IN THE

| Supe Court of the nited Stats

OcToBER TERM, 1967

i’ >

No.

GENERAL Foops Corporation, Petitioner

Vv.

FEpERAL TRADE ComMISSION, Respondent

PETITION FOR A WRIT OF CERTIORARI.TO THE

UNITED. STATES COURT OF APPEALS FOR THE

| THIRD CIRCUIT

Petitioner prays that a writ of certiorari issue to

‘review a final judgment of the United States Court of

Appeals for the Third Circuit entered in this case

on December 21, 1967: ,

OPINIONS BELOW

The opinion of the Court of Appeals is amnian at

386 F.2d 936 (1967) and appears at Appendix A to

‘this petition. The final order and opinion of the Fed-

eral Trade Commission (Dkt. 8600) is reported at —

F.T.C. —, [1965-67 Transfer Binder] TRADE Rea. Rep.

_ £17,465 (FTC 1966), oni at Appendix. B to this

— hey =? igi

a Y JURISDICTION .

The judgment of the Court of Appeals was entered

-on December 21, 1967, and appears at Appendix A

- to this Petition. The jurisdiction of this ‘Court is

invoked under 28 U.S.C. § 1254(1) (1964) and Sec-

tion 11(c) of the Clayton Act, as amended, iW U.S.C.

§ 21(¢) (1964). .

QUESTIONS PRESENTED

1, Where a relevant ‘‘product submarket”’ has been

selected in a conglomerate merger case, may the eco-

nomic effect upon that submarket of close substitute

products being developed and marketed by numerous

aggressive and well-financed rivals be treated as legally

irrelevant -in determining whether the merger niay

| substantially lessen competition within the submarket ?

2. Where the record in a conglomerate merger case

Shows the existence of numerous identified potential

' competitors of great size and strength in close economic

proximity to the relevant submarket, may a reviewing .

'. court of appeals properly conclude that the merger is

illegal on the basis of an abstract conclusion (different

from that of the Federal Trade Commission below)

that the merger raised entry barriers, without any de-

termination whether, in light of.the character of the

potential competitors, their competitive influence upon

the relevant submarket was lessened or whether they

might actually be deterred from entry ?.

3. Is an increase in efficiency in the operations of

an acquired firm as a result of a conglomerate merger

an affirmative reason for invalidating the merger under

the antitrust laws?

STATUTE INVOLVED

> Section 7 of the Clayton Act, 64 Stat. 1125 (1950),

~ 15 U'S.C..§ 18 (1964), ameriding 38 Stat. 731 (1914),

provides in pertinent part as follows:

‘‘No corporation engaged in commerce y shall: <ac-

- quire, directly or indirectly, the whole or any part

‘of the stock or other share capital and no corpora-

tion subject to the jurisdiction of the Federal -.

Tradé Commission shall acquire the whole or any

part of the assets of another corporation engaged

also i in commerce, where in any line of commerce in

any ‘section of the country, the effect of such ac-

quisition may be substantially. to lessen. competi-

tion, or to tend to create a monopoly.”’ .

STATEMENT

, In this conglomerate amerger case the acquired com-

pany was. the S.0.S. Company, a closely-held corpo-

ration which since 1919 had been: engaged in the

manufacture of scouring..devices for the housewife’s

—-use'in the kitchen. (R.979a.") Its principal product

__was the “‘8.0.S.”’ soap pad, a soap-impregnated steel

wool pad ‘used primarily For cleaning pots and pans.

@ (R. 521-22a, 1480a.) 3

In the 1950’s the principal S. 0. §. shareholder ‘was

' getting along in years”’ and wanted to sell the business _

_and retire, (R. 411a.) He approached petitioner, |

General Foods Corporation (‘‘GF’’); with a view to a

sale of the 8.0.S. business. (R, 1010a.) GF, a large

1The Record in this Court includes the printed joint appendix

in the Court of Appeals. ‘‘R.’’ citations are’ to pages of this joint

appendix. GF exhibits are designated ‘‘RX’’ and FTC exhibits

‘*CX.”? . For convenience, the pagination of the Commission opin-

_jon.as it appears in the puinted Record has been retained in Ap-

pendix B to this Petition:

manufacturer of packaged food products, had never

manufactured or sold products in any way. comparable ©

or related to those of 8.0.8. (R. 52a, 1401a), and. was

not an actual or potential competitor or an actual or

potential supplier or customer of°S.0.S. (App. A, p.

20; App. B, p. 234as R. 6a, 15a, 163a, 367a, 410a,_

41la). On December 31, 1957, GF purchased all of,

' the assets of the S.0.S. Company. (R: 3a, 14a.) Some

six’ years later the Federal Trade Commission issued

- a complaint alleging that the acquisition violated Sec-

tion 7 of the Clayton Act, 15 U.S.C. §18. (R. 1a.)

On March 17, 1966, by a vote of three to two, the —

Commission held that this conglomerate merger vio-

lated Section 7 and ordered divestiture. (App. B, pp.

189a-90a.) The Commission’s majority opinion, writ- .

ten by Commissioner Mary Jones, concluded that the

merger was: ‘‘identical in all respects’? (App. B, p.

212a) to that found unlawful in Federal Trade Com-

mission V. Procter & Gamble Co., 63 F.T.C. —, [1963-65

Transfer Binder] Trape Rec. Rep. 116,673 (FTC

1963), rev’d, 358 F.2d 74 (6th Cir. 1966), rev’d, 386 —

U.S. 568 (1967) (hereinafter the ‘‘Cloroz’’ case).

The dissenting opinion was written by Commissioner °

-Elman, the author of the Commission’s opinion in

Clorox. He concluded -that the present case was °

markedly different from Clorox in several respects:

(1) In Cloroz the acquiring company was virtually

the only potential competitor of the acquired company,

‘ go that the merger had the effect of eliminating vir-

tually all potential competition. In this respect, Com-

missioner Elman pointed out, the acquisition in Clorox

‘had many of the same effects on competition as a

conventional horizontal merger.’’ (App. B, p. 252a.)

But in this case, because GF was not a potential com-

petitor of 8.0:8.,’ the sequinition had no such hori-

zontal aspects. -

(2) Clorox involved a unique product for which

there were no substitutes, and, by definition, the pos-

sible exercise of oligopoly power within the market

was not subject to any restraint from subsfitutional

_ competition. But in this case, as Commissioner Elman

_ emphasized, there existed outside of the relevant mar-

ket a number of giant companies with ‘‘vast resources

"- and manasa power’’ who were developing and sell-

ing a variety of close substitute produsts and were thus _

exerting a powerful restraining influence upon the

exercise of- oligopoly power within the relevant sub-

market. In short, in Cloroz the acquisition eliminated

virtually all external restraining influence, bit in this

~ ease strong and growing restraining influences con-

tinued in force after the acquisition. (App. B, pp.

255-59a.)

(3) One of the evils found in Clorox was the achieve-

ment’ by the acquired company of certain advertising

; cost-savings which, because additional brand advertis-

ing in that particular market was not considered

socially useful, were thought to create an anticompeti-

tive advantage. But in this case the acquired company

~ was able to achieve certain genuine and desirable

efficiencies in transportation and warehousing, as well

as in advertising and promotions, and Commissioner

Elman did not believe that the genuine efficiencies in-

volved: here stood on the same ground as the advertis-

ing cost savings saverves 3 in Clorox. (App. B, pp. 261-

62a.)

2 The tribunals below explicitly so found. (App: A, p. 20; App.

B,-p: 234a, 254a; R. 163a [Finding of the Hearing Examiner].)

‘For the foregoing reasons Commissioner Elman con- :

cluded that this case, far from being ‘simply an echo —

of Clorox”? (App. B, p. 249a), broke new ground on

issues which were of great importance to the admin-’:

‘istration of the Clayton Act and that upon a correct

legal. and economic analysis the ao saaaaates did not |

violate the statute.

GF petitioned the Court of Appeals for the Third

Circuit for review.’ The Court of Appeals agreed with

Commissioner Elman that the case was economically

different-from Clorox (App. A, pp. 19-21), but it never-

theless affirmed the decision of the Commission’s three-

member majority. Because the case involves —

_ antitrust issues, eo seeks certiorari.

I, The Issue of Substitute Products

A. The Facts.

Steel wool was one of the first abrasive substances

to be used in kitchen scouring devices.- (R. 313a, 615-

16a.) Over the years various methods of inéorporating

soap into a steel wool pad were developed in order to

supplement the abrasive action of the steel, and the -

“soap pad’’ made of steel wool has long been the lead-

ing kitchen scouring device. (R. 982a, 1480a, 1490a,

1527a.)

From 1919 to 1946 there were scant only three

manufacturers. of steel wool soap pads—the S.O.S.

Company, the Brillo Company, and the American Steel

Wool Company. (R. 56la.) Between 1946 and 1957

two new manufacturers entered the field, the Durawool

_ Corporation (R. 565a). and the Alloy Corporation

(R. 86a-87a, 597a). Each of the five companies manu-

8 Jurisdiction of the Court of pares was founded upon Section

11 of the _— Ast, 15 U.S.C. § 21 (1964).

“7

factured different types of steel wool devices,‘ afd an

additional type was introduced into the Canadian mar-

ket by .the Colgate-Palmolive Company. (R. 631a,

-1740a-41a.) Following GF’s acquisition of 8.0.S. the

Alloy Corporation dropped out of the business (for

reasons wholly unrelated to GF’s entry). (R. 86a-87a,

597a, 641a); a company called Demcorp entered for

the first time (R. 640a); the B. T. Babbitt Company -

(Bab-O) made a brief entry (R. 1523a); Colgate-

Palmolive introduced its steel wool soap pad into the

American market ;° and both Leyer Bros. and Procter

*The‘‘SOS”’ pad, which was patented in 1918 (R. 982a), is

made of interwoven steel fibers in an oval shape, impregnated with

a blue soap. (RX 1, R. 1480a.) The Brillo products are ‘‘Brillo

Green,’’ a plain steel wool pad boxed with a separate cake of

soap (RX 2, R. 1490a) and ‘‘Brillo Red,’’ a pillow-shaped pad of

noninterwoven steel fibers covered with a red soap (RX 1, R. 982a,

- 1480a). ‘‘Brillo Red’’ once contained, and may still contain, de-

tergent as well as soap. (R. 1749a-50a.) The American soap pad

‘is a roll of fine steel. wool with soap spread in the interior. (RX

2, R. 1490a.) The American scour pad is a similar roll for use with

a separate cake of sodp. (R. 14la.) The Durawool soap pad is

round, impregnated with a red soap. (RX 2, R. 1490a.) Dem-

corp’s new ‘‘ Puffy’’ pad is a ball of steel wool with a lemon-scented,

oil-based soap in a ‘‘magic’ nugget’’ in the interior. (R. 1527a.)

‘*Paddy,’’ a recent innovation of Brillo, is a small flat*steel wool

pad with a hard paper back. (RX 5, 1515a.) ‘‘S.O.ettes,’’

which were introduced after ‘‘Paddy,’’ are small, flat disposable

steel wool pads with soft sponge bagks. (RX 5, R. 1515a.)

5 At the close of the hearing below, Colgate-Palmolive was selling

its pad in Canada but had not yet introduced the pad in the

United States. Following the decision of the Court of Appeals

below, GF petitioned the Court of Appeals for leave to adduce new

evidence before the Commission to‘show a number of highly rele-

vant new developments in the market (as established by a sup-

porting affidavit whose factual assertions were in effect. conceded),

including the fact that in 1966 Colgate-Palmolive had introduced

its steel wool soap pad into the United States. The motion (which

was denied) and the supporting affidavit are included in the Ree-

ord and appear at Appendix C to this Petition.

& Gamble have been working on the development of

__ new steel wool pads (R.(58(a-81a).

Although steel wool is an effective abrasive, it also

has incurable inherent defects, including its rusting

and splintering, its harshness on the hands, and its

relatively ‘short useful life: (R. 448a, 457a, 520-21a,

523a, 5338a, 554a, 590a, 1571la.) Indeed, manufacturers

of steel wool soap pads are so well aware of these

deficiencies that none uses the words ‘‘steel wool’’ on

the package for his product. (R. 590a, 1145a-46a,

1365a-68a, 1457a, 1467a; see R. 316a.) Perceiving an

opportunity to capitalize on these deficiencies, a num-

ber of other manufacturers in recent years have de-

veloped new kinds of non-steel kitchen scouring devices

employing such abrasive substances as silica, bronze

and copper webbing, nylon webbings with bonded abra-

sives, and various combinations of these and other ma-

terials. (R. 68a-70a.) Some of these pads incorporate

soap and some do not. Allof them are advertised and

sold from grocery store shelves—usually side by side

with the traditional steel wool pad—to the housewife

for use in her kitchen scouring chores. —(R. 318a, 477a-

- 18a, 524a, 626a, 659a, 784a, 785-86a, 795a, 893a, 1560a-

75a.). Many of these modern non-steel products, sev-

eral of which have been developed since GF'’s acquisi-

tion of S.0.8S., are expressly advertised as being

superior to steel wool (R. 120a-21a, 1952a, 1954a), and

their manufacturers have deliberately ,priced their .

products so as to be competitive with the prices of the

traditional steel wool pads, taking into account the

useful lives of the products.° (R.171a.) °

® A leading example is the so-called ‘‘Rescue’’ soap pad manu-

factured by Minnesota Mining & Manufacturing Company. It

is a long-life pad made of nylon webbing with a highly effective ab-

rasive bonded to the webbing (under a patent obtained in 1960),

The manufacturers of these modern non-steel sub-

stitutes include the . Pont. Company (R. 1509a-10a),

General Mi!ls Corporation @R. 1490a), General Cable

Corporation (R. 1480a, 1499a, 1690a), Colgate-Palm- -

olive Company (R. 5314-32a, 580a, 914a), and Minne-

sota Mining & Manufacturing Company (R. '895a,

1469a-79a), and additional major companies such as

the Procter & Gamble Company, Lever Bros., American

Home Products, and Union Carbide Corporation have

been developing similar substitute products (R. 532a,

580a, 618a, 887a). The new substitute products already

on the market have been steadily drawing business

away from the traditional pad manufacturers as house-

wives have switched from the old products to the new.

(R. 157a, 516-18a, 534a, 786a-87a, 817a, 1565a.) The

record establishes that, since the close of the hearing

below, the growth of steel wool soap pads has been

stopped entirely and that in 1966, for the first time in

history, sales of such pads started into an apparently

steady decline.’

_ B. The Opinioris Below

The Commission below. took the position that, in the

context of a broad market encompassing ‘many com-

: petitive products, the Commission and the courts have

and it contains soap. (R. 891a.) The manufacturer testified that

he deliberafely set his box price at exactly the price of a box of

steel wool soap pads having a comparable useful life. (R. 171a,

893a, 895a; 916a.) ‘‘Rescue’’ is explicitly advertised as being

superior to steel wool soap pads (R. 120a-21a), and it appears on —

, the shelves of grocery stores between the Brillo pad and the S.O.S.

pad (R. 787a, 892a). Although sold only in test markets at the

time of the Hearing in 1964, the Record shows that ‘‘Rescue’’ is

now in national distribution. (Supra n.5; App. C, p. 4.)

7 Sales are now falling at the rate of 4-7% per year. See GF’s

motion in the Court of Appeals, supra n. 5; App. C, p. 4.

_ broad discretien to identify as a ‘‘relevant submarket”’

- for the purposes of Section 7 any one of a number of

products groupings within the outer boundaries of the

market asa whole. (App. B, p. 198a.) . Noting a num-

-ber of Section 7 cases in which products which are ‘‘in

-direct competition’? with one another had been sepa-

_ rated into distinct submarkets (App. B, pp. 194-95a),

the Commission chose as the ‘relevant submarket?” in

this case a product category which it characterized as

‘‘household steel wool’’—4.e., scouring devices made of

steel wool, whether or not soap lia lianas (App.

B, p. 206.)

GF urged below that, asspming the propriety of the ~

selection, it was ineyinbent on the Commission under

the teaching of Clorox to evaluate the role of all com-..

"petitive influences—including the potential competition

of close substitute products—which might serve as a

restraint upon the exercise of oligopoly power within

the ‘‘relevant submarket.’’ The three-member ma-

jority of the Commission rejected GF’s contention. :

They flatly held that the competitive influence of the ©

substitute products, outside the steel wool submarket

was legally irrelevant and entitled to no consideration

in the evaluation of the consequences of the acquisition :

. & :

‘Respondent argues that ‘whatever the technical

definition of the product market no rational evalu-

ation of present or future competitive conditions

can be made without taking non-steel scouring de-

vices into account.’ .:. It is clear, however,

under Section 7 of the Clayton Act, that once the

_. appropriate -product market for determining the

effect of the merger has been defined, the only con- |

sideration which is relevant is whether or not there

is a reasonable probability that en in that

market may be substantially lessened. ... Conse-

quently, we reject. respondent’s contention that,

whatever the definition of the market may be,.we

must nevertheless still. consider the broader clean-

‘ing device market in our assessment of the com-

petitive impact of ne eg? $s merger.”’ (Em-

phasis. added, ) (App. B » P 198a, n. 5.) |

Commissioner Elman eau disagreed. In dissent

che pointed:out that no realistic appraisal of the struc-

ture of the household steel wool submarket, or .of the

likely future behavior of firms within or contemplating.

| entry into that submarket, could be made without tak-

ing into account the emerging competition of substitute .

~ non-steel scouring devices. (App. B, pp. 255-60.) He ‘

concluded that, given the existence of numerous giant

and aggressive manufacturers of new substitute prod- -

- ucts (as well as other factors), the replacement of the

S:0.8. Company by GF in -the steel wool submarket °

_ had not increased any opportunity for the exercise of

oligopoly power within that submarket and had not .

substantially lessened competition in violation of Sec-

tion 7. (App. B, pp. 260a-61a.)

Despite the sharp division among the members of »

the Commission on this important issue, the opinion of

the Court of. Appeals is silent on the point. The court

duly noted GF’s argument as to the role. of the substi-

tute products and their legal significance ® wa never

discussed it at all.

8 “Appellant further argues that « even if the market definition

. was technically tenable, the Commission nevertheless erred in as-.

sessing the impact of the merger by treating non-steel wood scour-

_ ing devices as —_— they did not exist. ”? (App. A, p. 7.)

IL The Issue of Entry Barriers

A. The Facis

As noted above, the record shows that siaeniie

some time before the acquisition and continuing

throughout the post-acquisition period there have been .

a number of potential entrants into the steel wool soap

pad business, including the Procter & Gamble Com-

pany, the du Pont Company, General Mills Corpora-

tion, General ‘Cable Corporation, Minnesota Mining &

Manufacturing Company, Lever Bros., American Home

_ Products Company, and Union Carbide Corporation.

‘{R. 531a-32a, 580a,.618a, 887a, 895a, 914a, 1469a-79a, .

1480a, 1490a, 1499a, 1509a-10a, 1690a:). :

Apart from these potential entrants, following GF'’s

entry into:the steel wool business by acquisition, three

additional companies have actually entered the market

with new steel -wool soap pads. They are Demcorp

- (R. 640a), the B. T. Babbitt Company (Bab-O) (R.

oo, and a

B. The Opinions Below 7 | | 5

As further discussed below, the three-member ma-

jority of the Commission concluded that the 8.0.8. ~

business, because of GF’s ownership, was in a position

to take advantage of certain operating efficiencies

which were not available to the S. O.S. Company prior

to the acquisitign. (App. B, pp. 234a-38a.) The ma-

jority also inferred, admittedly without evidence .and |

: ®The Commission found that Bene was a new entry. (App.

B, p. 242a.) It apparently overlooked the evidence as to Bab-O.

Since Colgate-Palmolive did not enter the market until after the

‘Commission’s decision, the Commission treated that firm as only a

_* **potential competitor’’ (App. B, p. 219a), but it has now become

an actual competitor (supra n. 5; App. C, pp. 4-5).

. without reference to ‘the character of the identified po-

_€&

tential, competitors, that GF’s presence in the steel wool

soap pad business had necessarily created a ‘* psycho-

logical” barrier tending to deter potential competitors —

from actually entering the Market. (App. B, p. 241a.)

On this basis the Commission concluded that GF’s

' 1957 entry had: raised barriers in the steel wool mar-

ket to ‘‘virtually insurmountable heights.’’ (App. B, p.

.219a.) This conclusion was reached in the face of

some-actual new entry into the market following GF’s

- entry, ‘and without considering whether any of the

identified © potential competitors would actually be

deterred by GF’s presence in the steel wool busiziess.

Again Commissioner Elman disagreed with the ma-

jority. He took the view that, where in fact there are.

a number of identified major companies standing at —

the edge of the market in the role of potential com-

petitors, a determination as to whether a merger has

raised entry barriers sufficiently to violate the statute —

requires an evaluation of the character and resources

% of the identified potential competitors to determine |

whether they would in fact be deterred by the merger

from entering the market. Accordingly, Commissioner

Elman examined the identity of the. potential com-

_ petitors and concluded that there had been no raising

of entry barriers so as to remove those companies as

a restraining influence within the steel wool submarket :

‘On no realistic appraisal of the market ‘would °

it appear that du Pont, .Colgate, and these .other

giants are likely to be discouraged from taking on

8.0.8. as a competitor because it has ‘been ac-

quired by General Foods. -In relation to these

firms, the substitution of General. Foods for 8.0.5.

has surely raised no barriers to entry or elimi-

_ nated the potential competition that now ‘exists.’’

(App. B, p. 259a.) (Emphasis added.)

On appeal GF, pointing to the-identity of the leading

' potential competitors,. vigorously chaMenged the ma-

jority’s finding that the acquisition had raised entry

barriers to ‘virtually insurmountable heights.’’ (See

Brief for Petitioner in the Court of Appeals, pp. 22-23,

. 33-35.) Faced with this challenge and a divergence of

view in the Commission, the Court of Appeals took a

middle ground. It did- ‘not endorse the majority’s

_ “virtually insurmountable heights’’ conclusion, but it

did hold that there was substantial evidence that entry

barriers had been raised to some extent. (App. A, pp.

18-19, 21.) The court did not consider, as Commis-

sioner Elman did, whether the increase in entry bar-

riers was sufficient to reduce the competitive influence

of the large identified potential competitors who were

actually standing at the edge of the market, or whether

the increase was sufficient to deter saeare’ entry by any

of these specific firms. .

III. The Issue of Operating Efficiencies

A. TheFacts | | :

As a ground for invalidating the merger, counsel

_ supporting the Complaint repeatedly urged upon the

Commission and the court below that the S.0.8. busi-

ness, as a result of its acquisition by GF,-did or could

achieve cost savings in transportation and warehousing

as well as in advertising and promotion. Particularly

stressed, for example, were the ‘‘important advan-

- tages’’ accruing to 8.0.8. and its customers from GF'’s ~

“‘stream-lined”’ and ‘‘market-centered distribution sys-

tem,’’ including “‘warehousing by the most efficient

time and labor-saving devices,’’ ‘‘distribution by the

most advantageous rate of transportation,’’ coordina-

tion of invoicing, credit arrangements, and other phases __

- of purchase order processing, and other ‘‘obvious econ-

6b O°:

omies of seale.”” (See, €.9., Brief for the Commission

in the Court of Appeals, pp. 12-13, 20-21, 45, 48, D0-97,

citing R. 1097a-98a, 1392a.). Taking advantage. of

these ‘‘handling and transportation economies,’’ Com-

mission counsel said, a retailer could obtain 8.0.8.

pads at a lower unit price (id. at pp. 13, 21, citing

R. 1059a, 1304a) and: was “‘enabled to run his business

more economically by holding his investment in inven-

tory to a minimum” (id. at pp. 18, 21, citing R. 375a-

Ta, 1053a-54a). The Commission and the Court of |

Appeals accepted these propositions as fact and found

that all these cost Savings resulted from the merger.

(App. A, pp. 6, 18-19; App. B, pp: 210a-11a, 217a,

222a, 237a, 238a.) ee 3 at

B. The Opinions Below |

The majority of the Commission relied expressly

upon the alleged operating efficiencies which were or

could be achieved by the 8.0.8. business as a result of

the acquisition as a basis for holding the acquisition

unlawful under Section 7. (App. B, pp. 210a-11a, 217a,

222a.) - Commissioner Elmar dissented. He said:

“The Commission also includes, as a ground for

holding this merger unlawful, purported cost sav--

ings accruing to 8.0.8. through - efficiencies in’

warehousing and distribution. . .. Economic effici-

encies should not be a ground for the invalidation

of a merger. Indeed, the. promotion of competi-.

tion has for one of its goals the achievement of

edter efficiency. ‘See Turner, Conglomerate °

ergers.and Section 7 of the Clayton Act, 78 Harv.

L, REV. 1313, 1323-28,” (App. B, p. 261a). )

. The Court of Appeals disagreed with Commissioner _

Elman and sustained the Commission majority. (App.

A, pp. 6, 18-19.) : ":

REASONS FOR GRANTING THE WRIT.

None of the three questions raised in this case was

‘raised by the facts in Clorox, but each is a question

which is likely to arise in many conglomerate situations

in the future. ‘Thus Clorox did not involve the eco-

nomic and legal significance of substitutional competi-

tion as.a factor existing outside of, but exerting a

competitive influence within, the relevant. product

. market. But most products are subject to some de-

gree of substitutional competition, and the question of

the significance of such competition may often be

crucial in conglomerate cases. .Similarly, although

in Clorox there were no identified potential competitors °

other than the acquiring company, it is to be expected

that in many conglomerate cases, as here, there will

be other identifiable potential competitors exerting an

influence upon the market after the acquisition, and i in

“such cases the question of the significance of the char- ..

acter of those competitors will arise: ‘Finally, while

in Clorox: no increases in genuine economic efficiency

were involved, genuine increases in efficiency of the

kind involved in- this case will in all probability be |

encountered in many conglomerate cases’ In these

respects the resolution of. the questions presented in

' - this case—the first true conglomerate case to reach

this Court’—is likely to have a broad — in the

merger field in the future.

- Cf, BoGK, MERGERS AND MArKers 159 (6th mi 1968).

11 See Turner, Conglomerate Mergers and Section 7 of the Clay-

ton Act, 78 Harv. L. Rev. 1313, 1315 (1965) ; Hale & Hale, More

on Mergers, 5 J. Law & Econ. 119, 125- (1962); Penrose, THE

THEORY OF THE GROWTH OF THE Fire 129-30 (1959).

12 Ag emphasized by . Commissioner Elman below, the Clorox ac- -

quisition was analogous to a horizontal merger because Procter #as

a potential competitor of Clorox. See p. 4, supra. Here there

was no such prior economic relationship | between the, acquiring

and the acquired companies. Lo

9’

The importance of framing intelligent rules with re-

spect to conglomerate mergers (which have become the

principal vehicle for the sale of capital assets in the

United States economy. today “) cannot bé overempha-.

sized: Unduly severe interdiction of conglomerate

mergers can and, will stifle the opportunities and in-

centives of potential new innovative enterprises which

are considering formation and entry into particular

markets. Undiscriminating merger rules may thus

actually raise entry barriers so as to protect and pre-

_ Serve existing oligopoly power “ and, in addition, lead

to an increase in general concentration.” It is therefore

important for this Court in this case to insure that the

rules which are to.govern conglomerate mergers for the

immediate future are designed to enhance rather than

to inhibit competition. ~ a

18 See Hearings Before the Subcommittee on Antitrust and

Monopoly of the Senate Committce on the Judiciary, pursuant to

S. Res. 40, 89th Cong., 1st Sess., pt. 2, at 516 (1965).

4 See, e.g., Turner, Conglomerate Mergers and Section 7 of the

Clayton Act, 78 Harv. L.:Rev. 1313, 1317-18 (1965) (‘‘There

are thus strong reasons for not making the prohibitions of section

7 so extensive as to damage seriously the market for capital assets,

or so broad as to interfere materially with mergers that are pro-

competitive in their facilitation of entry and expansion that would

otherwise be subject to serious- handicaps.’’ p. 1318.); KaysEn &

TURNER, ANTITRUST PoLicy 127-29 (1959). :

“18 See Bain, INDUSTRIAL ORGANIZATION’ 204, 206-07 (1959);

_ Turner, supra n. 14, 78 Harv. L. Rev. at 1326-27.

I. On THE ImPoRTANT LEGAL AND ECONOMIC QUESTION

OF THE RELEVANCE OF POTENTIAL COMPETITION

FroM CLOSE SUBSTITUTE PRopUCTS, THE RULE

ANNOUNCED BELOW ConFLIcTs WITH Prior HoLp-

INGS OF THIs CoURT AND WITH ACCEPTED ECONOMIC

DoctRINE

In prior merger cases this’ Court has repeatedly

recognized a fundamental economic and legal principle ~

which is applicable here. In United States v. El Paso

Gas Co., 376 U.S. 651 (1964), and in United States v.

Penn-Olin Co., 378 U.S. 158 (1964)—and of‘course in

‘the Clorox case as well—this Court recognized that

with respect to a particular market there may be ex-

ternal forces at work which, though they exist outside

the market, may have a decisively important procom- |

petitive influence upon the behavior of firms. within

the market. In each of the three cited cases the ex-

ternal force involved was ‘‘potential competition’’ in

the form of one or more extra-market firms whose

potential entry tended to restrain the exercise of

_ Oligopoly power. within the-market. In each case the

- Court considered it decisively important to determine

whether the challenged transaction had either elimi-

nated or reduced the influence of potential competition |

to such a degree that competition within the market

had been substantially smnenes within tlie ne of

Section 7.

This case involves a -peesinsly comparable eltre-

market force—namely, the emerging competition of ‘

substitute products being developed and sold by numer-

ous aggressive rivals with well-established reputations

for marketing judgment and success. In addition to

acting as a restraining influence upon the market be-

havior of steel-wool pad manufacturers, they are actu-

ally drawing business away from that submarket at a

rate which foreshadows the demise of‘the submarket

itself..° The tribunals below have flatly held that these

economic realities are legally irrelevant for Section 7 °

purposes. ._In so doing they have adopted a principle

which squarely conflicts with the cited decisions of this

Court.

Economically, of course, there is no difference be-

tween the restraining influence of ‘potential entry into

a given market and the influence of emerging substitu-

_ tional competition. Both these forms of potential

competition create, for firms within the market, the

threat that their customers will leave them if they try

to take advantage of imperfectly competitive condi-

tions.” The threat of a shift of customers to a substi-

tute product will act as a restraining influence upon |

the exercise of oligopoly power within a submarket im

exactly the same way as the threat of a shift of custo-

mers to a new entrant. ° Indeed, if anything, substitute

products constitute a more immediate and effective’

restraint because they are already in existence.” The

economic equivalence of these two forms. of potential

competition has long been recognized by authoritative

commentators from both the economic and legal disci-

‘plines. See sites oF EcoNoMIC ADVISORS ANNUAL

16 The affidavit i in support of GF’s motion in the Court of Ap-

_ peals (supra n. 5; App. C, p. 4) establishes that sales of steel wool”

scouring devices are now falling at the rate of 4-7% per year. See |

also R. 157a, 534a, 1565a. ’

17 As noted by Professor Bain, the availability and dueneus of

substitutes—i.e., the degree of «product differentiation’’—is as

much a dimension of markét structure’ as the ‘‘condition of entry.’’

Entry and substitutibility are two of ‘‘the most’ important condi-

tioning influences on market performance. ”” Balin, INDUSTRIAL OR-

GANIZATION 211-14, 264 (1959).

18 Cf, BAIN, BARRIERS TO New ComPETITION 10-11 (1956).

REPoRT, in PRESIDENT’s ECONOMIC REporT 132 (1965)”;

REPORT OF THE ATTORNEY GENERAL’S NATIONAL CoM-.

MITTEE TO StuDY THE ANTITRUST LAws 322 (1955). —

And in United States v. Continental Can Co., 378 U.S.

441 (1964), this Court itself recognized the legal’ and

economic significance 6f emerging substitutional ‘‘inter-’

industry competition’’ for Section 7 purposes.”

“*

19‘*Tn many industries, a .high concentration of output among

a small number of firms is not inconsistert with high active com-

petition, especially where there is also a fr of small firms, where

entry of new firms is easy, or where there exists active competition

from substitute products.’’ (Emphasis added.)

20 The Report states as follows:

‘‘In evaluating the market forces which together would char-

acterize effective competition, the rivalry of close substitutes

which may, for other purposes, be classified as belonging in

other industries has, in varying degree, the same kind of effect

as that of competing producers of the same or differentiated

products or services classified within the same industry. Tech-

nical advanee has often made the rivalry of close substitutes

quite effective:’’

In United States v. Penn-Olin Co., 378 U.S. 158, 176 (1964), this

Court quoted’ with approval. the Report’s exposition of restraints

on oligopoly power, including its reference to existing rivals as well

as potential entrants:

‘The basic characteristic of fective competition in the eco-

. nomie sense is that no one seller, and no group of sellers act-

. ing in concert, has the power to choose its level of profits by

giving less and charging more. - Where there is workable com-

petition, rival sellers, whether existing competitors or new or

potential entrants into the field, would keep this power in

check by offering or threatening to offer effective inducements

..”? (Emphasis added.)

21 The Court pointed out that the ‘‘possibility’’ of ‘‘customer |

diversion’’ to a substitute product ‘‘over the long run acts as a

deterrent against attempts by the dominant members of either

industry to reap the possible benefits of their position by raising

prices above the-competitive level or engaging in other comparable

practices.’ 378 U.S. at 465-66. ;

Disregarding this Court’s clear effort in Clorox and

earlier cases to make legal analysis conform to economic

analysis, the tribunals below have declared that the

highly significant economic fact of emerging substitu-

tional competition is legally irrelevant for Section 7

purposes. They have held in effect that, no: matter

how clear the impact of such substitutional competition,

the competitive consequences of a conglomerate merger

are to be determined by treating such competition as

', though it did not exist.2? This novel legal fiction is

completely at odds with the realistic economic princi-

ples followed by this Court.in Clorox and earlier

merger cases. As indicated by Commissioner Elman

in his strong dissent in this.case, the rule adopted below

constitutes ‘‘a long step’’ in the wrong direction in an”

*? The findings upon which the Commission based its selection of

the relevant product submarket—for instance, that steel wool manu-

facturers did not take the nascent substitutional competition into

account in their pricing decisions at the time of the merger—are

in no way inconsistent with the facts bearing on the future re-

- straining influence of potential competition from substitute product .

_ Manufacturers. Indeed, Commissioner Elman agreed with the

majority’s choice of the steel wool pad submarket. . It was the size

and experience of the companies engaged in the substitutional com-

petition; the degree of their investment and their announced ex-

pectations ; the vigor of the innovation and the likelihood of long-

run consumer response to it-—all established in the Record—which

convinced Aommissioner Elman that adequate and increasing re-

straints upon the exercise of oligopoly power in the steel wool

submarket remained and that the merger had not lessened com-

petition. These were the precise criteria for the evaluation of pros-

peetive poteritial competition announced by this Court in the cases

cited above. E.g., FTC v. Procter & Gamble Co., 386 U.S. 568,

580 (1967) ; United States v. Continental Can Corp., 378 U.S. 441,

452, 455 (1964); United States v. Penn-Olin Co., 378 U.S. 158,

174 (1964) ; United States v. El Paso Gas Co., 376 U.S.-651, 660

(1960). As noted, the majority of the Commission and the Third

Circuit viewed these economic facts as legally irrelevant and re-

fused to consider them.

area where it is particularly important that the legal

rules be evolved with caution. In view of the fact that

- conglomerate cases are necessarily going to turn pri-

marily upon the question of the role of potential com-

petition, itis .of great. amipertancé that this: _— re-

solve the qreee in this case.”

II. THe RELIANCE oF THE s Courr BeLow on A Novel

Asstract RuLE—THAT Entry Barriers May Be

ANALYZED WITHOUT REGARD TO THE CHARACTER OF

IDENTIFIED POTENTIAL ENTRANTS—Is INCONSISTENT

WitTH ACCEPTED. ECONOMIC PRINCIPLES AND WITH

THE DEcISsIONS OF THIS Court

As previously noted, the Commission maj jority’s find-

ing that barriers to entry. into the steel wool submarket

had been raised to ‘‘virtually insurmountable heights’’

was challenged as untenable, both by the dissenting

opinion and by GF on appeal, in view of the size and

strength of the identified potential competitors. The

Third Circuit did not advert to this challenge. Instead

_ it held in effect that the applicable test was not whether

entry barriers had been raised too high (i.e., to the

Commission majority’s ‘‘virtually’ insurmountable

heights’’), but whether they had been raised at all.

The character of the potential competitors, and whether

28 Cf. Bock, Mercers & Markets 159 (6th ed. 1968). ‘‘The

resolution of this issue concerning the relevance of substitute prod-

ucts and active rivals is, therefore, critical to the future status. of

. mergers of the General Foods-S.0.8. type.’’

2 Since the Commission majority refused to consider the in-

fluence of potential competition in the form of substitute products,

its conclusion that oligopoly power had been substantially in-

creased and competition thus substantially lessened in the steel

wool submarket would be legally insufficient even if its finding as

to entry barriers were valid:

an increase in‘entry barriers had substantially affected

their restraining influence, went unmentioned.’

The test thus applied by the Third Circuit not only

departs from the theory adopted’ by the Commission

below* but, more importantly, is in conflict with the —

basic criteria for the appraisal of potential competition

, announced by this Court in United States v. El Paso

Gas Co., 376 U.S. 651 (1960), United States v. Penn-

Olin Co., 378 U.S. 158 (1964), and Cloroz, and with

authoritative economic teaching on the use of entry

barrier analysis in merger cases. a

The opinions of this Court in Penn-Olin, El Paso,

' and Clorox make clear that tribunals must evaluate

_ the strength and character of potential competitors in

estimating their impact upon market behavior. For

example, in El Paso the Court held that the effect of

a potential competitor on: competition in a market

“is determined_by the nature or extent of that

market and by the nearness of the absorbed com-

pany to it, that company’s eagerness to enter that

market, its resourcefulness, and so on.”? 376 U.S.

at 660. (Emphasis added.)

In Penn-Olin the Court stated:

**Potential competition, insofar as the threat sur-

vives ... may compensate in part for the imper-

75 It is a settled rule in this Court, as most recently reiterated by -

Mr. Justice Harlan concurring in Consolidated Foods Corp. v.

FTC, 380 U.S. 592, 601 (1965), that a court of appeals may not

sustain a decision of-an administrative agency on a theory different

from that articulated by the agency. See Burlington Truck Lines

Inc. v. United States, 371 U.S. 156, 168-69 (1962) ; accord, NLRB

v. Metropolitan Life Ins. Co., 380 U.S. 488, 443-444 (1965) ;

SEC v. Chenery Corp., 332-U.S. 194, 196 (1947).

fection characteristic of ‘actual competition in the

‘great majority of competitive markets .. .’’

‘... The existence of an aggressive, well equipped

and well financed corporation engaged in the same

_or related lines of commerce waiting anxiously to

enter an oligopolistic market would be a substan-

tial incentive to competition which cannot be

underestimated.’’ 378 U.S. at 174. (Emphasis

added.) | :

~ And in Clorox the Court noted :

‘*[ T]he barriers to entry by a firm of Procter’s

size and with its advantages were not. significant.’’ °

But the Third Cireuit here made no effort to ‘oeliniin |

the strength of the identified ‘potential entrants in de-

termining whether competition within the steel wool .

submarket had been affected by this conglomerate.

merger.” Quite the contrary, the court looked -to

whether entry barriers had been raised in the abstract,

and assumed that oligopoly power within the market

had been increased ‘‘to the extent’’ that the barriers

had ‘been raised. (App. A, p. 21) The court failed

to ask the crucial question which makes entry barrier ‘_

analysis relevant.to an estimation of niarket power—

whether, in the words of Penn-Olm, ‘‘the threat [of

26 In Clorox, Procter was ‘‘virtually the only’’ potential entrant.

See 63 F.T.C. at —, [1963-65 .Transfer Binder] TrApe Ree. Rep.

{ 16,673 at 21,584 (FTC 1963). Its potential competition ‘was, of

course, eliminated by the merger.

27 There were ample facts in the Record to permit such an evalua- -

tion. R. 53la-32a, 580a-8la, 618a, 631a, 887a, 895a, 914a, 1469a-

79a; RX 1; R. 1480; RX 2, R. 1490a; RX 3, R. 1499a; RX 4,

R. 1509a-10a; R. 1632a, 1652a, 1664-65a; 1682-83, 1690a, —

1740a-41a, 1962a-94a, 1993-94a.

wotentiial competition] survives”’ the raising of entry

: barriers.

Obviously an increase in entry ' heetions does not per-

mit an oligopolist to take advantage of his market

power unless it significantly deters potential entrants

from entering. A mere comparison of the height of

entry barriers after a conglomerate merger with their

height before tells nothing. In simplistic terms, raising

a barrier by 100%, which would certainly be a ‘‘sub-

stantial’’ increase; will not protect an oligopolist from

potential rivals. who can easily surmount, the new

Weight. Conversely, a small increase which might be

. regarded by the Third Circuit as ‘insubstantial’? could

free oligopoly power if it resulted: in barring the im-

portant potential entrants. Economic texts explicitly

the character of the potential entrants,” and the in- |

structions of this Court in Penn-Olin, El Paso, and

Cloroz reflect this accepted understanding, The Third

Circuit’s mistaken view of entry’ barriers as a self-

sufficient index.of competitive conditions. is thus in

conflict with both law and economics.

28 See, e.g., BAIN, BARRIERS TO New ComPETITION 7-10 (1956) :

‘‘The condition of entry is measured by the long-run gap

between minimal cost and price which the most favored firms

can reach without attracting entry—but whose entry and how

much? ... It is not realistic to assume that all potential

entrants a are alike either in their capacity to enter or with

respect to the gap which will just induce them to enter... . If

the condition of entry refers to the condition for the induce-

ment to. entry of successive -finite numbers of firms it should

also logically refer to the size of each entry. .. . [TJhe condi-

tion of entry to an ‘industry . . Tefers to advantages which

established. firms in an industry ‘have over potential entrant

firms. ...’’

And it is no small error. Applied as a genéral rule

it could have a widespread economic impact. It could

arbitrarily ‘prohibit. conglomerate mergers which do

not in fact change market structure, and validate °

mergers which do in fact eliminate restraint on oligop-

oly power. Either result would be anticompetitive.

III. The Lower TriIBUNAtS’ RELIANCE Upon ACHIEVE- .

MENT OF OPERATING EFFICIENCIES AS AN AFFIRMA-

TIVE GROUND FOR PROHIBITING A CONGLOMERATE

Mercer Is A RApICAL DEPARTURE FROM THE At

CEPTED GOALS OF ANTITRUST POLICY.

‘ In concluding that this conglomerate merger had an

anticompetitive effect, the Third Circuit and the Com-

GF could achieve cost savings in transporting and ware-

housing soap pads (‘‘distributional efficiencies’’) and °

in advertising and promoting them. Their finding -

that GF could operate more eomenpaany was the crux

of their decision.

Reliance upon efficiency as an affirmative ground for -

invalidating a merger is not a minor variation on the

basic theme of antitrust policy. As. Commissioner |

Elman pointed out in his dissent below, it represents a

major departure from accepted antitrust policy, and

it flatly contradicts the teaching of commentators ac-

cepted as authoritative by this Court.” It is a novel

29 See Turner, Conglomerate Mergers and Section 7 of the

Clayton Act, 78 Harv. L. Rev. 1313, 1339 (1965) (‘‘ Economies

-'. of seale in production, distribution, research, and the like should

in no event be a factor militating against the lawfulness of con-

glomerate (or other) mergers’}); Kaysen & TurNeR, ANTITRUST

Pouiey 129 (1959) ; Bain, Banarers 10 New Comperrrion 207, 212

(1956) (‘‘[A]s to the sorts of entry barriers which may be legiti-.

mately attacked, it was observed that those resting on real economies

—

rejection of the carefully reasoned premises of the

Commission’s own landmark opinion in Clorox,” and

of the position taken by the Solicitor General only last

year in.his Brief to this Court in Cloroa: |

‘“We would agree with the court of appeals that,

in general, advantages afforded by a merger which

reflect simply greater efficiency ought not: be a

basis for holding the merger illegal ; efficiency is,

after all, a prime goal of antitrust.’’ Brief for the

Federal Trade Commission at 47, FTC v. Procter

& Gamble Co., 386 U.S. 568° (1967). . :

Mr. Turner has succinctly summarized the “‘over-

powering’’ reasors for rejecting the rule adopted be-

low: —

ee ‘First, there is the enormous social interest in

_ progress and efficiency, which has represented one

of the primary bases for the policy of promoting

competition as it has in fact evolved. Second, fo

forbid mergers that would or might produce sub- -

‘stantial efficiencies would narrow substantially the

category of acceptable mergers, thereby drastically

of large scale plant and firm (whatever their importance) should .

not and probably could -not be removed, because of the adverse.

- effects on efficiency: of such removal.’’ (p. 207.) ‘‘That economies

of scale in production and distribution do ‘not loom large as the

basis of barriers to entry is fortunate for the policy-maker, because

there is relatively little that can or should be done about them.’’

(p. 212.)) - }

8 See FTC v. Procter & Gamble Co., 63 F.T.C. —, —, [1963-65

Transfer Binder] Trapp Rea. Rep. | 16,673 at 21,580, 21,585-86

(FTC 1963). Economies of production or physical distribution

were not involved in Clorox. Id. at 21,585. See also Elman, Clorox

and Conglomerate Mergers, 36 ANTITRUST L.J. 23, 25 (1968) (‘‘The

Commission emphasized the character of the particular cost ad-

vantages, vis-a-vis potential. entrants, that the merger conferred ’

on Clorox, finding them not to be the kind of ‘efficiencies’? that

antitrust policy is intended to encourage. ’’) :

td x . ; 28 | 7 : “

weakening the market for capital assets and seri-

ously depreciating the price that entrepreneurs

could get for their businesses when they wish to

dignidate. Such a policy would seriously interfere

with maximum exploitation of productive re-

sources; and not only might it have adverse long-

~ run effects on.entry. and growth of small business,

_ but it. would also be clearly against the interests

of small businesses already in being. It can be

at least doubted that if Congress had focused-on —

the issue, it would have wished:such a result.

Third, the protection that this policy would afford

to small business, except in the short run, is at

best highly conjectural and probably —

There is. no doubt that in most instances, certain

when efficiencies from integration are S taatiat

the same adverse consequences to small business

will sooner or later be visited. through interna!

expansion by large firms. The last two points are

. interrelated: it would hardly be a favor to small °

-businesses threatened -with extinction by expand-

ing large rivals: to deprive them of the oppor-

tunity. to-sell to large outside firms at the better 2

eause of the prospects of achieving efficiencies of

integration.’® “Conglomerate Mergers and Section

ae <i Clayton Aet, 18 Harv. L. Rev. 1313, 1326 -

(1965 nau

The. rule adopted idee~tal the achievement of

operating efficiencies is, per se, 8 ground for invali-

dating a conglomerate merger “— should not be al-

31 Petitioner does not here contend that the fact that a merger

_ results in efficiencies for the acquired firm may be asserted as a

defense for an otherwise anticompetitive merger.. Petitioner’s

argument is that it was improper for the tribunals below to assert

the fact of such efficiencies as an affirmative basis for holding the

' merger illegal. In addition, if this Petition is granted petitioner

. intends to argue the subsidiary question of the appropriateness of

divestiture as a remedy, . as Opposed to an injunctive restriction

on ‘cost-saving practices.

° . ; & +3

lowed to snd without review on the merits by this

_ Court..” | Ae ce 3

In addition to their novel reliance upon distributional econ-

- omies, the Commission majority and the Third ‘Circuit: assumed

that this Court’s treatment of the advertising cost savings in Cloroz.

applied to the advertising savings found here. The Government in

Clorox took the position that the generally accepted principles with

_ respect to the antitrust treatment of cost savings did not apply to

heavy brand advertising of physically and chemically identi¢éal

products for which there were no substitutes: ‘The only result of

such cost savings, it was argued, would be more advertising which

could have no informative function, and this advantage could thus

be deemed anticompetitive. This Court agreed. But Clorox does

not establish a general rule ‘‘that brand advertising is inherently

or necessarily: wasteful,’’ even ‘‘where competitive brands are”

physically identical.’ See Elman, Cleror and Conglomerate |

Mergers, 36-AnTITRUsT L.J. 23, 26 (1968). And in this case steel

wool products are different from one another—to the point of

separate patentability—and different from their non-steel sub-

stitutes. The carefully articulated premises of the Clorox opinion

do ‘not obtain here, and the Commission’s reliance upon adver-

_tising and promotional cost savings in this case raises new and

- important questions. See Bock, MERGERS AND MarKets 150-51

(6th ed: 1968).' Commentators have noted sound policy reasons

‘against such an undiscriminating condemnation of advertising cost

savings. See, e.g., Turner, Conglomerate Mergers and Section 7 of

the, Clayton Act, 78 Harv. L. Rev. 1313, 1336-37 (1965). .

In. lieu of attempting to supply reasons for their reliance upon

advertising cost savings‘in the circumstances of this case, the Com:

mission majority and the Third Circuit sought to draw a parallel

between physically and chemically identical liquid bleaches and

qualitatively different steel wool scouring devices by characterizing

the latter as being ‘‘functionally identical.”’ On this basis they

viewed. this Court’s treatment of advertising in Clorox as‘ auto-

-matically applicable. This reasoning process, however, would

radically expand the Clorox holding to all product markets, because

all products in competition with one another can be characterized

‘as ‘‘functionally identical.”” Plainly this Court did not hold in

Clorox that all advertising is socially valueless. —

;

‘CONCLUSION

conglomerate merger rules in question here, even con-

sidered individually, deserves. this Court’ S considera-

tion. Taken ‘wane. their scope and importance |

‘ present an imperative case for review. As matters

- now stand, the opinion of the Third Circuit is the only

source of specific guidance, and this case is the only

foreseeable opportunity for this Court to prevent the

economic harm which, we submit, must follow, if the

Third Circuit’s rules are generally followed, or the

years of costly and disruptive litigation which. will

For the reasons set forth, this eGhon for Certiorari

should be granted. |

Respectfully ‘submitted,

* Roserts B. OWEN |

701 Union Trust Building

Washington, D. C. 20005

Attorney for Petitioner,

General Foods Corporation

Of waa:

GERALD P. Norton

G. JosEPH VINING

Covinaton & BuRLING

701 Union Trust Building

_ Washington, D.C. 20005

KENDALL M. CoLE

250 North Street

_ White Plains, New York

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.