Appellants Brief — United States v. Greater Buffalo Press, Inc.

1]

a A. Introduction

' _ B. The industry and the parties

C. The acquisition

D. The district court’s decision

nar & WOOD —

"I. The color comic supplement printing

business constitutes a single line of

commerce under Section 7 of the Clay-

II Sista sub sl ach ichchadeessbccsoihsousbnagibaaiiancied

II. The effect of the acquisition may have

been substantially to lessen competition

in the color comic supplement printing

business

A. The acquisition restrained compe-

tition between Greater Buffalo and

King and eliminated competition

petween Greater Buffalo and Inter-

national

The anticompetitive effects of the

acquisition have not been elimi-

nated or significantly mitigated by

subsequent events

. Greater Buffalo did not establish a fail-

ing company defense

Argument—Continued Page

IV. Divestiture of both International and

Dixie Color is necessary to restore ef-

fective competition ...............:-:-:ssree 36

Comelusion ..............-c.cessssssssssssesesensnnsnssssenenenensesens 41

CITATIONS

Cases:

Brown Shoe Co. v. United States, 370

TIS, BOF .......00...ccccceeenccccescrnrorensceccseeees 21, 22, 32

Citizen Publishing Co. v. United States,

BOA UG. 181 .......0.--..cs-ccerccessecscsensensens 33, 35, 36

Federal Trade Commission v. Procter &

Gamble Co., 386 U.S. 568.........-.------------ 31, 32

International Shoe Co. v. Federal Trade

Commission, 280 U.S. 291 ........------------- 33

Schine Chain Theatres v. United States,

BBA U.S, 110 .u.......cecesessssecsersceessneeeseenenees 37

Standard Oil Co. v. United States, 337

U.S, BOS ....,.....ccccrcccccessceoncccesansescccnncsssenenees 19

United States.y. Aluminum Co. of Amer-

ica, 247 F. Supp. 308, affirmed, 382

TF BG ooacnccsnncecsassnenvecsosssncsescsnanesnsanncconsnse 38

United States v. Chicago Tribune-New

York News Syndicate, No. 67 Civ. 4596,

08 TDD. Y, ..ccccscscocscesescoscsascsenensesessseseonsonsnsses 6

United States v. Container Corp., 393 U.S.

I . __.....scninininseinnestiamnionsanaannaencennnananinanin 23

United States v. Continental Can Co., 378

TIS, GAD ..ccnceccccccececsnsssecnccecsnensscessesscocssees 2, 20

United States v. Crescent Amusement Co.,

BPS U.S. 178 .........-..cceccneccccessssssenessnsecenense 37

United States v. Diebold, Inc., 369 US.

BD ccenenradensshnessiibensatinnnasbachaccanmannnetiis

1m

Cases—Continued Page

United States v. Du Pont, 353 U.S. 586.... 22, 36

United States v. Du Pont, 366 U.S. 316.... 36, 37

United States v. Field Enterprises, Inc.,

No. 67 Civ. 4597, S.D.N.Y. 000.000.0000... 6

United States v. Grinnell Corp., 384 U.S.

IIIT Socr, Sastccoscivadianaheh cds asmnananeeiaecans dex pomueabuiies 28, 37

United States v. The Hearst Corporation,

No. 67 Civ. 4598, S.D.N.Y. ................... 6

United States v. Pabst Brewing Co., 384

LSE A eens ee aeons ee re 2

United States v. Philadelphia National

SE Gk ree 19, 28

United States v. Phillipsburg National

Bama, SOD UGE. BD accncecs ssn nscevensnnoess 20, 21, 28

United States v. Third Nat'l Bank in

Nashville, 390 U.S. 171 ..................... 28, 34, 36

Statutes :

Clayton Act, 38 Stat. 731, Section 7, as

amended, 64 Stat. 1125 (15 U.S.C. 18).. 2, 3, 5,

14, 17, 19, 20, 22, 28, 36, 39

Expediting Act of February 11, 1903, 32

Stat. 823, Section 2, as amended, 15

RR eee th da AVE coats 2

Sherman Act, 26 Stat. 208, as amended,

15 U.S.C, 4:

i ee aanaaiaaen 4

I 2s 4

Miscellaneous:

Bok, Section 7 of the Clayton Act and

the Merging of Law and Economics,

74 Harv. L. Rev. 226 (1960) ................ 31

Turner, Conglomerate Mergers and Sec-

tion 7 of the Clayton Act, 78 Harv. L.

SE MIEN ntsc obictensnaaenaesnaeenaiaieas 31, 32

Iu the Supreme Court of the United States

OcTOBER TERM, 1970

No. 821

UNITED STATES OF AMERICA, APPELLANT

Vv.

GREATER BUFFALO PRESS, INC., ET AL.

ON APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE WESTERN DISTRICT OF NEW YORK

BRIEF FOR THE UNITED STATES

OPINION BELOW

The opinion of the district court (App. 1691-1706),

comprising its findings of fact and conclusions of law,

is not yet officially reported.

JURISDICTION

The final judgment of the district court (App.

1706) was entered on May 26, 1970. The notice of

appeal (App. 1706) was filed on July 24, 1970. Prob-

able jurisdiction was noted on January 11, 1971

(App. 1707). The jurisdiction of this Court is con-

(1)

2

ferred by Section 2 of the Expediting Act of Febru-

ary 11, 1903, 32 Stat. 823, as amended, 15 U.S.C. 29.

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

United States v. Pabst Brewing Co., 384 U.S. 546.

QUESTIONS PRESENTED

1. The ultimate question on the merits is whether

the acquisition by the leading printer of color comic

supplements of a comparably large printer of such

supplements violated Section 7 of the Clayton Act.

That question, in turn, involves the following sub-

sidiary questions:

a. Whether the district court defined too narrowly

the relevant product market by focusing exclusively

upon the direct printing competition between the ac-

quiring and acquired firms, and ignoring the sub-

stantial competition between the acquiring firm and

the sole customer of the acquired firm.

b. Whether the district court erred in ruling that

there was no reasonable probability of substantially

lessening competition in the color comic supplement

printing business because the acquired firm did not

itself engage in selling when, at the time of the ac-

quisition, its printing was sold on an exclusive con-

tract basis by its sole customer in competition with

the acquiring firm.

c. If the above questions are answered affirmative-

ly, whether the defendant met its burden for estab-

lishing a “failing company” defense to the Section 7

charge, where the acquired firm, at the time of the

acquisition, (a) had operated for thirty years under

3

an agreement with its sole customer, which it was in

the process of renegotiating, (b) was pursuing ex-

pansion plans, (c) had consistently shown after-tax

profits and paid large dividends and (d) had sought

only one alternative purchaser.

2. If the challenged acquisition violated Section 7,

whether divestiture of the acquired firm is appro-

priate and whether such divestiture should include a

subsidiary of the acquiring firm, whose plant was

planned by the acquired firm prior to the acquisition

and developed with its substantial assistance there-

after.

STATUTE INVOLVED

Section 7 of the Clayton Act, 38 Stat. 731, as

amended, 64 Stat. 1125, 15 U.S.C. 18, provides in

pertinent part:

That no corporation engaged in commerce

shall acquire, directly or indirectly, the whole

or any part of the stock or other share capital

and no corporation subject to the jurisdiction

of the Federal Trade Commission shall acquire

the whole or any part of the assets of another

corporation engaged also in commerce, where in

any line of commerce in any section of the coun-

try, the effect of such acquisition may be sub-

stantially to lessen competition, or to tend to

create a monopoly.

* Although the “questions presented” in the jurisdictional

statement did not specifically include questions 1b and 2 above,

we reserved the right to argue those issues if probable juris-

diction were noted. Jurisdictional Statement, p. 22, n. 12.

4

STATEMENT

A. Introduction

In January 1961, the United States filed a civil

antitrust suit charging that the acquisition in 1955

by Greater Buffalo Press, Inc. (“Greater Buffalo”)

of all the stock of International Color Printing Co.

(“International”) violated Section 7 of the Clayton

Act (App. 4-14). The complaint also alleged that

Greater Buffalo, The Hearst Corporation (“Hearst”),

acting through its unincorporated division King Fea-

tures Syndicate (“King”), Newspaper Enterprise

Association, Inc. (“N.E.A.”) and a co-conspirator

had conspired to restrain the sale to newspapers of

printing of color comic supplements, in violation of

Section 1 of the Sherman Act; that they had con-

spired to monopolize the sale and printing of those

supplements, and that Greater Buffalo had monopo-

lized such printing, in violation of Section 2 of the

Sherman Act;* and that Hearst and N.E.A. were

each parties to tying arrangements involving the

licensing of comic features and the sale of color

comic supplements, which violated Section 3 of the

Clayton Act.

In August 1965, before trial, a consent decree was

entered against Hearst, enjoining King generally

from entering into any agreement limiting competi-

tion in the printing of color comic supplements and

from tying the licensing of its comic features with

2The government eliminated the monopolization charge

against Greater Buffalo in its amended complaint filed in

1965 (App. 1597-1608).

5

the sale of printing of comic supplements (App. 520-

524). Although the decree expressly permits King to

quote a single price for the licensing of features and

the sale of printing, it provides that if a Greater Buf-

falo plant is divested pursuant to a final judgment in

this action, King would then be subject to certain re-

quirements to ensure against tie-ins, including the re-

quirement that it must quote separately its price for

licensing and for printing (App. 522). The decree

further provides for the court’s continuing jurisdic-

tion over King for the purpose of providing such

other relief as might be necessary to dissipate the

effects of any antitrust violations which might be

found against Greater Buffalo (App. 528).

After a full trial on all the issues, the district

court found against the government on all charges

(App. 1691-1706), and entered judgment dismissing

the complaint (App. 1706).’

B. The Industry and the Parties

The weekend editions of most newspapers contain

the familiar color comic supplements, containing

comics, advertising and other features. The rights to

*No appeal was taken from the district court’s dismissal

of the complaint against N.E.A., or its dismissal of the con-

spiracy claims against Greater Buffalo. The facts relevant to

these allegations will be discussed only insofar as they are

necessary to an understanding of the circumstances surround-

ing the challenged acquisition. While we believe that the court

below erred in these respects as well as in its disposition of

the Section 7 claim, we concluded that, because of the

essentially factual basis of the court’s judgment on these

other claims, they did not present substantial questions

warranting further review.

6

the individual comic features are generally controlled

by syndicates. The price for such rights is negotiated

between the syndicates and the newspapers, and the

rights are granted on a regionally exclusive basis

(App. 1018-1020, 1366-1367, 1379).* In putting to-

gether a supplement, the newspaper may obtain fea-

tures from different syndicate sources (App. 1017-

1018).

While obtaining feature rights for a supplement,

the newspaper must simultaneously arrange for its

printing. Comic supplement printing requires special-

ly skilled personnel and specially adapted printing

equipment. Although newspapers, at least the larger

ones, are capable of printing their own supplements,

most find that a better quality product can be ob

tained more economically from independent comic

supplement printers (App. 863-864).

Newspapers which do not print their own supple-

ments must arrange to have it done by a color comic

supplement printer. Arrangements can be made either

directly with the printer or with an intermediary,

such as a syndicate or a sales agency, which sells the

printing of others in conjunction with its feature-

selling business. Prior to selling such printing, the

intermediary must, of course, have a commitment

from the color comic supplement printer in order to

be able to assure the purchasing newspapers that ex-

‘In a group of cases filed while the instant case was under

submission, United States v. Chicago Tribune-New York News

Syndicate, United States V. Field Enterprises, Inc., and

United States v. The Hearst Corporation, Nos. 67 Civ. 4596-

4598, S.D.N.Y., the government is challenging as unreason-

able certain of these regional exclusivity provisions. The

legality of such exclusivity was not involved in this case.

7

acting production deadlines—which are the essense

of the newspaper business—will be met. Whether its

services are sold directly or indirectly, the printer

tailors the supplements to the needs of the newspapers

and ships them directly to such newspapers (App.

1252, 1834-1338). In arranging for printing, the dis-

tance between the printer and the newspaper is a fac-

tor, since transportation costs are substantial (App.

865, 869-870).

At the time of its acquisition of International,

Greater Buffalo was the most successful and efficient

comic supplement printer, largely because of the tech-

nical and innovative skills of its president, Koessler.

It owned no feature rights of its own, but did some

printing for the feature syndicates, though most of

its sales were direct to newspapers. In 1954, the last

full year before the acquisition, Greater Buffalo had

sales of about $8.5 million (P-138, para. 15, App.

1867). Its plants were then located in Buffalo and

Dunkirk, New York, but it was in the advanced stages

of planning for a new plant in Lufkin, Texas, in-

tended to facilitate and increase sales to southern

newspapers by reducing transportation costs. The

Lufkin plant was opened in 1958 (P-138, para. 20,

App. 1868).

International was also a comic supplement printer,

comparable in size to Greater Buffalo, but not as ef-

ficient (App. 1106; P-62, App. 1823). Its owners, the

Govin family, had made no capital investment in the

company after their initial loan to commence opera-

tions had been repaid (App. 1109-1110), and con-

sistently withdrew a large portion of the profits as

dividends. The dividends continued to the date of ac-

quisition as follows: $44,700 in 1953, $34,800 in

1954 and $17,400 for the first six months of 1955

(P-141, App. 1873). Although claiming a working

capital deficit at the end of 1954 of about $100,000

(App. 1111), the company showed a net profit for

that year of $11,000 (down from more than $70,-

000 in each of the four prior years)* and its net profit

for the year in which it was acquired (during one-

half of which the company was under the control of

Greater Buffalo) increased to more than $88,000 (P-

141, App. 1873).°

International, like Greater Buffalo, also had annual

sales of about $8.5 million at the time of the acquisi-

tion (P-138, para. 15, App. 1867), but employed no

sales force of its own as its sole source of business

was King (App. 1103-1104). Since 1926, shortly

after it was founded, International operated under

long-term contracts with King who in turn sold the

printing to those newspapers purchasing comic fea-

turers from King (P-2-7, App. 1415-1423, 1708).

6 The apparent reason for the marked decline in net income

is a matter of accounting. Charged against the income of that

year was a deferred fund for the 1955 vacation pay of Inter-

national employees (P-54, App. 1481). At that time, Inter-

national employed approximately 300 skilled workers (App.

169). In addition, costs of the proposed opening of the south-

ern plant were to be charged against income (P-54, App.

1481). Due to these charges, International’s president re-

quested that these amounts be excluded for purposes of de-

termining his salary, which was based upon net income be-

fore the deduction of interest on notes payable to the share-

holders and depreciation (id. at 1480-1481).

* At the time of the acquisition, International had prac-

tically no debt and its daily cash balance for the year of

acquisition averaged approximately $130,000. (P-1, App.

1412, see also P-134, App. 1587-1588.)

9

Thus, International’s revenues were obtained not

from newspapers for which it printed, but solely from

King under the contracts. The contract in effect in

1955 was cancellable upon six-months notice and per-

mitted King to place 25 percent of its supplement

printing with other printers (primarily on the West

Coast) (P-1, App. 1410).

International’s plants were located in Wilkes-Barre,

Pennsylvania, and Peoria, Illinois (P-138, par. 8,

App. 1866), the latter plant having been closed since

the acquisition. In mid-1954, International’s board of

directors, prodded by King’s recognition of the com-

petitive disadvantage it would suffer when Greater

Buffalo opened its Texas plant, authorized its presi-

dent, Gorman, to develop plans for its own southern

facility to be financed either by a favorable renegotia-

tion of the King contract or by a loan (P-54, App.

1477-1478). Although King and International ex-

perienced difficulties in negotiating a long-term con-

tract (P-54, App. 1477-1480; App. 1117-1123) and

loan negotiations were not extensively pursued (App.

1118-1119), plans for a southern plant, nevertheless,

went forward. By January 1955, after extensive in-

vestigations, International had focused on Sylacauga,

Alabama as a proposed site. Hearst, on behalf of

King, entered into a ten-year contract to purchase

newsprint from a newsprint company in that area,

contingent upon construction by International of a

plant there (P-56, App. 1483-1485). Plans were

drawn for such a plant (P-122, App. 1571-1573), and

by June 3, 1955, four weeks prior to the acquisition,

Gorman told the Sylacauga Chamber of Commerce

10

that “I can confidentially state that we are going to

locate in Sylacauga * * *” (P-114, App. 1562).

King, the strongest syndicate controlling feature

rights, is also the largest nonprinter selling color

comic supplement printing (P-1, App. 1410-1411). In

1955, its sales of printing amounted to almost $10 mil-

lion, most of which was done by International (Ex. 5G

to affidavit of Elliott H. Feldman, proceedings on or-

der to show cause, 3/20/61). Moreover, King does

not sell printing merely as an adjunct to its features

business; it has at all times sought to earn a satis-

factory profit on its sales of printing as well as on

its sales of feature rights (ibid.).

Although some of Hearst’s subsidiary newspapers

print their own color supplements, Hearst does not

print for King (P-62, App. 1823). Hearst has con-

sistently maintained, as a matter of policy, that it is

not interested in getting into the printing end of the

business (App. 1113). Although Greater Buffalo con-

tended at trial that Hearst had substantial excess

color supplement printing capacity (P-62, App. 1823),

there was evidence that conversion of such facilities

to make them significantly competitive with inde-

pendent color printers in handling King’s require-

ments was technically and economically unfeasible

(P-103-106, App. 1523-1537).

In 1955, the year of the acquisition, a total of about

$28 million worth of color comic supplement printing

was sold to newspapers by printers and syndicates.

While the record does not! contain a precise break-

down of printing sales, a good picture of the relative

strength of printers is given by the following break-

11

down by volume of printing (P-62; P-138, para. 18,

App. 1868) :

Printing Volume

Comic Printer (On Terms of 4-Page Sections)

The International Color Printing Company,

Wilkes-Barre, Pennsylvania 27,237,658

Greater Buffalo Press, Inc., Buffalo, New York .... 26,848,474

Acme Colorprint Company, San Bernardino, Calif-

fornia 5,001,714

Eastern Color Printing Company, Waterbury,

Connecticut 8,681,339

Southern Colorprint, Newport News, Virginia .... 477,714

World Color Press, Inc., St. Louis, Missouri... 758,559

Buffalo Colorpress, Inc., Buffalo, New York ....... 3,289,032

Fort Worth Star-Telegram, Fort Worth, Texas ...‘ 1,599,556

Hearst Corporation * 2,956,434

Thus Greater Buffalo and International (printing ex-

clusively for King) together accounted for more than

three-fourths of the printing done by comic supple-

ment printers for sale to newspapers which did not

do their own printing. Each did more than five times

the volume of the next largest printer (Computed

from P-61, App. 1709-1822, P-62, App. 1823, P-63,

App. 1824-1829. )*

* The figures included for Hearst and the Fort Worth Star-

Telegram represent supplement printing done by them for

other newspapers.

* Exhibit P-62 (App. 1823) was compiled by the govern-

ment from figures derived from International’s annual indus-

try survey (P-61, App. 1709-1822, P-68, App. 1824-1829,

P-138, par. 18, App. 1868). Greater Buffalo contended below

that the relevant market should include printing done by

newspapers for themselves (P-62, App. 1823). The govern-

ment objected to such inclusion on the ground that, while

such papers might be potential customers of the independent

printers, they would not seek the printing business of other

newspapers (Plaintiff’s Post-Trial Brief, p. 17). Even ac-

cepting the broadest market proposed by Greater Buffalo, its

12

C. The Acquisition

Dissatisfied with profit levels and unwilling to make

needed investments for modernization and expansion,

International’s owners had desired to sell the com-

pany for several years prior to 1955 (App. 1111-

1112). King was offered an opportunity to buy in

1962; although Frank Nicht, King’s chief executive

officer, favored the idea, Hearst declined to negotiate

“at any price” (App, 1112-1113). Late in 1954, Gor-

man, International’s president, through Nicht, ob-

tained an introduction to Koessler of Greater Buffalo

(App. 1113-1114), Koessler expressed an interest in

acquiring International, and discussions quickly prv-

ceeded to negotiations over the fair market value of

the company’s stock (App. 1114-1115).

Nicht kept himself well informed on these negotia-

tions (P-15, App. 1432-1433, P-16, App. 1434-1437,

P-19, App. 1440, P-21, App. 1441-1443, P-23, App.

1447-1458; App. 932-943). On March 25, 1955, in a

memorandum to his superior, he presented the sale of

International to Greater Buffalo as one of three pos-

sibilities for solving International’s problems; the

others were renegotiation of the King-International

contract at rates sufficient to finance International's

southern plant, or acquisition of International by

King (P-21, App. 1441-1443). Nicht advised:

The owners of International Color Printing

Company are now quite definitely anxious to

sell. They can hardly sell without our consent

and cooperation. We have had many meetings

share combined with International’s is nearly 42 percent (P-

62, column 5, App. 1823).

13

among ourselves and with the representatives of

ICP and Greater Buffalo Press. These meetings

have up to this time involved the overall prin-

ciples and not the many details.

The time has now come for us to decide what

we want to do. If management prefers a carry-

ing out of plan No. 3, [sale to Greater Buffalo]

I am prepared to proceed if given a green light.

Even in this event, there is a possibility of en-

countering opposition in the effort to protect the

interests of KFS on every conceivable point un-

der a long-term selling contract with the pros-

pective owners.

Greater Buffalo Press realizes they can hardly

continue purchase plans without the approval of

KFS and Greater Buffalo Press has indicated

they would like to talk further with me about

this quite conclusively next week, [7d. at 1443;

emphasis supplied. ]

On June 18, 1955, Koessler wrote Nicht a detailed,

formal letter setting forth “the provisions on which

we are in agreement” (P-16, App. 1434-1437).° These

included, inter alia:

1) Greater Buffalo would purchase International

and assume the long term printing agreement

~ 03 being negotiated by International with

Ing;

2) Greater Buffalo and King would each con-

tinue to hold their existing accounts;

3) With specified exceptions, Greater Buffalo

would grant King exclusive sales rights on all

new business; and

*Koessier had sent Nicht a similar, less complete letter

on June 2, setting forth “the points we discussed in New York,

on which we agreed could go into a contract” (P-15, 4. ‘9.

me 1482-1433).

14

4) With one exception, King would give all its

printing business to Greater Buffalo and Inter-

national.

The letter concluded: “This contract is to be for a

period of ten years” (ibid.).

On June 25, 1955, Greater Buffalo purchased In-

ternational’s stock for $575,000 (P-138, para. 16,

App. 1867). Later that summer, International and

King signed a ten-year printing contract, effective

July 30, at substantially the same rates provided for

in their previous contract. These rates had been

agreed upon prior to the sale. (P-23, App. 1451; App.

1138-1139.) Eventually, in 1958, a contract desig-

nating King as Greater Buffalo’s sales agent was

executed by Koessler and Nicht (P-72, App. 1834-

1843), but was not approved by the board of direc-

tors of either company, and never became formally

effective. Notwithstanding Koessler’s “understand-

ing” with Nicht, Greater Buffalo, since the acquisi-

tion, while continuing to do most of King’s printing,

has taken substantial sales accounts from King (P-

70).

After the acquisition, International, with financial

support from Greater Buffalo, concluded arrange-

ments for construction of a new plant in Sylacauga.

The plant was opened in 1963 and is operated by

Dixie Color Printing, a wholly-owned subsidiary of

Greater Buffalo (P-188, para. 21, App. 1868).

D. The District Court’s Decision

The district court rejected the government’s con-

tention that the acquisition violated Section 7 of the

Clayton Act on two principal grounds. First, it found

15

thet the printing of color comic supplements directly

for newspapers was a different market than the print-

ing Of such supplements for syndicates engaged in

the 8ale of both features and comic supplement print-

ing t0 newspapers. It reasoned that to treat them as

a single market would be to ignore “the tremendous

leverage” which control of features affords the syn-

dicates in selling such printing to newspapers (App.

1696-1697). Having so defined the markets, the court

found that Greater Buffalo and International had not

been in competition before the acquisition, since In-

ternational printed solely for a syndicate, King (App.

1700).

Although the court expressly found that “Greater

Buffalo and King engaged in active competition for

the business of printing color comic supplements”

(App. 1697), it made no attempt to assess the impact

of the acquisition on that competition. It found that

at the time of the acquisition, there was no agree-

ment, either between King and Greater Buffalo or

King and International, for a new long-term print-

ing contract for King’s business (App. 1702). It

viewed King as not dependent upon International for

its printing, believing that King had access to either

the capacity of Hearst or other independent printers

(App, 1701-1702). The court concluded, therefore,

that in acquiring International, Greater Buffalo sim-

Ply took a calculated risk that it could obtain King’s

Printing, and did not obtain by the acquisition a fur-

ther share of the printing market (App. 1702).

Second, the court found that, at the time of the

*Wisition, International was a failing company

16

(App. 1701). Its basis for this conclusion was that

King, International’s sole source of business, had

been placing some business elsewhere and was threat-

ening to increase this practice (which it could do

under the six-month cancellation clause in the con-

tract) unless International built a southern plant.

The court found that International lacked financing

for necessary expansion and modernization since it

had a working capital deficit, its owners were unwill-

ing to invest capital, and King was unwilling to enter

into a new long-term contract at higher rates. Noting

that King had refused to buy International, the court

found that there was no other prospective buyer. The

court also found that International became a healthy

and profitable company after the acquisition because

of technological improvements made possible by Great-

er Buffalo (App. 1702). It found further that compe-

tition from the remaining firms in the industry had

increased during the fifteen years since the acquisi-

tion (ibid.).

Finally, the court suggested that even if there was

a violation it was insufficient “to warrant a court’s

exercising its discretion to order a divestiture fifteen

years after the occurrence of the alleged illegal con-

duct” (ibid.).”°

In a concluding footnote, the court indicated its view

that the real offender in the case was King. It observed that

the evidence strongly suggested that King had utilized un-

lawful tie-in practices to restrict competition with Greater

Buffalo in the sale of printing. The court pointed out, how-

ever, that it was without power to impose further relief

against King, under the consent judgment entered against

it, in the absence of a finding of violation of any antitrust

law by Greater Buffalo (App. 1704, n. 4).

17

SUMMARY OF ARGUMENT

The effect of Greater Buffalo’s acquisition of Inter-

national was that the largest and most efficient inte-

grated printer-seller of color comic supplements in-

creased its share of the industry’s printing capacity

to approximately 75 percent, and also obtained the

capacity and contract right to perform most of the

printing for its leading sales competitor. As a result,

the leading sales competitor was denied an independ-

ent source of printing. In holding that this acquisition

did not violate Section 7 of the Clayton Act, the dis-

trict court defined the relevant product market in a

narrow and artificial manner, considering only sales

competition between the acquiring and acquired firms,

while ignoring the substantial competition for sales

of color comic supplement printing to newspapers be-

tween the acquiring firm and the sole customer of

the acquired firm. Moreover, its artificial market

definition led it to ignore the direct printing competi-

tion that existed between the acquiring and acquired

firms prior to the acquisition. The district court also

stated that competition has flourished in the color

comic supplement printing industry since the ac-

quisition; such competition, however, is necessarily

limited in scope and does not approach the fuller com-

petition that would exist in the presence of another

independent printer of comparable size to Greater

Buffalo. Finally, the court upheid a failing company

defense which did not satisfy the standards this

Court has announced for that defense.

The district court’s view that even a finding of

violation would not justify divestiture requires this

18

Court to determine the appropriate relief to redress

the impact of this anticompetitive acquisition. This

Court should direct a divestiture that will not only

restore actual competition in the color comic supple-

ment printing business, but also the potential im-

pact on such competition existing at the time of the

acquisition resulting from the acquired firm’s well-

advanced plans for construction of a southern plant.

Specifically, effective divestiture should include not

only the acquired assets, but also the Sylacauga, Ala-

bama plant operated by a Greater Buffalo subsidiary,

as the culmination of International’s pre-acquisition

planning.

ARGUMENT

i

The Color Comic Supplement Printing Business Con-

stitutes a Single Line of Commerce Under Section 7

of the Clayton Act.

Both Greater Buffalo and International print color

comic supplements for newspapers that do not print

their own. Greater Buffalo sells its printing. Inter-

national does no selling itself. All of its selling is

done by King, and King rather than the newspapers

has the direct buyer-seller relationship with Inter-

national. The actual product produced by Greater

Buffalo and International, of course, is the same.

There is no difference in either the printing process

or the finished product dependent upon whether the

color comic supplement is sold to its ultimate user

(the newspaper) by the printer itself or by a syndi-

cate that has a conjact with the printer.

19

The printing of color comic supplements and the

selling of such printing are integral, essential and

inextricably intertwined component parts of the color

comic supplement printing business. The same firm

may do both, as Greater Buffalo does; or the com-

ponent elements may be separated, as in the case of

International and King. But however a particular

printing business is organized, its basic character

is the same: it is engaged in producing and distribut-

ing color comic supplements for newspapers. That is

the market in which both Greater Buffalo and Inter-

national—the latter in conjunction with King—

operate; and it is the “area of effective competition”

(Standard Oil Co. v. United States, 337 U.S. 293,

299-300, n.5) in which the legality of the merger is

to be determined. Cf. United States v. Philadelphia

National Bank, 374 U.S. 321, 357.

In terms of traditional Section 7 product market

analysis, there are three separate but interrelated

markets present in this case. Since International does

no selling but only printing, and since King does no

printing but only selling, the printing of color comic

supplements and the selling of such printing are

separate markets. In our jurisdictional statement we

stressed the impact of the merger upon competition

in the selling market. In the trial court, we argued

not only that printing and selling were separate

markets but that together they constituted a third

market (Plaintiff’s Post-Trial Brief, pp. 3-14). On

the facts of this case, these nice distinctions seem

artificial and unimportant. In evaluating the effect of

@ merger upon competition, one must look to the eco-

20

nomic realities of the industry. The relevant product

market in Section 7 cases is accordingly determined

by the nature of the commercial entities involved and

the competition they face. United States v. Phillips-

burg National Bank, 399 U.S. 350, 360; United States

v. Continental Can, 378 U.S. 441, 456-457.

The facts of this industry are that the merging

companies are both engaged in the business of print-

ing and distributing color comic supplements. As the

district court expressly found, King and Greater Buf-

falo were active competitors in selling color comic

supplements to newspapers (App. 1697; see p. 15,

supra). As we later show (see infra, pp. 25-28),

that competition was dependent upon and necessarily

involved competition between International and

Greater Buffalo at the production level. This single

economic area—comprising the actual printing and

the selling of such printing—constitutes the color

comic supplement business, and is the segment of the

market where the effect of the merger upon com-

petition will be felt. It is therefore an appropriate

line of commerce for Section 7 purposes.

The district court deemed dispositive, however, the

fact that a syndicate’s ownership of the right to sell

the comic features gives it “tremendous leverage” in

selling the printing of such features (App. 1696-1697).

In its view, this leverage made printing for syndicates

a separate market. But the fact that a syndicate

may have a competitive advantage over an ordinary

printer in selling printing does not make the print-

ing the syndicate sells a different product; the print-

ing is the same no matter for whom it is done or

21

through which channels it is distributed. The fact

that King, in selling International’s printing, may

have had advantages that Greater Buffalo did not

have in selling its own printing, is not inconsistent

with the conclusion that Greater Buffalo, Interna-

tional and King were all engaged in the single line

of commerce consisting of the printing and distribu-

tion of color comic supplements. It is hardly novel

that certain competing firms in an industry have

various advantages over others. Indeed, we know of

no case in which the competitive advantages enjoyed

by a particular seller have themselves been deemed to

constitute a sufficient product distinction to justify

treating that firm’s business as a separate line of

commerce.

In any event, even if the district court were correct

in ruling that the printing of color comic supplements

for syndicates is a separate product market, that

would not preclude the existence of the broader prod-

uct market upon which the government relies, Al-

though “within this broad market, well-defined sub-

markets may exist which, in themselves, constitute

product markets for antitrust purposes” (Brown

Shoe Co. v. United States, 370 U.S. 294, 325), “sub-

markets are not a basis for the disregard of a broader

line of commerce that has economic significance”

(United States v. Phillipsburg National Bank, supra,

399 U.S. at 360).

22

Il

The Effect of the Acquisition May Have Been Sub-

stantially to Lessen Competition in the Color Comic

Supplement Printing Business.

A. The Acquisition Restrained Competition between

Greater Buffalo and King and Eliminated Competi-

tion between Greater Buffalo and International.

The court’s line-of-commerce error led it into the

further error of analyzing the competitive effects of

the acquisition solely in terms of competition be-

ween Greater Buffalo and International. It is well-

settled that the competition which Section 7 seeks

to preserve is not merely that between the acquiring

and acquired firms. Brown Shoe Co. v. United States,

870 U.S. 294, 317; United States v. DuPont & Co.,

353 U.S. 586, 589-598. In this case the competition

most substantially and dramatically lessened by the

acquisition was between Greater Buffalo and King

in the sale of comic supplement printing, which was

a vital aspect of the printing business.” In ac-

quiring International, Greater Buffalo not only in-

creased its share of color comic supplement printing

to approximately 75 percent (see p. 11, supra),

11 Paragraph 27 of the amended complaint, charging a Sec-

tion 7 violation, alleged that competition between Greater

Buffalo and International was eliminated. Paragraph 30(d),

however, which described the effects of all the violations

charged, alleged more generally that “competition in the

printing and sale of color comic supplements has been sup-

pressed.” The government’s trial brief emphasized the “com-

bined printing and selling of supplements” as an appropriate

line of commerce, and the lessening of competition between

Greater Buffalo and King (Plaintiff’s Post-Trial Brief, pp.

6-14, 17).

28

but also gained the almost certain right to print for

King, its principal selling competitor.”

As a result of the acquisition, King has become

dependent upon Greater Buffalo for most of the

printing which it sells in competition with Greater

Buffalo, and price competition between the two

necessarily has been restricted. King, seeking a

profit from printing sales, obviously cannot quote

a price below that which it pays Greater Buffalo for

printing; Greater Buffalo, in seeking to take accounts

from King, has no incentive to bid below the price

King pays it for the work. It is no answer that

Greater Buffalo has taken accounts from King since

the acquisition; existing competition between them,

effectively restricted to sales at a price higher than

Greater Buffalo charges King for printing, is not

the fuller competition that could exist if King had an

independent printing source.” Cf. United States v.

Container Corp., 393 U.S. 338, 387. It can hardly

be supposed that either would often be inclined to

compete so vigorously with the other as to jeopardize

a mutually valuable customer-supplier relationship.

%* The court found that Greater Buffalo, in acquiring Inter-

national, did not acquire an additional share of the market

because it had no assurance that King would continue to do

business with International (App. 1701-1702). While Greater

Buffalo may not have had a legally enforceable right to King’s

business following the acquisition, it certainly—in view of

Koessler’s letter to Nicht memorializing an agreement that

Greater Buffalo would assume the new contract then under

negotiation between International and King (P-16, App.

a )—had high and justifiable hopes of obtaining that

iness.

4 See, ¢.g., App. 1234-1236; P-185, App. 1589.

24

But Greater Buffalo does retain the option to disre

gard this relationship, when it feels it desirable to do

so, by using its dominant position in printing to cut

sharply into King’s share of the market for sales.”

%* Nicht, frustrated in his post-acquisition efforts to finalize

an agreement with Koessler to protect King from competition

from Greater Buffalo, came to recognize clearly King’s dis-

advantage by reason of its having become dependent on

Greater Buffalo for printing. He wrote his superior in June

1957:

I am not the least bit sanguine about the kind of a

deal that can eventually be worked out with Mr. Koeasler.

There is every evidence that he wants to stall as long as

possible. He is sitting pretty. I think we have been too

conciliatory with Koessler and it may be that is likely

to be the procedure because we can only lead from weak-

ness, [P-102, App. 1521].

In the same letter he proposed that King acquire its own

color supplement printing capacity:

Even if it cost money to do this and diminished profits,

wouldn’t that be better than the eventual loss of most,

if not all, of our readyprint business?

The Syndicate which for mijre than a quarter of 4

century has been number one in the readyprint field is

now at best number two, and quite helpless. Newspaper

history clearly emphasizes the difficulty, in fact hope-

lessness of regaining a lost position. There is plenty of

current evidence to substantiate this.

If Koessler, because of what he has done the past few

years, were to be attacked, in my opinion he would lose,

but there is the danger, I suppose, of our becoming an

accessory. Here is another reason why I think that if we

were in the readyprint field with plants of our own it

would restore a competitive aspect and certainly that

wouldn’t be discouraged in Washington [id. at 1521-

1522).

25

In addition to the restriction of price competition,

the acquisition also inevitably eliminated or weakened

product quality and incidental service competition

between Greater Buffalo and International. As long

as King had an independent source of printing, there

was constant pressure on each of those two com-

panies to match or better the quality of the other’s

product and services. With the merger, however, the

product and services being offered by Greater Buf-

falo and King originate from the same source; there

is no reason now for the two printers to compete

against each other in these important aspects of the

business.

Analysis of the relationships among Greater Buf-

falo, King and International prior to the acquisition

discloses the presence of certain important pressures

on International which contributed to the existence

of vigorous competition between Greater Buffalo

and King and also between Greater Buflalo and

International. These competitive pressures did not

survive the merger. First, there was pressure on In-

ternational flowing from its dependence upon King

as its only customer. International’s well-being turned

upon the ability of King to underbid Greater Buffalo

for sales of printing to newspapers, for only an in-

crease in King’s sales could lead to an increase in In-

ternational’s business. A second pressure on Interna-

tional stemmed from the fact that King was not in-

extricably tied to International for its printing. The

contract between the two concerns allowed King to

place up to 25 percent of its business with other

printers (P-1, App. 1410) and was also cancellable on

six months’ notice. Thus, in a very real sense, Inter.

national was under a constant threat of losing print-

ing business to Greater Buffalo.”

At the trial, Gorman of International conceded

that his firm and Greater Buffalo competed on a pro

duction basis, and that he feared Greater Buffalo

would take business away, but he maintained that this

competition did not extend to sales (3% App. 1138,

1141-1142, 1150-1151, 1237). But such distinction

between production and sales functions is not tenable

in an industry in which one dominant firm was an in-

tegrated printer-seller, and the only comparably large

printer was integrated by exclusive contract with the

leading sales firm. The competitive pressures on Inter-

national were applied directly by King, which de-

pended upon production efficiency by International to

support it in its sales competition with Greater Buf-

falo. King’s Nicht constantly pressured International

to match Greater Buffalo’s production flexibility (App.

1105-1108) and did, at one point, threaten to take

its printing elsewhere unless International constructed

a Southern plant to meet the competition of Greater

%*Nor was the competitive squeeze all in one direction.

Although its overall efficiency did not match Greater Buf-

falo’s, International possessed considerable expertise of its

own and actually enjoyed an advantage in some areas (App.

1106, 1181, 1214-1215; P-120, App. 1568-1570. See also P-

110, App. 1544), including the printing of small runs (App.

1265). vor

%* Gorman twice made clandestine visits to Greater Buffalo

plants, attempting to acquire insight into Greater Buffalo's

know-how (App. 1106-1108, 1136-1138). In negotiations

with International’s labor union, he continually referred to

Greater Buffalo as his greatest competitor (App. 272-276).

27

Buffalo’s proposed expansion in the Southwest (App.

1108-1109, 1141-1142; P-12, App. 1425-1427, P-53,

1474-1477, P-54, App. 1477). On numerous other

occasions Nicht induced International to cut its

prices to meet competition (App. 1105), and, not

long before the acquisition, King transferred three

substantial runs from International to Greater Buf-

falo because of price and threatened to transfer more

(App. 933-934, 985-986, 987, 1020-1023, 1032-1035,

1043-1044; P-13, App. 1427-1428).

With the acquisition of Greater Buffalo by Interna-

tional, the healthy competitive pressures on Interna-

tional described above have been either eliminated

or sharply reduced. Because Greater Buffalo now

controls approximately 75 percent of independent

color comic supplement printing, King has no viable

alternate source of supply.” This absence of alterna-

tives, as we have noted, severely limits the scope of

competition which can exist between Greater Buffalo

and King for sales of color comic supplement print-

ing to newspapers. Newspapers who buy such print-

ing lost some of the ability to play off those two

firms against each other that they had when King

had its printing done by International, which was a

direct competitor of Greater Buffalo.

The effect of the acquisition has been to combine in

a single firm approximately 75 percent of all color

comic supplement printing. The merging firms,

Greater Buffalo and International, were competitors

"The post-acquisition contract between King and Inter-

national, unlike its predecessors, was not terminable on

six months’ notice (App. 1225-1226).

28

of each other in any realistic sense of the term. The

share of the market that Greater Buffalo obtained

far exceeds the market shares this Court has deemed

sufficient to establish a violation of Section 7 in its

previous merger cases. Philadelphia Bank (30 per-

cent) ; Nashville Bank (38.4 percent) ; United States

v. Phillipsburg National Bank, 399 U.S. 350 (24 per-

cent). Indeed, Greater Buffalo’s share of the color

comic supplement printing business that resulted from

this acquisition approaches the 87 percent of the mar-

ket that was held sufficient to establish monopoly

power in United States v. Grinnell Corporation, 384

U.S. 563. Moreover, even in the broader printing

market for which Greater Buffalo argued below, the

combined Greater Buffalo-International market share

would be 42 percent (P-62; see p .11, n. 8, supra)—

a figure higher than the percentages involved in all

previous Section 7 cases. In terms of market shares

alone, the effect of this acquisition may have been

substantially to lessen competition.

B. The Anticompetitive Effects of the Acquisition

Have Not Been Eliminated or Significantly Miti-

gated by Subsequent Events.

As we have shown, the restriction of competition

between Greater Buffalo and King and the elimina-

tion of competition between Greater Buffalo and In-

ternational constitute anticompetitive effects that vic

late Section 7. The factors the district court relied

on for its conclusion that the acquisition was not

likely to—and, in fact, did not—have anticompetitive

effects do not support that conclusion.

The district court stressed that the modern print

ing facilities of many newspapers enable them to print

29

er own color comic supplements should the cost

cndependent printing become excessive and that the

in °3 printing capacity of the newspaper industry—

pal Part due to the recent demise of many news-

ple’ers—kept entry barriers in the color comic sup-

Prinent printing industry low (App. 1693-1696).

in ‘Sumably, these observations formed, at least

the basis for the court’s ultimate conclusion

in t despite the acquisition, unfettered competition

vaithe sale of color comic supplement printing pre-

er (App. 1702). On close analysis, however, neith-

= of these factors—the readiness of newspapers

baPrint their own supplements and absence of entry

tioitiers—shows the existence of unfettered competi-

n.

méVhile many newspapers can do their own supple-

Grnt printing, and this consideration may restrain

wheater Buffalo from raising its prices to a point

to ere many of its customers would find it economical

strdo so, Greater Buffalo, in the absence of other

priong independent printers, faces no competition at

conces below that point. The record shows that color

calnic supplement printing requires exacting mechani-

sor techniques performed by speciaily trained per-

sunnel and that independent printers specializing in

buoplement printing and handling a high volume of

nosiness can produce a high quality product more eco-

alsnically than most newspapers (App. 863-864; see

—o App. 919-920). Thus, the threat that newspaper

| dot, pwo-thirds of all color comic supplement printing is

1e by independent printers (P-62, App. 1823).

30

customers will do their own printing—while admit-

tedly a significant factor for Greater Buffalo to deal

with—is not a substitute for the vigorous competi-

tion which would exist were there other independent

printers also capable of achieving economies through

specialization and bulk production.”

As far as the absence of barriers to entry on ac-

count of excess printing capacity is concerned, it may

be that individual newspapers or those wishing to

become independent printers would have no difficulty

in finding printing capacity.” Even in this situation,

1 Greater Buffalo stresses the claim—made by Koessler in

his testimony at trial (App. 1055)—that it has not raised its

prices since the acquisition and that therefore it is clear

competition has continued or increased in the industry. Mo-

tion to Affirm, p. 8. It is unclear, however, what the true

ce of this claim is. On the one hand, Koessler claimed

that Greater Buffalo absorbed an average 3 percent annual

increase in labor costs while holding the price line (App.

1055, 1090-1091), but cost increases appear to have been

passed on to its customers. Greater Buffalo’s treasurer testi-

fied that the company’s printing contracts are based on 4

formula whereby newspapers are charged separately for

various cost components—e.g., preparing plates, ink, etc.

(App. 240-241, 253). Koessler conceded that the price of

newsprint was passed on to its customers (App. 1091).

Finally, Gorman testified that ,since the acquisition, Interna-

tional has been able to charge King more under its contract

because of its improved bargaining position (App. 1227-

1228; see also P-1383). The contract specifically provides

for passing on increased newsprint and labor costs and

leaves the rate for new business open to negotiation (P-23,

App. 1450).

s° Of course, it is by no means clear that much of the print-

ing capacity made available through the demise of various

newspapers could be economically adapted to fit the special

—————

31

however, the possibility of potential competition is

not an adequate substitute for actual, existing com-

petition. See Bok, Section 7 of the Clayton Act and

the Merging of Law and Economics, 74 Harv. L.

Rev. 226, 260-261 (1960). But in addition to obtain-

ing printing capacity, new independent printers must

match the efficiency and skill of the existing inde-

pendent printers to compete effectively. The concen-

tration of 75 percent of the independent color comic

supplement printing business in one firm, which re-

sulted from this acquisition, is likely to increase the

difficulties new entrants would have in becoming sig-

nificant competitors of Greater Buffalo.” See Turner,

Conglomerate Mergers and Section 7 of the Clayton

Act, 78 Harv. L. Rev. 1313, 1356-1358 (1965) ;

Federal Trade Commission v. Proctor & Gamble Co.,

386 U.S. 568, 578-580.

The district court also stressed the fact that, fol-

lowing the acquisition, Greater Buffalo had greatly

improved the facilities of the International plant and

that’ as a result International has been able to oper-

ate profitably (App. 1702). Greater Buffalo, in its

Motion to Affirm, pp. 7-8, also cites the increased

requirements of color comic supplement printing. Cf. discus-

sion at p. 10, supra; P-103-106, App. 1523-1537.

"The district court pointed to the continued existence of

the market’s remaining independent printing firms as evi-

dence of the absence of any anticompetitive effect flowing

from the acquisition (App. 1702). But the market shares

of these firms, small though they are, still apparently reflect

local advantages conferred by the factor of transportation

costs (see App. 917-919, 1214-1216). They are of little sig-

nificance in the national color comic supplement printing

market. See Bok, op. cit. supra, 74 Harv. L. Rev. at 274-278.

efficiency of International and claims that as a r

sult competition has flourished as the syndicates now

have access to a better product and can compete more

effectively with Greater Buffalo. There are two an-

swers. First, as we show in Part III, infra, pp. 33-35,

it is by no means clear that International would have

been allowed to stagnate had it not been acquired by

Greater Buffalo. Whether or not International would

have attained in the same period of time the increased

efficiencies which followed the acquisition had its

ownership remained independent from Greater Buf-

falo,” it seems likely that the company would have

thrived and continued to compete with Greater Buf-

falo. Second, although competition between King and

Greater Buffalo may actually have increased at cer-

tain levels as a result of the improvement of Inter

national’s facilities, it is still not, as we have noted,

supra, pp. 23-24, the type of fuller competition that

would exist if King had an independent source of

printing.

22 This is not to argue that increased efficiencies flowing

from an acquisition may not point towards legality where

anticompetitive effects are marginal. Turner, op. cit. supra,

78 Harv. L. Rev. at 1831-1382. But here, direct competition

has been eliminated at one level (production) and a floor

placed on competition at another (sales). Both involved

“horizontal” relationships to Greater Buffalo, in which cate

gory economic justification for restraints is inherently more

difficult. Id. at 1820-1822. Where the choice is between ef-

ficiency and competition, Congress has chosen the latter. See

Brown Shoe Co. v. United States, 370 U.S. 294, 344; Federal

Trade Commission v. Proctor & Gamble Co., 386 U.S. 568,

580.

Ill

Greater Buffalo Did Not Establish a Failing Com-

pany Defense.

An acquisition that would otherwise violate Sec-

tion 7 may be permitted if the acquired firm is a

“failing company,” that is, if its resources were 80

depleted at the time of acquisition and its prospects

for rehabilitation so remote that “it face[d] the grave

probability of a business failure” (International Shoe

Co. v. Federal Trade Commission, 280 U.S. 291;

United States v. Diebold, Inc., 369 U.S. 654, 655)

and if there was no other prospective purchaser for

it (Citizen Publishing Co. v. United States, 394 U.S.

131, 188). The failing company defense in this case

met neither requirement.

A. The district court concluded that International

was failing at the time of its acquisition because it

had a working capital deficit, its owners wished to

sell rather than make the capital investment neces-

sary to permit modernization and expansion, financ-

ing of such expansion had not been obtained from

other sources, and King, its sole customer, was

threatening to place some of its business elsewhere

(App. 1701). The court, however, overlooked the

consistent profitability of the company (including a

substantial increase in profits in the year of the sale),

"The appellees did not explain the basis on which Inter-

national determined this deficit to be in excess of $100,000 at

the time of acquisition (App. 146, 1111; P-141, App. 1873).

A virtually debt free firm with considerable assets (see

App. 169) cannot be regarded as failing solely because its

sole customer is dissatisfied with its performance (see n. 6,

p. 8, supra, and accompanying text).

and its continued ability to pay substantial dividends

to its owners (P-141, App. 1873). Notwithstanding

some technological obsolescence, International was the

largest volume printer of color supplements (P-62,

App. 1823) and King had not invoked or threatened

to invoke the six-month cancellation provision in its

contract (App. 1225-1226). Moreover, expansion

plans were being actively pursued even without as.

sured financing (see p. 9, supra).

This is scarcely the picture of a business facing

imminent collapse. There is little doubt that Interna

tional’s growth and development had stagnated by

reason of the owners’ insistence on high dividends

to the exclusion of reinvestment of profits, and that

the owners preferred a profitable sale to the commit

ment of capital for needed expansion and moderniza-

tion (App. 1110-1112). But it is equally clear that

this still-profitable concern was an important compet-

itive force in color supplement printing, performing

vital services for its sole customer, King. Compare

United States v. Third Nat’l Bank in Nashville, 390

U.S. 171, 175-176, 183.

Indeed, International’s failure was hardly possible

so long as King remained dependent upon Interns

tional for printing, and had the power to prevent it

For nearly 30 years, King had relied upon Interna

tional to print substantially all the color supplements

it sold. Nicht’s contemporaneous memoranda make

clear that King followed closely the Greater Buffalo

International negotiations; the acquisition was nd

consummated until Nicht had a written commitment

from Koessler that International would continue t

print for King, and King’s market position would

be maintained (P-21, App. 1441-1443, P-23, App.

1447-1458, P-15, App. 1432-1433, P-16, App. 1434-

1487).* Until such assurance was given, Nicht still

considered either acquisition by King or renegotiation

of the printing contract at rates adequate to finance

International’s southern expansion as viable alterna-

tives (P-21, App. 1441-1443). King was in no posi-

tion to permit any disposition of International which

did not’ protect its long-term interests; in those cir-

cumstances it neither could nor would have permitted

International to fail.

B. In any event, the failing company defense is in-

applicable unless the acquiring company is “the only

available purchaser.” Citizen Publishing Co. v. United

States, 394 U.S. 131, 188. King is the only prospec-

tive purchaser, other than Greater Buffalo, to which

International was ever offered. But there are several

smaller color comic supplement printers in the in-

dustry and acquisition by any one of them would

have been substantially less anticompetitive (P-62,

App. 1828). Nothing in the record indicates that these

firms, or any others, were approached by Interna-

tional. Indeed, although the owners were apparently

“The district court did not view the Koessler letters as

evidence of conspiracy between Greater Buffalo and King,

apparently on the ground that Koessler was actually mislead-

ing Nicht as to his intentions to reach an agreement (App.

1698). But for present purposes that consideration is irrele-

vant, since King, relying on Koessler’s promises, obviously

believed that its interests were protected in the Greater Buf-

falo acquisition, and therefore was not required to under-

take other steps to finance the expansion of International.

willing to sell as early as 1952 (App. 1112-1113),

there is nothing to show that International’s avail-

ability was even made known generally to the trade.

In these circumstances, there was no basis for the

district court’s finding that “no other person or cor-

poration was interested in acquiring International

* * *” (App. 1701). The finding reflects an errone-

ous legal standard of what the defense requires (see

Nashville Bank, swpra)—a defense that has a “nar-

row scope” (Citizens Publishing Co., supra, at p. 139).

The burden of establishing the failing company

defense “is on those who seek refuge under it.”

Citizens Publishing Co., supra, at 138-139. Greater

Buffalo did not satisfy that burden.

IV

Divestiture of Both International and Dixie Color

Is Necessary to Restore Effective Competition.

The Court has carefully considered the question of

re ‘lef in antitrust cases because the public benefits of

successful litigation may be entirely lost if the decree

is inadequate. United States v. Du Pont, 366 U.S. 316,

$22-324. Although normally the district court has the

preliminary and primary responsibility to fashion a

remedy, see Du Pont, supra, 366 U.S. at 323, the dis-

trict court in this case has already indicated its view

that, even if the acquisition violated Section 7, to

order divestiture fifteen years later would be inappro

priate (App. 1702). Accordingly, if this Court

% Of course, the passage of time in itself is no barrier t

divestiture of stock acquired in violation of Section 7 of the

Clayton Act. See United States v. Du Pont, 353 U.S. 586.

37

agrees with the government that the acquisition was

illegal, it should also hold that divestiture is necessary

and should state the general contours that the divesti-

ture order should have.

“Divestiture or dissolution has traditionally been

the remedy for Sherman Act violations whose heart

is intercorporate combination and control, and it is

reasonable to think immediately of the same remedy

when §7 of the Clayton Act * * * is involved” (Du

Pont, supra, 366 U.S. at 329-330). “[C]jomplete

divestiture is peculiarly appropriate in cases of stock

acquisitions which violate § 7” (id at 328). See, also,

United States v. Crescent Amusement Co., 323 U.S.

173, 189; Schine Chain Theatres v. United States, 334

U.S. 110, 127-129; United States v. Grinnell Corp.,

384 U.S. 563, 578, 580. Divestiture is necessary here

because it is the only remedy that will accomplish

the three-fold objectives of the suit: (1) it ter-

minates the violation, (2) it deprives the offender of

the fruits of its offense, and (3) it breaks up the il-

legally acquired market power. Schine Theatres,

supra.

Effective relief in this case—which should create

a viable independent color comic supplement printer

capable of providing King with an alternate source

of printing from Greater Buffalo—requires divesti-

ture* of both the assets owned by International at

* Divestiture in this case will also trigger the provisions of

the Hearst consent decree (App. 522) empowering the

court to require King to quote separately its prices for feature

rights and printing, thus effectively preventing anti-competi-

tive tying agreements.

[Continued on next page]

the time of the acquisition and the Sylacauga, Ala

bama plant planned by International, but constructed

and operated after the acquisition by Dixie Color

Printing Corp., a Greater Buffalo subsidiary. Inter-

national planned its Sylacauga facility under the in-

sistent prodding of King, which well recognized the

competitive threat to its southern business posed by

Greater Buffalo’s preparations for a plant in Lufkin,

Texas (App. 1108, 1141-1142; P-12, App. 1425-1427,

P-13, App. 1427-1480, P-22, App. 1443-1446, P-52,

App. 1473-1474, P-53, App. 1474-1477). It is equally

clear today that no prospective purchaser of Inter-

national under a divestiture order could hope to be

competitive in the South if Greater Buffalo were per-

mitted to retain two plants in that area.

There is a precedent for divestiture of the Ala

bama plant in United States v. Aluminum Co. of

The government agreed to the somewhat unusual condi-

tional decree against Hearst in recognition of existing com-

petitive realities. So long as Greater Buffalo controls King’s

printing as a result of the International acquisition, a require-

ment that King quote a separate price for printing would

substantially reduce any ability King now retains to compete

effectively for color supplement printing sales.

Greater Buffalo has consistently suggested (Post trial

brief, pp. 3-17; App. 1683-1690; Motion to Affirm, p. 13)

that the government acted improperly in negotiating this

decree inasmuch as this case is the result of complaints

directed at King’s illegal tie-in activities. But the govern-

ment had no interest in forcing Boule to litigation upon

a defendant that was willing to to a judgment that

preserved the court’s ability to fully deal with industry-

wide restraints at issue in a continuing trial. The government

properly pursued additional violations uncovered while in-

vestigating the practices tiiat first drew its attention to this

industry.

39

America, 247 F,. Supp. 308 (E.D. Mo.), affirmed, 382

U.S. 12. In that case, the district court ordered

divestiture of a plant constructed after an acquisition

in violation of Section 7, where the plant had pre-

viously been planned by the acquired firm. In this

case, the Alabama plant was conceived of and con-

structed after the acquisition as a part of the Interna-

tional operation. International acquired, modified and

its employees installed the equipment for the new

plant (App. 156-160, 175-179, 180-182, 1197-1198,

1203, 1212, 1218-1219; P-119, App. 1567, P-128, App.

1578-1580, P-132, App. 1585-1586) and Internation-

al’s Gorman served as president of Dixie Color—the

corporation created to operate the plant (P-126, App.

1574-1577 )—for more than three years (P-127, App.

1859, see also P-115, App. 1563-1564) while Inter-

national’s supervisor became Dixie Color’s general

manager (App. 56-59, 11/41-1212, 1219-1220). Gor-

man conceded at trial that for at least some period of

time after the acquisition, it was contemplated that

International would operate the new plant as part of

the International operation (App. 1184, 1193, 1199).

Finally, after the plant became operative, King trans-

ferred almost enough runs from International to

Sylacauga to meet International’s minimum estimates

for a profitable operation (App. 244, 1213, 1217).

Although Koessler testified that Dixie Color was

the fruition of Greater Buffalo’s own plans for a

plant in the Southeast, he conceded that his prefer-

ence had been for the Chattanooga area and that

through the persuasion of Gorman he reluctantly ac-

40

quiesced in the Sylacauga location (App. 874-876; se

also App. 1120-1122). In any event, it is hardly prob-

able that Greater Buffalo would have proceede

with any expansion plans in the area if International

had been able to go forward with its plans and locate

in the region first. Indeed, when Koessler first dis

cussed with Gorman the availability of International

for sale, he expressed interest in International's

“southern section” (App. 1153-1154), strongly sug.

gesting that a primary motive for the acquisition was

elimination of International’s planned expansion as a

competitive threat.

Against this background, we submit that the Syla-

cauga plant was more the realization of Interna

tional’s plans than Greater Buffalo’s, and must be

viewed as a fruit of the unlawful acquisition. More

over, its divestiture is essential to restore effective

competition among color comic supplement printers.

41

CONCLUSION

The judgment of the district court should be re-

versed and the case remanded for the fashioning by

the district court of appropriate relief as indicated in

this brief.”

Respectfully submitted.

ERWIN N. GRISWOLD,

Solicitor General.

RICHARD W. MCLAREN,

Assistant Attorney General.

DANIEL M. FRIEDMAN,

Deputy Solicitor General.

SAMUEL HUNTINGTON,

Assistant to the Solicitor General.

GrecoRY B. HOVENDON,

LEE A. RAU,

E.uLiotT H. FELDMAN,

Attorneys.

In addition to divestiture, it may be appropriate to in-

clude other provisions, such as one designed to prohibit after

divestiture—at least for a period—Greater Buffalo from

printing for King to assure that the purchaser of the divested

assets will be in a position to obtain sufficient business to

operate profitably (see App. 834-837). The selection and

formulation of those provisions is for the district court to

decide in the first instance.

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