Brief for the United States — United States v. Marine Bancorporation, Inc.

CITATIONS

Camden Trust Co. v. Gidney, 301 F. 2d 521, certiorari ©

I OR 01S: Bn kok eek seis 3

First National Bank v. Walker Bank, 385 U.S. 252... 3,4

Otter Tail Power Co. v. United States, 410 U.S. 366 --- 10

Pineland State Bank v. Proposed First National Bank

of Bricktown, 335 F. Supp. 1376_---------------- 3

Ramapo Bank v. Camp, 425 F. 2d 333, certiorari denied,

Ts BOG eee a ee ee 3

: Schine Theatres v. United States, 334 U.S. 110______- 10

: Traverse City State Bank v. Empire National Bank, 228

We SOE ssc ce teste eecccsentecaeccestees 3

United States v. Griffith, 334 U.S. 100_--.--..------- 10

United States v. Grinnell Corp., 384 U.S. 563__------ 10

United States v. Pabst Brewing Co., 384 U.S. 546_--_- 8, 10

United States v. Philadelphia Nat. Bank, 374 U.S. 321. 8,9

United States v. Phillipsburg Nat. Bank, 399 U.S. 350. 7,9

Statutes:

Bank Merger Act of 1966, 80 Stat. 7, as amended, 12

Ba De OE No ices ees ee 6

Clayton Act, Section 7, 38 Stat. 731, as amended, 64

Stat. 1125, 15 U.S.C. 18__-_----------------- 6, 7, 8, 10

Nationa! Bank Act, 12 U.S.C. 21, et seq.:

FS CAS | Re ee ee 3

: OD UA BE ae ce ee 3

2 TT BU aa ee 3

. Sherman Act, Section 2, 26 Stat. 209, as amended,

16 TUBA. 8 noi cece eee cee eco 10

Revised Code of Washington (RCW) 30. 04.230_-_--- 5

522-755—73——_-1

nena

It

Miscellaneous: . :

Advisory Report of the Board of Governors of the

Federal Reserve System on the Competitive Factors

Involved in the Proposed Merger of Pioneer Na-

tional Bank and First National Bank of Logan,

MOMRON BA, WUD ok s woh Shae nonce ck

Decision of the Office of the Comptroller of the Cur-

rency on the Application to Merge Pioneer Na-

tional Bank, Logan, Utah, with The First National

Bank of Logan, Logan, Utgh, April 23, 1973_____-

Solomon, Bank Merger Policy and Problems: A Linkage

Theory of Oligopoly, 89 The Banking Law Journal

EEG AO Sinha etna icwabuna A Moca erie,

4n the Supreme Gourt of the Wnited States

| OctoBER TERM, 1973

No. 73-38

Unitep States OF AMERICA, APPELLANT

v.

Marine BancorporaTion, Inc., NationaL BaNK OF

~ CoMMERCE OF SEATTLE, WASHINGTON TrUsT BANK,

AND JAMES FE. SmirH, COMPTROLLER OF THE

CURRENCY

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR

THE WESTERN DISTRICT OF WASHINGTON

BRIEF FOR THE UNITED STATES IN OPPOSITION TO MOTIONS

TO AFFIRM

1. The government contends that National Bank of.

Commerce (“NBC”) was a potential entrant into the

Spokane market because, inter alta, it could have spon-

sored a new national bank there as an affiliate and later

acquired it. The appellee banks argue that NBC could

not in fact have done so beeause such conduct would

violate provisions in Washington law limiting branch

banking, and that NBC would not have done so be-

cause the settled practice among Washington banks

has been to the contrary.

(1)

ee

2

The record shows, however, that Washington banks

have for many years gained entry into areas in

which they could not establish de novo branches by

sponsoring new banks in those areas and subsequently

acquiring them.’ The federal regulatory authorities,

including appellee Comptroller, are aware of this prac-

tice and have never objected to it when considering

specific applications by national banks in Washington.’

The merging banks NBC* and WTB‘ have also been

aware of the sponsorship activities of other Washing-

ton banks.

Indeed, officers of NBC themselves considered spon-

soring an affiliate in several instances.* Moreover, NBC

sponsored a new bank in South Central Washington,

the Columbia Center National Bank, for the purpose

of acquiring it in the future.‘ It has never been sug-

gested that either these sponsorship activities by NBC

and its officers, or the practice itself is illegal."

* See Tr, 280-298, GX H-1 and H-11.

*GX H-1, H-3, H-4, H-5, H-6, H-7, H-8, H-11, H-12, H-13

and H-14 show that all three federal bank regulatory agencies

are aware of the practice among major Washington banks of

sponsoring new banks in furtherance of their expansion

programs.

*GX I-4+b, I-6b, I-7, I-8a, I-8b, I-9a, I-9b, I-10a, I-10b

I-11a, I-11b, I-11c, I-11d, J-45, J-46.

*GX C.

*GX I-3, I-4e, I-4d, Ie, I-5.

"*GX J-1 through J-54; GX K-1 through K-94.

* During the trial, the district court flatly rejected appellees’

assertion that NBC could not legally sponsor the formation of a

new national bank as a vehicle for its entry into Spokane (Tr.

732-733) :

“I don’t conclude * * * that there is anything wrong with

that approach. * * * [T]he only thing is, they had the capa-

’

—_—

3

Contrary to appellees’ contention, First National

Bank v. Walker Bank, 385 U.S. 252, does not indicate

that such sponsorship by NBC would be prohibited

under the National Bank Act. That case held that the

provision of that Act governing branch banking (12

U.S.C. 36(c)) permits national banks to establish

pranches only in accordance with state law. The estab-

lishment of a new national bank, however, even where

sponsored. by an existing bank, is governed by other

provisions of the Act (12 U.S.C. 26, 27) which do not

require compliance with state law restrictions on

branch banking. This distinction between the charter-

ing of new, bona fide national banks to be affiliated

with existing banks, and branching by existing banks,

is reflected in the decisions of other federal courts; *

in the Comptroller’s decisions cited above (n. 2,

supra, p. 2), and in the subsequent history of the

Walker Bank case itself.

In Walker Bank this Court held that it was unlawful

for The First National Bank of Logan to establish a de

bility, and they had done it, if that is what you are trying to

prove.

* _ * * * *

“Well, I have no doubt about that, I had no doubt about that

right from the beginning of the case. I think they can go in.

They can help organize one, they can loan money, and all the

rest of it, and they could probably do it in Spokane. I will agree

that they could do that.”

* Ramapo Bank v. Camp, 425 F.2d 333 (C.A. 3), certiorari

denied, 400 U.S. 828; Camden Trust Co. v. Gidney, 301 F.2d 521

(C.A.D.C.), certiorari denied, 369 U.S. 886; Pineland State

Bank v. Proposed First National Bank of Bricktown, 335 F.

Supp. 1376 (D. N.J.) ; Traverse City State Bank v. Empire Na-

tional Bank, 228 F. Supp. 984 (W.D. Mich.).

: 7.

4

nove branch in Logan. The Comptroller then author-

ized the establishment of a new national bank (Pioneer

National Bank), sponsored by persons associated with

First National Bank of Logan. Subsequently, the

Comptroller approved the merger of Pioneer National

Bank into First National Bank of Logan, so that the

latter in effect obtained the Logan office it originally

sought.°

Since the chartering of national bank affiliates is

not governed by state law, it is apparent that the pro-

visions of Washington law barring a newly-chartered

state bank from being acquired for ten years without

the consent of the State Supervisor of Banking are

also inapplicable.

Appellee banks (Motion, p. 21, n. 15) characterize

the practice of Old National Bank of Washington, a

subsidiary of Washington Bancshares, Inc., of spon-

soring and later acquiring new national banks in areas

* Decision of the Office of the Comptroller of the Currency on

the Application to Merge Pioneer National Bank, Logan, Utah,

with The First National Bank of Logan, Logan, Utah, April 23,

1973. As the Comptroller explained in his opinion (p. 1) :

“Pioneer National Bank, the merging bank, was chartered

in January 1968 by persons associated with The First National

Bank of Logan after an attempt by that bank to establish a

branch in Logan was stifled on legal grounds [ie., this Court's

decision in the Walker Bank case, supra]. Pioneer National

Bank has operated as an affiliate of the charter bank since its

inception and these two banks have a common directorate as

well as common stock ownership; * * *.”

See also, Advisory Report of the Board of Governors of the

Federal Reserve System on the Competitive Factors Involved in

the Proposed Merger of Pioneer National Bank and First Na-

tional Bank of Logan, March 22, 1973, p. 1: “Due to Court

action, the branch was closed on January 26, 1968, and a few

days later Pioneer was established at that location.”

where it could .not establish de nove branches, as a

“violation of both state and federal law.” Although

they assert that the Comptroller would not have

granted the charters for the national banks had he

known that the plan was to obtain branches for Old

National Bank, the record shows that the Comptroller

was fully informed of the sponsoring banks’ intention

prior to the filing of the applications * (Tr, 288-289).

Indeed, in one instance, officials of the Comptroller’s

Office actually suggested this procedure (tbid.)."

Finally, appellee banks suggest (Motion, p. 20) that

sponsorship of a new bank by NBC might result in the

forfeiture of the charter of its parent, Marine Bancor-

poration, under a provision of Washington law”

which prohibits a bank holding company from owning

or controlling more than 25 percent of the stock of

another bank. The statute, however, only bars such

There was one exception: the Comptroller was not informed

of Old National Bank’s intention to acquire a state bank it had

assisted in forming until after that bank had been formed (Tr.

288).

“The Comptroller's approval of sponsorship and acquisition

as a method of achieving de novo entry undermines the testi-

mony by the Regional Administrator of National Banks, upon

which appellee banks rely (Motion, p. 19), that his office would

not approve a charter application where the applicants disclosed

a purpose of establishing the newly created bank as a branch

of an existing bank. In any event, that testimony came in re-

sponse to a question which assumed that the applicants dis-

closed that the “sole purpose” of the application was to estab-

lish a branch (Tr. 975). This response, therefore, has no bear-

ing on the situation where the sponsored affiliate operates as a

bona fide national bank for a period of time before its sponsor

acquires it, as did the sponsored afliliates of Old National Bank.

* RCW 30.04.230.

6

ownership or control by a bank holding company, and

does not cover ownership or control merely by persons

affiliated with a holding company or one of its oper-

ating subsidiaries. This provision has not prevented

Old National Bank of Washington and its parent

Washington Bancshares, Inc., or NBC itself from

sponsoring affiliates (see nn. 1 and 6, supra, p. 2.).”

2. Appellees contend that the district court prop-

erly approved the merger on the alternative ground

that, even assuming that the government had estab-

lished the anticompetitive effects alleged in the com-

plaint, those effects were clearly outweighed by the

benefits the merger would provide in serving the con-

venience and needs of the community. The Bank

Merger Act, however, does not permit a district court

to apply the convenience and needs standards on the

basis of a hypothetical assumption with respect to the

charged violation of Section 7 of the Clayton Act.

Before a merger with anticompetitive effects may be

approved under the “convenience and needs” defense,

the court is required to balance the actual anticom- -

petitive effects against the community convenience and

needs that the merger would serve, and it may approve

the merger only if the latter factors clearly outweigh

the anticompetitive effects. See our Jurisdictional

"33 Appellees point out (Bank’s Motion to Affirm, p. 27, n. 17;

Comptroller’s Motion to Affirm, p. 17, n. 10) that the Jurisdic-

tional Statement cites certain documents that were not admitted

into evidence. With respect to some of them, other documents in

evidence support the propositions for which the excluded docu-

ments were cited. In the case of two depositions, government

trial counsel believes that they were admitted in evidence but

that the court reporter’s transcript erroneously fails to show

that fact. These documents are discussed in the appendix, infra.

—

7

Statement, p. 23. If, as we contend, this merger does.

have the anticompetitive effects condemned by See-

tion 7, the district court must conduct the balancing on

the basis of the actual facts relating to the anticom-

petitive effect, not a hypothetical case.

In any event, the record here shows that the anti-

competitive effects of this merger were not “clearly

outweighed in the public interest” by the benefits in

serving the community convenience and needs which

the district court found. The benefits that the district

court cited were primarily the additional services that

the merger will enable Washington Trust to perform

in Spokane. Although all these services are currently

available from other banks there (Tr. 949), appellees

contend, and the district court held, that the com-

munity would benefit from an alternate source for

these services. The additional services include an in-

crease in Washington Trust’s lending limit from $1.25

million to $7.5 million; international banking services ;

mining, agricultural, and student loans; and municipal

bond financing. The district court concluded that in-

creased competition for these few specialized banking

services would increase economic growth in Spokane

to the benefit of all banking customers (J.S. App., p.

46).

The convenience and needs defense, however, re-

quires a showing that the services offered by the new

bank are “likely to benefit all seekers of banking serv-

ices in the community * * *.’’ United States v. Phil-

lipsburg Nat. Bank, 399 U.S. 350, 372 (emphasis

added). Appellees have not made that showing. The

additional services that the merger would enable

Washington Trust to provide would benefit only a

small number of banking customers. Appellees have

- not shown that there is a substantial unsatisfied de.

mand for mining, agricultural and student loans. The

number of customers seeking loans up to $7,500,000

necessarily is small. Similarly, the greater availability

of municipal bond financing can benefit only a few

borrowers. Moreover, these latter two services ordi-

narily are provided by banks that operate in national

or regional rather than local markets.

3. The merger will have serious adverse effects out-

side the Spokane area, which may substantially lessen

competition in the Eastern Region of Washington and

in the State of Washington as a whole. These areas

are not banking markets, t.e., areas within which most

customers may conveniently find sellers of banking

services. See United States v. Philadelphia Nat. Bank,

374 U.S. 321, 357-359. They are, however, “section[s] of

the country,” economically differentiated from other

areas, within which the merger may “‘substantially les-

sen competition.” Since the purpose of defining a ‘‘sec-

tion of the country” under Section 7 is to foeus upon

the geographic area where the merger will have a

significant impact upon competition (United States v.

Pabst Brewing Co., 384 U.S. 546, 549-550), it is neces-

sary to consider the effect of this merger in those

broader areas.

a. State boundaries delineate a distinct area within

which banks are legally insulated from competition by

—*OW7H7" ~ ah

9

panking institutions located outside the state." Banks

in the state are required to confine their market exten-

sions (i.e., the establishment or acquisition of banking

offices in local banking markets where they have not

previously competed) within the state boundaries. If,

as a result of mergers and acquisitions, the same few

large institutions face each other in most of the state’s

major local banking markets, then competition in the

state, as a “‘section of the country” greater than the

banking markets within it, may be substantially

lessened.

Oligopolistic behavior in local banking markets will

not be limited by the threat of potential de novo or

foothold entry by other banks, since the significant

potential competitors in the state, t.e., the major banks

in local markets capable of expansion elsewhere, will

have been eliminated by merger. Thus in this case the

acquired bank is being eliminated as a potential en-

trant into other local markets in Eastern Washington.

Moreover, once the same few banking institutions have

purchased large market shares in most of a state’s

local banking markets, the local oligopolies in each

such market become linked. As a result, the statewide

institutions may engage in more standardized, and

hence less competitive business behavior everywhere,

“Very large banking customers, such as national corpora-

tions, and very large banks, however, can be said to operate in

regional and national banking markets irrespective of state

boundaries, since convenience of access is not a limiting factor at

this level. For the vast bulk of banking customers, however,

convenience is the key element in defining banking markets. See

United States v. Philadelphia Nat. Bank, supra; United States

v. Phillipsburg Nat. Bank, supra.

622-755—73——_-2 P

10

rather than risk retaliation by competing locally

anywhere.” .

In contrast, if the expansive drive of the state’s

large banks is channeled into entry into local markets

by de novo or foothold acquisitions, then they will have

to compete vigorously to enlarge their initial small

market shares. They will thus bring to local markets

throughout the state a new competitive force, which

can challenge the entrenched positions of the locally

dominant banks.”* This is the competition the merger

will eliminate.

b. NBC, the acquiring bank, is the second largest

bank in Washington, where commercial baiiking is

already highly concentrated. The five largest banks

have approximately three-fourths of total deposits in

the state. Banking concentration is even higher in

Eastern Washington, an economically distinct region

in the state; the five largest banks operating there hold

84 percent of the area’s total deposits (J.S., pp. 4-5).

Moreover, the five largest banks in the state in vary-

ing combinations hold a dominant share of deposits in

practically all the local banking markets in the state

(GX A-35).

“48 See, Solomon, Bank Merger Policy and Problems: A Link-

age Theory of Oligopoly, 89 The Banking Law Journal 116, 119

Om under Section 2 of the Sherman Act have recognized

that even though a particular firm operates in local markets, the

relevant section of the country may be broader. United States v.

Grinnell Corp., 384 U.S. 563; Otter Tail Power Co. v. United

States, 410 U.S. 366; United States v. Griffith, 334 U.S. 100, Schine

Theatres v. United States, 334 U.S. 110. The same considerations

apply to determining the “section[s] of the country” within which

anticompetitive probabilities are assessed under Section 7 of the

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

549-550.

11

Washington Trust, the acquired bank,:is the eighth

jJargest bank in the state, the third largest in Spokane,

and is a growing institution ready to expand beyond

Spokane (JS., p. 6). With assets of $112 million, it is

one of only 12 middle-sized banks in Washington (1.e.,

panks with assets in the $250 million to $30 million

range) (GX A-2) capable of expanding into other

local markets.

As developed in our Jurisdictional Statement, we be-

lieve that this merger may substantially lessen com-

petition in the Spokane market by eliminating NBC,

the acquiring bank, as a potential competitor (both

actual and perceived) in that market. But the anti-

competitive effects of this merger must also be evalu-

ated in the broader context of the prevailing banking

structure in Eastern Washington and in the state as

a whole.

Washington Trust (the acquired bank) is one of a

few banks which has the potential for entering new

markets in Eastern and other sections of Washington.

Moreover, its acquisition by one of the state’s domi-

nant banks will add Spokane to the number of local

banking markets in which the few large banks in the

state face each other as dominant factors, thus con-

tributing to the creation of a statewide banking struc-

ture of commonly linked local oligopolies. This creates

a real danger that the large banks will renounce vigor-

ous competition,” and instead pursue parallel prac-

tices of mutual advantage without regard to local com-

petitive conditions.

~The large banks in Washington have shown a tendency to

pursue parallel, and in some instances cooperative, behavior

(see GX B-1, B-2, B-3, F-29, F-31, Dep. R. Buck, pp. 53-57).

12

By disregarding the regional and statewide implica-

tions of the acquisition, therefore, the district court

severely, and erroneously, limited its assessment of the

merger’s probable competitive effects.

Respectfully submitted. :

Rosert H. Bork,

Solicitor General.

THomas E. Kavupsr,

‘Assistant Attorney General.

Howakrp E. SHapiro,

RicHarp J. Torre,

Attorneys,

Ocroser 1973.

APPENDIX

Documents cited in the government’s Jurisdictional

Statement that were not admitted in evidence.

1. GX F-21, F-24, F-28 and F-29. They were cited

(J.S., p. 19) to support the government’s contention that

NBC had made known its interest in entering the Spo-

kane market. This proposition is supported by GX F-23,.

F-25, F-26 and F-31, all of which were admitted. More-

over, GX F-21 was admitted as an exhibit to the Carlson

Deposition, received in evidence at Tr. 327. When

GX F-21 was offered to show NBC’s interest in

acquiring Washington Trust and the services of one

of its officers, however, it was rejected as immaterial

(Tr. 595). GX F-24, GX F-28 are each the second

page of a two-page document, the first page of which

was admitted and the second page of which was not.

2. GX F-3, F-10, F-11 and F-19. They were cited

(J.S., p. 18, n. 11) to show that the Comptroller favored

the merger prior to considering the application for its

approval. These exhibits were offered but rejected by

the district court (Tr. 582, 1020) as immaterial. The

district court stated (Tr. 1006), however, “* * * I'll

take it as being the fact that [NBC] talked with the

Comptroller and the chief deputy and the chief deputy

or Comptroller, whoever it was, said * * * that he

would look with favor on it if the application were

made, that’s all. I’ll accept it as being the fact—that’s

what he said.” The court therefore recognized that the

Comptroller favored the merger.

3. GX F-14 was cited (J.S., p. 6) to support the prop-

osition that the acquired bank’s officers were paid rates

(18)

14

comparable to those paid by the state’s largest insti :

tions. GX F-14 was an exhibit to the Faragher Dep

osition. Government trial counsel believes that. thi

deposition was offered and admitted but that thro gh

error the court reporter failed to record it. We are ens

deavoring to verify this, The exhibit was subsequer y

rejected by the court as immaterial to the government’

offer to show the price NBC was willing to pay for he

acquired bank (Tr. 593). yl

4. GX G-5, G-6 and G-10. They were cited (J S.y De

17, n. 10) to support the proposition that NBC h d

negotiated to acquire a smaller bank, the Farmers

and Merchants Bank, in the Spokane suburbs. Tt ay

were rejected (Tr. 606, 610), but this proposition j }

supported by GX G-2, G-3, G-7, G-8, G-9 and by’

P.T.O. VIII, Exhs. E and F, pt. IX. a

5. The government cited the Stanton Deposition

(J.S., p. 6, n. 3a) to show that the acquired bank had a

potential for expansion in Eastern Washington. -

cording to government trial counsel, this deposition

was offered and admitted into evidence, but through

a reporter’s error is not. reflected in the transcript. Ag

with the Faragher Deposition, we are attempting to

verify this. j

U.S. GOVERNMENT PRINTING OFFICE: 1973