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

Supreme Court brief1974

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Text

| Jurisdiction. ----.---------------------------"

: Question presented----------------------------

Statutes involved -----------------------------

3s H DORE

The acquired bank---------------------

The Spokane metropolitan area—the local

geographic market-------------------

. State banking law and the available means

of entry into the Spokane market - - ----

. The proceedings- ----------------------

1. Agency reports and the Comptrol-

ler’s decision - - - - -------------

2. The district court’s oral ruling - ---

3. The district court’s findings and

conclusions. ------------------

Argument.......-.-----------------------<""-

I. The effect of a bank merger that elimi-

nates a significant potential competitor

may be substantially to lessen compe-

tition, in violation of Section 7 of the

Clayton Act. ---------------------

A. Potential competition plays an

important role in maintaining

and strengthening competition

in banking markets ----------

$29-185—73——1

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Argument—Continued

I. The effect, ete.—Continued

B. The elimination of a significant

potential competitor may have

anticompetitive effects in bank-

ing on a regional and state-

II. NBC was a significant potential entrant

into the Spokane banking market____

A. Whether a firm is an actual poten-

tial entrant must be determined

by objective evidence. _______

B. On the basis of the objective cri-

teria, NBC was an actual po-

tential entrant into the Spo-

kane banking market________

1. NBC had the incentive

and capability to enter_

2. NBC could have entered

the Spokane market by

sponsoring a bank or

making a foothold ac-

a. NBC could have

sponsored a new

bank and then

acquired it...

b. NBC could have

made a foothold

acquisition of a

smaller bank in

C. NBC was a perceived potential

entrant into the Spokane area_

a...

— ——

Argument—Continued

III. The acquisition may substantially lessen

competition in the Spokane market,

in Eastern Washington, and in the state

as a whole... ......----------+--2--- 54

A. The merger may substantially

lessen competition in the Spo-

kane market by eliminating

NBC as a potential competitor

B. The effect of the merger may be

substantially to lessen compe-

tition in Eastern Washington

and in the state as a whole- - -- 65 |

IV. The anticompetitive effects of the merger

would not be clearly outweighed by the

probable effect of the merger in meeting

the convenience and needs of the Spo-

ame OFA... . . 2-2 nee none e cenene 67

Conclusion... -------------------------------- 72

Appendix. ...-------------------------+--7--° 73

CITATIONS

Cases:

Bendix Corp., The, 3 Trade Reg. Rep. § 19,288,

vacated and remanded on other grounds,

The Bendix Corporation v. Federal Trade

Commission, 450 F. 2d 534-.....---------- 30

Brown Shoe Co. v. United States,370 U.S. 294.28, 56, 70

Camden Trust Co. v. Gidney, 301 F. 2d 521, cer-

tioari denied, 369 U.S. 886---------------- 47

Elcco Products Co. v. Federal Trade Commission,

O67 F, BOVE «| 2... oc ccisn ne cccceee cesses 29 |

Federal Trade Commission v. Procter & Gamble

Co BIO UE. CB. c055 << <ccccccnnetens 29,32,37

First National Bank v. Walker Bank, 385 U.S.

ee rs Se

Cases—Continued ee

Ford Motor Co. v. United States, 405 U.S. 562_- 29

General Foods Corp. v. Federal Trade Com-

mission, 386 F. 2d 936, certiorari denied,

GE Sk Sibatewnnkchwestissiensen teen 29

/Nealley v. Brown, 284 A. 2d 480_........_.- 47

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

iin Sti eee dna detianseesscces 35-36

Pineland State Bank v. Proposed First National

Bank of Bricktown, 335 F. Supp. 1376- - --- 47

Ramapo Bank v. Camp, 425 F. 2d 333, cer-

tiorari denied, 400 U.S. 828_............- 47

Schine Theatres v. United States, 334 U.S. 110- 36

Traverse City State Bank v. Empire National

Bank, 228 F. Supp. 964.................- 47

United States v. Aluminum Co. of America, 377

Ri Ei lcenisueminntnth sn sacindbondenteces 31

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

OEE gc ntnnennasdisadinnnnnnslibinttietiewnss 29, 32

United States v. El Paso Natural Gas Co., 376

Wk GE ond nceaeenoancentansosnokis 29

United States v. Falstaff Brewing Corp., 410

US. 526....-.- 27, 28, 29, 32, 37, 38, 39, 41, 53

United States v. First City National Bank of

Bomstin, SES GE GER i noo ccccvewesinncsss 28

United States v. First National Bancorporation,

BD Gi SN co xtde ntnantided dete edbece: 26

United States v. Griffith, 334 U.S. 100____-_.- 36

United States v. Grinnell Corp., 384 U.S. 563_- 35

United States v. Jos. Schlitz Brewing Co., 253

F. Supp. 129, affirmed, 385 U.S. 37-- ----- 29

a cml Pabst Brewing Co., 384 U.S. ‘tie

< @ ” Seas ee 28, 29, 32, 37

Cases—Continued

United States v. Philadelphia National Bank, page

S74 TB BON... ncccdecddnahdaeedtaiaition 2,

24, 27, 28, 29, 31, 32, 33, 34, 41, 55, 56, 61, 70

United States v. Tidewater Oil Co:, Phillips

Petroleum Company, et al., D.C. C.D. Cal.,

No. 66-1154-F, decided November 13,

a ee 29

United States v. Phillipsburg National

399 U.S. 350.....---- 2, 28, 29, 32, 34, 61, 70, 71

Caliente v. Rinaeoean sat Stee = Supp

United States v. Third National Bank in Nash-

ville, $390 U.S. 171. ..-.--.-- 2, 27, 28, 55, 67, 68

United States v. Topco Associates, 405 U.S. 596- 41

United States v. Wilson Sporting Goods Co., 288

Fy Beth, GOB. .n npc ccnnccccnccnccespescs 29

Statutes:

Bank Holding Company Act, 12 U.S.C.

8 ddcnccnpncunhacnevthconousy 28

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

amended, 12 U.S.C. 1828 et seq.:

este FI vdn cc ecccccccaccecnnnns 18

Section 1828(c)(5)(B) --..------- 2-3, 25, 28, 52

Boctiens TRUS « « co cccnscnqecns 18

eg: 19, 21

Section 1828(c)(7)(D) - ..-------------- 19

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

amended, 64 Stat. 1125, 15 U.S.C. 18.-.-- 2,

8, 4, 22, 25, 26, 27, 28, 31, 82, 33, 36, 38, 39,

41, 52, 54, 55, 62, 63, 69

Expediting Act, Section 2,15 U.8.C.29..... 2

National Bank Act, 12 U.S.C. 21, et seg.:

TOT” abil Ras etd eeene se 47

DL ™ sige Saale alienate 47

ee AMT 47

Statutes—Continued

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

entendied, 18 UBC. B..2ccccedesecin.. ie

Revised Code of Washington (RCW)

IG wk oko ahha ick. Civica ctaca

Revised Code of Washington (RCW)

DRE ocncdcodathsenhastkivtaodsns

Miscellaneous:

Advisory Report of the Board. of Governors

of the Federal Reserve System on the Com-

petitive Factors Involved in the Proposed

Merger of Pioneer National Bank and First

National Bank of Logan, March 22, 1973- - -

Areeda, Antitrust Analysis (1967) - ...-------

Bain, Industrial Organization (2d ed., 1970) - - -

Brodley, Oligopoly Power Under the Sherman

and Clayton Acts—From Economic Theory to

Legal Policy, 19 Stan. L. Rev. 285 (1967) ----

Gilbert, Predicting De Novo Expansion in

Bank Merger Cases, Proceedings of a Con-

ference on Bank Structure and Competition,

p. 93, Federal Reserve Bank of Chicago

CRTs onc icnenonasneenesbnndmnss<

Kohn, Carlo and Kaye, Meeting Local Credit

Needs, New York State Banking Depart-

NE Tecan ncknnbnnicmasttanenanes

Moody’s Bank & Finance Manual 1962- - - - --

New ABA survey on “free checking,” Journal

of the American Bankers Association

IEE, HI eecittnd cape annnnscaces

Oldfield, Projecting the Structure of Local

Banking Markets in Pennsylvania, in Chang-

ing Pennsylvania’s Branching Laws: An

Economic Analysis, Federal Reserve Bank

ee FRIIIIA, BEI G «onc cenmencevnqssce

Page

15, 52

S$S&

& &

VII

Miscellaneous—Continued site

Pitofsky, Joint Ventures Under the Antitrust

Laws: Some Reflections on the Significance of

Penn-Olin, 82 Harv. L. Rev. 1007 (1969) --- 39

Recent Changes in the Structure of Commercial

Banking Federal Reserve Bulletin, March

Rhoades, Some Observations on Potential Com-

petition in Banking, Proceedings of a Con-

ference on Bank Structure and Competition,

Federal Reserve Bank of Chicago (1972) _--- 32

Solomon, Bank Merger Policy and Problems:

A Linkage Theory of Oligopoly, 89 The Bank- .

in Law Journal 116 (1972)_-.------------- 35

Turner, Conglomerate Mergers and Section 7 of

the Clayton Act, 78 Harv. L. Rev. 1313

PR nnnccdsciccascnncunspnchanednans 30

Wille, FDIC Merger Policy, 1970-1972, Pre-

sentation at the Practicing Law Institute

Seminars on Bank Acquisitions and Mergers

and Other Antitrust Problems, New York,

New York, October 13-14, 1972, FDIC

Wille, Potential Competition: Unfounded Faith

or Pragmatic Foresight? (New York State

Banking Department, 1970) - -.----------- 33

Yeats, An Analysis of the Effect of Mergers on

Banking Market Structures, Journal of

Money, Cedit, and Banking (May, 1973) - - - 35

Yn the Supreme Gourt of the Wnited Stutes

OcroBeR TERM, 1973

No. 73-38

Unrrep States oF AMERICA, APPELLANT

Marre Banoorporation, Inc., NationabL Bank OF

CoMMERCE OF SEATTLE, WasmINGTON TRUST Bank,

anp James E. Smrru, COMPTROLLER OF THE

CURRENCY

ON APPEAL FROM THE UNITED STATES DISTRIOT COURT FOR

THE WESTERN DISTRICT OF WASHINGTON

BRIEF FOR THE UNITED STATES

OPINION BELOW

Neither the oral opinion of the district court (Tr.

1195-1210, App. 1138-1147), nor its findings of fact

and conclusions of law (App. 1932-1952) are reported.

JURISDICTION

The judgment of the district court (J.S. App. B,

pp. 48a-49a) was entered on January 31, 1973. The

United States filed a notice of appeal to this Court

(1)

on March 30, 1973 (App. 1970-1971). Probable juris-

diction was noted on October 15, 1973 (App. 1973).

The jurisdiction of this Court is conferred by Section

2 of the Expediting Act (15 U.S.C. 29). United States

v. Phillipsburg National Bank, 399 U.S. 350; United

States v. Third National Bank in Nashville, 390 U.S.

171.

QUESTION PRESENTED

Whether the effect of the acquisition of a leading

bank in the concentrated Spokane, Washington, bank-

ing market by one of the largest banks in the state may

be substantially to lessen competition, in violation of

Section 7 of the Clayton Act.

STATUTES INVOLVED

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

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

tinent part:

No corporation engaged in commerce shall ac-

quire, 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 cor-

poration engaged also in commerce, where in

any line of commerce in any section of the

country, the effect of such acquisition may be

substantially to lessen competition, or to tend to

create a monopoly.

Subsection 5(B) of the Bank Merger Act of 1966,

80 Stat. 8, as amended, 12 U.S.C. 1828(¢) (5) (B), pro-

vides in pertinent part:

The [Comptroller of the Currency] shall not

approve—

* * * * *

(B) any other proposed merger transaction

whose effect in any section of the country may

be substantially to lessen competition, or to tend

to create a monopoly, or which in any other

manner would be in restraint of trade, unless it

finds that the anticompetitive effects of the pro-

posed transaction are clearly outweighed in the

public interest by the probable effect of the

transaction in meeting the convenience and

needs of the community to be served.

In every case, the responsible agency shall

take into consideration the financial and mana-

gerial resources and future prospects of the

existing and proposed institutions, and the con-

venience and needs of the community to be

served.

STATEMENT

The United States instituted this civil antitrust

action under Section 7 of the Clayton Act (15 U.S.C.

18). The complaint challenges the acquisition of the

third largest bank in Spokane, Washington, the

Washington Trust Bank (‘Washington Trust’’), by

the second largest bank in the State of Washington,

the National Bank of Commerce of Seattle (“NBC”),

a subsidiary of the Marine Bancorporation, a bank

holding company. The complaint (App. 9-16)

alleged that the effect of the proposed acquisition may

be substantially to lessen competition because the en-

try of NBC into the Spokane commercial banking

market through the acquisition of Washington Trust

rather than by de novo entry or by a so-called foot-

hold acquisition of a smaller bank would eliminate

NBC as (a) a potential competitor whose future entry

into Spokane other than by acquisition of a large

market share eould effeet substantial deconcentration

of that market; and (b) a perceived potential entrant

exerting a procompetitive influence on banks in the

Spokane market from its position on the fringe of

the market.

The, complaint also alleged that the acquisition of

Washington Trust, the largest middle-sized bank with

headquarters in Eastern Washington and one of the

twelve remaining middle-sized ‘banks in the state,

would eliminate that institution as a potential com-

petitor in other local markets in the state, would re-

move one of the few middle-sized banks capable of

merging with other middie-sized and smaller banks

and becoming a significant statewide or regional com-

petitor, and would adversely affect banking competi-

tion by strengthening the dominance of the state’s

few large banking institutions.

After a trial the district court dismissed the com-

plaint holding that the merger did not violate Section

7 and that if the merger would have some or all of the

alleged anticompetitive effects, they are clearly out-

weighed by the effects of the merger in meeting the

convenience and the needs of the community.’

* Prior to trial, all allegations in the complaint relating to

actual competition in commercial banking and correspondent

banking were abandoned. The case went to trial only on the

potential competition issues detailed above.

A. THE STRUCTURE OF BANKING IN WASHINGTON

It is undisputed that the relevant product market in

this case is, as the district court found (F. 11, App.

1934), “commercial banking.”’

Commercial banking is highly concentrated in the

State of Washington, in Eastern Washington (a

geographically distinct region comprised of 19 coun-

ties and separated from the Western part of the state

by the Cascade Mountains), and in the Spokane

metropolitan area, which the district court found to

be the relevant geographic market (F.13, App. 1934).

There are 90 national and state banking organiza-

tions in Washington. The five largest banking orga-

nizations * hold 74.3 percent, of total commercial bank

deposits in Washington; they operate 421, or 61.3

percent, of the state’s 687 commercial banking offices

(GX A-17, App. 1165). The two largest banking or-

ganizations (Seattle-First National Bank and NBC)

hold 51.3 percent of total deposits, and operate 251

offices, or more than one-third, of the total number

of banking offices operated in the state (ibid.). One or

the other operates in 34 of the state’s 39 counties, they

? These organizations and their shares of total deposits held

by all Washington banks are: Seattle-First National Bank

(31.7 percent), NBC (19.6 percent), Pacific National Bank of

Washington (10.0 percent), Peoples National Bank of Wash-

ington (72 percent), and Washington Bancshares, Inc. (5.8

percent) (GX A-17, App. 1165).

* Unless otherwise indicated, all figures are as of June 30,

1972. “GX” refers to government exhibits; “P.T.O.” refers. to

the pre-trial order (App. 364-445) ; “Tr.” refers to transcript;

“Interr.” refers to defendants’ answers to plaintiff's interroga-

tories.

both operate in 25 counties, and in 22 of these 25 coun-

ties each has 10 percent or more of the total county

bank deposits (GX A-23, App. 1173-1176, GX A-25,

App. 1181-1184).

In most areas in Washington commercial bank

deposits are, in various combinations, concentrated in

the state’s five largest banking organizations. Thus the

state’s five largest banking organizations, in vari-

ous combinations, hold more than 75 percent of the

bank deposits in 21 of the 39 counties (ibid.) ; in 30

counties one or two of the state’s five largest banking

organizations hold more than one-half of the deposits

(ibid.).*

In Eastern Washington, the five banking organiza-

tions with the largest shares of bank deposits in that

region ® hold 84 percent of the area’s total bank de-

posits and operate 69 percent of its offices (GX A-19,

App. 1167). The large bulk of those deposits are in

Spokane County (GX A-27, App. 1186), the most

populous county in Eastern Washington, whose total

deposits ranked third among all counties in the state

(ibid). In Spokane County, nine banking organiza-

* We do not contend that all counties are relevant local bank-

ing markets; however, county market share figures do reflect

the pattern of statewide concentration at the local level.

5 These organizations and their shares of Eastern Washing-

ton bank deposits are: Seattle-First National Bank (31.2 per-

cent), Washington Bancshares, Inc. (22.8 percent), NBC (19.4

percent), Washington Trust (6.2 percent), and Pacific National

Bank of Washington_(4.4 percent) (GX A-19, App. 1167).

*Spokane County banking offices hold 8.4 percent of the

total deposits in the state and 34.7 percent of Eastern Wash-

ington’s bank deposits (GX A-27, App. 1186).

——

tions operate 52 banking offices (GX A-52, App.

1217), The three leading banking organizations in

Spokane County ‘ hold 89.6 percent of all commercial

bank deposits and operate 75 percent of the offices in

the county (ibid.). |

The City of Spokane and the populated areas im-

mediately adjacent to it (the Spokane metropolitan

area), which comprise a part of Spokane County and

which the district court found to be the relevant

geographic market, is the third most populous area in

the state (P.T.O., Admitted Facts IV, App. 366)

and is the growing economic and financial center of

the “Inland Empire,” a rich geographic area in the

Northwest (GX L-2, p. 5, App. 1751). The Spokane

metropolitan area is served by only six of the nine

banking institutions operating in Spokane County

(compare GX A-52, App. 1217, with GX A-55, App.

1220).

Here, too, the commercial banking business is high-

ly concentrated. ‘Phe three largest banking organiza-

tions in the Spokane metropolitan area hold 92.3 per-

cent of the area’s total deposits (GX A-55, App.

1220) and 92 percent of the area’s outstanding bank

loans (GX A-58, App. 1223). The following table

(derived from GX A-55, App. 1220, and GX A-58,

App. 1223) shows the distribution of total deposits

and total loans for the six- ing organizations

operating in the Spokane metropolitan area:

*These organizations and their shares of Spokane County

bank deposits are: Washington Bancshares, Inc. (40.3 percent),

Seattle-First National Bank (31.5 percent), and Washington

Trust (17.8 percent) (GX A-52, App. 1217).

—_—_—

weniee | HE

B. THE ACQUIRING BANK

_ The National Bank of Commerce, a wholly-owned

subsidiary of Marine Bancorporation, Ine.

(“Marine”), a registered bank holding company, is

the second largest banking organization in the State

of Washington. As of December 31, 1971, NBC had

total deposits of $1.6 billion (22.8 percent of total de-

posits held by Washington commercial banks), total

assets of $1.8 billion, and total loans of $881.3 million

(21 percent of total loans of Washington commercial

banks) (GX A-2, App. 1149). NBC operates 107

branch banking offices; 31 in Eastern Washington,

located in all but two of the 20 counties there (P.T.O.,

Admitted Facts IV, App. 366-368, GX A-23, App.

1173-1176). :

Although NBC does not operate a branch office in

the Spokane metropolitan area, Spokane is a market

which NBC has considered attractive and sought to

enter for many years (see e.g., Tr. 742-743, App. 876-

877, GX F-27, App. 1276). NBC had knowledge of the

Spokane banking business through its past and exist-

ing business relationships in that market (P.T.O.,

SSS STL See ne ee

ey, ae ano Si ae ent es ee eR

Admitted Facts IV, App. 366).’ As of January 31,

1972, NBC derived $4.4 million in deposits from and

had outstanding $10.2 million in loans to customers in

Spokane (P.T.O., Admitted Facts IV, App. 366-367).

In its 1970 annual report, Marine reported that with

the proposed merger, NBC was within “sight of one

of its long-sought goals; representation in the city of

Spokane” (GX D-6, p. 5, App. 1270). Indeed, in their

economic brief in support of this merger, the parties

stated that if NBC ‘“‘is to maintain its present rela-

.. tive position with its competitors and maintain the

business of its major national customers,, [NBC]

must have representation in Spokane, the state’s sec-

ond largest city” (GX L-1, p. 47, App. 1743; emphasis

added). They pointed out that several economic fac-

tors linking Seattle and Spokane ‘emphasize the need

for a banking system with representation in both

* NBC operates two branch offices in Spokane County, one

in the gommunity of Deer Park, 20 miles north of Spokane,

and one in the community of Medical Lake, 15 miles west of -

Spokane (GX L-1, p. 43, App. 1739). These two offices, located

in rural areas, had combined deposits of $11.% million as of

January 31, 1972. Althongh they derived some business from

Spokane, they are not part of the Spokane commercial banking

‘Seattle and Spokane. Conversely [these factors] em-

phasize the disadvantage at which banks without such

representation operate’ (id., at p. 18, App. 1714),

Peoples National Bank of Washington, which has no

representation in Spokane, is the only other bank-

ing organization among the five largest in the state

that is currently operating at such a “disadvantage.” ”

Peoples National Bank is approximately one-third as

large as NBC (GX A-2, App. 1149).

C. THE ACQUIRED BANK

Washington Trust, the acquired bank, is the eighth

largest banking organization with headquarters in

Washington (GX A-2, App. 1149). As of December

31, 1971, it had assets of $112 million, total deposits

of $95.6 million and loans of $57.6 million (¢bid.). It

ranks fourth in terms of totAl deposits among banking

organizations operating in Eastern Washington (GX

A-19, App. 1167), and third among banking organi-

** Of the five largest banking organizations in Washington

NBC is the only one that is not represented in three of the

' four largest. cities in the state (Spokane, Tacoma and Everett—

Seattle is the largest) (P.T.O., Admitted Facts I. Exh.

App. 365, 398). Seattle-First National Bank and Pacifie Na-

tional Bank of Washington are represented in all four cities:

Peoples National Bank of Washington is represented in Seattle.

Tacoma and Everett: and Washington Bancshares, Inc. (Old

National Bank of Washington and First National Bank of

Spokane) is represented in Seattle and Spokane (GX A-54,

App. 1219, GX A-67, App. 1232, GX A-68, App. 1233, GX

A-69, App. 1234).

zations operating in the Spokane metropolitan

area, where (as of December 31, 1971) it operated

17.4 percent of the area’s 46 banking offices (GX A-54,

App. 1219). It is one of only 12 middle-sized banks in

Washington (¢.e., banks with assets in the $250 million

to $30 million range) (GX A-2, App. 1149) capable of

expanding into other local markets.

Washington Trust is a well-managed and growing

banking institution. In the five years preceding the

approval of the proposed merger its deposits in- —

creased by 50 percent, and its market share by 2 per-

cent, while the market share of its larger competitor,

Seattle-First National Bank, had declined by approxi-

mately 6 percent (GX A-55, App. 1220). Similarly, its

total loans increased 70 percent from December 1966

to June 1972, an increase in its share of total bank

loans of about 1 percent (GX A-58, App. 1223).

Washington Trust’s officers were paid at rates at least

comparable to those paid by the state’s largest institu-

tions (see, Tr. 829, App. 927), and the bank had re-

cently introduced several new services (Interr. No. 9,

App. 44-52)."

At the time of the proposed acquisition, as a report

made for Washington Trust by a banking consultant

indicated (GX M-2, pp. 8-9, App. 1765-1766), the

™ Washington Trust had options to purchase stock in two

other banks in Eastern Washington (Interr. No. 48, App. 87-

89); and its officers had assisted in the organization of a third

bank (Tr. 849-851, App. 938-940). An officer of Washington

Trust is a member of the board of directors of two of the three

latter banks (Interr., No, 538, App. 89-90).

| ae

bank was ready to expand beyond the Spokane market

and play a larger role in the state by making “small”

acquisitions.” This report emphasized Washington

Trust’s “‘youthful and capable management’ (GX

M-2, p. 8, App. 1765), and an earlier preliminary

report noted the bank’s “young and eager staff” and

the “leadership” of its top two officers as “important

resource[s]” of the bank (GX M-1, p. 3, App. 1755).

™ The report stated that (GX M-2, pp. 8-9, App. 1765-1766) :

“* * * the bank is ready to move to a new plateau of actir-

ity. The bank has a strong business background, a healthy

capital structure and earning power, youthful and capable

management, and a good chance of improving its prominence

state-wide. There are undoubtedly more branches to be’ added

in Spokane (county and city) and more accounts to attract

at existing locations; but the bank is ready for more than

that. It is time to consider the bank’s role state-wide.

If the bank is to grow through smaller acquisitions, then

these should be on the basis of as even an exchange as is possi-

ble in terms of earnings and book value. Ephrata [é.e., Security

Bank of Washington at Ephrata, Washington, see Interr. No.

48, App. 87-89] would be a good merger on such a basis, as

would any possibility in the Southwestern “Inland Empire.” If

only holdup prices are possible, however, then serious thought

should be given first to a merger with a sizeable coastal institu-

tion so that the maximum potential value of present Washington

Trust stockholders can be realized. If the only possible partner

is National Bank of Commerce, then smaller interim acquisi-

tions should be cautious to guard against potentially serious

anti-trust problems. As N.B.C. is a high-risk merger possi-

bility from an antitrust standpoint, other possible merger

partners should be cultivated. In any event, the Washington

Trust Bank, all things considered, appears to have outgrown

the potential of Spokane.”

D. THE SPOKANE METROPOLITAN AREA—THE LOCAL

GEOGRAPHTO MARKET

The district court found that the city of Spokane

and the populated areas immediately adjacent, to it

(‘the Spokane metropolitan area’’) constituted the

relevant geographie market (F. 13, App. 1934). This is

the second largest city in Washington and the largest

‘city in eastern Washington (P.T.O., Admitted Facts.

VIII, Exhs. E & F, pt. IV, App. 368, 415, 427). As

appellee banks pointed out in the economic brief they

submitted to the Comptroller in support of the pro-

posed merger (GX L-1, p. 19, App. 1715) : “The eco-

nomic influence of the city of Spokane reaches far

beyond the borders of Spokane County. The city has

developed as the center of a regional trade territory

popularly known as the Inland Empire, encompassing

portions of four states and bounded by major moun-

tain ranges.”’

Spokane is also the center of a more narrowly de-

fined area (‘‘the Spokane Trade Area’’) with which

it has closer economie and commercial ties. This area

includes 17 Washington counties located east of the

Caseade Mountains, and counties in Idaho and Mon-

tana (id., at p. 20, App. 1716). Agriculture, mining

and forestry are major industries in this area, and

Spokane, “[e]Jentrally located in the Trade Area,

*** has become the focal point for wholesale and

retail trade” (id., at pp. 21-22, App. 1717-1718).

Spokane’s economy is healthy and growing. Accord-

ing to Washington Trust’s 1972 report to its stock-

holders, ‘Spokane County has held the gains achieved

during five years of healthy growth from 1965 through

1970 despite reduced activity in manufacturing in-

dustries. General business activity can be described as

nothing less than very good” (GX D-1, p. 1, App.

1265). Various economic indicators in the record show

that this optimism for Spokane’s future is well

justified.

Employment figures show that Spokane’s * economy

has become more diversified over the years (Tr. 231-

223, App. 577-578, GX O-3, App. 1822), and that

although Spokane’s economy has undergone four

“eycles” since 1950, it is now in a period of expansion

(following periods of expansion, recession and recov-

ery) (Tr. 225-226, App. 573-574). Total employment

in Spokane has increased about 20 percent since 1962

(GX 0-3, App. 1822), its population has been inereas-

ing moderately (GX O-1, App. 1820), and the number

of housing units authorized per year has increased

sharply from less than 1,000 in the years 1962-1964 to

more than 4,000 in 1971 (GX O-11, App. 1829). The

government’s expert concluded from these data that

Spokane will experience steady economic growth in

the near future (Tr. 253, App. 590).

**The data in the text relating to Spokane’s economy are

data for the Spokane Standard Metropolitan Statistical Area,

which is Spokane County and is larger than the Spokane

metropolitan area. These data are the most conveniently avail-

able, and provide a good base for evaluating trends (Tr. 229-

230, App. 576).

In addition to this general economic growth, the

banking business in the Spokane metropolitan area

has grown substantially. From December 1966 through

December 1971, total deposits held by banks in that

area increased approximately 32 percent from $379

million to $500 million, and total loans held by these

banks increased approximately 38 percent from $224

million to $319 million (GX A-55, App. 1220, GX

A-58, App. 1223). During this period all the banks in

the Spokane metropolitan area operated profitably

(GX A-65, App. 1230),"* and the combined income of

all the banks in the Spokane metropolitan area in-

creased steadily (GX A-66, App. 1231).

E. STATE BANKING LAW AND THE AVAILABLE MEANS OF

ENTRY INTO THE SPOKANE MARKET

" Washington law” permits banks to open branches

only in (1) the city in which their headquarters are

located, (2) the unincorporated areas of the county

in which their headquarters are located, and (3) in-

corporated communities which have no banking office.

Branching into other areas is permitted by the ac-

quisition of an existing bank or banking office. Banks

in the State of Washington, however, have entered

de novo into areas foreclosed to branching by spon-

soring the organization of an affiliate bank, and later

acquiring the bank. This method of expansion is a

legal (Tr. 732-733, App. 870, Tr. 289, App. 610) and a

“The Pacific National Bank of Washington, however, had a

loss for the year ending December 1966 (GX A-65, App. 1230).

* RCW 30.40.020.

well-reeognized practice used by large statewide bank-

ing organizations (Tr. 280-298, App. 604-616, GX I-3,

¥-4b, I-4d, I-4e, I-5, I-6b, I-7, E-S8a, I-8b, I-9a, I-

9, I-10a, I-10b, I-lla, I-11b, I-Lle, I-1ld, App.

1350-1352, 1354, 1356-1361, 1363-1375), and recognized

by the federal banking authorities.”

Sinee NBC’s headquarters is in Seattle, it is le-

gally barred from opening a branch in Spokane. In

order to enter the city, it would have to do so by ac-

quisition. Apart from entry by purchase of: a large

market share—the method attempted in this case—

there were two significant possibilities: (1) acquisi-

tion of a sponsered bank formed by NBC officers, di-

rectors, or their associates as an independent firm to

be assisted by NBC until acquired and converted into

a branch; or (2) acquisition of a smaller bank.

In the last decade, the sponsored bank proeedure

has become an established method by which national

banks enter new markets in Washington. Under that

%* GX H-1, H-8 through H-15 (App. 1288-1290, 1293-1345),

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. These

agencies have never questioned the practice when considering

specific applications by national banks in Washington. Indeed,

the Comptroller of the Currency, in his statement approving the

application of Old National Bank of Washington to purchase

Tri-Cities National Bank of Pasco, noted that the latter bank is

“a satellite of the purchasing bank, opened in 1961 to provide

the purchasing bank with access to the Pasco area” (GX H-8,

App. 1815). As the Federal Deposit Insurance Corporation

pointed out in its report to the Comptroller of the Currency on

that proposed acquisition, “Under applicable branching laws re-

stricting the establishment of de novo branches, Old National

[the purchasing bank] can enter Pasco only through merger or

the absorption of an existing bank” (GX H-10, App. 1324).

_™

procedure—as is shown by the experience of Old

National Bank of Washington discussed below—the

sponsored bank must first be chartered by the Comp-

troller as an independent national bank. It must be

operated for a period of time as a bona fide and in-

dependent institution, although it may be affiliated

with its sponsor for purposes of correspondent rela-

tionships and other inter-bank services, including fi-

nancial support. It may be acquired by its sponsor,

with the Comptroller’s consent, after it has become es-

tablished in the community it serves.

Old National Bank of Washington has used the

procedure on five occasions (Tr. 280-298, App. 604—

616), and the record shows that the Comptroller was

fully informed of the sponsoring bank’s intentions

prior to the filing of three of the four applications for

national bank charters (Tr. 288-289, App. 609-610,

and see n. 16, supra, p. 16)."" Indeed, in one instance,

officials of the Comptroller’s Office actually suggested

this procedure (Tr. 288-289, App. 610).

Officers of NBC themselves considered sponsoring

an affiliate in several instances. NBC itself sponsored

the formation of an affiliate in a strategically located

sori center in South Central Washington, the

Columbia Center National Bank, for the purpose of

acquiring it in the future.” .

7 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, App. 609-610).

18 GX 1-3, 1-44, I-4e, 1-5, App. 1350-1352, 1356-1361.

»® Tr, 730-731, App. 869, GX J-20, J-37, GX K-36, K-70, K-93,

App. 1396, 141, 1514-1515, 1573-1575, 1694, Dep. A. Price, pp.

71-72, 101, App. 286, 305, Dep. D. Loney, 43-44, App. 357-358.

F, THE PROCEEDINGS

1. Agency Reports and the Comptroller’s Decision

In February 1971, Marine, NBC, and Washingto

Trust agreed to merge the latter into NBC and sub

sequently applied to the Comptroller of the Currency

for approval of the merger. Pursuant to 12 U.S.C

1828(¢), the Board of Governors of the Federal Re

serve System, the Federal Deposit Insurance Cor

poration, and the Department of Justice furnishec

reports to the Comptroller on the competitive effect:

of the proposed merger. The Board of Governors con

cluded that the merger ‘‘would increase the already

high level of concentration of banking resources it

Washington,’’ and that the overall effect on competi:

tion would be “adverse’’ (P.T.O., Admitted Facts I

Exh. C, App. 365, 408-410). The Federal Deposit In-

surance Corporation similarly concluded that the pro-

posed merger would “add significantly to the already

high level of commercial bank concentration which eX:

ists in the state of Washington,” and that it “would

have a substantially adverse effect’ on competition

-(id., Exh. D, App. 411-413). The Department of Jus-

tice reported that the proposed merger would have a

“significantly adverse effect on competition” (id., Exh.

B, App. 403-407). The Comptroller, however, ap-

proved the merger on September 24, 1971 (id., Exh. A,

App. 398-402).

On October 22, 1971, the United States filed its com-

plaint challenging the merger. Consummation was

stayed automatically pursuant to 12 U.S.C. 1828 (¢) (7)

(A), pending the termination of the suit. The Comp-

_—

troller intervened as a party defendant under 12

U.S.C 1828(¢)(7)(D).

9. The District Court’s Oral Ruling. After the trial

and final oral argument, the district court ruled for

the defendants from the bench (Tr. 1195-1210, App.

1138-1147). The court indicated that it found the de-

fendants’ expert witnesses to be more credible than the

government’s witness with respect to the nature of

competition in banking (Tr. 1195-1197, App. 1138-

1139). It apparently agreed with the defendants’ ex-

perts that there was little likelihood of de novo or

‘foothold’? entry by NBC into Spokane and that NBC

did not influence the Spokane banking market from ~

the “wings” (Tr. 1197-1198, App. 1139-1140).

‘The court found that the government had not sus-

tained its burden of proving anticompetitive effects

(Tr. 1200-1201, App. 1141). It stated that economic

growth in Spokane was likely to be “slow and mod-

erate;’’ that banking competition was different from

competition in other industries; and that Spokane

was “well banked” and did not need another bank “to

go in there on a new basis to make competition” (Tr.

1201-1203, App. 1142-1143). The court also indicated

that only the Spokane area could be affected by the

merger (Tr, 1205-1206, App. 1143-1144). Finally, with

“yespect to the convenience and needs justification au-

thorized by the Bank Merger Act, 12 U.S.C. 1828(c)

(7)(B), the court remarked “that a need has been es-

tablished, and how great a degree I am not prepared to

say, but.there is a need, but I don’t think it is neces-

sary to show the need because I don’t see any anti-

competitive effect of the merger” (Tr. 1206, App.

1144).

3. The District Court’s Findings and Conclusions,

The court subsequently adopted, without change, the

defendants’ proposed findings of fact and conclusions

of law. These findings rejected the claim that banking

in the Spokane metropolitan area was not competitive.

The court concluded that although three banks held 92

percent of the area’s deposits, “other structural fac-

tors * * *, such as the number of banks and the num-

ber of banking offices in the market area,. together

with the actual performance of the market,” as ob-

served by defendants’ experts, established that regard-

less of market share data Spokane was a ‘‘highly com-

petitive market’’ (F. 22, App. 1940).

The district court also found no likelihood that

NBC would enter Spokane de novo or by foothold ac-

quisition and that there was no feasible method by

which NBC could enter Spokane other than by ac-

quiring Washington Trust (F. 19, App. 1936). It

found that no bank office or bank that was reasonably

acceptable to NBC was available for acquisition (F. 19

(a), App. 1936-1937). In addition, the court found

that Spokane’s growth would be too slow to justify

“starting from scratch or from a minimal foothold”

(F. 19(b)C, App. 1938). It also found that entry de

novo or by foothold acquisition would have little com-

petitive impact in Spokane (F. 20, App. 1939).

The district court rejected the government’s claim

that the termination of Washington Trust’s inde-

pendent existence may substantially lessen competition

because it would eliminate a vigorous independent mid-

dle-sized banking institution capable of entering other

markets in the state or merging with other banks of

similar size. The court found that there was no “‘rea-

sonable probability” that ‘‘WTB will expand into

other banking markets in eastern Washington or that

WTB has the incentive or capability to do so,” or that

it would combine with other middle-sized banks (F.

23, App. 1940).

The court also rejected the government’s contention

that the merger would adversely affect banking in the

State of Washington by strengthening the dominance

of the state’s few large banking institutions. The court

ruled that since banking is an inherently local busi-

ness, neither the state nor Eastern Washington ‘‘con-

stitutes a commercial banking market or a relevant

geographic market’’ within which to consider competi-

tive effects (F. 14, App. 1934-1935).

Finally, the court found that the benefits to the

“convenience and needs” of the Spokane community

that the proposed merger would provide clearly out-

weighed any anticompetitive effects it might have.

Under the Bank “Merger Act of 1966, 12 U.S.C. 1828

(c)(7)(B), this finding constitutes an affirmative de-

fense to a merger that otherwise would violate Section

7. The ‘‘convenience and needs” finding was based on

the effects of the merger in eliminating Washington

Trust’s competitive disadvantage from being unable

to offer all thé services being offered by the largest

banks in Spokane, such as international banking, gov-

ernment insured mortgage financing, and student loans

(F. 25, App. 1941-1950). :

The acquisition by the second largest bank in the

state of Washington, NBC, of the third largest bank

in Spokane, may substantially lessen competition in

Spokane, in Eastern Washington, and in the state as

a whole. The acquisition will eliminate NBC as a

perceived and actual potential entrant ‘in Spokane,

and consequently will have adverse effects on the

regional and state-wide structure of banking in

Washington.

The purpose of Section 7 is to prevent changes in

the structure of industries which threaten anticom-

petitive consequences. Elimination of both actual and

perceived potential «ompetitors is such a change, be-~

causesuch competitors are factors in the market's

structure. A perceived potential entrant waiting in the

wings may influence the behavior of those in the

market. An actual potential entrant can deconcentrate

the market by independent entry and bring more com-

petitive vigor to it by competing vigorously to enlarge

its market share.

“The test for determining whether someone is ag

actual potential entrant is whether, considering all the

circumstances, independent entry in the future is a

reasonable choice for prudent management if entry

by a large acquisition is not available. This depends

upon the market’s prospects for growth and for profit-

able operations, and upon the legal, technological and

financial capabilities of the firm in the light of its

P ;

past expansion. The same factors apply to determina-

tion of both perceived and actual entrants. This deter-

* mination must be. based upon such objective criteria

and not upon statements by the acquiring firm’s man-

agement respecting its future intentions for independ-

ent entry.

Elimination of either aspect of potential competi-

tion may have adverse competitive effects not only in

local banking markets, but in larger, economically dis-

tinct areas such as geographically separate regions

like Eastern Washington and the state itself. These

are not customer-seller banking markets, but neverthe-

less they are statutory “sections of the country.” The

state so qualifies because state banking laws insulate

it from outside entry and confine bank expansion

within it. As the state’s banking markets became domi-

nated by the same few large institutions, which then

encounter each other in most of a state’s major bank-

ing niarkets, competition in the state as a whole may

be lessened. Local oligopolistic structures and patterns

of behavior may then become linked, projecting that

structure and behavior throughout the state.

By objective criteria NBC was a potential entrant

into the Spokane banking market. It was one of only

two Washington banking organizations capable of

independently entering Spokane. Its interest in entry

there is undisputed. Its substantial resources and his-

tory of expansion demonstrate that it has the capa-

- bility to enter.

= oe

It was not legally barred by Washington law from

entering Spokane. Although it cannot establish

branches there de novo, it could sponsor the charter-

ing of a bona fide independent bank, in which its par-

ent holding company could own up to 25 percent

of the equity. When that bank became established

in the local market, NBC could acquire it. This pro-

cedure is lawful, has been used by another large

Washington bank and is being used by NBC at Co

lumbia Center, Washington. It is also acceptable to

Federal banking authorities, including the Comp-

troller of the Currency. There are also in Spokane

two state chartered banks offering solid footholds

in the area which NBC might acquire.

Documentary evidence also shows that NBC was a

perceived potential entrant whose “closing in around

Spokane” was eausing concern to banks there.

Tit

The anticompetitive effects of the acquisition are

substantial. The distriet court misconceived these

effects beeause it concluded that despite Spokane’s

intensely concentrated banking structure, it was a

highly competitive market. This approach is contrary

to United States v. Philadelphia National Bank, 374

U.S. 321, and to documentary evidence showing

close relationships among the large banks in the state,

which confirms the anticompetitive consequences of

coneentrated banking structures.

_ —— —

Moreover, the expert testimony relied on by the dis-

trict court rested on factors other than competition. It

was concerned with such factors as the ratio of bank-

ing offices to population and with the “adequacy” of

local banking service. But Section 7 is concerned with

promoting competition, i.e. the struggle between inde-

pendently managed banking organizations. Bank-

office-population ratios do not reflect competition, but

only customer convenience.

The merger will also eliminate Washington Trust,

a strong healthy bank with good prospects for ex-

pansion, as an independent competitive factor capable

of challenging the state’s major banks in Spokane and

Eastern Washington. In addition, the merger will add

Spokane to the number of local banking markets

where the state leaders, each possessing a large

local market share, encounter each other. In this way,

the merger contributes to the creation of a state-wide

structure dominated by a few large banks and linked

by common oligopolistic interests.

The anticompetitive effects of the acquisition are

not outweighed by the special defense created by the

Bank Merger Act of 1966, 12 U.S.C. 1828(¢) (5) (B),

“the convenience and needs of the community to be

served.” Since the district court did not properly de-

termine the competitive effects, it could not properly

balance them against the benefits claimed for the

merger. That evaluation cannot be made on an ab-

stract, assumed hypothesis of adverse competitive

effects.

529-185—73-——3

Moreover, the benefits found by the court are insuf-

ficient to establish the defense. It is not satisfied by

the claim that substituting a larger firm for Washing-

ton Trust might counter-balance the other large state-

wide bank in Spokane. Such a test would lead rapidly

to domination of .banking markets by a few large

organizations, a purpose never contemplated by Con-

gress. The other benefits claimed, such as improved

availability of loans in excess of $1,000,000, interna-

tional banking services and municipal bond financing,

are available in markets larger than the Spokane

area. Services such as agricultural, mining, and

student loans benefit only a small segment. of the

community, and they are all available through alter-

native sources in the area.

ARGUMENT

This ease involves the application of Section 7 of

the Clayton Act to the acquisition of a bank with a

large market share in the concentrated Spokane bank-

ing market, by one of the largest banks in the State

of Washington.” The government contends that the

acquiring bank is a potential competitor in the Spo-

kane market and that the effect of its entry into that

market by acquisition of a large market share may

be substantially to lessen competition by eliminat-

ing both an actual potential entrant and a perceived

potential entrant which is likely to influence the con-

duct of bankers in that market.

*° Similar issues were presented in United States v. First Na-

tional Bancorporation, affirmed by an equally divided court, 410

US. 577.

LT eT TE SEE TC TE a eS Se ee

We submit that the district court disregarded the

signifieance of banking concentration, contrary to the

principles of United States v. Philadelphia National

Bank, 374 U.S. 321, 363. It improperly gave greater

weight to subjective than to objective evidence in de-

termining whether the acquiring bank is a potential

competitor. It failed to consider the effects of the

merger upon competition in Eastern Washington and

the State as a whole. It erred in assessing the anti-

competitive effects of the acquisition in eliminating

the acquired bank as a potential competitor in its re-

gion. Finally, it applied erroneous standards in as-

sessing “the convenience and needs of the community

to be served” under the Bank Merger Act of 1966, as

construed in United States v. Third National Bank in

Nashville, 390 U.S. 171.

Il. THE EFFECT OF A BANK MERGER THAT ELIMINATES A

SIGNIFICANT POTENTIAL COMPETITOR MAY BE SUBSTAN-

TIALLY TO LESSEN COMPETITION, IN VIOLATION OF SEC-

TION 7 OF THE CLAYTON ACT

Last Term, in United States Vv. Falstaff Brewing

Corp., 410 U.S. 526, this Court left open the question

whether a merger that eliminated a potential competi-

tor violates Section 7 if it is “challengeable under §7

only on grounds that the company could, but did not,

enter de novo or through ‘toe-hold’ acquisition and

that there is less competition than there would have

been had entry been in such a manner” (id. at 537).

Although, as we show below (pp. 53-54), NBC was

perceived as a potential entrant into the Spokane

banking market by other firms operating there, that

was not the primary basis upon which this case was

presented to the district court. Accordingly, we first

discuss the role of potential competition in banking,

and explain why the question left open in Falstaff

should be answered affirmatively.

A, POTENTIAL COMPETITION PLAYS AN IMPORTANT ROLE

IN MAINTAINING AND STRENGTHENING COMPETITION IN

BANKING MARKETS

1. Section 7 of the Clayton Act was intended to

bar mergers which contribute to further concentration

in the structure of American business. United States

v. Philadelphia National Bank, 374 U.S. 321, 362-363;

United States v. Penn-Olin Chemical Co., 378 US.

158, 170-171; Brown Shoe Co. v. United States, 370

U.S. 294, 331-332. Because of the key role played by

banking in the American economy, prevention of in-

creases in concentration in that industry by applica-

tion of Section 7 has been of special concern to

Congress. This is reflected by the incorporation by

‘Congress into the Bank Merger Act, 12 U.S.C. 1828

(c)(5)(B), and the Bank Holding Company Act, 12

U.S.C. 1842(¢), of the antitrust standards set forth in

United States v. Philadelphia National Bank, supray

United States v. Phillipsburg National Bank, 399 U.S.

350, 357-358; United States v. First City National

Bank of Houston, 386 U.S. 361; United States v.

Third National Bank in Nashville, 390 U.S. 171.

Section 7 is concerned with preventing changes in

market structure that pose anticompetitive conse-

quences. Cf. United States v. Philadelphia National

Bank, supra, 374 U.S. at 334, 362. In banking, market

structure is reflected by the number and relative mar-

ket shares of the banking organizations supplying “the

cluster of products and services that full-service banks

offer’? (United States v. Phillipsburg National Bank,

supra, 389 U.S, at 360) ; the geographic area in which

they operate (United States v. Philadelphia National

Bank, supra, 374 U.S. at 357-359) ; and the insulative

effect of state law on the nature of banking in local

and regional markets and in the state as a whole.

This Court has heretofore recognized, although in

cases not involving banking, the importance of pre-

serving potential competition in concentrated indus-

tries. United States v. Falstaff Brewing Corp., 410

U.S. 526; Ford Motor Co. Vv. United States, 405 U.S.

562; Federal Trade Commission v. Procter & Gamble

Co., 386 U.S. 568, 577; United States v. Penn-Olin

Chemical Co., supra; United States v. Continental Can

Co., 378 U.S. 441, 458, 464-465; United States

vy. El Paso Natural Gas Co., 376 U.S. 651." Under

these decisions potential competition is significant

where there are only a limited number of firms with

the eapability and incentive to enter an already con-

centrated market. Such firms may be competitively

important in relation to that market cither because

2 Sea also. United States v. Phillips Petroleum Company, et

al., D.C. C.D. Cal., No. 66-1154-F, decided November 15, 1973:

‘ United States v. Standard Oil Co., 253 F. Supp. 196 (D. NJ.) 3

United States y. Jos. Schlitz Brewing Co., 253 F. Supp. 129

(N.D. Cal.), affirmed, 385 U.S. 87; United States v. Wilson

Sporting Goods Co., 288 F. Supp. 543 (N.D. Ill.) ; Ekeo Prod-

ucts Co. v. Federal Trade Commission, 347 F. 2d 745 (C.A. 7):

General Foods Corp. v. Federal Trade Commission, 386 F. 2d

936 (C.A. 3), certiorari denied, 391 U.S. 919.

they are a source of future deconcentration by inde-

pendent or “foothold” entry”; or because such firms

may be an external factor influencing the conduct of

those already in the market *, or both.

An actual potential competitor is a firm that, were

it not for the acquisition, would be likely to enter the

market independently or by foothold. The determina-

tion whether a firm is an actual potential competitor

rests on whether, considering all the circumstances, in-

dependent entry in the future is a reasonable choice

for a prudent management if entry by large acquisi- —

tion is not available. Where a concentrated market is

growing, and profit expectations in it are good, an out-

side firm with the legal, technological and financial

capabilities to enter is a potential entrant if it would

be reasonable from a business standpoint for it to

attempt actual entry. Where, as here, a firm possess-

ing such capabilities has indicated a desire to enter

the market, its status as an actual potential competi-

tor is clear.

When an actual potential competitor enters a market

by acquisition of a large market share, the existing

competitive structure in the market may be un-

changed but the beneficial effects of potential com-

*2“Foothold” entry means entry by a new competitor into a

market through acquisition of a small competitor already operat-

ing there. See Zhe Bendix Corp., 3 Trade Reg. Rep. §19,288,

vacated and remanded on other grounds, Zhe Bendix Corpora-

tion v. Federal Trade Commission, 450 F.2d 5384 (C.A. 6).

** See Bain, /ndustrial Organization, 2d ed. 1970, p. 8; Turner,

Conglomerate Mergers and Section 7 of the Clayton Act, 78

Harv. L. Rev. 1313, 1372-1373 (1965); Areeda, Antitrust Anal-

ysis, 517-518 (1967).

petition are eliminated. Had the potential competitor

entered independently, it would have had to compete

vigorously in order to enlarge its initially small

market share, thus enhancing competition among the

small number of firms in the market. Moreover, if it

is a strong and aggressive company, its independent

entry is likely to inject new competitive vigor into

the market. In-addition, by adding another firm to

the market’s concentrated structure, it would have

increased customer alternatives thereby aiding decon-

centration.

Since one of the purposes of Section 7 is to “ ‘pre-

serv[e] the possibility of eventual deconcentration,’ ”

United States v. Aluminum Co. of America, 377 U.S.

271, 279, United States v. Philadelphia National Bank,

374 U.S. 321, 365, n. 42, and since under Section 7

“corporate growth by internal expansion is socially

preferable to growth by acquisition” (Philadelphia

National Bank, supra, 374 U.S. at 370), when a signifi-

cant potential entrant enters a concentrated market by

purchasing a large market share, competition may be

substantially lessened even though the acquisition only

substitutes one firm for another.

The existence of a substantial firm capable of entry

will itself have an additional positive effect on com-

petition if such a firm is perceived as standing on the

edge of the market. The presence of such a firm

affects competition because it may influence the be-

havior of firms already in the market. The elimina-

tion of a significant perceived potential competitor is

now well recognized by this Court as creating the prob-

ability of a substantial lessening of competition within

the meaning of Section 7. United States v. Penn-

Olin Chemical Co., 378 U.S. 158, 174; Federal Trade

Commission v. Procter & Gamble Co., 386 U.S. 568,

981; United States v. nena Brewing Cor ‘p., 410 US.

526, 531-532.

2. Potential competition is as important to competi-

tion in banking as in any other industry. The sig-

nificance of its elimination is determimed by the same

criteria, namely, it ‘‘must be viewed functionally in

the context of the particular market involved, its

structure, history and probable future.’’ United States

v. Continental Can Co., supra, 378 U.S. at 458; United

States v. Philadelphia National Bank, supra, 374 U.S,

at 357-358; United States v. Phillipsburg National

Bank, supra, 399 U.S. at 360, 365.

Because. local banking markets can support only a

limited nmamber of banks, such markets inherently

tend to be concentrated. The preservation of potential

competition in both its aspects is, therefore, parti-

cularly important to the local, regional, and statewide

competitive structure of banking. Indeed, a leading

expert in state and federal bank regulation has re-

cently written that “the potential competition stand-

ard may be the only criterion available to the bank

regulatory agencies or the courts by which a trend

** Rhoades, Some Observations on Potential Competition in

Banking. Proceedings of a Conference on Bank Structure and

Competition, p. 79, Federal Reserve Bank of C hicago (1972).

toward a market dominated by only a handful of

banks or bank holding companies may be checked.” *

_B, THE ELIMINATION OF A SIGNIFICANT POTENTIAL COMPETITOR MAY

HAVE ANTICOMPETITIVE EFFECTS IN BANKING ON A REGIONAL AND

STATE-WIDE BASIS :

Adverse competitive effects of market extension

mergers by banks may be felt in the state as a whole,

or in economically distinct regions of the state, such

as Eastern Washington, as well as in local markets

like Spokane. Such areas are not banking markets,

ie., areas within which most customers may conven-

iently find sellers of banking services. See United

States v. Philadelphia National 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 lessen competi-

tion.” Since the purpose of defining a “section of the

country” under Section 7 is to focus upon the geo-

graphic area where the merger will have a signi-

fieant impact upon competition (United States v.

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

essary to consider the effect of this merger in those

broader areas.

State boundaries delineate a distinct area within

which banks are legally insulated from competition by

Chairman, Federal Deposit Insurance Corp., in foreword to Kohn

Fovesight? (New York State Banking Department, 1970).

** Frank Wille, then New York Superintendent of Banks, now

and Carlo, Potential Competition: Unfounded Faith or Pragmatic .

banking institutions located outside the state.” For

example, Washington does not permit out-of-state

banking organizations to do business- there, and sur-

rounding states have similar restrictions. Banks in the

state are required to confine their market extensions

(z.e., the establishment or acquisition of banking of-

fices 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” larger than the

banking markets within it, may be substantially

lessened. (Tr. 75-77, 133-134, 139, App. 487-488,

520, 523).

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, \7.e., the major

banks in local markets capable of expansion else-

where, will have been eliminated by merger. Thus in

this case the acquired bank is being eliminated as

an independent potential entrant 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 mar-

*°' Very large banking customers, such as national corpora-

tions, and very large banks, serving such customers, can be said

to operate in regional and national banking markets irrespec-

tive 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 defin-

ing banking markets. See United States v. Philadelphia National

Bank, supra; United States v. Phillipsburg National Bank,

supra,

kets, the local oligopolies in each such market may

become linked. As a result, the statewide institutions

may engage in more standardized, and hence less

competitive business behavior everywhere, rather than

risk retaliation by departing from such standards

locally anywhere.” Moreover, even where statewide

domination of most local markets by a few leading—

banks has taken hold, as is true in most local markets

in Washington, the preservation of strong independ-

ent banks in local markets, especially in the middle

sized range, can inhibit the adverse effects of any

linked oligopoly among the state’s leaders. Indeed,

preservation of such banks may be the only means of

accomplishing this result.

If the expansive drive of the state’s large banks is

channeled into entry into local markets by de novo or

foothold acquisitions, they will then 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

any entrenched pasitions of locally dominant banks.”

*t See, Solomon, Bank Merger Policy and Problems: A Link-

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

119 (1972); Wille, FD/C Merger Policy, 1970-1972, Presenta-

tion at the Practicing Law Institute Seminars on Bank Acqui-

sitions and Mergers and Other Antitrust.Problems, New York,

New York, October 13-14, 1972, FDIC News Release, pp. 28-

32. See also Yeats, An Analysis of the Effect of Mergers on Bank-

ing Market Structures, Journal of Money, Credit, and Bank-

ing, p. 623 (May 1973); and Recent Changes in the Structure

of Commercial Banking, Federal Reserve Bulletin, March 1970,

- pp. 205 and 210. :

8 Cases under Section 2 of the Sherman Act have implicitly

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

This, and the competitive potential of the acquired

bank as an independent source of local and regional

expansion, constitute the competition which mergers

of the kind at bar will eliminate.

Such competition is likely to be eliminated in the

state of Washington, in the economically distinct area

of Eastern Washington, and in the immediate Spokane

banking market where Washington Trust, the ac-

quired bank, is located, if the merger of NBC and

Washington Trust is permitted.

Il. NBC WAS A SIGNIFICANT POTENTIAL ENTRANT INTO THE

SPOKANE BANKING MARKET

A. WHETHER A FIRM IS AN ACTUAL POTENTIAL ENTRANT MUST BE

DETERMINED BY OBJECTIVE EVIDENCE

It is not uncommon in Section’7 cases for a firm

having both resources and incentive for independent

entry to assert—as NBC did in this case—that it

would enter only through the means yielding the high-

est return, t.e., by acquiring a leading firm in the mar-

ket. This Court has always rejected such evidence as

providing a conclusive basis for determining whether

a firm is a potential competitor.

The determination with respect to potential com-

petition in a Section 7 case should not turn on such

subjective, self-serving statements; the status of a

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.

firm as a potential entrant must be ascertained on the

basis of objective evidence showing the potential en-

trant’s financial capability to enter independently, its

economic incentive to do so, and the reasonable pros-

pects for making such an entry successfully.” Thus,

in United States v. Penn-Olin Chemical Co., 378 U.S.

158, 175, after a full review of objective evidence

showing the capability and incentive of joint ven-

turers to enter a market independently, this Court

heldes"* Unless we are going to require subjective evi-

dence, this array of probability certainly reaches the

prima facie stage. As we have indicated, to require

more would be tq read the statutory requirement of

reasonable probability into a requirement of certainty.

This we will not do.” Seep/also, Federal Trade Com-

mission v. Procter & Gamble Co., 386 U.S. 568, 580-

581.

The Court reiterated this view last Term in United

StateS v. Falstaff Brewing Corp., 410 U.S. 526, 533-

536. There it ruled that in determining whether a firm

was a potential competitor on the fringe of the mar-

ket, the district court should have appraised the eco-

nomic facts and not been guided by the management’s

statements concerning its intent. It stated: ‘‘The spe-

cific question with respect to this phase of the case is

not what Falstaff’s internal company decisions were

but whether, given its financial capabilities and condi-

tions in the New England market, it was reasonable

*See Gilbert, Predicting De Novo Expansion in Bank

Merger Cases. Proceedings of a Conference on Bank Struc-

ture and Competition, p. 93, Federal Reserve Bank of Chicago

(1971), setting forth an economic analysis of objective opera-

tional criteria for predicting d@novo expansion.

to consider it a potential entrant into that market.”

410 U.S. at 533. Moreover, the Court specifically noted

(410 U.S. at 534, n. 13) that “circumstantial evidence

is the lifeblood of antitrust law, see Zentth Radio

Corp. v. Hazeltige Research, Inc., 395 U.S. 100

(1969) ; Interstate Circuit, Inc. v. United States, 306

U.S. 208, 221 (1939); Frey & Son, Inc. v. Cudahy

Packing Co., 256 U.S. 208, 210 (1921), especially for

§ 7 which is concerned ‘with probabilities, not certain-

ties,’ Brown Shoe Co. v. United States, 370 U.S., at

323. As was stated in United States v. Penn-Olin

Chemical Co., 378 U.S. 158, 174 (1964), ‘[p]otential

competition cannot be put to a subjective test. It is not .

‘susceptible of a ready and precise answer.’’’”

The Falstaff case involved the determination of a

firm’s role as a potential entrant influencing conduct

in the market from the wings. The standards for de-

termining when a firm is an actual potential entrant

were reserved (410 U.S. at 537). We submit, however,

that the reasons for preferring objective economic

evidence over subjective testimony in the “wings”

aspect of potential competition apply equally to deter-

mining the likelihood of actual entry (see Tr. 97,

App. 500).

Section 7 is designed to arrest concentration in its.

incipiency. It is therefore concerned with market

structure, not management’s preferences. The proper

question in potential competition cases under Section

7, necessarily, is not whether management considered ©

independent entry to be preferable to entry by acquisi-

tion, but whether independent entry is preferable to

no entry at all for a firm with the defendant’s cape-

bilities and incentives.

From the standpoint of an individual firm’s manage-

ment, economic decisions must be made so as to maxi-

mize profits for their company, not to create the in-

dustry structure most likely to confer the benefits of

competition on the public. It is almost always easier

and more immediately profitable for.a firm to enter a

market by purchasing a large existing market share

‘than it is for’it to engage in the competitive struggle

necessary to win a significant market share by inde-

pendent or “‘feothold” entry. “But the test in §7

cases is not whether anticompetitive conduct is profit

maximizing. The very purpose of §7 is to direct the

profit incentive into channels which are procompeti-

tive.” Falstaff, supra (Marshal_P. concurring), 410

U.S. at 572. If management’s subjective preferences

are given precedence over the very economic factors

which Congress intended should contre] those prefer-

ences, Section 7 will be seriously weakened.

Indeed, if objective criteria are not controlling,

then management will never ask itself whether, if

the option of entry by acquisition were not a¥ailable,

independent entry would nevertheless be preferable

to no entry at all. It will always choose the easy road

of purchasing a large market share instead of the

hard road of competition.”

Moreover, if subjective evidence is determinative,

the test for potential competition will depend heavily

*See Pitofsky, Joint Ventures Under the Antitrust Laws:

Some Reflections on the Significance of Penn-Olin, 82 Harv.

L. Rev. 1007, 1024 (1969).

upon elaborate proof regarding the corporate deei-

sion making process, and the trial court’s evaluation

of the sincerity of management’s statements. This in-

troduces an additional and highly uncertain complexity

into the already complex administration of Section 7.

Management officials who are committed to justifica-

tion of their corporation’s decision to enter a market

by acquisition are often unable to give disinterested

retrospective testimony about what and how their

corporation would have decided if it had not been able

- to make the acquisition in issue. Such testimony, how-

ever sincere, cannot overcome the effects of corporate

self-interest.”

Despite disavowals by officials, corporate choices

motivated by a legitimate concern to maximize profits

by entering profitable markets often turn in pro-com-

petitive directions when faced with an antitrust bar-

rier to an acquisition. In our growing economy, bank-

ing organizations have strong economic incentives

to expand into new markets, and where they cannot do

*t A subjective standard could also lead to the building of

a “record” to support corporate self-interest before litigation

begins. Thus it has been observed :

“The determination .of what a large corporation — acting

through staff agencies, committees, officers and directors intends

to do-—not merely in the present, but at some future time as

well—involves the proceedings in a vast labyrinth of evidence.

Further, once the legal issues are known to astute corporate

counsel, future facts as to corporate intent can be expected

to be shaped under careful legal guidance to negate any. in-

ference that a corporation intended to enter any particular

market which it later enters by merger” (Brodley, Oligopoly

Power Under the Sherman and Clayton Acte—From Economic

Theory to Legal Policy, 19 Stan. L. Rev. 285, 357-68 (1967)).

so by acquisition, they often are willing to do so by

de novo entry or foothold acquisition.”

In addition,, unless objective criteria are control-

ling, businessmen, their counsel and the government are

unable to determine in advance whether in a case in-

volving a firm’s role as a potential competitor, an ac-

quisition may substantially lessen competition. As

this Court has noted: “unless businessmen can assess

the legal consequences of a merger with some con-

fidence, sound business planning is retarded. * * *.

[I]n any case in which it is possible, without doing

violence to the Congressional objective embodied in

Section 7 to simplify the test of illegality, the courts

ought to do so in the interests of sound and practical

judicial administration.” United States v. Philadel-

phia National Bank, supra, 374 U.S. at 362. See also

United States v. Topco Associates, 405 U.S. 596, 609,

n. 10.

Finally, as Falstaff holds, objective evidence is the

primary determinant of a firm’s role as a potential

entrant when the wings effect is being examined.

*2 For example, after the Federal Reserve Board had denied

NBC’s parent holding company Marine Bancorporation the

right to enter the Spokane mortgage banking market by ac-

quiring a mortgage banking firm there, Marine’s Coast Mort-

gage company applied to the Board for permission to open its

own branch office in Spokane. The Board granted this authority.

See n. 9, supra, p. 9.

A recent economic study has found that merger and branch-

ing are, for bank management, essentially interchangeable sub-

stitutes for expansion. Oldfield, Projecting the Structure of

Local Banking Markets in Pennsylvania, in Changing Penn-

sylvania’s Branching Laws: An Economic Analysis, p. 43,

Federal Reserve Bank of Philadelphia, 1973.

529-185—-73—-4

- Ordinarily, firms in the market will be aware of

objective factors bearing on the economic incentive of

others to enter, and the financial capacity of such firms

to do so. But they will not be aware of a particular

management’s balancing of independent entry or no

entry, as against entry by acquisition. Even if the out-

side firm publicly announces a preference for expan-

sion by acquisition, experience teaches that such deci-

sions are not immutable. Thus the outsider’s impact

“from the wings’’ will necessarily turn on the same

objective factors apparent to any reasonable business-

man that should govern whether a firm is an actual

potential competitor.

B. ON THE BASIS OF THE OBJECTIVE CRITERIA, NBC WAS AN ACTUAL

POTENTIAL ENTRANT INTO THE SPOKANE BANKING MARKET

1. NBC had the incentive and capability to enter. In

holding that NBC would enter the Spokane market

only by the acquisition of a large market share, the

district court relied on evidence reflecting manage-

ment’s statements of its intentions (F. 19, App.

1936-1939). The objective evidence on this issue, how-

ever, established that NBC was a significant potential

entrant in the market.

* NBC claimed that the high cost of providing a full serv-

ice banking operation in Spokane made entry other than by

acquiring a large market share uneconomical and therefore un-

likely (Tr. 871-872, 879-881, 926-927, App. 951-952, 956, 989-

983). It offered no supporting data, however—such as earnings

projections or analyses of the deposit base and facilities re-

quired—to substantiate that claim.

Indeed, many of the services relied on by NBO for its “full

service” status would not appear to require any additional in-

NBC’s significance as a potential competitor was

demonstrated by expert testimony that it was one of

only two institutions whose entry into Spokane de

novo or by foothold acquisition would have a sub-

stantial competitive impact (Tr. 98-100, App. 500-502,

see also Tr. 936, App. 988).* NBC’s capability to ac-

complish de novo entry was shown by its substantial

resources and history of expansion. It is the state’s

second largest banking organization. In 1971 it had

total assets of $1.8 billion, and total deposits of $1.6

billion, at least three times its 1960 assets of $586

million and deposits of $538.6 million (@X A-2, A-13,

App. 1149, 1161). It has grown steadily. In 1962 it

had 65 banking offices (Moody’s Bank & Finance

Manual 1962, p. 913). By June 30, 1970, the number

had* increased to 98, and two years later it was 107

(GX A-16, A-17, App. 1164 1165). Between 1962

and 1972 it had acquired four small banks in Eastern

Washington (GX A-43, App. 1208).

In view of NBC’s substantial resources and history

of expansion, its capability as a significant potential

competitor cannot be seriously disputed.

In addition to its capacity for entry, NBC had the

incentive and interest to enter the Spokane market. Its

vestment upon entry in the Spokane market. For example, large

commercial loans are presently offered by NBC wide geo-

graphic area, including Spokane (P.T.O., Admire! Facts IV,

App. 366-367). Moreover, assuming some services are unprofit-

able without a local deposit base, no reason appears why such

services must be initially available.

“Since the other firm, Peoples National Bank of Washing-

ton, the state’s fourth largest bank, is only one-third the size

of NBC, the latter is the most significant potential entrant, and

the most effective source for deconcentration.

interest in entering that market, the third largest in

the state, was longstanding and conceded (P.T.0,,

Admitted Facts IV, App. 367). The experts on both

sides agreed that Spokane is growing (Tr. 441-443,

App. 698-699), although the court found its growth

would be only slow to moderate (F. 19(b)C, App.

1938). While Spokane may not currently be a boom

town, it is the trade center of Eastern Washington

and the “Inland Empire.”’

There is substantial evidence that NBC had at-

tempted to enter the Spokane market. Thus, before

it acquired the Washington Trust Bank, NBC nego-’

tiated to acquire the much smaller Farmers and Mer-

chants Bank—a three-office suburban bank with about

$13 million in deposits and 2.5 percent of the market

(GX A-54, A-55, App. 1219, 1220, G-2, G-3, G-8,

G-9, App. 1280-1287). NBC considered the Spokane

area to be a good center for the region’s correspondent

banking business (Dep. F. Abersfeller, Exh. 1, App.

236-238, Dep. M. Carlson, pp. 18-19, App. 147-148),

an appropriate regional headquarters for its Eastern

Washington branches (Dep. M. Carlson, pp. 17-18,

and Exh. 3, App. 147, 155), a community to which

many former NBC customers had moved (GX D4,

App. 1268), and a market which would buy NBC’s in-

ternational banking skills (GX D-5, App. 1269). The

Chairman of NBC’s holding company said that he had

confidence in Spokane’s future potential (Tr. 744,

App. 877-878), and the acquired bank’s 1971 Annual

Report referred to Spokane’s general business activity

as “nothing less than very good” (@X D-1, App.

1265).

Was oe At ar +a 45

The record thus demonstrates that NBC possessed

the resources, incentive, and desire to enter the Spok-

ane market. Not only was NBC an actual potential

entrant, but, as shown below (pp. 53-54), NBC was

perceived to be a potential entrant by firms operating

in the Spokane market.

2. NBC could have entered the Spokane market by

sponsoring a bank or making a foothold acquisition

there. As shown above Washington law would bar

NBC from opening a branch in Spokane, since it does

not have its headquarters there. The only way it could

enter that market, therefore, is through an acquisition.

It could have entered that way either by sponsoring

a new bank and ultimately acquiring it, or by making

a ‘‘foothold”’ acquisition of a small bank.

a. NBC could have sponsored a new bank and then

acquired it. (1) As explained in-the Statement (supra,

pp. 15-17), the sponsorship by an existing bank of a

new bank, followed by the sponsoring bank’s acquisi-

tion of the new bank, has become an established method

in Washington by which national banks may enter

new markets in which they cannot open branches.”

The federal regulatory authorities, including ap-

pellee Comptroller, are aware of this practice and have

never objected to. it when considering specific applica-

tions by national banks in Washington.” The merging

*® See Tr. 280-298, App. 604-616, GX H-1 and H-11, App.

1288-1290, 1326-1328.

* GX H-1, H-3 through H-15, App. 1288-1290, 1293-1345,

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,

banks, NBC * and Washington Trust,” have also been

aware of the sponsorship activities of other Wash-

ington banks.

Officers of NBC themselves considered sponsoring

an affiliate in several instances,” Moreover, NBC spon-

sored 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. In-

deed, the district court, which adopted defend-

ants’ findings verbatim, made no determination that

use of the sponsored bank procedure is barred by

Washington law.”

Contrary to the Comptroller’s contention (Comp-

troller’s Mo. to Aff.,*p. 14), First National Bank v.

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

I-lla, I-11b, I-11, I-11d, App. 1354, 1363-1375, J-45, J46,

App. 1421-1422.

88 GX ©, App. 1242-1243.

%° GX I-3, I-4d, I-4e, I-5, App. 1350-1352, 1856-1361.

“GX J-1 through J-54, App. 1878-1430, GX K-1 through

K-04, App. 1431-1696.

“ During the trial, the district court rejected appellees’ as-

sertion that NBC could not legally sponsor the formation of

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

732-733, App. 870) :

“* * * T don’t conclude * * * that there is anything civilly

wrong with that approach. * * * [T]he only thing is, they had

the capability, and they had done it, if that is what you are

trying to prove.”

* * * a *

“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 and they can help organize one, they can loan money

and ail the rest of it, and they could probably do it in Spokane.

I will agree that they could do that.”

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 branches

only in accordance with state law. The establishment

of a new national bank, however, even where spon-

sored by an existing bank, is governed by other pro-

visions 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 and state

courts; in the Comptroller’s decisions cited above

(n. 36, supra, p. 45), and in the subsequent history

of the Walker Bank case itself.

In Walker Bank, this Court held that it was unlaw-

ful for The First National Bank of Logan to establish

a de novo branch in Logan. The Comptroller then

authorized the establishment of a new national bank

(Pioneer National Bank), sponsored by persons asso-

ciated with First National Bank of Logan. Subse-

quently, the Comptroller approved the merger of

Pioneer National Bank into First National Bank of

* Ramapo Bank v. Camp, 425 F.2d 333 (C.A. 8), 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.) ; Nealley v. Brown,

284 A. 2d 480 (Me.).

Logan, so that the latter in effect obtained the Legan

office it originally sought.“

Since the chartering of national bank affiliates is

not governed by state law, the provisions of Wash-

ington 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 (Mo. to Aff., p. 21, n. 15) charac-

terize the practice of Old National Bank of Washing-

ton, a subsidiary of Washington Bancshares, Inc., of

sponsoring and later acquiring new national banks

in areas where it could not establish de novo branches,

as a “‘violation of both state and federal law.’’ Al-

though 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 bank’s intention

“ 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 [ i.e., 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.”

prior to the filing of the applications. Indeed, in one

instance, officials of the Comptroller’s Office actually

suggested this procedure. See Statement, supra,

% i Ae | |

: Appellee banks suggest (Mo. to Aff., 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

more than one bank. On the contrary, we submit that

this statute enhances the effectiveness of the sponsored

bank procedure. Under its provisions NBC’s parent

holding company, Marine, could acquire up to 25 per-

cent of the stock of any bank sponsored by NBC, or

itself sponsor a bank, thus assuring that NBC’s owner

would have a substantial, direct and legal interest in

the sponsored bank.“

“The Comptrofier’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 (Mo. to Aff., 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 response 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, App. 1011). This response, therefore, has

no bearing on the situation where the sponsored affiliate oper-

ates as a bona fide national bank for a period of time before

its sponsor acquires it, as did the sponsored affiliates of Old

National Bank.

“RCW 30.04.230.

“In at least 17 states during the last three years, holding

companies have sponsored and acquired banks in locations not

a, 50

The statute, moreover, while limiting the extent of

stock ownership by a bank holding company, does not

cover ownership or control by persons merely affiliated

with a holding company or one of its operating sub-

sidiaries. Thus this provision has not prevented Old

National Bank of Washington and its parent Wash-

ington Bancshares, Inc., or NBC itself from sponsor-

ing affiliates (see nn. 35 and 40, supra, pp. 45, 46).

Appellee banks in effect contend (Mo. to Aff., pp.

22-24) that the sponsored bank procedure is too

clumsy, too slow, and too costly for effective entry into

a large market. Although it is less immediately profita-

ble than direct entry by a large acquisition; its use in

the state demonstrates that it is practical. Indeed, if

the sponsored bank competes effectively, it can estab- -

lish new branches until it is acquired. In effect, NBC

would be establishing its own target for a foothold

acquisition in Spokane, and pending its eventual

acquisition, NBC could assist it in branching in the

city,” and could assure that it would be soundly

managed.

open to branching by their subsidiaries. A list giving one ex-

ample from each state appears in an Appendix to this brief.

The Federal Reserve Board has approved these transactions.

“The district court noted that since NBC’s headquarters is

in Seattle, once it entered Spokane either by a foothold ac-

quisition or the acquisition of a sponsored bank, it would

thereafter be unable to branch in the Spokane area (F. 19(b)B,

App. 1987-1938). But, as noted above, its sponsored bank could

(2) The district court concluded that NBC could

not enter by sponsoring a bank because it found that

the Comptroller of the Currency would not grant a

charter for a new nationa] bank in the Spokane area

in the reasonably foreseeable future (F. 19{b)C, App.

1938). The eourt relied heavily upon testimony by the

Regional Administrator of National Banks that he

did not believe it reasonable to assume that such a

charter would be granted (Tr. 974-975 App. 1011).

But since he was testifying in support of a merger his

superior had already approved, and since he could

state only what he would recommend, not what the

Comptroller would decide (Tr. 979-980, App. 1013-

1014), such evidence does not establish that NBC

could not have obtained a charter for a new sponsored

national bank.“

Indeed, if the market is undergoing reasonable

growth and the existing banks are profitable, as was

the case in Spokane (GX A-65 A-66, App. 1230-

1231), it must be assumed that the regulatory decision

will reflect the national policy in favor of market ex-

tensions by internal expansion rather than by acqui-

sition, which is incorporated into the Bank Merger

NBC a solid competitive base. Finally, in view of its very large

existing establishment in the Spokane area—fifteen branch

offices within a 100 mile radius of Spokane—a downtown base

in the city itself would provide a foundation from which to

service the entire region.

“The district court recognized that the Comptroller had

given advance approval to the merger, since it stated (Tr.

1006, App. 1029): “* * * T’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.”

- —_—_—a

Act to the extent that it reiterates Section 7 (12

U.S.C. 1828(c)(5)(B)). Only if new entry might

threaten the stability of existing ‘banks could the

Comptroller properly refuse to permit new competi-

tion. Yet the Regional Administrator conceded that

new entry would not threaten the soundness of any

Spokane bank (Tr. 998, 1014-1015, App. 1025, 1033-

1034).

b. NBC could have made a foothold acquisition of a

smaller bank in the Spokane market. There were two

state chartered banks whose acquisition would have

enabled NBC to make a non-anticompetitive entry

into the market: The Farmers and Merchants Bank

(supra, p. 44) and American Commercial Bank.

NBC had been negotiating to buy Farmers and

Merchants prior to acquiring Washington Trust, but

claimed the price was too high. American Commercial

Bank has its headquarters in downtown Spokane, four

branches (Tr. 506, App. 736), $15.7 million in deposits

and about three percent of the market (GX A-55,

App. 1220). It will be eligible for acquisition in 1975.”

Since its stock is widely held (see GX C, Exh. C,

App. 1251), acquisition thereof should not be too diffi-

cult for a determined buyer. Moreover, since it has

only three fewer branches than Washington Trust, its

acquisition would give NBC a solid base in the area.”

“P.T.O., Admitted Facts VIII, Exhs. E & F, pt. X,

App. 368, 421, 433. Under RCW 30.08.020(7), a state chartered

bank may not, except with the consent of the state Supervisor

of Banking, agree to be acquired for ten years after it is

chartered.

The defendants stressed the unsatisfactory experience of

the state’s third largest banking organization, the Pacific Na-

tional Bank of Washington, whose predecessor had entered

ce. NBC was a Perceived Potential Entrant into the

Spokane area. The objective evidence showed that

NBC was perceived by other banks in Spokane as a

potential competitor and as such exerted a “beneficial

influence om competitive conditions in that market”

(United States v. Falstaff Brewing Corp., supra, 410

U.S. at 533). Washington’s former Supervisor of

Banking testified that bankers fear entry by well

financed outsiders and therefore seek to prevent it by

claiming that they are adequately serving their area

(Tr. 492-506, App. 728-736). NBC made its interest

in entering Spokane known for many years (GX

F-23, F-26, F-27, F-29, App. 1273, 1275, 1276, 1277,

Dep. M. Carlson, Exh. 3, App. 154).

Documentary evidence from NBC’s files showed

NBC’s influence on the banks in Spokane and their

awareness of its presence in the wings. A memorandum

written in 1962 by an official of NBC reported that

“there is an air of competitive resistence toward our

bank by Old National Bank and Washington Trust

with reference to our closing in around the Spokane

area. * * * Throughout our branch locations neighbor-

ing the Old National, it appears there is evidence of a

Spokane by a small foothold acquisition. Some of these dif-

ficulties were attributed by a government witness to inherited

mismanagement and lack of close home office attention (Tr.

511-515, App. 739-742). Another difficulty was that Pacific had

lacked sufficient branches within a 100-mile radius of Spokane

to provide a deposit base which would support a more viable

operation there (Tr. 1133-1136, App. 1103-1104). In contrast,

NBC presently has 15 branch offices within that radius (Tr. 945,

App. 993), with total deposits of $103 million (GX A-23, App.

1173-1176), and already had $4.4 million in total deposits from,

and $10.2 million in loans to Spokane customers (P.T.O.,

Adimnitted Facts IV, App. 366-367).

54 P

stronger competition and an inclination to cut rates”

(GX B-, App. 1240).

Ill. THE ACQUISITION MAY SUBSTANTIALLY LESSEN COM-

PETITION IN THE SPOKANE MARKET, IN EASTERN WASH-

INGTON, AND IN THE STATE AS A WHOLE

A. THE MERGER MAY SUBSTANTIALLY LESSEN COMPETITION IN THE

SPOKANE MARKET BY ELIMINATING NBC AS A POTENTIAL COM-

PETITOR THERE

As we have shown (supra, pp. 28-33), a merger that

eliminates a substantial potential competitor in a con-

centrated market may substantially lessen competition,

in violation of Section 7. The present merger would

have precisely that effect. Under the proper objective

criteria for determining whether a firm is a potential

competitor, NBC met those standards because it had

the resources and incentive to enter Spokane; in addi-

tion, it had shown a strong interest in entering that

market (supra, pp. 43-44, 53). The merger would

eliminate NBC as both an actual and a perceived po-

tential entrant in the Spokane market which, as we

have shown (supra, pp. 7-8), is a concentrated one.

The district court, however, was of the view that

these factors were irrelevant because of its conclusion

that the Spokane banking market was in fact highly

competitive so that the elimination of a significant

potential entrant presumably would have no adverse

effect upon competition there. It also viewed Wash-

ington Trust as a relatively weak bank, whose com-

- §

petitive “abilities the merger would strengthen.”

Neither conclusion can withstand analysis.

1. Although the Spokane banking market is highly

concentrated, with the three largest banks holding 92

percent of the deposits there (supra, pp. 7-8), the dis-

trict court ruled that “other structural factors [beside

concentration] relied on [by defendants’ experts Drs.

Haywood and Baxter], such as the number of banks

and the number of banking offices in the market area,

together with the actual performance of the market as

observed by Dr. Baxter, establish as a fact that the

Spokane commercial banking market is a highly com-

petitive market, and does not suffer from parallel or

other anticompetitive practices attributable to undue

market power” (F. 22, App. 1940). This Court has

repeatedly recognized, however, that in amending

Section 7 of the Clayton Act in 1950, Congress was

concerned with stemming the rising trend of con-

centration in American industry, and in encouraging

forces that could lead to deconcentration of already

concentrated markets. See, e.g., United States v. Phil-

“So the extent that the court relied on the theory that

the merger would replace Washington Trust with a bank

able to compete more effectively with larger banks in the

Spokane market and to provide additional services there, those

were factors to be considered under the community “conven-

‘ence and needs” defense, but not in assessing the competitive

impact of the merger. Cf. United States v. Third National

Bank in Nashville, 390 U.S. 171, 182-183. As we show below

(pp. 69-71), in our discussion of that defense, neither of those

factors establishes the defense in this case.

adephia National Bank, 374 U.S. 321; Brown Shoe

Co. v. United States, 370 U.S. 294. Congress thus

sought to preserve the forces in the economy that

contribute to the maintenance and strengthening of

competition.

Potential competition is an important one of those

forces. Although the elimination of a potential com-

petitor through merger does not itself increase con-

centration in the market involved, it does have a sig-

nificant anticompetitive impact because of the role

that potential competition plays in strengthening com-

petition in concentrated markets and deconcentrating

them. For this reason, a merger that eliminates a sub-

stantial potential entrant from a concentrated market

cannot be justified on the ground that the market in

which the acquired firm operates is nevertheless cur-

rently competitive.* The elimination of such a poten-

tial competitor necessarily adversely affects the basic

structure and organization of the market. In passing

a statute that was designed to stop the trend toward

increasing concentration in its incipiency (Brown

Shoe Co. v. United States, supra, 370 U.S. at 317),

Congress made the judgment that in concentrated mar-

kets competition is likely to be less vigorous than in

nonconcentrated markets, and that mergers that pose

any significant threat to competition in concentrated

markets were to be proscribed.

* For example, one or two independent banks struggling to

enlarge their market shares can intensify competition in a

concentrated market. But this phenomenon may be temporary.

See Tr. 145-146, App. 526. a

- °°

The evidence in this case confirms the congressional

conclusion that competition in concentrated markets

tends to be less vigorous. It shows that the highly con-

centrated banking business in Washington was marked

by interdependent behavior in an atmosphere of

friendly cooperation rather than vigorous price and

service competition (Tr. 72-77, 78-80, 82-84, 86-93,

131-132, 173-174, App. 485-492, 494-497, 518-520,

542-543).

For example, there were extensive references to

“‘personal,”’ “cordial’’? and “friendly’’ relationships

among bankers in the Spokane market with respect

to the possibility of new entry by NBC.” Evidence of

* See, for example, GX F-31 (App. 1278), a memorandum

written by an official of NBC of a 1953 conversation with

Fred Stanton, president of Washington Trust. After reporting

that he informed Mr. Stanton that NBC would not be inter-

ested in purchasing a bank in Newport, a community “in

Spokane’s back yard,” if Mr. Stanton wanted to buy it, the

author states: “I was told that Mr. Stanton had heard rumors

regarding the possible sale of the Newport bank and if anyone

bought it he would prefer that it be the National Bank of

Commerce.”

In a 1955 memorandum an official of NBC states (GX F-29,

App. 1277) : “I asked him [Bill Scammell, Vice President of the

Washington Trust Bank] how he would feel if our bank were

to come into the Spokane area and he remarked that they

would not object as they would like to have us as a competitor

and that they have always welcomed competition. I assured him

that if such a union [NBC's acquisition of Old National Bank]

would ever come into being that they could be well assured that

they would find the National Bank of Commerce most coop-

erative and they would be one of the first to be informed if we

made any changes affecting both banks.”

In 1961 an official of NBC reported a conversation with Mr.

Fred Stanton (GX F-26, App. 1275) : “Looking at me, he [Fred

Stanton] said that some day the National Bank of Commerce

529-185—73-—_5

“friendly cooperation’’ was not confined to Spokane,“

and it even extended to such matters as the treatment

of simultaneous branch applications.”

Indeed, the appointment in 1962 of a new president

of Washington Trust, the acquired bank, led to con-

cern by NBC that Washington Trust would become

a more aggressive competitor.” ‘‘[B]ased on informa-

tion that comes to me through both friends and our

own branch managers in the surrounding area,’’ an

NBC official wrote that “it would appear to me we

might have to change our approach in the Spokane area”

(GX B-4).

will be in Spokane and we will be friendly competitors. It was

a very personal conversation and I was complimented that he

would tell me about his plans before he had even approached his

directors.”

*% An NBC official reported a 1968 conversation with the

president of a bank in Lynwood, Washington (GX B-1, App.

1237) : “He told me that Bob Young, President of the Everett

Trust & Savings Bank, had recently told him that he was ‘com-

ing your way,’ to which his response was ‘come ahead so long

as we can compete and be friends like with NB of C at Ed-

monds.’ This apparently is his philosophy of competition. * * *

We also discussed service charges. He is moving to a 3-2-1

system which he believes will increase his profitability. * * *

He indicated however, he was not interested in competing either

on rate or on service charges.” See also GX B-3, App. 1239.

% Thus, as early as 1951, an official of NBC reported (GX

B-2, App. 1238) that he “told [a representative of the F.D.1.C.]_

under normal circumstances, where the Seattle-First and ourselves

learned one had made previous application [for a branch], the

other would withdraw theirs.”

%*° GX B-4, App. 1240-1241. After reporting the statement of

Washington Trust’s new president that he intended to compete

aggressively, an NBC official noted in his memorandum: “It

was hard for me to believe he was serious in his remarks 80

later on, while visiting with Don Kirkbride at his home, I

These relationships reflect daily gatherings among

the top management of the larger banks in the state

at a wide variety of business functions (Dep. R.

Buck, pp. 55-56, App. 126-127). “[E]very bank is rep-

resented in every one of these groups, and so it would

be scarcely a day that I didn’t see somebody from

one of the top banks. * * * [They would say some-

thing like] ‘When are you guys going to drop your

savings rate instead of making it tough for us’ ” (¢d., pp.

56-57, App. 127). As the government’s expert, Professor

Smith testified, “this would indicate that there is

this rather elaborate social structure which enables

bankers to discuss their rates and to discuss their busi-

ness problems with one another”’’ (Tr. 80, App. 490).

By acquiring a large market share in Spokane

through acquisition, instead of by competing for it

with the market leaders there, particularly the state’s

largest bank, Seattle-First, the acquisition will have

the effect of extending to Spokane the already close

working relationship between NBC and Seattle-First

in Seattle (Tr. 125-126, 133-134, App. 515-516, 520).

The evidence also showed the restraints on competi-

tion that follow when leading branching banks with

similar interests extend throughout the state, and en-

counter each other in most of the state’s leading bank-

ing markets. Such banks fear the competitive reaction

of locally-oriented institutions which have no concern

over retaliation in other markets. In 1962, for example,

asked him about it. Don was not quite sure that was Phil’s

intention but did admit that their operation has changed some-

what from the previous management of his father” (ibid.).

Washington Trust’s aggressive young president sug.

gested that a smaller independent bank could cut loan

rates and service charges with less costs than one of |

the larger institutions, such as Seattle-First, Old

National or NBC.” In another example an NBC mem-

orandum reported a conversation between officials of

NBC and Old National Bank, expressing the view that

the large bank systems are “friendlier” competitors

than the independent unit banks (GX B-3, App. 1239);

Mr. Stilson [Vice President of Old National]

said that as far as he is concerned where they

He said, ‘‘We would be a lot better off if they

were in Ritzville than the unit bank there, and

certainly the Old National would be better off

if NB of C went into Pomeroy; that there

would be better co-operation between two branch

banks systems than where they had a unit bank

as competition.”

Defendants’ experts, whose views the district court

adopted as more credible (Tr. 1195-1197, App. 1138-

1139) than those of the government’s expert, did not

challenge the government’s concentration data or the

evidence summarized above. They characterized the

5t As an official of NBC reported (GX B-4, App. 1240) : “Phil

[Stanton] has taken an aggressive position as the bank’s new

President * * *. During my visit with Phil, he indicated their —

bank is going to be more aggressive in every way to bring in

new business accounts with the intention to offer the lowest

service charges of any bank in town and to cut loan rates below

the other banks. It is his feeling operating as a smaller in-

dependent bank they can do this with less cost than one of the

larger branching institutions such as Seattle First, Old National

or ourselves.”

former as only a crude indicator, and the latter as

insignificant (Tr. 361-363, 377, 383, 1097, 1122-1127,

App. 652-653, 660-661, 664, 1082, 1096-1099).

They concluded that, despite the high concentration

in the Spokane market, it was structurally competi-

tive because of the number of firms there and the large

absolute size of some of them (Tr. 350, 382-383, 1035-

1036, 1094-1095, App. 645, 663-664, 1046, 1080). They

stated that, based on comparisons of ratios of banks and

banking offices to population in Spokane and cities of

similar size, Spokane was adequately banked because its

ratio was-below the national average (Tr. 355, 1045-

1046, 1092-1093, App. 648, 1052-1053, 1079).

The district court accepted those views (F'. 22, App.

1940), stating in its oral opinion: “Well now, Spokane

is well banked, let’s put it that way, it doesn’t need

another bank, a new one to go in there on a new basis

to make competition in that market’’ - 1203, App.

1143).

This conclusion completely misconceives Congress’

purpose in requiring that bank mergers must. pass

“muster under the antitrust standards of * * * [Phil-

adelphia National Bank], which were preserved in the

Bank Merger Act of 1966.” United States v. Phillips-

burg National Bank, supra, 399 U.S. at 357-358. That

standard does not turn upon “adequacy” of banking

resources, but upon competition. The unique standard

the district court adopted—comparisons of ratios of

population to banks and banking offices in various

cities—is not a measure of competition.

The proper measure of competition is not the total

number of banking offices, but the number of inde-

pendent banking organizations that operate such

offices. A community in which all the banking offices

are operated by a single firm is obviously not com-

petitive even though the office-population ratio is high.

The district court’s theory thus does not properly de-

fine competition, but simply describes convenience of

access by customers to banking offices.

Moreover, variations in local markets and state law

governing branching make impossible meaningful com-

parison of such ratios. (Tr. 1073-1076, App. 1068-1070).

f such data were the standard, the test for the validity

f acquisitions would not be whether competition among

ient access to offices. Reliance on such a standard

is therefore inconsistent with both the purposes of

Section 7, and its authoritative construction by this

Court before and after the Bank Merger Act of 1966

in Philadelphia National Bank and in Phillipsburg Na-

tional Bank.“

Moreover, the conclusions of defendants’ experts

that the Spokane market is competitive were not sup-

ported by an analysis of the competitive performance

of the Spokane banking market (Tr. 411, App. 679-680).

To be meaningful, such an analysis would have had to

show comparisons of such matters as rates and costs for

various services, and to have considered other indicia of

8 Defendant’s expert Dr. Baxter offered the same views in

the Philli case. The Court's reaffirmation there of Phila-

delphia Bank would appear to be a definitive rejection of this

approach.

—

competition, such as whether profits were above com-

petitive levels. Defendant’s experts, however, relied al-

most entirely upon subjective conclusions drawn from

conversations with bankers and others (Tr. 409-410,

1034-1035, App. 679, 1045-1046) ; and upon their con-

cepts of an adequately banked market as shown by ratios

of population to banking offices.”

2. The district court viewed Washington Trust as a

“limited service” bank (F. 16, App. 1935) which was

competing inadequately against the large statewide

“full service” institutions (Seattle-First and Old Na-

tional Bank) already in Spokane. Yet it was stipu-

lated that Washington Trust is a sound and well-

managed institution for its size; (P.T.O., Admitted

Facts V, App. 367) ; and the record showed that it was

doing extremely well. It was the area’s third largest

bank. In the preceding five years its deposits had

increased by 50 percent and its market share by 2

percent, while its larger competitor, Seattle-First,

had suffered a 6 percent decline in market share. It

was profitable, aggressive and capable of expansion

beyond Spokane. Its officers were paid at rates com-

* Part of the district court’s error may have arisen from its

view that assessment of the expert testimony before it simply

turned on questions of “credibility” (Tr. 1195-1197, App. 1138-

1139). We submit, however, that the issue was really whether the

economists’ analyses rested upon and reflected the kind of evidence

which accords with the purposes of Section 7 and this Court's

interpretation of it in prior cases. If Congress were to substitute

a standard of “adequacy” in banking markets for the present

standard of competition, testimony of the kind presented by

defendants’ experts might be entitled to great weight. Under

Section 7 standards, however, it was not sufficient.

parable to those paid by the state’s largest institutions;

it had introduced several new services; and it offered

all but a few specialized banking services. See State-

ment, supra, p. 11; Tr. 824-830, App. 924-928.

Moreover, a report made by a banking consultant

for Washington Trust concluded that it could expand

beyond the Spokane market and should play a larger

role in the state by making small acquisitions. The

report emphasized its “young and eager staff’’ and its

vigorous leadership, and concluded that Washington

Trust “appears to have outgrown the potential of

Spokane.” See Statement, supra, p. 12, n. 12.

The State’s former Supervisor of Banks corrob-

rated this evidence; he testified about the soundness

of Washington Trust and its potential for expanding

outside the Spokane market (Tr. 544-545, App. 758).

The few services Washington Trust did not furnish

were not of great competitive significance, for they

necessarily are required only by a very small percent-

age of Spokane’s commercial bank customers (see,

infra, pp. 70-71). Loans greater than its $1.25 million

limit, emphasized by the district court (F. 16, App.

1935), involve competition which occurs in a much larger

area than a single city. Indeed, a principal witness

introduced by the Comptroller to show a competitive

need for this service came from outside any of the

sections of the country involved (Tr. 622-630, App. 804-

809).

Washington Trust is thus a thriving and important

banking institution in the Spokane market, which was

reasonably likely to expand beyond that market. As

‘we now show, one of the anticompetitive consequences

of the merger was to eliminate that likelihood of such

expansion.

B. THE EFFECT OF THE MERGER MAY BE SUBSTANTIALLY TO LESSEN

COMPETITION IN EASTERN WASHINGTON AND IN THE STATE AS A

WHOLE

As we have explained above (pp. 33-36), both Eastern

Washington and the State as a whole, although not

traditional banking markets, nevertheless are relevant

sections of the country within which to consider the

competitive impact of the merger. We submit that the

effect of the merger may be substantially to lessen

competition in banking in both of those areas.

As we have shown (Statement, supra, pp. 5-6), five

of Washington’s 90 national and state banking organi-

zations hold 74.3 percent of the state’s commercial

banking deposits and operate 61.3 percent of its total

banking offices. The two largest institutions, Seattle

First and NBC (the acquiring bank here) themselves.

account for more than half of the state’s total deposits

and one-third of its total banking offices. Banking con-

centration is even higher in Eastern Washington, where

five banking organizations which operate 69 percent of

the region’s banking offices have 84 percent of this

region’s total bank deposits. Moreover, the five largest

banks in the state in varying combinations hold a

dominant share of deposits in practically all the local

banking markets in the state (GX A-35, App. 1197-

1198).

As noted in the Statement, supra, p. 11, there are

only twelve independent middle-sized banks in Wash-

ington. They are important factors in preventing

domination of the state’s banking by a few large

institutions.” Washington Trust is one of these. Middle-

sized banks smaller than Washington Trust had made

market expansions by small acquisitions (GX A-41

(Bank of the West, Bank of Yakima), App. 1204

1205), entering markets where they would have to com-

pete against larger banks. Washington Trust itself

had options to purchase the stock of two other banks

in Eastern Washington, its officers had participated

in the organization of a third, and one of its officers

wos & member of the board of two of the three (see n. 11, supra,

p. 11). It is, therefore, one of a few banks which has the

potential for entering new markets in Eastern and other

sections of Washington.

Washington Trust’s acquisition by one of the state’s

dominant 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

contributing to the creation of a statewide banking

structure of commonly linked local oligopolies. This

creates a real danger that the large banks will

renounce vigorous competition," and instead pursue

parallel practices of mutual advantage without regard

to local competitive conditions.” Moreover, the re-

See Kohn, Carlo and Kaye, Meeting Local Credit Needs,

New York State Banking Department, pp. 20-21 (1973).

“= 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, App. 1237-1289, 1277-1278,

Dep. R. Buck, pp. 53-57 App. 125-128.).

As a competitive element, the importance of the independ-

ent medium-size bank has been especially important in offering

“free” checking. The American Bankers Association, in a survey

placement of Washington Trust by a large state leader

which is already operating in Eastern Washington

eliminates the acquired bank as an independent force

which might expand to compete with the State’s major

banks. :

IV. THE ANTICOMPETITIVE EFFECTS OF THE MERGER WOULD

NOT BE CLEARLY OUTWEIGHED BY THE PROBABLE EFFECT

OF THE MERGER IN MEETING THE CONVENIENCE AND

NEEDS OF THE SPOKANE AREA

The Bank Merger Act of 1966 provides that the dis-

triet courts are to test the validity of bank mergers by

the anticompetitive standards of Section 7 of the Clay-

ton Act. It also ‘‘created a new defense, with the

merging banks having the burden of proving that

defense”? (United States v. Third National Bank in

Nashville, 390 U.S. 171, 178), namely, whether ‘‘the

anticompetitive effects of the proposed transaction are

clearly outweighed in the public interest by the prob-

able effect of the transaction in meeting the convenience

and needs of the community to be served” 12 U.S.C. 1828

cordingly required “to determine, first, whether the

merger offended the antitrust laws and, second, if it did,

of about 3,100 banks, has found that the greatest percentages

of banks offering completely free checking are those in the $50-

$100 million-asset category, closely followed by those in the $25-

$50 million-asset class. In most market areas, banks under $500

million were initiators. The most important reason for their

doing so was to meet competition from other banks. Promotion

of new business ranked second in importance. See New ABA

survey on ‘free checking, Journal of the American Bankers Asso-

ciation, pp. 23, 75 (October 1973).

whether the banks had established that the merger

was nonetheless justified by ‘the convenience and

needs of the community to be served’’’ (United

States v. Third National Bank*in Nashville, supra,

390 U.S. at 178).

The district court, after concluding that the merger

would not have any anticompetitive effects (F. 18,

App. 1936), further held (F. 25, App. 1941) that even

if the merger would have “‘some or all of the anticom-

petitive effects” urged by the government, the defend-

ants nevertheless had established the convenience-and-

needs defense. This conclusion was incorrect for two

reasons: (1) The court’s erroneous conclusion that the

merger would have no anticompetitive effect necessar-

ily undermined and invalidated its finding that any

anticompetitive effects were clearly outweighed by the

merger’s effect in meeting community convenience

and needs; (2) the benefits that the district court

found the merger would bring to the Spokune area do

not satisfy the convenience-and-needs standard.

1. A proper evaluation of the convenience-and-needs

defense cannot be made on an abstract basis. The anti-

competitive consequences of the merger must first be

properly determined, and then the effect of the merger

in meeting the convenience and needs of the com-

munity must be carefully balanced against those anti-

competitive effects. “To weigh adequately one of

these factors against the other requires a proper

conclusion as to each” (United States v. Third Na-

tional Bank in Nashville, supra, 390 U.S. at 183).

The court’s erroneous determination that the effect of

the merger may not be substantially to lessen com-

petition necessarily invalidated its conclusion that any

anticompetitive effects it might have were clearly

outweighed by its probable effect in meeting the con-

venience and needs of the Spokane area.

The Bank Merger Act does not permit a district

court to apply the convenience and needs standards

on the basis of a hypothetical assumption with re-

spect to the charged violation of Section 7 of the Clay-

ton Act. Before a merger with anticompetitive effects

may be approved under the “convenience and needs”

defense, the court is required to balance the actual

anticompetitive effects against the community con-

venience and needs that the merger would serve, and

it may approve the merger only if the latter factors

clearly outweigh the anticompetitive effects. If, as we

contend, this merger does have the anticompetitive

effects condemned by Section 7, the district court must

conduct the balancing on the basis of the actual facts

relating to the anticompetitive effect, not a hypotheti-

cal case.

2. The district court upheld the “convenience and

needs” defense because of two types of benefits it con-

cluded the merger would supply by replacing Wash-

ington Trust with a much larger bank which could

provide in the Spokane area: (a) additional competi-

tion with the largest bank in the state, Seattle First;

and (b) additional services (F. 25, App. 1941-1950).

Neither of these benefits, however, satisfies the “con-

venience and needs” defense.

a. The primary purpose of the defense was to per-

mit a merger that would enable the merged bank ty

provide needed services in the community. Cf. United

States v. Phillipsburg National Bank, 399 U.S. 350,

371. The defense, however, was not intended to sane-

tion an otherwise illegal merger of two large and

healthy banks merely because the resulting bank

would be able to compete better with an even larger

bank in the area.

Under the theory the district court adopted, an anti-

competitive merger would be permissible whenever

there was a bank operating in the market that would

be larger than the combined firm. This theory would

rapidly lead to the domination of banking markets by

a few large organizations. That is not the result Con-

gress intended when it strengthened the Clayton Act

by the 1950 amendments in order to stem ‘‘the rising

tide of economic concentration” by “arresting mergers

at a time when the trend to a lessening of competi-

tion in a line of commerce was still in its incipiency”

(Brown Shoe Co. v. United States, 370 U.S. 294, 317).

The approach of the district court would promote

rather than halt trends toward further concentration

in already concentrated banking markets.

b. The additional services that the district court

concluded would justify the merger were an increase

in Washington Trust’s lending limit from $1.25 mil-

—

lion to $7.5 million; international banking services;

mining, agricultural, and student loans; and municipal

bond financing. The district, court ruled that increased

competition for these few specialized banking services

would increase economic growth in Spokane to the

benefit of all banking customers (F’. 27, App. 1951).

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

services in the community * * *.’’ United States v.

Phillipsburg National Bank, 399 U.S. 350, 372 (empha-

sis 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 demand for mining, agricultural and stu-

dent loans. The number of customers seeking loans in

excess of one million dollars necessarily is small. The

same is true of international commercial services.

Similarly, the greater availability of municipal bond

financing can benefit only a few borrowers. Moreover,

these specialized services ordinarily are provided by

large banks, like NBC, which in this respect operate

in national or regional or statewide rather than local

markets. Finally, other banks in the area already offer

all of these services (Tr. 949, App. 995).

CONCLUSION

The judgment of the district court should be

versed and the case remanded for entry of an app:

priate decree.

Respectfully submitted.

Rosert H. Bork,

Solicitor General,

THomas KE. Kavuper, se

Assistant Attorney General, —

DANIEL F’. FRIEDMAN, ‘5

Deputy Solicitor General,

Howarp E. SHapiro,

GroRGE EDELSTEIN,

Pui L. VERVEER,

Attorneys.

DECEMBER 1973.

APPENDIX

EXAMPLES FROM 17 STATES IN WHICH BANK HOLDING COMPANIES HAVE CHARTERED NEW BANKS 18

MARKETS IN WHICH THEY HAVE BEEN BARRED FROM ESTABLISHING A BRANCH (SEE NOTE 46, SUPRA,

PAGE 49)

State Acquiring organization Acquired bank Citation 4

oe Weerva, Inc.................-. W B, Longmont........ 58 F.R. Bull 474 (19

Florida..___-_.. Ellis Corp... ooo FNB of Hudson, Hudson... 65 FR Bu 30 fra

lowa...._..... Brenton inc........... Brenton B&T of Cedar Rapids... 58 F.R. Bull 65 (19.

Maine._....... United of Maine... ._. Central NB, Waterville... 57 F.R. Bull 727 ah

Michigan... American Holding Co.. American NB in Western Mich., 38 FR 27950 C1Od.

Missouri... Mercantile Bancorp...........- Mercantile NB of St. Louis 38 F.R. 20125 (7-27-73),

Minnesote__.... Mid American Bancorp... ...... Mid American State Bank of 57 F.R. Bull 858 (1971). :

New Ha Koo eee Hooksett Bank, Hooksett... _ 57 F.R. Bull 694 (1971).

New Jersey... Midlantic Banks, inc. - = Midlantic National Bank” of 38 FR. 23909 957d

New York._._.. First National City Corp._...._- Citibank, N.A. Islip... 57 F.R. Bull 944.1971).

— Swopsnae Commu ‘opciané Seb ent 58 F.R. Bull iss {197 ae.

Tennessee... .. Hamilton Bancshares, Inc... . - Hamilton of A. by Fed,

(i1-7-72). 7 ‘

Texas_......... First City Bancorp. of Texas, Inc. First Professional Bank, N.A— 38 F.R. 18492 (7-11-73),

Utah__...______ First Security Corp. ...-....--- First Security Bank of Murray, 38 F.R. 18411 (7-10-73),

Virginia... Va. National Bancshares, Inc.... VNB/Henry Co... 38 F.R. 17545 (7-2-73),

Wisconsin... . Affiliated Bank Corp. _......-.- Middleton Shores Bank—Mid- 58 F.R. Bull 165 asd. as

dieton.

Wyoming_...... Wyoming Bancorp. ............ FNB of Jackson Hole—Jackson.. 57 F.R. Bull 737 (1971).

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