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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Brief for the United States
- **Published:** January 1, 1974
- **Citation:** 418 U.S. 602

## Text

:
,

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| 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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8

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...

42

45

45

52

— ——

Il

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

Vv
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

35
49

15, 52

S$S&

37

& &

67

41

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
v.

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)

2

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:

3
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

a

4

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.

5

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.

6

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).

|

——

7

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

10

‘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).

ll

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

12

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.”

13

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).

14

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).

15

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.

16

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).

_™

17

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.

18
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-

_—

19

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-

20

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-

21

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 ;

23

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.

II

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

24

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.

_ —— —

25

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.

IV

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

ee

26

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

a
27

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

28

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

ee

29

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.

i

30

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).

31

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-

a,

32

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).

33

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 .

%

34

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,

35

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

36

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.

37

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.

38

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

39

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).

40

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)).

41

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

42

- 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-

43

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.

44

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,

46

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.”

47

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.).

48

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.”

49

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

51

(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

52

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

53

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-

- §
55

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.

56

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

- °°

as

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

58

“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

59

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.).

60

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
have competition he wished it was the NB of ©.
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.”

61

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.

64

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

65

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

67

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
(c) (5) (B). In bank merger cases the district court is ac-
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).

a
/

68

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 p

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0339%3A10. Public record. Not legal advice.