Brief for the United States — United States v. Connecticut Nat. Bank

Supreme Court brief1974

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What actually matters in this document.

Text

Opinion below

Jurisdiction

Questions presented

Statutes involved _

Statement

A. The structure of banking in Connecti-

1. Economic structure

2. The structural effect of Connecticut

law

. Connecticut’s growth in a

1. Agency reports and the Comptrol-

ler’s decision

2. The district court’s decision

Introduction and summary of argument

I. The district court erroneously held that

commercial banking is not a line of com-

merce in Connecticut

II. The Bridgeport and New Haven metro-

politan areas and the State of Connec-

ticut are all sections of the country for

the purposes of Section 7

Argument—Continued

Il.

The State of Connecticut is a rele-

vant section of the country, but it is

not the only relevant section of the

country ..

. The Bridgeport and New Haven

metropolitan areas are banking

markets and hence are sections of

the country for the purposes of Sec-

INF isaiicncicsiehcihn estan eteenctas

The individual cities and towns in

Connecticut are not relevant sections

of the country =

On the basis of objective evidence Con-

necticut National Bank is a significant

potential entrant into the New Haven

market and First New Haven National

Bank is a significant potential entrant

into the Bridgeport market.......-_»==>==

A. There is ample incentive for Connec-

ticut National and First New Haven

to enter each other’s primary mar-

. Effective means for entry exist

through de novo branching, toehold

acquisition, and the formation of a

holding company _...__-_»-»» =

. Connecticut National and First New

Haven have the financial capability

independently to enter each other’s

primary market _

Argument—Continued

IV. The effect of the merger may be sub-

stantially to lessen competition ____.____..

A. The merger will eliminate substan-

tial potential competition in the

Bridgeport and New Haven mar-

kets See eee acne:

B. This merger will likely trigger other

mergers among the largest banks in

Connecticut and thus spread anti-

competitive effects statewide...

C. Under the district court’s theory

that the State of Connecticut is the

only relevant market, the merger is

illegal because it would significantly

increase concentration in that con-

centrated market 3

V. The anticompetitive effects of the mer-

ger would not be clearly outweighed by

the probable effect of the merger in

meeting the convenience and needs of

the Bridgeport and New Haven areas.

Conclusion

CITATIONS

Cases:

Bendix Corp., The (FTC), 3 Trade Reg.

Rep. { 19,288, vacated and remanded

on other grounds, Bendix Corporation

v. Federal Trade Commission, 450 F.

2d 534

Cases—Continued

Brown Shoe Co. v. United States, 370

UB B06 ee 41

Fort Worth National Corp. v. Federal

Savings & Loan Ins. Corp., 469 F. 2d

47 22

Hudson County National Bank v. Provi-

dent Institution for Savings, 80 N.J.

Super. 339, 193 A. 2d 697, affirmed per

curiam, 44 N.J. 282, 208 A. 2d 409 26

Savings Bank of Baltimore v. Bank Com-

missioner of Maryland, 248 Md. 461,

237 A. 2d 45.00 26

United States of America v. The Connec-

ticut National Bank and the Connecti-

cut Bank and Trust Company, D. Conn.,

Civil No. 13138 6

United States v. Continental Can Co., 378

U.S. 441 | 14, 23, 60-61

United States v. Falstaff Brewing Corp.,

410 U.S. 526. 45, 51, 54

United States v. First Nat. Bancorpora-

tion, 410 U.S. 577 2

United States v. Pabst Brewing Co., 384

U.S. 546 19, 31, 35, 39, 64, 65

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

158 54

United States v. Philadelphia National

Bank, 201 F. Supp. 348 21

United States v. Philadelphia National

Bank, 374 U.S. 321 0. passim

United States v. Phillipsburg National

Bank & Trust Co., 306 F. Supp. 645 ___ 21, 22,

23, 42

United States v. Phillipsburg National

Bank, 399 U.S. 350

passim

Cases—Continued

United States v. Provident National Bank,

Page

280 F. Supp. 1. 41, 42

United States v. Third National Bank in

Nashville, 390 U.S. 171 _. 27, 53, 67, 68

United States v. Von’s Grocery Co., 384

U.S. 270 _...19, 61, 64, 65

United States v. Wilson Sporting Goods

Co., 288 F. Supp. 543 61

Statutes:

Bank Holding Company Act, Section 3

(d), 70 Stat. 188, as amended, 12

U.S.C. 1842(d) 7, 32

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

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

Section 1828(c) (4) 12

Section 1828(c)(5)(B) __. 3, 19, 67

Section 1828(c) (7) (A) 13

Section 1828(c) (7) (D) 13

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

amended, 15 U.S.C. 18 passim

Expediting Act, Section 2, 32 Stat. 823,

as amended, 15 U.S.C. 29 2 2

12 U.S.C. 36 7, 32

Annotated Code of Maryland, Article 11,

Section 41(a) 26

Connecticut General Statutes Annotated:

§ 36-59 7, 32

§§ 36-418—36-430 23 7, 32, 55

Connecticut Public Act No. 73-195, (May

14, 1973) 25, 26

New Jersey Statutes Annotated, 17:9A-

184

Miscellaneous:

1970 Census of Population, Volume 1 _....

Federal Home Loan Bank Board, Member

Savings and Loan Associations of the

Federal Home Loan Bank System, Com-

bined Financial Statements 1968...

37 Fed. Reg. 5981

38 Fed. Reg. 27552

Moody’s Bank & Finance Manual (1958) -.

Polk’s World Bank Directory (March

1972) _ site

Recent Changes in the Structure of Com-

mercial Banking, Federal Reserve Bul-

letin, Maree 2070

Solomon, Bank Merger Policy and Prob-

lems: A Linkage Theory of Oligopoly,

89 The Banking Law Journal 116

(1972)

Wille, FDIC Merger Policy, 1970-1972,

Presentation at the Practicing Law In-

stitute Seminars on Bank Acquisitions

and Mergers and Other Antitrust Prob-

lems, New York, New York, October

13-14, 1972, FDIC News Release...

Yeats, An Analysis of the Effect of Mer-

gers on Banking Market Structures,

Journal of Money, Credit, and Banking

COR BOR vertcctecormmatnonaanain

Iu the Supreme Court of the United States

OCTOBER TERM, 1973

No. 73-767

UNITED STATES OF AMERICA, APPELLANT

THE CONNECTICUT NATIONAL BANK, THE FIRST NEW

HAVEN NATIONAL BANK, AND JAMES E. SMITH,

COMPTROLLER OF THE CURRENCY

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF CONNECTICUT

BRIEF FOR THE UNITED STATES

OPINION BELOW

The opinion of the district court (J.S. App. A, pp.

la-103a) is reported at 362 F.Supp. 240.

JURISDICTION

The judgment of the district court (App. 2584-

2585) was entered on July 16, 1973. The United

States filed a notice of appeal to this Court on Sep-

(1)

tember 12, 1973 (App. 2586). Probable jurisdiction

was noted on January 7, 1974 (App. 2587). 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. First Nat. Bancorporation, 410 U.S. 577.

QUESTIONS PRESENTED

Whether the consolidation of the fourth and eighth

largest banks in Connecticut may substantially lessen

competition, in violation of Section 7 of the Clayton

Act:

(a) by eliminating the two banks as significant po-

tential entrants into each other’s markets in metro-

politan Bridgeport and New Haven and into other

local banking markets in Connecticut;

(b) by stimulating other mergers and by intensify-

ing the trend toward banking concentration in the

state as a whole.

STATUTES INVOLVED

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

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

pertinent 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 substantial-

ly to lessen competition, or to tend to create a

monopoly.

Section 5(B) of the Bank Merger Act of 1966, 80

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

vides in pertinent part:

The * * * [Comptroller of the Currency] shall

not approve * * * any other proposed merger

transaction whose effect in any section of the

country may be substantially to lessen competi-

tion, 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 proposed 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 managerial

resources and future prospects of the existing

and proposed institutions, and the convenience

and needs of the community to be served.

STATEMENT

The United States brought this civil antitrust ac-

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

18) challenging the proposed merger between the Con-

necticut National Bank (“Connecticut National”) and

the First New Haven National Bank (“First New

Haven”), which are, respectively, the fourth and

eighth largest commercial banks in Connecticut. The

complaint alleged that the merger would eliminate

Connecticut National as a significant potential com-

petitor in the New Haven metropolitan area and First

New Haven as a significant potential competitor in

the Bridgeport metropolitan area; reduce the number

of Connecticut banks capable of expanding statewide

independently; and trigger other mergers between

leading banks in Connecticut, thus contributing to in-

creased concentration of statewide banking resources

and promotion of parallel policies among leading

banks in local Connecticut markets (App. 10-11).'

After trial the district court held that the merger

did not violate Section 7 and dismissed the complaint.

A. THE STRUCTURE OF BANKING IN CONNECTICUT

1. Economic structure. Commercial banking in Con-

necticut is highly concentrated." At the end of 1971,

‘ The complaint also alleged that the merger would eliminate

actual competition between the banks in a four-town area

adjacent to Bridgeport and New Haven (App. 10-11). The dis-

trict court rejected this contention (J.S. App. A, pp. 89a-9la).

It is not an issue in this appeal.

* There are other kinds of financial institutions in Connec-

ticut, but the services which they may offer to the public are

limited by law. Savings banks are the principal thrift insti-

tutions and lenders on real property in the state (J.S. App.

A, p. 14a; App. 1798, 1795); they also have limited powers to

make personal installment loans (App. 466). Under legislation

enacted in May, 1973, savings banks will obtain by December

31, 1975, the right, subject to protective provisions for small-

town commercial banks, to offer personal non-interest-bearing

checking accounts (J.S. App. A, p. 16a; App. 2555-2563).

Savings and loan associations also operate in Connecticut,

the five largest banks had 61 percent, and the ten

largest banks had 83.1 percent, of the $5,678,553,000

in deposits in the state (App. 1598). This degree of

concentration reflects a relatively recent increase in

banking concentration in Connecticut. The percent-

age of deposits held by the top five banks increased

from 46.4 percent in 1954 to 61 percent in 1971; and

the percentage share of the ten biggest banks rose in

the same period from 57.8 percent to 83.1 percent

(App. 1598).

Concurrent with the increase in concentration since

1954 was a decrease in the number of commercial

banks. One hundred five banks operated in 1955, but

65 banks were subsequently eliminated by merger,

and by 1971 only 63 banks were in business in Con-

necticut (App. 1597)." Most of these acquisitions

were made by larger banks (App. 1553-1558). Al-

though all but three of the acquisitions between 1955

and 1968 were of small banks (with deposits of less

than $30 million), more recent mergers have involved

some of the largest banks in the state.

Thus, in 1968 Connecticut Bank & Trust Company

of Hartford (“CBT”), then the state’s second largest

bank, attempted to acquire Connecticut National; a

government antitrust suit caused abandonment of

offering savings accounts and making loans on real estate

mortgages (J.S. App. A, p. 14a).

* During the same period, 23 new banks began operations

(App. 1597).

the merger.‘ In 1970 the Fairfield County Trust,

which had deposits of $321,000,000, merged with the

Union and New Haven Trust, which had deposits of

$116,000,000, to form Union Trust, the state’s third

largest bank (J.S. App. A, p. 10a; App. 1554). In

October, 1973, after the decision in this case, Union

Trust and First Connecticut Bancorp., a holding com-

pany whose banks make it the state’s ninth largest

banking organization, sought approval from the Fed-

eral Reserve Board of their merger plan. 38 Fed.

Reg. 27552.

The large banks have also expanded greatly the ter-

ritory which they serve. In the early 1950’s, bank-

ing in Connecticut was unofficially but effectively

compartmentalized in five districts, and banks op-

erated only fifteen offices outside the metropolitan

areas in which they had their headquarters (App.

1582). By 1972, however, the districts had broken

down: the ten leading banks had 217 offices out-

side their headquarters metropolitan areas; and two

banks with headquarters in Hartford, CBT and

Hartford National Bank (“Hartford National’),

operated statewide (J.S. App. A, pp. 8a, 21a-22a;

App. 1583-1584).°

* United States of America v. The Connecticut National

Bank and The Connecticut Bank and Trust Company, D.

Conn., Civil No. 18138 (Complaint filed May 9, 1969).

5 At year-end 1972, CBT and Hartford National held

20.9 percent and 20.4 percent of statewide deposits (App.

2554). Union Trust, the third largest bank, has 8.3 percent

of statewide deposits (computed from App. 2424 and 2554).

Concentration in local Connecticut banking markets

is even higher than in the state as a whole. There

are eleven metropolitan areas in Connecticut,’ but,

as of June 30, 1970, in only one (Norwalk) did the

top three banks have less than 80 percent of deposits

in area banking offices (App. 1545, 1548, 1587-1595).

In the Bridgeport metropolitan area‘ historical con-

centration levels have persisted: the market share of

the top three banks was 86.8 percent in December,

1954, and 87.8 percent in June, 1970 (App. 1544-

1545). In the New Haven metropolitan area,* con-

centration has increased markedly: the market share

of the top three banks rose from 69.1 percent in De-

cember, 1954, to 838.3 percent in June, 1970 (App.

1547-1548).

2. The structural effect of Connecticut law. Al-

though Connecticut banking law prohibits banks not

headquartered in Connecticut from operating bank-

ing offices within the state,” it permits any Connecti-

*The metropolitan areas in Connecticut, described by the

Census Bureau as Standard Metropolitan Statistical Areas

(“SMSAs”), are: Bridgeport, Bristol, Danbury, Hartford,

Meriden, New Britain, New Haven, New London-Groton-

Norwich, Norwalk, Stamford and Waterbury (App. 1440-

1441).

* The Bridgeport SMSA includes: Bridgeport, Easton, Fair-

field, Milford, Monroe, Shelton, Stratford, and Trumbull (App.

1440).

8 The New Haven SMSA includes: New Haven, Bethany,

Branford, East Haven, Guilford, Hamden, North Haven, North

Branford, Orange, West Haven, and Woodbridge (App. 1441).

° See Conn. Gen. Stat. Ann., §§ 36-59 and 36-418 to 36-430;

and 12 U.S.C. 36 and 1842(d).

not already have its headquarters (J.S. App. A, p.

7a). Subject to this “home-office-protection” provi-

sion, banks may branch statewide. At the time of

the challenged merger, the cities of Bridgeport and

New Haven were “closed” to branching by outside

banks, but many of their suburbs were “open” be-

cause no banks had headquarters there.”

3. Connecticut’s growth in population and wealth.

In the last three decades Connecticut has enjoyed a

sustained population growth, occurring principally

in suburbs like those in the Bridgeport and New

Haven metropolitan areas. Between 1950 and 1969

Connecticut’s population grew from 2,016,000 to

3,012,000, an increase of 49 percent which exceeded

the national average and was the highest percentage

increase of the New England states (App. 1464).

cut banks to merge. It also allows banks to establish a

de novo branch in any town where another bank does

2° In the New Haven metropolitan area, New Haven, Orange,

Woodbridge, Hamden, North Haven and North Branford were

closed to de novo branching at the time of the merger; and

East Haven, West Haven, Branford, Guilford, and Bethany

were open (App. 1505). Closed towns in the Bridgeport metro-

politan area were Bridgeport and Stratford; open towns were

Milford, Fairfield, Trumbull, Monroe, Shelton and Easton

(App. 1505). The opening after trial of a new state-chartered

bank in Monroe has closed that town to branching. Also

after trial state banking authorities granted provisional

authority for new banks to be opened in Bridgeport,

Trumbull and Shelton, and the Comptroller gave similar au-

thority for a new national bank in Fairfield. These new

charters close the towns in question to de novo branching.

But see pp. 49-51, infra.

Connecticut presently ranks first in the nation in

per capita income and per capita value added by

manufacture, and second in per capita effective buy-

ing power (App. 2568, 2214). The state’s economic

prospects are good: it is estimated that by 1990 Con-

necticut’s population will have risen to 4,313,000 and

its per capita income will have increased from $4,239

to $7,106 (App. 1464, 1467).

The Bridgeport and New Haven metropolitan areas

have shown good growth, which is expected to continue

in the coming years. Between 1950 and 1970 sub-

urban population practically doubled, increasing the

population of the Bridgeport metropolitan area from

275,888 to 389,153, and the New Haven metropolitan

area from 273,049 to 355,538 (App. 1456, 1457).”

Projections for each metropolitan area point to con-

tinued growth, with significant increases expected in

population, employment and personal income.”

11 The population of Bridgeport’s suburbs rose from 117,179

in 1950 to 232,611 in 1970; at the same time, the population

of Bridgeport city declined from 158,709 to 156,542 (App.

1456). The population of New Haven’s suburbs increased

from 108,606 in 1950 to 217,831 in 1970; during those years

the population of New Haven city fell from 164,443 to 137,707

(App. 1457). ;

12 By 1980 the population of the Bridgeport metropolitan

area is expected to be 471,000 and that of the New Haven

metropolitan area to be 406,000 (App. 1474). Civilian em-

ployment in the Bridgeport area is expected to have risen

from 164,000 in 1968 to 199,000 in 1980, and in the New

Haven area from 166,200 to 205,900 (App. 1475). Total per-

sonal income is expected to climb from $1,412,100,000 to

$2,490,900,000 in the Bridgeport area and from $1,459,700,000

to $2,544,500,000 in the New Haven area (App. 1477).

B. THE MERGING BANKS

Connecticut National is the largest commercial

bank with headquarters in the Bridgeport metropoli-

tan area and the fourth largest commercial bank in

Connecticut (J.S. App. A, pp. la-8a). At year-end

1972 it had $412 million in deposits, which were 6.2

percent of deposits in commercial banks in Connecti-

cut (App. 2554)." As of June 30, 1970, it held 40

percent of commercial bank deposits in the Bridge-

port metropolitan area, the largest share (App.

1545).

Connecticut National operates 51 offices, of which

25 are in the Bridgeport metropolitan area, and 20

are in the Danbury, New Haven, Norwalk, Stamford,

and Waterbury metropolitan areas (App. 1545, 1548,

1587, 1588, 1590, 1592, 1816-1817). The bank ex-

panded substantially in the decade and a half prior

to the merger. In 1955 Connecticut National oper-

ated only one branch outside the Bridgeport metro-

politan area (App. 1582). Between 1955 and 1971

it established 34 de novo branches—more than any

other bank in the state (App. 1561-1562); seven-

teen of these branches were outside the Bridge-

port metropolitan area. In the same period it ac-

48 Its total assets were $463.3 million (J.S. App. A, p. 3a).

% Connecticut National’s share of the Bridgeport area

market has consistently been high; in 1954, for example, it was

the market leader with a 47.4 percent share (App. 1544).

quired four banks, all of which were outside the

Bridgeport area (App. 1555)."

Connecticut National also became more profitable.

While its total resources increased from approximate-

ly $216 million in 1961 to nearly $399 million in

1970, its net income” rose from $1,279,791 to

$3,757,796 (App. 18387).

First New Haven is the second largest commercial

bank with headquarters in the New Haven metro-

politan area, and the eighth largest bank in Con-

necticut (J.S. App. A, pp. la, 3a-4a). At year-end

1972 it had $272 million in deposits, which were 4.1

percent of deposits in commercial banks in Connec-

ticut (App. 2554). As of June 30, 1970, First New

Haven had 39.5 percent of deposits in commercial

bank offices in the New Haven metropolitan area, the

largest share (App. 1548).”

First New Haven operates 22 offices, of which 17

are in the New Haven metropolitan area and three

are in the Bridgeport metropolitan area (J.S. App.

A, p. 4a; App. 1858, 1872-1873).*° The bank ex-

* The banks acquired and their deposits size were: First

National Bank in Westport, $4,034,000; Waterbury Trust Co.,

$15,571,000; City National Bank of South Norwalk,

$14,470,000; and Atlantic National Bank of Stamford,

$16,639,000 (App. 1555).

** “Net income” refers to net income before securities gains

or losses.

** First New Haven’s share of the New Haven area market

has consistently been high: in 1954, for example, it was

the market leader with a 31.5 percent share (App. 1547).

** Two offices are in towns—Derby and Wallingford—that

are not in any metropolitan area.

panded appreciably in the years prior to the merger.

First New Haven established 14 de novo branches

between 1955 and 1971 (App. 1562). At the same

time it acquired three banks (App. 1556). As with

Connecticut National, increasing size brought First

New Haven greater profitability; assets grew from

approximately $168 million in 1961 to $315.2 million

in 1970, while net profits rose from $1,098,512 to

$3,043,756 (App. 1884).

C. THE PROCEEDINGS

1. Agency Reports and the Comptroller’s Decision.

On November 19, 1970, Connecticut National and

First New Haven signed a Consolidation Agreement

which on February 2, 1971, they submitted to the

Comptroller of the Currency for approval (J.S. App.

A, p. 4a; App. 2209). The Comptroller, as required

by the Bank Merger Act of 1966 (12 U.S.C. 1828

ernors of the Federal Reserve System, the Federal

Deposit Insurance Corporation, and the Department

of Justice,

The Board of Governors stated that the merger

would eliminate the “potential for increased competi-

tion between the two banks” and reduce by one the

number of banks capable of expanding statewide, and

thus it concluded that “[o]verall, the competitive

1” The banks acquired and their deposits were: Milford Trust

Co., $12,977,000; The New Haven Bank, N.B.A., $43,024,000;

and Branford Trust Co., $5,107,000 (App. 1556).

effect of the proposed consolidation would be sub-

stantially adverse” (App. 1631, 1632, 1633). The

Federal Deposit Insurance Corporation, believing that

the merger would eliminate potential competition be-

tween the banks and encourage the concentration of

banking statewide, also concluded that the “proposed

transaction would have a substantially adverse effect

on commercial bank competition * * *” (App. 1629).

The Department of Justice reported that the merger

“would have a significantly adverse effect on competi-

tion” (App. 1622).

The Comptroller approved the merger on July 26,

1971 (App. 2566-2572).

2. The District Court’s Decision. On August 23,

1971, the United States filed its complaint challeng-

ing the merger (App. 3). Pursuant to 12 U.S.C.

1828(c)(7)(A), this automatically stayed the mer-

ger. The Comptroller intervened as a party defend-

ant (App. 18). 12 U.S.C. 1828(c)(7)(D).

After trial, the district court held that the merger

would not violate Section 7 (J.S. App. A, pp. 1la-

103a).”

The court held that the line of commerce in this

case “includes both commercial banks and savings

banks” (J.S. App. A, p. 87a), because it found mean-

ingful competition between both types of banks for

personal checking accounts, real estate mortgages,

20 Entry of judgment dismissing the complaint followed on

July 16, 1973 (App. 2584-2585). Because of the unusual length

of the district court’s findings (J.S. App. A, pp. la-80a), there

has been no attempt to summarize them here.

personal loans, IPC deposits, and commercial loans

(J.S. App. A, p. 85a).”

The court then ruled that the State of Connecticut

is the only appropriate “section of the country” in

which to test the effects of the merger (J.S. App. A,

pp. 89a, 92a), and that the government had failed to

prove that metropolitan areas are appropriate sec-

tions of the country (J.S. App. A, pp. 88a-89a).”

The court determined that the merger would not

substantially lessen actual competition because, after

reducing thé more-than-11 percent statewide market

share of the two banks,” the merger would increase

the concentration level of the state’s ten largest com-

mercial banks less than 1.8 percent (J.S. App. A,

p. 96a).

*1 The court also cited this Court’s finding of overlapping

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

441, and the omission from the Bank Merger Act of the phrase

“in any line of commerce” (J.S. App. A, p. 86a).

22 The court also cited the absence of any showing of the

percentage of metropolitan area residents who bank in that

metropolitan area; the fact that 43 percent of Connecticut

National’s deposits come from outside the Bridegport metro-

politan area; and prior adverse precedent (J.S. App. A, pp.

88a-89a).

23 The reduction was to account for the influence of New

York City banks (J.S. App. A, p. 96a).

Year-end 1971 figures, which the court used, show that

Connecticut National had 6.6 percent and First New Haven

had 4.7 percent of statewide deposits—hence a combined share

of over 11 percent (App. 1550).

* The court found that with savings banks included, the

merger increased the combined share of the five largest banks

0.9 percent (J.S. App. A, p. 96a).

The court also found no likely loss of substantial

potential competition. Successful entry into either

the New Haven or Bridgeport metropolitan area, ac-

cording to the court, required entry into the cities of

Bridgeport or New Haven (J.S. App. A, p. 99a).

Entry by branching was not possible, it held, because

both cities are closed to branching (J.S. App. A, p.

99a).*° It ruled that toehold entry into the city of

New Haven was impossible because there are no

banks suitable for such acquisition there, and that

the government had failed to identify any small banks

for sale,in Bridgeport and other towns (J.S. App.

A, p. 101a). It held that economic, legal, and regu-

latory barriers made entry into these cities by use

of a holding company to charter a new bank un-

feasible (J.S. App. A, p. 100a). Statewide expansion

by branching was not probable, according to the

court, because of the banks’ lack of sufficient finan-

cial resources and the limited availability of econom-

ically attractive open towns (J.S. App. A, p. 100a).

The court also rejected the government’s claim that

this merger would trigger other mergers, since it

concluded that regulatory and antitrust criteria will

be applied case-by-case (J.S. App. A, p. 101a).

Finally, the court found that the merger’s benefits

to the convenience and needs of the community would

clearly outweigh any harm to competition by enabling

the new bank to compete statewide with the two big

** The court stated that branching into the suburbs to any

significant extent would not receive the approval of the Comp-

troller of the Currency; and that the defendants also lacked

the intention to enter each other’s service area by branching

(J.S. App. A, pp. 99a-100a).

Hartford banks, and by offering their customers new

services (J.S. App. A, p. 102a).

INTRODUCTION AND SUMMARY OF ARGUMENT

This case involves a merger between two of the

largest commercial banks .in Connecticut: Connecti-

cut National, whose main office is in Bridgeport, and

First New Haven, whose main office is some twenty

miles away in New Haven. In the government’s view,

the record shows that the merger eliminates signifi-

cant potential competition in commercial banking in

the New Haven and Bridgeport metropolitan area

markets and in the other local markets in Connecticut.

Even under the district court’s conclusion, which we

question, that the State of Connecticut is the only

market, this merger eliminates substantial actual

competition.

This Court in United States v. Philadelphia Na-

tional Bank, 374 U.S. 321, and United States v. Phil-

lipsburg National Bank, 399 U.S. 350, recognized that

the broad cluster of banking services known as “‘com-

mercial banking” is a line of commerce even though

commercial banks may compete with thrift institu-

tions in providing such services as savings accounts,

personal loans and real estate mortgages. Thus, the

competition which savings banks in Connecticut offer

commercial banks in these discrete and limited serv-

ices provides no ground for rejecting commercial

banking as a line of commerce. The district court’s

findings of significant cross-institutional competition

for commercial and ffidustrial loans and demand de-

posits do not change matters, for those findings are

clearly erroneous. Such competition is either non-

existent or insubstantial.

The Bridgeport and New Haven metropolitan areas

are each areas in which both buyers and sellers of

banking services can conveniently operate. Thus, un-

der the market definition principles enunciated by

this Court in United States v. Philadelphia National

Bank, supra, they are relevant sections of the coun-

try in which to test the effects of this merger. The

district court’s failure to recognize them as sections

of the country stems principally from a market analy-

sis that mistakenly focuses only on the sellers of

banking services. That same error caused the district

court to conclude that the State of Connecticut is a

banking market and the only relevant section of the

country. We submit that because of the insulating

effects of Connecticut law, the whole state is a section

of the country, although it is not a banking market

nor the only relevant section of the country, as the

district court found.

Ill

Judged by the objective criteria of incentive, pros-

pects for success, and financial capability, Connecti-

cut National was a potential entrant into the New

Haven area market, and First New Haven was a po-

tential entrant into the Bridgeport area market.

Each bank had ample incentive to enter the markets,

because these markets have been economically sound

in the past and have good prospects for the future.

Further incentive came from the need to compete

more effectively with the two large Hartford banks,

each of which had recently entered the Bridgeport

and New Haven markets.

Prospects for entry were good through either de

novo branching or toehold acquisition. Connecticut

law allows acquisition statewide, and in each mar-

ket there were several banks suitable for toehold

acquisition. Connecticut allows de novo branching

statewide, subject to the limitations of the Home

Office Protection Law. Although the cities of Bridge-

port and New Haven were closed to branching, sever-

al other towns in those markets were open. Approval

by the Comptroller of the Currency would be neces-

sary for either type of expansion, but the Comptroller

has regularly approved acquisitions and de novo

branching in Connecticut. In addition, Connecticut

permits bank holding companies, which thus form a

third method of entry.

Entry was financially possible because the banks

are large, strong and profitable. They established

many branches and made several acquisitions in the

past when they were smaller and less profitable.

Modest but competitively significant entry is all the

more possible when, as now, Connecticut National and

First New Haven are larger and stronger.

The merger has severe anticompetitive effects, Each

bank has the incentives, prospects for success, and

financial capability to be a significant potential com-

petitor in the metropolitan area where the other is

headquartered. This merger will eliminate that com-

petition. Each bank is a significant potential competi-

tor in those other local banking markets in Connecti-

cut where it does not now compete. The merger will

also eliminate or reduce that competition. Moreover,

the merger is very likely to trigger mergers among

other large Connecticut banks—thus further increas-

ing concentration and spreading the anticompetitive

effects of the merger statewide.

In addition to the principles of potential competi-

tion, the traditional doctrine of elimination of actual

competition provides an alternative and narrower

ground for resolution of the case. The district court

found that the State of Connecticut is a banking mar-

ket and the only relevant section of the country. We

agree that the state is a section of the country for

purposes of Section 7, although we do not think

that it is the only section or that it can be character-

ized as a traditional customer-supplier banking mar-

ket. If, however, this Court accepts the market as

defined by the district court, it should treat the mer-

ger as one between actual competitors. As such it is

illegal because it significantly increases concentration

in an already concentrated market. United States

v. Philadelphia National Bank, supra; United States

v. Von’s Grocery Co., 384 U.S. 270; and United

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

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(c) (5)

(B), the effect of the merger in meeting “the con-

venience and needs of the community to be served.”

Since the district court did not properly determine

the competitive effects, it could not properly balance

them against the benefits claimed for the merger.

That evaluation cannot be made on an abstract, as-

sumed hypothesis of adverse competitive effects.

Moreover, the benefits found by the court are in-

sufficient to establish the defense. It is not satis- —

fied by the claim that the merged bank could compete

more effectively with the two large Hartford banks

elsewhere in Connecticut. Such a test would lead

rapidly to domination of banking markets by a few

large organizations, a purpose never contemplated by

Congress. The other benefits claimed, such as in-

creased lending limits and the ability to provide

sophisticated services, aid only a minute portion of

the banks’ customers rather than the entire commu-

nity of users of banking services, for whose benefit

the defense is designed.

I. THE DISTRICT COURT ERRONEOUSLY HELD

THAT COMMERCIAL BANKING IS NOT A LINE

OF COMMERCE IN CONNECTICUT

The district court ruled that “the appropriate ‘line

of commerce’ in the Connecticut banking environ-

ment includes both commercial banks and savings

banks” (J.S. App. A, p. 87a). Its principal reason

for combining these two types of financial institutions

in one line of commerce was its conclusion that com-

mercial banks and savings banks engage in substan-

tial competition for savings accounts, real estate mort-

gages, personal loans, commercial loans and checking

accounts (J.S. App. A, p. 85a). We submit that in

so ruling, the district court misapprehended both this

Court’s prior decisions and the record in this case.

1. In United States v. Philadelphia National Bank,

374 U.S. 321 (“Philadelphia National Bank’’), this

Court recognized that the cluster of banking services

which make up “commercial banking” constituted a

line of commerce. Jd. at 356-357. The Court was

aware that the merging commercial banks faced com-

petition from savings banks and savings and loan

associations for certain kinds of banking business:

savings accounts, installment loans, and real estate

loans. Jd. at 357, n. 34; United States v. Philadelphia

National Bank, 201 F. Supp. 348, 362 (E.D. Pa.).

Nonetheless, it held that significant competition be-

tween commercial banks and thrift institutions in lim-

ited and discrete aspects of banking—which might

themselves be lines of commerce—could exist without

nullifying as a line of commerce the broader range

of banking services clustered only at commercial

banks. Philadelphia National Bank, supra, 374 U.S.

at 356-357.

In United States v. Phillipsburg National Bank,

399 U.S. 350 (“Phillipsburg”), this Court emphasized

again the importance of commercial banking as a line

of commerce to test the competitive effect of a merger

between commercial banks. The district court seem-

ingly had rejected commercial banking as a line of

commerce and had focused instead on particular serv-

ices. United States v. Phillipsburg National Bank &

Trust Co., 306 F. Supp. 645, 648-649 (D. N.J.). This

Court, however, stressed that the existence of sub-

markets like savings accounts and real estate loans,

in which the defendants competed with savings and

loan associations,“ was “not a basis for the disregard

of a broader line of commerce that has economic sig-

nificance.” Phillipsburg, supra, 399 U.S. at 360.

Pointing to the cluster of services uniquely available

at commercial banks, the Court reaffirmed the validity

of commercial banking as a line of commerce. /d. at

360-361.

Both Connecticut National and First New Haven

are commercial banks and offer the cluster of services

subsumed under the heading “commercial banking.”

The fact that they also compete with savings banks

for savings, personal loans and real estate mortgages,

though it may be evidence of a particularized product

sub-market that crosses institutional lines,” is no

2¢ Although there may have been no savings banks in the

area, there were savings and loan associations. United States

v. Phillipsburg National Bank & Trust Co., 306 F. Supp. 645,

649 (D. N.J.). Indeed, savings and loan associations were

economically significant in both New Jersey and Pennsyl-

vania: at the time of the merger involved in Phillipsburg,

savings and loan associations in each state had savings capi-

tal in excess of $5 billion. Federal Home Loan Bank Board,

Member Savings And Loan Associations Of The Federal Home

Loan Bank System, Combined Financial Statements 1968,

pp. 15, 16.

27In Phillipsburg, this Court while upholding the validity

of commercial banking as a line of commerce, also observed

that “[s]ubmarkets such as the District Court defined would

be clearly relevant, for example, in analyzing the effect on com-

petition of a merger between a commercial bank and another

type of financial institution.” Phillipsburg, supra, 399 U.S. at

360. Thus in Fort Worth National Corp. v. Federal Savings &

Loan Ins. Corp., 469 F. 2d 47, 58-60 (C.A. 5), it was held that

savings deposits under $100,000 were an appropriate line of

commerce to test the effects of a merger between a commercial

more reason to ignore the broader commercial bank-

ing market as a valid line of commerce than it was

in Philadelphia National Bank and Phillipsburg.”

The district court’s additional conclusions that savy-

ings bank compete with commercial banks for com-

mercial loans and personal checking accounts (J.S.

App. A, p. 85a) are either clearly erroneous or im-

material. The court’s findings do not support its con-

clusion that there is competition between commercial

bank and a savings and loan association. However, the exist-

ence of a line of commerce which cuts across institutional

bounds is not inconsistent with the existence of a line of com-

merce expressing competition among institutions of one kind.

This Court so recognized in United States v. Continental Can

Co., 378 U.S. 441, 456-458, upon which the district court im-

properly relied for its contrary conclusion (J.S. App. A,

p. 86a).

*8 Indeed, Phillipsburg presented a more persuasive case for

abandoning commercial banking as a line of commerce than

does the present case framed in terms of competition from

thrift institutions for savings, personal loans and mortgages.

The two merging commercial banks in Phillipsburg also re-

ceived competition from thrift institutions for savings ac-

counts and real estate loans. United States v. Phillipsburg Na-

tional Bank & Trust, Co., 306 F. Supp. 645, 649 (D. N.J.).

Moreover, in that case the district court found that the de-

fendants were “more comparable to savings institutions than

to large commercial banks” because demand deposits accounted

for less than 30 percent and time and savings deposits ac-

counted for more than 70 percent of total deposits in each.

Id. at 648, 649. By contrast, demand deposits account for 50.2

percent and 60.8 percent of deposits, respectively, at Connec-

ticut National and First New Haven. Computed from Con-

necticut National 1972 Annual Report, p. 12, and First New

Haven 1972 Annual Report, p. 7.

banks and savings banks for commercial loans.” Nor

does the record in general buttress this conclusion:

defendants’ own expert witnesses admitted that sav-

ings banks were either a non-existent or an unim-

portant factor in commercial and industrial loans

(App. 479, 641).”

Similarly erroneous is the district court’s conclu-

sion that savings banks compete with commercial

banks for personal checking accounts. The findings

cited by the district court do not establish such com-

petition (J.S. App. A, pp. 16a-17a). In fact, as re-

spondents recognize (Motion To Affirm, pp. 36, 39),

savings banks in Connecticut do not compete with

commercial banks for personal checking accounts be-

* The district court relied for its conclusion (J.S. App. A,

p. 85a) only upon Finding No. 45—which does not specifically

mention commercial loans at all (J.S. App. A, p. 14a). The

transcript reference in that finding to the government’s ad-

mission that “CNB competes directly with savings banks for

79 percent of its loans” (J.S. App. A, p. 14a) shows only

that commercial-industrial loans are the 21 percent of Con-

necticut National’s loan business which is not subject to sav-

ings bank competition (App. 169-170).

80 “Commercial and industrial loans” are short term business

loans, generally for inventory or working capital (App. 479,

487). These are distinct from a real estate loan secured by

commercial or industrial property (App. 487, 1793, 1795).

Nonetheless, if a businessman is willing and able to mortgage

his business real property, he may obtain a savings bank

loan, secured only by a first mortgage, to finance inventory

or working capital (App. 479, 487-488). Since these savings

bank loans amounted to only $26 million compared to more

than $1 billion in commercial bank commercial and industrial

loans, outstanding at year-end 1971, they are not competi-

tively significant, as savings bankers agree (App. 487, 1072).

cause they do not offer that service; they have no

present authority under Connecticut law to do so.”

Although in May, 1973, Connecticut enacted legis-

lation to authorize savings bank demand deposits, the

effective date of the legislation is deferred and condi-

tional, the law has not yet taken effect and it may not

take effect for nearly two years (J.S. App. A, p. 17a).

Connecticut Public Act No. 73-195 (May 14, 1973).*

Thus one can only speculate about whether savings

banks, when they finally begin to offer checking ac-

counts, will provide significant competition to com-

mercial banks for demand deposit business. There is

good reason to believe that they will not be significant

competitors. Not all Connecticut savings banks were

in favor of having checking account services, and,

according to their spokesman, “[i]t is not likely that

all savings banks will offer it * * *” (App. 481, 486).

In two states where savings banks already have the

right to offer checking accounts, New Jersey and

81Qne Connecticut savings bank, the Savings Bank of

Tolland, by dint of an unusual provision in its charter, has

offered checking accounts for many years (J.S. App. A, p.

17a).

82 The new law will take effect on the earliest of three

occasions: enactment of similar federal legislation; elimina-

tion of the difference in interest rates allowed to be paid on

deposits under $100,000 by savings banks and state banks

not members of the Federal Reserve System; or December 31,

1975. Connecticut Public Act No. 73-195, § 7.

33 The district court, having erroneously determined that

savings banks currently compete with commercial banks for

checking accounts, made no findings on what kind of competi-

tive impact could be expected (see J.S. App. A, pp. 16a-18a).

Maryland, demand deposits amount to less than 3 per-

cent of total savings bank deposits (App. 1785) .*

Even more restrictive of any competitive impact

from savings bank checking accounts in Connecticut

is the fact that the Connecticut law will permit sav-

ings banks to accept demand deposits only from nat-

ural persons and only for personal, non-business pur-

poses. Connecticut Public Act No. 73-195, §§ 1, 2 and

5.° Thus, savings banks will have no authority to of-

fer checking accounts other than to one class of cus-

tomer and for one purpose. Commercial banks, by

force of law, will still have all the demand’ deposit

business of commercial customers, whether large or

%¢In Maryland, demand deposits amounted to only 2.05 per-

cent of total deposits in savings banks at year-end 1971 (App.

1785). See Annotated Code of Maryland, Article II, Section

41(a). Savings Bank of Baltimore v. Bank Commissioner of

Maryland, 248 Md. 461, 237 A. 2d 45. In New Jersey, where

savings banks’ right to hold demand deposits has been clear

for several years and where nineteen out of twenty savings

banks do offer checking; demand deposits account for only

$99,285,000—or 2.72 percent of the $3,650,985,000 total de-

posits (App. 1785, 486). See Hudson County National Bank

v. Provident Institution for Savings, 80 N.J. Super. 339, 193

A. 2d 697, affirmed per curiam, 44 N.J. 282, 208 A. 2d 409.

85 By contrast, savings banks in Maryland may provide

checking accounts both to natural persons and to legal en-

tities, such as corporations; and the accounts may be used for

either personal or business purposes. Annotated Code of

Maryland, Article II, Section 41(a). In New Jersey, natural

persons and legal entities (except for-profit corporations) may

have savings bank checking accounts, whether for personal

or business use. New Jersey Statutes Annotated, 17:9A-184.

small.* These demand deposits will continue to serve

as a matrix of the cluster of services forming the line

of commerce known as commercial banking.*’

%* Although the record lacks precise figures on the extent

of commercial demand deposits at Connecticut banks, it is

clear that the checking accounts of business entities and in-

dividuals for business purposes are large and important. At

Connecticut National’s main office there are 61 demand de-

posit accounts larger than $100,000; these accounts, averaging

$386,639 and almost certainly business accounts, total

$23,585,000—or 61 percent of the total dollar value of demand

deposit accounts at that office (computed from App. 1513).

At First New Haven’s main office, there are 79 demand de-

posit accounts larger than $100,000; these accounts, averag-

ing $328,101, amount; to $25,920,000—slightly more than 50

percent of the demand deposits at that office (computed from

App. 1528).

Small corporations, partnerships, and individual entre-

preneurs, of course, also use checking accounts, and under

the new law they must continue to do their checking at com-

‘mercial banks. This type of customer’s checking business,

which is probably best indicated by demand deposits between

$10,000 and $100,000 (see, e.g., App. 421-422, 574-575), is also

very important to commercial banks. At Connecticut Nation-

al’s main office, there are 306 demand deposit accounts in this

range, averaging $30,186; they amount to $9,237,000—or 24

percent of the total dollar volume of demand deposit accounts

at that office (computed from App. 1518). At First New

Haven’s main office, there are 517 accounts of this size, aver-

aging $29,433; they amount to $15,217,000—or 29.5 percent of

the demand deposits at that office (computed from App. 1528).

8? The district court’s reliance (J.S. App. A, p. 86a) upon

the omission of the phrase “in any line of commerce” from the

Bank Merger Act of 1966 is erroneous. United States v.

Third National Bank in Nashville, 390 U.S. 171, 182, n. 15.

II. THE BRIDGEPORT AND NEW HAVEN METRO-

POLITAN AREAS AND THE STATE OF CONNEC-

TICUT ARE ALL SECTIONS OF THE COUNTRY

FOR THE PURPOSES OF SECTION 7

The United States contended that the Bridgeport

and New Haven metropolitan areas are sections of

the country within which to test the effects of the

merger on potential competition, because they are

local banking markets with supply and demand char-

acteristics like those found in Philadelphia National

Bank and Phillipsburg. It also maintained that the

State of Connecticut as a whole, though not a bank-

ing market, is nonetheless a section of the country,

because state law limits entry into local Connecticut

markets to those banks with headquarters in Connec-

ticut. The district court held that the Bridgeport

and New Haven areas are not sections of the country,

and it concluded that the state as a whole is the only

relevant section of the country. We agree, though for

reasons different from the district court’s, that the

state is a section of the country within the meaning

of Section 7, but we submit that the court erred both

in identifying Connecticut as the only relevant section

of the country, and in rejecting the Bridgeport and

New Haven metropolitan areas.

A. The State Of Connecticut Is A Relevant Section Of

The Country, But It Is Not The Only Relevant

Section Of The Country

1. The district court’s determination that the State

of Connecticut is the only relevant section of the .

country (J.S. App. A, pp. 89a, 92a) is based upon

an analysis squarely at odds with the standards set

forth by this Court in Philadelphia National Bank.

In Philadelphia National Bank the Court empha-

sized that because banking is a service industry in

which convenience of location is very important, a

banking market is the “ * * * area in which the seller

operates, and to which the purchaser can practicably

turn for supplies * * *.” Philadelphia National Bank,

supra, 374 U.S. at 359 (emphasis in original). Thus,

in delineating a banking market, although it is nec-

essary to focus on the location of a bank’s offices,

that is only half the task. It is also necessary to ex-

amine the proximity to bank offices of “customers

that are neither very large nor very small.” Id. at

361. This the district court failed-to do.

The court found that Connecticut National and

First New Haven, like the other major banks in Con-

necticut, price systemwide: i.e., each bank charges the

same price for services at all its branches (J.S. App.

A, p. 21a). It also found that the two big Hartford

banks, CBT and Hartford National, operate to a sub-

stantial degree within the service areas of the defend-

ants (J.S. App. A, pp. 21a-22a). From these findings

the court reasoned that defendants’ prices are respon-

sive to the competition of te Hartford banks, and

thus it concluded that competitive pressures flow

throughout the state, obliterating any local markets

and establishing one statewide market (J.S. App. A,

pp. 92a, 21a-24a).

_ Even if this analysis were a complete and accurate

picture of seller behavior and were sound economics,”

it would still be legally insufficient under Philadelphia

National Bank, supra, to establish that the state as

a whole is the only relevant section of the country.

Proper banking market definition requires the dis-

trict court to consider not only the area where the

sellers. of banking services operate, but also the area

to which the buyers of those services can conveniently

turn. Jd. at 359. The district court made no findings

that the customer who is neither very large nor very

small can conveniently use banking offices all over

the state. Nor is there anything,in the record which

shows that most customers can practicably go from,

say, New London to Waterbury, or from Stamford

to Hartford, to do their banking. The district court

simply ignored the convenience of these bank cus-

tomers. By focusing solely on the banks and neglect-

ing those who purchase their services, the district

** Even if a bank prices system-wide, it may still vary serv-

ice from branch to branch. First New Haven, according to

its president, has “different evening hours all through our. .

system” (App. 923). Similarly, various of its competitors Keep

certain offices open on Saturday (App. 1702-1703). The dis-

trict court ignored this evidence of service competition.

Furthérmore, the court’s finding of system-wide pricing

does not negate the significance of local markets. A bank

which prices system-wide will set its price to maximize its

profits system-wide; and in so doing it will be most seriously

affected by competition in the markets where it has the most

business and where concentration is highest (App. 359-360).

For the defendants, such areas are the Bridgeport and New

Haven metropolitan areas.

court performed only half the market analysis which

Philadelphia National Bank requires.

2. Although the State of Connecticut is not a bank-

ing market as defined by the criteria of Philadelphia

National Bank,” it is nonetheless a “section of the

country” within which it can meaningfully be said

that the merger may substantially lessen competition.

To be sure, a banking market will always constitute

a “section of the country,” and thus the Bridgeport

and New Haven metropolitan areas, which are bank-

ing markets (see pp. 34-43, infra), are sections of

the country. But a geographic area need not be

a banking market to be a section of the country.

Section 7, after all, speaks not of “markets” but of

“section[s] of the country.” And, as this Court has

held, the purpose of defining a “section of the coun-

try” is to focus on the geographic area where the

merger will have a significant impact on competition.

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

549-550. We submit that the anticompetitive effects

of this merger transcend the harm done to potential

competition in the Bridgeport and New Haven metro-

politan areas, and, because of the way in which Con-

necticut law has shaped banking structure, reach to

the state as a whole.

Connecticut law forbids any bank which does not

have its headquarters in Connecticut from operating

% This is not to say that the state could not constitute a

banking market for specialized banking services or for very

large customers of commercial banking.

banking offices within the state. Thus the law in-

sulates the state from entry by outside banks,“ and

the boundaries of the state define the area within

which any potential entrant into a local Connecticut

banking market is to be found. It also means that

Connecticut banks, which, subject to home office pro-

tection, may branch statewide, have no place to direct

their expansion but within the state.“

Since local banking markets in Connecticut, as in

most other states, are highly concentrated,* signifi-

cant potential entrants into local markets are very

important. First, by their independent entry they

are likely to stimulate competition, for only by hard

competition can they enlarge their initially small

market shares and win business from the dominant

banks. Second, the addition of new firms provides

* Conn. Gen. Stat. Ann., § 36-59(4} provides: “No foreign

banking corporation, except a national banking association

having its main office in this state, shall maintain any office

within the state to solicit deposits or to conduct a general bank-

ing, a savings banking or a banking and trust business.” Fed-

eral law dovetails with this state statute: 12 U.S.C. 36. Bank

holding companies operate under similar strictures. See Conn.

Gen. Stat. Ann., §§ 36-418 to 36-430; and 12 U.S.C. 1842(d).

“ This does not prohibit out-of-state banks from soliciting

Connecticut residents through salesmen and mass media to do

Caaie eaning at eebetn peated te eeiRer atete, See, e.g., J.S.

- App. A, pp. 25a-27a.

* Connecticut permits its banks to branch only within

Connecticut. See Conn. Gen. Stat. Ann., § 36-59.

** As pointed out above (p. 7, supra), in ten out of the

eleven metropolitan areas in Connecticut the top three banks

have, market share of at least 80 percent.

customers with new alternatives and increases the

likelihood that in the long run banks in the market

will compete rather than cooperate.“

The pool of significant potential entrants is small,

however, for it is limited to those Connecticut banks

with the capacity and incentive for major expansion.

There are, at most, ten banks in Connecticut which

have the potential to operate statewide (App. 140-

144). Since two of the ten, CBT and Hartford Na-

tional, for all practical purposes already operate state-

wide (J.S. App. A, pp. 2la-22a), only eight such

banks exist—Connecticut National and First New

Haven among them—and this merger will eliminate

one of them. Thus the effect of a merger which elim-

inates even one of these banks will be felt statewide,

for it will have an impact in every local market in

the state where that bank does not currently operate

but which it might otherwise enter. |

The effect on competition is even greater when that

merger is part of a trend among large banks, for it

is likely to trigger other “defensive” mergers which

further concentrate banking.“* As we have pointed

out, in recent years there have been mergers involv-

“ Cooperation is more difficult the larger the number of

persons whose cooperation is necessary.

*’ The fact that mergers are subject to regulatory and ju-

dicial scrutiny does not, as the district court thought (J.S.

App. A, p. 101a), render triggering unlikely. Under the dis-

trict court’s analysis, which favors the merger so as to per-

mit the consolidated banks to compete against the Hartford

banks (id. at p. 102a), other large banks are encouraged to

merge.

ing some of the state’s largest banks. And after

the decision of the district court, the third and ninth

largest banks in Connecticut submitted a merger to

the Federal Reserve Board for approval (see p. 6,

). Other large banks in Connecticut are also

hap aiiee “defensive” mergers.

Such a pattern of mergers will produce a state-

wide banking structure in which each local market is

not only a tight oligopoly, but is an oligopoly of the

same firms. The local oligopolies in each market may

become linked, in that the same banks, unaffected by

fear of outside entry, may engage in more standard-

ized and hence less competitive business behavior in

all the state’s markets, rather than risk retaliation by

departing from such standards in any locality.“

B. The Bridgeport And New Haven Metropolitan

Areas Are Banking Markets And Hence Are Sec-

tions Of The Country For The Purposes Of Section 7

The government contended that the Bridgeport and

New Haven metropolitan areas are banking markets

and thus are sections of the country. The district

*©See, Solomon, Bank Merger Policy and Problems: A

Linkage Theory of Oligopoly, 89 The Banking Law Journal

116, 119 (1972); 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 News Release,

pp. 28-32. See also Yeats, An Analysis of the Effect of Merg-

ers on Banking Market Structures, Journal of Money, Credit,

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

Structure of Commercial Banking, Federal Reserve Bulletin,

March 1970, pp. 205, 210.

court did not question the accuracy or relevance of

the government’s proof, but it nonetheless concluded

that the United States had failed to carry its burden

of proof (J.S. App. A, pp. 88a-89a). The court’s

conclusion, in our opinion, is based on erroneous legal

analysis,

1. Convenience of location is vitally important in

- banking, and thus the dimensions of a banking mar-

ket should define an area in which the banks and

their customers may easily deal with each other. Phil-

adelphia National Bank, supra, 374 U.S. at 357-361.

This ultimately is a question of the realities of trade;

thus, there is no formula for mechanical definition

of markets. However, for the customer who is neither

very large nor very small, the limits within which

banking is convenient are quite confining, and thus

banking markets tend to be localized. Phillipsburg,

supra, 399 U.S. at 362. The evidence shows that

the Bridgeport and New Haven metropolitan areas

are sections of the country in which banks and their

customers conveniently interact.“

Although the concept of a “metropolitan area” is

familiar, the precise use of the concept of Standard

Metropolitan Statistical Area (“SMSA”) by the Office

of Management and Budget and by the Census

Bureau makes it a particularly useful starting point

for banking market analysis. An SMSA is an area

4* This Court has emphasized that “[t]his phrase does not

call for the delineation of a ‘section of the country’ by metes

and bounds as a surveyor would lay off a plot of ground.”

United States v. Pabst Brewing Co., 384 U.S. 546, 549.

characterized by economic and social integration as

reflected in patterns of residence and employment

(App. 56-57, 1435-1436). In Connecticut, an SMSA

is defined as a thickly settled area consisting of a

central city with at least 50,000 inhabitants, and

surrounding towns linked to it (App. 1436). The

measure of linkage between core city and surround-

ing towns is that either 15 percent of the workers

living in the town work in the central city, or that

25 percent of those working in town live in the cen-

tral city (App. 1435-1436).

The metropolitan area concept thus is wholly prac-

tical. It is built on an examination of where people

live and work. By directing attention to commuting

patterns, the SMSA points in the proper direction for

sound market analysis. As Dr. Murphy, an expert

in banking economics, testified, commuting patterns

are “the kind of patterns, living patterns and trans-

portation patterns that determine [customer] alter-

natives” (App. 124).

The strength of commuting patterns in the Bridge-

port and New Haven metropolitan areas \is evident

from the unquestioned figures supplied by the Cen-

** The utility of the SMSA concept in directing attention

to the area of convenient customer alternatives that makes

it important, at the same time makes irrelevant the criti-

cism (Motion To Affirm, p. 27) that the concept does not

include banking data and was not developed as a tool for bank-

ing analysis. The “town” concept, on which defendants place

great emphasis (Motion To Affirm, pp. 20-25), similarly was

not developed as a tool for banking analysis and does not in-

clude banking data.

sus Bureau. Of the 146,596 workers living in the

Bridgeport metropolitan area and reporting their

place of work, 121,178, or 82.7 percent, work within

that area (computed from App. 1442). Of the

129,810 workers living in the New Haven metropoli-

tan area and reporting their place of work, 112,599,

or 86.7 percent, work within that area (computed

from App. 1444). Similarly, although Bridgeport and

New Haven are barely twenty miles apart, only

5,769 persons residing in the Bridgeport SMSA work

in the New Haven SMSA; and only 6,911 residents

of the New Haven SMSA work in the Bridgeport

SMSA (computed from App. 1442, 1444).

Data from the defendant banks further confirms

that the Bridgeport and New Haven SMSAs are

areas within which the sellers and buyers of banking

services can conveniently deal with each other. Most

of the customers at Connecticut National and First

New Haven offices within the Bridgeport and New

Haven SMSAs come from those SMSAs (App. 1513-

1540). For example, the vast majority of demand

deposit accounts in Connecticut National’s main office

are from the Bridgeport metropolitan area: 90.9

percent by number of accounts, 85.9 percent by dol-

lar volume (App. 1518). First New Haven’s main

office also draws most of its demand deposit accounts

from the New Haven: metropolitan area: 85.1 per-

*° Connecticut National operates 25 offices in the Bridgeport

metropolitan area; First New Haven operates 17 offices in the

New Haven metropolitan area (App. 1816-1817; 1872-1873).

cent by number of accounts, 79.4 percent by dollar

volume (App. 1528).

The branches in the suburbs show a similar pat-

tern. Connecticut National’s Fairfield office draws

84.4 percent of its demand deposits and loan busi-

ness from customers with addresses in the Bridgeport

SMSA (computed from App. 1519); and First New

Haven’s Hamden office receives 88.7 percent of its

demand deposits and 83 percent of its loan business

from customers resident in the New Haven SMSA

(computed from App. 1536).

2. The district court’s reasons for concluding that,

- despite this extensive proof, the government had

failed to show that the Bridgeport and New Haven

SMSAs are relevant sections of the country, are legal-

ly erroneous.

The district court’s primary reason was that “the

appropriate section of the country for the purposes

of this case is the state of Connecticut as a whole”

(J.S. App. A, p. 89a). However, as we have shown

(see pp. 28-31, supra), this is legally insufficient un-

der the standards set forth in Philadelphia National

Bank, supra, for it is based on an erroneous seller-

oriented market analysis. Such analysis, which also

finds expression in two of the district court’s other

reasons relating to system-wide pricing (see J.S. App.

A, p. 89a, Nos. 3 and 4), is just as improper a method

of determining whether the Bridgeport and New Ha-

ven metropolitan areas are relevant sections of the

country as it is of appraising the state as a whole.

The other reasons advanced by the district court

are also legally deficient, That the government did

not show “the percentage of residents in any Con-

necticut SMSA who are customers within the same

SMSA” (J.S. App. A, p. 88a) puts an unnecessary

and unjustified burden of proof upon the government.

The government did establish that a large majority of

persons working in each metropolitan area also live in

the area, that there is very little commuting between

metropolitan areas, and that banking offices in each

area do the great bulk of their business with residents

of the area (see pp. 36-38, supra). The logical infer-

rence from these facts is that most residents of a

metropolitan area bank within that area. To demand

that the government reduce this to percentages is to

require a definition of the market by “metes and

bounds”—a standard which this Court has explicitly

rejected. United States v. Pabst Brewing Co., supra,

384 U.S. at 549.

‘The district court’s reliance upon the supposed fail-

ure of the other banking regulatory agencies to an-

alyze the proposed merger “in terms of the SMSA

concept” (J.S. App. A, p. 89a) involves errors of

faet_and law. Since in all bank merger cases the dis-

‘alourt is required to make a determination of

the issues de novo, the advisory reports of agencies,

rapidly prepared and without the benefit of discov-

ery,” ordinarily are of little significance in evaluating

*°°The Comptroller wrote to the agencies concerning the

proposed merger on February 3, 1971. The Department of

Justice reported on March 29, 1971 (App. 1618); the Federal

Deposit Insurance Corporation reported on May 20, 1971

(App. 1627); the Federal Reserve Board reported on March

12, 1971 (App. 1630).

the evidence at trial—although the agencies’ unani-

mous conclusion that the merger would be anticom-

petitive is entitled to some weight, as this Court held

in Philadelphia National Bank, supra, 374 U.S. at

361-362 and Phillipsburg, supra, 399 U.S. at 364.

Although it cited no authority, the district court

here apparently meant to analogize what it thought

was agency unanimity of omission of the metro-

politan area concept to the unanimity of mention of

the market recognized by this Court in Philadelphia

National Bank and Phillipsburg. The analogy fails,

however, because the district court made a plain

error of fact when it asserted that none of the agen-

cies analyzed the merger in terms of the metropolitan

area concept.

The Federal Reserve Board in fact analyzed this

merger in terms of metropolitan areas. The findings

upon which the district court relied for a contrary

conclusion (J.S. App. A, p. 19a, Nos. 61, 62) do not

even mention the Federal Reserve Board. In fact,

the Board’s report (App. 1630-1633) makes frequent

reference to the Bridgeport and New Haven “mar-

kets,” and although it does not use the acronymn

“SMSA,” there can be no doubt that the Board was

using the concept of metropolitan area when it spoke

of “markets”. This is so not just because of the gen-

eral context, but because of the virtual identity of

market share figures computed by the Board for the

leaders of the Bridgeport and New Haven “markets”

and the figures used by the government for leaders

of these “SMSAs”—in each case about 39 percent

(compare App. 1630-1631 with App. 1545, 1548).

Another erroneous ground for the district court’s

rejection of the Bridgeport and New Haven metro-

politan areas was its reliance upon rejection of the

SMSA concept by the court in United States v. Provi-

dent National Bank, 280 F.Supp. 1(E.D. Pa.) (J.S.

App. A, p. 89a). This argument, which the defend-

ants embellish by contentions of government incon-

sistency with positions taken in Philadelphia National

Bank and Phillipsburg (Motion To Affirm, pp. 27-28),

is unsound because it ignores the teaching of this ,

Court that market definition depends not on rigid

legal rules but on ascertainment of the competitive

realities of trade. Brown Shoe Co. v. United States,

370 U.S, 294, 336-337; Phillipsburg, supra, 399 U.S.

at 362. The SMSA concept is a useful tool for

banking market analysis, but it is only a tool, and

its value will vary from case to case.

Thus we do not contend that an SMSA is ipso

facto a banking market, and we realize that, although

some SMSAs may be congruent with banking mar-

kets, others might be so large that submarkets exist

within their contours, and yet others might be too

small. Each case must turn on its own facts. The facts

show significant differences between the Bridge-

port and New Haven SMSAs and those involved in

earlier cases, and there is nothing improper or in-

consistent with precedent in claiming that in the

present case the Bridgeport and New Haven metro-

politan areas are congruent with banking markets.”

" Phillipsburg is not even remotely apposite, for the question

of the validity of an SMSA as a banking market was not

Finally, the district court’s statement that “mean-

ingful banking alternatives” are available beyond

the confines of each metropolitan area, and its finding

that only 57 percent of Connecticut National’s busi-

ness comes from the Bridgeport metropolitan area

(J.S. App. A, pp. 88a-89a, Nos. 2 and 5) are either

irrelevant or inconsistent with the principles set forth

in Philadelphia National Bank. Upon an examination

of the underlying findings (J.S: App. A, pp. 19a-20a),

these conclusions turn out to mean no more than that

presented. The only SMSA in that area is the Allentown-

Bethlehem-Easton SMSA, and the district court specifically

found that it “is too large”. United States v. Phillipsburg Na-

tional Bank and Trust Co., 306 F. Supp. 645, 652 (D. N.J.).

In Philadelphia National Bank and Provident National Bank

this Court and the district court held that the Philadelphia

SMSA, an eight-county area spanning two states and covering

3,553 square miles (1970 Census of Population, Volume I,

Part A (Characteristics of The Population), p. 1-188), was

too large an area in which to measure the competitive impact

of a merger between two banks headquartered in Philadelphia.

Each court accepted a smaller four-county area in Pennsyl-

vania as the relevant section of the country. Philadelphia

National Bank, supra, 374 U.S. at 359; Provident National .

Bank, supra, 280 F. Supp. at 6. However, the merging banks

were prohibited by law from having offices in the fifth Pennsyl-

vania county and in three counties located in New Jersey, and

virtually none of their business (less than 3 percent) came

from that part of the SMSA. Provided National Bank, supra,

280 F. Supp. at 6, n. 8. By contrast, in the present case Con-

necticut law applies to both metropolitan areas—which com-

bined have an area of only 438 square miles (computed from

1970 Census of Population, supra, at 1-187, 1-188); thus, each

bank has the right to operate statewide, including the Bridge-

port and New Haven metropolitan areas; and each draws a

sizeable amount of business from that part of the metropolitan

areas outside the center cities.

banks which operate in one or more markets have

customers in one or more markets—especially very

large customers. This is true, but irrelevant.

Obviously most of a bank’s business will come from

the area where it has most of its offices—this is the

essence of the concept of “service area”. A service

area, though it is a measure of where the bank sells

its services, does not in any way indicate the con-

venience of the bank offices to the buyers of banking

services. Convenience of buyer-seller interaction is

the lesson of banking market definition taught by

Philadelphia National Bank, where this Court held

“Tt]he proper question to be asked * * * is not where

the parties to the merger do business or even where

they compete, but where, within the area of competi-

tive overlap, the effect of the merger on competition

will be direct and immediate.” 374 U.S. at 357. This

Court then added: “[T]his depends upon ‘the geo-

graphic structure of supplier-customer relations’.”

Ibid.“ The distritt court’s conclusions disregard that

lesson.

52 A bank’s service area is defined by banking authorities as

the region from which it derives 75 percent of its deposits

(J.S. App. A, p. 20a).

58 Defendants correctly point out (Motion To Affirm, p. 31,

n. 25) that in Philadelphia National Bank this Court held

the relevant market to be an area in which the defendants’

banks had their branches. However, as this Court observed

in Phillipsburg, the location of a bank’s branches and the

places from which it draws its business are important “[i]n

locating ‘the market area in which the seller operates’ * * *.”

Phillipsburg, supra, 399 U.S. at 363. Market analysis requires —

attention to sellers and buyers, however. Philadelphia Nation-

al Bank, supra, 374 U.S. at:357-361.

C. The Individual Cities And Towns In Connecticut

Are Not Relevant Sections Of The Country

Defendants, after contending in the district court

that the relevant sections of the country are the State

of Connecticut plus New York City, or alternatively

the State of Connecticut (J.S. App. A, pp. 88a, 91a),”

now propose to this Court that “[t]he town or

community is the appropriate unit for analysis of the

competitive effect * * *” (Motion To Affirm, p. 28).

This argument is, of course, inconsistent with the

' opinion of the district court, which did not determine

that the individual towns are sections of the country,

but to the contrary held that the State of Connecti-

cut is the only relevant section of the country (J.S.

App. A, pp. 87a-92a, 89a, 92a). It is also inadequate-

ly supported by the testimony of the defendants’ wit-

ness; Dr. Peck, upon whosé testimony the defendants’

present argument is apparently based.

Although Dr. Peck analyzed the competitive con-

sequences of the proposed merger in terms of in-

. dividual towns, he not only recognized that no party

contended that individual towns are banking mar-

kets (App. 828), but he also admitted that he had

no opinion on whether or not they are markets (App.

847). Absent evidence relating to market defini-

tion, there is no reason to suppose that historical

boundaries of political subdivisions are controlling for

purposes of Section 7. :

** See Defendants’ Pre-Trial Memorandum, pp. 12-14, and

Defendants’ Post-Trial Brief, p. 17.

Ill. ON THE BASIS OF OBJECTIVE EVIDENCE CON-

NECTICUT NATIONAL BANK IS A SIGNIFICANT

POTENTIAL ENTRANT INTO THE NEW HAVEN

MARKET AND FIRST NEW HAVEN NATIONAL

BANK IS A SIGNIFICANT POTENTIAL ENTRANT

INTO THE BRIDGEPORT MARKET

The United States contended that on the basis of

objective evidence showing their economic incentive,

reasonable prospects for success and financial ca-

pability, Connecticut National and First New Haven

are significant potential competitors in each other’s

prime markets. The district court recognized that

the government had presented what was at least

“fojn paper * * * a strong case” (J.S. App. A, p.

98a). We-submit that the government’s case was

strong in fact as well as on paper, and that the

court erred in not accepting it. a

In bank merger cases, as in other Section 7 cases,

the determination whether a firm is 2 significant po-

tential entrant must be made on the basis of objec-

tive evidence showing the potential entrant’s economic

incentive to enter independently, its financial capabil-

ity to do so, and the reasonable prospects for mak-

ing such an entry successfully. As this Court stated

last Term in United States v. Falstaff Brewing Corp.,

410 U.S. 526, 533: “The specific question with respect

to this phase of the case is not what * * * [the

firm’s] internal company decisions were but whether,

given its financial capabilities and conditions in the

* * * market, it would be reasonable to consider it a

potential entrant into that market.” As we have ex-

plained at length in our brief in the companion bank

merger case, there is every reason to apply the same

standards in determining actual potential entry in

banking.*

A. There Is Ample Incentive For Connecticut National

And First New Haven To Enter Each Other’s

Primary Market

Ample incentive for Connecticut National to enter

the New Haven market and for First New Haven to

enter the Bridgeport market exists in the economic

attractiveness of a nearby, important banking mar-

ket with sound growth prospects. Both markets ex-

perienced significant economic growth in the two

decades prior to the merger and are forecast to

have further substantial growth in the years ahead.

The Bridgeport area population grew by 41.1 per-

cent and the New Haven area population grew by

30.2 percent between 1950 and 1970 (App. 1458).

Projections point to continued and substantial popu-

lation increase in the next decade (App. 1474). Em-

ployment and personal income, which increased in

the years prior to the merger, are expected to keep

increasing in the coming years (App. 1475, 1477).

Moreover, this metropolitan area growth takes place

in a state where per capita income is already the

highest in the country (App. 2568, 2214).

The fact that economic growth in the cities of

Bridgeport and New Haven, as the district court

found (J.S. App. A, pp. 34a-35a), has been less rapid

°s Brief for the United States, pp. 36-42, United States v.

Marine Bancorporation, Inc., S. Ct. No. 73-38, copies of which

have been furnished to the parties to this case.

than that in the state as a whole does not detract

from the economic vitality of the metropolitan areas.

Each of those cities is but a part of a separate metro-

politan area banking market which has experienced

consistent economic growth and for which continued

growth is projected. The relevant focus of inquiry

should not be on the core cities, which neither the

district court nor the parties before it contended were

markets, but on the metropolitan areas. .

The district court’s failure properly to focus on

the relevant markets also led it to the erroneous con-

clusion that effective entry into either the Bridge-

port or the New Haven metropolitan area requires

entry into the cities of Bridgeport and New Haven

(J.S. App. A, p. 99a). The findings for this con-

clusion (J.S. App. A, pp. 99a, 33a-35a) rely on the

testimony of Dr. Peck. But, as we have pointed out

(see p. 44, supra), Dr. Peck, who sought to rank

commercial banks in the state as potential entrants

into each principal town or city instead of into cus-

tomer-supplier markets, recognized that banking mar-

kets are not confined to the boundaries of individual

Connecticut towns.”

* Actually, the findings do not even support the conclusion

except to the very limited extent that Dr. Peck testified that

to serve effectively “some kinds of medium-sized commercial

business that are centered in Downtown Bridgeport’’, a bank

must have an office in Bridgeport (App. 784). Dr. Peck also

pointed to the importance of the suburbs as places of employ-

ment and centers of retail trade and emphasized the flexibility

of commuters and suburban businessmen (App. 784, 785).

The realities of banking show that dynamic pat-

terns of urban expansion have changed the nature

of metropolitan banking markets and that core city

offices are not indispensable to effective market pene-

tration. These markets no longer stop at city lines.“

They are defined by the area-wide interaction of

banks and customers. The defendant banks con- .

duct their business on this basis. It is for this reason

that Connecticut National established 12 branches in

the Bridgeport suburbs and First New Haven es-

tablished 6 branches in the New Haven suburbs be-

tween 1955 and 1971 (App. 1561-1562). It is for

this reason also that CBT and Hartford National,

the two large Hartford banks, entered the Bridge-

port market by establishment of branches in subur-

ban Fairfield (App. 1952).*

The defendants do not deny that the competition

of Hartford National and CBT, which both operate

in the Bridgeport and New Haven metropolitan areas,

stimulates their interest in seeking a broader area

of operations in order to stay competitive (App.

1646, 1662-1663). Thus since banks, no less than

other businesses, are attracted to new markets where

economic growth offers the prospect of profit, there

5* Indeed, population trends, i.e., suburban growth, indicate

that the most attractive locations for new entry are not in

the core cities but in the suburban areas of the market.

88 Hartford National, which has only the Fairfield branch

in the Bridgeport market, thus competes for business in the

market from an office which is about 5 miles from downtown

Bridgeport (App. 1952).

are multiple incentives for the defendants to enter

each other’s prime markets.

B. Effective Means For Entry Exist Through De Novo

Branching, Toehold Acquisition, And The Forma-

tion Of A Holding Company

Effective means exist for Connecticut National and

First New Haven to enter the markets which they

have strong incentive to enter. Those means are the

same which the banks have used successfully to enter

new territory for years: de novo branching and toe-

hold acquisitions.” Connecticut law allows branch-

ing statewide, subject to the limited restriction of

home office protection, and it allows acquisitiofi state-

wide without even that restriction.

The banks are thoroughly familiar with both tech-

niques of expansion from past experience. Connecti-

cut National led all Connecticut banks with the es-

tablishment of 34 branches between 1955 and 1971;

at the same time it also acquired four banks (App.

1561-1562, 1555). First New Haven followed a simi-

lar course: between 1955 and 1971 it opened 14 de

novo branches and acquired three banks (App. 1562,

1556).

Entry by toehold acquisition is possible in each

metropolitan area. At the time of the merger, there

were three banks suitable for toehold acquisition in

the Bridgeport metropolitan area, including two banks

*° On “toehold” entry, see The Bendix Corp., (FTC), 3 Trade

Reg. Rep. {| 19,288, vacated and remanded on other grounds,

Bendix Corporation v. Federal Trade Commission, 450 F. 2d

534 (C.A. 6).

with headquarters in the city of Bridgeport; and

there were five such banks in the New Haven metro-

politan area (App. 1510, 1545, 1548).” Subsequent

to trial, the opening (or impending opening) of state-

chartered banks in Monroe and Bridgeport added two

more banks suitable for toehold acquisition.”

The district court’s answer to the evidence on this

issue—that “[n]o small banks were identified that

were available for sale” (J.S. App. A, p. 10la)—is

*° In the Bridgeport market the Lafayette Bank & Trust Co.,

with five offices, four of which are in Bridgeport, has a 5.9

percent market share and total deposits of $44.5 million; James

Staples & Co., with its one office in Bridgeport, has a 0.4 per-

cent market share and total deposits of $2.1 million (App.

1510, 1545, 1550); the Bank of Stratford, with its one office,

has somewhat more than 1 percent of the market and total

deposits of $5.7 million (App. 1512; computed from App.

1545 and Polk’s World Bank Directory (March 1972), Con-

necticut, p. 44).

In the New Haven market, the Hamden National Bank,

with two offices, has a 2.9 percent market share and total

deposits of $20.3 million; Community Banking Co., of North

Branford, with four offices, has a 2 percent market share and

total deposits of $14.7 million; Orange National Bank, with

three offices, has a 1.7 percent market share and total deposits

of $13.5 million; Woodbridge Bank and Trust Co., with one

office, has a 1.3 percent market share and total deposits of

$8.4 million; and North Haven National Bank, with two

offices, has a 1.3 percent market share and total deposits of $12

million (App. 1548, 1550-1551).

*: It is our understanding that the new state-chartered banks

in Trumbull and Shelton, referred to by the defendants (Mo-

tion To Affirm, p. 19, n. 16) and the new national bank, re-

ferred to by the Comptroller (Comptroller’s Motion To Affirm,

p. 15, n. 9), have so far received only provisional authority

and have not yet opened. Obviously, when these new, small

banks open, they too will be suitable for toehold acquisition.

beside the point.“ Banks never display “For Sale”

signs, but the large number of bank mergers that

have taken place in Connecticut and the rest of this

country indicates that sales will be made if an attrac-

tive enough offer is made. Moreover, it is no answer

to the evidence of the incentive (see pp. 46-49, supra)

and capacity (see pp. 55-59 infra) of Connecticut

National and First New Haven to make such an offer

to the small banks in the metropolitan areas, that

the government did not independently prove the in-

terest of those banks in selling. See United States

v. Falstaff Brewing Corp., 410 U.S. 526, 568-569

(concurring opinion of Mr. Justice Marshall).

De novo branching offers another route by which

the defendants can enter the metropolitan area mar-

kets. At the time of the merger, although the cities

of Bridgeport and New Haven were closed to de novo

branching because of the Home Office Protection Law,

many of the other towns in the Bridgeport and New

Haven markets were open. In the Bridgeport mar-

ket, Milford, Fairfield, Trumbull, Monroe, Shelton

and Easton were open to branching; and in the New

Haven market, East Haven, West Haven, Branford,

Guilford and Bethany were open to branching (App.

1505). The same five towns in the New Haven mar-

ket are still open. In the Bridgeport market the char-

tering or provisional chartering of new banks in

* The court also stated that “CNB was unable to negotiate

the purchase of smaller banks in the past * * *” (J.S. App. A,

p. 10la). This is erroneous, for the record establishes that

between 1955 and 1971 Connecticut National purchased four

small banks (App. 1555).

Monroe, Fairfield, Trumbull and Shelton closes those

towns to branching at the same time that it opens

them to entry by toehold acquisition (see pp. 49-50,

supra).

Moreover, the defendants, like other banks in Con-

necticut, have a history of turning to independent

entry by de novo branching when merger proves im-

possible. Thus, in 1968 Connecticut National attempt-

ed to acquire the Litchfield County National Bank

in New Milford but was rebuffed: a year later Con-

necticut National opened a de novo branch in New

Milford (App. 1601, 1569). In 1964 First New

Haven unsuccessfully tried to acquire the Guilford

Trust Company; then, in 1965 it opened a de novo

branch in Guilford (App. 1605-1606, 1575).° And

CBT, after abandoning its proposed merger with

Connecticut National in the face of a government

antitrust suit, made a competitively significant entry

into the Bridgeport market and the rest of Fairfield

County with de novo branches, which prior to the

suit it had asserted it could not establish (App. 1952,

1933) .”

Although, as the district court found (J.S. App.

A, p. 7a), establishment of a branch in an open town

by either defendant requires the approval of the

6s First New Haven had similar unsuccessful merger at-

tempts followed by de novo branching in Derby and Walling-

ford in 1966 and 1968 (App. 1606, 1603-1604, 1575).

** CBT coupled its branching with toehold acquisitions (App.

1952). Connecticut National has also responded to unsuccess-

ful efforts to acquire a larger bank by acquiring a smaller

one, as happened in Stamford (App. 1601, 1553-1555).

Comptroller, the district court’s conclusion that “* * *

the Comptroller’s present policy will not permit any

significant de novo branch penetration by CNB into

the service market of FNH, or vice versa” (J.S. App.

A, p. 100a) is erroneous. The “policy” to which the

court referred is not found in any statute or regula-

tion, but rather in an unrevoked 1965 press release

temporarily closing major Connecticut banking mar-

kets to new charters (App. 2573-2575). Even if one

were to take this expression of policy, which does not

even mention de novo branching, at face value, it

would simply be the present view, subject to change,

of an administrator who presumably will do his stat-

utory duty of taking into account antitrust doctrine

which favors de novo entry over entry by acquisition.

See Philadelphia National Bank, supra, 374 U.S. at

370.°

Moreover, whatever the words of this policy, the

facts are that the Comptroller has continued to ap-

prove branch applications in major markets all over

Connecticut. Between 1966 and 1971, the Comptroller

approved 78 of 86 de novo branch applications for

Connecticut—an approval rate of 90.7 percent (App.

1954). These approvals include branches of the de-

fendants’ competitors in both the Bridgeport and the

*’ This policy is incorporated into the Bank Merger Act to

the extent that the Act reiterates Section 7 (12 U.S.C. 1828

Nashville, 390 U.S. 171.

The press release does not apply to acquisitions, which the

Comptroller has regularly approved in Connecticut.

New Haven metropolitan areas (App. 1955-1956).”

There is no reason to think that the Comptroller will

discriminate against the defendants by barring their.

branching.” \

There was yet a third method by which the de-

fendants could make an independent entry into new

markets: organization of a holding company whose

agents would obtain a charter for a new state or

national bank to be acquired thereafter by the holding

company. It is a procompetitive way, in the words

of two First New Haven executives who recommended

it, of “opening closed towns” (App. 1648), especially

those where there is no suitable toehold acquisition.

*¢ Indeed, it was by means of de novo branching, approved

by the Comptroller, that Hartford National entered the

Bridgeport market (App. 1952). As shown by the vigorous

competition which Hartford National gives from its one

branch in the suburbs to Connecticut National in this market,

it is hardly necessary to blanket a market with branches to

make a competitively significant entry.

*' Similarly, there is no justification for a court, in the face

of solid objective evidence of the defendants’ incentive, pros-

pects for success and capability independently to enter each

other’s prime markets, to give significant weight to the testi-

mony of defendants’ officers that they would not independently

enter (J.S. App. A, p. 99a). As this Court has observed, the

existence of potential competition cannot depend upon sub-

jective statements of intent. United States v. Penn-Olin Co.,

378 U.S. 158, 174, 175; United States v. Falstaff Brewing

Corp., 410 U.S. 526, 534-536, n. 13. In fairness to the district

court, however, it appears that it may have considered this

evidence no more than a makeweight (see J.S. App. A, p. 99a),

hence a matter of no consequence either in its decision or in

this appeal.

The holding company method is novel in Connecti-

cut (J.S. App. A, p. 100a), for until the passage of

the Connecticut Bank Holding Company and Bank

Acquisition Act in 1969 (Conn. Gen. Stat. Ann.,

§§ 36-418 through 36-430) the legality of multibank

holding companies was uncertain under state law.

Their legality is now clear. Similarly, the evidence

is clear, although the district court ignored it, that

this means of expansion has been used successfully in

several other states with home office protection laws

(App. 1585-1586, 1980-1982), and that it is accept- —

able to the Federal Reserve Board, which adminis-

ters the Bank Holding Company Act. See, e.g., 37

Fed. Reg. 5981.

Thus, defendants have three available means of

entry into new local markets: de. novo branching,

toehold acquisition, and formation of a holding com-

pany. Defendants are not, of course, limited to util-

izing only one of these methods, and, to the extent

that management wishes to enter a new market on

a scale larger than one office, the result may be ob-

tained by de novo branching in open towns and by

either toehold acquisition or the holding company .

route in closed towns.

C. Connecticut National And First New Haven Have

The Financial Capability Independently To Enter

Each Other’s Primary Market :

Finally, the defendants have the financial capa-

bility to make the independent entry into each other’s

prime market which the law allows and which econ-

omic incentive urges. The district’ court’s conclusion

to the contrary (J.S. App. A, pp. 99a, 101a) is the

result of applying an erroneous legal standard.

Connecticut National and First New Haven are re-

spectively the fourth and eighth largest commercial

banks in Connecticut (J.S. App. A, p. la). Of the

approximately 14,000 commercial banks in the United

States, Connecticut National is the 186th largest, and

First New Haven is the 268th largest (App. 688).

Connecticut National is the largest bank in Con-

necticut not already possessing an office in the New

Haven area, and First New Haven is the second

largest bank in Connecticut without a branch in the

Bridgeport area (App. 1506-1508).°

The evidence establishes that, as a result of increas-

ing size and net income in the decade prior to the

merger, both banks are strong and profitable. Be-

tween 1961 and 1970 the total resources of each bank

nearly doubled, and at the same time the net income

of each bank nearly tripled (see pp. 11-12, supra).

Indeed, the district court did not contradict nor de-

clare irrelevant this evidence of the banks’ size and

profitability.

Since Connecticut National and First New Haven

established numerous branches and made several ac-

quisitions when each was smaller and had smaller

profits (see pp. 10-12, supra), the district court’s con-

clusion that independent expansion into adjoining

6° This omits from consideration the First New Haven

branches in Milford and the Connecticut National branch in

Orange, two towns on the somewhat hazy border between

the Bridgeport and New Haven areas.

markets is too expensive when the banks are bigger

and more profitable quite simply does not square with

the record. The district court’s misunderstanding of

potential competition explains this anomaly. The

district: court assumed that competitively significant

entry into either market requires the prompt estab-

lishment of many banking offices and the rapid cap-

ture of a big market share.”

- This assumption is really a challenge to the ra-

tionale of Section 7, which favors de novo entry.

Philadelphia Natiénal Bank, supra, 374 U.S. at 370.

The significance of potential entry is not lost merely

because the potential entrant might initially make

only a small entry into a market. That entrant is

still a new competitive force, for whose success in the

market vigorous competition is essential. There is

no guarantee that the entrant, in the face of re-

newed competition from the market leaders, will in

fact enlarge its market share, nor does this matter

for Section 7 purposes: the antitrust laws protect

not competitors but competition. However, it does

matter that the potential for this competition be

preserved, for when through merger it is lost, the

loss to competition is both immediate and irremedi-

able. — 7

The record in this case confirms the importance

of small-scale entry. The two Hartford banks, CBT

and Hartford National, each entered the Bridgeport

market in a modest way: the establishment of a

6° Hence the court’s emphasis on a “substantial” or “signifi-

cant” amount of branching (see, e.g., JS. App. A, pp. 100a,

48a).

single branch in the suburban town of Fairfield

(App. 1952)." Each has set out to compete from

there: The record does not show how much busi-

ness the Hartford banks draw in the Bridgeport

market, but it shows that their competition is felt

(App. 1662-1663; Motion To Affirm, p. 18).”

The record establishes that the defendants, too,

have the resources to make a comparable modest en-

try into each other’s prime markets. The construc-

tion of a branch costs no more than $300,000," and

there are banks suitable for toehold acquisition in

each market (including two in Bridgeport city) that

are of roughly the same size as those which CBT

and Hartford National acquired to enter the Bridge-

port and New Haven markets (see pp. 49-50, supra) ."

* Hartford National still has only that one branch; CBT

some time later made a toehold entry by acquiring the de-

funct Columbus Industrial Bank and turning it into a com-

petitive branch (App. 1952).

Since CBT was able to make a good toehold entry out of

this defunct bank, the assertions of the defendants and the

intervenor (Motion To Affirm, pp. 13, 18; Comptroller’s Mo-

tion To Affirm, pp. 18-14) that First New Haven could not

reasonably enter Bridgeport by acquiring James Staples & Co.,

a functioning bank with over $2 million in deposits, are un-

tenable.

"™ The entry of the Hartford banks into the New Haven

market was comparable, although with greater emphasis on

toehold acquisitions (App. 1952).

? Both Connecticut National and First New Haven lease

many of their branches (J.S. App. A, p. 49a; App. 957, 1055).

Leasing, of course, saves investment capital.

"8 First New Haven also has the capacity to enter the Bridge-

port market by acquisition of Lafayette Bank & Trust, a

The district court, having focused mistakenly on the

costs of large-scale expansion, never addressed the

defendants’ financial capacity to expand on a small-

scale. Had it done so, there can be no question that

it would have found that each. of these two big, sound

banks, whose. combined resources approach $800,000,-

000, can afford entry.

IV. THE EFFECT OF THE MERGER MAY BE SUB-

STANTIALLY TO LESSEN COMPETITION

A. The Merger Will Eliminate Substantial Potential

Competition In The Bridgeport And New Haven

Markets

As shown in the discussion at pp. 46-59, supra,

Connecticut National and First New Haven have the

incentive, available means, and capability independ-

ently to enter each other’s primary market. The

merger, by removing these independent competitive

forces, may substantially lessen competition. See

Brief for the United States in United States v. Ma-

rine Bancorporation, Inc. et al., No. 73-38, pp. 28-36,

55-56.

Bridgeport-based bank with five offices and deposits of $44.5

million (App. 1510, 1545, 1550). First New Haven acquired

the New Haven Bank, a bank of virtually the same size ($42

million in deposits) in 1957, when First New Haven’s re-

sources were only $118,196,000—about one third of what they

are today (App. 1556). Moody’s Bank & Finance Manual

(1958), p. 228. The district court did not deny that First

New Haven could afford Lafayette, but found only that to

acquire it or any other bank, First New Haven or Connecti-

cut National would, in the exchange of shares by which

acquisitions are made, have to pay a premium (J.S. App. A, p.

52a). The court did not identify this premium, let alone find

it prohibitive.

B. This Merger Will Likely Trigger Other Mergers

Among The Largest Banks In Connecticut And

Thus Spread Anticompetitive Effects Statewide

There has been a pronounced trend in recent years

toward mergers among the largest banks in Con-

necticut (see pp. 5-6, supra). Approval of this

merger will almost surely accelerate that trend. In-

deed, since the conclusion of the trial in this case,

the third and ninth largest banks in the state have

sought approval to merge (see p. 6, supra), and

other leading banks will seek partners for “defen-

sive” mergers (App. 615-616, 688-690). The result

will be a consolidation of the ten largest banks into

five or six even larger banks. This result was fore-

seen at trial (App. 616) and endorsed by the dis-

trict court, which concluded that:

* * * this proposed consolidation would mean

more competitive choices for the people of Con-

necticut and a more healthy and balanced bank-

ing structure of five or six strong and relatively

equal competitors [J.S. App. A, p. 64a]

This approval of “countervailing power” is the corner-

stone of the district court’s analysis of competitive

effects, and it is contrary to the decisions of this

Court and to the purpose of Section 7, which seeks

to prevent rising levels of concentration.

This Court has recognized in actual competition

cases that one anticompetitive result of a merger may

be the inducement, or “triggering”, of other mergers

among major firms in an industry which lead to

further concentration. United States v. Continental

Can Co., 378 U.S. 441, 464; and see United States

v. Von’s Grocery Co., 384 U.S. 270, 275-278; Phila-

delphia National Bank, supra, 374 U.S. at 367.

A merger between two large potential competitors

can also trigger a merger trend among other large

potential competitors who fear being left behind, thus

multiplying the anticompetitive effects of such a mer-

ger. See, e.g., United States v. Wilson Sporting

Goods Co., 288 F. Supp. 543 (N.D. Ill.). Such effects

are particularly grave in banking because, as we have

shown, unless trends toward combinations of large

banks are resisted, once they have become apparent,

the state may rapidly become dominated by a few,

large, statewide institutions.

This danger now exists in Connecticut. There is

a discernible trend towards concentration (see pp.

5-6, supra). The present merger not only elimi-

nates Connecticut National and First New Haven as

potential competitors; it also encourages other lead-

ing banks toward mergers which may eliminate sig-

nificant potential competition in loeal markets around

the state. Since there are presently, at most, eight

banks left in Connecticut which have the capability

to become statewide banks," the triggering of mer-

gers which will remove two or three of them poses a

serious anticompetitive effect. .

The district court concluded that this merger could

have no triggering effects, because bank mergers re-

quire regulatory agency approval, and that approval

™ CBT and Hartford National already are statewide banks

for all practical purposes.

is subject to de novo judicial review upon suit by the

Department of Justice (J.S. App. A, p. 10la). This

analysis is inconsistent with the court’s endorsement

of countervailing power and fails to recognize the

precedential significance of the court’s opinion. Its

reasoning would apply with equal force to mergers

between other large Connecticut banks, and neither

the regulatory agencies nor the district court itself

could disregard this precedent in considering future

mergers in Connecticut, although the agencies would

not be bound by it.

The likelihood that other mergers will be triggered

is enhanced by the district court’s view that this

merger should be permitted because the consolidated

firm will be able better to compete against the big

Hartford banks (J.S. App. A, pp. 64a-67a). Not

only is this reasoning at odds with a basic tenet

of Section 7—see Philadelphia National Bank, supra,

374 U.S. at 370, where this ‘Court rejected a similar

theory of “countervailing power’—but it invites a

chain reaction of “defensive” mergers which will pro-

duce exactly the further concentration of statewide

banking resources which the court foresaw and fa-

vored (J.S. App. A, p. 64a). The message of the

district court’s opinion will not be lost on manage-

ment of other large Connecticut banks, and those

faced with competition from merged institutions will

actively seek merger partners under the justification

erroneously adopted by the district court for this

merger.

C. Under The District Court’s Theory That The State

5 Of Connecticut Is The Only Relevant Market, The

Merger Is Illegal Because It Would Significantly

Increase Concentration In That Concentrated

Market

If the district court correctly concluded that the

State of Connecticut is the only relevant section of

the country, then the defendants cannot be potential

competitors because all banks in Connecticut are nec-

essarily actual competitors in one statewide market.

In this event, the merger must be tested under well-

established Section 7 principles applicable to hori-

zontal mergers. The district court misapplied these

principles.

The defendants proposed to unite Connecticut Na-

tional, with a 6.6 percent share of the statewide mar-

ket, and First New Haven, with a 4.7 percent share:

the result would be a new bank with an 11.3 per-

cent market share (App. 1550). The merger, more-

over, would take place in a state in which there is

a significant trend toward concentration. Concentra-

tion in Connecticut, measured by the shares of the top

ten banks, increased from 57.8 percent in 1955 to

*s These are year-end 1971 figures.

The fact that the merger increased the statewide market

share of the top ten banks by only about 1.8 percent, as found

by the district court (J.S. App. A, pp. 44a-45a), does not

indicate weak competitive impact, but simply that the bank

currently the eleventh largest in the state (which would after

the merger become the tenth largest) is small and has a 1.8

percent market share (App. 1550).

83.1 percent in 1971 (App. 1598). This Court’s

decisions establish that such a merger, even after

appropriate “shading” of the percentages,” is a viola-

tion of Section 7. United States v. Von’s Grocery Co.,

384 U.S. 270; United States v. Pabst Brewing Co.,

384 U.S. 546; Philadelphia National Bank, supra;

Phillipsburg, supra.

In Von’s Grocery, supra, the firms whose merger

was held unlawful had 4.7 percent and 4.2 percent

shares of a market in which the top twelve competi-

tors had only 48.8 percent. 7d. at 281 (concurring

opinion of Mr. Justice White). In Pabst, supra, the

illegal merger produced a combined 4.49 percent share

of the nationwide beer market, in which the ten lead-

ing sellers controlled 45.06 percent of the market. Jd.

*¢ During the same period the combined market share of the

top five banks also increased substantially: from 46.4 percent

to 61.0 percent (App. 1598).

™™ See Philadelphia National Bank, supra, 374 U.S. at 364,

n. 40. The district court appointed a special master to ascer-

tain the amount of deposits of Connecticut residents in New

York City and Boston banks (App. 2331). The master located

only about $483.9 million in New York City banks and $37 mil-

lion in Boston banks in 1972 (computed from App. 2346,

2353). These New York City deposits are only 7.3 percent of

the roughly $6.6 billion in deposits held by Connecticut com-

mercial banks in 1972 (computed from App. 2554). In: fact,

even if one shades the percentages by 10 percent, which the

district court thought a not unreasonable figure (J.S. App. A,

p. 42a) the combined market share of Connecticut National

and First New Haven will still be over 10 percent.

Out-of-state savings banks should not be included, be-

cause, as discussed above (pp. 20-27), commercial banking

is a valid line of commerce in Connecticut.

at 550-551. The merger between Connecticut National

and First New Haven will thus produce a larger mar-

ket share in a more heavily concentrated market than

either of the mergers struck down in Von’s Grocery

and Pabst. And, just as a trend toward concentra-

tion is important in unregulated industries (see Von’s

Grocery, supra, 384 U.S. at 275-278; Pabst, supra,

384 U.S. at 552-553), a trend toward concentration

like that in Connecticut is also highly relevant in ap-

praising the competitive consequences of a bank

merger. Philadelphia National Bank, supra, 374 U.S.

at 367.

To avoid the force of these precedents, defendants

argue on the one hand that the State of Connecticut

is too small a market and on the other hand that it

is too big. Thus they suggest here, as they contended

before the district court," that New York City, with

its massive banks, should be included with Connec-

ticut in one banking market. Motion To Affirm, pp.

32-34. However, this contention runs afoul of the

district court’s explicit conclusion that “the inter-

venor and defendants failed to produce the quantum

of proof necessary for the Court to include New York

City as part of the relevant market” (J.S. App. A,

p. 92a).

Alternatively, but inconsistently, defendants argue

that because the Bridgeport and New Haven metro-

politan areas are separate markets the merging banks

are “not ‘substantial competitors’” (Motion To Af-

78 See Defendants’ Post-Trial Brief, pp. 12-17.

firm, pp. 30, 31).” This, too, requires an attack

on the findings of the district court, for the district

court found that the State of Connecticut is the only

section of the country (J.S. App. A, pp. 89a, 21a-

24a). And in so doing it further found that the

state is a banking market because it is an “* * *

area in which banking products or services are sold

by a group of firms which act as though they are

competing * * *” (J.S. App. A, p. 21a).° The de-

fendants, of course, may agree with the United States

that the State of Connecticut is not a banking market,

but if they do so they must also recognize that rele-

vant markets smaller than the whole state exist. The

United States submits that the Bridgeport and New

Haven metropolitan areas are such markets.

V. THE ANTICOMPETITIVE EFFECTS OF THE

MERGER WOULD NOT BE CLEARLY OUT-

WEIGHED BY THE PROBABLE EFFECT OF THE

MERGER IN MEETING THE CONVENIENCE AND

NEEDS OF THE BRIDGEPORT AND NEW HAVEN

AREAS

The Bank Merger Act of 1966 provides that the

district courts are to test the validity of bank mergers

by the competitive standards of Section 7 of the

Clayton Act. It also created a new defense: whether

“the anticompetitive effects of the proposed transac-

7 On this reasoning, a fortiori, New York City is not part

of the relevant market.

8° The defendants’ expert, Dr. Stokes, testified in appraising

concentration that the state as a whole is “* * * one of the

best market[s] to be considered for this purpose” (App. 633).

tion 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.”

12 U.S.C. 1828(c) (5)(B). The merging banks have

the burden of proving that defense. United States

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

178. 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, 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 mer-

ger would not have any anticompetitive effects, fur-

ther held that the defendants had established that

“any hypothesized anticompetitive effects of the mer-

ger were clearly outweighed by the resultant bank’s

increased ability to meet the convenience and needs

of the community” (J.S. App. A, p. 10la). This

conclusion was incorrect for two reasons: (1) the

court’s erroneous determination that the merger

would have no anticompetitive effect necessarily un-

dermined and invalidated its finding that any anti-

competitive effects were clearly outweighed by the

merger’s effect in meeting community convenience and

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

do not satisfy the “convenience-and-needs” standard.

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

needs” defense can be made only after a proper eval-

uation of the anticompetitive consequences of the

merger. As this Court has stated: “To weigh ade-

quately one of these factors against the other re-

quires a proper conclusion as to each.” United States

v. Third National Bank in Nashville, supra, 390

U.S. at 183. The district court did not reach a prop-

er conclusion on the merger’s competitive conse-

quences, and thus it could not adequately weigh con-

venience and needs against them. Moreover, since

the Bank Merger Act requires judicial balancing of

real costs and benefits, a district court may not weigh

convenience and needs against “hypothesized anticom-

petitive effects of the merger” (J.S. App. A, p. 101a)..

2. The district court sustained the “convenience-

and-needs” defense on the grounds that it would pro-

vide two kinds of benefits: (a) additional competi-

tion for the two big Hartford banks statewide (J.S.

App. A, pp. 102a-1038a, Nos. (1), (2), and (6));

and (b) additional services to customers and poten-

tial customers in the markets the banks presently

serve (J.S. App. A, pp. 102a-103a, Nos. (3), (4) and

(5)). Neither of these benefits, however, satisfies

the “convenience-and-needs” defense.

a. The primary purpose of the defense was to

permit a merger that would enable the merged bank

to provide needed services in the community. Cf.

Phillipsburg, supra, 399 U.S. at 371. The defense,

however, was not intended to sanction an otherwise

illegal merger of two large and healthy banks mere-

ly because the resulting bank would be able to com-

pete better with a larger bank in the area. Still less

was it intended to permit such a merger so that the

resulting bank could compete better with a larger

bank outside the community which the resulting bank

serves. The district court’s discussion of competition

under the rubric of “convenience and needs” is no

more than a reintroduction of competitive issues pur-

portedly dealt with earlier in its opinion.

b. The additional or better services that the dis-

triet court concluded would justify the merger were

an increased lending limit," sophisticated computer

and international services, corporate and municipal

financing services, and trust services (J.S. App. A,

pp. 102a-103a, 68a-80a). Virtually the only bene-

ficiaries of these services are very large customers—

customers who are in no way limited to banking al-

ternatives in their community. Yet the “convenience-

and-needs” defense requires a showing that the serv-

ices offered by the new bank are “likely to benefit

all seekers of banking services in the community

** *.” Phillipsburg, supra, 399 U.S. at 372 (empha-

sis added). Appellees; having presented a case based

on the testimony of executives of large corporations,

*: Connecticut National’s present limit is $2.8 million; First

New Haven’s present limit is $2.3 million; the bank resulting

from the merger would have a lending limit of $5.1 million

(J.S. App. A, p. 69a).

** The “trust services” referred to by the district court are

not for individuals of moderate income, but rather for “ [i] ndi-

viduals whose net worth is greater than the capital of a

bank”, the Knights of Columbus, and “three pension plans”

of a corporation with 1500 employees and annual sales of $30

million (J.S. App. A, pp. 76a-77a; App. 1286).

proved only that for such customers would the mer-

ger possibly offer any real benefits.“ Such a showing

is, as a matter of law, insufficient to establish a “con-

venience-and-needs” defense.

** The assertion of the Comptroller (Comptroller’s Motion

To Affirm, p. 23) that “intervenor called seven witness [sic]

representing broad sectors of the business community * * *”

is erroneous. The seven witnesses and the business community

they represent are: Robert J. Blinken, of Mite Corporation—

annual sales around $30 million; James H. Gilbert of C. W.

Blakeslee—annual sales $45 million—$50 million; William

Schmiedel of M. Schiavone—annual sales $40 million—$80

million; Virgil DeChant of the Knight of Columbus—annual

life insurance premium income $45 million; Leon J. Simkins of

Simkins Industries—annual sales of $80 million; Frederick M.

Robison of Warnaco—annual sales $300 million; and Michael

F. Fountain of Armstrong Rubber—the nation’s sixth largest

tire manufacturer (App. 1242, 1255, 1263, 1274, 1286, 1293,

1824).

The district court’s conclusion that the “merger would bene-

fit many small businessmen as well as the large corporations”

(J.S. App. A, p. 108%) is based upon findings (J.S. App. A,

p. 72a, Nos. 259-260) which show that the making of big loans

“to large corporations” will increase the bank’s lendable funds

generally because those corporations must deposit “compen-

sating balances.” But as the district court found, compensat-

ing balances amount to only 10 to 20 percent of the loans

(J.S. App. A, p. 72a), and the banks, by directing their lending

attention to large customers, in fact deprive average customers

of millions of dollars in lendable funds (App. 19738). More-

over, on this theory, the larger the beneficiaries of the merger,

the better it meets the “convenience-and-needs” defense, Con-

gress did not intend, however, that banks could make this

defense by showing the incidental spillover to average cus-

tomers of indirect benefits from a merger principally and

directly beneficial to large corporations. The banks made no

showing that their lending limit for average customers is

inadequate.

CONCLUSION

The judgment of the district court should be re-

versed and the case remanded for entry of an appro-

priate decree.

Respectfully submitted.

Ropert H. Bork,

Solicitor General.

THOMAS E. KAUPER,

Assistant Attorney General.

Howarp E. SHAPIRO,

RoBERT B. NICHOLSON,

JOHN W. CLARK,

Attorneys.

MARCH 1974.

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