FORD MOTOR CO. v. UNITED STATES
Legal provision: Clayton
Argument of Whitney North Seymour
Chief Justice Warren E. Burger: We will hear arguments next in Number 113, Ford Motor Company against the United States.
Mr. Seymour, you may proceed whenever you are ready.
Mr. Whitney North Seymour: May it please the Court.
I am going to try to reserve a few minutes for reply.
This is a direct appeal from the judgment of the District Court in Detroit holding that the acquisition in 1961 by Ford Motor Company of the spark plug business and the name of the Autolite Company to enable Ford to supply its own needs for original installation of spark plugs and also to supply replacement plugs to others and the acquisition occurred after Ford had been the customer of Champion, a leading company in the business for 50 years.
The Court held that the acquisition violated Section 7 of the Clayton Act.
He directed divestiture and then ended seven other extraordinary injunctions.
First, he enjoined Ford from going into the business of making spark plugs by internal entry for 10 years.
The judgment enjoined Ford from making any plugs under its own name for five years, not marketing any plugs under its own name for five years and required Ford to buy half its requirements for five years from the purchaser of the divested -- the portion divested.
When the case was tried, batteries were also involved, but they dropped out and they are not now involved, that matter having been satisfactory disposed of.
Ford challenges the decision of the District Court as to the violation and submits that even if there was a violation, divestiture in this case was not the best remedy because other remedies which I will mention were better and challenges all the extraordinary injunctions with particular weight on the injunction against the internal entry and the injunction against the use of the Ford name which it regards as definitely anticompetitive.
Now, I think it is important to understand the nature of this industry because as in other cases, the impact of Section 7 depends on the nature of the industry in a particular situation involved.
General Motors has made its own spark plugs since 1909.
In that year, it acquired the then Champion spark plug business and had since marketed its spark plug under the name of AC, under the letters AC and at the time of the acquisition, General Motors had 30% of the spark plug market.
When I say the spark plug market, I am talking for the most part about the, not the original installations but the market, in the so-called after-market, the replacement plugs, that is where the large amount of the plug business is done.
Champion went back into the spark plug business after selling to General Motors and has supplied or had at the time of that acquisition, supplied Ford for 50 years.
And in 1936, Autolite came into the business and began to supply Chrysler and Champion got 50% of the business, it had 50% of the business at the time of the acquisition, that is General Motors 30, Champion 50, and Autolite about 15, and the balance of few percent was sort of -- were spread among small manufactures mostly in the private brand market.
Now, the private brand market is the market served by such companies as Sears, Roebuck, and Montgomery Ward and other mass merchandisers and some of the oil companies who market spark plugs under their own trade names.
In 1960 to 1961, in those years, Chrysler got very concerned, I mean, Autolite got very concerned because it saw signs that Chrysler might be getting ready to go into the spark plug business itself and that might leave it with an expensive plant which the Court described, below described as a potential albatross if it could not do something about it.
And so it came to Ford and offered to sell the spark plug business to Ford and the Autolite name for spark plugs and other uses.
And they worked out a deal under which Ford brought this assets including the battery assets which are no longer involved for a total of $28 million and Autolite became Eltra.
So that there was a new company with a name of Eltra created which carried on the portion of the business not sold by Autolite to Ford and Eltra has built a spark plug plant in Alabama and is in the business of supplying spark plugs largely for the private brand market.
Ford, in connection with the sale agreed to buy 12 million plugs from Eltra over a period of two years and also to provide it with certain ceramic parts and thereupon Ford was in the business under the Autolite name.
Champion became Chrysler’s supplier and took part of -- a large part of the year to change over from Champion plugs to Autolite plugs and worked out the technical difficulties involved and also to begin the process of improving the distribution systems and it took about the same for Chrysler to get started with its new supplier, Champion.
At the time of the acquisition or just before the acquisition, Ford had some 14% of the spark plug business and after the acquisition, Ford's percentage gradually came up and Champion’s went down and General Motor’s remained about the same, although it has gone up a little bit.
Chief Justice Warren E. Burger: What was the Champion figure?
Mr. Whitney North Seymour: The Champion figure originally was 50% at the time of the acquisition.
Chief Justice Warren E. Burger: In 1961?
Mr. Whitney North Seymour: Yes, 1960-1961, just before the acquisition and Ford’s was 30 and Autolite was about 15.
And when Ford came in, the Autolite business began to go up so that by -- about 19 -- in the late 1960s, Ford’s business was up to about 19% and Champion’s business had come down from 50 to about 40 and General Motors had remained about the same, perhaps gone up a little bit.
It is not correct as the Government suggests that this was all automatic, that all happened was that the Champions business went down and the Autolite business went up and Chrysler was changing suppliers.
There was active and intense competition in the after-market and it was a result of that competition that these changes and percentages took place through, it seemed like relatively small changes in percentage but each percentage point was about 4 million plugs and it is a substantial amount of business where involving thousands and thousands of transactions.
The -- I think Your Honors will be satisfied when I finish describing the industry that historically there have been, since 1936, only three major suppliers to the automobile companies and that before that, there were only two and that the business does not accommodate itself to more than three major suppliers.
There is this private market business, but inevidently there are in this business I think there is room only for three major suppliers and that is because of the special nature of the plug in the business which are not joined to.
Without going into any detail of the mechanics, the spark plug is a small but essential part of an automobile and the truck and also used in tractors and long-horse and so on.
It has, as you know two electrodes.
It is inserted in the cylinder to jump a spark caused by power from the generator to ignite the mixture of oil and gasoline and air in the cylinder and cause the explosion which drives the engine.
The plugs are carefully engineered to particular mix and models.
It takes the plug manufacturers and the automobile manufacturers work closely together over a long period of time to get just the right form and construction of the plug and to make it deal most effectively with the particular model for which it is used.
Just as an example, I think Ford now makes some 80 different motors and has 80 different plugs for those motors.
The use of the wrong plug can cause malfunctioning, affect the exhaust fumes from the engine and could cause serious damage.
Now, the plugs are installed at the factory in what is called OE Installation, that is Original Equipment Installation and the automobile manufacturer buys or makes these plugs and they are put in the car and then the car is sold and about 18 months after the car is sold, the average kind of owner goes around and gets a tune up and has a replacement of the plugs.
And the plugs are replaced about five times during the use of the average automobile and that means that on a six-cylinder car, there are 30 plugs that are bought over that period, on eight-cylinder 40 plugs.
The facts I am stating I think there is no dispute about -- were at one about, think the nature of the market and the facts about the market and indeed many of them are stipulated.
Most replacement plugs are inserted by mechanics in the course of a tune-up.
One does not ordinarily take his car around and says, I need a new spark plug, but usually he is going to a garage or a service station or some other place to have the car tuned-up and gone over and at that time that the mechanic ordinarily inserts the new plugs.
And the new plugs are such a minor part of the cost of that operation that really price and cost of the plugs to the customer are no moment so that there is little if any price competition at that level.
The mechanic --
Justice Potter Stewart: Well, the customer does not really choose either?
It is the mechanic that probably chooses what plugs to put in?
Mr. Whitney North Seymour: That is right.
The mechanic on the basis of his experience and knowledge ordinarily makes the choice.
Now, he chooses the plug which ordinarily, the plug which was originally installed.
This propensity of mechanics to use the plug originally installed is called in this record sometimes the OE type which merely means the propensity of mechanics to use the same plug in replacement that was there originally and he does this because he knows about the fact that the plug was originally designed for that car and he does not want to take into risk about it.
He does not want to think that he is smarter than the engineering department that designed it.
Now, there are all purpose plugs manufactured by all of these companies and the average garage man or service station man stocks some of the plugs, but usually not all the plugs.
Usually, if the record shows that sometimes the garage owner or the filling station owner has only the AC plug or sometimes the Champion plug, but usually both of those because they are so popular and then at the time of this acquisition, probably few of these places also stock the Autolite plugs and one of the great efforts here in the competitive struggle has been to get more and more of these places to stock the Autolite plug.
If they do not have the --
Justice Potter Stewart: Up to the time of this acquisition, all General Motor car -- General Motors cars had AC plug?
Mr. Whitney North Seymour: That is right.
Justice Potter Stewart: Is that correct?
And all of Ford cars had Champion plug?
Mr. Whitney North Seymour: That is right.
Justice Potter Stewart: And all Chrysler cars had Electra and the Autolite plugs?
Mr. Whitney North Seymour: After 1936.
Before 1936, General Motors had supplied Chrysler.
Justice Potter Stewart: Right, but from 1936 until the time of its acquisition, is that correct?
Mr. Whitney North Seymour: That is right.
Justice Potter Stewart: And then if as you tell us it was the habit or practice of mechanics to install as replacement plugs, the original equipment plugs, why would they have stocked all three just in the ordinary course of business because of the so-called big three automobiles?
Mr. Whitney North Seymour: Well, generally speaking there are perhaps two reasons as far as the Autolite plug and the Ford Champion plug to take that first.
Ford, tried to distribute these plugs through its franchise dealers and the franchise dealers were no longer handling at or about the time of the acquisition as many of the installations as the filling stations and others.
And the filling station proprietors and the garage proprietors were concerned about not having too large an inventory and actually they would maintain an inventory which would do the best job in supplying plugs for the largest possible number without too much of an investment.
So there was a tendency to have a major lines and the Autolite line had difficulty getting in as indicated by the fact that between about the time of the acquisition in the late 1960s, the percentage of Ford sales in the aftermarket crept up some 5% which I think is represented by the increase stocking of these plugs in the market.
Now, the -- I mentioned the all purpose plug, all these companies make all purpose plugs so that if the mechanic does not have the OE plug at the time, he can try to do the best he can by using an all purpose plug which is a sort of a compromise.
It is not as good as many people think as the OE plug, but it is better than a plug that was made for a wholly different kind of a car and that is a kind of compromise solution.
Chief Justice Warren E. Burger: Did I read somewhere in the record that there have been testimony to the effect that most of the filling stations did not appear to want to carry more than two different brands?
Mr. Whitney North Seymour: That was so for a long time and the business are trying to get them to carry three took a lot of effort and that is what went off.
Now, the OE use is of such importance to the manufacturer that Champion, beginning in 1920, started what is now as the six cent OE price, it began to sell the plugs for original installation at 6 cents and then everybody -- all the manufacturers followed soon so that all the plugs were original equipment installation were sold at 6 cents and the cost of the plugs was three or four times as much as that.
So that the manufacturer used this low OE price to get in and get the business and then he had to make up for the loss on that sale by a higher price on the sales for the aftermarket, the replacement plugs.
And so this is a very important part of the getting into the business and holding the business and is a fact of life which is unusual in this industry I think.
The -- I have already mentioned the fact that because of the fact that the plugs are originally installed as part of other work, that their prices of little or no moment and this and one of the reasons of the price in the business has been so stable is that in 1953, all of the plug manufacturers had cases before the Federal Trade Commission which involved the question of whether they could distinguish in price between the various types of distributors who distributed their plugs including the other companies who wanted to distribute their plugs and the Federal Trade Commission held that they had to give the same price to everybody in the distribution chain and this has naturally kept the plug manufacturers from lowering their price because if they did, they had to do it to everybody and therefore they could not do it in the ordinary competitive way.
The court below regarded one of the important factors as to whether or not the Champion or the Ford’s relation to Champion tended to moderate Champion’s price and he held that it did and it was his view that somehow Ford being a large customer of Champion, moderated Champion’s price.
Now, on this record that is just a theory.
There was no proof and there is nothing in this record to show that there was any such moderation.
I would take it that the original equipment price given 50 years ago is hardly a moderation which should still persist in any realistic sense at the time of the acquisition.
It was really not a moderation that was a sort of a payment for entrance or an arrangement for entrance and aside from that the record does not show any moderation.
Ford had to pay a higher price in 1959 and 1960 for its plugs than other people did and there is not any evidence of moderation.
The suggestion is made that the Court examined this carefully that Ford was a potential competitor and that under Penn-Olin, somehow this acquisition was bad.
Now, the Court took testimony and the government tried very hard to try to show that Ford was on the verge of entering this business, but the evidence the Court found did not show that Ford was on the brink of entering this business.
There are certain memoranda in the record which indicate that there was a study made to that subject, several studies but they never reached the point of top level consideration and the reason they did not was that, and the testimony of Mr. Duffy in the record which the Court accepted, was that plugs were available to Ford for OE Installation at one-third of cost.
Ford did not have at that time any engineers who were expert in the plug business or even in the ceramic business that they had no distribution system which was adequate at that time to enable them to compete effectively in the aftermarket and then the undisputed evidence is and the Court recognized it and everybody recognized it, that after an original OE installation of a new plug, it takes five to eight years to have enough vehicles on the road with that plug in them to really do a lot of business in the aftermarket.
And so anybody going into the plug business has a major manufacturer had to face all these difficulties, the problem of five to eight years before he can really realize on the aftermarket.
The problem of the loss which was involved in connection with getting -- having something other than the six-cent price, the problem of working out to technicalities and so on.
So, it is clear I think that Ford was not a potential competitor and the Court did not conclude that it was.
Justice Potter Stewart: Did any of the -- was AC -- are AC plugs manufactured by General Motors or are they manufactured by a company that (Voice Overlap)
Mr. Whitney North Seymour: No, I believe and in fact I believe they are manufactured by General Motors at one of its divisions.
Justice Potter Stewart: And it was the only one of the so-called big three then that did manufacture its own plug?
Mr. Whitney North Seymour: Yes, yes.
At the time Ford, went in the business, at the time Ford made the acquisitions.
Justice Potter Stewart: After its acquisition?
Mr. Whitney North Seymour: Now, I want to move along, I have spent more time over the industry than I intended to.
The Court pointed out I think that Ford considered that making this acquisition would enable it to get into the business and compete effectively and that expectation was real honest because of the competition has increased since Ford made this acquisition and it is perfectly clear that it was not just a slipping around of percentages, but it was a genuine increase in competition in the market.
This acquisition we submit was pro-competitive because it made Ford a -- Ford was a stronger and more effective competitor than Autolite had been, where there were three companies before the acquisition, the creation of Eltra after the -- in connection with the acquisition, a company which is now an effective competitor in the private brand market and the fact that Champion having lost a portion of its interest and its sales in the aftermarket has had to become a more effective and competitor in the private brand market.
All, I submit are contributions to competition and so we submit that it was a pro-competitive acquisition.
Now the court below, as I have suggested, regarded the fact that although Ford was not a potential entrant, it still moderated Champion’s price and also the fact that the acquisition somehow foreclosed competition and perhaps also increased barriers to entry as a ground upon which it decided the Section 7 case adversely to Ford.
Now, as I have said, there is no evidence in this record of moderation of Champions’ prices.
There is no foreclosure of anybody, but Champion, and Champion has had to simply get out and compete in a different way.
This is not a case like Brown Shoe where there were sales being made by competitors in the market and such sales would have gone on, but for the acquisition.
It is not a case like many of your cases on potential competition where a potential competitor was acquired and absorbed and there was no substitute as there was here for the absorption.
Here, the acquisition gave rise to a stronger competitor and as far as barriers to entry is concerned, I hope I have made clear that any company seeking to go into the making of spark plugs for use in automobiles had to face the barriers to entry which were inherent in the business, that is they had to sell at low price, at a loss, they had to make up that loss over a period of years through the replacement market.
They could not get into the replacement market for a five to eight years.
They had to workout all kinds of technical difficulties in arriving at the thing, so that really, the idea that little companies were in a position that come knocking on the door and get the business is just a concept of unnecessary charade.
It would just be a charade to suggest that the small manufacturers were in a position to come in and get that business.
Now Champion, if this transaction had not taken place, it seems clear on this record that what would have happened would be, the Champion would have continued as it had for 50 years to be Ford’s supplier and the market would have been just what it was before.
Instead of that, the market has become more competitive as a result of Ford’s activity in it and the creation of Eltra as a real competitor and the fact that Champion has to scramble out for business by competing in the private brand market, all are contributions to competition.
Justice Potter Stewart: Eltra does not supply, it does not supply any original equipment, does it?
Mr. Whitney North Seymour: No, as far as I know.
Unknown Speaker: But what are those $12 million, were some arrangements made?
Mr. Whitney North Seymour: Oh well, I beg your pardon, yes sir.
In connection with the sale, Ford undertook to buy $12 million for two years.
Justice Potter Stewart: Right.
Mr. Whitney North Seymour: So those may have well have been used for original --
Unknown Speaker: For original?
Mr. Whitney North Seymour: They might well have been used for that purpose.
Now, I must come to the problem of relief.
Let me just, before I come to that, I really think that the Government’s position and the Court’s position here was without any kind of sub silentio treatment that Ford being a large customer must as a matter of law be regarded as having somehow moderated without regard to the facts and thus that any acquisition involving such a large customer must be regarded as per se illegal.
The Court does not use those words, but I think that is the necessary implication and I submit that they are quite enough per se rules now without having one in this field and further more it would be very unsound indeed to treat a customer in the same position as one as Your Honor said in Penn-Olin, waiting anxiously on the edge of the market to come in now on relief.
If I have satisfied Your Honors that there is no violation, that is the end of the case.
If Your Honors think, as far as we are concerned, if Your Honors think that there was a violation, we submit that divestiture in this case was an improper remedy.
We know that divestiture is usually the remedy, but Your Honors have laid it down that it is not an execrably the remedy and here the effect of divestiture as we shown in our brief would have been one or two things.
Either after all the effort involved in divestiture, all that would have happened would have been that the New Fostoria, the purchaser would have become tied before just as the old company had, just as Champion had been the market would have been just as it was before and all the advantages, the pro-competitive advantage of this acquisition would have been lost and the alternative to that which is perhaps still worse is that after the five years during which Ford had to take half of its requirements from New Fostoria, the company would not have been able to market.
Somehow it would have lost its markets and it would have failed and then the whole thing would have gone for naught, a great economic loss to the public.
Now, let me leave that.
Ford made a proposal which I think really was in this setting far more fruitful than divestiture and that was that for 10 years, it should buy 30 million plugs from Eltra.
Eltra then had the capacity of about 20 million plugs.
Annual purchases of 30 million would have put Eltra in the position to sell 50 or more million a year and made it an effective competitor and that relief in lieu of divestiture would have done more to improve the competitive situation than divestiture would have done.
Let me come to the injunctions because these are things which I have a deep concern and I have not left myself any time to talk about it.
The injunction which the Court granted, forbidding Ford by internal entry to go into manufacture for 10 years is absolutely unprecedented as far as I know.
It is clearly anticompetitive.
Its effect would be to deprive Ford of a right that everybody else has.
The General Motors had an exercise and there is absolutely no reason except some back-handed penalty or any such harsh injunction.
My learned friend says, well, it would take Ford awhile to get into the business and it was trying to go into the business anyhow, that does not take away I think from the error in the court below in granting such a sweeping, unprecedented and unjustified injunction and in the same category is the injunction against Ford using its own name after four or five years.
That means that Ford would have to buy not only half its plugs from Eltra or from New Fostoria, but would have to buy the rest of its plugs from somebody else under that person’s trade name and not use the Ford name.
So that Ford would be forbidden from really beginning to edge into this market under its own name for a long period of time.
There is no precedent for any such relief as that.
It is unnecessary and clearly anticompetitive.
Now, I will not argue with the requirements contract which is the third injunction because in my own view if divestiture was proper or if there was a violation in divestiture and it was proper, that injunction may have been useful in implementing the divestiture and ensuring the divested company of business for a period of time and while it is unusual and I think unnecessary, I will not press that.
But it seems to me, the other two injunctions whatever Your Honor does -- whatever Your Honors do with divestiture and violation are clearly erroneous and the decree should be reversed on that ground alone, but our view is that it should be reversed across the board.
Chief Justice Warren E. Burger: Thank you, Mr. Seymour.
Argument of Friedman
Mr. Friedman: Mr. Chief Justice and may it please the Court.
Section 7 of the Clayton Act, of course deals with the probabilities not with certainties.
The statutory standard is that acquisitions are condemned whose effect maybe, maybe substantially to less the composition and as this Court has stated and as the legislative history indicates all that is required is that there be a reasonable probability of anticompetitive effect.
And in the Philadelphia Bank opinion, this Court stated that a determination of whether there is such a reasonable probability of anticompetitive effect as it said requires not merely an appraisal of the immediate impact of the merger upon competition, but a prediction of its impact upon competitive conditions in the future and also added that a prediction as to the future impact is sound only if it is based upon a firm understanding of the structure of the market.
That is the impact of Section 7 is to prevent anticompetitive changes in the structure of the market.
The way the market operates.
Now, there is no question about the market in this case.
It is one of the most concentrated markets that we can find.
For more than 20 years, the three leading firms that had between 90 and 95% of the market, in most instances closer to 95 and that condition is continued since the acquisition.
There are also as Mr. Seymour has indicated high entry barriers in this market primarily because of the fact that due to the OE tie, a manufacturer finds it almost impossible to get into the lucrative replacement market unless he has the OE tie and you cannot get the OE tie unless the you can get the business of one of the major automobile manufacturer.
Justice Potter Stewart: And in order to do that, you have to sell way below cost?
Mr. Friedman: You have to sell way below cost.
So what you have is this is a market where there is a high concentration and very high barriers to entry and is to be expected in such a market, this little price competition.
I am not talking now of the price competition at the service station or the garage level where you go to have your motor tuned.
I am talking of the competition at the next level, at the distributor level, at the warehouse level to prices at which the manufacturers and the distributors of spark plugs put the plugs into the distribution channel.
Chief Justice Warren E. Burger: Mr. Friedman, do you agree with Mr. Seymour that as a result of the acquisition in 1961, the giants are less big and the lesser companies are bigger and have a greater share of the total market?
Mr. Friedman: We do not agree as he characterizes it.
Of course have result of the acquisition, Ford now, Autolite in the hands of Ford now has a greater share of the market than Autolite had before the acquisition, but of course what has happened is that since the Ford account was a much larger account than the Chrysler account, necessarily when Autolite shifted its custom from Chrysler to Ford, it necessary got a larger share of the market and conversely when Champion after it had lost the Ford account, picked up the Chrysler account, it had a smallest share of the market.
Now, we are not saying that the correspondence is automatic but we think this reflects a major share of the shift in the market, but we do not think the market is anymore competitive Mr. Chief Justice.
Now, we had an economist to testify on this and the fact of the matter is that even after the shift, there has been no basic change in the market.
The market is still all oligopolistic.
The market is still the big three at 95%.
There is still virtually no price competition in the market.
This new competitor that has been referred to the Eltra Company, the Eltra Company as the District Court characterizes it as a pygmy.
It has something now, even now something like 1.4 or 1.6% of the market.
It has its own name brand Prestolite which is made very little progress in the market.
It is basically attempting to sell in the aftermarket through the private brand label and it just cannot get into the market at any substantial measure because of the Original Equipment tie.
We do not conceive that the market is anymore competitive.
In fact --
Chief Justice Warren E. Burger: Who is at the top of the market now?
Mr. Friedman: Still Champion.
Chief Justice Warren E. Burger: But do they not have to try harder as a result of this to hold their position?
Mr. Friedman: Well, they may have to try it.
They may have to try harder.
They may have to sell more because having lost the Ford account, they may find it necessary to fight more vigorously for business in the aftermarket but nevertheless, nevertheless, all there has been is a slight shifting of shares among the firms in the market and we had an economist, a distinguished economist Professor Mann (ph) who testified that in a market of this type, in a market of this type, the shifting of shares, like shifting of shares among the three leading firms that together have 95% does not really reflect any greater vigor of competition in the market.
There is no price competition.
This is not injected any greater price competition into the market.
There is no --
Chief Justice Warren E. Burger: Is price the only area of competition or --?
Mr. Friedman: Price is not the only area of competition Mr. Chief Justice, but one of the characteristics of an oligopolistic market is the absence of price competition and price competition is in the sense the ultimate of competition.
I mean that is what is really all about is prices And if you get into a market of this type where you have a rigid structure and I might mention in passing, one of the things that is pointed out by our economist and one of the things that the record shows is in this type of a market price of profit is very high, although the average return of all manufacturing enterprises in the country is 10% on investment, Champion over 15-year period had an average of 25%.
Justice Harry A. Blackmun: Mr. Friedman, do you have any comment, perhaps it is not the case as to the very advantageous position with GM occupies here?
Maybe there is nothing you can do about it?
Mr. Friedman: I do not think there is anything Mr. Justice that can be done about it here except I think the fact that GM has in effect tied up such a large share of the market because of its own manufacturing of plugs is an important consideration as to why it is significant and vital to preserve the other forces in the market that tend to be competitive.
Now, I would like to turn this --
Justice Harry A. Blackmun: But this is more of comfort to Ford I suppose?
Mr. Friedman: That may be Mr. Justice, on the other hand the fact that General Motors is now engaged in the manufacture of its own spark plugs is no reason why Ford should be permitted to do the same thing whereas we believe and I will come to this in a minute now, you think the effect of Ford’s acquisition of the Autolite Company and going into the manufacture has definite and are competitive consequence.
Justice Harry A. Blackmun: (Inaudible) would not object before taking the time to develop it internally I take it?
Mr. Friedman: That is correct because Section 7 Mr. Justice speaks of acquisition.
Any firm is free to develop it internally.
That is exactly --
Justice Potter Stewart: Exact point under this decree?
Mr. Friedman: Under this decree and as I will cover, and the reason for that Mr. Justice is that Ford is this prohibited from manufacturing for 10 years in order to give the divested company the opportunity to get on its feet again.
Basically, it is an attempt, four to ten years has had the benefits of the ownership of Electric Autolite.
Ford has acquired in this ten-year period many things.
It has developed great know-how.
It has built up a staff of engineers.
It acquired Autolite’s entire distribution system, it is entry for these warehouse distributors who are so important and penetrating into the aftermarket and the purpose of a ten-year provision in effect is to put the thing back, put the thing back the way it was before that once again Ford to be a customer, there will be a large independent manufacturer and to give this large company the opportunity to begin to develop because if I may just say one other thing on that Mr. Justice, if Ford were permitted to go into manufacture immediately, the likely first -- the likely thing that will happen would be this.
And of course, I mentioned that the provisions of the decree are all interrelated because if Ford were permitted to go into manufacture itself and there was no ban on the use of Ford’s name or even with the present thing, what probably would happen is Ford would purchase its 50% requirements from divested plant and put those plugs into the aftermarket to sell for the replacement of the Ford plugs that are ready on the road and would begin manufacturing under its own name and selling under its own name and by in a very short period, after five or six years when the market for the replacement plugs was exhausted, this new company would find itself with no basis at all, It could not -- it would have no OE tie because Ford itself would be using its own brand on the plugs and it would be left to kind of floundering if this is the word trying to break into the aftermarket and this is designed, this provision and all of the provisions of the decree are designed to give the new company an opportunity to get a foothold at least in the market to try to restore as much as possible the market structure that existed before the acquisition.
Justice Potter Stewart: I take it the new company means the so-called New Fostoria?
Mr. Friedman: In fact, New Fostoria --
Justice Potter Stewart: The divested?
Mr. Friedman: The divested company.
Justice Potter Stewart: Autolite.
Chief Justice Warren E. Burger: Mr. Friedman, would you care to speculate on what impact this will have on Champion and General Motors if any or is there not anything that you can speculate it?
Mr. Friedman: I think it is dangerous to speculate Mr. Chief Justice.
I think that presumably, what is likely to happen is this.
The divested plant, the New Fostoria under this decree knows that at the end of five years, it may or may not continue with any part of Ford’s business.
It is obviously going to be under pressure as a result of this decree.
First to try to gain all of Ford’s business in the initial five years, and not just the 50% and indicates the business after the fiver years, it does not know however whet is going to happen.
Conceivably after five years, Ford may take its business elsewhere or after 10 years, Ford may decide to manufacture.
So, I think what is likely to happen is from the very outset the new Fostoria is going to do two things.
One, it is going to do everything it can to try to satisfy Ford in terms of quality, in terms of fair price, and etcetera.
Secondly, it is going to be aware of the fact that at the end of five years it has no assured market.
It may have to start fighting at this point in the aftermarket, and therefore, it seems to me in the initial five-year period, the new company is going to do everything it can to try to build its business in the aftermarket.
And if it is going to be building its business and competing vigorously in the aftermarket, I presume that Chrysler and General Motors will also feel the impetuous to compete vigorously in the aftermarket.
Now, if I may, I would now like to, having gone to the second part of the case in some detailed relief, I now like to go on and discuss the merits of the case in finding the violation.
Justice Byron R. White: I take it (Inaudible) indicated a while ago the market really has not changed much?
Mr. Friedman: That is correct.
Justice Byron R. White: It has not become anymore competitive?
Mr. Friedman: We do not think so.
Justice Byron R. White: And if it remains throughout the same and this is after 10 years?
Mr. Friedman: This is after 10 years.
Justice Byron R. White: Do you feel things might have been worse?
Mr. Friedman: It is hard to say.
It could get worse.
I suppose --
Justice Byron R. White: Well it is hard to pay and what about the -- what is the (Inaudible) is about?
Mr. Friedman: What --
Justice Byron R. White: Aftermarket, is this really have to change the market much, it does not make much difference one way or the other, whether Ford does or does not own the company?
Mr. Friedman: Well, we --
Justice Byron R. White: Perhaps you say we must ignore the experience of 10 years in some cases, perhaps indicate that 10 years is a long time for you to review the impact of the market and using to indicators is much impact at all?
Mr. Friedman: No, I did not.
Justice Potter Stewart: Nevertheless, you (Inaudible)
Mr. Friedman: No, I did not indicate.
I am sorry Mr. Justice.
I did not intend to indicate that there is impact.
What has happened in the market has been that two things have happen in the market and these were the consequences.
The basis of the District Court’s decision first, the opportunity of other spark plug manufactures to sell in the large segment of the market represented by Ford’s purchases from Champion has been eliminated.
That is the first thing.
Unknown Speaker: Well, the market still has to change or has it have to be the way it was before?
Mr. Friedman: But there was the opportunity.
There was a very great distinction Mr. Justice.
Unknown Speaker: The opportunity for some company to beat up Champion?
Mr. Friedman: That is correct and that opportunity was irrevocably lost.
It is irrevocably lost.
It is irrevocably lost by the foreclosure.
Our comment a minute, we discussed in our brief, there is evidence in the record that during the time that Champion was supplying Ford close to the time of the --
Unknown Speaker: Does the market -- Does Ford has (Inaudible) where the market price has improved?
Mr. Friedman: Oh, yes.
Unknown Speaker: It might improve?
Mr. Friedman: It might have certainly might improved.
There is evidence that people were trying to sell to Ford.
Autolite was trying to sell to Ford.
Another company called General Battery and Ceramics Corporation was trying to sell to Ford.
Once this acquisition took place, these companies stop selling to Ford.
They have no more chance of selling to Ford than they have sell to General Motors because that market was foreclosed.
Now in addition to that, the other thing this acquisition did was it removed the pro-competitive effect, the mediating influence that Ford had upon the market and this impact on the market was twofold.
First, Ford as a potential entrant into the market and secondly, the impact Ford had as a customer.
Unknown Speaker: But from what you are saying now, I should have thought you might considered getting in divestiture decree of some kind and the general motors Champion thereto.
Are you not dealing with speculation of --
Mr. Friedman: Well, Mr. Justice --
Unknown Speaker: --not reasonable capabilities?
Mr. Friedman: Mr. Justice a very, very significant distinction, Champion was not acquired Chrysler.
Champion and Chrysler have a (Voice Overlap)
Unknown Speaker: I realize that they have dominated the market for all this period, have they not?
Mr. Friedman: They are the largest market and perhaps at some point we should proceed against Champion.
I do not know, but that it seems to me again is no reason not to permit -- is not reason to permit this acquisition which is one, we think clearly within the terms of Section 7.
Unknown Speaker: Champions is a publicly held corporation?
Mr. Friedman: Champion is a publicly held corporation and very interestingly, very interestingly, the question is to whether Ford with itself becomes a manufacturer.
There were two things.
First, in 1960, there were some studies made by high level Ford group which recommended to the top management that Ford itself go into the manufacturing of spark plugs.
And in addition to that, in 1958 --
Unknown Speaker: Yes, but --
Mr. Friedman: That was not followed.
Unknown Speaker: What year was that?
Mr. Friedman: That was in 1960.
Unknown Speaker: The recommendation was made to top management but it was not done?
Mr. Friedman: It was not done.
Unknown Speaker: And I do not see how that evidence helps you very much?
Mr. Friedman: Well, it does indicate --
Unknown Speaker: Because that indicates it was a decision of top management not to do it?
Mr. Friedman: But it does indicate Mr. Justice that Ford was thinking about it and as the District Court said, Ford was the leading potential entrant.
And I refer this Court to its decision in the Procter and Gamble case.
In which the Court stated there the Court of Appeals had reversed the commission’s finding that Procter and Gamble was a pro-likely entrant into the household bleach industry on the ground there was no showing that in fact it was going to do it and this Court in reversing said that is immaterial.
The important thing is that it was the most probable entrant.
And we think this is he most probable --
Justice Potter Stewart: Well, except here, you have an explicit decision not to do it?
Mr. Friedman: You have a decision --
Justice Potter Stewart: What you just told us?
Mr. Friedman: You have a decision not to do it, but at least as far people in the industry were concerned, as far as the spark plug manufacturers were concerned, to them it was certainly not beyond the bound of possibility that Ford would enter.
Let me just mention one of the thing Mr. Justice, in connection with Champion.
In 1958, Champion for the first time went public as a corporation.
Of course, it had to file registration statement to the SEC and one of the things that came out in this registration statement was the very high rate of return Champion was making and a witness from Electric Autolite said that he thought it was not improbable that when Ford realized that for all these years, Champion had been making this average of 25% rate of return to a large extent as a result of Ford business and that Ford was very seriously think about going into the business.
Justice Potter Stewart: You talk about the -- I think just now you used the word “mediating effect” of Ford, I think in the briefs and in the District Court’s opinion it is called the moderating effect.
I do not quite understand what it is?
Mr. Friedman: Well, what --
Justice Potter Stewart: It has two aspects I gather and that be understood --
Mr. Friedman: Yes, well but there are two aspects.
The first one is the possibility that Ford may enter.
Justice Potter Stewart: Right, now you are talking.
Mr. Friedman: I am talking.
The second one is that here was Ford a very large customer in an industry that is very concentrated and Champion knew that it had to satisfy Ford in order to keep the business.
If I may just refer Your Honor to one statement here about on page 35 of the record, this is the testimony of Champion’s Vice President in charge of sales in the middle of the page and he said, we were concerned about Autolite getting in there because there were no actual affiliation, no financial arrangements between Ford and Champion.
It was just a year-to-year arrangement and we had to sell them a quality product and service them well to retain that business.
And if Autolite had been able to persuade them that they could have done as well or better, our account would in jeopardy.
That is Chrysler knew that in this peculiar market, it had to satisfy Ford among other things on price.
Justice Potter Stewart: Champion?
Mr. Friedman: I am sorry.
Champion had to satisfy Ford on price.
Justice Potter Stewart: Well, the price was told 6 cents, but I gather as 588 cents (Voice Overlap) on the OE price?
Mr. Friedman: There is no question about the OE price and basically --
Justice Potter Stewart: And that was standard throughout the industry?
Mr. Friedman: That is right.
It is basically the price on the replacement plugs.
It is basically the replacement plug which they sell for anywhere from 35 to 40 cents because that is where the big profit is.
Justice Potter Stewart: Sell them to Ford and Ford sends in to his distributors and dealers?
Mr. Friedman: They sell them to Ford or to the Warehouse Distributors and then in turn Ford sends them to each dealers and Ford itself distributes them to the warehouse.
Justice Potter Stewart: I thought in recent years, the majority of the replacement of the aftermarket was distributed to filling stations and service stations?
Mr. Friedman: That is the majority.
Justice Potter Stewart: Not by Ford?
Mr. Friedman: That is correct, but Ford itself -- but Ford itself in addition to distributing through its dealers also distributes through the warehouse distributors.
In other words, the Ford Autolite plug today appears not only in Ford dealers but also in service stations and garages and so on.
Justice Potter Stewart: Alright.
Mr. Friedman: Now if Ford has made a conscious effort to try to penetrate the replacement market.
Justice Potter Stewart: Since the acquisition?
Mr. Friedman: Since the acquisition.
Justice Potter Stewart: Yes but I am talking about this moderating effect and I --
Mr. Friedman: Well the moderating --
Justice Potter Stewart: The moderating effect on price --
Mr. Friedman: On Champion.
The moderate -- This is the effect that Ford had part of the acquisition on Champion.
Justice Potter Stewart: On the price of Champion plugs?
Mr. Friedman: On the price.
Justice Potter Stewart: In the aftermarket, is that it?
Mr. Friedman: In the aftermarket.
With the corresponding impact not only on Champion’s prices Ford, but Champion’s prices to the warehouse distributors because of the Federal Trade Commission 1953 order required prohibiting Champion and all the other manufacturers --
Justice Potter Stewart: From discriminating between the two customers and also was an indirect impact on the whole, on the other makers, on their price?
Mr. Friedman: Yes.
Justice Potter Stewart: But then and we have the -- as far as I understand that and I am not sure I quite do this moderating effect but there is a finding that is almost no price competition?
Mr. Friedman: That is right and I think that is conceded and we are talking about price competition here.
Now, I want to reiterate not the price charge by the service man when he tunes the motor, but the price charge in selling when the plugs get into the distribution.
Now, if I may, I would like to --
Chief Justice Warren E. Burger: Mr. Friedman, before you leave that, who was it who was speaking, Mr. Harry Davis at page 35, identify him again for me?
Mr. Friedman: Yes, he is the Vice President in charge of sales and the general Sales Manager of Champion.
That is shown at 22 of the record.
The title of each of these witnesses is set forth in considerable detail.
Chief Justice Warren E. Burger: I am interested in what he said a few lines down from you read in response to a question, he said, we are very vulnerable with Chrysler in speaking of the relationship with new relationship with Chrysler.
I mean, we do not dress up on our laurels any single day because we know that we have the specter with Prestolite in the background willing to battle us for that business and we have nothing except our good product and so forth.
What is the significance?
What do you read all of that statement?
Mr. Friedman: Well, all I read is that --
Chief Justice Warren E. Burger: Does that mean that he is under the new situation they have try harder?
Mr. Friedman: No, I think, well it is a recognition on his part that they were previously had a try to deal with Ford.
Now, they still have to try to keep the Chrysler account, but the Chrysler account is of course much smaller.
Chief Justice Warren E. Burger: Smaller account.
Mr. Friedman: And also there I think there is a recognition the part, of course as we have indicated, Prestolite at the moment, does not have an OE -- any OE tie.
As I say, I think there is competition here.
Of course there is competition here but the important thing is what the acquisition did in terms of the prior competition and Prestolite which has a very small share of the market now is certainly not the significant impact on the market that Ford, a principle customer was upon Champion the principal firm in the market.
Justice Potter Stewart: Where is it, Eltra, you mean?
Mr. Friedman: Eltra.
Well, Eltra makes the Prestolite plug that is why Eltra which is the successor to the old Autolite is now making the Prestolite plug.
Justice Potter Stewart: Right.
Mr. Friedman: Now, we were discussing the fact that Ford on the edge of the market was a mediating influence because of its pressures that it exert on Champion and the possibility it might enter.
There is another aspect of the case, another ground on which the District Court rested its decision and that is the fact that the effect of this acquisition was to foreclose sellers of spark plugs from the significant share of the market that I have mentioned.
Ford at the time, it was buying from Champion before the acquisition had approximately 10% of the entire spark plug market.
And this was roughly 40 million plugs and the value of these plugs was almost $10 million.
And the impact of course of this foreclosure was even greater because of the fact that GM which made approximately 50% of the cost had in fact preempted almost 50%, 45% at that time of the OE market and thus the OE -- and this closed off, this big share of the OE market and when Ford applied its share of the market, there was a foreclosure of a greater share of the OE market in the actual 10% show.
Now, Ford’s answer to this, to this foreclosure point as saying, well, it was really know significant foreclosure here because the market was really tied up with Champion.
We have been buying from Champion for 50, or 60 years and the acquisition had not taken place we would have continued, therefore, there was no foreclosure because all these people were excluded from a market they could never hope to get into.
Justice Byron R. White: The total market is the only market?
Mr. Friedman: It is roughly --
Oh, I would say about 15%.
Justice Byron R. White: Champion say, it would sell like it was prior arrangement selling 85% of its plugs in the aftermarket.
Mr. Friedman: It may vary little bit, it may vary a little.
Justice Byron R. White: So what we are really talking about, reasonabilities about (Inaudible) about foreclosing Ford’s share 50%.
What part does Ford got 40% of the --
Mr. Friedman: Ford has roughly 30% of the total.
Justice Byron R. White: So we are talking about 30% of 15% --
Mr. Friedman: Well, but it is more than the -- It is both the -- It is more than 30%, more than 15% of 30%.
The 15% is only the (Voice Overlap) initial equipment market, but in addition, Ford was also selling in the aftermarket.
In other words --
Justice Byron R. White: I understand that but Ford selling in the aftermarket does not foreclose others from competing for the aftermarket?
Mr. Friedman: Well, it does Mr. Justice.
Once Ford owns its own -- Once Ford acquires Electric Autolite because Ford is now selling the Electric Autolite plugs in the aftermarket.
Justice Byron R. White: Is it not Ford may or may have a lien on part of the deal, but it certainly has not gone all the people who are dealing of cars who need new plugs to put in car?
Mr. Friedman: No, no.
Justice Byron R. White: Ford cannot foreclose competitor from trying to sell in the channel?
Mr. Friedman: No, of course not but Ford has been foreclosed, there is a substantial shift back to the market.
It is segment of the total spark plug purchases Ford made prior to the acquisition.
Justice Byron R. White: But how much of that market do you, can really say to foreclose?
The OE market is only 15% of the total market.
Ford's share that is only a third that is 5% of the OE market that is foreclosed.
Now, how much percent of the aftermarket has actually been foreclosed by Ford's acquisition in the sense that places, competitors used to be able to sell in and they could no longer sell?
Mr. Friedman: Well, but they used to be able to sell to Ford.
They would sell to Ford and Ford in turn would distribute in the aftermarket and they are foreclosed from selling to Ford the products that Ford would sell in the aftermarket and that total, that plus the OE market comes to 10% of total spark plug production.
Justice Potter Stewart: Now, when you say they, you mean Champion for 50 years when they say they used to be able to sell.
It was the Champion --
Mr. Friedman: No, what I am suggesting is that a firm like Autolite at least could try to sell.
Justice Potter Stewart: But they were not able to?
Mr. Friedman: They were not able to.
Justice Potter Stewart: For 50 to 60 years, it was Champion and only Champion?
Mr. Friedman: They were not able to but they tried?
They were not able to but they tried.
And that it seems to us is the significant thing, the knowledge that they were there, the knowledge that the opportunity at least had a mediating effect on the market and also prevented any of these people from ever getting in.
They have not been able to sell for 50 or 60 years.
Maybe they could.
Maybe they would come up with some new spark plug which would enable them to cut the price substantially.
We do not know but this is foreclosed them irrevocably.
They are out.
They cannot sell it.
As I said, there is no more hope of their selling it to Ford now than there is for selling to General Motors.
Chief Justice Warren E. Burger: Well, is that necessarily so.
Suppose, hypothetically, the Champion now came up with the plug that they could sell for 3 cents, would that not give them possibility of getting back into Ford?
Mr. Friedman: It is unlikely Mr. Justice because Ford --
Chief Justice Warren E. Burger: Who buys for 6 cents when they can buy for 3 cents?
It is just, that is a very strong supposition, but I was testing your absolute statement.
Mr. Friedman: Well, but as a practical matter I think Mr. Chief Justice, as a practical matter the champion now under ordinary circumstances is effectively foreclosed from selling to Ford.
There is no point and that is even trying to sell to Ford and even though conceivably, if they could come up with some revolutionary new plug, maybe I do not know what would happen, but I think in dealing with Section 7 we have to consider what is the impact at the time of the acquisition on the competitors.
Chief Justice Warren E. Burger: I am sure that the government has no interest in trying to make Champion bigger or make its position more secure, has it?
Mr. Friedman: Certainly, certainly not.
What we are trying to do what we are trying to do Mr. Chief Justice is to restore to this market as much as we can the conditions that existed before the acquisition took place.
Chief Justice Warren E. Burger: But that would mean with the Champion in a more dominant position than it is now?
Mr. Friedman: No, when I suggest restore, what I mean by restore is not to restore the Champion-Ford relationship.
What I mean is to try to restore the situation that existed before the acquisition where you had only one automobile manufacturer engaged in manufacturing spark plugs and where you had the other two manufacturers existing as customers of spark plug firms.
That is what we are trying to do, to restore to the market a second independent not affiliated with an automobile manufacturer, a second independent manufacturer of spark plugs to give this company a chance to build up and to develop.
Now, let me, if I may --
Justice Potter Stewart: Who supplies them?
Mr. Friedman: Pardon me?
Justice Potter Stewart: Just before we start again, who supplies the American Motors or do they make theirs?
Mr. Friedman: Champion supplies American Motors.
Justice Potter Stewart: 100%?
Mr. Friedman: A 100%.
Now at one point, they divided their business between, I think, Champion and Autolite, there was a merger of Nash and another company in 1951 and the testimony indicates they decided they preferred Champion and Champion supplies all of their plugs.
Justice Potter Stewart: And there is something in the record in effect to the merit there is some risk that American Motors might not get this way below cost price?
Mr. Friedman: Well, I would --
Justice Potter Stewart: Or danger that they might lose it, that is what I mean?
Mr. Friedman: I do not know, that would present -- I mean that might present problems under the Robinson-Patman Act.
They discriminate –- that will be a nice question whether they could discriminate and sell it at lower cost.
Justice Potter Stewart: Now they get this?
Mr. Friedman: They now do get this, yes.
I would like now briefly to turn to the question of the appropriate relief in the case.
We think that in light of the violations found in this case, only divestiture would be appropriate and proper remedy.
Justice Byron R. White: What is that, just the plant?
Mr. Friedman: Just the plant and the name.
Justice Byron R. White: And the name, but how about the -- I guess Ford acquired a distribution system?
Mr. Friedman: That is right, that is not diverse.
Justice Byron R. White: What did they acquire under distribution?
Mr. Friedman: They acquired some sales people.
They acquired contracts with distributors.
They required if you might call it an introduction to the distributor --
Justice Byron R. White: I guess divestiture against the name and the plant is going to be a new company?
Mr. Friedman: It is to be a new company.
Justice Byron R. White: Capitalized by whom?
Mr. Friedman: Now, that is uncertain.
All -- it is --
Justice Byron R. White: But this company is getting -- it is thinking over any of the distribution of Ford --
Mr. Friedman: No.
The company is for continuous to have its distribution system that it applied and of course that also includes --
Justice Byron R. White: At the moment they cannot make spark plugs or sell under Ford name?
Mr. Friedman: That is correct, but it will have its distribution system to enable it to distribute the spark plugs that it will purchase during this period and of course eventually, if Ford wishes to get into the manufacturing business, Ford will then have the benefit of this distribution system that it has built up over the past 10 years.
Justice Potter Stewart: Would Eltra be an eligible purchaser of New Fostoria?
Mr. Friedman: I would suppose so.
I had hesitate to commit myself on that because it might require a fairly careful examination of all the circumstances in the industry and I just would be reluctant to express an off hand opinion.
Justice Potter Stewart: I understand that Eltra is what remains of the original Autolite?
Mr. Friedman: It is what remains of the original Autolite plus a lot more, Eltra and –-since that time it has merged with a number of other companies and it is a $200 million corporation itself.
Justice Potter Stewart: But only as you told us of tiny share of the spark plug?
Mr. Friedman: Of the spark plug market, that is correct.
I would suppose, I would think Eltra might well be --
Justice Potter Stewart: An eligible purchase?
Mr. Friedman: As eligible purchase but I would not want to commit myself to that because this is something we would have to study very carefully.
Justice Potter Stewart: We are talking about this, my brother White suggested in his question, just one plant of Fostoria, Ohio, are we not?
Mr. Friedman: Yes, just one plant.
That is all that they acquired and Eltra now by the way has three plants.
It is now operating three plants.
One of which is in Canada, but we are just talking of the single plant.
Justice Byron R. White: What is meant by that plant being (Inaudible)
Mr. Friedman: The Fostoria plant?
The fact that here applied is the fact that is a large facility and it needs to have a very substantial volume of stock -- spark plug production apparently in order to make a go it over economically.
It has a capacity of about a 175 million plugs a year.
I do not how many it would have to have in order to function --
Justice Byron R. White: Total sales volume is how much?
Mr. Friedman: Oh!
I suppose 60-70 million something in that range.
Now, we start I think with a basic proposition that the normal remedy for an acquisition that violates Section 7 is to undo the acquisition.
That is, if it was illegal for a firm to acquire another company, the simple and most effective remedy is to require them to get rid of it.
In this case, there were two anticompetitive effects that that the District Court found and of course in getting to questions of relief we must of course exhume the correctness of the findings and therefore what we had was two things: One, the foreclosure of the sellers of spark plugs from the 10% share of the market that Champion was supplying to Ford and two, the removal of these mediating or pro-competitive effects that resulted from Ford remaining on the sidelines while it was purchasing from Champion and it seems to us that the only effective way we can remedy those violations is to restore as much as we can the situation that existed.
That is to have once again, Ford as a customer, not manufacturing, sitting on the sidelines, exerting the pro-competitive influence --
Justice Byron R. White: Sitting on the sidelines as a potential entrant?
Mr. Friedman: As a potential entrant, as once again as a potential entrant.
Justice Byron R. White: Yet it is enjoined from being one?
Mr. Friedman: For 10 years, for 10 years.
It is not permanently enjoined.
It is enjoined for 10 years.
In order to give the divested company the chance to build itself up in the market.
In order to give the divested company the opportunity once again to become a strong, vigorous competitive factor in the market and once that happens, once that happens then Ford is perfectly free if it wishes to enter the market and even at the time, even at the time while this is going on of course, the divested company will be well aware of this possibility and this itself will exert pressures under divested company to deal most favorably with Ford.
Justice Byron R. White: Really if by divesting, you are really creating one more company there (Inaudible) once before?
Mr. Friedman: That is in effect, in effect, that is correct.
Justice Potter Stewart: Well, unless Eltra does purchase it?
Mr. Friedman: Unless Eltra does purchase it, but even if Eltra purchases it, you would have a very different market than you had.
You have a market comparable to what you had before, not exactly, but you would have a comparable market with two significant independent spark plug manufacturers and only one of the big three automobile companies engaged in the manufacture of spark plugs.
The -- our economist indicated that the only real hope of ultimately achieving deconcentration in this market and I just paused to point out that in a market of this type, an oligopolistic, very tightly structured market with high barriers to entry, no price competition, it is vital that we do everything in the hope of procuring deconcentration.
Every step that may lead to deconcentration, may lead to more vigorous competition should be incurred.
The only hope of any real deconcentration in this market is breaking the OE tie.
That is trying to persuade the automobile mechanics that really they do not have to use the original equipment plug.
Now, Mr. Seymour suggested that while you have these all purpose plugs, they are really not quite as good.
The average service station or a garage has charts would show substitutability of plugs and it is interesting thing that Ford’s own witness testified that he recognized that the plugs that Ford makes, they all make -- all three of them, Champion, Ford, and General Motors that is Autolite, make all purpose plugs and he testifies that well he thought that the Ford plugs would do just as good a job as the Champion in the AC plugs that were original equipment in Chrysler and General Motors cars and he was asked and he said I suppose you would have to acknowledge that the Champion in AC plugs that is a substitute for your plugs will do just as well, and he said well yes.
Evidence for example shows that Ford was much elated when they discovered few years ago that at some trials, automotive trials down in Florida, all the people who were driving the Stop Pontiac (ph) automobiles were using electric Autolite spark plugs.
They said, this just shows how good our plugs are and the indication is that the real hope, the real hope of any deconcentration in this market is to break the OE tie and to persuade people that they do not have to buy the original equipment plug if the other plug would have -- and of course, there is going to be an automobile manufacturer owning a spark plug firm.
It is going to be much less likely to be pushing the sales of the private brands in the aftermarket than an independent, who -- particularly this independent, the divested company that knows its ultimate future may depend on success in penetrating into the aftermarket.
Now, Ford complains about the requirement that it purchased its half of its need from Autolite because it says, this is going to cause also some problems in terms of pollution control, that we will not have adequate control over the quality of the plugs and this is going to be very unfortunate that we can do a much better job ourselves.
Well, first of all, the decree says that Ford in purchasing the half of its requirements from Autolite under Autolite’s name that the product must conform to Ford’s designs, specifications, quality standards and delivery requirements and to be priced competitively.
So that Ford is protected because the decree does guarantee it and the requirements are contingent on the plugs meeting those standards.
Moreover, as I have indicated the divested company will be under very great pressure to satisfy Ford, both in the hope of getting more than 50% of the business and in the hope of retaining that business after the five years.
Unknown Speaker: But what if all Ford could do about it that if the plugs did not -- Ford to try to buy from somebody else and would it not be free thing to make it themselves?
Mr. Friedman: They would be not be free to making themselves, but it seems Mr. Justice, realistically, considering the nature of the relationship, I am sure the divested company is going to do everything it can to meet Ford's standards.
Chief Justice Warren E. Burger: But just assuming that is true, are you suggesting that is just as good as having either General Motors for itself or Ford or Chrysler for those companies to make and completely control their own development and design in manufacture and research?
Mr. Friedman: Well, I think the record shows that it is very close collaboration between the independent spark plug manufacturers, prior for example to the acquisition Ford worked very closely with Champion and they worked close together.
It seems that Ford for 50 years was fully satisfied with the product it was getting from Champion.
Even today, Chrysler has not thus far attempted to integrate and there is no indication that Chrysler is not getting satisfactory quality and there is not -- no indication that Chrysler is not able.
If I may, Mr. Justice I would like to just close with one thought if I may which is, on the question of the use of Ford’s own trade name on plugs.
Ford makes the point that this is a harsh remedy, that it is a penalty, that it is unfair, that it is unnecessary and they say this goes far beyond anything is ever happened here because even prior to the acquisition.
Ford was perfectly free at anytime to manufacture under its own trade name and now it its precluded and I think the answer to this contention is something that this Court stated some years ago in Federal Trade Commission v. National Lead Company in 352 U.S.
when the complaint was there made that a decree subjected the defendants to very strict strictures and was unfair.
The Court said that those “violating the Act” must expect some fencing in.
I think Ford here has violated the Act through this acquisition and it too must expect some fencing in.
Chief Justice Warren E. Burger: Thank you Mr. Friedman.
Rebuttal of Whitney North Seymour
Mr. Whitney North Seymour: I would just take a moment or two in the colloquy that developed the basic question.
Did this acquisition substantially lessen competition or have the probability of doing so and I submit that it is amply clear that not only did it not lessen the competition or eliminate any competitor, it added competition.
It aided competition.
It promoted competition and what Mr. Friedman has told Your Honors, points that up.
Chrysler and Champion are in a more competitive relationship than when Champion did not have these grounds for business.
Champion is also in the aftermarket, in the private brand market.
Eltra which is the fourth company in the business and if this divestiture took place, there would still only be four.
There would not be a new company because New Fostoria would just take the place of Ford as a supplier, but the result of this acquisition was to create a fourth competitor and that is Eltra which is active in the private brand market where it is competing actively with Champion, still the biggest company in the business or having the largest franchise of that kind of business, and Eltra sales and in the last figures in the record for 17 million plugs.
Now, that is not very much compared with the sales of General Motors and others, but it is coming up.
Eltra’s President testified that he expected the market by 1980 to be around 150 million plugs.
This is a contribution to competition now.
Now, let me explain the way this private brand market works as I understand it in connection with automobiles.
The mass merchandisers have put in repair bases in many of their retail outlets in suburbs and so on and you come in to shop at Sears Roebuck, you pull your car in there and get them to tune it up and unless you tell them, that what you want is an AC plug, what they do is to put on a series plug and so this business of overcoming the OE tie by direction of the guy that runs the station is what happens in connection with these private brand sales and apparently it is having a monopoly scale so it is getting to be a more significant part of the market.
Now, I submit that this was a pro-competitive activity.
If that so, that ends the case and the judge had to struggle so hard to get away from the inference and I must say it was clear in 1969 and it was when the government brought the suit.
In 1961, it may have looked less pro-competitive than it turned out to be, but the judge had or really take this concept of being on the edge of the market, but he transposed the notion of being on the edge of the market from your potential completion decisions to a mere customer status where I submit it does not have any place or customer is always on the edge of the market, but it is not on the edge of the market as one anxiously waiting to come in which is what your case deals with.
My learned friend said that Champion was -- might have lost the business before nibbling at it, but Champion showed no signs of concern in the testimony, including the testimony quoted in our reply brief shows that Champion was not worried about it.
It felt that it would go on forever.
That is the way it had been and Chrysler had some inquiries, but nobody ever made a bid to Chrysler and so when you talk about it, when the judge talks about the terrible thing being in the denial of the opportunity to try, this is really test as I said before a charade.
It is not a real effort and it is really not open to people to come in and make the sacrifice involved and selling below cost and waiting eight years to draw out the market.
Now finally, the -- it is clear from counsel’s argument I think and I think from the opinion on relief that the Court below really was concerned about the OE tie and was trying to find a way to break it and he thought that it was the divestiture in holding Ford’s head underwater with these injunctions maybe something would happen to break the tie.
But quite aside from the fact that that was a judicial experiment which is beyond I submit, the ordinary activities that are proper under the statute.
There is no prospect of breaking it that way.
The prospect of breaking it is by competition and competition was encouraged by this transaction and thus one word on the injunctions.
Counsel says it took 10 years to get the judgment in this case, and therefore, Ford should be banned for 10 years from entering the market.
I submit that that does not follow at all and that be banned at all from entering the market was anticompetitive and there is no basis for it and as far as Ford’s name is concerned to deny it an opportunity to even lay the basis for ultimate entry in the market for many, many years by preventing it from letting its name be connected with spark plugs made by others is quite wrong.
And aside from everything else those injunctions were excessive beyond I think any proper exercise of the Court’s discretion, but basically my view is that this was a pro-competitive acquisition and the judgment should be reversed.
Chief Justice Warren E. Burger: Thank you Mr. Seymour.
Thank you Mr. Friedman.
The case is submitted.